Instructor Solution Manual for Essentials of Strategic Management The Quest for Competitive Advantag

Instructor Solution Manual For Essentials of Strategic Management The Quest for Competitive Advantage 8e By John Gamble, Arthur Thompson and Margaret Peteraf Chapter 1-10 With Cases (1-12)

Chapter 1 Lecture Note Strategy, Business Models, and Competitive Advantage Chapter Summary Chapter 1 explores the fundamental concepts surrounding organizational strategy. It begins with an explanation of the term strategy and discusses why companies need a distinctive strategy in order to compete successfully. Next, it explores why a company must have a viable business model and the five most dependable strategic approaches for setting a company apart. The chapter wraps up with an illustration of how a company‘s strategy tends to evolve over time due to changing business conditions and the three tests for winning strategies.

Lecture Outline I. Introduction 1. A company‘s strategy is the set of actions that its managers take to outperform the company‘s competitors and achieve superior profitability.

LO 1-1 Understand what is meant by a company‘s strategy.

2. In effect, managers must determine how many and which strategic options to pursue including: a. How to create products or services that attract and please customers. b. How to position the company in the industry. c. How to develop and deploy resources to build valuable competitive capabilities. d. How each functional piece of the business (R&D, supply chain activities, production, sales and marketing, distribution, finance, and human resources) will be operated. e. How to achieve the company‘s performance targets.

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Section 6 Case Teaching Note for Case 09

CORE CONCEPT A company‘s strategy is the coordinated set of actions that its managers take to outperform the company‘s competitors and achieve superior profitability.

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II. The Importance of a Distinctive Strategy and Competitive Approach Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 1-2 Explain why a company needs a creative, distinctive strategy that sets it apart from rivals.

1. For a company to matter in the minds of customers, its strategy needs a distinctive element that sets it apart from rivals and produces a competitive edge.

2. Simply trying to mimic the strategies of the industry‘s successful companies rarely works.

3. Every company‘s strategy needs to have some distinctive element that draws in customers and produces a competitive edge.

III. The Relationship between a Company's Strategy and Business Model Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 1-3 Explain why it is important for a company to have a viable business model that outlines the company‘s customer value proposition and its profit formula.

1. A company‘s business model is management‘s blueprint for delivering a valuable product or service to customers in a manner that will yield an attractive profit.

2. The two elements of a company‘s business model are: a. Customer value proposition: The company‘s approach to satisfying buyer wants and needs at a price customers will consider a good value. b. Profit formula: The Company‘s approach to determining a cost structure that will allow for acceptable profits given the pricing tied to its customer value proposition

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Section 6 Case Teaching Note for Case 09

3. Concepts & Connections 1.1 discusses three contrasting business models in radio broadcasting.

CORE CONCEPT A company‘s business model sets forth how its strategy and operating approaches will create value for customers, while at the same time generate ample revenues to cover costs and realize a profit. The two elements of a company‘s business model are its (1) customer value proposition and (2) profit formula.

Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Illustration Capsule. You can post instructions for the student within the assignment and collect their attachments for grading.

IV. Strategy and the Quest for Competitive Advantage Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 1-4 Identify the five most dependable strategic approaches for setting a company apart from rivals and winning a sustainable competitive advantage.

1. The heart and soul of any strategy is the actions and moves in the market place that managers are taking to gain a competitive edge over rivals. The five most used and dependable approaches are: a. Low-Cost Provider: Achieving a cost-based advantage over rivals. b. Broad Differentiation: Seeking to differentiate the company‘s product or service from rivals‘ in ways that will appeal to a broad spectrum of buyers. c. Focused Low Cost: Concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by having lower costs than rivals and thus being able to serve niche members at a lower priced.

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d. Focused Differentiation: Concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals‘ products. e. Best Cost Provider: Giving customers more value for the money by satisfying buyers‘ expectations on key quality/features/performance/service attributes, while beating their price expectations.

Concepts & Connections 1.1 Pandora, Sirius XM, and Over-the-Air Broadcast Radio: Three Contrasting Business Models Discussion Question: What is the prominent difference between the business models of these three organizations?

Answer: While all three provide essentially the same type of entertainment service, the business models employed by Pandora, Sirius XM, and Over-The-Air Broadcast Radio are completely different. In the area of value proposition (what the customer sees), Sirius XM provides commercial free entertainment with some local content based upon a monthly fee, while Broadcast Radio provides entertainment with some local content with interruptions for commercials without a fee. Pandora bridges these two methods. In one mode it operates more like Over-the-Air Broadcast Radio in that it provides entertainment without a fee that includes targeted advertisements, with the added benefit of allowing the listener to customize the music mix. In the other mode, listeners can elect to go ad-free for a fee using Pandora One. For profit, Sirius XM must attract a large enough customer base in order to cover costs and provide profit, while Broadcast Radio must attract a large enough advertiser base to cover costs and provide profit. Pandora, once again bridging the two, generates profit by either an advertiser base or through ad-free services.

CORE CONCEPT A company achieves sustainable competitive advantage when an attractively large number of buyers develop a durable preference for its products or services over the offerings of competitors, despite the efforts of competitors to overcome or erode its advantage.

2. Concepts & Connections 1.2 illustrates how Apple has gained competitive advantage in its market segment.

Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this

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Section 6 Case Teaching Note for Case 09

Illustration Capsule. You can post instructions for the student within the assignment and collect their attachments for grading.

V. The Importance of Capabilities in Building and Sustaining Competitive Advantage Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

1. Winning a sustainable competitive edge over rivals with any of the five strategies relies on two interrelated efforts: a. Building competitively valuable capabilities that rivals cannot readily match. b. Having a distinctive product offering.

Concepts & Connections 1.2 Apple Inc.‘s Strategy in the Marketplace Discussion Question: Describe Apple‘s strategic approach in the computer industry.

Answer: The student should be able to discuss that Apple uses a Focused Differentiation strategic approach. The company focuses on the upper end of the computer buyer market and offers a premium product. The company designs its own operating system, hardware, and application software through continuous investments in R&D. These higher cost approaches to the market place are offset by premium pricing that the niche market can support.

VI. Why a Company’s Strategy Evolves over Time Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 1-5 Understand that a company‘s strategy tends to evolve over time because of changing circumstances and ongoing management efforts to improve the company‘s strategy.

1. Every company must be willing and ready to modify its strategy in response to changing market conditions, advancing technology, competitive moves, shifting buyer needs and

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preferences, emerging market opportunities, new ideas for improving the strategy, and mounting evidence that the strategy is not working well.

2. Most of the time a company‘s strategy evolves incrementally from management‘s ongoing efforts to fine tune pieces of the strategy, but, on occasion, major strategy shifts are called for.

3. The evolving nature of a company‘s strategy means the typical company strategy is a blend of (1) proactive moves to improve the company‘s financial performance and secure a competitive edge and (2) adaptive reactions to unanticipated developments and fresh market conditions.

4. Figure 1.1, A Company’s strategy is a blend of proactive initiatives and reactive adjustments, depicts the typical blend found within a company‘s strategy.

5. A company‘s realized strategy tends to be a combination of proactive and reactive elements.

CORE CONCEPT A company‘s realized strategy is a combination deliberate planned elements and unplanned emergent elements. Some components of a company‘s deliberate strategy will fail in the marketplace and become abandoned strategy elements.

VII.

The Three Tests of a Winning Strategy

Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 1-6 Identify the three tests of a winning strategy.

1. Three Questions can be used to distinguish a winning strategy from a so-so or flawed strategy: a. How well does the strategy fit the company‘s situation? b. Is the strategy helping the company achieve a sustainable competitive advantage? c. Is the strategy producing good company performance?

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2. Strategies that come up short on one or more of the above tests are plainly less appealing than strategies passing all three tests with flying colors.

VIII. Why Crafting and Executing Strategy Are Important Tasks Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

1. High-achieving enterprises are nearly always the product of astute, creative, and proactive strategy making.

2. Indeed, good strategy and good strategy execution are the most telling signs of good management.

IX. The Road Ahead 1. Throughout the remaining chapters and the accompanying case collection, the spotlight is trained on the foremost question in running a business enterprise: What must managers do, and do well, to make a company a winner in the marketplace?

2. The mission of this book is to provide a solid overview of what every business student and aspiring manager needs to know about crafting and executing strategy.

Connect Activity Use the Question Bank to build a quiz for the chapter to measure and reinforce learning.

Consider using the questions you select to build a comprehensive mid-term and final exam for the course. The assignment can be graded and posted automatically.

Chapter 2 Lecture Note Strategy, Formulation, Execution, and

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Governance Chapter Summary Chapter 2 presents an overview of the managerial tasks associated with developing and executing company strategies. Special attention is given to the importance of a clear vision for the company and the strategic and financial objectives that will guide the way. The importance of setting objectives at all levels of the organization is explored along with the role of operating excellence in the successful execution of strategy.

Lecture Outline I. The Strategy Formulation, Strategy Execution Process Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

3. Crafting and executing a company‘s strategy is an ongoing process with five integrated phases: c. Developing a strategic vision that charts the company‘s long-term direction, a mission statement that describes the company‘s business, and a set of core values to guide the pursuit of the strategic vision and mission. d. Setting objectives for measuring the company‘s performance and tracking its progress in moving in the intended long-term direction. e. Crafting a strategy for advancing the company along the path to management‘s envisioned future and achieving its performance objectives. f. Implementing and executing the chosen strategy efficiently and effectively. g. Evaluating and analyzing the external environment and the company‘s internal situation and performance to identify corrective adjustments that are needed in the company‘s long-term direction, objectives, strategy, or approach to strategy execution.

4. Figure 2.1, The Strategy Formulation, Strategy Execution Process, displays this fivestage process, and the need for management to evaluate the company‘s performance on an ongoing basis.

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5. Table 2.1, Factors Shaping Decisions in the Strategy Formulation, Strategy Execution Process, exhibits the external and internal considerations that come into play in the strategic management process.

6. The evaluation stage of the strategic management process shown in Figure 2.1 also allows for a change in the company‘s vision when it becomes evident to management that the industry has changed and rendered its vision obsolete. Such occasions can be referred to as strategic inflection points.

7. The first three stages of the strategic management process make up a strategic plan.

CORE CONCEPT A company‘s strategic plan lays out its future direction, performance targets, and strategy.

II. Stage 1: Developing a Strategic Vision, a Mission, and Core Values Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 2-1 Understand why it is critical for company managers to have a clear strategic vision of where a company needs to head and why.

A. The Vision Statement 8. Top management‘s views about the company‘s direction and future productcustomer-market-technology focus are shaped by its views of the external industry and competitive environment and the internal situation and constitute a strategic vision for the company.

9. Well-conceived visions are distinctive and specific to a particular organization; they avoid generic, feel-good statements. A clearly articulated strategic vision communicates management‘s aspirations to stakeholders about ―where we are going‖ and helps steer the energies of company personnel in a common direction.

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CORE CONCEPT A strategic vision describes ―where we are going‖—the course and direction management has charted and the company‘s future product customer-market-technology focus.

10. For a strategic vision to function as a valuable managerial tool, it must provide understanding of what management wants its business to look like and provide managers with a reference point in making strategic decisions.

11. Table 2.2, Characteristics of an Effectively Worded Vision Statement, lists some characteristics of effective vision statements. For a strategic vision to function as a valuable managerial tool, it must provide understanding of what management wants its business to look like and provide managers with a reference point in making strategic decisions.

12. Table 2.3, Common Shortcomings in Company Vision Statements, provides a list of the most common shortcomings in company vision statements.

Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Illustration Capsule. You can post instructions for the student within the assignment and collect their attachments for grading.

Concepts & Connections, 2.1: Examples of Strategic Visions—How Well Do They Measure Up? Discussion Question: What appears to be missing from the Whole Foods vision statement presented in Capsule 2.1?

Answer: (1) Brevity: the statement is very long which makes it difficult to keep the

attention of the audience. (2) Memorable: The statement cannot be easily reduced to a few choice lines or a one-phrase slogan.

Discussion Question: What is effective in the Nike vision statement presented in Capsule 2.1?

Answer: The statement is short, making it focused and memorable. The vision described

is feasible and flexible.

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13. The Importance of Communicating the Strategic Vision h. A strategic vision has little value to the organization unless it‘s effectively communicated down the line to lower-level managers and employees. i. One effective method is to expressing the essence of the vision in a slogan. j. A well-thought-out, forcefully communicated strategic vision pays off in several respects: a. Crystallizes senior executives‘ own views about the firm‘s long-term direction b. Reduces the risk of rudderless decision making by management at all levels c. Is a tool for winning the support of employees to help make the vision a reality d. Provides a beacon for lower-level managers in forming departmental missions e. Helps an organization prepare for the future 14. An effectively communicated vision is a valuable management tool for enlisting the commitment of company personnel to engage in actions that move the company in the intended direction.

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B. Developing a Company Mission Statement 15. The distinction between a strategic vision and a mission statement is fairly clear cut: A strategic vision portrays a company‘s future strategic course (―where we are going and what our focus will be‖) whereas a company‘s mission statement typically describes its present business and purpose (―who we are, what we do, and why we are here‖).

CORE CONCEPT A well-conceived mission statement conveys a company‘s purpose in language specific enough to give the company its own identity.

16. Ideally, a company‘s mission statement is sufficiently descriptive to: k. Identify the company‘s products or services. l. Specify the buyer needs it seeks to satisfy. m. Specify the customer groups or markets it is endeavoring to serve. n. Give the company its own identity.

17. Occasionally, companies state that their mission is to simply earn a profit. This is misguided—profit is more correctly an objective and a result of what a company does.

C. Linking the Vision/Mission with Company Values 18. By values or core values, we mean the beliefs, traits, and ways of doing things that management has determined should guide the pursuit of its vision and mission.

CORE CONCEPT A company‘s values are the beliefs, traits, and behavioral norms that company personnel are expected to display in conducting the company‘s business and pursuing its strategic vision and mission.

19. Company values statements tend to contain between four and eight values, which ideally, are tightly connected to and reinforce the company‘s vision, strategy, and operating practices.

20. The extent to which company values translate into actually living the values varies widely:

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o. At one extreme are companies with window-dressing values; the professed values are given lip service by top executives but have little discernible impact on either how company personnel behave or how the company operates. p. At the other extreme are companies whose executives are committed to grounding company operations on sound values and principled ways of doing business.

Executives at these companies deliberately seek to ingrain the designated core values into the corporate culture—the core values thus become an integral part of the company‘s DNA and what makes it tick.

Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Illustration Capsule. You can post instructions for the student within the assignment and collect their attachments for grading.

Concepts & Connections 2.2 Toms Shoes: Its Mission-Driven Business Model Discussion Question: TOMS Shoes presents the following mission statement: With every product you purchase, TOMS will help a person in need. One for One® In what way is this mission ingrained in the company?

Answer: The student should be able to identify that since inception, TOMS Shoes has built the cost of giving away a pair of shoes into the price of each pair they sell. It is a core component of their business model and is expanded into new products as they go into the market place to include eye-ware, coffee, and backpacks. The mission is clearly and consistently communicated inside and outside the company.

III. Stage 2: Setting Objectives Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 2-2 Explain the importance of setting both strategic and financial objectives.

A. The Purpose of Setting Objectives 21. The managerial purpose of setting objectives is to convert the strategic vision into

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specific performance targets. q. They focus organizational attention and align actions throughout the organization r. They serve as yardsticks for tracking a company‘s performance and progress s. They motivate employees to expend greater effort and perform at a high level.

22. The Imperative of Setting Stretch Objectives: A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective by pushing the enterprise to be more inventive exhibit more urgency in improving financial performance and business position.

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CORE CONCEPT Objectives are an organization‘s performance targets—the results management wants to achieve.

Stretch objectives set performance targets high enough to stretch an organization to perform at its full potential and deliver the best possible results.

A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective, concentrating the full force of its resources and competitive actions on achieving that objective.

2. What Kinds of Objectives to Set: Two very distinctive types of performance yardsticks are required: t. Those relating to financial performance u. Those relating to strategic performance CORE CONCEPT Financial objectives relate to the financial performance targets management has established for the organization to achieve.

Strategic objectives relate to target outcomes that indicate a company is strengthening its market standing, competitive vitality, and future business prospects.

3. Achieving acceptable financial results is a must. Without adequate profitability and financial strength, a company‘s pursuit of its strategic vision, as well as its long-term health and ultimate survival, is jeopardized.

4. As a result of often competing objectives, utilizing a performance measurement system that strikes a balance between financial objectives and strategic objectives is optimal.

This Balanced Scorecard approach is illustrated in Table 2.4 The Balanced Scorecard Approach to Performance Management.

CORE CONCEPT The balanced scorecard is a widely used method for combining the use of both strategic and financial objectives, tracking their achievement, and giving management a more complete and balanced view of how well an organization is performing.

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Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Illustration Capsule. You can post instructions for the student within the assignment and collect their attachments for grading.

Concepts & Connections 2.3 Examples of Company Objectives Discussion Question 1: What is the prominent purpose of an organization‘s stated objectives?

Answer: Objectives identify an organization‘s performance targets. They serve to

function as measures for tracking the organization‘s performance and progress toward achievement of desired goals.

Discussion Question 2: What are some specific examples of top-level objectives that are included in the Capsule: Answer: The student should be able to locate the top-level objective for each firm and then the measureable strategic and financial objectives that support it: Jetblue: Produce above average industry margins by offering a quality product at a competitive price. They go on to set very specific financial and strategic goals that are measureable.

Yum Brands: Add 100 new Taco Bell units in India by 2021. . . Increase Taco Bell revenues from . . . Expand the number of Pizza Hut locations in globally by . . .

4. Short-Term and Long-Term Objectives: Short-term objectives focus attention on delivering performance improvements in the current period, while long-term targets force the organization to consider how actions currently under way will affect the company at a later date.

5. The Need for Objectives at All Organizational Levels: Company objectives need to be broken down into performance targets for each of the organization‘s separate businesses, product lines, functional departments, and individual work units, employees within various functional departments, and individual work units.

IV. Stage 3: Crafting a Strategy Connect Activity

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Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 2-3 Explain why the strategic initiatives taken at various organizational levels must be tightly coordinated to achieve companywide performance targets.

6. Strategy formulation should involve managers at all organizational levels.

7. In most companies, crafting strategy is a collaborative team effort that includes managers in various positions and at various organizational levels. Crafting strategy is rarely something only high-level executives do.

CORE CONCEPT Corporate strategy establishes an overall game plan for managing a set of businesses in a diversified, multi-business company.

Business strategy is primarily concerned with strengthening the company‘s market position and building competitive advantage in a single business company or a single business unit of a diversified multi-business corporation.

8. A Company‘s Strategy Making Hierarchy: The larger and more diverse the operations of an enterprise, the more points of strategic initiative it will have and the more managers at different organizational levels will have a relevant strategy-making role. Figure 2.2, A Company‘s Strategy Making Hierarchy illustrates this concept. v. Corporate strategy establishes an overall game plan for managing a set of businesses in a diversified, multi-business company. w. Business strategy is primarily concerned with strengthening the company‘s market position and building competitive advantage in a single business company or a single business unit of a diversified multi-business corporation. x. Functional-area strategies concern the actions related to particular functions or processes within a business. y. Operating strategies concern the relatively narrow strategic initiatives and approaches for managing key operating units.

V. Stage 4: Implementing and Executing the Chosen Strategy

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Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 2-4 Recognize what a company must do to achieve operating excellence and to execute its strategy proficiently.

9. Easily, the most time demanding and consuming part is managing the implementation and execution of the strategy-management process.

10. In most situations, managing the strategy execution process includes the following principal aspects: z. Staffing the organization with the needed skills and expertise aa. Allocating ample resources to activities critical to good strategy execution. bb. Ensuring that policies and operating procedures facilitate rather than impede effective execution cc. Installing information and operating systems that enable company personnel to perform essential activities dd. Pushing for continuous improvement in how value chain activities are performed ee. Tying rewards and incentives directly to the achievement of performance objectives ff. Creating a company culture and work climate conducive to successful strategy implementation and execution gg. Exerting the internal leadership needed to propel implementation forward VI. Stage 5: Evaluating Performance and Initiating Corrective Adjustments Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

11. The fifth phase of the strategy-management process—monitoring new external developments, evaluating the company‘s progress, and making corrective adjustments— is the trigger point for deciding whether to continue or change the company vision, objectives, strategy, and/or strategy-execution methods.

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12. Successful strategy execution entails vigilantly searching for ways to continuously improve and then making corrective adjustments whenever and wherever it is useful to do so.

13. A company‘s vision, objectives, strategy, and approach to strategy execution are never final; managing strategy is an ongoing process, not an every-now-and-then task.

Connect Activity Use the Question Bank to build a quiz for the chapter to measure and reinforce learning.

Consider using the questions you select to build a comprehensive mid-term and final exam for the course. The assignment can be graded and posted automatically.

Chapter 3 Lecture Note Evaluating a Company’s External Environment Chapter Summary Chapter 3 explores the concepts and analytical tools for assessing strategically important factors in a company‘s external environment. Attention centers on tools for determining the level of competition, mapping market positions of key rivals, and evaluating the long-term outlook for growth and profitability.

Lecture Outline I. Introduction 14. Chapter 2 identified that the strategy-formulation strategy-execution process begins with an appraisal of the company‘s present situation. The company‘s situation includes two facets: (1) the competitive conditions in the industry in which the company operates—its external environment; and (2) its resources and organizational capabilities—its internal environment.

15. This chapter presents the concepts and analytical tools for zeroing in on a single-business company‘s external environment.

II. Assessing the Company’s Industry and Competitive Environment

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Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

Thinking strategically about a company‘s industry and competitive environment entails using some well-validated concepts and analytical tools to get clear answers to seven questions: hh. Do macro-environmental factors and industry characteristics opportunities for growth and attractive profits?

offer sellers

ii. What kinds of competitive forces are industry members facing, and how strong is each force? jj. What forces are driving industry change and what impact will these changes have on competitive intensity and industry profitability? kk. What market positions do industry rivals occupy—who is strongly positioned and who is not? ll. What strategic moves are rivals likely to make next? mm.

What are the key factors of competitive success?

nn. Does the industry outlook offer good prospects for profitability?

III. Question 1: What Are the Strategically Relevant Components of the MacroEnvironment?

Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 3-1 Identify factors in a company‘s broad macro-environment that may have strategic significance.

1. Strictly speaking, a company‘s macro-environment includes all relevant factors and influences outside the company‘s boundaries; by relevant, we mean these factors are important enough that they should shape management‘s decisions regarding the company‘s long-term direction, objectives, and business model.

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2. Figure 3.1, The Components of a Company’s External Environment, presents a depiction of macro-environmental factors with a high potential to affect a company‘s business situation. The Macro-Environment will be explored using a PESTEL analysis and the Industry and Competitive Environment will be explored in Question 2 using Porter‘s Five-Forces Model.

CORE CONCEPT The macro-environment encompasses the broad environmental context in which a company is situated and is comprised of six principal components: political factors, economic conditions, sociocultural forces, technological factors, environmental factors, and legal/regulatory conditions.

PESTEL analysis can be used to assess the strategic relevance of the six principal components of the macro-environment: political, economic, social, technological, environmental, and legal forces.

The factors and forces in a company‘s macro-environment that have the biggest strategy shaping impact typically pertain to the company‘s immediate industry and competitive environment—competitive pressures, the actions of rival firms, buyer behavior, and supplier-related considerations.

16. Table 3.1, The Six Components of the Macro-Environment Included in a PESTEL Analysis, describes the broad areas that must be explored when conducting a PESTEL analysis.

Political Factors oo. Economic Conditions pp. Sociocultural Forces qq. Technological Factors rr. Environmental Forces ss. Legal and Regulatory Factors IV. Question 2: How Strong Are the Industry’s Competitive Forces?

Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 3-2

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Identify factors in a company‘s broad macro-environment that may have strategic significance.

The nature and subtleties of the competitive forces operating in a company‘s industry are never the same from one industry to another and must be wholly understood to accurately form answers to the question, “Where are we now?”

17. The most powerful and widely used tool for assessing the strength of the industry‘s competitive forces is the five-forces model of competition.

18. Figure 3.2, The Five-Forces Model of Competition holds that competitive forces affecting industry attractiveness go beyond rivalry of competing sellers and include pressures stemming from five co-existing forces: Competitive pressures stemming from buyer bargaining power. tt. Competitive pressures coming from companies in other industries to win buyers over to substitute products. uu. Competitive pressures stemming from supplier bargaining power. vv. Competitive pressures associated with the threat of new entrants into the market. ww. Competitive pressures associated with rivalry among competing sellers to attract customers. This is usually the strongest of the five competitive forces.

B. Competitive Force of Buyer Bargaining Power Whether seller–buyer relationships represent a weak or strong competitive force depends on: Whether some or many of the buyers have sufficient bargaining leverage to obtain price concessions and other favorable terms and conditions of sale. xx. The extent to which buyers are price sensitive 19. Factors affecting buyer bargaining power can create competitive pressures: The leverage that certain types of buyers have in negotiating favorable terms can range from weak to strong.

20. Even if buyers do not purchase in large quantities or offer a seller important market exposure or prestige, they gain a degree of bargaining leverage in the following circumstances: If buyers‘ costs of switching to competing brands or substitutes are relatively low—buyers who can readily switch brands or source from several sellers have more negotiating leverage than buyers who have high switching costs.

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If the number of buyers is small or if a customer is particularly important to a seller— the smaller the number of buyers, the less easy it is for sellers to find alternative buyers when a customer is lost to a competitor.

If buyer demand is weak—weak or declining demand creates a ―buyers market‖ and shifts bargaining power to buyers.

If buyers are well-informed about sellers‘ products, prices, and costs—the more information buyers have, the better bargaining position they are in.

If buyers pose a credible threat of integrating backward into the business of sellers— companies like Anheuser-Busch, Coors, and Heinz have integrated backward into metal-can manufacturing to gain bargaining power in obtaining the balance of their can requirements from otherwise powerful metal-can manufacturers.

21. Figure 3.3, Factors Affecting the Strength of the Bargaining Power of Buyers, summarizes the circumstances that make for strong or weak bargaining power on the part of buyers.

22. Not all buyers of an industry‘s product have equal degrees of bargaining power with sellers and some may be less sensitive than others to price, quality, or service differences.

C. The Competitive Force of Substitute Products Companies in one industry are vulnerable to competitive pressure from the actions of companies in another industry whenever buyers view the products of the two industries as a good substitute.

23. Just how strong the competitive pressures are from sellers of substitute products depends on three factors: Whether substitutes are readily available and attractively priced. yy. Whether buyers view the substitutes as being comparable or better in terms of quality, performance, and other relevant attributes. zz. Whether the costs that buyers incur in switching to the substitutes are high or low.

24. Figure 3.4, Factors Affecting Competition from Substitute Products, lists factors affecting the strength of competitive pressures from substitute products and signs that indicate substitutes are a strong competitive force.

25. As a rule, the lower the price of substitutes, the higher their quality and performance, and the lower the user‘s switching costs, the more intense the competitive pressures posed by substitute products.

D. Competitive Force of Supplier Bargaining Power

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Whether supplier–seller relationships represent a weak or strong competitive force depends on the degree to which suppliers have sufficient bargaining power to influence the terms and conditions of supply in their favor.

26. How Supplier Bargaining Power Can Create Competitive Pressures: When the major suppliers to an industry have considerable leverage in determining the terms and conditions of the item they are supplying, they are in a position to exert competitive pressures on one or more rival sellers.

27. The factors that determine whether any of the suppliers to an industry are in a position to exert substantial bargaining power or leverage are fairly clear-cut: If the item being supplied is a commodity that is readily available from many suppliers, aaa.

The ability of industry members to switch their purchases from one supplier to another or to switch to attractive substitutes, bbb.

If certain inputs are in short supply, ccc.

If certain suppliers provide a differentiated input that enhances the performance, quality, or image of the industry‘s product, ddd.

Whether certain suppliers provide equipment or services that deliver cost savings to industry members in conducting their operations, eee.

The fraction of costs of the industry‘s product accounted for by the cost of a particular input fff. If industry members are major customers of suppliers ggg.

Whether it makes good economic sense for industry members to vertically integrate backward.

28. Figure 3.5, Factors Affecting the Strength of Suppliers Bargaining Power, summarizes the conditions that tend to make supplier bargaining power strong or weak.

E. Competitive Force of Potential New Entrants Two classes of factors affect the strength of the competitive threats of potential entry in a particular industry.

The expected reaction of incumbent firms to new entry hhh.

Barriers to entry.

29. The most widely encountered barriers that entry candidates must hurdle include:

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Section 6 Case Teaching Note for Case 09

The presence of sizable economies of scale in production or other areas of operation—When incumbent companies enjoy cost advantages associated with large-scale operation, outsiders must either enter on a large scale or accept a cost disadvantage and consequently lower profitability. iii. Cost and resource disadvantages not related to scale of operation—Aside from economies of scale, industry incumbents can have cost advantages that stem from experience/learning curve effects, the possession of proprietary technology, partnerships with the best and cheapest suppliers, and low fixed costs. jjj. Strong brand preferences and high degree of customer loyalty—In some industries, buyers are strongly attached to established brands, making it more difficult for a newcomer to break into the marketplace. kkk.

High capital requirements—The larger the total dollar investment needed to enter the market successfully, the more limited the pool of potential entrants. lll. The difficulties of building a network of distributors-retailers and securing adequate space on retailers‘ shelves. mmm.

Patents and other forms of intellectual property protection. nnn.

Strong ―network effects‖ in customer demand. In industries where buyers are more attracted to a product when there are many other users of the product, there are said to be ―network effects.‖ ooo.

Restrictive regulatory policies—Government agencies can limit or even bar entry by requiring licenses and patents. ppp.

Tariffs and international trade restrictions—National governments commonly use tariffs and trade restrictions to raise entry barriers for foreign firms and protect domestic producers from outside competition. qqq.

The ability and willingness of industry incumbents to launch vigorous initiatives to block a newcomer‘s successful entry.

30. Figure 3.6, Factors Affecting the Strength of Threat of Entry, identifies several factors that affect how strong the competitive threat of potential entry is in a particular industry.

F. The Competitive Force of Rivalry among Competing Sellers The strongest of the five competitive forces is nearly always the rivalry among competing sellers—the marketing maneuvering and jockeying for buyer patronage that continually go on.

31. In effect, a market is a competitive battlefield where it is customary and expected that rival sellers will employ whatever resources and weapons they have in their business arsenal to improve their market positions and performance.

32. Figure 3.7, Factors Affecting the Strength of Rivalry, shows a sampling of

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competitive weapons that firms can deploy in battling rivals and indicates the factors that influence the intensity of their rivalry.

33. Some of the factors that influence the tempo of rivalry among industry competitors include: Rivalry is stronger in industries where competitors are equal in size and capability. rrr. Rivalry is usually stronger when demand is growing slowly or declining. sss. Rivalry increases as it becomes less costly for buyers to switch brands. ttt. Rivalry increases when sellers find themselves with excess capability and/or inventory. uuu.

Rivalry increases as the products of rival sellers become less strongly differentiated. vvv.

Rivalry becomes more intense as the diversity of competitors increases in terms of long-term directions, objectives, strategies, and countries of origin. www.

Rivalry is stronger when high exit barriers keep unprofitable firms from leaving the industry.

34. Rivalry can be characterized as cutthroat or brutal when competitors engage in protracted price wars or habitually employ other aggressive tactics that are mutually destructive to profitability.

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G. The Collective Strengths of the Five Competitive and Industry Profitability Scrutinizing each competitive force one by one provides a powerful diagnosis of what competition is like in a given market.

36. As a rule, the stronger the collective impact of the five competitive forces, the lower the combined profitability of industry participants.

37. The most extreme case of a ―competitively unattractive‖ industry is when all five forces are producing strong competitive pressures.

38. In contrast, when the collective impact of the five competitive forces is moderate to weak, an industry is competitively attractive in the sense that industry members can reasonably expect to earn good profits and a nice returns on investment.

39. The ideal competitive environment for earning superior profits is one in which both suppliers and customers are in weak bargaining positions, there are no good substitutes, high barriers block further entry, and rivalry among present sellers generates only moderate competitive pressures.

V. Question 3: What Are the Industry’s Driving Forces of Change and What Impact Will They Have?

Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

The intensity of competitive forces and the level of industry attractiveness are almost always fluid and subject to change.

The Concept of Driving Forces Driving forces analysis has three steps: Identifying what the driving forces are, xxx.

Assessing whether the drivers of change are, individually or collectively, acting to make the industry more or less attractive, and yyy.

Determining what strategy changes are needed to prepare for the impact of the driving forces.

CORE CONCEPT

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Driving forces are the major underlying causes of change in industry and competitive conditions.

H. Identifying an Industry’s Dominant Driving Forces

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Many developments can affect an industry powerfully enough to qualify as driving forces. Some are unique and specific to a particular industry situation, but most drivers of change fall into one of the following categories: Changes in an industry‘s long-term growth zzz.

Increasing globalization aaaa.

Changes in who buys the product and how they use it bbbb.

Product innovation cccc.

Technological change and manufacturing process innovation dddd.

Marketing innovation eeee.

Entry or exit of major firms ffff.

Diffusion of technical know-how across more companies and more countries gggg.

Changes in cost and efficiency hhhh.

Growing buyer preferences for differentiated products iiii. Regulatory influences and government policy changes jjjj. Changing societal concerns, attitudes, and lifestyles 40. Table 3.2, Common Driving Forces, summarizes the most common forces.

41. Company strategists must resist the temptation to label every change they see as a driving force.

Assessing the Impact of the Driving Forces The second step of driving forces analysis is to determine whether the prevailing driving forces are acting to make the industry environment more or less attractive.

42. An important part of driving forces analysis is to determine whether the individual or collective impact of the driving forces will be to increase or decrease market demand, make competition more or less intense, and lead to higher or lower industry profitability.

J. Determining Strategy Changes Needed to Prepare for the Impact of the Driving Forces The third step of driving forces analysis is for managers to draw some conclusions about what strategy adjustments will be needed to deal with the impact of the driving forces.

43. An important part of driving forces analysis is to determine whether the individual or collective impact of the driving forces will be to increase or decrease market demand, make competition more or less intense and lead to higher or lower industry

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profitability.

3. The real payoff of driving forces analysis is to help managers understand what strategy changes are needed to prepare for the impacts of the driving forces.

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VI. Question 4: How Are Industry Rivals Positioned?

Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 3-3 Map the market positions of key groups of industry rivals.

The best technique for revealing the market positions of industry competitors is strategic group mapping. This analytical tool is useful for comparing the market positions of industry competitors or for grouping industry combatants into like positions.

CORE CONCEPT Strategic group mapping is a technique for displaying the different market or competitive positions that rival firms occupy in the industry.

Using Strategic Group Maps to Assess the Market Positions of Key Competitors A strategic group consists of those industry members with similar competitive approaches and positions in the market.

CORE CONCEPT A strategic group is a cluster of industry rivals that have similar competitive approaches and market positions.

44. The procedure for constructing a strategic group map is straightforward: Identify the competitive characteristics that differentiate firms in the industry kkkk.

Plot the firms on a two-variable map using pairs of these differentiating characteristics llll. Assign firms that fall in about the same strategy space to the same strategic group mmmm. Draw circles around each strategic group, making the circles proportional to the size of the group‘s respective share of total industry sales revenue 45. Concepts & Connections 3.1, Comparative Market Positions of Selected Companies in the Casual Dining Industry: A Strategic Group Map Example, represents a two-dimensional diagram for this industry.

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Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Concepts and Connections exercise. You can post instructions for the student within the assignment and collect their attachments for grading.

Concepts & Connections 3.1, Comparative Market Positions of Selected Pizza

Chains: A Strategic Group Map Example Discussion Question 1. According to the diagram, which companies comprise the strategic group of firms to which Dominoes belongs? Why is the circle containing Dominoes bigger than the one containing Papa John‘s?

Answer: The diagram reveals Dominoes strategic group members to be Pizza Hut, Papa

John‘s, and Little Caesar‘s. Dominoes circle is bigger because it generated more revenue than Papa John‘s.

Discussion Question 2. According to the diagram, what is California Pizza Kitchen‘s closest competitor?

Answer: The diagram reveals Mellow Mushroom as California Pizza Kitchen‘s closest competitor. The student should be able to identify that both companies are pursuing a high price/service/ambiance strategy with focused (limited) market coverage.

K. The Value of Strategic Group Maps Strategic Group maps are revealing in several respects.

The most important has to do with identifying which rivals are similarly positioned and are thus close rivals and which are distant rivals. Generally speaking, the closer strategic groups are to each other on the map, the stronger the cross-group competitive rivalry tends to be. nnnn.

Not all positions on the map are equally attractive. Two reasons account for why some positions can be more attractive than others. (1) Industry driving forces may favor some strategic groups and hurt others and (2) competitive pressures may cause the profit potential of different strategic groups to vary.

VII. Question 5: What Strategic Moves Are Rivals Likely to Make Next?

Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the

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chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

Unless a company pays attention to what competitors are doing and knows their strengths and weaknesses, it ends up flying blind into competitive battle.

46. Having good information about the strategic direction and likely moves of key competitors allows a company to prepare defensive countermoves, to craft its own strategic moves with some confidence about what market maneuvers to expect from rivals in response, and to exploit any openings that arise from competitors‘ missteps.

47. Michael Porter‘s Framework for Competitor Analysis points to four indicators of a rival‘s likely strategic moves and countermoves. These include a rival‘s current strategy, objectives, capabilities, and assumptions about itself and the industry.

CORE CONCEPT Objectives are an organization‘s performance targets—the results management wants to achieve.

Current Strategy: Questions to consider include: How is the competitor positioned in the market? What is the basis for its competitive advantage (if any)? What kinds of investments is it making (as an indicator of its growth trajectory)? oooo. Objectives: An appraisal of a rival‘s objectives should include not only its financial performance objectives, but strategic ones as well (such as those concerning market share). The appraisal should also examine how well they are meeting them. pppp. Capabilities: A rival‘s capabilities (and efforts to acquire new capabilities) serve as a strong signal of future strategic actions (and reactions to your company‘s moves).

Assessing a rival‘s capabilities involves sizing up not only their strengths in this respect, but their weaknesses as well. qqqq. Assumptions: How a rival‘s top managers think about their strategic situation can have a big impact on how they behave.

48. Information regarding these four components can often be found by examining public documents such as press releases, websites, and SEC filings.

VIII. Question 6: What Are the Key Factors for Future Competitive Success?

Connect Activity

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Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

An industry‘s key success factors (KSF) are those competitive factors that most affect industry members‘ ability to prosper in the marketplace.

CORE CONCEPT Key success factors are the strategy elements, product attributes, competitive capabilities, or intangible assets with the greatest impact on future competitive success in the marketplace.

49. An industry‘s key success factors can usually be deduced through identifying the industry‘s dominant characteristics, assessing the five competitive forces, comparing the market positions of industry members, and forecasting the likely next moves of key rivals.

50. Table 3.3, Common Types of Industry Key Success Factors (KSFs), lists the common types of KSFs. 51. The answer to three questions helps identify an industry‘s key success factors: On what basis do buyers of the industry‘s product choose between the competing brands of sellers? That is, what product attributes are crucial? rrrr. Given the nature of the competitive forces prevailing in the marketplace, what resources and competitive capabilities does a company need to have to be competitively successful? ssss. What shortcomings are almost certain to put a company at a significant competitive disadvantage?

52. Only rarely are there more than five or six key factors for future competitive success.

IX. Question 7: Does the Industry Offer Good Prospects for Attractive Profits?

Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 3-4 Determine whether an industry‘s outlook presents a company with sufficiently attractive

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opportunities for growth and profitability.

The final step in evaluating the industry and competitive environment is boiling down the results in Questions 1 through 6 to determine if the industry offers a company strong prospects for attractive profits.

53. The important factors on which to base such a conclusion include: The industry‘s growth potential tttt. Whether powerful competitive forces are squeezing industry profitability to subpar levels and whether competition appears destined to grow stronger or weaker uuuu. Whether industry profitability will be favorably or unfavorably affected by the prevailing driving forces vvvv. The company‘s competitive position in the industry vis-à-vis rivals wwww.

How competently the company performs industry key success factors 54. The degree to which an industry is attractive or unattractive is not the same for all industry participants and potential new entrants. The attractiveness of an industry depends on the degree of fit between a company‘s competitive capabilities and industry key success factors.

Connect Activity Use the Question Bank to build a quiz for the chapter to measure and reinforce learning.

Consider using the questions you select to build a comprehensive mid-term and final exam for the course. The assignment can be graded and posted automatically.

Chapter 4 Lecture Note Evaluating a Company’s Resources, Capabilities, and Competitiveness Chapter Summary Chapter 4 discusses the techniques of evaluating a company‘s internal situation, including its collection of valuable resources and capabilities, its relative cost position, and its competitive strength versus its rivals. The analytical spotlight will be trained on five questions: (1) How well is the company‘s strategy working? (2) What are the company‘s competitively important resources and capabilities? (3) Is the company‘s cost structure and customer value proposition competitive? (4) Is the company competitively stronger or weaker than key rivals? (5) What

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strategic issues and problems merit front burner managerial attention? The answers to these five questions complete management‘s understanding of ―Where are we now?‖ and position the company for a good strategy situation fit required of the ―Three Tests of a Winning Strategy.‖

Lecture Outline I. Question 1: How Well Is the Company’s Strategy Working?

Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 4-1 Assess how well a company‘s strategy is working.

55. The two best empirical indicators are: xxxx. Whether the company is recording gains in financial strength and profitability. yyyy. Whether the company‘s competitive strength and market standing are improving.

56. Other indicators of how well a company‘s strategy is working include:   

Trends in the company‘s sales and earnings growth Trends in the company‘s stock price The company‘s overall financial strength

   

The company‘s customer retention rate The rate at which new customers are acquired Changes in the company‘s image and reputation with customers Evidence of improvement in internal processes such as defect rate, order fulfillment, delivery times, days of inventory, and employee productivity

57. The stronger a company‘s current overall performance, the less likely the need for radical changes in strategy. The weaker a company‘s financial performance and market standing, the more its current strategy must be questioned. Weak performance is almost always a sign of weak strategy, weak execution, or both.

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II. Question 2: What Are the Company’s Competitively Important Resources and Capabilities?

Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

1. A company‘s competitive approach requires a tight fit with a company‘s internal situation and is strengthened when it exploits resources that are competitively valuable, rare, hard to copy, and not easily trumped by rivals‘ equivalent substitute resources. Many companies pursue resource-based strategies that attempt to exploit company resources in a manner that offers value to customers in ways rivals are unable to match.

CORE CONCEPT Resource and capability analysis is a powerful tool for sizing up a company‘s competitive assets and determining if the assets can support a sustainable competitive advantage over market rivals.

L. Identifying Competitively Important Resources and Capabilities 58. A company‘s resources are competitive assets that are owned or controlled by the company and can either be tangible resources such as plants and distribution or intangible assets such as a well-known brand or a results-oriented organizational culture.

CORE CONCEPT A resource is a competitive asset that is owned or controlled by a company; a capability is the capacity of a company to competently perform some internal activity. Capabilities are developed and enabled through the deployment of a company‘s resources.

CORE CONCEPT A competence is an activity that a company has learned to perform with proficiency. A core competence is an activity that a company performs proficiently and that is central to its strategy and competitive success.

59. Table 4.1, Common Types of Tangible and Intangible Resources, gives examples of both types of resources. These include:

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Tangible zzzz. Physical resources aaaaa. Financial resources bbbbb. Technological resources ccccc. Organizational resources Intangible ddddd. Human assets and intellectual capital eeeee. Brand image and reputational assets fffff. Relationships ggggg. Company culture M. Determining the Competitive Power of a Company Resources and Capabilities.

60. What is most telling about company‘s aggregate of resources is how powerful they are in the marketplace.

CORE CONCEPT The VRIN tests for sustainable competitive advantage ask if a resource or capability is valuable, rare, inimitable, and non-substitutable.

61. The tests are often referred to as the VRIN tests for sustainable competitive advantage an acronym for valuable, rare, inimitable, and non-substitutable. hhhhh. Is the resource or capability competitively valuable? iiiii. Is the resource strength rare—is it something rivals lack? jjjjj. Is the resource inimitable or hard to copy? kkkkk. Is the resource non-substitutable or is it vulnerable to the threat of substitution from different types of resources and capabilities?

62. Can the resource strength be trumped by substitute resource strengths and competitive capabilities?

CORE CONCEPT Social complexity and causal ambiguity are two factors that inhibit the ability of rivals to imitate a firm‘s most valuable resources and capabilities. Causal ambiguity makes it very hard to figure out how a complex resource contributes to competitive advantage and therefore exactly what to imitate.

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CORE CONCEPT Companies that lack a stand-alone resource that is competitively powerful may nonetheless develop a competitive advantage through resource bundles that enable the superior performance of important cross-functional capabilities.

63. If management determines that the company doesn‘t possess a resource that independently passes all four tests with high marks, it may have a bundle of resources that can pass the tests.

N. The Importance of Dynamic Capabilities in Sustaining Competitive Advantage 64. Resources and capabilities must be continually strengthened and nurtured to sustain their competitive power.

65. A dynamic capability is the ability to modify, deepen, or reconfigure the company‘s existing resources and capabilities in response to its changing environment or market opportunities.

CORE CONCEPT A dynamic capability is developed when a company has become proficient in modifying, upgrading, or deepening the company‘s resources and capabilities to sustain its competitiveness and prepare it to seize future market opportunities and nullify external threats to its well-being.

66. A company requires a dynamically evolving portfolio of resources and capabilities in order to sustain its competitiveness and position itself to pursue future market opportunities.

O. Is the Company Able to Seize Market Opportunities and Nullify External Threats?

67. Appraising a company‘s resource strengths and weaknesses and its external opportunities and threats, commonly known as SWOT analysis, provides a good overview of whether its overall situation is fundamentally healthy or unhealthy.

CORE CONCEPT SWOT analysis is a simple but powerful tool for sizing up a company‘s internal strengths and competitive deficiencies, its market opportunities, and the external threats to its future well-being.

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68. A first-rate SWOT analysis provides the basis for crafting a strategy that capitalizes on the company‘s strengths, aims squarely at capturing the company‘s best opportunities, and defends against the threats to its well-being.

69. Table 4.2, Factors to Consider When Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats, provides a detailed list of potential strengths and competitive assets, potential weaknesses and competitive deficiencies, potential market opportunities, and potential external threats to a company‘s future profitability.

70. The Value of a SWOT Analysis—A SWOT analysis involves more than making four lists. The most important parts of SWOT analysis are: lllll. Drawing conclusions from the SWOT listings about the company‘s overall situation. mmmmm.

Translating these conclusions into strategic actions to better match the company‘s strategy to its strengths and market opportunities, correcting problematic weaknesses, and defending against worrisome external threats.

III. Question 3: Are the Company’s Costs Structure and Value Proposition Competitive?

Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 4-3 Grasp how a company‘s value chain activities can affect the company‘s cost structure and customer value proposition.

71. One of the most telling signs of whether a company‘s business position is strong or precarious is whether its prices and costs are competitive with industry rivals.

72. Price-cost comparisons are especially critical in a commodity-product industry where the price competition is typically the ruling force.

73. Two analytical tools are particularly useful in determining whether a company‘s prices and costs are competitive and thus conducive to winning in the marketplace: value chain analysis and benchmarking.

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Company Value Chains 74. All of the various activities that a company performs internally combine to form a value chain, so-called because the underlying intent of a company‘s activities is to do things that ultimately create value for buyers.

CORE CONCEPT A company‘s value chain identifies the primary activities that create customer value and related support activities.

75. Figure 4.1, A Representative Company Value Chain, depicts the linked set of value creating activities.

76. The value chain consists of two broad categories of activities: nnnnn. Primary activities: foremost in creating value for customers ooooo. Support activities: facilitate and enhance the performance of primary activities 77. The value chain also includes a profit margin component; profits are necessary to compensate the company‘s owners/shareholders and investors, who bear risks and provide capital.

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78. Concepts & Connections 4.1 The Value Chain for Everlane, Inc., shows representative costs for various activities performed by the producers and marketers of apparel.

Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Concepts and Connections exercise. You can post instructions for the student within the assignment and collect their attachments for grading.

Concepts & Connections 4.1, The Value Chain for Everlane, Inc. Discussion Question: What are the total costs associated with producing and shipping a pair of slim-fit denim jeans to the end customer and how much is their profit? How does their ―radical transparency‖ strategy help them compete?

Answer: The total costs are $28.02 with a retail price of $60.00, resulting in a profit margin of $39.97.

Answer: Consumers are able to compare the retail price of competitive products and see that the price of a comparable Everlane product is significantly lower. By disclosing cost and profits numbers they allow the consumer to gauge the profit margin for competitive products and make an informed decision.

P. Benchmarking: A Tool for Assessing Whether a Company’s Value Chain Activities Are Competitive 79. Benchmarking entails how different companies perform various value chain activities, how customer orders are billed and shipped, and how maintenance is performed—and then making cross-company comparison of the costs and effectiveness of these activities.

80. The objectives of benchmarking are to identify the best practices in performing an activity and to emulate these best practices when they are possessed by others.

81. The tough part of benchmarking is not whether to do it, but how to gain access to information about other companies‘ practices and costs.

CORE CONCEPT Benchmarking is a potent tool for learning which companies are best at performing particular activities and then using their techniques (or ―best practices‖) to improve the cost and effectiveness of a company‘s own internal activities.

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CORE CONCEPT A best practice is a method of performing an activity that consistently delivers superior results compared to other approaches.

Q. The Value Chain System for an Entire Industry 82. Accurately assessing a company‘s competitiveness requires that company managers understand the entire value chain system for delivering a product or service to end users, not just the company‘s own value chain.

83. Figure 4.2, A Representative Value Chain for an Entire Industry, explores a value chain for an entire industry.

84. Suppliers‘ value chains are relevant because suppliers perform activities and incur costs.

85. Forward channel and customer value chains are relevant because: ppppp. The costs and margins of a company‘s distribution allies are part of the price the end user pays. qqqqq. The activities that distribution allies perform affect the end user‘s satisfaction.

86. A company‘s customer value proposition and cost competitiveness depend not only on internally performed activities (its own company value chain), but also on the value chain activities of its suppliers and forward channel allies.

R. Strategic Options for Remedying a Cost or Value Disadvantage 87. There are three main areas in a company‘s overall value chain where important differences between firms in costs and value can occur: a company‘s own internal activities, the suppliers‘ part of the industry value chain, and the forward channel portion of the industry chain.

88. Improving Internally Performed Value Chain Activities—If the source of a firm‘s cost disadvantage is internal; managers can use any of the following eight strategic approaches to restore cost parity: rrrrr. Implement the use of best practices throughout the company, particularly for high-cost activities. sssss. Try to eliminate some cost-producing activities altogether by revamping the value chain.

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ttttt. Relocate high-cost activities to geographic areas where they can be performed more cheaply. uuuuu. Outsource certain internally performed activities to vendors or contractors they can reduce costs. vvvvv. Invest in productivity-enhancing, cost-saving technological improvements. wwwww.

Find ways to detour around the activities or items where cost is high. xxxxx. Redesign the product so that it can be manufactured or assembled quickly and more economically. yyyyy. Try to make up the internal cost disadvantage by achieving savings in the other two parts of the value chain system.

89. Rectifying a weakness in a company‘s customer value proposition—This can be accomplished by applying one or more of the following approaches: zzzzz. Implement the use of best practices throughout the company aaaaaa. Adopt best practices for marketing, brand management, and customer relationship management to improve brand image and customer loyalty. bbbbbb.

Reallocate resources to activities having a significant impact on value delivered to customers 90. Improving Supplier-Related Value Chain Activities—Supplier-related cost disadvantages can be attacked by: cccccc. Pressuring suppliers for lower prices dddddd.

Switching to lower-priced substitute inputs eeeeee. Collaborating closely with suppliers to identify mutual cost-saving opportunities. ffffff. A company can also enhance its customer value proposition through its supplier relationships.

91. Improving Value Chain Activities of Forward Channel Allies—There are three main ways to combat a cost disadvantage in the forward portion of the industry value chain: gggggg.

Pressure dealer-distributors and other forward channel allies to reduce their costs and markups. hhhhhh.

Work closely with forward channel allies to identify win-win opportunities to reduce costs. iiiiii. Change to a more economical distribution strategy, including switching to cheaper distribution channels or perhaps integrating forward into company-owned retail outlets.

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Section 6 Case Teaching Note for Case 09

jjjjjj. A company can improve its customer value proposition through the activities of forward channel partners through (1) cooperative advertising and promotions with forward channel allies; (2) training programs for dealers, distributors, or retailers to improve the purchasing experience or customer service; and (3) creating and enforcing operating standards for resellers or franchisees to ensure consistent store operations.

S. How Value Chain Activities Relate to Resource and Capabilities 92. A close relationship exists between the value-creating activities that a company performs and its resources and capabilities.

93. Because of the linkage between activities and enabling resources and capabilities, value chain analysis complements resource and capability analysis as another tool for assessing a company‘s competitive advantage.

IV. Question 4: What Is the Company’s Competitive Strength Relative to Key Rivals?

Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 4-4 Evaluate a company‘s competitive strength relative to key rivals.

94. An additional component of evaluating a company‘s situation is developing a comprehensive assessment of the company‘s overall competitive strength.

95. Making this determination requires answers to two questions: kkkkkk.

How does the company rank relative to competitors on each of the important factors that determine market success? llllll. All things considered, does the company have a net competitive advantage or disadvantage to major competitors?

96. The followings are steps for compiling a competitive strength assessment:

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mmmmmm. Make a list (usually 6–10) of the industry‘s key success factors and most telling measures of competitive strength or weakness. nnnnnn.

Assign a weight (must sum to 1.0) to each measure of competitive strength. oooooo.

Calculate the weighted strength ratings by scoring each competitor on each strength measure (using a 1–10 rating scale where 1 is very weak and 10 is very strong) and multiplying the assigned rating by the assigned weight. pppppp.

Sum the strength ratings on each factor to get an overall measure of competitive strength for each company being rated. qqqqqq.

Use the overall strength ratings to draw conclusions about the size and extent of the company‘s net competitive advantage or disadvantage and to take specific note of areas of strengths and weaknesses.

97. Interpreting the Competitive Strengths Assessment rrrrrr. Competitive strength assessments provide useful conclusions about a company‘s competitive situation. ssssss. The overall competitive strength scores indicate whether the company is at a net competitive advantage or disadvantage against each rival. tttttt. Table 4.3, Illustration of a Competitive Strength Assessment, provides an example of a Competitive Strength Assessment 98. When a company has important competitive strengths in areas where one or more rivals are weak, it makes sense to consider offensive moves to exploit rivals‘ competitive weaknesses.

99. When a company has competitive weaknesses in important areas where one or more rivals are strong, it makes sense to consider defensive moves to curtail its vulnerability.

V. Question 5: What Strategic Issues and Problem Must Be Addressed by Management?

Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 4-5

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Section 6 Case Teaching Note for Case 09

Understand how a comprehensive evaluation of a company‘s external and internal situations can assist managers in making critical decisions about their next strategic moves.

100.

The final and most important analytical step is to zero in on exactly what strategic issues that company managers need to address.

101.

This step involves drawing on the results of both industry and competitive analysis and the evaluations of the company‘s own competitiveness.

102.

Pinpointing the precise things that management needs to worry about sets the agenda for deciding what actions to take next to improve the company‘s performance and business outlook.

103.

Managers need to differentiate between major and minor worry lists. Dominantly minor issue lists are an indicator of solid planning and execution, while dominantly major issue lists are an indicator of significant challenges.

Connect Activity Use the Question Bank to build a quiz for the chapter to measure and reinforce learning.

Consider using the questions you select to build a comprehensive mid-term and final exam for the course. The assignment can be graded and posted automatically.

Chapter 5 Lecture Note The Five Generic Competitive Strategies Chapter Summary Chapter 5 describes the five basic competitive strategy options—which of the five to employ is a company‘s first and foremost choice in crafting overall strategy and beginning its quest for competitive advantage.

Lecture Outline I. Introduction 1. There are several basic approaches to competing successfully and gaining a competitive advantage, but they all involve giving buyers what they perceive as superior value compared to the offerings of rival sellers.

II. The Five Generic Competitive Strategies

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Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 5-1

Understand what distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of industry and competitive conditions than in others.

1. A company‘s competitive strategy deals exclusively with the specifics of management’s game plan for competing successfully—its specific efforts to please customers, strengthen its market position, counter the maneuvers of rivals, respond to shifting market conditions, and achieve a particular kind of competitive advantage.

2. The biggest and most important differences among competitive strategies boil down to: a. Whether a company‘s market target is broad or narrow b. Whether the company is pursuing a competitive advantage linked to low costs or differentiation CORE CONCEPT A competitive strategy concerns the specifics of management‘s game plan for competing successfully and achieving a competitive advantage over rivals.

3. Figure 5.1, The Five Generic Competitive Strategies—Each Stakes Out a Different Position in the Marketplace, examines how each of the five strategies stake out a different market position.

4. Five distinct competitive strategy approaches stand out: a. A low-cost provider strategy: striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers, usually by underpricing rivals. b. A broad differentiation strategy: seeking to differentiate the company‘s product/service offering from rivals‘ in ways that will appeal to a broad spectrum of buyers c. A focused low-cost strategy: concentrating on a narrow buyer segment and outcompeting rivals by serving niche members at a lower cost than rivals

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Section 6 Case Teaching Note for Case 09

d. A focused differentiation strategy: concentrating on a narrow buyer segment and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals‘ products e. A best-cost provider strategy: giving customers more value for the money by incorporating good-to-excellent product attributes at a lower cost than rivals; the target is to have the lowest (best) costs and prices compared to rivals offering products with comparable attributes III. Low-Cost Provider Strategies Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 5-2

Explain the major avenues for achieving a competitive advantage based on lower costs.

A company achieves low-cost leadership when it becomes the industry‘s lowest cost provider rather than just being one of perhaps several competitors with low costs.

CORE CONCEPT A low-cost leader‘s basis for competitive advantage is lower overall costs than competitors. Success in achieving a low-cost edge over rivals comes from eliminating and/or curbing ―nonessential‖ activities and/or out-managing rivals in performing essential activities.

104.

The Two Major Avenues for Achieving a Cost Advantage

1. To achieve a low-cost advantage over rivals, a firm‘s cumulative costs across its overall value chain are lower than competitors‘ cumulative costs. There are two ways to accomplish this: a. Performing essential value chain activities more cost-effectively than rivals. b. Revamping the firm‘s overall value chain to eliminate or bypass some cost-producing activities 2. Figure 5.2, Important Cost Drivers in a Company’s Value Chain, provides an illustration of each cost driver.

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CORE CONCEPT A cost driver is a factor that has a strong influence on a company‘s costs.

3. Cost-Efficient Management of Value Chain Activities: Managers must launch a concerted, ongoing effort to ferret out cost-saving opportunities in every part of the value chain. a. b. c. d. e. f. g. h. i.

Striving to capture all available economies of sale Taking full advantage of learning/experience curve effects Trying to operate facilities at full capacity Substituting lower cost inputs wherever doing so will not entail too great a sacrifice in quality Employing advanced production technology and process design to improve overall efficiency Using communications systems and information technology to achieve operating efficiencies Using the company‘s bargaining power vis-à-vis suppliers to gain concessions Being alert to the cost advantages of outsourcing and vertical integration Pursuing ways to boost labor productivity and lower overall compensation costs

4. Revamping the Value Chain: Dramatic costs advantages can emerge from finding innovative ways to eliminate or bypass cost-producing value chain activities. The primary ways companies can achieve a cost advantage by reconfiguring their value chains include: a. Selling direct to consumers and bypassing the activities and costs of distributors and dealers b. Streamlining operations by eliminating low value-added or unnecessary work steps and activities. c. Improving supply chain efficiency to reduce materials handling and shipping costs.

5. Concepts & Connections 5.1 describes the path that Vanguard has followed in achieving its position as the low-cost leader in the investment management industry

Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Concepts and Connections exercise. You can post instructions for the student within the

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assignment and collect their attachments for grading.

Concepts & Connections 5.1 Vanguard‘s Path to Becoming the Low-Cost Provider in Investment Management Discussion Question: How has Vanguard used a passive index investing strategy to gain competitive advantage as the investment market?

Answer: The student should be able to identify several elements of the passive index investing

strategy and discuss how they differ from conventional investment management methods. (1) Rather than making continuous purchases and sales of individual equities, a passive index strategy selects stocks that mirror major index markets in order to avoid transaction and management fees. (2) The company is based upon a client/investor ownership strategy which essentially cuts out the conventional shareholder and the profit they would expect. (3) The company has a very flat organizational structure with a very low turnover rate which allows for fast responses to market changes and lower overhead.

Together, these initiatives give the company a significant competitive advantage in the investment management market.

105.

When a Low-Cost Provider Strategy Works Best

1. A competitive strategy predicated on low-cost leadership is particularly powerful when: a. Price competition among rival sellers is especially vigorous b. The products of rival sellers are essentially identical and suppliers are readily available from any of several eager sellers c. There are a few ways to achieve product differentiation that have value to buyers d. Buyers incur low costs in switching their purchases from one seller to another 106.

Pitfalls to Avoid in Pursuing a Low-Cost Provider Strategy

1. Perhaps the biggest pitfall of a low-cost provider strategy is getting carried away with overly aggressive price cutting and ending up with lower, rather than higher, profitability.

2. A second big pitfall is relying on an approach to reduce costs that can be easily copied by rivals.

3. A third pitfall is becoming too fixated on cost reduction.

4. Even if these mistakes are avoided, a low-cost provider strategy still entails risk.

IV. Broad Differentiation Strategies

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Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

1. Differentiation strategies are attractive whenever buyers‘ needs and preferences are too diverse to be fully satisfied by a standardized product or by sellers with identical capabilities.

CORE CONCEPT The essence of a broad differentiation strategy is to offer unique product or service attributes that a wide range of buyers find appealing and worth paying for.

2. Successful differentiation allows a firm to: a. Command a premium price for its product b. Increase unit sales c. Gain buyer loyalty to its brand 3. Differentiation enhances profitability whenever the extra price the product commands outweighs the added costs of achieving the differentiation.

Approaches to Differentiation LO 5-3

Explain the major avenues for developing a competitive advantage based on differentiating a company‘s product or service offering from the offerings of rivals.

1. Companies can pursue differentiation from many angles.

2. The most appealing approaches to differentiation are those that are hard or expensive for rivals to duplicate.

3. Differentiation that creates switching costs that lock in buyers also provides a route to sustainable advantage.

107.

Managing the Value Chain in Ways that Enhance Differentiation CORE CONCEPT

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Section 6 Case Teaching Note for Case 09

A value driver is a value chain activity or factor that can have a strong effect on customer value and creating differentiation.

1. Figure 5.3, Important Uniqueness Drivers in a Company’s Value Chain, provides an illustration of each cost driver.

2. Differentiation opportunities can often be found in uniqueness drivers; possibilities include the following: a. b. c. d. e. f.

Seeking out high-quality inputs Striving for innovation and technological advances Creating superior product features, design, and performance.

Investing in production-related R&D activities Pursuing continuous quality improvement Emphasizing human resource management activities that improve the skills, expertise, and knowledge of company personnel g. Increasing emphasis on marketing and brand-building activities h. Improving customer service or adding additional service.

3. Revamping the Value Chain to Increase Differentiation—Differentiation opportunities can exist in activities all along an industry‘s value chain; possibilities include the following: a. Coordinating with channel allies to enhance customer perception of value b. Coordinating with suppliers to better address customer needs

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4. Strong relationships with suppliers can also mean that the company‘s supply requirements are prioritized when industry supply is insufficient to meet overall demand.

108.

Delivering Superior Value via a Differentiation Strategy

1. While it is easy enough to grasp that a successful differentiation strategy must entail creating buyer value in ways unmatched by rivals, the big question is which of three basic differentiating approaches to take in delivering unique buyer value: a. Include product attributes and user features that lower the buyer’s costs. b. Incorporate tangible features that improve product performance. c. Incorporate intangible features that enhance buyer satisfaction in noneconomic ways.

109.

Perceived Value and the Importance of Signaling Value

1. Buyers seldom pay for value they do not perceive, no matter how real the unique extras may be. Thus, the price premium commanded by a differentiation strategy reflects the value actually delivered to the buyer and the value perceived by the buyer.

2. Signals of value that may be as important as actual value include: (1) when the nature of differentiation is subjective or hard to quantify, (2) when buyers are making first-time purchases, (3) when repurchase is infrequent, and (4) when buyers are unsophisticated.

110.

When a Differentiation Strategy Works Best

1. Differentiation strategies tend to work best in market circumstance where: a. b. c. d.

111.

Buyer needs and uses of the product are diverse There are many ways to differentiate the product or service that have value to buyers.

Few rival firms are following a similar differentiation approach Technological change is fast-paced and competition revolves around rapidly evolving product features.

Pitfalls to Avoid in Pursuing a Differentiation Strategy

1. Differentiation strategies can fail for any of several reasons.

2. A differentiation strategy keyed to product or service attributes that are easily and quickly copied is always suspect.

3. Differentiation strategies can also falter when buyers see little value in the unique attributes of a company‘s product.

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4. Overspending on efforts to differentiate is a strategy flaw that can erode profitability.

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5. Other common pitfalls and mistakes in pursuing differentiation may include: a. Failing to open up meaningful gaps in quality or service or performance features visà-vis the products of rivals. b. Over differentiating so that the product quality or service level exceeds buyers‘ needs. c. Trying to charge too high a price premium 6. A low-cost provider strategy can defeat a differentiation strategy when buyers are satisfied with a basic product and do not think extra attributes are worth a higher price.

V. Focused (or Market Niche) Strategies Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

1. What sets focused strategies apart from low-cost leadership or broad differentiation strategies is concentrated attention on a narrow piece of the total market.

2. The target segment or niche can be defined by: a. Geographic uniqueness b. Special product attributes that appeal only to niche members A Focused Low-Cost Strategy 1. A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than rival competitors.

2. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment.

3. Focused low-cost strategies are fairly common.

4. Concepts & Connections 5.3, describes how Clinícas del Azúcar‘s focus on lowering the costs of diabetes care is allowing it to address a major health issue in Mexico.

Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this

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Concepts and Connections exercise. You can post instructions for the student within the assignment and collect their attachments for grading.

Concepts & Connections 5.2 Clinícas del Azúcar‘s Focused Low-Cost Strategy

Discussion Question: Discuss the advantages this organization achieves from its focused low-cost provider strategy.

Answer: Through utilization of this type of strategy, the company has developed

proprietary technology for diagnosing and managing the illness along with a streamlined care system that reduces the need for multiple referrals and multiple trips to see other professionals. This has resulted in a ―one-stop shop‖ for the diagnosis and treatment of diabetes within their target market.

112.

A Focused Differentiation Strategy

Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Concepts and Connections exercise. You can post instructions for the student within the assignment and collect their attachments for grading.

Concepts & Connections 5.3 describes how Canada Goose has become a popular winter apparel brand with revenues of nearly $300 million in 2016 through its focused differentiation strategy.

113.

When a Focused Low-Cost or Focused Differentiation Strategy Is Viable

1. A focused strategy aimed at securing a competitive edge based either on low cost or differentiation becomes increasingly attractive as more of the following conditions are met: a. The target niche is big enough to be profitable and offers good growth potential b. Industry leaders have chosen not to compete in the niche. c. It is costly or difficult for multi-segment competitors to put capabilities in place to meet specialized needs of the target market niche and at the same time satisfy the expectations of their mainstream customers d. The industry has many different niches and segments e. Few, if any, other rivals are attempting to specialize in the same target segment 114.

The Risks of a Focused Low-Cost or Focused Differentiation Strategy

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1. Focusing carries several risks such as: a. The chance that competitors will find effective ways to match the focused firm‘s capabilities in serving the target niche b. The potential for the preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers c. The segment may become so attractive it is soon inundated with competitors, intensifying rivalry and splintering segment profits Connect Activity

Consider adding a File Attachment assignment requiring the student to develop a response to this Concepts and Connections exercise. You can post instructions for the student within the assignment and collect their attachments for grading.

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Concepts & Connections 5.3 Canada Goose‘s Focused Differentiation Strategy Discussion Question: How does Canada Goose‘s choice of strategy differentiate it from other luxury outerwear companies in the marketplace?

Answer: Canada Goose chose to cease production of private-label products as well as nonouterwear products in order to focus on its luxury outerwear market. The company further differentiated its products by maintaining its Canadian production operation and using locally supplied raw material such as down and fur. Taken together, this gave the company significant differentiation in a narrow target market.

1. Focused differentiation strategies are keyed to offering carefully designed products or services to appeal to the unique preferences and needs of a narrow, well-defined group of buyers.

2. Most markets contain a buyer segment willing to pay a price premium for the very finest items available, thus opening the strategic window for some competitors to pursue differentiation-based focused strategies.

VI. Best-Cost Provider Strategies Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 5-4

Recognize the attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.

1. Best-cost provider strategies aim at giving customers more value for the money. The objective is to deliver superior value to buyers by satisfying their expectations on key quality/service/features/performance attributes and beating their expectations on price.

CORE CONCEPT Best-cost provider strategies are a hybrid of low-cost provider and differentiation strategies that aim at satisfying buyer expectations on key quality/features/performance/service attributes and beating customer expectations on price.

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2. A company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals, and this capability is contingent on: a. A superior value chain configuration that eliminates or minimizes activities that do not add value b. Unmatched efficiency in managing essential value chain activities c. Core competencies that allow differentiating attributes to be incorporated at a low cost.

3. A best-cost provider can use its low-cost advantage to underprice rivals whose products or services have similar upscale attributes and still earn attractive profits.

4. Concepts & Connections 5.4 American Giant’s Best-Cost Provider Strategy, describes how Trader Joe‘s has applied the principles of a focused best-cost provider strategy to achieve competitive advantage in the retail grocery industry.

Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Concepts and Connections exercise. You can post instructions for the student within the assignment and collect their attachments for grading.

When a Best-Cost Provider Strategy Works Best 1. A best-cost provider strategy works best in markets where: a. Product differentiation is the norm b. Attractively large numbers of value-conscious buyers can be induced to purchase midrange products rather than the basic products of low-cost producers or the expensive products of top-of-the-line differentiators 2. Best-cost provider strategies also work well in recessionary times when great masses of buyers become value-conscious Concepts & Connections 5.4 Trader Joe‘s Focused Best-Cost Strategy Discussion Question: Discuss how Trader Joe‘s has been able to achieve its best-cost leadership status in the industry.

Answer: Trader Joe‘s has combined the sale of private label products, great prices, and

store locations that target value-focused consumers to provide a value proposition that

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consistently ranks them high on product quality despite their relatively low number of SKUs. The resulting smaller inventory reduces inventory costs, and the smaller store size reduces rents, taken together, which increases the firm‘s profit potential.

115.

The Danger of an Unsound Best-Cost Provider Strategy

1. The danger of a best-cost provider strategy is that a company using it will get squeezed between the strategies of firms using low-cost and differentiation strategies.

2. To be successful, a best-cost provider must offer buyers significantly better product attributes in order to justify a price above what low-cost leaders are charging.

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VII. Successful Competitive Strategies Are Resource Based Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

1. For a company‘s competitive strategy to succeed in delivering good performance and the intended competitive edge over rivals, it has to be: a. Well-matched to a company‘s internal situation b. Supported by an appropriate set of resources c. Powered by know-how and competitive capabilities Connect Activity Use the Question Bank to build a quiz for the chapter to measure and reinforce learning.

Consider using the questions you select to build a comprehensive mid-term and final exam for the course. The assignment can be graded and posted automatically.

Chapter 6 Lecture Note Strengthening a Company’s Competitive Position: Strategic Moves, Timing, and Scope of Operations Chapter Summary Chapter 6 explains that once a company has settled on which of the five generic competitive strategies to employ, attention must turn to what other strategic actions can be taken in order to complement its competitive approach and round out its business strategy. As discussed in earlier chapters, a company‘s overall business strategy includes not only the details of its competitive strategy, but also other strategic initiatives that can promote competitive advantage.

I. Introduction Managers must carefully evaluate and choose from the several measures that can enhance a company‘s strategy as illustrated in Figure 6.1, Strategies to Strengthen a Company‘s Competitive Approaches.

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   

When to undertake strategic moves based upon whether it is advantageous to be a first mover or a fast follower or a late mover.

Whether and when to go on the offensive and initiate aggressive strategic moves to improve the company‘s market position.

Whether and when to employ defensive strategies to protect the company‘s market position.

Scope of the firm decisions to broaden resources and capabilities, achieve cost efficiencies, or strengthen market position: • Whether to integrate backward or forward into more stages of the industry value chain.

• Which value chain activities, if any, should be outsourced.

• Whether to enter into strategic alliances or partnership arrangements with other enterprises.

• Whether to bolster the company‘s market position by merging with or acquiring another company in the same industry.

Lecture Outline II. Launching Strategic Offensives to Improve a Company’s Market Position Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 6-1

Understand whether and when to pursue offensive or defensive strategic moves to improve a company‘s market position.

No matter which of the five generic competitive strategies a company employs, there are times when a company should be aggressive and go on the offensive. d. Choosing the Basis for Competitive Attack 2. Generally, strategic offensives should be grounded in a company‘s competitive assets and strong points and should be aimed at exploiting competitor weaknesses.

3. Ignoring the need to tie a strategic offensive to a company‘s competitive strengths is like going to war with a popgun—the prospects for success are dim.

4. The principal offensive strategy options include the following:

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116. Offering an equally good or better product at a lower price 117. Leapfrogging competitors by being the first to market with next-generation technology or products 118. Pursuing continuous product innovation to draw sales and market share away from less innovative rivals 119. Pursuing disruptive product innovations to create new markets 120. Adopting and improving on the good ideas of other companies (rivals or otherwise) 121. Using hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent or distracted rivals 122. Launching a preemptive strike to capture a rare opportunity or secure an industry‘s limited resources e. Choosing Which Rivals to Attack—Some rivals offer a more attractive target than others: Market leaders that are vulnerable.

5. Runner-up firms with weaknesses in areas where the challenger is strong.

6. Struggling enterprises that are on the verge of going under.

7. Small local and regional firms with limited capabilities. f. Blue Ocean Strategy—A Special Kind of Offensive CORE CONCEPT

Blue ocean strategies offer growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand.

A blue ocean strategy seeks to gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and, instead, inventing a new industry or distinctive market segment that renders existing competitors largely irrelevant and allows a company to create and capture altogether new demand.

8. This strategy views the business universe as consisting of two distinct types of market space: Industry boundaries are defined and accepted, the competitive rules of the game are well understood by all industry members, and companies try to outperform rivals by capturing a bigger share of existing demand.

123. Industry does not really exist yet, is untainted by competition, and offers wide open opportunity for profitable and rapid growth if a company can come up with a

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product offering and strategy that allows it to create new demand rather than fight over existing demand.

Concepts & Connections 6.1, Etsy’s Blue Ocean in the Online Retailing of Homemade Crafts, gives a clear example of how such a strategy might be employed in the fashion industry.

Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Concepts and Connections exercise. You can post instructions for the student within the assignment and collect their attachments for grading.

Concepts & Connections 6.1 Etsy‘s Blue Ocean in the Online Retailing of Homemade Crafts Discussion Question: Did Etsy pursue their Blue Ocean strategy in an industry with well-defined boundaries and competitive rules or did they pioneer a new industry? What was the fundamental nature of their competitive advantage?

Answer: The student should point out that Etsy started out by narrowing the ebay business model to focus on only connecting customers that value craftsmanship with vendors that provide limited quantity homemade crafts. In this sense, there were welldefined boundaries and competitive rules in place but Etsy carved out a new space for this buyer–seller relationship within those boundaries. This focus was the fundamental nature of their competitive advantage.

III. Using Defensive Strategies to Protect a Company’s Market Position and Competitive Advantage Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

All firms in a competitive market are subject to the offensive challenges created by rival firms. Defensive strategies counter these challenges by (1) lowering the risk of being attacked, (2) weakening the impact of any attach that occurs, and (3) influencing challengers to aim their attacks at other rivals.

9. Blocking the Avenues Open to Challengers The most frequently employed approach to defending a company‘s present position is to block an attack.

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Methods can include alternative technology, introduction of new features and models, maintaining economy priced options, enhancing support, and volume discounts to dealers.

10. Signaling Challengers that Retaliation Is Likely The goal is to discourage challengers from attacking or diverting their attack to another rival.

124. Methods can include:    

Publicly announcing management‘s commitment to maintain the firm‘s present market share Publicly committing the company to a policy of matching competitors‘ terms or prices Maintaining a war chest of cash and marketable securities Making an occasional strong counter response to the moves of weak competitors

IV. Timing a Company’s Offensive and Defensive Moves Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 6-2

Understand whether and when to pursue offensive or defensive strategic moves to improve a company‘s market position.

When to make a strategic move is often as crucial to success as what strategic move to make.

This is especially important when first move advantage or disadvantages exist.

CORE CONCEPT Because of first-mover advantages and disadvantages, competitive advantage can spring from when a move is made as well as from what move is made.

11. The Potential for first-mover advantages is great however, first-movers typically bear greater risks and development costs than firms that move later 12. There are five conditions where first-movers have an advantage:

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When pioneering helps build a firm‘s reputation with buyers and creates brand loyalty 125. When a first mover‘s customers will thereafter face significant switching costs 126. When property rights protections thwart rapid imitation of the initial move 127. When an early lead enables the first mover to move down the learning curve ahead of rivals 128. When a first mover can set the technical standard for the industry 13. The Potential for Late-Mover Advantages or First-Mover Disadvantages. There are conditions where late-mover advantages exist: When pioneering leadership is more costly than imitating followership and only negligible learning/experience curve benefits accrue to the leader—a condition that allows a follower to end up with lower costs than the first mover.

129. When the products of an innovator are somewhat primitive and do not live up to buyer expectations, thus allowing a clever follower to win disenchanted buyers away from the leader with better-performing products.

130. When potential buyers are skeptical about the benefits of a new technology or product being pioneered by a first mover.

131. When rapid market evolution (due to fast-paced changes in either technology or buyer needs or expectations) gives fast followers and maybe even cautious late movers the opening to leapfrog a first mover‘s products with more attractive nextversion products.

Deciding whether to Be an Early Mover or Late Mover In weighing the pros and cons of first mover versus fast follower, it matters whether the race to market leadership in a particular industry is a marathon or a sprint. In a marathon, a slow mover is not unduly penalized—first mover advantage can be fleeting.

132. The lesson is that there is a market penetration curve for every emerging opportunity; typically, the curve has an inflection point at which all the pieces of the business model fall into place, buyer demand explodes, and the market takes off.

133. Any company that seeks competitive advantage by being a first mover thus needs to ask some hard questions:   

Does market takeoff depend on the development of complementary products of services that currently are not available?

Is new infrastructure required before buyer demand can surge?

Will buyers need to learn new skills or adopt new behaviors? Will buyers

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

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encounter high switching costs?

Are there influential competitors in a position to delay or derail the efforts of a first mover?

134. When the answer to any of these questions is yes, then a company must be careful not to pour too many resources into getting ahead of the market opportunity V. Strengthening a Company’s Market Position via Its Scope of Operations Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 6-3

Identify the strategic benefits and risks of expanding a company‘s horizontal scope through mergers and acquisitions.

Separate from competitive moves and timing, managers must also carefully consider the scope of a company‘s operations. These decisions essentially determine where the boundaries of the firm lie and the degree to which the operations within the boundaries are common.

CORE CONCEPT The scope of the firm refers to the range of activities which the firm performs internally, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses.

14. Four dimensions of firm scope have the capacity to strengthen a company‘s position in a given market The breadth of its product and service offerings 135. The range of activities the firm performs internally 136. The extent of its geographic market presence 137. Its mix of businesses CORE CONCEPT Horizontal scope is the range of product and service segments that a firm serves within its focal market.

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CORE CONCEPT Vertical scope is the extent to which a firm‘s internal activities encompass one, some, many, or all of the activities that make up an industry‘s entire value chain system, ranging from raw material production to final sales and service activities.

VI. Horizontal Merger and Acquisition Strategies Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

Mergers and acquisitions are a much-used strategic plan. They are especially suited for situations where alliances and partnerships do not go far enough in providing a company with access to the needed resources and capabilities.

15. Combining the operations of two companies within the same industry, via merger or acquisition, is an attractive strategic option for achieving operating economies, strengthening the resulting company‘s competencies and competitiveness, and opening up avenues of new market opportunity.

16. The difference between a merger and an acquisition relates more to the details of ownership, management control, and financial arrangements than to strategy and competitive advantage. The resources, competencies, and competitive capabilities of the newly created enterprise end up much the same whether the combination is the result of acquisition or merger.

17. Merger and acquisitions strategies typically set sights on achieving any of five objectives: Extending a company‘s business into new product categories 138. Creating a more cost-efficient operation out of the combined companies 139. Expanding a company‘s geographic coverage 140. Gaining quick access to new technologies or complementary resources and capabilities 141. Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities 18. Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results— Many mergers and acquisitions do not always produce the hoped for outcomes, reasons include:

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Cost savings may prove smaller than expected.

142. Gains in competitive capabilities may take substantially longer to realize or, worse, may never materialize at all.

143. Key employees at the acquired company can quickly become disenchanted and leave.

144. The morale of company personnel who remain can drop to disturbingly low levels because they disagree with newly instituted changes.

145. Differences in management styles and operating procedures can prove hard to resolve 19. Illustration Concepts & Connections 6.2, Walmart‘s Expansion into E-Commerce via Horizontal Acquisition describes how the company developed its horizontal acquisition strategy to fill in its e-commerce development gaps in order to better compete with Amazon.

Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Concepts and Connections exercise. You can post instructions for the student within the assignment and collect their attachments for grading.

ILLUSTRATION CAPSULE 6.2 Walmart‘s Expansion into E-Commerce via Horizontal Acquisition Discussion Question: How did Walmart use a horizontal acquisition strategy to gain competitive advantage in E-Commerce?

Answer: Walmart‘s executive team recognized that the boundaries between traditional store retailing and online retailing were beginning to blur. Rather than investing in the development of e-commerce capability, the firm chose to acquire Jet.com. Jet.com was an ecommerce start-up that had been developed to compete directly with industry leader Amazon. The low-price leader strategy developed by Jet.com fit well with Walmart‘s position as low-price strategy and the acquisition drastically cut short the time required to gain entry into e-commerce when compared with an internal development effort.

VII. Vertical Integration Strategies Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

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LO 6-4

Explain the advantages and disadvantages of extending a company‘s scope of operations via vertical integration.

Vertical integration extends a firm‘s competitive and operating scope within the same industry. It involves expanding the firm‘s range of activities backward into sources of supply and/or forward toward end users.

20. Vertical integration strategies can aim at full integration, partial integration, or even tapered integration.

CORE CONCEPT A vertically integrated firm is one that performs value chain activities along more than one stage of an industry‘s value chain system.

CORE CONCEPT Backward integration involves performing industry value chain activities previously performed by suppliers or other enterprises engaged in earlier stages of the industry value chain; forward integration involves performing industry value chain activities closer to the end user.

The Advantages of a Vertical Integration Strategy The two best reasons for investing company resources in vertical integration are to strengthen the firm‘s competitive position and/or boost its profitability, 21. Integrating Backward to Achieve Greater Competitiveness: For backward integration to be a viable and profitable strategy, a company must be able to: Achieve the same scale economies as outside suppliers.

146. Match or beat supplier‘s production efficiency with no drop-off in quality.

22. Backward vertical integration can produce a differentiation-based competitive advantage when a company, by performing activities internally contributes to a better quality product/service offering, improves the caliber of its customer service, or in other ways enhances the performance of its final product.

23. Integrating Forward to Enhance Competitiveness: The strategic impetus for forward integration is to gain better access to end users and better market visibility.

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Forward integration can lower costs by increasing efficiency and bargaining power. In addition, it can allow manufacturers to gain better access to end users.

147. Forward integration can improve market visibility and include the end user‘s purchasing experience as a differentiating feature.

24. Forward Vertical Integration and Internet Retailing: Bypassing regular wholesale/retail channels in favor of direct sales and Internet retailing can have appeal if it lowers distribution costs, produces a relative cost advantage over certain rivals, offers higher margins, or results in lower selling prices to end users. g. The Disadvantages of a Vertical Integration Strategy—Vertical integration has some substantial drawbacks: It raises a firm‘s capital investment in the industry 25. Integrating into more industry value chain segments increases business risk if industry growth and profitability sour 26. Vertically integrated companies are often slow to embrace technological advances 27. It can result in less flexibility in accommodating shifting buyer preferences.

28. It may not be able to achieve economies of scale through capacity matching problems 29. It often calls for the development of new skills and business capabilities VIII. Outsourcing Strategies: Narrowing the Scope of Operations Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 6-5

Describe the conditions that favor farming out certain value chain activities to outside parties.

CORE CONCEPT Outsourcing involves contracting out certain value chain activities to outside specialists and strategic allies.

Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Concepts and Connections exercise. You can post instructions for the student within the

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assignment and collect their attachments for grading.

Concepts & Connections 6.3 Tesla‘s Vertical Integration Strategy Discussion Question: In what way has Tesla used vertical integration to gain competitive advantage in the automotive industry?

Answer: The student should be able to identify several ways in which the company has integrated backward into component manufacturing to include batteries and seats as well as forward integration into distribution, sales, and service. This has allowed the company to respond quickly to changes in market demands and maintain a higher level of control over the entire supply chain. While not strictly vertical integration, Tesla has also invested in the critical charging infrastructure necessary to support the adoption of their electric vehicles.

When Outsourcing Value Chain Activities Makes Sense: An activity can be performed better or more cheaply by outside specialist 148. The activity is not crucial to the firm’s ability to achieve sustainable competitive advantage and won’t hollow out its capabilities, core competencies, or technical know-how.

149. It improves organizational flexibility and speeds time to market.

150. It reduces the company‘s risk exposure to changing technology and/or changing buyer preferences 151. It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does.

30. The Big Risk of Outsourcing Value Chain Activities—is that a company will farm out too many or the wrong types of activities and thereby hollow out its own capabilities.

IX. Strategic Alliances and Partnerships Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 6-6

Explain how strategic alliances and collaborative partnerships can bolster a company‘s collection of resources and capabilities.

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Companies in all types of industries have elected to form strategic alliances and partnerships to complement their accumulation of resources and capabilities and strengthen their competitiveness in domestic and international markets.

31. A strategic alliance is a formal agreement between two or more separate companies in which there is strategically relevant collaboration of some sort, joint contribution of resources, shared risk, shared control, and mutual dependence.

CORE CONCEPT A strategic alliance is a formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective.

32. Collaborative relationships between partners may entail a contractual agreement, but they commonly stop short of formal ownership ties between the partners.

33. A joint venture is a partnership involving the establishment of an independent corporate entity that is jointly owned and controlled by two or more companies.

CORE CONCEPT A joint venture is a type of strategic alliance that involves the establishment of an independent corporate entity that is jointly owned and controlled by the two partners.

34. Capturing the Benefits of Strategic Alliances—Six factors influence the extent to which companies benefit from alliances and partnerships: Picking a good partner.

152. Being sensitive to cultural differences.

153. Recognizing that the alliance must benefit both sides.

154. Ensuring that both parties live up to their commitments.

155. Structuring decision making process so that actions can be taken swiftly when needed.

156. Managing the learning process and then adjusting the alliance agreement over time to fit new circumstances.

35. Most alliances with an objective of technology sharing or providing market access turn out to be temporary, fulfilling their purpose after a few years because the benefits of mutual learning have occurred.

36. The Strategic Dangers of Relying on Alliances for Essential Resources and Capabilities

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The Achilles‘ heel of alliances and cooperative strategies is becoming dependent on other companies for essential expertise and capabilities.

157. Some alliances hold only limited potential because the partner guards its most valuable skills and expertise; in such instances, acquiring or merging with a company possessing the desired know-how and resources is a better solution.

Connect Activity Use the Question Bank to build a quiz for the chapter to measure and reinforce learning.

Consider using the questions you select to build a comprehensive mid-term and final exam for the course. The assignment can be graded and posted automatically.

Chapter 7 Lecture Note Strategies for Competing in International Markets Chapter Summary Chapter 7 focuses on strategic options for expanding beyond domestic boundaries and competing in the markets of either a few or a great many countries. The chapter will introduce a number of core concepts including multi-country competition, global competition, profit sanctuaries, and cross-cultural differences in cultural, demographic, and market conditions. Chapter 7 includes sections on strategy options for entering and competing in foreign markets, the importance of locating operations in the most advantageous countries, and the special circumstances of competing in such emerging markets.

Lecture Outline I. Why Companies Expand into Foreign Markets LO 7-1

Identify the primary reasons companies choose to compete in international markets.

37. A company may opt to expand outside its domestic market for any of four major reasons: 158. To gain access to new customers—Expanding into foreign markets offers potential for increased revenues, profits, and long-term growth and becomes an especially attractive option when a company‘s home markets are mature.

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159. To achieve lower costs through economies of scale, experience, and increased purchasing power—Many companies are driven to sell in more than one country because domestic sales volume is not large enough to fully capture manufacturing economies of scale or learning curve effects and thereby substantially improve the firm‘s cost-competitiveness.

160. To gain access to low-cost inputs of production—Companies in industries based on natural resources (e.g., oil and gas, minerals, rubber, and lumber) often find it necessary to operate in the international arena since raw material supplies are located in different parts of the world and can be accessed more cost-effectively at the source 161. To further exploit its core competencies—A company may be able to leverage its competencies and capabilities into a position of competitive advantage in foreign markets as well as just domestic markets.

162. To gain access to resources and capabilities located in foreign markets—An increasingly important motive for entering foreign markets is to acquire resources and capabilities that cannot be accessed as readily in a company‘s home market.

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II. Factors that Shape Strategy Choices in Foreign Markets Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 7-2

Understand why and how differing market conditions across countries influence a company‘s strategy choices in international markets.

Four important factors shape a company‘s strategic approach to competing in foreign markets: The degree to which there are important cross-country differences in demographic, cultural, and market conditions 38. Whether opportunities exist to gain a location-based advantage based on wage rates, worker productivity, inflation rates, energy costs, tax rates, and other factors that impact cost structure 39. The risks of adverse shifts in currency exchange rates 40. The extent to which governmental policies affect the local business climate h. Cross-Country Differences in Cultural, Demographic, and Market Conditions Buyer tastes for a particular product or service sometimes differ substantially from country to country.

41. Understandably, differing population sizes, income levels, and other demographic factors give rise to considerable differences in market size and growth rates from country to country.

42. Market growth can be limited by the lack of infrastructure or established distribution and retail networks in emerging markets.

43. The managerial challenge at companies with international or global operations is how best to tailor a company‘s strategy to take all these cross-country differences into account. i. Opportunities for a Location-Based Competitive Advantage Differences in wage rates, worker productivity, inflation rates, energy costs, tax rates, government regulations, and the like create sizable variations in manufacturing costs

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from country to country.

44. A company’s operating costs and profitability are significantly impacted by where its production, distribution, and customer service activities are located. j. Industry Cluster Knowledge Sharing Opportunities There are advantages available to companies operating in a location containing a cluster of related industries, including others within the same value chain system and the makers of complementary products or those that are technologically related.

45. The advantage comes from the close collaboration with key suppliers and the greater knowledge sharing throughout the cluster. k. The Risks of Adverse Exchange Rate Shifts The volatility of exchange rates greatly complicates the issue of geographic cost advantages.

Currency exchange rates often fluctuate as much as 20 to 40 percent annually.

46. Changes of a large magnitude can either totally wipe out a country‘s low-cost advantage or transform a former high-cost location into a competitive cost location.

47. The lesson of fluctuating exchange rates is that companies that export goods to foreign countries always gain in competitiveness when the currency of the country in which the goods are manufactured is weak. Exporters are disadvantaged when the currency of the country where goods are being manufactured grow stronger. l. The Impact of Host Government Policies on the Business Climate in Host Countries National governments enact all kinds of measures affecting business conditions and the operations of foreign companies in their markets.

48. A country‘s business climate is also a function of the political and economic risks associated with operating within its borders.

Political risks have to do with the instability of weak governments or the potential for future elections to produce government leaders hostile to foreign-owned businesses.

163. Economic risks have to do with the threat of piracy and lack of protection for the company‘s intellectual property and the stability of a country‘s economy CORE CONCEPT

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Political risks stem from instability or weakness in national governments and hostility to foreign business; economic risks stem from the stability of a country‘s monetary system, economic and regulatory policies, and the lack of property rights protections.

III. Strategy Options for Entering Foreign Markets Connect Activity

Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 7-3

Identify the five general modes of entry into foreign markets.

There are five general modes of entry for a company that decides to expand outside its domestic market and compete internationally or globally: Maintain a national (one-country) production base and export goods to foreign markets 164. License foreign firms to produce and distribute the company‘s products 165. Employ a franchising strategy 166. Establish a subsidiary in a foreign market 167. Rely on strategic alliances or joint ventures with foreign partners to enter new country markets Export Strategies Using domestic plants as a production base for exporting goods to foreign markets is an excellent initial strategy for pursuing international sales.

49. With an export strategy, a manufacturer can limit its involvement in foreign markets by contracting with foreign wholesalers experienced in importing to handle the entire distribution and marketing function in their countries or regions of the world.

50. An export strategy is vulnerable when: Manufacturing costs in the home country are substantially higher than in foreign countries where rivals have plants 168. The costs of shipping the product to distant foreign markets are relatively high 169. Adverse fluctuations occur in currency exchange rates

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m. Licensing Strategies Licensing makes sense when a firm with valuable technical know-how or a unique patented product has neither the internal organizational capability nor the resources to enter foreign markets.

51. Licensing also has the advantage of avoiding the risks of committing resources to country markets that are unfamiliar, politically volatile, economically unstable, or otherwise risky.

52. The big disadvantage of licensing is the risk of providing valuable technological knowhow to foreign companies and thereby losing some degree of control over its use. n. Franchising Strategies While licensing works well for manufacturers and owners of proprietary technology, franchising is often better suited to the global expansion efforts of service and retailing enterprises.

53. Franchising has much the same advantages as licensing.

54. The franchisee bears most of the costs and risks of establishing foreign locations while the franchisor has to expend only the resources to recruit, train, support, and monitor franchisees.

55. The big problem a franchisor faces is maintaining quality control.

56. Another problem that may arise is whether to allow foreign franchisees to make modifications in the franchisor‘s product offerings so as to better satisfy the tastes and expectations of local buyers. o. Foreign Subsidiary Strategies Companies pursuing international expansion may elect to take responsibility for the performance of all essential value chain activities in foreign markets.

57. Companies that prefer direct control over all aspects of operating in a foreign market can establish a wholly owned subsidiary Acquisition: quicker option and might be the least risky and cost-effective means of entry for a firm without significant knowledge of the local market.

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170. Internal Development: requires experience, a strong global position, and a sufficient resource pool.

58. Four other conditions make an internal start-up strategy appealing: When creating an internal start-up is cheaper than making an acquisition.

171. When adding new production capacity will not adversely impact the supply– demand balance in the local market.

172. When a start-up subsidiary has the ability to gain good distribution access (perhaps because of the company‘s recognized brand name).

173. When a start-up subsidiary will have the size, cost structure, and resources to compete head-to-head against local rivals. p. Alliances and Joint Ventures Strategies Historically, export minded firms in industrialized nations sought alliances with firms in less developed countries to import and market their products locally—such approvals were often necessary to win approval for entry from the host country‘s government.

59. The strategic appeal of cooperative arrangements between domestic and foreign companies: Gaining better access to attractive company markets 174. To capture economies of scale in production and/or marketing 175. To fill gaps in technical expertise and/or knowledge of local markets 176. To share distribution facilities and dealer networks and to mutually strengthen each partner‘s access to buyers 177. Cross border allies can direct their competitive energies more toward mutual rivals and less toward one another 178. When companies wanting to enter a new foreign market conclude that alliances with local companies are an effective way to establish working relationships with key officials in the host country government 179. Alliances can be a particularly useful way for companies across the world to gain agreement on important technical standards 60. What makes cross-border alliances an attractive strategic means of gaining the above types of benefits is that entering into alliances and strategic partnerships allows a

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company to preserve its independence.

61. Concepts & Connections 7.1 shows how Walgreens pursued an Alliance-based strategy with Alliance Boots in order to facilitate its expansion abroad.

Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Concepts and Connections exercise. You can post instructions for the student within the assignment and collect their attachments for grading.

Concepts & Connections 7.1 Walgreens Boots Alliance, Inc.: Entering Foreign Markets via Alliance Followed by Merger Discussion Question: How did Walgreens use its alliance with Boots Alliance to gain sustainable global competitive advantage?

Answer: The student should note that the two companies have complementary rather than competitive assets and expertise. Walgreens is dominantly a U.S. retail seller while Boots Alliance is a European retail and wholesale seller. The alliance gave Walgreens a swift entry into foreign markets by leveraging the global footprint of Boots Alliance with 3,300 stores across 10 countries. They were also able to spread into the related field of wholesale drug sales via Boots Alliance‘s large European distribution network for wholesale drugs.

The student should also note that the success of the alliance let to the acquisition of Boots Alliance by Walgreens, and that the resulting global company gained significant price negotiating power in addition to growing global revenue and market share. This had the net effect of greatly increasing revenue while reducing overall costs thereby producing sustainable global competitive advantage.

62. The Risks of Strategic Alliances with Foreign Partners: Alliances and joint ventures with foreign partners have their pitfalls.

Allies typically have to overcome language and cultural barriers and figure out how to deal with diverse operating practices.

180. It is not unusual for partner to discover they have conflicting objectives and strategies, deep differences of opinion about how to proceed, or important differences in corporate values and ethical standards.

181. Tensions build up, working relationships cool, and the hoped-for-benefits never materialize.

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182. The recipe for successful business alliances requires many meeting of many people working in good faith over a period of time to iron out what is to be shared, what is to remain proprietary, and how the cooperative arrangements will work.

IV. International Strategy: The Three Principle Options Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 7-4

Identify the three main options for tailoring a company‘s international strategy to crosscountry differences in market conditions and buyer preferences.

The company‘s strategy for competing in two or more countries simultaneously Companies must choose whether to vary the competitive approach to fit specific market conditions and buyer preferences in each country or to employ essentially the same strategy in all countries.

63. Figure 7.1, A Company‘s Three Fundamental Strategic Options for Competing Internationally, highlights a company‘s options and their relationship to buyer preferences and market conditions.

CORE CONCEPT A company‘s international strategy is a strategy for competing in two or more countries simultaneously

q. Multi-domestic Strategy—A Think Local, Act Local Approach to Strategy Making The bigger the differences in buyer tastes, cultural traditions, and marker conditions in different countries, the stronger the case for a think-local, act-local approach to strategy making.

64. The strength of this approach is that the company‘s actions and business approach are

deliberately crafted to accommodate differing tastes and expectations of buyers in each country and to stake out the most attractive market positions as compared to its local competitors.

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CORE CONCEPT A multi-domestic strategy is one in which a company varies its product offering an competitive approach from country to country in an effort to be responsive to differing buyer preferences and market conditions.

It is a think-local, act-local type of international strategy facilitated by decision making decentralized to the local level.

65. There are two main disadvantages to this strategic choice: Hinders the transfer of company capabilities, knowledge, and other resources across borders.

183. Does not promote building a single worldwide competitive advantage, especially one based upon low cost. r. Global Strategy—A Think-Global, Act-Global Approach to Strategy Making A global strategy sells the same products under the same brand names everywhere, uses much of the same distribution channels in all countries, and competes on the basis of the same capabilities and marketing approaches worldwide.

CORE CONCEPT Global strategies employ the same basic competitive approach in all countries where a company operates and are best suited to industries that are globally standardized in terms of customer preferences, buyer purchasing habits, distribution channels, or marketing methods. This is the think-global, act-global strategic theme.

66. This strategic theme prompts company managers to integrate and coordinate the company‘s strategic moves worldwide and to expand into most if not all nations where there is significant buyer demand. s. Transnational Strategy—A Think-Global, Act-Local Approach to Strategy Making This middle-ground approach sometimes called glocalization entails using the same basic competitive theme in each country but allowing local managers the latitude to: Incorporate whatever country-specific variations in product attributes are needed to best satisfy local buyers.

184. Make whatever adjustments in production, distribution, and marketing are needed to be responsive to local market conditions and compete successfully against local rivals.

CORE CONCEPT

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A transnational strategy is a think global, act local approach to strategy making that involve employing essentially the same strategic theme (low-cost, differentiation, focused, best-cost) in all country markets, while allowing some country-to-country customization to fit local market conditions.

67. As a rule, most companies that operate multinationally endeavor to employ as global a strategy as customer needs and market conditions permit.

68. Concepts & Connections 7.2 explains how Four Seasons Hotels has been able to compete successfully on the basis of a transnational strategy.

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Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Concepts and Connections exercise. You can post instructions for the student within the assignment and collect their attachments for grading.

Concepts & Connections 7.2 Four Seasons Hotels: Local Character, Global Service Discussion Question: How has Four Seasons Hotels operationalized a Transnational Strategy in order to gain competitive advantage in the global high-end hotel industry?

Answer: By combining local architectural and cultural experiences with globally consistent luxury service. When moving into a new area, the firm seeks out a local capital partner with understanding of the local customs and business relationships. The firm then hires local architects and structures the interior spaces to match the needs of local customers. To maintain a local touch, the firm hires local workers that understand the unique needs of local customers to complement experienced global hotel staff. Finally, the firm supports all of this with globally based best practices for service and administrative support.

V. Using International Operations to Improve Overall Competitiveness Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 7-5

Explain how multinational companies are able to use international operations to improve overall competitiveness.

Using Location to Build Competitive Advantage To use location to build competitive advantage, a company must consider two issues: Whether to concentrate each activity it performs in a few select countries or to disperse performance of the activity to many nations 185. In which countries to locate particular activities 69. When to Concentrate Activities in a Few Locations

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When the costs of manufacturing or other activities are significantly lower in some geographic locations than in others 186. When there are significant scale economies 187. When there is a steep learning curve associated with performing an activity 188. When certain locations have superior resources, allow better coordination of related activities, or offer other valuable advantages 70. Companies that compete multinationally can pursue competitive advantage in world markets by locating their value chain activities in whichever nations prove most advantageous.

71. When to Disperse Internal Processes across Many Locations Buyer-related activities, such as distribution to dealers, sales and advertising, and aftersale service, usually must take place close to buyers.

189. High transportation costs, diseconomies of large size, and trade barriers make it too expensive to operate from a central location 190. To hedge against the risks of fluctuating exchange rates and adverse political developments t. Using Cross-Border Coordination to Build Competitive Advantage Multinational and global competitors are able to coordinate activities across different countries to build competitive advantage.

72. If a firm learns how to assemble its product more efficiently at one plant, the accumulated expertise and knowledge can be shared with assembly plants in other world locations.

73. Efficiencies can be achieved by shifting workloads from where they are unusually heavy to locations where personnel are underutilized.

VI. Strategies to Compete in the Markets of Developing Countries Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 7-6

Recognize the unique characteristics of competing in developing-country markets.

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Tailoring products to fit conditions in an emerging country market often involves more than making minor product changes and becoming more familiar with local cultures.

74. Strategy Options for Developing Country Markets Prepare to compete on the basis of low price.

191. Modify aspects of the company‘s business model or strategy to accommodate local circumstances (but not so much that the company loses the advantage of global scale and global branding).

192. Try to change the local market to better match the way the company does business elsewhere.

193. Stay away from emerging markets where it is not practical to modify the company‘s business model to accommodate local circumstances.

75. Profitability in emerging markets rarely comes quickly or easily—new entrants have to adapt their business models and strategies to local conditions and be patient in earning a profit.

Connect Activity Use the Question Bank to build a quiz for the chapter to measure and reinforce learning.

Consider using the questions you select to build a comprehensive mid-term and final exam for the course. The assignment can be graded and posted automatically.

Chapter 8 Lecture Note Corporate Strategy: Diversification and the Multibusiness Company Chapter Summary Chapter 8 moves up one level in the strategy-making hierarchy, from strategy making in a single business enterprise to strategy making in a diversified enterprise. The chapter begins with a description of the various paths through which a company can become diversified and provides an explanation of how a company can use diversification to create or compound competitive advantage for its business units. The chapter also examines the techniques and procedures for assessing the strategic attractiveness of a diversified company‘s business portfolio and surveys the strategic options open to already-diversified companies.

Lecture Outline I. Introduction

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76. In most diversified companies, corporate-level executives delegate considerable strategymaking authority to the heads of each business, usually giving them the latitude to craft a business strategy suited to their particular industry and competitive circumstances and holding them accountable for producing good results. However, the task of crafting a diversified company‘s overall or corporate strategy falls squarely on the shoulders of toplevel corporate executives.

77. Devising a corporate strategy has four distinct facets: a. Picking new industries to enter and deciding on the means of entry b. Pursuing opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantage c. Establishing investment priorities and steering corporate resources into the most attractive business units. d. Initiating actions to boost the combined performances of the corporation‘s collection of businesses.

II. When Business Diversification Becomes a Consideration LO 8-1 Understand when and how business diversification can enhance shareholder value.

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Diversification into new industries always merits strong consideration whenever a singlebusiness company encounters diminishing market opportunities and stagnating sales in its principle business.

III. Building Shareholder Value: The Ultimate Justification for Diversification Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

Diversification must do more for a company than simply spread its risk across various industries.

78. Business diversification stands little chance of building shareholder value without passing the following three tests: a. The industry attractiveness test: The industry chosen for diversification must be attractive enough to yield consistently good returns on investment. b. The cost of entry test: The cost to enter the target industry must not be so high as to erode the potential for profitability. c. The better-off test: Diversifying into a new business must offer potential for the company‘s existing businesses and the new business to perform better together under a single corporate umbrella than they would perform operating as independent standalone businesses.

79. Diversification moves that satisfy all three tests have the greatest potential to grow shareholder values over the long term. Diversification moves that can pass only one or two tests are suspect.

80. Creating added value for shareholders via diversification requires building a multibusiness company where the whole is greater than the sum of its parts.

IV. Approaches to Diversifying the Business Lineup Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

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A. Diversification by Acquisition of an Existing Business Acquisition is a popular means of diversifying into another industry. It is quicker and offers an effective way to hurdle such entry barriers as acquiring technological know-how, establishing supplier relationships, achieving scale economies, building brand awareness, and securing adequate distribution.

81. The big dilemma is whether to pay a premium price for a successful company or to buy a struggling company at a bargain price.

B. Entering a New Line of Business through Internal Development Achieving diversification through internal start-up involves building a new business subsidiary from scratch and is often referred to as corporate venturing.

CORE CONCEPT Corporate venturing (or new venture development) is the process of developing new businesses as an outgrowth of a company‘s established business operations. It is also referred to as corporate entrepreneurship or intrapreneurship since it requires entrepreneurial-like qualities within a larger enterprise.

82. Generally, forming a start-up subsidiary to enter a new business has appeal only when: a. The parent company already has in-house most or all of the skills and resources it needs to piece together a new business and compete effectively b. There is ample time to launch the business c. Internal entry has lower entry costs than entry via acquisition d. The targeted industry is populated with many relatively small firms such that the new start-up does not have to compete head-to-head against larger, more powerful rivals e. Adding new production capacity will not adversely impact the supply–demand balance in the industry f. Incumbent firms are likely to be slow or ineffective in responding to a new entrant‘s efforts to crack the market C. Using Joint Ventures to Achieve Diversification A joint venture can be useful in at least two types of situations: a. To pursue an opportunity that is too complex, uneconomical, or risky for a single organization to pursue alone

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b. When the opportunities in a new industry require a broader range of competencies and know-how than any one organization can marshal 83. However, partnering with another company has significant drawbacks due to the potential for conflicting objectives, disagreements over how to best operate the venture, culture clashes, and so on.

84. Joint ventures are generally the least durable of the entry options, usually lasting only until the partners decide to go their own ways.

V. Choosing the Diversification Path: Related versus Unrelated Diversification Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

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Once the decision is made to pursue diversification, the firm must choose whether to diversify into related businesses, unrelated businesses, or some mix of both.

85. Figure 8.1, Strategic Themes of Multibusiness Corporations, illustrates these choices.

CORE CONCEPT Related businesses possess competitively valuable cross-business value chain and resource matchups; unrelated businesses have dissimilar value chains and resource requirements, with no competitively important cross-business chain relationships.

VI. Diversifying into Related Diversification Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 8-2 Explain how related diversification strategies can produce cross-business strategic fit capable of delivering competitive advantage.

Businesses are said to be related when their value chains possess competitively valuable cross-business relationships.

86. A related diversification strategy involves building the company around businesses whose value chains possess competitively valuable strategic fits as shown in Figure 8.2, Related Diversification.

CORE CONCEPT Strategic fit exists when the value chains of different businesses present opportunities for cross-business skills transfer, cost sharing, or brand sharing.

87. Strategic fit exists whenever one or more activities comprising the value chains of different businesses are sufficiently similar as to present opportunities for:

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a. Transferring competitively valuable resources, expertise, technological knowhow, or other capabilities from one business to another. b. Cost sharing between separate businesses where value chain activities can be combined. c. Brand sharing between business units that have common customers or that draw upon common core competencies.

CORE CONCEPT Related diversification involves sharing or transferring specialized resources and capabilities. Specialized resources and capabilities have very specific applications and their use is limited to a restricted range of industry and business types, in contrast to general resources and capabilities, which can be widely applied and can be deployed across a broad range of industry and business types.

88. Cross-business strategic fit can exist anywhere along the value chain A. Strategic Fit and Economies of Scope Strategic fit in the value chain activities of a diversified corporation‘s different businesses opens up opportunities for economies of scope—a concept distinct from economies of scale.

CORE CONCEPT Economies of scope are cost reductions stemming from strategic fit along the value chains of related businesses (thereby, a larger scope of operations), whereas economies of scale accrue from a larger operation.

89. Economies of scale are cost savings that accrue directly from cost-saving strategic fits along the value chains of related businesses.

B. The Ability of Related Diversification to Deliver Competitive Advantage and Gains in Shareholder Value.

Economies of scope and the other strategic-fit benefits provide a dependable basis for earning higher profits and returns than what a diversified company‘s businesses could earn as stand-alone enterprises.

90. There are three things to bear in mind here:

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a. Capturing cross-business strategic fit via related diversification builds shareholder value in ways that shareholders cannot replicate by simply owning a diversified portfolio of stocks. b. The capture of cross-business strategic-fit benefits is possible only through related diversification. c. The benefits of cross-business strategic fit are not automatically realized.

91. Illustration Capsule 8.1 describes the merger of Kraft Foods Group, Inc. with the H. J. Heinz Holding Corporation, in pursuit of the strategic fit benefits of a related diversification strategy.

Concepts & Connections 8.1, The Kraft–Heinz Merger: Pursuing the Benefits of CrossBusiness Strategic Fit Discussion Question: In what way did the merger of Kraft Foods Group, Inc. with the H. J. Heinz Holding Corporation leverage cross-business strategic fit?

Answer: The student should be able to identify that Kraft–Heinz was able to leverage cross business value chain activities and resource similarities. These included increased bargaining power with suppliers due to raw material similarities, economies of scale in production as a result of manufacturing fit in packaged foods allowing, reduced distribution costs due to distribution channel similarities, and consolidated marketing and sales activities to include more effective advertising campaigns. Taken together, this increased profitability by reducing overall cost of value chain activities for the merged company while maintaining the value proposition for the customer Connect Activity Consider adding a File Attachment assignment requiring the student to fully explore and explain how the companies used a merger to gain competitive advantage through cross-business strategic fits.

Ask the student to describe areas where the company leveraged strategic fits in critical value chain activities in order to improve cost competitiveness. You can send the student to the following links to supplement the information in the Illustration Capsule: http://www.kraftheinzcompany.com/company.html http://ir.kraftheinzcompany.com/overview.cfm VII. Diversifying into Unrelated Businesses

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Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 8-3 Recognize the merits and risks of corporate strategies keyed to unrelated diversification.

Companies that pursue a strategy of unrelated diversification generally exhibit a willingness to diversify into any industry where there is potential for a company to realize consistently good financial results.

92. The basic premise of unrelated diversification is that any company that can be acquired on good financial terms and that has satisfactory earnings potential represents a good acquisition and a good business opportunity.

93. Three types of acquisition candidates are usually of particular interest: a. Businesses that have bright growth prospects but are short on investment capital. b. Undervalued companies that can be acquired at a bargain price. c. Struggling companies whose operations can be turned around with the aid of the parent company‘s financial resources and managerial know-how.

A. Building Shareholder Value through Unrelated Diversification To succeed with a corporate strategy keyed to unrelated diversification, corporate executives must: a. Do a superior job of identifying and acquiring new businesses that can produce consistently good earnings and returns on investment b. Do an excellent job of negotiating favorable acquisition prices c. Do such a good job overseeing and parenting the firm‘s businesses that they perform at a higher level than they would otherwise be able to do through their own efforts alone B. The Pitfalls of Unrelated Diversification Unrelated diversification strategies have two important negatives that undercut the positives.

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94. Demanding Managerial Requirements—Successfully managing a set of fundamentally different businesses operating in fundamentally different industry and competitive environments is a very challenging and exceptionally difficult proposition for corporate level managers.

95. The greater the number of businesses a company is in and the more diverse those businesses are, the harder it is for corporate managers to: a. Stay abreast of what is happening in each industry and each subsidiary. b. Pick business-unit heads having the requisite combination of managerial skills and know-how to drive gains in performance. c. Be able to tell the difference between those strategic proposals of business-unit managers that are prudent and those that are risky or unlikely to succeed. d. Know what to do if a business unit stumbles and its results suddenly head downhill.

96. As a rule, the more unrelated businesses that a company has diversified into, the more corporate executives are reduced to ―managing by the numbers.‖ 97. Limited Competitive Advantage Potential—Unrelated diversification offers no potential for competitive advantage beyond that of what each individual business can generate on its own.

C. Misguided Reasons for Pursuing Unrelated Diversification Competently overseeing a set of widely diverse businesses can turn out to be much harder than it sounds. Wrong reasons can include: a. Risk reduction—reducing perceived risk by spreading the company‘s investments over a set of truly diverse industries whose technologies and markets are largely disconnected. b. Growth—pursuing growth for the sake of growth. c. Earnings stabilization—offsetting market downtrends in some businesses by upswings in others. d. Managerial motives—unrelated diversification that results only in benefits to managers such as higher compensation and reduced employment risk.

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VIII. Diversifying into Both Related–Unrelated Diversification Strategies Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

There is nothing to preclude a company from diversifying into both related and unrelated Businesses.

98. Indeed, the business makeup of diversified companies varies considerably a. Dominant business enterprises—one major core business accounts for 50 to 80 percent of total revenues and a collection of small related or unrelated businesses accounts for the remainder b. Narrowly diversified—two to five related or unrelated businesses c. Broadly diversified—wide ranging collection of related businesses, unrelated businesses, or a mixture of both IX. Evaluating the Strategy of a Diversified Company Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 8-4 Evaluate a company‘s diversification strategy.

The procedure for evaluating a diversified company‘s strategy and deciding how to improve the company‘s performance involves six steps: a. Assessing the attractiveness of the industries the company has diversified into. b. Assessing the competitive strength of the company‘s business units. c. Evaluating the extent of cross-business strategic fits along the value chains of the company‘s various business units.

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d. Checking whether the firm‘s resources fit the requirements of its present business lineup. e. Ranking the performance prospects of the businesses from best to worst and determining a priority for resource allocation. f. Crafting new strategic moves to improve overall corporate performance.

A. Step 1: Evaluating Industry Attractiveness A principal consideration in evaluating a diversified company‘s strategy is the attractiveness of the industries in which it has business operations.

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99. A reliable analytical tool for gauging industry attractiveness scores based on the following measures: a. b. c. d. e. f. g. h. i.

100.

Market size and projected growth rate The intensity of competition Emerging opportunities and threats The presence of cross-industry strategic fits Resource requirements Seasonal and cyclical factors Social, political, regulatory, and environmental factors Industry profitability Industry uncertainty and business risk Calculating Industry Attractiveness Scores

a. There are two necessary conditions for producing valid industry attractiveness scores: (1) one is deciding on appropriate weights for the industry attractiveness measure, and (2) the second requirement is to have sufficient knowledge to rate the industry on each attractiveness measure b. Each industry is rated on each of the chosen industry attractiveness measures, using a rating scale of 1 to 10 (where 10 signifies high attractiveness and 1 signifies low attractiveness). c. Weighted attractiveness scores are then calculated by multiplying the industry‘s rating on each measure by the corresponding weight. d. Despite the hurdles, calculating industry attractiveness scores is a systematic and reasonably reliable method for ranking a diversified company‘s industries from most to least attractive.

101.

For a diversified company to be a strong performer, a substantial portion of its revenues and profits must come from business units with relatively high attractiveness scores. Table 8.1 shows the results of an industry attractiveness analysis.

B. Step 2: Evaluating Business Unit Competitive Strength The second step in evaluating a diversified company is to determine how strongly positioned each of its business units are in their respective industry.

102.

The following factors may be used in quantifying the competitive strengths of a diversified company‘s business subsidiaries: a. Relative market share

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b. c. d. e. f. g. h.

Costs relative to competitors‘ costs Products or services that satisfy buyer expectations Ability to benefit from strategic fits with sibling businesses Number and caliber of strategic alliances and collaborative partnerships Brand image and reputation Competitively valuable capabilities Profitability relative to competitors

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103.

After settling on a set of competitive strength measures that are well matched to circumstances of the various business units, weights indicating each measure‘s importance need to be assigned.

104.

Each business unit is then rated on each of the chosen strength measures, using a rating scale of 1 to 10. Weighted strength ratings are calculated by multiplying the business unit‘s rating on each strength by the assigned weights.

105.

The sum of weighted ratings across all the strength measures provides a quantitative measure of a business unit‘s overall market strength and competitive standing. Table 8.2 shows the results of Calculating Weighted Competitive Strength Scores for a Diversified Company‘s Business Units.

106.

Using a Nine-Cell Matrix to Evaluate the Strength of a Diversified Company’s Business Lineup a. The industry attractiveness and business strength scores can be used to portray the strategic positions of each business in a diversified company. Industry attractiveness is plotted on the vertical axis and competitive strength on the horizontal axis. b. A nine-cell grid emerges from dividing the vertical axis into three regions and the horizontal axis into three regions. c. Figure 8.3, A Nine-Cell Industry Attractiveness-Competitive Strength Matrix, depicts this tool. d. Each business unit is plotted on the nine-cell matrix according to its overall attractiveness score and strength score and then shown as a ―bubble.‖ The size of each is scaled to what percentage of revenues the business generates relative to total corporate revenue. e. The location of the business units on the attractiveness–strength matrix provides valuable guidance in deploying corporate resources to the various business units. In general, a diversified company‘s prospects for good overall performance are enhanced by concentrating corporate resources and strategic attention on those business units having the greatest competitive strength and industry attractiveness. f. High attractiveness is associated with scores of 6.7 or greater on a rating scale of 1 to 10, medium attractiveness with scores of 3.3 to 6.7, and low attractiveness with scores below 3.3. g. The nine-cell attractiveness–strength matrix provides clear, strong logic for why a diversified company needs to consider both the industry attractiveness and business strength in allocating resources and investment capital to its different businesses.

C. Step 3: Determining the Competitive Value of Strategic Fits in Multibusiness Companies

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Checking the competitive advantage potential of cross-business strategic fits involves searching and evaluating how much benefit a diversified company can gain from four types of value chain matchups: a. Opportunities to combine the performance of certain activities thereby reducing costs and capturing economies of scope. b. Opportunities to transfer skills, technology, or intellectual capital from one business to another. c. Opportunities to share the use of a well-respected brand name across multiple product and/or service categories.

The greater the value of cross-business strategic fit in enhancing a company‘s performance in the marketplace or the bottom line, the more powerful is its strategy of related diversification.

D. Step 4: Evaluating Resource Fit The businesses in a diversified company‘s lineup need to exhibit good resource fit.

CORE CONCEPT A diversified company exhibits resource fit when its businesses add to a company‘s overall mix of resources and capabilities and when the parent company has sufficient resources to support its entire group of businesses without spreading itself too thin.

CORE CONCEPT A strong internal capital market allows a diversified company to add value by shifting capital from business units generating free cash flow to those needing additional capital to expand and realize their growth potential.

107.

Resource fit exists when:

a. Businesses, individually, strengthen a company‘s overall mix of resources and capabilities b. The parent company has sufficient resources to support its entire group of businesses without spreading itself too thin 108.

Financial Resource Fit

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a. Business units in rapidly growing industries are often cash hogs—so labeled because the cash flows they are able to generate from internal operations are not big enough to fund their expansion. b. Business units with leading market positions in mature industries may be cash cows—businesses that generate substantial cash surpluses over what is needed to fund their operations.

CORE CONCEPT A strong internal capital market allows a diversified company to add value by shifting capital from business units generating free cash flow to those needing additional capital to expand and realize their growth potential.

CORE CONCEPT A cash hog generates operating cash flows that are too small to fully fund its operations and growth; a cash hog must receive cash infusions from outside sources to cover its working capital and investment requirements.

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CORE CONCEPT A cash cow generates cash flows over and above its internal requirements, thereby providing financial resources that may be used to invest in cash hogs, finance new acquisitions, fund share buyback programs, or pay dividends.

109.

A diversified company has a good financial resource fit when the excess cash generated by its cash cow businesses is sufficient to fund the investment requirements of promising cash hog businesses.

110.

Star businesses are often the cash cows of the future.

111.

Aside from cash flow considerations, there are two other factors to consider in assessing the financial resource fir for businesses in a diversified firm‘s portfolio: a. Do individual businesses adequately contribute to achieving companywide performance targets? b. Does the corporation have adequate financial strength to fund its different businesses and maintain a healthy credit rating?

112.

Examining a Diversified Company‘s Nonfinancial Resource Fits—Diversified companies must also ensure that the nonfinancial resource needs of its portfolio of businesses are met by its corporate capabilities. a. Companies should avoid adding to the business lineup in ways that overly stretch such nonfinancial resources as managerial talent, technology and information systems, and marketing support. b. Two guiding questions can help: (1) Does the company have or can it develop the specific resource strengths and competitive capabilities needed to be successful in each of its businesses? (2) Are the company‘s resources being stretched too thinly by the resource requirements of one or more of its businesses?

E. Step 5: Ranking Business Units and Setting a Priority for Resource Allocation Once a diversified company‘s strategy has been evaluated from the perspectives of industry attractiveness, competitive strength, strategic fit, and resource fit, the next step is to rank the performance prospects of the businesses from best to worst and determine which businesses merit top priority for new capital investments by the corporate parent.

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113.

The locations of the different businesses in the nine-cell industry attractiveness/competitive strength matrix provide a solid basis for identifying highopportunity businesses and low-opportunity businesses.

114.

Allocating Financial Resources—Figure 8.4 shows the chief strategic and financial options for allocating a diversified company‘s financial resources.

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115.

Business units with the brightest profit and growth prospects and solid strategic and resource fits generally should head the list for corporate resource support.

G. Step 6: Crafting New Strategic Moves to Improve Overall Corporate Performance The conclusions flowing from the five preceding analytical steps set the agenda for crafting strategic moves to improve a diversified company‘s overall performance. The strategic options boil down to four broad categories of actions: a. Sticking closely with the existing business lineup and pursuing the opportunities it presents. b. Broadening the company‘s business scope by making new acquisitions in new industries. c. Divesting some businesses and retrenching to a narrower base of business operations. d. Restructuring the company‘s business lineup and putting a whole new face on the company‘s business makeup.

LO 8-6 Identify a diversified company‘s four main corporate strategy options for solidifying its diversification strategy and improving company performance.

116.

Sticking Closely with the Existing Business Lineup makes sense when the company‘s present businesses offer attractive growth opportunities and can be counted on to generate good earnings and cash flow.

117.

Broadening a Diversified Company‘s Business Lineup—Motivating factors to build positions in new industries a. Sluggish growth in revenues and profits b. Vulnerability to seasonal or recessionary influences or to threats from emerging new technologies c. The potential for transferring resources and capabilities to other related or complementary businesses d. Unfavorable driving forces facing core businesses Divesting Some Businesses and Retrenching to a Narrower Diversification Base: a. Retrenching to a narrower diversification base is usually undertaken when top management concludes that its diversification strategy has ranged too far afield and

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that the company can improve long-term performance by concentrating on building stronger positions in a smaller number of core businesses and industries. b. Market conditions in a once-attractive business have badly deteriorated c. A business lacks adequate strategic or resource fit, either because it‘s a cash cow or it is weakly positioned in the industry. d. A diversification move that seems sensible from a strategic-fit standpoint turns out to be a poor cultural fit.

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CORE CONCEPT A spin-off is an independent company created when a corporate parent divests a business either by selling shares to the public via an initial public offering or by distributing shares in the new company to shareholders of the corporate parent.

118.

Broadly Restructuring the Business Lineup through a Mix of Divestitures and New Acquisition.

CORE CONCEPT Corporate restructuring involves radically altering the business lineup by divesting businesses that lack strategic fit or are poor performers and acquiring new businesses that offer better promise for enhancing shareholder value. a. Restructuring strategies involve divesting some businesses and acquiring others to put a whole new face on the company‘s business lineup. b. Performing radical surgery on a company‘s group of businesses is an appealing strategy alternative when a diversified company‘s financial performance is being squeezed or eroded by: 1) A serious mismatch between the company‘s resources and capabilities and the type of diversification that it has pursued.

2) Too many businesses in slow-growth, declining, low-margin, or otherwise unattractive industries.

3) Too many competitively weak businesses.

4) The emergence of new technologies that threaten the survival of one or more important businesses.

5) Ongoing declines in the market shares of one or more major business units that are falling prey to more market-savvy competitors.

6) An excessive debt burden with interest costs that eat deeply into profitability.

7) Ill-chosen acquisitions that have not lived up to expectations.

119.

Over the past decade, corporate restructuring has become a popular strategy at many diversified companies, especially those that had diversified broadly into many different industries and lines of business.

Connect Activity Use the Question Bank to build a quiz for the chapter to measure and reinforce learning.

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Consider using the questions you select to build a comprehensive mid-term and final exam for the course. The assignment can be graded and posted automatically.

Chapter 9 Lecture Note Ethics, Corporate Sustainability, and Strategy Chapter Summary Chapter 9 focuses on examining what link, if any, there should be between a company‘s efforts to craft and execute a winning strategy and its duties to (1) act in an ethical manner, (2) demonstrate socially responsible behavior by being a committed corporate citizen, and (3) adopt business practices that conserve natural resources and protect the interest of future generations.

Lecture Outline I. What Do We Mean by Business Ethics?

Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 9-1 Understand why the standards of ethical behavior in business are no different from ethical standards in general.

1. Business ethics is the application of ethical principles and standards to the actions and decisions of business organizations and the conduct of their personnel.

2. Business ethics does not involve a special set of ethical standards applicable only to business situations.

3. Ethical principles in business are not materially different from ethical principles in general.

CORE CONCEPT

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Business ethics involves the application of general ethical principles to the actions and decisions of businesses and the conduct of their personnel.

II. Drivers of Unethical Strategies and Business Behavior Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 9-2 Recognize conditions that give rise to unethical business strategies and behavior.

1. Apart from ―the business of business is business, not ethics‖ kind of thinking apparent in recent high-profile business scandals, three other main drivers of unethical business behavior also stand out: Faulty oversight, enabling the unscrupulous pursuit of personal gain and other selfish interests Heavy pressures on Company Managers to Meet or Beat Earnings Targets A company culture that puts profitability and good business performance ahead of ethical behavior CORE CONCEPT Self-dealing occurs when managers take advantage of their position to further their own private interests rather than those of the company.

III. The Costs of Ethical Wrongdoing Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 9-3 Identify the costs of business ethics failures.

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1. It is inarguable that there is a moral case for an ethical business strategy that reflects well on the character of the company and its personnel.

2. An ethical strategy is good business and serves the self-interest of shareholders.

3. Pursuing unethical strategies and tolerating unethical conduct will in time damage a company‘s reputation and result in a wide-ranging set of other costly consequences.

4. Figure 9.1 shows the Costs Companies Incur When Ethical Wrongdoing Is Discovered and Punished which include visible costs, internal administrative costs, and intangible or less visible costs.

5. Concepts & Connections 9.1 describes the ethical violations at Uber and how the company was impacted.

Concepts & Connections 9.1 Ethical Violations at Uber and Their Consequences

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Discussion Question: Do Uber‘s actions indicate that their position on business ethics is aligned with the principle of ethical universalism, ethical relativism, or neither?

Answer: The student should be able to see that the ethics challenges at Uber range from internal issues such as sexual harassment and a toxic workplace to external issues such as price gouging, data breaches, unsafe conditions for customers, and unfair competition. Taken together, this presents the image of a company with no business ethics strategy. The only consequences to the organization to date have been market forces presented by customers looking for alternative suppliers.

Connect Activity Consider adding a File Attachment assignment requiring the student to fully explore and explain how the Uber has failed to implement a clear ethics position within the organization and enforce that position with meaningful consequences. Ask the student to hypothesize on the likely outcome if the situation is not corrected in a timely manner.

6. Shareholders suffer major damage when a company‘s unethical behavior is discovered and punished. Making amends for unethical business conduct is costly, and it takes years to rehabilitate a tarnished company reputation.

IV. Ensuring a Strong Commitment to Business Ethics in Companies with International Operations Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

There are three schools of thought about the extent to which the ethical standards travel across cultures and whether multinational companies can apply the same set of ethical standards in all of the locations where they operate.

A. The School of Ethical Universalism 1. According to the school of ethical universalism, some concepts of what is right and what is wrong are universal; that is, they transcend all cultures, societies, and religions.

2. To the extent that there is common moral agreement about right and wrong actions and behaviors across multiple cultures and countries, there exists a set of universal ethical

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standards to which all societies, all companies, and all individuals can be held accountable.

CORE CONCEPT According to the school of ethical universalism, the same standards of what‘s ethical and what‘s unethical resonate with peoples of most societies regardless of local traditions and cultural norms; hence, common ethical standards can be used to judge the conduct of personnel at companies operating in a variety of country markets and cultural circumstances.

3. The strength of ethical universalism is that it draws on the collective views of multiple societies and cultures to put some clear boundaries on what constitutes ethical business behavior and what constitutes unethical business behavior no matter what country market or culture a company or its personnel are operating in.

B. The School of Ethical Relativism 1. There are meaningful variations in what societies generally agree to be right and wrong in the conduct of business activities.

2. The school of ethical relativism holds that when there are national or cross-cultural differences in what is deemed an ethical or unethical business situation, it is appropriate for local moral standards to take precedence over what the ethical standards may be in a company‘s home market.

CORE CONCEPT According to the school of ethical relativism different societal cultures and customs have divergent values and standards of right and wrong—thus what is ethical or unethical must be judged in the light of local customs and social mores and can vary from culture or nation to another.

3. Codes of conduct based upon ethical relativism can be ethically dangerous by creating a maze of conflicting ethical standards for multinational companies.

C. Integrative Social Contracts Theory 1. Integrative social contracts theory provides a middle position between the opposing views of universalism and relativism.

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2. According to integrative social contracts theory, the ethical standards a company should try to uphold are governed both by: A limited number of universal ethical principles that are widely recognized as putting legitimate ethical boundaries on actions and behavior in all situations and The circumstances of local cultures, traditions, and shared values that further prescribe what constitutes ethically permissible behavior and what does not.

3. ―First-order” universal ethical norms always take precedence over “second-order” local ethical norms in circumstances in which local ethical norms are more permissive 4. These mostly uniform agreements about what is morally right and wrong form a ―Social contract‖ or contract with society that is binding on all individuals, groups, organizations, and businesses in terms of establishing right and wrong and in drawing the line between ethical and unethical behaviors.

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CORE CONCEPT According to integrative social contracts theory, universal ethical principles or norms based on the collective views of multiple combine to form a ―social contract‖ that all employees in all country markets have a duty to observe. Within the boundaries of this social contract, there is room for host country culture to exert some influence in setting their own moral and ethical standards. However, ―first-order‖ universal ethical norms always take precedence over ―second-order‖ local ethical norms in circumstances where local ethical norms are more permissive.

V. Strategy, Corporate Social Responsibility, and Environmental Sustainability Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

1. The Idea that businesses have an obligation to foster social betterment took root in the 19th century when progressive companies, in the aftermath of the industrial revolution, began to provide workers with housing and other amenities.

CORE CONCEPT Corporate social responsibility (CSR) refers to a company‘s duty to operate in an honorable manner, provide good working conditions for employees, encourage workforce diversity, be a good steward of the environment, and actively work to better the quality of like in the local communities where it operates and in society at large.

A. Corporate Social Responsibility, Sustainability, and the Triple Bottom Line 1. The essence of socially responsible business behavior is that a company should strive to balance the benefits of strategic actions to benefit shareholders against the duty to be a good corporate citizen.

2. The particular combination of socially responsible endeavors a company elects to pursue defines its corporate social responsibility strategy.

CORE CONCEPT

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A company‘s corporate social responsibility strategy is defined by the specific combination of socially beneficial activities it opts to support with its contributions of time, money, and other resources.

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B. Corporate Social Responsibility and the Triple Bottom Line LO 9-4 Understand the concepts of corporate social responsibility and corporate sustainability and how companies balance economic responsibilities to shareholders with environmental and social duties to stakeholders.

1. The triple bottom line is concerned with three types of metrics: economic, social, and environmental with a goal of succeeding in all three at the same time.

2. The three dimensions of performance are often referred to as the three pillars of: people, planet, and profit.

3. Figure 9.2 shows the triple bottom line including economic, social, and environmental focus.

CORE CONCEPT Corporate sustainability involves the adoption and implementation of a broad range of practices across the environmental, social, and governance (ESG) interfaces of an organization.

CORE CONCEPT Sustainability initiatives undertaken by companies are frequently directed at improving the company‘s ―triple bottom line‖—a reference to three types of performance metrics: economic, social, and environmental.

4. Environmental Sustainability—Sustainability reporting and TBL reporting nearly always highlight the relationship of a company to its environment and its use of natural resources, including land, water, air, minerals, and fossil fuels.

5. Most major companies have begun to change how they do business, emphasizing the use of sustainable business practices CORE CONCEPT Sustainable business practices are those that meet the needs of the present without compromising the ability to meet the needs of the future.

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6. Environmental sustainability strategies entail deliberate and concerted actions to operate businesses in a manner that protects and maybe even enhances natural resources and ecological support systems, guards against outcomes that will ultimately endanger the planet.

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CORE CONCEPT Environmental sustainability involves deliberate actions to protect the environment, provide for the longevity of natural resources, maintain ecological support systems for future generations, and guard against the ultimate endangerment of the planet.

7. Sustainability and Social Impact—Corporate sustainability strategies and is featured prominently in sustainability reporting. Programs commonly involve: Making charitable contributions, donating money and the time of company personnel to community service endeavors, supporting various worthy organizational causes, and reaching out to make a difference in the lives of the disadvantaged.

Actions to create a work environment that enhances the quality of life for employees.

Actions to build a workforce that is diverse with respect to gender, race, national origin, and other aspects that different people bring to the workplace.

8. Concepts & Connections 9.2 describes Warby Parker's approach to corporate social responsibility.

Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Concepts and Connections exercise. You can post instructions for the student within the assignment and collect their attachments for grading.

Concepts & Connections 9.2 Warby Parker: Combining Corporate Social Responsibility with Affordable Fashion Discussion Question: In what way did Warby Parker‘s founders ingrain Corporate Social Responsibility into the culture of their organization?

Answer: The student should identify that the founders generated a culture that focuses on customers, employees, and social responsibility while maintaining profitability. Through partnerships with critical suppliers and investments in lean manufacturing costs are minimized, allowing an attractive value proposition for buyers. Higher profits also allow the firm to fund international nonprofit organizations that provide eye exams and glasses in developing countries, while helping those organizations that train community members to manufacture and sell glasses. The firm regularly evaluates itself against benchmark organizations to promote outcomes beyond traditional profit motives. Employees benefit from this as the firm is widely viewed as an employer of choice. Importantly, these goals are achieved while maintaining attractive profitability and strong brand recognition.

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C. Economic Performance and Corporate Governance Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

1. A company‘s board of directors share four important corporate governance obligations: Oversee the company‘s financial accounting and financial reporting practices.

Diligently critique and oversee the company‘s direction, strategy, and business approaches.

Evaluate the caliber of senior executives‘ strategy-formulation and strategy-execution skills.

Institute a compensation plan for top executives that rewards them for actions and results that serve shareholder interests.

CORE CONCEPT Environmental, social, and governance (ESG) sustainability goals and triple bottom line metrics create expectations for companies to achieve a balance between the economic responsibilities to shareholders and the environmental and social duties to relevant stakeholders.

2. Every corporation should have a strong, independent board of directors that: Is well informed about the company‘s performance Guides and judges the CEO and other top executives Has the courage to curb management actions it believes are inappropriate or unduly risky Certifies to shareholders that the CEO is doing what the board expects Provides insight and advice to management Is intensely involved in debating the pros and cons of key decisions and actions D. Crafting Corporate Social Responsibility and Sustainability Strategies 1. A company may choose to focus its social responsibility strategy on generic social issues, but social responsibility strategies linked to its customer value proposition or key value chain activities may also help build competitive advantage.

2. Concepts & Connections 9.3 shows the risks of not having strong board governance.

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Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Illustration Capsule. You can post instructions for the student within the assignment and collect their attachments for grading.

Concepts & Connections 9.3 Corporate Governance Failures at Volkswagen Discussion Question: In what way did the Board of Directors at Volkswagen contribute to the Emission Test scandal in 2015?

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Answer: The primary cause is the absence of a strong group of independent directors. Based upon

German Corporate law, governance is provided by a Management Board and a Supervisory Board, with employees making up 50 percent of the Supervisory Board. This should have allowed for at least 50 percent of the Supervisory Board to be fully independent. While staying within the ―letter of the law,‖ they sidestepped the ―spirit of the law‖ by cycling recent former senior executives through the Supervisory Board Chairmanship position and other board positions. This had the effect of removing truly independent oversight.

A secondary cause is that 50 percent of voting shares are controlled by the Porsche family.

Family members, acting as Chairman of the Board, will regularly remove an independent CEO and replaced them with unqualified family members. This has the effect of removing qualified and independent senior management oversight.

3. In sum, companies that take social responsibility and environmental sustainability seriously can improve their business reputations and operational efficiency while also reducing their risk exposure and encouraging loyalty and innovation.

Connect Activity Use the Question Bank to build a quiz for the chapter to measure and reinforce learning.

Consider using the questions you select to build a comprehensive mid-term and final exam for the course. The assignment can be graded and posted automatically.

Chapter 10 Lecture Note Superior Strategy Execution—Another Path to Competitive Advantage Chapter Summary Once managers have decided on a strategy, the emphasis turns to converting it into actions and good results. Putting the strategy into place and getting the organization to execute it well call for different sets of managerial skills. Strategy execution requires every manager to think through the answer to the question: ―What does my area have to do to implement its part of the strategic plan, and what should I do to get these things accomplished effectively and efficiently?‖ CORE CONCEPT

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Good strategy execution requires a team effort. All managers have strategy-executing responsibility in their areas of authority, and all employees are active participants in the strategy execution process.

Lecture Outline I. The Principal Managerial Components of the Strategy Execution Process Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically. u. Executing strategy entails figuring out the specific techniques, actions, and behaviors that are needed for a smooth strategy-supportive operation and then following through to get things done and deliver results. v. Eight managerial tasks crop up repeatedly in company efforts to execute strategy: (see Figure 10.1) 1. Despite the need to tailor a company‘s strategy-executing approaches to the particulars of its situation, certain managerial bases have to be covered no matter what the circumstances w. Figure 10.1, The Eight Components of the Strategy Execution Process, depicts the eight managerial tasks that come up repeatedly in a company‘s efforts to execute strategy: Building an organization with the capabilities, people, and structure needed to execute the strategy successfully Allocating ample resources to strategy-critical activities Ensuring that policies and procedures facilitate rather than impede effective strategy execution Adopting process management programs that drive continuous improvement in how strategy execution activities are performed Installing information and operating systems that enable company personnel to perform essential activities Tying rewards directly to the achievement of performance objectives Fostering a corporate culture that promotes good strategy execution Exerting the internal leadership needed to propel implementation forward II. Building an Organization Capable of Good Strategy Execution: Three Key Actions

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Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 10-1 Recognize what managers must do to build an organization capable of good strategy execution.

Building a capable organization is always a top priority in strategy execution. Three types of organization building actions that are paramount include: Staffing the organization Acquiring, developing, and strengthening strategy-supportive resources and capabilities Structuring the organization and work effort E. Staffing the Organization No company can hope to perform the activities required for successful strategy execution without attracting and retaining talented managers and employees with suitable skills and intellectual capital. x. Staffing the Organization includes several key elements: Building managerial talent 1) Assembling a capable management team is a cornerstone of the organizationbuilding task.

2) The most important consideration is to fill key managerial slots with people who are good at figuring out what needs to be done and skilled in “making it happen” and delivering good results.

Recruiting and Retaining a Capable Workforce 1) The quality of an organization’s people is always an essential ingredient of successful strategy execution.

2) Knowledgeable, engaged employees are a company’s best source of creative ideas for the nuts-and-bolts operating improvements that lead to operating excellence. y. Concepts & Connections 10.1, Management Development at Deloitte Touche Tohmatsu Limited, describes this company‘s approach to developing a high-caliber management

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team.

Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Concepts and Connections exercise. You can post instructions for the student within the assignment and collect their attachments for grading.

Concepts & Connections 10.1 Management Development at Deloitte Touche Tohmatsu Limited Discussion Question: Identify the process each potential partner navigates as they develop their career within the firm moving from Analyst to Principle or Director.

Answer: The company has created a three stage process that allows the new hire (undergraduate hire) to (1) gain broad exposure to multiple areas in the firm to gauge their interest and aptitude; then (2) allow the Senior Consultant to focus in a particular field of interest where their best talents can be brought to bear, and finally, (3) allow the Principle or Director to develop eminence in their field by leading the firms efforts in a particular area. In this way, the firm benefits as the employee develops and benefits. z. The tactics listed below are common among companies dedicated to staffing jobs with the best people they can find: Putting forth considerable effort in screening and evaluating job applicants.

Investing in training programs that continue throughout their careers.

Providing promising employees with challenging, interesting, and skills-stretching assignments.

Rotating people through jobs that span functional and geographic boundaries Striving to retain talented, high-performing employees via promotions, salary increases, performance bonuses, stock options and equity ownership, fringe benefit packages, and other perks.

Coaching average performers to improve their skills and capabilities while weeding out underperformers and benchwarmers F. Acquiring, Developing, and Strengthening Key Resource Capabilities A top organization-building priority in the strategy implementing/executing process is the need to build and strengthen competitively valuable core competencies and organizational capabilities.

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Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Concepts and Connections exercise. You can post instructions for the student within the assignment and collect their attachments for grading.

Concepts & Connections 10.2 Zara’s Strategy Execution Capabilities Discussion Question: In what way does Zara develop competitive advantage through excellent strategy execution?

Answer: Students should identify key areas where the firm focuses its efforts. First, Zara has a quick production process based upon nearly real time feedback from stores with manufacturing centers located close to management and design teams. Second, the company excels at driving customers to their stores by using small lot sizes and frequent shipments which encourages multiple visits. Their customer’s visit stores on average 17 times in a year compared to four or five visits for Gap. They also locate their stores close to the high-end retailers they emulate, reinforcing the high fashion association of their brand. aa. Three Approaches to Building and Strengthening Capabilities—Building core competencies and competitive capabilities is a time-consuming, managerially challenging exercise. The capability building process has three common approaches: Internal development Acquiring capabilities through mergers and acquisitions Accessing capabilities via collaborative partnerships bb. Developing Capabilities Internally First, the organization must develop the ability to do something, however, imperfectly or inefficiently.

Second, as experience grows and company personnel learn how to perform the activity consistently well and at an acceptable cost, the ability evolves into a tried-and-true competence or capability.

Third, should the organization continue to polish and refine its know-how and otherwise sharpen its performance such that it becomes better than rivals at performing the activity, the core competence rises to the rank of a distinctive competence, thus providing a path to competitive advantage.

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cc. Acquiring capabilities through mergers and acquisitions Sometimes a company can build and refresh its competencies by acquiring another company with attractive resources and capabilities. b. The primary advantage of this method is speed and these types of acquisitions are essential in two situations: (1) when a market opportunity can slip by faster than a needed capability can be created internally and (2) when industry conditions, technology, or competitors are moving at such a rapid clip that time is of the essence. dd. Accessing capabilities via collaborative partnerships a. Sometimes a company can access capabilities via collaborative partnerships with suppliers, competitors, or other companies having the cutting-edge expertise. b. First, outsource the function requiring the capabilities to a key supplier or another provider. c. Second, collaborate with a firm that has complementary resources and capabilities in a joint venture, strategic alliance, or other type of partnership established for the purpose of achieving a shared strategic objective. d. Third, engage in a collaborative partnership for the purpose of learning how the partner does things, internalizing its methods and thereby acquiring its capabilities.

G. Matching Organizational Structure to the Strategy The best approach to settling on an organizational structure is to first consider the key value chain activities that deliver value to the customer. ee. The rationale for making strategy-critical activities the main building blocks in structuring a business is compelling: if activities crucial to strategic success are to have the resources, decision-making influence, and organizational impact they need, they have to be centerpieces in the organizational scheme. ff. Types of Organizational Structures.

Companies engaged in a single line of business tend to utilize a functional (departmental) organization structure that organizes strategy critical activities into distinct functional, product, geographic, process, or customer groups.

CORE CONCEPT A functional (or departmental) organizational structure organizes strategy-critical activities into distinct functional, product, geographic, process, or customer groups.

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Many diversified companies utilize a multidivisional or divisional organizational structure.

CORE CONCEPT A multidivisional (or divisional) organizational structure is a decentralized structure consisting of a set of operating divisions organized along market, customer, product, or geographic lines, along with a central corporate headquarters, which monitors divisional activities, allocates resources, and exercises overall control.

Matrix organizational structures allow companies to specify dual reporting relationships for various value-creating building blocks.

CORE CONCEPT A matrix organizational structure is a combination structure that overlays one type of structure onto another type, with multiple reporting relationships. It is used to foster cross-unit collaboration and communication. gg. Organizational Structure and Authority in Decision Making The two extremes are to centralize decision making at the top (the CEO and a few close lieutenants) or to decentralize decision making by giving managers and employees considerable decision-making latitude in their areas of responsibility.

In a highly decentralized organization, decision-making authority is pushed down to the lowest organizational level capable of making timely, informed, competent decisions.

The objective is to put adequate decision-making authority in the hands of those closest to and most familiar with the situation and train them to weigh all the factors and exercise good judgment.

In a highly centralized organization structure, top executives retain authority for most strategic and operating decisions and keep a tight rein on business unit heads, department heads, and the managers of key operating units; comparatively little discretionary authority is granted to frontline supervisors and rank and file employees. hh. Facilitating Collaboration with External Partners and Strategic Allies Strategic alliances, outsourcing arrangements, joint ventures, and cooperative partnerships can contribute little of value without active management of the relationship.

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Building organizational bridges with external allies can be accomplished by appointing ―relationship managers‖ with responsibility for making particular strategic partnerships or alliances generate the intended benefits.

Communication and coordination are also aided by the adoption of a network structure that links independent organizations involved in cooperative arrangements to achieve some common undertaking.

CORE CONCEPT A network structure is the arrangement linking a number of independent organizations involved in some common undertaking.

III. Allocating Resources to Strategy-Critical Activities Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 10-2 Explain why resource allocation should always be based on strategic priorities.

Early in the process of implementing and executing a new or different strategy, top management must determine what funding is needed to execute new strategic initiatives, to bolster value-creating processes, and to strengthen the company‘s capabilities and competencies.

A company‘s ability to marshal the resources needed to support new strategic initiatives has a major impact on the strategy execution process.

A change in strategy nearly always calls for budget reallocations and resource shifting.

A company‘s strategic priorities must drive how capital allocations are made and the size of each unit‘s operating budgets.

IV. Instituting Strategy-Supportive Policies and Procedures Connect Activity

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Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 10-3 Understand why policies and procedures should be designed to facilitate good strategy execution.

Well-conceived policies and operating procedures act to facilitate organizational change and strategy execution in three ways: Policies and procedures help enforce needed consistency in how particular strategycritical activities are performed.

Policies and procedures support change programs by providing top-down guidance regarding how certain things now need to be done.

Well-conceived policies and procedures promote a work climate that facilitates good strategy execution. ii. There is wisdom in a middle approach: Prescribe enough policies to give organization members clear direction in implementing strategy and to place desirable boundaries on employees‘ actions: then empower them to act within these boundaries, however, they think makes sense.

V. Striving for Continuous Improvement in Internal Processes Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 10-4 Understand how process management programs that drive continuous improvement help an organization achieve operating excellence.

Continuous Improvement Company managers can significantly advance the cause of superior strategy execution by pushing organization units and company personnel to strive for continuous improvement in how value chain activities.

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jj. Best practice implementation has stimulated greater management awareness of the importance of business process reengineering, total quality management (TQM) programs, Six Sigma quality control techniques, and other continuous improvement methods. kk. Total quality management (TQM) is a philosophy of managing a set of business practices that emphasizes continuous improvement in all phases of operations.

While TQM concentrates on the production of quality goods and fully satisfying customer expectations, it achieves its biggest successes when it is extended to employee efforts in all departments.

TQM is thus a race without a finish. Success comes from making little steps forward each day, a process that the Japanese call kaizen. ll. The essence of Six Sigma is to reduce variability in processes, but creative processes, by nature, include quite a bit of variability. mm.

While Six Sigma programs often improve the efficiency of any operating activities and processes, there is evidence that innovation can be stifled by Six Sigma program. nn. A blended approach to Six Sigma implementation that is gaining in popularity pursues incremental improvements in operating efficiency, while R&D and other processes that allow the company to develop new ways of offering value to customers are given more free rein.

H. The Difference between Process Reengineering and Continuous Improvement Programs The essential difference between business process reengineering and continuous improvement programs is that reengineering aims at quantum gains on the order of 30 to 50 percent or more whereas total quality programs stress incremental progress.

The two approaches to improved performance of value chain activities and operating excellence are not mutually exclusive; it makes good sense to use them in tandem.

The purpose of using benchmarking, best practices, business process reengineering, TQM, Six Sigma, or other operational improvement programs is to improve the performance of strategy-critical activities and promote superior strategy execution.

VI. Installing Information and Operating Systems

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Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 10-5 Recognize the role of information and operating systems in enabling company personnel to carry out their strategic roles proficiently.

Company strategies and value creating internal processes can‘t be executed well without a number of internal systems for business operations. oo. Information systems need to cover five broad areas: Customer data Operations data Employee data Supplier/partner/collaborative ally data Financial performance data pp. Real time information systems permit company mangers to stay on top of implementation initiatives and daily operations and to intervene if things seem to be drifting off course.

VII. Using Rewards and Incentives to Promote Better Strategy Execution Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 10-6 Explain how and why the use of well-designed incentives and rewards can be management‘s single most powerful tool for promoting operating excellence.

To create a supportive of rewards and incentives, a company must emphasize rewarding people or accomplishing results related to creating value for customer, not just for dutifully performing assigned tasks.

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qq. A properly designed reward structure is management‘s most powerful tool for mobilizing organizational commitment to successful strategy execution.

Motivation and Reward Systems To get employees‘ sustained, energetic commitment, management has to be resourceful in designing and using motivational incentives—both monetary and nonmonetary. rr. The more a manager understands what motivates subordinates and is able to use appropriate motivational incentives, the greater will be employees‘ commitment to good day-in, day-out strategy execution and achievement of performance targets.

I. Guidelines for Designing Monetary Incentive Systems Incentives that link employee behavior to organizational objectives include: Make the performance payoff a major, not minor, piece of the total compensation Have incentives that extend to all managers and all workers, not just top management.

Administer the reward system with scrupulous objectivity and fairness.

Tie incentives to performance outcomes directly linked to good strategy execution and financial performance.

Make sure the performance targets that each individual or team is expected to achieve involve outcomes that the individual or team can personally affect.

Keep the time between achieving the target performance outcome and the payment of the reward as short as possible.

J. Nonmonetary Rewards Important nonmonetary approaches to motivation include: Provide attractive perks and fringe benefits Adopt promotion from within policies Act on suggestions from employees Create a work atmosphere in which there is a genuine sincerity, caring, and mutual respect among workers and between management and employees Share information with employees about financial performance, strategy, operational measures, market conditions, and competitors‘ actions Have attractive office space and facilities 2. Concepts & Connections 10.3, How the Best Companies Motivate and Reward Employees, examines some of the varieties of techniques utilized by organizations to motivate employees.

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Connect Activity Consider adding a File Attachment assignment requiring the student to develop a response to this Concepts and Connections exercise. You can post instructions for the student within the assignment and collect their attachments for grading.

Concepts & Connections 10.3 How Wegmans Rewards and Motivates Its Employees Discussion Question: Companies engage a vast variety of employee motivational techniques. What are the primary tools that Wegmans uses?

Answer: The student should highlight that Wegmans has a strong benefits philosophy

that includes flexible or compresses schedules, above average wages, as well as training and education programs. Other tools include communications, benefits packages, and a priority on promoting from within the organization.

VIII. Instilling a Corporate Culture the Promotes Good Strategy Execution Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 10-7 Explain how and why a company‘s culture can aid the drive for proficient strategy execution.

The character of a company‘s culture or work climate is a product of the work practices and behaviors that define ―how we do things around here,‖ its approaches to people management, and the ―chemistry‖ that permeates its work environment. ss. The meshing together of stated core beliefs, business principles, style of operating, ingrained behaviors and attitudes, and work climate define a company‘s corporate culture.

CORE CONCEPT Corporate culture is a company‘s internal work climate and is shaped by its core values, beliefs, and business principles. A company‘s culture is important because it influences its traditions, work practices, and style of operating.

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tt. Concepts & Connections 10.4 describes the corporate culture of another exemplar company, Epic Systems, well known by health care providers.

High-Performance Cultures The standard cultural traits of high-performance cultures are a ―can-do‖ spirit, pride in doing things right, no-excuses accountability, and a pervasive result-oriented work climate. uu. There is a strong sense of involvement on the part of company personnel and emphasis individual initiative and creativity. vv. The challenge in creating a high-performance culture is to inspire high loyalty and dedication on the part of employees.

K. Adaptive Cultures The hallmark of adaptive corporate cultures is willingness on the part of organizational members to accept change and take on the challenge of introducing and executing new strategies.

CORE CONCEPT As a company‘s strategy evolves, an adaptive culture is a definite ally in the strategy execution process. ww.

In direct contrast to change-resistant cultures, adaptive cultures are very supportive of managers and employees at all ranks who propose or help initiate useful change. xx. In fast-changing business environments, a corporate culture that is receptive to altering organizational practices and behaviors is a virtual necessity.

L. Unhealthy Corporate Cultures The distinctive characteristic of an unhealthy corporate culture is the presence of counterproductive cultural traits that adversely impact the work climate and company performance.

Politicized Cultures: What makes a politicized internal environment so unhealthy is that political infighting consumes a great deal of organizational energy. Often with the result

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that political maneuvering takes precedence over what is best for the company.

Change-Resistant Cultures: Hostility to change is most often found in companies with multilayered management bureaucracies that have enjoyed considerable market success in years past and that are wedded to the ―We have done it this way for years‖ syndrome.

Insular, Inwardly Focused Cultures: Sometimes a company reigns as an industry leader or enjoys great market success for so long that its personnel start to believe they have all the answers or can develop them on their own. Such confidence breeds arrogance—company personnel discount the merits of what outsiders are doing and what can be learned by studying best-in-class performers.

Unethical and Greed-Driven Cultures: Companies that have little regard for ethical standards or that are run by executives driven by greed and ego gratification are scandals waiting to happen.

Incompatible Subcultures: Values, beliefs, and practices within a company sometimes vary significantly by department, geographic location, division, or business unit. Multiple subcultures become unhealthy when they are incompatible with each other or the overall corporate culture.

M. Changing a Problem Culture Changing a problem culture is among the toughest management tasks. It is natural for company personnel to cling to familiar practices and to be wary, if not hostile, to new approaches toward how things are to be done. yy. The single most visible factor that distinguishes successful culture change efforts from failed attempts is competent leadership at the top. Figure 10.2 shows the steps required to change a problem culture: The first step in fixing the problem culture is for top management to identify those facets of the present culture that pose obstacles to executing new strategic initiatives and meeting or beating company performance targets.

Second, managers have to clearly define the desire new behaviors and features of the culture they want to create.

Third, managers have to convince company personnel why the present culture poses problems and why and how new behaviors and operating approaches will improve company performance—the case for cultural reform has to be persuasive.

Finally, all the talk about remodeling the present culture has to be followed swiftly by visible, forceful actions to promote the desired new behaviors and work practices.

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zz. Making a Compelling Case for Culture Change—Management must sell company personnel on the need for new-style behaviors and work practices by making a compelling case for why the company‘s new strategic direction and culture-remodeling efforts are in the organization best interest. This can be done by: Citing reasons why the current strategy has to be modified and why new strategic initiatives that are being undertaken.

Citing why and how certain behavioral norms and work practices in the current culture pose obstacles to good execution of new strategic initiatives.

Explaining why new behavior and work practices that are to have important roles in the new culture will be more advantageous and produce better results. aaa.

Management‘s efforts to make a persuasive case for changing what is deemed to be a problem culture must be quickly followed by forceful, high-profile actions across several fronts. bbb.

Substantive Culture-Changing Actions: Company executives have to give the culture-change effort some teeth by initiating a series of actions that company personnel will see as unmistakable support for the change program. The strongest signs that management is truly committed to instilling a new culture include: Replacing key executives who stonewall needed organizational and cultural changes.

Promoting individuals who have stepped forward to advocate the shift to a different culture and can serve as role models for the desired cultural behavior.

Appointing outsider with the desired cultural attributes to high-profile positions.

Screening all candidates for new positions carefully, hiring only those who appear to fit in with the new culture.

Mandating that all company personnel attend culture training programs.

Designing compensation incentives that boost the pay of teams and individuals who display the desired cultural behaviors and hit change-resisters in the pocketbook.

Revising policies and procedures in ways that will help drive cultural change. ccc.

Symbolic Culture-Changing Actions—There is also an important place to alter a problem culture and tighten the strategy—culture fit.

The most important symbolic actions are those that top executives take to lead by example.

Another category of symbolic actions includes holding ceremonial events to single out and honor people whose actions and performance exemplify what is called for in the new culture.

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Every group gathering is seen as an opportunity to repeat and ingrain values, praise good deeds, and cite instances of how the new work practices and operating approaches have led to improved results.

IX. Leading the Strategy Execution Process Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

LO 10-8 Recognize what constitutes effective managerial leadership in achieving superior strategy execution.

For an enterprise to execute its strategy in truly proficient fashion and approach operating excellence, top executives have to take the lead in the implementation and execution process and personally drive the pace of progress.

Staying on top of what is happening and closely monitoring progress Putting constructive pressure on the organization to execute the strategy well and achieve operating excellence Initiating corrective actions to improve strategy execution and achieve the targeted performance results ddd.

Concepts & Connections 10.4 discusses the approaches used at Goldman Sachs to change a culture that was grounded impeding its efforts to recruit the best young talent.

Concepts & Connections 10.4, Driving Cultural Change at Goldman Sachs Discussion Question: What elements were put in place to transform the culture at Goldman Sachs?

Answer: The student should identify several substantive actions to include: 

  

Made the change a top-level priority—They put the Chief Learning Officer in charge of the transformation effort

Top management support—They sought support and buy-in from the full C-Suite Led with small victories to get “wins”—sports leagues and team happy hours Followed with bigger steps—Better work hours and promoting a better work-life

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balance as well as an overhaul of the performance review and recruiting practices The payoff was evident by 2017 when the career website Vault.com named the firm the best banking firm to work for.

Connect Activity Consider adding a File Attachment assignment requiring the student to fully explore and explain how the Goldman Sachs was able to transform its culture.

Ask the student to describe specific areas of operation that were impacted and specific actions taken to ensure that leadership was seen as being part of the change process.

Staying on Top of How Well Things Are Going The best ways for executives to stay on top of how things are going is to: Regularly visit the field Talk with many different people, and Pursue a variation of MBWA (Management by walking around) N. Putting Constructive Pressure on Organizational Units to Achieve Good Results and Operating Excellence Successfully leading the effort to foster a results-oriented, high-performance culture generally entails such leadership actions and managerial practices as: Treating employees with dignity and respect Encouraging employees to use initiative and creativity in performing their work.

Setting stretch objectives and clearly communicating an expectation that company personnel are to give their best in achieving performance targets Focusing attention on continuous improvement Using the full range of motivational techniques and compensation incentives to reward high performance Celebrating individual, group, and company successes O. Initiating Corrective Actions to Improve Both the Company’s Strategy and Its Execution The leadership challenge of making corrective adjustments is twofold: deciding when adjustments are needed and deciding what adjustments to make.

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Both decisions are a normal and necessary part of managing the strategic management process, since no scheme for implementing and executing strategy can foresee all the events and problems that will arise.

Connect Activity Use the Question Bank to build a quiz for the chapter to measure and reinforce learning.

Consider using the questions you select to build a comprehensive mid-term and final exam for the course. The assignment can be graded and posted automatically.

Case 1 Teaching Note

Airbnb in 2022 Overview Airbnb was launched in 2007 when Brian Chesky and a friend decided to rent their apartment to guests for a local convention. To accommodate the guests, they used air mattresses and referred to it as the ―Air Bed & Breakfast.‖ It was that weekend when the idea—and the potential viability—of a peer-to-peer room-sharing business model was born. During its 15-year existence, Airbnb had experienced immense growth and had successfully launched an IPO in 2020. By 2021, Airbnb had entered over 220 countries with more than 5 million locationsi. In 2022, Airbnb seemed positioned to continue revolutionizing the hotel and tourism industry through its business model that allowed hosts to offer spare rooms or entire homes to potential guests in a peer-reviewed digital marketplace.

Airbnb‘s business model had been successful by leveraging what is known as the sharing economy. As it grew, however, Airbnb‘s business model was met with resistance. City officials and owners and operators of hotels, motels, and bed and breakfasts complained that, unlike traditional brick-and-mortar establishments that were subject to regulations and taxation, Airbnb hosts were able to circumvent and avoid such liabilities due to participation in Airbnb‘s digital marketplace. In other instances, Airbnb hosts had encountered legal issues due to city and state ordinances governing hotels and apartment leases. Then, in 2020, the spread of COVID-19 and the global pandemic posed an existential crisis for Airbnb and other business such as hotels operating in the travel and accommodation market. Many Airbnb hosts were using their hosting revenue to subsidize their mortgage payments while other hosts had purchased properties that depended solely on the revenue driven through booked Airbnb accommodations. In the early part of the pandemic during 2020, travel restrictions and shelter in-place orders to mitigate the spread of COVID-19 significantly impacted travel.

As vaccines were distributed during 2021 and many countries had reopened their economies,

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Airbnb‘s bookings and revenues grew to more than 300 million and nearly $6 billion—see Exhibit 1. However, at the start of 2022, the company had yet to have a profitable year with some suggesting that the company needed radical changes in elements of its business model to justify its lofty stock price. The company‘s $114 billion market capitalization indicated that investors continued to believe in Airbnb‘s potential, but excuses for continuing losses were becoming more difficult as the company had achieved sufficient scale to become profitable. _____ * This teaching note primarily reflects the thinking and analysis of Professor John D. Varlaro, Johnson & Wales University. We are most grateful for his insight, analysis and contributions to how the case can be taught successfully.

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Suggestions for Using the Case Students should find Airbnb in 2022 an interesting case because of their own experiences renting an Airbnb property and using other sharing economy services from Lyft and Uber. We recommend using the case immediately following your coverage of Chapter 1. As this case specifically addresses the unique business models employed for sharing economy companies.

Specifically, you may allow students to compare and contrast the customer value propositions and profit formulas of sharing economy firms relative to their traditional business model rivals.

We believe that Airbnb in 2022 is an excellent leadoff case for the course (other choices are Robin Hood and Costco Wholesale). This case is ideal for exploring the concepts of sustainable competitive advantage, competing differently, and business models. Instructors can drill students on such topics as customer value proposition, profit formula and compare and contrast Airbnb‘s approaches with those of traditional lodging operators. This case can also be used to explore factors within the general environment and how external analysis is important for incumbents and new entrants alike.

The assignment questions and teaching outline presented below reflect our thinking and suggestions about how to conduct the class discussion and what aspects to emphasize.

To provide students with guidance in what to think about and which analytical tools to utilize in preparing the Airbnb in 2022 case for class discussion, we strongly recommend providing class members with a set of study questions and insisting that they develop good notes/answers to these questions in preparing for class discussion of the case.

To facilitate your use of assignment questions and making them available to students, we have posted a file of the Assignment Questions contained in this teaching note in the instructor resources section of the Connect library. You should be aware that there is a set of assignment questions posted in the in the instructor resources section of the Connect library for each of the cases included in the 8th edition. In all instances, these assignment questions correspond to the assignment questions in the teaching note for the case.

The Connect-based Exercise for the Airbnb in 2022 case. We developed an exercise for the Airbnb in 2022 case for inclusion in the publisher‘s Connect web-based assignment and assessment platform. The exercise will lead students through all six assignment questions in this teaching note.

It should take class members roughly 30 minutes to complete the exercise, assuming they have done a conscientious job of reading the case and absorbing the information it contains. All of the questions are automatically graded, and the grades are automatically recorded in your Connect grade book, which makes it easy for you to evaluate each class member‘s ability to apply many

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of the concepts and analytical methods in Chapters 1 and 2.

You may also find it beneficial to have your class read the Guide to Case Analysis that is posted in the Instructor Resources section of the Connect Library. Students will find the content of this Guide particularly helpful if this is their first experience with cases and they are unsure about the mechanics of how to prepare a case for class discussion, oral presentation, or written analysis.

The case is also well suited for use as a written case or oral presentation. Our recommended questions for written assignments are as follows: 

Marriott management has asked you to assess the threat of Airbnb. Please prepare a fiveor six-page report that includes a description of both Marriott‘s and Airbnb‘s business models, with an emphasis on an evaluation and comparison of disparate customer demands and user profiles. Marriott‘s management also asks that you make a recommendation as to how best to mitigate the growing appeal of Airbnb, and how to potentially reach millennials and other potential users of Airbnb.



As a new member of Airbnb‘s management team, you have been asked to prepare an analysis of its competitive position and potential threats. Your two- or three-page executive summary should list strategic issues confronting Airbnb and make recommendations to address both opportunities and challenges. The executive summary should be supported by your analysis of the lodging industry.

Assignment Questions eee. How would you illustrate and compare the business models for Airbnb, large hotel chains such as Marriott and Hilton, and bed & breakfast operators? Use the example chart in the textbook for business models as a guide (Concepts & Connections 1.1) fff. What are the general strengths and weaknesses of large, hotel chains such as Marriott and Hilton, bed & breakfasts, and Airbnb? Explain how you would compare and contrast those businesses. ggg. What was Airbnb‘s response to the COVID-19 pandemic? Does it appear that the company‘s business model is more resilient than that of its hotel chain rivals? hhh. In what ways has the lodging consumer changed, and how does Airbnb‘s customer valueproposition meet this change? iii. What is your assessment of Airbnb‘s financial performance since the company has gone public? jjj. What recommendations would you make to Airbnb to improve its competitiveness in the

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accommodation market while mitigating any current and future risks?

Teaching Outline and Analysis 4. How would you illustrate and compare the business models for large hotels chains such as Marriott and Hilton, bed & breakfast operators, and Airbnb? Use the example chart in the textbook for business models as a guide (Concepts & Connections 1.1)

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Students should be able to identify the following:

Chain Hotels/Motels Customer  Value  Proposition



Familiar brands International brands to which customers are accustomed and potentially feel affinity and loyalty Global reach with loyalty programs

Bed & Breakfast (single proprietor) 





Profit Formula







 Revenue generation dependent on renting rooms and overall occupancy Cost structure extensive, composed of  wages and high fixed costs associated with the purchase and upkeep of multiple physical assets/locations Other costs would include food and  beverage, marketing, taxes, licenses

One location, offering unique, local accommodation Intimate accommodation, with proprietor sometimes serving multiple roles, including ambassador to area If in rural area, may be only accommodation

Airbnb    

  

Revenue  generation dependent on renting rooms and overall occupancy Cost structure  associated with operating brick and mortar physical location, food and beverages, marketing Possible staff wages if

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Use of technology to which users are familiar Smartphone compatibility Shorter, more intimate stays Varying and different locales in which to stay, both local and international reach Cheaper accommodations Unique accommodations Revenue opportunities for real estate owners Revenue generation transaction fee charged to users whom offer and rent accommodations through app Cost structure associated with developing and updating software and technology, marketing and advertising, wages for engineers, professional management and staff

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Profit Margin



Global costs further complicate structure, including operating across multiple legal and physical jurisdictions

operations are large enough to necessitate staff



 Dependent on generating sufficient revenues across multiple locations to cover fixed and variable costs globally.

Profitable locations may be used to offset losses and unprofitable locations

Dependent on  generating revenues sufficient to cover fixed and variable costs. Lack of profitability several jeopardizes business as owned by sole proprietor

Not contingent upon the fixed costs associated with operating hotels/bed & breakfasts.

Instead, profitability associated with percentage of revenue generated by all participating users offering accommodations

5. What are the general strengths and weaknesses of large hotel chains such as Marriott and Hilton, bed & breakfasts, and Airbnb? Explain how you would compare and contrast those businesses.

Students should be able to identify the following:

Large Hotel/Motel Chains Strengths

   

Familiar, international brands Brand loyalty Global reach Perception of safe, comfortable and/or reliable accommodations

Bed & Breakfast (single proprietor) 



One location, offering unique, local accommodation Intimate accommodation, with proprietor sometimes serving

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Airbnb 



No fixed costs associated with operating hotels, thus greatly reduced cost structure Leveraging technology when consumers are more

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

Corporate accounts



multiple roles, including ambassador to area If in rural area, may be only accommodation







Weaknesses







High-cost structure, further exacerbated by global operations and presence If consumer has bad experience with one location, all locations may be viewed as terrible Need at times to compete on price through discount offerings





Revenue generation dependent on renting rooms and overall occupancy, highly associated with travel trends in the area Cost structure, which is highly sensitive to fluctuations, as a sole proprietor has very little room for shifts in revenue and costs

 







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smartphone dependent Market leader perception in technology Ubiquitous, as user can access anytime through app Offering both low-cost accommodations, as well as unique experiences Perception of at times unsafe experiences Users may be hesitant to use Airbnb in specific locations, opting for a more familiar brand Legal exposure through individual hosts not following laws, such as antidiscrimination Legal exposure as cities and towns determine if renting rooms through Airbnb is legal, and the potential for it to be illegal Business model is relatively easy to copy, as demonstrated

by Uber and Lyft in the ride-sharing space

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

While Airbnb offer an extensive range properties, they do not offer many property amenities that compete with upscale resorts.

The resorts can provide first class service and often have spectacular views.

While this is a costly expense for the upscale hotels, it creates an image of luxury that many Airbnb locations cannot provide.

6. What was Airbnb‘s response to the COVID-19 pandemic? Does it appear that the company‘s business model is more resilient than that of its hotel chain rivals?

Students should be able to identify the following moves undertaken by Airbnb. 

Airbnb was forced to delay its IPO as a result of the pandemic. The company also had to raise $2 billion in private funding and debt to support operations during the pandemic.



The company was forced to layoff 1,900 employees (about one-fourth of its workforce) in May 2020 to reduce costs.



Guests were forced to cancel their reservations due to governmental restrictions and safety reasons. Airbnb provided refunds for cancelled reservations made prior to March 14, 2020.



The company issued safety and cleaning guidelines to hosts.



Hosts lost a large portion of their income leading Airbnb to establish a $17 million dollar fund to help support the hosts.

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Section 6 Case Teaching Note for Case 09



Airbnb created ―online experiences‖ to virtually mimic a vacation.

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Students should recognize that while Airbnb‘s revenues and profitability were greatly affected by the COVID-19 pandemic, its business model is far more efficient that employed by hotel chains. Airbnb‘s reliance on hosts to provide physical accommodation spaces is better suited to the dramatic decline in travel accommodations that business models involving brick-and-mortar lodging locations. Lodging companies with extensive brick-and-mortar locations must maintain high occupancy rates to achieve breakeven. Airbnb differs in the fact that there no room-related utility costs, labor expenses, or maintenance costs incurred by the Airbnb company.

7. In what ways has the lodging consumer changed and how does Airbnb‘s customer value proposition meet this change?

Students should be able to identify the following changes in the profile of lodging customers: 



Desire for unique experiences, not focused on ownership. Students should be able to discuss their experiences as consumers of the sharing economy (not only with Airbnb but also Uber, Lyft, and other similar companies). 

Airbnb provides customers with opportunities to experience multiple, unique accommodations not typically associated with larger chain brands.



Smaller sole proprietors such as bed & breakfasts may be accessed through the app.



Those offering accommodations as hosts share in the desire to not only have a unique experience with a guest but also to invite a stranger into their own home or apartment.

Desire to access experiences immediately through smartphone technology. Students should note that a company like Airbnb could only exist since the advent of Internet and smartphone technologies. 



Apps and smartphones have provided the consumer the opportunity to have immediate access, such as purchasing songs immediately only after hearing them on the radio, or even the simple act of ―googling‖ and looking-up information.

Familiarity with apps and fluency with life/smartphone integration. Consumers— especially the Millennial age-group (i.e., those consumers born between the early 1980s and the early years of the 21st century)—are less technology-averse, use smartphones and apps, and are more willing to experiment and embrace the ―experience economy‖ than previous generations, and this trend should continue to occur. 

As younger generations who have used smartphones from childhood age and get older, technology and businesses such as Airbnb will seem less unusual and more

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commonplace. The majority of Airbnb users were under 34 years of age which aligns with technology and demographic trends.

Students should conclude that these consumer changes position Airbnb very strongly to compete effectively, especially given its unique business model.

8. What is your assessment of Airbnb‘s financial performance since the company has gone public?

While Airbnb recorded revenues of nearly $6 billion in 2021, students should consider if the company‘s profit formula and cost structure will allow for adequate shareholder returns.

Students who review case Exhibits 1 and 2 will note the company‘s dramatic increase in bookings, booking value, and revenues and operating profit margin during 2021. As shown in case Exhibit 2, Airbnb reported revenues of $3,378,199 in 2020, with revenues increasing to $5,991,760 in 2021. Students should be quite impressed with the increase in revenue of over $2.5 million. Also, students who have closely reviewed case Exhibit 1 will recognize that the gross value of bookings and revenues have grown at a much faster annual growth rate than nights and experiences booked. Table 1 of this teaching note shows that gross booking values and revenues increased by 96.2 percent and 77.4 percent, respectively, between 2020 and 2021. Table 1 shows that nights and experiences booked grew by 55.6 percent between 2020 and 2021. The company experienced high double-digit growth in nights and experiences booked between 2020 and 2021 in all markets except Asia.

While the company recorded a net loss of $352 million in 2021, it also recorded its first positive operating profit of $429 million in in 2021. Students who have made calculations similar to those shown in Table 2 should recognize that most expense categories grew at a slower rate than revenues between 2019 and 2021. Only product development costs increased faster rate than revenue growth of 11.7 percent, between 2019 and 2021. The company‘s cost of revenue, sales and marketing expenses, and net loss all declined in dollars and had negative growth rates between 2019 and 2021.

But nevertheless, some students may suggest that the company should be able to achieve positive net income given its 2021 revenues of nearly $6 billion. Table 3 presents selected financial ratios for Airbnb, Inc. in 2019 through 2021. While its profitability ratios are improved from both 2020 and 2019, students could support the position that the company should strive to provide improved returns to shareholders. Case Exhibit 3 indicates that the company had a cash balance of more than $6 billion and marketable securities increased to nearly $2.3 billion in 2021. However, students may conclude that while the company is highly solvent and profitability is improving, its current revenues should allow it to achieve profitability.

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Table 1 Compounded Annual Growth Rate in Airbnb, Inc.’s Bookings, Gross Booking Value, and Revenue, 2020–2021 CAGR (2020– 2021) Nights and Experiences Booked North America EMEA Latin America Asia Pacific Total

51.0% 74.4% 73.2% 7.6% 55.6%

Gross Booking Value North America EMEA Latin America Asia Pacific Total

92.1% 119.3% 117.9% 37.7% 96.2%

Revenue North America EMEA Latin America Asia Pacific Total ____ Calculated from Case Exhibit 1.

80.6% 88.6% 78.2% 26.2% 77.4%

Table 2 Compounded Annual Growth Rates for Selected Items in Airbnb, Inc.’s Income Statements, 2019–2022 CAGR (2019– 2022) Revenue Cost of revenue Operations and support Product development Sales and marketing General and administrative Total costs and expenses

11.7% (1.7)% 1.9% 20.8% (14.5)% 9.5% 2.4%

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Section 6 Case Teaching Note for Case 09

Net loss ____

155

(27.7)%

Calculated from case Exhibit 2.

Table 3 Selected Financial Ratios for Airbnb, Inc., 2019–2022 2021 Operating profit margin Net profit margin Return on assets Return on equity ____ n.a. Not available

2020

2019

7.2% (106.3)% (10.4)% (5.9)% (135.7)% (14.0)% (2.6)% (43.7)% n.a.

(7.4)% (158.0)% n.a.

Calculated from case Exhibits 2 and 3.

9. What recommendations would you make to Airbnb to improve its competitiveness in accommodation market while mitigating any current and future risks? 



Continue to lobby and advocate for friendly legislation, while proactively supporting legal compliance, such as it began in 2018 with collecting taxes automatically through its platform. 

Identify business organizations, such as chambers of commerce, as large, probusiness groups could be leveraged to gain legislative support.



Identify platform enhancements, such as the automatic collection of taxes, that take advantage of its technological differentiation to further reinforce its value proposition for its users, while protecting itself legally.

Conduct a cost analysis to identify and eliminate non-value-adding costs. 

General and administrative expenses should be closely scrutinized to determine if costs benefiting executives or others are limiting the company‘s ability to achieve a positive net income.



While the company must continue to invest in sales and marketing activities, it is possible that the company‘s sales and marketing expenditures of more than $1.1 billion annually have passed a point of diminishing returns.

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Attract and enroll single-proprietor establishments, and devise methods to provide added value for such businesses, for example, in utilizing Airbnb as a platform for marketing and offering accommodations. 

Doing so could mitigate the legislative risk while growing the user base and potential future revenues (as in the bullet above).



Doing so could also enable Airbnb to leverage its investments in technologies such as yield management and dynamic pricing systems across a wider base of proprietors.

Pursue the business and international traveler segments, as it is an essential component of the market, 

Business travelers and extended stay guests present opportunities for increased user base and revenue growth.



However, given Airbnb‘s current position, it is not as business friendly as rival hotel/motel chains, has not developed a customer loyalty program, and would potentially need to change its user interface and invoicing systems to accommodate corporate accounts.

Make continued investments in technology to maintain its differentiation/focus generic strategy. 

These investments will not only be in smartphone and computer interfaces, but also in emergent technologies that employ big data and customer preference algorithms.



For example, some students might discuss how virtual reality (VR) could be leveraged to advertise accommodations, or even improve brand aspects such as quality and safety.

Find ways to mitigate competition between larger hotels and Airbnb. This can reduce legislative and competitive risk, while potentially expanding user base and revenues. 

For example, students might suggest that Airbnb create a user interface that refers customers seeking lodging in high-demand locations (such as resorts and cities) to established chain hotels during peak periods when regular Airbnb rooms are unavailable.

EPILOGUE

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More recent news on Airbnb can be found at: https://press.atairbnb.com.

Case Teaching Note 2 Costco Wholesale in 2022: Mission, Business Model, and Strategy OVERVIEW Ten years after turning the leadership of Costco Wholesale over to a new CEO, Jim Sinegal, Costco‘s cofounder and chief executive officer (CEO) from 1983 until year-end 2011, had ample reason to be pleased with the company‘s ongoing revenue growth and competitive standing as one of the world‘s biggest and best consumer goods merchandisers. Sinegal had been the driving force behind Costco‘s 37-year evolution from a startup entrepreneurial venture into the third largest retailer in the United States and the world (behind Walmart and Amazon.com) and the undisputed leader of the discount warehouse and wholesale club segment of the North American retailing industry. Since January 2012, when the then-president Craig Jelinek took the reins as Costco Wholesale‘s president and CEO, the company had prospered, growing from annual revenues of $89 billion and 598 membership warehouses at year-end fiscal 2011 to annual revenues of $195.9 billion and 815 membership warehouses at year-end fiscal 2021 (August 29, 2021). Costco‘s growth continued in the first six months of fiscal 2022; six-month revenues were $102.3 billion, up 16.3 percent over the first six months of fiscal 2021, and the company had opened 12 additional warehouses and relocated three others as of April 2022. As of June 2022, Costco had continued to maintain its ranking as the third largest retailer in both the United States and the world.

The case spotlights Costco‘s mission, business model, and strategy, but it also contains good coverage of the company‘s warehouse operations, compensation practices, business philosophy, core values, and ethical standards. The company is interesting in several important respects: 

Costco‘s mission in the membership warehouse business was ―To continually provide our members with quality goods and services at the lowest possible prices.‖



The centerpiece of Costco‘s business model entailed generating high sales volumes and rapid inventory turnover by offering fee-paying members attractively low prices on a limited selection of nationally branded and selected private-label products in a wide range of merchandise categories. Membership fees were a critical element of Costco‘s business

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model because they provided sufficient supplemental revenues to boost the company‘s overall profitability to acceptable levels. 

The cornerstones of Costco‘s strategy were low prices, a limited product line and limited selection, and a ―treasure hunt‖ shopping environment. Costco‘s philosophy was to keep customers coming in to shop by wowing them with low prices and thereby generating big sales volumes.



To attract customers with considerable disposable income—the average annual income of Costco members was approximately $100,000 (in 2015, Costco management believed the 8.6 million subscribers to the company‘s monthly Costco Connection magazine had an average annual income of $156,000). Many members were affluent urbanites, living in nice neighborhoods not far from where Costco warehouses were located.



Whereas typical supermarkets stocked about 40,000 items and a Wal-Mart Supercenter or a SuperTarget might have 125,000 to 150,000 items for shoppers to choose from, Costco‘s merchandising strategy was to provide members with a selection of only about 3,700 items. Of these, about 75 percent were quality brand-name products and 25 percent carried the company‘s private-label Kirkland Signature brand. 

Employee compensation at Costco was higher than at Sam‘s Club. Jim Sinegal was convinced that having a well-compensated workforce was very important to executing Costco‘s strategy successfully. He said, ―It has to be a significant advantage for you. . . . paying good wages and keeping your people working with you is very good business.‖ Moreover, executives at Costco did not earn the outlandish salaries that had become customary over the past decade at most large corporations.

SUGGESTIONS FOR USING THE CASE This case was written to (1) illustrate the CEO‘s role as chief strategist and organization leader, (2) demonstrate how a company‘s business principles and core values can link tightly to and drive a company‘s strategy and operating practices, and (3) give students practice in evaluating a company‘s direction and strategy in the highly competitive retail marketplace. The case requires that students draw upon most of the concepts discussed in Chapters 1 and 2 in preparing the case for class discussion.

We think Costco Wholesale is an excellent leadoff case for the course (other good choices are Airbnb in 2022 and Robin Hood—both of which require that students draw upon the material covered in Chapters 1 and 2, although Robin Hood also illustrates leadership and strategy execution concepts from Chapter 10. Student familiarity with ―big box‖ discount retailing, the

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very interesting character of Costco Wholesale and its co-founder/former CEO Jim Sinegal, and the very close connection between the case and the material in Chapters 1 and 2 make this an especially good leadoff case. You may want to consider covering Chapter 1 in your first day‘s lecture, Chapter 2 on your second day‘s lecture, and then assigning Costco Wholesale for class discussion on Day 3.

However, if you opt for another leadoff case like Airbnb in 2022, we think you will find that the Costco Wholesale case works exceptionally well (1) in the early part of your business strategy module (where you want students to draw from Chapters 1 to 3 in doing their analysis and making action recommendations), (2) as a comprehensive written case or oral team presentation case, or (3) as an end-of-the-course or final exam case (because the case contains issues that cut across topics covered in many of the 12 chapters). If you want to cover Chapters 1–5 or Chapters 1–7 before assigning a case for class discussion, you‘ll find that the Costco case contains ample information on industry and competitive conditions and the businesses of Costco‘s two chief competitors in North America—Sam‘s Club and BJ‘s Wholesale. Thus, Costco Wholesale is one of those multifaceted cases that will work nicely in any of several places in your lineup of case assignments—although our preference is to assign it after covering Chapters 1 and 2 or Chapters 1–3.

You‘ll find ample opportunity here to explore Jim Sinegal‘s style of managing, his values and business principles, the company‘s clever and innovative business model, the chief elements of its business strategy, and the company‘s financial performance. If you wait to assign the case until students have read Chapters 3–5, then you can expect students to probe a bit deeper in evaluating Costco‘s competitive strengths/weaknesses, its potential for continued growth, and how well it is positioned to compete against Sam‘s Club, BJ‘s Wholesale, and other big-box discounters like Walmart and Target. But students will really have no trouble wrestling with the competitive issues and generating opinions without the benefit of having first covered Chapters 3–5—this is because they not only are likely to have shopped at one or more membership warehouses but also because the strategic issues and analysis turn out to be fairly clear-cut, which is why Costco Wholesale makes such a good early assignment or leadoff case.

We suggest use of a teaching plan that focuses on Jim Sinegal‘s business principles and management philosophy, how well Craig Jelinek is performing as Sinegal‘s successor, the various aspects of Costco‘s business model, the company‘s strategy and growth initiatives, its compensation and benefits practices, why shopping at Costco appeals to upscale consumers, and whether the strategy is delivering good financial performance. If class members have read Chapter 3, then you can also make a point of press class members for their five-forces analysis of competitive conditions in the North American wholesale club industry.

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The Connect-Based Exercise for the Costco Case. We developed an exercise for the Costco Wholesale case for inclusion in the publisher‘s Connect Management web-based assignment and assessment platform because 

The case is very appropriate for use early in the course (following coverage of Chapters 1–3).



One of the purposes of the Connect-based case exercises is to drill students in applying the concepts and analytical tools discussed in the chapters to the circumstances posed in the cases.

The Connect case exercise for Costco in 2022 and other cases in the text follow the teaching outline and analysis section of the teaching note.

Unless you want to use a particular case exercise for testing purposes, the best approach to using the Connect case exercises is to require all class members to complete this exercise for the Costco case before coming to class on the day the case has been assigned. Students definitely need practice in doing a five-forces analysis—it is not as simple as it might look to do an insightful analysis of competitive pressures. Certainly, students who do a conscientious job of completing the exercise will be better prepared to make meaningful contributions to the discussion of what competition is like in the wholesale club industry, as opposed to merely giving off-the-cuff opinions.

What to Tell Students in Preparing the Costco Case for Class. To give students guidance in what to do and think about in preparing the Costco case for class discussion, we strongly recommend two things: 120.

Have class members complete the Connect-based exercise for the Costco case (in the event you have opted to make the Connect supplement for the 8th edition a part of the materials required for your course).

Provide class members with assignment questions (in addition to what is covered in the Connect exercise) and insist that they prepare good notes/answers to these questions before coming to class. Our recommended assignment questions for the

121.

Costco case are presented in the next section of this TN. Since there are 12 assignment questions, you may want to have students focus on a subset of the questions (depending on how you want to conduct the class discussion).

To facilitate your use of assignment questions and making them available to students, we have posted a file of the Assignment Questions contained in this teaching note in the Instructor Resources section of the Connect Library). (You should be aware that

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there is a set of assignment questions posted in the student OLC for each of the 12 cases included in the 8th edition.)

In our experience, it is quite difficult to have an insightful and constructive class discussion of an assigned case unless students have conscientiously have made use of pertinent core concepts and analytical tools in preparing substantive answers to a set of well-conceived study questions before they come to class. In our classes, we expect students to bring their notes to the study questions to use/refer to in responding to the questions that we pose. Moreover, students often find that a set of study questions is useful in helping them prepare oral team presentations and written case assignments—in addition to whatever directive question(s) you supply for these assignments.

Hence, we urge that you provide students with assignment questions—either those we have provided or a set of your own questions—for all those aspects of an assigned case that you believe are worthy of student analysis or that you plan to cover during your class discussion of the case.

Utilizing the Guide to Case Analysis. If this is your first assigned case, you may find it beneficial to have class members read the Guide to Case Analysis that is available when you adopt the 8th edition. The content of this Guide is particularly helpful to students if your course is their first experience with cases and they are unsure about the mechanics of how to prepare a case for class discussion, oral presentation, or written analysis.

Suggested Assignment Questions for an Oral Team Presentation or Written Case Analysis.

The Costco case is quite suitable for both oral team presentations and a written case assignment.

Our suggested assignments for either an oral presentation or a written case assignment are as follows: What is your assessment of Costco‘s business model and strategy? How well is Costco‘s strategy working? What recommendations would you make to Costco management to sustain the company‘s growth and improve the company‘s financial performance?

122. What is competition like in the North American wholesale club industry? Which of the five competitive forces is strongest and why? Which of the three rivals— Costco, Sam‘s, or BJ‘s Wholesale—has the best strategy? Why? Which of the three rivals has been the best performer? Five years from now, is Costco‘s standing as the industry leader likely to be stronger or weaker? Are the other two rivals likely to gain or lose ground on Costco? Why? What recommendations would you make to Costco management to sustain Costco‘s growth and improve the company‘s financial performance?

(Should time permit, you could ask for action recommendations pertaining to Sam‘s Club and/or BJ‘s Wholesale. If you are using the case for oral presentations by two or more

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teams, then different teams could be assigned different companies when it comes to proposing action recommendations.)

ASSIGNMENT QUESTIONS What is Costco‘s business model? Is the company‘s business model appealing? Why or why not?

123.

What are the chief elements of Costco‘s strategy? How good is the strategy?

124.

Do you think Jim Sinegal was an effective CEO? What grade would you give him in leading the process of crafting and executing Costco‘s strategy? How well is Craig Jelinek performing as Sinegal‘s successor; what grade would you give him so far in leading the process of crafting and executing strategy? What support can you offer for these grades? Refer to Figure 2.1 in Chapter 2 in developing your answers.

125.

What core values or business principles did Jim Sinegal stress at Costco?

126.

(In the event you have covered Chapter 3) What is competition like in the North American wholesale club industry? Which of the five competitive forces is strongest and why? Use the information in Figures 3.2 through 3.7 (and the related discussions) in Chapter 3 to do a complete five-forces analysis of competition in the North American wholesale club industry.

127.

How well is Costco performing from a financial perspective? Do some numbercrunching using the data in case Exhibit 1 to support your answer. Use the financial ratios presented in Appendix following Chapter 10 to help you diagnose Costco‘s financial performance.

128.

How well is Costco performing from a strategic perspective? Does Costco enjoy a competitive advantage over Sam‘s Club? Over BJ‘s Wholesale? If so, what is the nature of its competitive advantage? Does Costco have a winning strategy? Why or why not?

129.

What do you think of Costco‘s compensation practices? Does it surprise you that Costco employees apparently are rather well-compensated?

130.

What recommendations would you make to Costco top management regarding how best to sustain the company‘s growth and improve its financial performance?

TEACHING OUTLINE AND ANALYSIS 194. What is Costco‘s business model? Is the company‘s business model appealing? Why or why not?

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As discussed in Chapter 1, a company‘s business model explains the rationale for why its business approach and strategy will be a moneymaker. This rationale sets forth the key components of the company‘s business approach, indicates how revenues will be generated, and makes a case for why the strategy can deliver value to customers and at the same time be profitable.

The information in the case lays out the chief components of Costco‘s business model in a straightforward manner:

195.

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Require the payment of membership fees to shop at Costco (Costco employs a ―subscription‖ membership business model)



Generate high sales volumes and rapid inventory turnover by offering members very low prices on a limited selection of nationally branded and selected privatelabel products in a wide range of merchandise categories.



The broad appeal of the company‘s low prices created high levels of store traffic and produced big sales volumes on many items.



Management believed that rapid inventory turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, enabled Costco to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters.



Furthermore, Costco‘s high sales volume and rapid inventory turnover generally allowed it to sell and receive cash for inventory before it had to pay many of its merchandise vendors, even when vendor payments were made in time to take advantage of early payment discounts. Thus, Costco was able to finance a big percentage of its merchandise inventory through the payment terms provided by vendors rather than by having to maintain sizable working capital (defined as current assets minus current liabilities) to facilitate timely payment of suppliers.

What are the chief elements of Costco‘s strategy? How good is the strategy?

The cornerstones of Costco‘s strategy were low prices, a limited product line and limited selection, a ―treasure hunt‖ shopping environment, strong emphasis on low operating costs, and ongoing expansion of its geographic network of store locations. 

Costco has steadfastly and successfully pursued a low-cost leader strategy (as students should quickly recognize from the discussions in both Chapters 1 and 5).

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Costco‘s CEO Jim Sinegal left no doubt about the company‘s efforts to be a lowcost operator when he stated: 





Costco can offer lower prices and better values by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing, and accounts receivable. We run a tight operation with extremely low overhead which enables us to pass on dramatic savings to our members.

Costco‘s strategic approach to pricing was to keep customers coming in to shop by wowing them with low prices. Costco was known for selling top quality national and regional brands at prices consistently below traditional wholesale or retail outlets. The company only stocked items which could be priced at bargain levels and provide members with significant cost savings; this was true even if an item was often requested by customers. 

A key element of Costco‘s strategy to keep prices low to members was to cap the margins on brand name merchandise at 14 percent (compared to 20 to 50 percent margins at other discounters and many supermarkets).



The margins on Costco‘s private-label Kirkland Signature items were a maximum of 15 percent, but the fractionally higher markups on Costco‘s private label items still resulted in its private-label prices being about 20-0 percent below comparable name brand items. The company‘s private-label Kirkland Signature products—vitamins, juice, bottled water, coffee, spices, olive oil, canned salmon and tuna, nuts, laundry detergent, baby products, dog food, luggage, cookware, trash bags, batteries, wines and spirits, paper towels and toilet paper, and clothing—were designed to be of equal or better quality than national brands.

Whereas typical supermarkets stocked about 40,000 items and a Walmart Supercenter or SuperTarget might have as many as 150,000 items for shoppers to choose from, Costco‘s merchandising strategy was to provide members with a selection of only about 3,700 items. 

However, Costco‘s product range covered a broad spectrum—rotisserie chicken, all types of fresh meats, seafood, fresh and canned fruits and vegetables, paper products, cereals, coffee, dairy products, cheeses, frozen foods, flat-screen televisions, iPods, digital cameras, fresh flowers, fine wines, caskets, baby strollers, toys and games, musical instruments, ceiling fans,

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vacuum cleaners, books, apparel, cleaning supplies, DVDs, light bulbs, batteries, cookware, electric toothbrushes, vitamins, and washers and dryers.

But the company deliberately limited the selection in each product category to fast-selling models, sizes, and colors. Many consumable products like detergents, canned goods, office supplies, and soft drinks were sold only in big container, case, carton, or multiple-pack quantities. 

The selections of appliances, equipment and tools often included commercial and professional models because of many of Costco‘s members were small businesses. 

To encourage members to shop at Costco more frequently, the company operated ancillary businesses within or next to most Costco warehouses; Costco‘s sales by major product category, 2016–2019 are shown in case Exhibit 2.



While Costco‘s product line consisted of approximately 3,700 active items, some 20 to 25 percent of its product offerings were constantly changing. Costco‘s merchandise buyers were continuously making one-time purchases of items that would appeal to the company‘s clientele and that would sell out quickly. A sizable number of these items were high-end or name-brand products that carried big price tags; examples included $1,000 to $4,500 big-screen TVs, $800 espresso machines, expensive jewelry and diamond rings (priced from $10,000 to $400,000+), Omega watches, Waterford Crystal, exotic cheeses, Coach bags, cashmere sports coats, $1,500 digital pianos, $800 treadmills, $2,500 memory foam mattresses, and Dom Perignon champagne. Many of the featured specials came and went quickly, sometimes in several days or a week—like Italian-made Hathaway shirts priced at $29.99 and $800 leather sectional sofas. The strategy was to entice shoppers to spend more than they might by offering irresistible deals on big-ticket items or name-brand specials and, further, to keep the mix of featured and treasure hunt items constantly changing so that bargain-hunting shoppers would go to Costco more frequently than for periodic ―stock up‖ trips.



Costco‘s low prices and its reputation for making shopping at Costco something of a treasure hunt made it unnecessary to engage in extensive advertising or sales campaigns. Marketing and promotional activities were generally limited to monthly coupon mailers to members, weekly e-mails to members from Costco.com, occasional direct mail to prospective new members, and regular direct marketing programs (such as The Costco Connection, a magazine published

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for members), in-store product sampling, and special campaigns for new warehouse openings. The company‘s primary direct mail program for members was The Costco Connection, a multipage mail-out that contained a host of savings coupons for featured specials. For new warehouse openings, marketing teams personally contacted businesses in the area that were potential wholesale members; these contacts were supplemented with direct mailings during the period immediately prior to opening. 

Potential Gold Star (individual) members were contacted by direct mail or by promoting membership offerings at local employee associations and businesses with large numbers of employees. After a membership base was established in an area, most new memberships came from word-of-mouth (existing members telling friends and acquaintances about their shopping experiences at Costco), follow-up messages distributed through regular payroll or other organizational communications to employee groups, and ongoing direct solicitations to prospective Business and Gold Star members.



Management believed that its emphasis on direct mail advertising kept its marketing expenses low relative to those at typical retailers, discounters, and supermarkets.



Most Costco stores were located in the upscale areas/suburbs of major metropolitan areas.



In April 2022, Costco was operating 878 warehouses, including 572 in the United States and Puerto Rico, 105 in Canada, 40 in Mexico, 29 in the United Kingdom, 30 in Japan, 16 in Korea, 14 in Taiwan, 12 in Australia, 2 in Spain and 1 each in Iceland, France, and China. Costco also operated e-commerce sites in the United States, Canada, the United Kingdom, Mexico, Korea, Taiwan, Japan, and Australia; e-commerce sales represented about 7 percent of total net sales in 2021.



Costco websites enabled members to shop for many in-store products online and provided them with a means of obtaining a much wider variety of value-priced products and services that were not practical to stock at the company‘s warehouses. In recent years, online merchandise offerings had expanded significantly, and the company was continuously exploring opportunities to deliver added value to members via a broader array of online offerings. Examples of value-priced items that members could buy online included sofas, beds, mattresses, entertainment centers and TV lift cabinets, outdoor furniture, office furniture, kitchen appliances, billiard tables, and hot tubs.

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

Members could also use the company’s websites for such services as digital photo processing, prescription fulfillment, travel, the Costco auto program (for purchasing selected new vehicles with discount prices through participating dealerships), and other membership services. In 2020, Costco sold 689,000 vehicles through its 3,000 dealer partners (up 32.5 percent over the 520,000 vehicles sold in 2017); the big attraction to members of buying a new or used vehicle through Costco’s auto program was being able to skip the hassle of bargaining with the dealer over price and, instead, paying an attractively low price prearranged by Costco. At Costco’s online photo center, customers could upload images and pick up the prints at their local warehouse in little over an hour.



Website sales accounted for 7 percent of Costco’s total net sales in fiscal 2021 versus 3 percent in 2014



Almost 111 million cardholders were entitled to shop at Costco as of 2022; in fiscal 2021, membership fees generated $3.9 billion in revenues for the company.



Annual sales per location averaged about $236 million ($4.54 million per week), some 131 percent higher than the $102.7 million per year averages for Sam‘s Club, Costco‘s chief competitor.



The key elements of Costco‘s strategy were ultra-low prices, a limited selection of nationally branded and private-label products, a ―treasure hunt‖ shopping environment, strong emphasis on low operating costs, and ongoing expansion of its geographic network of store locations.



Costco‘s growth strategy was to increase sales at existing stores by 5 percent or more annually and to open additional warehouses, both domestically and internationally.

Once the chief elements of Costco‘s strategy have been brought out, you may want to poll the class on what they think of the strategy. How good is it? Based on Costco‘s rapid growth, its status as market leader, and its financial performance, we see no basis for a grade of less than B+. A grade of A would seem appropriate.

196. Do you think Jim Sinegal was an effective CEO? What grade would you give him in leading the process of crafting and executing Costco‘s strategy? How well is Craig Jelinek performing as Sinegal‘s successor; what grade would you give him so far in leading the process of crafting and executing strategy? What support can you offer for these grades?

Refer to Figure 2.1 in Chapter 2 in developing your answers.

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Class members are likely to approve of the way Jim Sinegal managed Costco and the overall job he did. We suggest that you push the class to evaluate Sinegal in terms of how well he performed the five tasks of strategic management portrayed in Figure 2.1 in Chapter 2. You might want to ask the following questions: 

Was it a good idea for Sinegal to spend time visiting Costco stores? Why or why not?



Should Sinegal have ―cross-examined‖ store managers pretty aggressively as he toured the stores he visited?



Should he expect solid, reasoned answers to the questions he posed? Should he offer suggestions?



What should Sinegal have strived to accomplish on his store visits?

We would give Jim Sinegal an ―A‖ for the job he did in leading the strategy-making process at Costco. But there is always merit in pushing class members to justify their reasons for approving of Jim Sinegal‘s performance. Very likely, students will find little to criticize.

Most will concur that the strategy is fundamentally sound and that there is every indication it is working well. Some points that class members ought to make: 

Jim Sinegal has set forth a clear and well-defined strategic path for the company to follow.



He is the architect of Costco‘s business model and presided over the development of the company‘s strategy.



Sinegal had savvy merchandising skills and orchestrated the company‘s effective strategy to create a ―treasure hunt‖ atmosphere in the stores, to keep prices ultralow, and to build a high volume of store traffic that promotes rapid inventory turnover. Until his retirement, he was definitely the driving force behind the company‘s ability to grow the company, achieve an exceptionally high annual sales volume per store, and enhance the company‘s long-term performance.

Moreover, Sinegal did a very commendable job in leading the strategy execution process at Costco. He spent a lot of time in the stores, checking out store layouts and merchandising, speaking with employees, and in general staying in close touch with how well things are going. He was apparently very quick to take action when he spotted ways a store could improve. In touring a Costco store with the local store manager, Sinegal was very much the person in-charge. He functioned as producer, director, and knowledgeable critic. He cut to

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the chase quickly, exhibiting intense attention to detail and pricing, wandering through store aisles firing a barrage of questions at store managers about sales volumes and stock levels of particular items, critiquing merchandising displays or the position of certain products in the stores, commenting on any aspect of store operations that caught his eye, and asking managers to do further research and get back to him with more information whenever he found their answers to his questions less than satisfying. Information in the case indicates that Sinegal had tremendous merchandising savvy, that he demanded much of store managers and employees, and that his views about discount retailing set the tone for how the company operated under his leadership and seems to be continuing to operate. Knowledgeable observers have said that Jim Sinegal‘s merchandising expertise was on a par with that of the legendary Sam Walton.

In short, there is very little about Jim Sinegal’s performance that merits criticism. Students ought to concur that he has effectively performed the five tasks shown in Figure 2.1 of Chapter 2.

Likewise, students should concur that Craig Jelinek is doing a very creditable job of following in Sinegal‘s footsteps. There‘s no hard evidence in the case that Jelinek is doing anything other than a good job as Costco CEO. What really is there to criticize about Jelinek‘s performance so far. Our grade for Jelinek would be an A. Key Conclusion and Teaching Point: Jim Sinegal and Craig Jelinek have been effective CEOs. Jim Sinegal, in particular did a superb job of strategic leader—he merits a grade of A+ for his performance. Craig Jelinek‘s job at Costco has been made far easier because of all the things Sinegal did and accomplished. Pretty much all Jelinek has had to do in his 6+ years as Costco CEO is follow in Sinegal‘s footsteps and make sure that things continue to work as well or better than in the past. Students should see that Costco is a good illustration of a point much emphasized at the end of Chapter 1: good strategy + good strategy execution = good management.

197.

What core values or business principles did Jim Sinegal stress at Costco?

Two core values or business principles seem to stand out at Costco: 

Take care of our members.



Take care of our employees.

Jim Sinegal‘s comments in the case make it clear that he firmly believed in instilling these values as part of Costco‘s culture. He seems to have drawn a line in the sand in insisting that these two values/business principles be reflected in the way Costco operates. Nothing seems

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to have changed under Craig Jelinek.

198. (In the event you have covered Chapter 3) What is competition like in the North American wholesale club industry? Which of the five competitive forces is strongest and why?

Use the information in Figures 3.2 through 3.7 (and the related discussions in Chapter 3) to do a complete five-forces analysis of competition in the North American wholesale club industry.

Below is a representative five-forces model of competition for the North American wholesale club industry:

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Section 6 Case Teaching Note for Case 09

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

Rivalry among wholesale club competitors—a strong to fierce competitive force

The rivalry among Costco, Sam‘s Club, and BJ‘s Wholesale is vigorous and likely to remain so. All three competitors are striving to attract more members and to offer merchandise selections and a shopping experience that will cause members to make more store visits and/or spend larger sums per visit. Rivalry is centered on two main factors: 

Low prices (consistently below retail price levels and the prices charged by retail discounters)—prices had to be at ―bargain levels‖ in order to attract members and provide them with considerable cost savings (enough to more than cover membership fees)



Product quality and selection 

Merchandise was generally of good to excellent quality and often included name brand products supplemented with an assortment of private-label products



Warehouse clubs stocked 3,500 to 4,500 items, a portion of which were everchanging as company purchasing personnel ran upon one-time buying opportunities.



The product lineups of the three competitors are comparable and include such items as appliances, electronics, office and restaurant supplies, auto supplies, toys and games, light bulbs, batteries, cookware, tools, apparel, DVDs, books, canned and frozen foods, fresh meats and seafood, fresh fruits and vegetables, bakery items, beverages, wines, vitamins and personal care products, cleaning supplies, and paper products.



Selection within each category is typically limited, consisting mainly of fastselling models, colors, and large-quantity sizes).

To encourage members to shop more frequently and create a bit more of a one-stop shopping appeal, both Costco and Sam‘s Club operated ancillary businesses within or next to most warehouses—gas stations, optical centers, photo centers, print and copy centers, pharmacies, food courts, and the like. BJ‘s was extending its gasoline station business to more locations.

To a much lesser extent, rivalry also revolved around attracting members/shoppers by means of convenient store locations, a comparatively pleasant big-box shopping environment, and maybe even satisfactory checkout speeds.

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Class members should cite several factors as working to intensify rivalry among the three warehouse club competitors in North America: 

All three club rivals are aggressively pursuing top-line revenue growth (chiefly by opening new stores, striving to attract more members at both new and existing stores, and endeavoring to grow sales revenues and shopper traffic at existing stores). The industry is becoming somewhat mature (which strengthens rivalry); achieving fast revenue growth is heavily dependent on the speed with which rivals open new stores and grow sales at existing stores.

Clearly, Costco is doing a far better job than both its two rivals in growing its sales revenues by adding new stores and boosting sales revenues per warehouse location. Students might well note that Costco is less affected by having to compete against Sam‘s and BJ‘s than the higher degree of rivalry that both Sam‘s and BJ‘s experience in having to compete with Costco in those locations where Costco warehouses are also located. There is little if any rivalry among these three competitors when a particular city has only one local warehouse. Moreover, all three warehouse competitors almost always confront competitive pressures from local Walmart Supercenters and also large Target stores (as well as Amazon.com).



Low switching costs on the part of consumers (membership fees were very similar from club to club). In large metropolitan areas with stores of two or more of the three competitors, it is easy for households and businesses to switch their memberships from one club to another (or to belong to both and then shop at whichever club has the best deals).



Weak to modest degrees of product line differentiation from club to club.

There is considerable similarity in the merchandise offerings of all three clubs (which enhances rivalry).

Factors that might be cited as making rivalry weaker include: 

The differentiation that exists from club to club (as concerns shopping ambience, product selection, merchandising, and convenient access to store locations)—this differentiation poses a barrier to switching to the extent that some bargain-hunting shoppers prefer shopping at one club versus another when there are multiple clubs to choose from in their shopping area, thus acting to weaken rivalry.

But this one factor is not powerful enough to overcome the combination of factors that create

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rivalry among the three warehouse clubs, local Walmart and Target stores, and Amazon.com. 

Threat of entry into the warehouse club industry in North America—a weak competitive force

From our perspective, the window for entering the North American warehouse club industry is pretty much closed. There is, of course, potential for each competitor to enter cities/localities where no stores are currently located.

The barriers to a totally new warehouse club entrant are quite high: 

Costco and Sam‘s have to be considered formidable competitors and enjoy sizable scale economies not easily accessed by a newcomer.



Capital requirements are sizable—if an entrant wishes to compete on a scale comparable to the industry incumbents.



The marketing and advertising costs to attract members and build a significant volume of sales (and otherwise overcome the loyalty of existing warehouse club members) would seem to be significant. Why, for example, would a Costco member want to switch to an industry newcomer? Overcoming member switching costs would be an uphill struggle of considerable proportions.

Moreover, the three industry incumbents are in a strong position to vigorously contest a newcomer’s entry.

Conclusions concerning the threat of entry. All things considered, a newcomer‘s prospects for attractive profitability appear slim indeed. This is a low-margin business to begin with (with profits coming chiefly from membership fees). What outside company (besides perhaps Target—and that is a big and risky perhaps) really would want to come in to this industry and do battle head-to-head with Costco, Sam‘s, and BJ‘s in such a low-margin industry? It makes little or no business sense.

In short, the pool of candidates for fresh entry into warehouse club industry is small and the likelihood of fresh entry in 2022 and beyond is equally small, making the competitive pressures from the threat of new entry virtually nonexistent.

The only new entry of relevance comes from the existing competitors expanding their locations into places where they currently have no nearby warehouses already in operation.

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

175

Competition from substitutes—a strong to fierce competitive force

Students should quickly recognize that small business and individuals/households have hordes of substitutes for shopping at warehouse clubs. While the prices of substitute retailers may not be quite as low, the range of merchandise selection is far greater, and the number of convenient store locations of these substitute retailers is overwhelmingly greater. Even the members of warehouse clubs buy a considerable fraction of what they need from other types of local retail/discount outlets.

Students should conclude that the substitutes for being a member of and shopping at wholesale clubs are a relatively strong competitive force, given that





Acceptable substitutes are readily available.



Buyer costs to switch to substitutes are minimal (except for the higher prices that may have to be paid).



Many consumers are familiar with and comfortable with shopping at substitute retailers/discounters.



The merchandise that can be purchased at substitute retailers/discounters is broader and thus sometimes more appealing/suitable than the narrow production selection at wholesale clubs.

The bargaining power and leverage of suppliers to the warehouse club industry—a moderate to weak competitive force.

The suppliers consist mainly of the manufacturers of the products that warehouse clubs elect to stock. While a big fraction of these manufacturers are undoubtedly large enterprises with well-recognized brand names and good reputations among consumers, they are not necessarily in a strong bargaining position that allows them to dictate the terms and conditions on which they will sell their wares to the warehouse clubs.

Costco and Sam‘s, in particular, have considerable buying power and bargaining leverage in obtaining the merchandise they desire to stock. If a particular manufacturer chooses not to sell to the wholesale clubs at an attractively low price (such that the clubs can, in turn, charge what are perceived by members as ―bargain prices‖ and save their members money), the three existing warehouse competitors can purchase goods for their stores from other more willing and price competitive sources. In Costco‘s case, no single manufacturer supplied a large percentage of the merchandise that Costco stocked (which lessens any one manufacturer‘s bargaining power). Moreover, because the items that the wholesale clubs

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stock produce high volumes of sales for manufacturers, manufacturers tend to be anxious to sell their goods to the wholesale clubs—in other words, the wholesale clubs are big volume buyers and thus have substantial bargaining clout with their suppliers. Costco management believed that if its current sources of supply became unavailable (for reasons of high supply prices or whatever), the company could switch its purchases to alternative manufacturers without experiencing a substantial disruption of its business—such ease of switching suppliers weakens supplier bargaining power and strengthens the bargaining power of Costco/Sam‘s Club (but less so for BJ‘s).

Conclusion: The suppliers to the wholesale clubs tend to be a relatively weak competitive force—weak in the sense of being unable to put much pressure on their wholesale club customers in negotiating for better/higher prices and other more favorable terms of sale. 

The bargaining power and leverage of customers (the members of wholesale clubs)—a very weak competitive force

Wholesale club members buy in relatively small quantities; no single member accounts for a meaningful fractions of a wholesale club‘s total sales. Consequently, individual members of wholesale clubs have essentially no power or leverage to bargain with a wholesale club over the prices they will pay or over other terms and conditions of sale. A member can certainly not purchase a particular item (and obtain it for another retailer/discounter) and can also choose not to renew their membership, but this does not convey any bargaining power of consequence (any customer of any company in any industry can always refuse to purchase and take their business elsewhere). So even though a member‘s switching costs are relatively low, it does not result in having the clout to go to the Customer Service desk and bargain down a club‘s posted price on an item or otherwise obtain any benefit beyond what their membership card provides.

In perusing all the factors that result in strong buyer bargaining power, class members should conclude that wholesale clubs face little to no competitive pressure of any consequence stemming from the bargaining power of their members. In support of this position, they can argue that: 

Buyers/members are small, numerous, and buy in relatively small quantities.



There‘s no evidence indicating that clubs are frequently so overstocked with certain merchandise that a single member can bargain down the posted price of overstocked items.

Conclusions concerning the overall strength of competitive forces: Competitive pressures

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associated with rivalry and substitutes are definitely the two strongest of the five competitive forces. Competitive pressures from the other three competitive forces are weak. On the whole, competitive pressures confronting wholesale clubs are ―normal‖ or reasonable—not so strong as to unduly crimp profit margins but certainly strong enough to prevent wholesale clubs from earning well above-average profits and attracting outsiders to entry the industry.

To some large extent, the competitive market success of a wholesale club is a function of keeping its costs to buy goods and operate its stores low enough to be able to charge ―bargain prices,‖ attract new members, and still achieve acceptable profitability.

199. How well is Costco performing from a financial perspective? Do some number-crunching using the data in case Exhibit 1 to support your answer. Use the financial ratios presented in the Appendix following Chapter 10 to help you diagnose Costco‘s financial performance.

The financial and operating summary in case Exhibit 1 indicate that Costco‘s financial performance during the 2018–2021 period has been quite good, especially considering challenges in the retail sector and COVID-19. Students can point to any of several statistics and measures to support this conclusion: 

Net sales increased from $138.4 billion in fiscal 2018 to $192.1 billion in fiscal 2021, equal to a compound average growth rate (CAGR) of 11.5 percent.



Total revenues (sales plus membership fees) increased from $141.6 billion in fiscal 2018 to $195.9 billion in fiscal 2019, equal to an average annual compound rate of 11.4 percent.



Operating income increased from $4.5 billion to $6.7 billion between 2018 and 2021, a compound average growth rate of 14.4 percent which is faster than the growth rate for revenues.



Net income increased from $4.0 billion in 2018 to $5.0 billion in 2021, which represents a 16.9 percent compounded annual growth rate. Students should point out that operating income and net income growth rates that exceed revenue growth rates reflects outstanding management and superior strategy execution.



Costco‘s operating profit margins have improved slightly from 3.2 percent in 2018 to 3.4 percent in 2021. The company‘s net profit margins have also improved slightly from 2.2 percent in 2018 to 2.6 percent in 2021. Both profitability measures are impressive given the impact of COVID-19 on the retail sector.



Students should recognize from reviewing case Exhibit 2 that Costco‘s

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profitability measures would be greatly reduced without the benefit of membership fees. In fact, students may surmise that the company operates near breakeven on merchandise sales and that membership fees provide a relatively attractive margin.

200. How well is Costco performing from a strategic perspective? Does Costco enjoy a competitive advantage over Sam‘s Club? Over BJ‘s Wholesale? If so, what is the nature of its competitive advantage? Does Costco have a winning strategy? Why or why not?

Costco‘s strategic performance seems rather solid. 

Since its founding in 1983, Costco has grown to become the third largest retailer in the United States and the world, and the clear leader of the discount warehouse and wholesale club segment of the North American retailing industry.



Net sales at Costco‘s warehouses are rising briskly; memberships and membership fees are likewise rising. Sales per warehouse location are exceptionally robust.



Costco has ample opportunities to open additional warehouses annually for many years to come (especially in China), thus paving the way for continued growth in sales and membership.



The company‘s stores attract upscale consumers in large numbers; many members are loyal Costco shoppers.

We think students should conclude that Costco has a competitive advantage over Sam‘s Club and certainly a big competitive advantage over BJ‘s Wholesale. The basis for Costco‘s competitive advantage relates chiefly to Costco‘s more appealing ―treasure hunt‖ atmosphere and better selection of bargain-priced, upscale merchandise. Average sales per Costco warehouse are substantially larger than average sales at Sam‘s and BJ‘s. Costco‘s much larger sales volume per store, combined with its shorter operating hours, very likely result in Costco having very competitive labor costs per dollar of sales.

BJ‘s Wholesale is clearly a distant third in the membership warehouse segment and will likely never match the other two rivals in terms of total numbers of stores or sales per store or overall customer draw and allure.

But all three competitors—Costco, Sam‘s Club, and BJ‘s Wholesale—appeal to members because of (1) their low prices (it is not clear that any one of the three has lower prices than the other two on such merchandise as paper towels or meats or toothpaste or pet foods) and (2) their ability to save customers money on the merchandise they stock.

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Conclusions Regarding Whether Costco Has a Winning Strategy. In our view, it is fair to conclude that Costco has a winning strategy. As discussed in Chapter 1, there are three tests of a winning strategy: (1) Does the strategy fit the company‘s situation?

(2) Is the strategy building competitive advantage?

(3) Is the strategy improving company performance?

As concerns Costco, we strongly believe that students should conclude that the answers to these three questions are yes. 

Costco‘s strategy seems quite well matched to market conditions in the membership warehouse segment of the retailing industry and to the company‘s resources and competitive capabilities. We can see no justifiable basis for criticizing the matchup.



As indicated above, there is convincing empirical evidence that Costco enjoys a competitive advantage over its rivals insofar as attracting customers/members and generating high sales volumes per warehouse location. Costco is clearly the standout leader in the membership warehouse retailing segment, and its status as industry leader is unlikely to be challenged by Sam‘s Club any time in the foreseeable future.



And Costco‘s bottom-line performance is good (although, as indicated above, improvements in Costco‘s bottom line and profit margins would be welcomed by shareholders—but not at the expense of high member satisfaction with shopping at Costco). Costco is adding new stores at a faster pace than its rivals and there seems to be ample room in the domestic and international marketplace to add more Costco warehouse stores annually for some years to come—this should lay a solid foundation for further growth in revenues, net income, and earnings per share, along with boosting Costco‘s stock price.

What really seals the case for Costco having a winning strategy is that Costco is likely destined to remain the clear market leader in the membership warehouse segment for some time to come. Neither of Costco‘s two rivals in the membership warehouse segment is in a position to challenge or overtake Costco as the market leader in sales.

201. What do you think of Costco‘s compensation practices? Does it surprise you that Costco employees apparently are rather well-compensated? Better compensated than employees at Sam‘s Club or BJ‘s?

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Costco‘s compensation and benefit levels are substantially higher than those at Wal-Mart (and presumably those at Wal-Mart‘s Sam‘s Club subsidiary—many of the Sam‘s Club locations are adjacent to Wal-Mart Supercenters).

In March 2019, Costco raised its minimum wage for hourly employees to $15 per hour and also bumped up pay scales for a variety of other jobs, including supervisory positions. In response to the COVID-19 pandemic and its associated challenges, Costco began providing $2 per hour premium pay to the majority of its hourly employees in March 2020, which continued through February 2021. In fall 2020, Costco also began offering employees additional paid time off to attend to child care and schooling needs through the 2021 school year. In March 2021, Costco permanently built an increase of $1 into its wage scales in the United States Hourly pay scales for warehouse jobs ranged from $16 to $19 in March 2021. The highest paid full-time warehouse employees could earn close to $26.00 per hour after 4 years. Frontend supervisors averaged about $29.50 per hour. Compensation averaged $17–$19 per hour for pharmacy technicians and $70 per hour for licensed pharmacists. Salaried Costco employees earned anywhere from $30,000 to close to $200,000 annually, depending on job type. Average salaries for pharmacy managers were in the $146,000 range. Average total compensation (including bonuses) for assistant general managers of warehouses averaged about $93,000. Average total pay for general managers of warehouses ranged from $90,000 to $180,000 and reportedly averaged about $135,000.

Moreover, Costco employees enjoyed the full spectrum of benefits; the package included heath, dental, prescription, vision, 401k, dependent care reimbursement, long-term and shortterm disability coverage, and life insurance and accidental death and dismemberment coverage.

Former CEO Jim Sinegal firmly believed that having a well-compensated workforce was very important to executing Costco‘s strategy successfully. He said, ―Imagine that you have 120,000 loyal ambassadors out there who are constantly saying good things about Costco. It has to be a significant advantage for you. . . . Paying good wages and keeping your people working with you is very good business.‖ When a reporter asked him about why Costco treated its workers so well compared to other retailers (particularly Walmart, which paid lower wages and had a skimpier benefits package), Sinegal replied: ―Why shouldn‘t employees have the right to good wages and good careers. . . . It absolutely makes good business sense. Most people agree that we‘re the lowest cost producer. Yet we pay the highest wages. So, it must mean we get better productivity. Its axiomatic in our business— you get what you pay for.‖

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Good wages and benefits were said to be why employee turnover at Costco ran about 5 percent after the first year of employment. Some Costco employees had been with the company since its founding in 1983. Many others had started working part time at Costco while in high school or college and opted to make a career at the company. One Costco employee told an ABC 20/20 reporter, ―It‘s a good place to work; they take good care of us.‖ A Costco vice president and head baker said working for Costco was a family affair: ―My whole family works for Costco, my husband does, my daughter does, my new son-in-law does. Another employee, a receiving clerk that made about $40,000 a year, said ―I want to retire here. I love it here.‖ An employee with over two years of service could not be fired without the approval of a senior company officer.

Once you have covered these points with class members, you should then press the class for their opinions as to whether Jim Sinegal was right. There are several questions you can pose to stimulate discussion: 

Do you agree with Jim Sinegal‘s views about the importance of having wellcompensated employees at Costco?



Are Costco‘s employees overpaid?



Could Costco boost profitability by trimming back on its fairly high levels of compensation and its probably pricey fringe benefit package?



What are the benefits to Costco and its shareholders of compensating employees so well?



Are shareholders well-served by the company‘s practice of paying good wages and fringe benefits? Would Costco shareholders be better off if the company‘s pay scales were somewhat lower and its fringe benefit offerings less costly? Why or why not?



What does Costco‘s practice of paying good wages/salaries and having an attractive fringe benefit package tell us about the company‘s values?



If Costco opts to boost profitability by increasing its profit margins, would it be better to raise prices very slightly (say 0.5 percent) rather than to trim back on compensation and benefits for its work force?

It is reasonable for class members to suspect that wages and fringe benefits at Walmart/Sam‘s Club were skimpier than those at Costco. But it is pretty hard to disagree with Jim Sinegal‘s philosophy and beliefs about the merits of good compensation for Costco

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employees.

What recommendations would you make to Costco top executives regarding how best to sustain the company‘s growth and improve its financial performance?

Costco is not a company with glaring problems and shortcomings that desperately need to be fixed. On the whole, we think students should recommend that the company ―stay the course‖ and continue with the present strategy largely unchanged from what we see the company doing as of the end of fiscal 2017. The company has a sound strategy and no major overhaul is called for—some minor tweaking and fine-tuning might well be proposed by class members.

There are a couple of issues that you should press the class to deal with: 

What can/should Costco management do to try to boost profit margins and spur improvements in the company‘s bottom line? The above analysis of the company‘s financial performance indicated there was room for improvement in the company‘s overall profitability.



Should the company avoid incurring additional long-term debt, even if it means curtailing the number of new warehouses opened annually?



Do you agree with Costco‘s greater emphasis on international expansion as compared to expanding warehouse locations in the United States and/or Canada?

Costco‘s options for boosting its profit margins are fairly limited, but students should recognize the following possibilities: 

Boost profitability by doing a better job of containing selling and administrative costs. The problem with this option is that Costco is already a lean operator; management has long been aggressive in controlling operating costs and finding ways to operate cost-efficiently. There are not likely many ways to trim costs by very much.



Raise prices fractionally. This is probably the quickest and surest route to better profitability. But the culture at Costco and the company‘s strong and ongoing conviction about charging the lowest possible prices will make this option a tough sell.



Continue to open new stores and grow sales at existing stores. 

Sales growth at existing stores might well over time produce better

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profitability, since costs at existing stores might not rise appreciably as store traffic and sales volumes grow. Costco might be able to spur sales growth at existing stores by adding new product lines (like furniture) or having more big ticket ―treasure hunt‖ items in its merchandise lineup. 

Aggressively recruiting new members for existing stores would help grow membership fees and boost store traffic and sales volume.



Opening new stores should definitely act to boost total sales and total profits—but it may not do much for profit margins immediately due to the extra costs associated with a new store opening—see the preopening expenses shown in case Exhibit 1.

The company has the financial resources to continue to grow its business and open new warehouse locations, but some class members might argue that the current amount of longterm debt (while not burdensome) still makes it advisable to keep the number of new store openings within the number than can be financed with internal cash flows—so as to avoid incurring much additional long-term debt. Some class members might favor raising prices slightly in order to boost cash flows from operations and thereby generate more funds to finance growth internally.

Winding Up the Class: You can end the class by pointing out that Costco Wholesale is a perfect example of a company that 

Has a good strategy and



Is executing the strategy with a high degree of proficiency.

Costco, in our view, is a company that illustrates why Chapter 1 stressed the point that: Good strategy + Good strategy execution = Good management

EPILOGUE For the latest information on developments at Costco Wholesale, please check the company‘s latest financial results and press releases in the Investor Relations section at www.costco.com.

Case 3 Teaching Note

Lululemon athletica‘s Strategy in 2022: Can

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the Retailer Continue to Deliver Growth Despite the Headwinds?

OVERVIEW Calvin McDonald, Chief Executive Officer of lululemon athletica, Inc. was very positive regarding the company‘s fiscal fourth quarter 2021 performance. ―The fourth quarter was a strong finish to a strong year,‖ he said.ii Overall results for fiscal 2021 were impressive as well. ―Looking at our full year results, I am particularly proud that we crossed the $6 billion in annual revenue milestone and we accomplished this despite the ongoing challenges in the macro environment,‖ he said.iii Consumers who purchased lululemon, a designer and retailer of high-tech athletic apparel, had continued to buy lululemon products despite the COVID-19 shutdowns and were eager to return to lululemon stores once in-person shopping restrictions around the world began to be lifted. Calvin McDonald, who became the company‘s CEO in August 2018, had been nimble with company operations. lululemon had been adept at growing their company, particularly their online presence, which provided a cushion as store shutdowns in 2020 and 2021 had dampened the prospects of most major apparel retailers. In fiscal 2021, lululemon revenues had increased 42 percent, to $6.3 billion, and net profits had increased 66 percent compared to fiscal 2020 to $975 million. The number of companyoperated stores had increased from 521 stores in Fiscal 2020 to 574 stores in 17 countries around the world in fiscal 2021. Growth in the number of stores in the People‘s Republic of China had been particularly strong, adding 31 stores. Online sales, or direct to consumer, grew from $2.3 billion in Fiscal 2020 to $2.8 billion in Fiscal 2021. The company‘s direct to consumer sales were 44 percent of the company‘s total revenues in fiscal 2021, down from 52 percent of total revenue in fiscal 2020 as lululemon‘s physical stores began to reopen. The company was forecasting strong growth in fiscal 2022.

However, there were several front burner issues for lululemon management heading into April 2022. In-store sales had suffered during the COVID-19 shutdowns around the world, and the company needed a strategy to return in-stores sales to pre-COVID levels. Global supply chain issues had resulted in increased costs as well, and it was possible that margins on the company‘s signature products might come under pressure. The resulting cost pressures also meant that the company was carefully examining product pricing. Further, COVID-19 had begun to surge in Mainland China, resulting in new shutdowns, which could possibly further pressure both lululemon store operations and the company‘s supply chains. The MIRROR unit, lululemon‘s newly acquired in-home digital platform, was also experiencing integration issues and management turnover. The net of all these issues was placing pressure on lululemon‘s stock price. Lululemon common stock, which peaked at an all-time high of $477.91 on November 16, 2021, was now trading the $360–$360 range as of April 2022.

Could lululemon continue to deliver growth in 2022 despite all these headwinds?

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SUGGESTIONS FOR USING THE CASE This freshly revised case should generate considerable student interest and provoke a lively, interesting class discussion of what moves and approaches are necessary to return lululemon store to pre-pandemic levels of performance, how to manage increasing costs, and what actions are necessary to integrate its new Mirror unit. The lululemon case is best assigned after you have covered Chapters 3–5. You may also consider assigning the case after covering Chapters 6 and 7. Topics in both chapters are pertinent to student identification and assessment of lululemon‘s strategy and competitive approaches, including lululemon‘s entry into foreign markets.

As a consequence, you‘ll find that lululemon athletica is a good case for drilling students in (1) applying the tools of analysis covered in Chapters 3 and 4, (2) identifying and evaluating a company‘s strategy, and (3) identifying strategic issues/problems that merit top management attention and then proposing action recommendations to resolve these issues/problems. The case provides an opportunity for class members to evaluate industry and competitive conditions, weigh an assortment of competitive factors, draw a strategic group map, identify driving forces and key success factors, think strategically about lululemon‘s resources and capabilities versus those of its main rivals, crunch some numbers in the financial exhibits, and make action recommendations regarding lululemon‘s future course of action.

The Connect-Based Exercise for the lululemon Case. We developed an exercise for lululemon athletica for inclusion in the publisher‘s Connect Management web-based assignment and assessment platform because:  Many of the topics in this case bear directly on the material in Chapters 3 through 7. 

One of the purposes of the case exercises is to drill students in applying the core concepts and analytical tools discussed in the chapters to the circumstances posed in the cases.

It should take class members roughly 30–45 minutes to complete the exercise, assuming they have done a conscientious job of reading the case and absorbing the information it contains.

All of the questions are automatically graded, and the grades are automatically recorded in your Connect grade book, which makes it easy for you to evaluate each class member‘s ability to apply many of the concepts and analytical methods in Chapters 3–5.

What to Tell Students in Preparing the lululemon athletica Case for Class. To give students guidance in what to do and think about in preparing the lululemon case for class discussion, we strongly recommend two things: 131.

Have class members complete the Connect-based exercise for the lululemon case in the event you have adopted the Connect software for your course.

OR 132.

Provide class members with assignment questions and insist that they prepare good notes/answers to these questions before coming to class. Our recommended assignment questions

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for the lululemon case are presented in the next section of this TN. You may wish to have the class concentrate their attention on a subset of these questions, depending on what you want to concentrate on during the class discussion.

To facilitate your use of assignment questions and making them available to students, we have posted a file of the Assignment Questions contained in this teaching note in the instructor resources section of the Connect library. You should be aware that there is a set of assignment questions posted in the in the instructor resources section of the Connect library for each of the cases included in the 8th edition. In all instances, these assignment questions correspond to the assignment questions in the teaching note for the case.

In our experience, it is quite difficult to have an insightful and constructive class discussion of an assigned case unless students have conscientiously made use of pertinent core concepts and analytical tools in preparing substantive answers to a set of well-conceived study questions before they come to class. In our classes, we expect students to bring their notes to the study questions to use/refer to in responding to the questions that we pose. Moreover, students often find that a set of study questions is useful in helping them prepare oral team presentations and written case assignments—in addition to whatever directive question(s) you supply for these assignments. Hence, we urge that you provide students with assignment questions—either those we have provided or a set of your own questions—for all those aspects of a case that you believe are worthy of student analysis or that you plan to cover during your class discussion.

Utilizing the Guide to Case Analysis. If this is your first assigned case, you may find it beneficial to have class members read the Guide to Case Analysis in the Appendix that follows Chapter 10 in the text. The content of this Guide is particularly helpful to students if your course is their first experience with cases and they are unsure about the mechanics of how to prepare a case for class discussion, oral presentation, or written analysis.

Suggested Assignment Questions for an Oral Team Presentation or Written Case Analysis.

We believe the lululemon athletica case is quite well-suited for written assignments and/or oral team presentations. Our suggested assignment questions are as follows: 

lululemon CEO Calvin McDonald has employed you as a consultant to assess the company‘s overall situation and recommend a set of actions to improve the company‘s future prospects. Please prepare a report to Mr. McDonald that includes: (1) an evaluation of competitive forces in the market for yoga and fitness apparel, (2) an assessment of lululemon‘s strengths, weaknesses, opportunities and threats, (3) an identification of the primary components of lululemon‘s value chain, (4) an evaluation of lululemon‘s financial and operating performance as displayed in case Exhibit 1, and (5) a set of action recommendations that lululemon‘s top executive team should initiate in order to sustain

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the company‘s growth and performance. Your report should be five to six pages plus it should include an assortment of original (not copied from the case!) charts, tables, and exhibits to support your analysis and recommendations. 

Prepare a brief report to lululemon CEO Calvin McDonald outlining the two to three top priority issues that lululemon management needs to address and the actions you believe he must initiate to address these issues. Your report should contain detailed and convincing reasons in support of each one of your recommendations. It is imperative that each of your recommendations: (a) be based on conclusions drawn from application of the concepts and analytical tools discussed in Chapters 3 and 4 and (b) provide specific action items regarding what strategic moves that may be suitable for lululemon.

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ASSIGNMENT QUESTIONS 1. How strong are the competitive forces confronting lululemon in the market for performance-based yoga and fitness apparel? Do a five-forces analysis to support your answer.

2. What does your strategic group map of the performance sports apparel industry look like?

Is lululemon well positioned? Why or why not?

3. What do you see as the key success factors in the market for performance-based yoga and fitness apparel?

4. What does a SWOT analysis reveal about the overall attractiveness of lululemon‘s situation?

5. What are the primary components of lululemon‘s value chain?

6. What are the key elements of lululemon‘s strategy? (If you have previously covered the Under Armour case, which features of lululemon‘s strategy stand out as being different from the strategy at Under Armour?)

7. Which one of the five generic competitive strategies discussed in Chapter 5 most closely approximates the competitive approach that lululemon is employing?

8. What do the data in case Exhibit 1 reveal about lululemon‘s financial and operating performance? You should use the financial ratios in the Appendix following Chapter 10 in performing calculations to determine which aspects of lululemon‘s financial performance might be characterized as impressive and those aspects you believe are in need of improvement.

9. What three to four top priority issues do CEO Calvin McDonald and lululemon management need to address?

10. What recommendations would you make to lululemon CEO Calvin McDonald? At a minimum, your recommendations should cover what to do about each of the top priority issues identified in question 9.

TEACHING OUTLINE AND ANALYSIS 1. How strong are the competitive forces confronting lululemon in the market for performance-based yoga and fitness apparel? Do a five-forces analysis to support your answer.

Below is a representative five-forces model of competition for companies that design and market performance-based yoga and fitness apparel (the portion of the larger performance

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sports apparel arena where lululemon competes). These forces are discussed in turn below the five-forces diagram.

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Rivalry among the designers and marketers of performance-based yoga and fitness apparel—a moderate to strong competitive force

In assessing this competitive force, students should draw upon the information in Figure 3.4 in Chapter 3 (and the related text discussion).

The rivalry among lululemon and its competitors in the market for performance-based yoga and fitness apparel is moderate to strong and seems to be on the verge of growing stronger because of the dramatic success that lululemon is enjoying and from the added competition from rivals that lululemon‘s success is attracting is contending with, including Nike, The adidas Group, Under Armour, Athleta, and others. Rivalry is centered on three main factors: 

Product quality, styling, comfort, and performance features



Product line breadth



Brand image and brand reputation Students should be pressed to identify the following rivalry-related competitive pressures at work: 

Rivalry-related competitive pressures are being intensified by the efforts of rivals to expand their product lines and offer wider apparel selections to those people who wear performance-based yoga and fitness apparel.



Rivalry-related competitive pressures are being intensified by the active efforts on the part of the designers/marketers of performance-based yoga and fitness apparel to build and strengthen the appeal of their product offerings via lower prices (as compared to lululemon‘s product offering) and good merchandising and eye-catching displays in their stores and on their online websites.



Rivalry is weakened by the differentiation that exists from one brand of performancebased yoga and fitness apparel to another (as concerns product selection, brand image, quality, design, and styling)—such differentiation creates buyer preferences for the features of certain brands, thus inhibiting brand switching and giving rise to buyer loyalty to their preferred brand.



Growing demand for performance-based yoga and fitness apparel acts to weaken the rivalry among rival designers/marketers because there is enough new demand to enable each rival to grow sales/market share without having to steal customers away from rival brands in a head-to-head battle for the business of fitness- and styleconscious buyers.

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On the whole, we think it is fair to say that the competitive pressures associated with rivalry among the designers/marketers of performance-based yoga and fitness apparel are moderate to strong. Class members should recognize that there is little evidence in the case that indicates the competitive pressures associated with rivalry are so potent as to make it difficult for lululemon, Athleta, and other rivals to earn attractive profits in performance-based yoga and fitness apparel. In market circumstances where rivalry is very strong or even fierce, then the profitability of rival sellers is definitely adversely impacted and industry profitability tends to be more modest than what we see at lululemon.

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Competitive pressures associated with the threat of new entry into the market for performance-based yoga and fitness apparel—a weak to moderate competitive force In assessing this competitive force, students should draw upon the information in Figure 3.5 in Chapter 3 (and the related text discussion).

Factors that are acting to intensify the threat of entry: 

The fast rate of growth in buyer demand for performance-based yoga and fitness apparel



Existing industry members are actively striving to expand their market reach by (1) broadening their product offerings (more types and styles of fitness apparel and stylish casual wear, items for a wider range of fitness activities and casual lifestyles, and (2) entering geographic localities/areas where they currently do not have a presence. Nike, Under Armour, lululemon, adidas, and Athleta are strong candidates to enter new geographic areas and to broaden their offerings of performance-based yoga and fitness apparel items, as well as apparel that can be worn for leisure and casual occasions.

Factors that are acting to weaken the threat of new entrants: 

The small pool of apparel designers/marketers likely to begin adding performancebased yoga and fitness apparel to their product offering



Somewhat formidable entry barriers—brand new designers/marketers of performance-based yoga and fitness apparel face high barriers in building a retail distribution network and securing attractive retail display space for their product offerings to consumers.



The degree of product differentiation and brand name awareness enjoyed by Under Armour, Nike, adidas, and lululemon (and Athleta to a lesser extent)—trying to go head-to-head against these rivals would be quite expensive from the standpoint of establishing a credible and potent brand image and brand reputation.

All things considered, we think it is fair to say that the competitive pressures associated with the threat of additional entry into the marketplace for performance-based yoga and fitness apparel are: 

Relatively weak in the case of new competitors entering the marketplace on a grand scale with intentions to take on the market leaders. However, we would not

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disagree with students who argue that a number of new competitors may well decide to enter on a limited scale and trying to compete with a limited product offering in those locations where they already have a market presence. 



Relatively strong in terms of the existing competitors (particularly Nike, Under Armour, adidas, lululemon, and Athleta) entering new geographic areas where they currently do not have a market presence or significantly expanding the number of items, styles, designs of performance-based yoga fitness, and leisure/casual apparel they offer to buyers.

Competitive pressures associated with substitutes for performance-based yoga and fitness apparel—a moderate to strong competitive force

In assessing this competitive force, students should draw upon the information in Figure 3.6 in Chapter 3 (and the related text discussion).

Factors that are acting to intensify competitive pressures from substitute products: 

The widespread availability of yoga and fitness apparel products that are not made of performance fabrics.



Many types and brands of substitute yoga and fitness apparel products are typically cheaper than those sold by lululemon (or Under Armour and other designers/marketers, whose athletic apparel items are made from performance fabrics).

Factors that are acting to weaken competitive pressures from substitute products: 

Substitute types of athletic apparel often deliver less comfort and are viewed by many users as being of inferior quality (despite the attraction of their often-lower prices).

All things considered, it is fair to say that the competitive pressures from substitutes for performance-based yoga and fitness apparel are moderate to fairly strong. Some students might argue for strong to maybe very strong because of the lower prices of substitutes but we think a convincing case can be made that rapidly growing numbers of consumers are becoming aware of and attached to the performance and quality of the products made of ―high-tech‖ performance fabrics and are increasingly inclined to pay the higher price if the offerings are stylish and make a fashion statement (like those offered by lululemon). 

Competitive pressures associated with the bargaining power of suppliers—a moderate competitive force

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In assessing this competitive force, students should draw upon the information in Figure 3.7 in Chapter 3 (and the related text discussion).

The two types of suppliers that really matter here are (1) the suppliers/makers of performance-based fabrics and (2) the contract manufacturers that actually produce the apparel items sold by lululemon, Nike, Under Armour, adidas, and others.

Factors that are acting to intensify the bargaining power of suppliers: 

Fabric suppliers having proprietary fabrics with superior performance features and/or superior quality and/or especially stylish designs have significant bargaining power to influence the prices and other terms and conditions under which they will sell/supply these fabrics for use in the garments of the designers and marketers of performancebased yoga and fitness apparel. Such product differentiation (if it is truly significant) almost certainly enables them to command a price premium.



The designers and marketers of performance-based yoga and fitness apparel are not a strong threat to integrate backward and attempt to self-manufacture their own performance fabrics.

Factors that are acting to weaken the bargaining power of suppliers: 

Fabric suppliers that serve upstream designers and marketers of performance-based yoga and fitness apparel are at most a very modest threat to integrate forward and attempt to develop branded product lines and global wholesale, retail, and direct-toconsumer (e-commerce) distribution channels for those products.



There are very few, if any, contract manufacturers who have the willingness, and the resources and competitive capabilities to try to integrate forward into the business designing and marketing their own private label brands in head-to-head competition against lululemon, Athlete, Nike, adidas or Under Armour, adidas-Reebok, and others and who also have the capabilities (1) to make these items to the designer/marketer‘s specifications and (2) to meet their delivery schedules.



The costs to lululemon, Nike, Under Armour, adidas-Reebok, and others of switching their orders over to alternative contract manufacturers are relatively low, which undercuts the bargaining power of any sole contract manufacturer to insist on a higher price or other favorable terms and conditions.



Fabric suppliers having non-differentiated or commodity-like performance fabrics lack any significant bargaining power to the extent that comparable fabrics are readily

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available from other fabric suppliers at competitive prices.

All things considered, it is fair to say that competitive pressures from the bargaining power and leverage of suppliers are weak in the case of contract manufacturers and moderate when certain fabric suppliers have developed performance fabrics that have better quality and/or features and/or more stylish/appealing fabric designs/patterns than those of rival fabric suppliers. 

Competitive pressures associated with the bargaining power of buyers—a weak to moderate competitive force depending on the type of buyer

In assessing this competitive force, students should draw upon the information in Figure 3.8 in Chapter 3 (and the related text discussion).

The buyers of performance-based yoga and fitness apparel consist of: 

Retailers that stock performance-based yoga and fitness apparel in their stores and buy the items they carry directly from Nike, Under Armour, adidas-Reebok, and other designer/marketers



Individuals who shop at the retail stores/outlet stores/showrooms/websites of lululemon, Athleta, Nike, Under Armour, adidas-Reebok, and others looking to performance-based yoga and fitness apparel.



The relatively small number of fitness centers/yoga studios that stock limited amounts of fitness apparel for the shopping convenience of their customers

Class members need to understand here that individual buyers of performance-based yoga and fitness apparel are really in no position to bargain with the store personnel at the retail stores/outlets (or websites) of lululemon, Athleta, Under Armour, Nike, or adidas for lower prices or other favorable terms and conditions of sale because they buy in such small quantities. The only ―power‖ any individual shopper for performancebased yoga and fitness apparel has is to not buy an item they believe is overpriced or of inferior quality or not appealingly designed to their liking. Those customers may opt to shop elsewhere and/or purchase an alternative brand, but such options do not convey any bargaining leverage sufficient to wrestle concessions and thereby qualify as a legitimate source of competitive pressure.

Likewise, fitness centers/yoga studios have little bargaining power because they, too, buy in small quantities.

Because lululemon and Athleta sell their products only at company-owned (and maybe

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in the future at a select number of franchised) retail stores, they face no bargaining power from large chain retailers, as do Nike, Under Armour and adidas.

Large multi-store retailers definitely have bargaining power in purchasing performance-based sports and fitness apparel from designers/marketers like Nike, Under Armour, adidas-Reebok who sell a substantial fraction of their products at wholesale to retailers, especially chain retailers and others. Such retailers have meaningful bargaining power for several reasons. 

The retailers of performance athletic apparel have some freedom to decide which brands they want to stock in their stores and also which specific apparel items within a branded product line to stock—retailers are unlikely to stock all brands and all models/styles of each brand of performance-based yoga, fitness, and sports apparel.

Such choices—most especially if they have many store locations and buy in very sizable quantities—are likely to convey some bargaining power in wresting concessions regarding prices or other important terms and conditions from the designers/marketers of performance-based yoga and fitness apparel.



It is easy and relatively inexpensive for the retailers of performance-based yoga, fitness, and sports apparel to switch a portion (and in some instances, perhaps, even a big fraction) of their purchases from one brand to another. In other words, they have some freedom in choosing what mix/proportion of the items of each brand they opt to stock.



Retailers have the freedom to determine which brands of performance-based yoga, fitness, and sports apparel to display in which space on their floors (all floor or shelf locations or types of merchandise displays may not be equally attractive in terms of generating sales). Retail buyers may therefore be able to wring some concessions in return for granting a designer/marketer of performance-based yoga, fitness, and sports apparel the best or most preferred locations of merchandise display space within their stores.



Some retailers of performance-based yoga, fitness, and sports apparel have bargaining power and leverage because they buy in large quantities and thus qualify as very important and competitively valuable customers of the designers and marketers of performance-based yoga and fitness apparel—such status may enable them to wring concessions regarding prices or other terms and conditions they consider important.

Factors that act to weaken the bargaining power of chain retailers of performance-based yoga and fitness apparel:

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

Inasmuch as the performance-based yoga and fitness apparel category is small, at least relative to the entire universe of sports apparel and equipment, a vast majority of retailers will not for the foreseeable future pose a credible threat to integrate backward into the design, manufacture, and marketing of performance-based yoga and fitness apparel—and compete head-to-head against Under Armour, Nike, and Adidas-Reebok—with their own private-label brands. Should the performance-based yoga and fitness apparel category attain a certain critical mass in terms of size in dollars and volume in units sold, however, it is likely that the largest retailers will develop their own ―house brands‖ for sale.



Retailers are aware that growing numbers of individuals who buy performance-based yoga and fitness apparel are less concerned about price than they are about the quality, comfort, design, fashion appeal, and performance features of the items they use/wear.



Because there are so many different retailers of performance-based yoga and fitness apparel, no one single retailer tends to be so critical to any one designer/marketer that they have to agree to unreasonable demands from a particular retailer in order to secure the retailer‘s business.

All things considered, buyer bargaining power tends to be: 

Strong for large chain retailers who buy performance-based yoga and fitness apparel directly from Under Armour, Nike, Adidas-Reebok, and other designers/marketers to sell in their retail locations and/or who may ultimately develop their own store brands.

However, lululemon is not confronted with bargaining power from chain retailers (as are Nike, Under Armour, and adidas-Reebok) because it only sells to individuals at its own company-operated and company-owned retail stores. Lululemon does not distribute its products to consumers through third-party retailers; its products are, for the most part only available at the company‘s retail stores, the company‘s website, and a limited number of fitness centers that specialize in yoga. 

Weak to nonexistent for individuals who shop at the stores/outlets/websites of retailers of performance-based yoga and fitness apparel.

Conclusions concerning the Overall Strength of All Five Competitive Forces: The collective strength of the five competitive forces facing lululemon, Athleta, Under Armour, Nike, Adidas-Reebok, and other ―name-brand‖ sellers of performance-based yoga and fitness

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apparel is moderate to perhaps ―moderately strong‖—but definitely not so strong as to prevent the chief industry rivals from earning attractive profits in a growing market.

2. What does your strategic group map of the performance sports apparel industry look like? Is lululemon well positioned? Why or why not?

Strategic group maps are beneficial for determining relative company placement in the industry. A good strategic group map should utilize two strategic variables that differentiate the various competitors in the sports apparel marketplace.

Students can choose among any of several strategic variables to divide the performance sports apparel industry into strategic groups and illustrate the different market positions that industry rivals occupy. We have chosen to employ breadth of product line and the type(s) of distribution channel used to accessing individuals who buy/wear performance sport apparel marketed by lululemon, Nike, Under Armour, adidas, and others. Other possibilities for axes might include scope of geographic coverage and image/reputation/brand name recognition— no one single strategic group map is necessarily best.

A representative strategic group map is shown in Figure 1.

Once students have come up with a map, then we think you should press them for their evaluation of what we learn from the map. Any of the following questions can be posed to help draw out their views: 





Which other industry members are well positioned?



Which industry members are weakly positioned?

The point here is that students should not stop their analysis with just drawing a strategic group map. The most important part of strategic group mapping is to draw some conclusions about the story the map tells.

On the whole, we like lululemon‘s position on the map because its product offerings and distribution channel strategy are distinct from those of its key rivals. Lululemon and Athleta are the only two designer-marketers of performance-based yoga and fitness apparel who sell their products exclusively through their own chain of company-owned retail stores and company-operated websites. Moreover, lululemon has a relatively strong (and improving) brand-image/reputation—one that is weaker than Nike, adidas, and Under Armour, but is considerably stronger than Athleta.

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Those designers/marketers that sell their performance-based sports apparel products at wholesale to other retailers of performance sports apparel as Nordstrom and other department store chains, sporting goods chains like Dick‘s, and smaller regional and local retailers of sports apparel (a few of which may be merchandising and selling some of the sports apparel they stock under their own private label) do not have brand-name reputations and brandname recognition as potent and widely-known as do lululemon, Under Armour, Nike, adidas, and Polo/Ralph Lauren. Moreover, lululemon‘s product line and retail presence (e.g., in terms of outlets around the globe) is relatively narrow as compared to Nike, adidas, and Under Armour.

Despite some recent moves to broaden its product line to appeal to men and golf and tennis aficionados, lululemon‘s product offerings remains strongly focused on women‘s yoga and fitness apparel, particularly compared to the broader product lines (for men, women, and youths) of Nike, adidas, and Under Armour. So, to some considerable extent, lululemon is almost alone in its own strategic group—joined only by the small number of Gap‘s Athleta brand stores. Athleta has grown rapidly, from one store in 2011 to 190 retail stores in North America at year-end 2019, with additional stores expected to open in the next 1–4 years. Hence, Athleta during the last 10 years has emerged as lululemon’s most potent rival in the women’s segment of the market for performance sports apparel in North America.

Figure 1 A Representative Strategic Group Map of the Designers/Marketers of Branded Performance Sports Apparel

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3. What do you see as the key success factors in the market for performance-based sports apparel and, especially, yoga and fitness apparel?

Class members who have done some good strategic analysis and thinking should be able to make a convincing argument for why one or more of the following qualify as being key success factors in the marketplace for sports apparel made of performance fabrics, and most especially in the narrower segment where lululemon currently competes—performance-based yoga and fitness apparel: 

Good product design and styling capabilities—competitors will have to stay on the cutting edge in using high-tech moisture-wicking performance fabrics that are of good quality, that are comfortable to wear, and that have appealing, fashionable, and stylish designs. Management of the supply chain to assure quality control is a very high priority for rivals, particularly in light of lululemon‘s Luon fiasco in 2013.



Strong distribution capabilities—having good access to the buyers of performance sports apparel is a must. This can mean having a sizable chain of company-owned retail stores or selling through independent retailers at thousands of store locations or being able to attract buyers to the company‘s website or some combination of these.



Capabilities in building and maintaining a strong brand image and reputation—many buyers of such apparel are brand-conscious and brand-loyal.



Capabilities to increase geographic coverage—being a market leader in performance-

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based yoga and fitness apparel will require gaining national coverage in the United States and then expanding into additional country markets, with the aim of gradually approaching global market coverage (or at least coverage in three or more geographic regions of the world—particularly North America, Europe, and the Asia-Pacific).

4. What does a SWOT analysis reveal about the overall attractiveness of lululemon’s situation?

Lululemon’s Resource Strengths and Competitive Assets 

The company‘s lineup of stylish, premium-priced yoga and fitness apparel that offers performance, fit, and comfort



A contingent of fitness-conscious women who view lululemon products as ―must have‖



A core competence in designing stylish, appealing yoga and fitness apparel items



Using showroom stores to enter geographic markets where lululemon does not yet have a market presence



A growing chain of lululemon retail outlets outside Canada and the United States and the high sales per square-foot being generated at many/most of these stores



Proven retail merchandising skills and store operations capabilities in effectively merchandising lululemon apparel at its retail stores and achieving high sales per square foot of store space.



The company‘s success in recruiting local yoga and fitness instructors as ambassadors for lululemon‘s products adds authenticity and credibility to the lululemon name



Good marketing and brand-building capabilities—the company has succeeded in creating a differentiated product offering and a brand name/image that is becoming increasingly well-known in more and more geographic locations



High and rising sales per gross square foot at corporate-owned stores open at least one full year—lululemon‘s sales per gross square foot are several times higher than at most every other apparel retailer (see case Exhibit 1).



High and rising average annual sales at corporate-owned stores open at least one full year (see case Exhibit 1).



Strong growth in direct-to-consumer sales (e-commerce) via the company‘s website (see Exhibit 4)

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Under the leadership of the company‘s recently appointed CEO, Calvin McDonald, lululemon has delivered impressively higher financial and operating results

lululemon’s Resource Weaknesses and Competitive Liabilities 

Weaker geographic coverage than key rivals in performance-based sports apparel— namely Nike, adidas, and Under Armour. Lululemon had 2019 revenues of nearly $4.0 billion versus $39 billion for Nike in some 190 countries and €23.6 billion (about $26 billion) in close to 200 countries for adidas.



Product line breadth remains significantly smaller than global market leaders Nike and adidas—lululemon‘s main strength is in yoga and fitness apparel for women—its other offerings in sports apparel and leisure/casual wear for women, men, and youth are rather limited (although growing). In 2019, Nike had sales of $7.4 billion to women versus $2.8 billion for lululemon.

Lululemon’s Market Opportunities 

Opening lululemon athletica stores in more geographic areas and in more countries



Growing sales at the company‘s website



Perhaps expand lululemon‘s product offering to include larger sizes for women and men.

The External Threats to lululemon’s Future Well-Being 

The COVIV-19 pandemic extends into 2021 and perhaps part of 2022, thereby limiting shopper traffic in lululemon‘s stores.



More women begin to view other brands (particularly Athleta) as good substitutes for lululemon‘s products



Gap-Athleta continues to expand domestically and its growing number of store locations begin to cut into lululemon‘s market share in the women‘s segment for performance sports apparel



The supply side of the performance sports apparel market becomes increasingly crowded because large, well-known, incumbent makers of performance athletic apparel (such as Nike, Under Armour, adidas, and maybe Polo/Ralph Lauren and others) roll out stylish lines of performance sports apparel for women and men, matching or undercutting lululemon‘s retail prices



The supply side of the performance sports apparel market becomes increasingly crowded

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because more department store chains and other large apparel retail chains introduce their own private-label performance sports apparel for both women and men at lower price points Conclusions regarding the attractiveness of lululemon’s overall situation: Going into 2020. We think students should conclude that lululemon‘s overall situation is definitely attractive. Lululemon gives every indication of being an up-and-coming company with potent resource strengths that are producing gains in sales and good profitability. It has made a name for itself and developed a loyal clientele of enthusiastic customers. It has a differentiated product offering that, so far, enables it to command premium prices for its product offering and earn healthy profit margins.

However, there is a likelihood that lululemon will face somewhat stronger competitive pressures in the years ahead, especially from rival designers/marketers of performance-based sports apparel. These can make it more challenging for lululemon to stand far apart from Athleta and other makers of performance sports apparel for women and men and sustain strong buyer appeal for premium-priced lululemon products.

Nonetheless, lululemon‘s market opportunities, coupled with its resource strengths and competitive assets, appear potent enough for the company to continue to be competitively successful and grow its sales and profits for at least the next 2–5 years (unless the new management team stumbles in its efforts to keep the company on track).

5. What are the primary components of lululemon’s value chain?

Four primary value chain components stand out: 1. Product design and styling 2. Supply chain management 

Handling the outsourcing of production to contract manufacturers and



Arranging for timely/frequent deliveries of finished goods to lululemon retail stores

3.

Retail store and website operations

4.

Marketing and brand-building (including recruiting ambassadors, having free yoga classes in stores)

6. What are the key elements of lululemon’s strategy?

Class members should be expected to identify the following key elements of lululemon‘s

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strategy: Grow the store base in North America, primarily the United States. 

Open additional stores outside of North America (Australia/New Zealand, Asia, and Europe)



Increase awareness of the lululemon brand and apparel line via showrooms, a growing number of retail store locations, and e-commerce marketing channels



Incorporate next-generation fabrics and technologies in the company‘s products to strengthen consumer association of the lululemon brand with technically advanced apparel products and support lululemon‘s efforts to continue to differentiate its product offering and command higher prices for its apparel products compared to the prices of rival brands of performance-based athletic apparel



Broaden the company‘s product line by designing apparel items and accessories for a wider range of athletic and fitness activities such as golf and tennis, plus items suitable for casual/leisure wear by both men and women



Design products in smaller size ranges that only smaller/trimmer, fitness-conscious women can wear comfortably and still be ―attractive-looking‖



Provide a distinctive in-store shopping experience, complemented with strong ties to fitness instructors and fitness establishments, local athletes and fitness-conscious people, and various community-based athletic and fitness events



Use showrooms in selected locations as a means of introducing the lululemon brand and culture to a community, developing relationships with fitness instructors and fitness enthusiasts, and hosting community-related fitness events, all as a means of ―preseeding‖ the future opening of a new lululemon athletica retail store in that location



Market lululemon products to select yoga studios, health clubs and fitness centers as a way to gain the implicit endorsement of local fitness instructors and personnel for lululemon branded apparel, familiarize the customers of these establishments with the lululemon brand, and give them an opportunity to conveniently purchase lululemon apparel



Use contract manufacturers to produce lululemon products



Maintain limited store inventories of most lululemon apparel items (so as to never have to put unsold items on sale at discounted prices) and also frequently add new colors/fabric

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designs so that returning shoppers (attendees at free in-store yoga classes) will find new things to buy each time they visit the store 

Continue to try to sell all products/items at full price. Special colors and seasonal items were in stores for only a limited time—such products were on three, six, or 12-week life cycles so that frequent shoppers could always find something new. Store inventories of short-cycle products were deliberately limited to help foster a sense of scarcity, condition customers to buy when they saw an item rather than wait, and avoid any need to discount unsold items

7. Which one of the five generic competitive strategies discussed in Chapter 5 most closely approximates the competitive approach that lululemon is employing?

We think lululemon‘s strategy is well along the path of migrating from a tightly focused strategy on yoga apparel for fitness-conscious women toward a broad differentiation strategy.

The company‘s strategy to offer a bigger selection of items for both men and women clearly signals intent to transition to a broad differentiation strategy within the performance-based sports apparel segment that will attract fitness-conscious males as well as females to its retail stores.

Nonetheless, students might want to make arguments—pro and con—characterizing lululemon‘s current competitive strategy approach as one of focused versus broad differentiation, especially since the company will, almost certainly, stay within the performance sports apparel market segment and not venture out into sport apparel items made of fabrics that are not made of performance fabrics.

8. What do the data in case Exhibit 1 reveal about lululemon’s financial and operating performance? You should use the financial ratios in the Appendix following Chapter 10 in performing calculations to determine which aspects of lululemon’s financial performance might be characterized as impressive and those aspects you believe are in need of improvement.

The following aspects of lululemon‘s financial and operating performance ought to be identified by class members: 

Net revenues have grown from $2.65 billion in 2017 to more than $6.26 billion in 2021.



Gross profit has increased from $1.40 billion in 2017 to $3.61 billion in 2021.



The company‘s gross profit margins have consistently trended upward during the 2017– 2021 period, as shown below:

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2021 57.7% 21.3% 15.3%



2020 56.0% 18.6% 14.5%

2019 55.9% 22.3% 16.2%

2018 55.2% 21.5% 14.7%

2017 52.8% 17.2% 9.8%

Gross profit margin Operating profit margin Net profit margin (or return on sales) Students should note that as of 2021, operating profit margins and net profit margins had not returned to their 2019 peaks (see above table).



The company‘s return on stockholders‘ equity investment was 16.2 percent in 2017, 33.5 percent in 2018, and 33.1 percent in 2019, 24.9 percent in 2020, and 34.9 percent in 2021.



Basic EPS increased from $1.90 in 2017 to $7.49 in 2021.



Net cash provided by operating activities increased from $489.3 million in 2017 to $1.39 billion in 2021.



Inventory turnover (cost of goods sold ÷ inventory) was 3.79 in 2017, 3.64 in 2018, and 3.39 in 2019, 2.99 in 2020, and 2.74 in 2021.



Average sales per company-owned stores open at least one year trended upward during 2015–2019.



Sales per gross square foot also trended upward during 2017–2019, but were not reported in 2020 and 2021 due to temporary store closings and in-store shopping restrictions.

However, sales per gross square foot at corporate-owned stores was remained lower in 2021 ($1,443) than in any other reporting year dating back to 2017 ($1,554).



Free cash flows (Net cash provided by operating activities—Capital expenditures) was strongly positive in all five years, indicating that the company had ample internal cash flows to finance new store opening and all other capital needs without resorting to borrowing.

9. What three to four top priority issues do CEO Calvin McDonald and lululemon management need to address?

We think it is always a good idea to push the class for their assessment of what issues management needs to address before proceeding to ask for action recommendations. Issue identification is a way for students to draw conclusions from all the preceding analysis, plus it sets the stage for what actions need to be taken.

In lululemon‘s case, we see several high-priority issues meriting priority consideration:

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

How to increase average sales per company-owned stores and sales per gross square foot to pre-COVID-19 levels?



How fast to expand the number of lululemon stores?



How rapidly and by what means to expand the distribution of lululemon products to foreign markets outside North America? Should more emphasis be given to expanding store locations outside North America or inside North America? In which countries/geographic regions should it concentrate its foreign expansion efforts? Should adding more store in Europe be higher priority than adding more stores in Asia or should the priority be reversed? Where should store expansion in the Middle East fit into the picture?



In foreign country markets, should lululemon continue to avoid the use of franchising and open only company-owned and -operated retail stores?



How fast and how far to expand lululemon‘s product offerings into additional sports apparel and recreational apparel categories. Should the company continue to focus mainly on yoga and related fitness apparel? Should the company focus more heavily on apparel items for women and young females than for men and young boys? How aggressively should the company expand the number of items for men and male teenagers?



How to best integrate the MIRROR at-home fitness unit?

10. What action recommendations would you make to CEO Calvin McDonald? At a minimum, your recommendations should cover what to do about each of the top priority issues identified in question 9.

Students should be pressed to offer practical action recommendations to address the issues identified in the prior question.

The following recommendations seem to us to be actions that students might reasonably propose: 

Launch in-store promotional campaigns and other in-store shopping events to have customers visit stores more often. The company‘s direct-to-consumer sales have increased from 28.6 percent in 2019 to 44.4 percent in 2021 as shoppers have begun to return to stores. However, the company‘ income from operations attributed to corporate owned stores represents just 36 percent of the company‘s total income from operations in 2021.



Continue to expand into additional foreign countries and geographic regions of the world.

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It is unclear whether to push for faster expansion in Europe or in Asia. We suspect expansion into Europe should carry a higher priority than expansion into Asia (with the possible exception of Japan, China, and such major cities as Bangkok and Singapore). A few more stores in Australia may also makes sense—and possibly a couple in New Zealand. However, there seems to be ample opportunity to continue to open the majority of the company‘s new retail stores in the United States for several more years at least.

There should be room in the U.S. market for 250–350 lululemon stores before having to worry much about lululemon stores cannibalizing sales from one another because the store locations are too close together. But the more stores that lululemon has in the U.S. market, the harder it may be to find additional locations where new stores, at an average approximate cost of about $2.5 million per store, can generate average sales of $5 million-plus annually. Achieving high sales per gross square foot is a big key to lululemon‘s high profitability. So, from a sales per square foot basis, lululemon may run out of attractive locations in the U.S. market before much longer—it seems doubtful that the market for lululemon products can support, say, 500 lululemon stores capable of generating average annual sales of $5 million or more.

The case does not provide enough information for students to offer sound recommendations about which European countries or Asian countries should carry the highest priority for expansion. But because of the logistics costs of supplying foreign store locations with lululemon products and also introducing customers to the lululemon brand, we suspect that lululemon‘s strategy of entering Europe or Asia or even the Middle East should be one country at a time (and at best one or two major capitals or metropolitan locations at a time within a country), rather than many countries (or many locations within a country) all at once; the latter strategy risks spreading the company‘s resources too thinly and impairing the profitability of newly-opened retail stores. 

Continue to add new performance-based apparel items for women, men, and teenagers of both sexes to the company‘s product lineup. But the company should be cautious about adding too many new items at once and trying to move rapidly to a much broader differentiation strategy. A case can be made that straying very far from designing and marketing apparel items that are not complementary or ―similar‖ to what is worn for yoga and related kinds of workout/fitness/recreational activities pits lululemon into closer competition with much larger, better capitalized rivals, such as Nike and Adidas, that have a bigger pool of design capabilities and resources (as well as more experience in managing a large and more diverse product lineup). In our view, lululemon has no business in designing/marketing apparel for such sports or recreational segments as basketball, baseball, football, softball, hunting, snow skiing, and so forth, but it might well be successful in designing/marketing performance-based apparel items for such

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activities as swimming, hiking, casual and leisure wear, and possibly undergarments for women‘s skiing. Historically, the lululemon name and reputation have had far more clout and appeal in activities for females than for males, but this is changing and lululemon should definitely widen its product offerings for males and perhaps increase its marketing efforts to attract more males to its stores and website. 

The company‘s MIRROR fitness product line may appeal to purchasers of its apparel but includes no important value-chain matchups with its apparel business. The company should employ an experienced team of managers with long-term success in the fitness equipment business who better understand key success factors in the industry. However, the fitness equipment business tends to favor ―faddish‖ devices that quickly become uninteresting to consumers, when a new fad arrives. Lululemon should also consider divesting the business unit and focus its expansion efforts on new store openings in attractive international markets.

In addition, there are several key strategy elements that students might reasonably propose for lululemon management to continue: 

Recruiting local fitness instructors as ambassadors of the lululemon brand and conducting free yoga classes weekly at lululemon stores.



Holding in-store yoga classes.



Continue to provide shoppers with a very satisfying in-store shopping experience. One of lululemon‘s most important and distinctive features is the attention paid to making shopping at lululemon stores a distinctive, pleasant, and fun experience.



Making sure that lululemon apparel items are stylish, fashionable, and ―must have,‖ thereby helping to grow the company‘s base of satisfied customers and helping to nurture the cult following that will help lululemon stay ahead of its encroaching rivals (like Athleta).



Continuing to seek out innovative fabrics for fitness apparel that enhance performance, comfort, and product quality and to come up with somewhat more innovative/appealing/fashionable designs and styles as compared to the designs/styles of rival brands.



Continue to use contract manufacturers to produce lululemon products—integrating backward into manufacturing should be avoided.

The ideal outcome is for lululemon apparel to sustain and capitalize on a ―must have‖ status

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among a big percentage of the shoppers that patronize its retail stores and purchase lululemon apparel at its website.

EPILOGUE For the latest information on developments at lululemon athletica, please visit the Investor Relations section at www.lululemon.com and check out the company‘s recent press releases and financial results.

Case 4 Teaching Note

Yeti in 2022: Will Its Strategy Lead to Sustainable Advantage and Growth?

OVERVIEW In early 2022, Matthew Reintjes, president and CEO of Yeti, contemplated the company‘s fiscal 2021 operations. For fiscal 2021, net sales had increased 29 percent, to $1,411 million, and net income increased 35 percent to $227.8 million, compared to $164.2 million in 2020. Yeti‘s coolers and other products had captured the number-one position in the United States, and awareness in the domestic markets had risen from 2 percent in October 2015 to 10 percent in July 2018 and to 14 percent in 2021 according to the company‘s own brand tracking survey. Yeti had become a cult icon for the hunting, fishing, boating and outdoors sports communities, and was rapidly expanding beyond those groups. On almost every outing, one would see people wearing Yeti T-shirts and caps, and Yeti stickers on the rear windows of pickups and SUVs. Yet despite the meteoric rise increase in revenues, market share, and profits, there were storm clouds on the horizon. First, the COVID-19 global pandemic that began in early 2020 and continued into 2022, and its economic fallout could certainly have a negative impact on the sales of all Yeti products, both domestically and foreign, for an extended period. Second, and perhaps most concerning, was the large and increasing number of competitors across the entire product line, ranging from large well-known brands such as Otter Box, Tervis, Igloo, and Pelican to numerous small brands.

Yeti‘s management was aware that although the company‘s products were high quality, there were many equally high-quality competitor products available in the market: the market value of Yeti appeared to be the market value of its brand. The management team recognized that the path

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to continued success for Yeti was to maintain and increase the value of the brand, and to position the brand to have increased value with larger numbers of consumers. Mr. Reintjes resolved to craft a strategy that would reestablish and maintain the upward trajectory of profits for the company. ______ * This teaching note reflects the thinking and analysis of Professor Diana Garza, University of the Incarnate Word and David L. Turnipseed, University of South Alabama. We are most grateful for their insight, analysis, and contributions to how the case can be taught successfully.

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SUGGESTIONS FOR USING THE CASE The Yeti case is certain to generate considerable student interest and provoke lively, interesting class discussion about the strategy of a very profitable, two-product, company facing numerous and increasing competitors. Student interest will be high because almost every student will be familiar with Yeti and many will own one or more Yeti products. Yeti has the dominant position in the large and growing cooler and drinkware industries. Because of Yeti‘s growing sales and increasing profitability and domestic market dominance, this case presents a unique opportunity to examine a company which appears to be doing everything right, and reaping the rewards, and doing so in the face of mounting competition.

Class discussion tends to focus why the Yeti brand has become an iconic brand, and on the pros and cons of the possibility of a diversification strategy going forward, strategic alliances and joint ventures, and how to preserve and extend the company‘s present market dominance.

Students are especially interested in the wisdom and practicality of Yeti making small, largely superficial changes in its coolers and whether there is adequate demand for a continuing line of coolers and drinkware. There will be spirited debate on the value and ―staying power‖ of Yeti, and what, if any, changes in strategy are needed at the company?

The Yeti in 2022 case is probably best assigned after you have covered Chapters 1–8, but it can be successfully used after students have read just Chapters 3–5. The topics covered in Chapters 5 and 6 are pertinent to student identification and assessment of Yeti‘s strategy and competitive approaches. With Yeti‘s entry into foreign markets and the company‘s focus on a global strategy, the material in Chapter 7 regarding competing in foreign markets is relevant as well.

You will find that the Yeti in 2022 is a good case for drilling students in (1) applying the tools of analysis covered in Chapters 3 and 4, (2) identifying and evaluating a company‘s strategy, (3) identifying strategic issues/problems that merit top management attention, and then (4) proposing action recommendations to resolve these issues/problems. The case provides an opportunity for class members to evaluate industry and competitive conditions, weigh an assortment of competitive factors, fully consider both competitive advantage and sustainable competitive advantage, think strategically about Yeti‘s resources and capabilities, practice financial analysis, and make action recommendations regarding Yeti‘s future course of action.

Videos for Use with the Yeti in 2022 Case There are two short videos that you can show in class (or have students view on their own), as well as the Yeti YouTube Channel videos: 

A 5.15-minute video from 2020 entitled ―Coronavirus Crisis: Impact on Yeti Supply Chain with CEO Matt Reintjes.‖ The video can be accessed at

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https://www.youtube.com/watch?v=Za2mhxbVxGw. 

A 7.10-minute video from 2018 entitled ―How Did Yeti Get Started?‖ The video can be accessed at https://www.youtube.com/watch?v=JdEGot5JfzI.



Yeti Channel can be accessed https://www.youtube.com/channel/UCAZ5PoEUL2_clEdDBrFF-aQ.

at

In our experience, it is quite difficult to have an insightful and constructive class discussion of an assigned case unless students have conscientiously made use of pertinent core concepts and analytical tools in preparing substantive answers to a set of well-conceived study questions before they come to class. In our classes, we expect students to bring their notes to the study questions to use/refer to in responding to the questions that we pose. Moreover, students often find that a set of study questions is useful in helping them prepare oral team presentations and written case assignments—in addition to whatever directive question(s) you supply for these assignments. Hence, we urge that you provide students with assignment questions—either those we have provided or a set of your own questions—for all those aspects of a case that you believe are worthy of student analysis or that you plan to cover during your class discussion.

To facilitate your use of assignment questions and making them available to students, we have posted a file of the Assignment Questions contained in the instructor resources section of the Connect Library.

Utilizing the Guide to Case Analysis. If this is your first assigned case, you may find it beneficial to have class members read the Guide to Case Analysis located in the instructor resources section of the Connect Library. The content of this Guide is particularly helpful to students if your course is their first experience with cases and they are unsure about the mechanics of how to prepare a case for class discussion, oral presentation, or written analysis.

Suggested Assignment Questions for an Oral Team Presentation or Written Case Analysis.

We believe the Yeti in 2022: Will Its Strategy Lead to Sustainable Advantage and Growth? Case is very well-suited for written assignments and/or oral team presentations. Our suggested assignment questions are as follows: 

Yeti President and CEO Matthew Reintjes has employed you as a consultant to assess the company‘s overall situation and recommend a set of actions to improve the company‘s future prospects. Please prepare a report to Mr. Reintjes that includes: (1) an evaluation of Yeti‘s business strategy in the market for coolers (employing the data in exhibits 2, 3, & 4); (2) an assessment of Yeti‘s strengths, weaknesses, opportunities, and threats; (3) an evaluation of Yeti‘s financial and operating performance as provided in case Exhibit 1.5; (4) an evaluation of the company‘s international focus; and (5) a set of action

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recommendations that Mr. Reinties and his top executive team should initiate in order to preserve and enhance the company‘s growth and performance. Your report should be five to six pages and should include an assortment of original (not copied from the case!) charts, tables, and exhibits to support your analysis and recommendations. 

Prepare a brief report to Yeti president Reintjes outlining the three or four top priority issues that the company‘s management should address and the actions you believe he must initiate to address these issues, and preserve Yeti as the dominant firm, both in terms of market share and profitability, in the cooler industry. Your report should contain detailed and convincing reasons in support of each one of your recommendations. It is imperative that the support offered for each of your recommendations be based on: (a) conclusions drawn from application of the concepts and analytical tools discussed in Chapters 3 and 4 and (b) the content of Chapters 5–8 regarding strategic moves that may be suitable for Yeti.

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SUGGESTED ASSIGNMENT QUESTIONS Identify the driving forces in the cooler and equipment industry. Which of these forces appears to be the strongest? What are key factors of success? Where does the industry appear to be headed as a result of these forces?

What are Yeti‘s competitive capabilities and resource strengths and what opportunities do you identify? Are there any notable weaknesses and threats facing the company? Assess the combined impact of these forces on Yeti‘s future profitability.

Describe Yeti‘s competitive strategy. Does it appear to be well-matched to the competitive conditions of the coolers and equipment industry?

Does your analysis indicate that Yeti has a sustainable competitive advantage in the coolers and equipment industry? If so, describe the nature of its advantage.

What is your assessment of the company's financial situation? Does your financial analysis of the company disclose resource strengths or weaknesses? Does the company's current financial situation support future growth?

What recommendations would you make to Yeti‘s CEO, Matthew Reintjes, to enhance its competitive position in the industry, drive future growth, and improve profitability. Please provide ample detail to allow Yeti management to carry out your recommendations.

TEACHING OUTLINE AND ANALYSIS Identify the driving forces in the coolers and equipment industry. Which of these forces appears to be the strongest? What are key factors of success? Where does the industry appear to be headed as a result of these forces?

The driving forces in the cooler and equipment market are readily apparent, however, students will have different opinions about the industry‘s direction as a result of these forces.

Driving forces in the cooler and equipment industry were product innovation, changing societal concerns, attitudes, and lifestyles, and shifts in buyer demographics. Manufacturers were attracting first-time buyers and eliciting repeat purchases with new, innovative products. Innovation was critical to add some degree of differentiation to manufacturers‘ products that were all basically the same. Product innovation increased the rivalry in the industry as firms were forced to be increasingly innovative to match or beat their competitors and maintain or expand their market share. Also, innovation could reduce the barriers to entry in the industry as new entrants could introduce their new cooler technology into the market and start competing with existing firms without the need to match an existing product line. The many new entrant firms described in the case, and the innovative ideas that they

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brought to the market, are clear examples of the force of innovation in the cooler and equipment industry.

The societal concerns for the environment and attitudes about good environmental stewardship were also driving change in the industry. Although there is no information given in the case about increases in sales as a result of firms shifting to environmental-friendly processes and materials, there is information provided that environmental concerns are being noticed by the industry. For example, Igloo‘s new bioplastic line and its environmentally conscious, biodegradable cooler are the result of societal environmental concerns.

A shift in buyer demographics was evident in the cooler and equipment industry, resulting in the customer base being increasingly broadened. Over the three-year period 2015 to 2018, Yeti‘s customer base progressed from 9 to 34 percent female, and from 64 to 70 percent under 45 years of age. Yeti brand awareness in the U.S. cooler and drinkware markets grew from 7 percent in 2015 to 24 percent in 2017. Although Yeti continued to invest in their hunting and fishing communities, their customer base dropped from 69 to 38 percent hunters during 2015–2018, as the company‘s appeal broadened beyond their original customer communities. By the end of 2021, the company had extended its community reach from hunting and fishing to include culinary, skiing/snowboarding, rodeo, wellness, beer and BBQ, ranching, climbing/alpine sports, skateboarding, surfing/paddleboarding, and music.

There will be debate among students about which of these forces was the strongest, but we believe that product innovation was the strongest. The Yeti Innovation Center is a clear indication of the importance of innovation. Also, as the case reveals, the firms in the industry offered numerous products that were very similar, with only minor differentiations. Yeti‘s constant new offerings, Igloo‘s new bioplastic line and environmentally conscious biodegradable cooler, and Corkcicle‘s Chillsner were further examples of the ongoing stream of innovation that was driving the industry.

The key factors of success in the cooler and equipment industry were brand image, performance, and quality. Yeti‘s success, and its increasing sales of products at inflated prices, plus the emergence of the Yeti brand as a cult icon demonstrated that brand image was key to success in the industry.

The industry appears to be headed for increased demand but also increased competition.

Increased industry demand appeared to be the net result of the driving forces, which would be the catalyst for more entrants and thus more fierce competition.

What are Yeti’s competitive capabilities and resource strengths and what opportunities do you identify? Are there any notable weaknesses and threats facing the company? Assess the combined

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impact of these forces on Yeti’s future profitability

Yeti’s Resource Strengths and Competitive Capabilities 

Liquid financial position, not excessively leveraged, large amount of working capital, and ample financial resources to sustain and grow the business



Competitive strategy that is well matched to the company‘s overall situation



Very strong brand name and company reputation, award-winning products



Excellent product quality



Very high prices and thus large margins



Broad geographic coverage and beginning multinational distribution



Significant and superior technological and innovative skills



Strong, well-known endorsement partnerships. Alliances or joint ventures with companies such as NASCAR, Professional Bull Riders, USA Climbing, and majorleague soccer



Domestic market leadership and growing international sales



Strong global economic conditions



Very good and growing sales (29 percent CAGR 2019–2022) and net income (35 percent CAGR increase, 2019–2022).

Yeti’s Resource Weaknesses and Competitive Liabilities 

Increasing number of competitors



Very high prices



Ability of new and existing competitors to leapfrog Yeti‘s products with new features, and lower costs



A two-product company, with all its ―eggs in two baskets‖—coolers and drinkware

Yeti’s Market Opportunities 

Strong and increasing buyer demand for hard and soft-side coolers, drinkware, and the Yeti name

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

Utilization of existing company skills and technological ability to develop new coolers and drinkware with new and advanced features



Expanding global coverage



Penetration of additional markets with high-profile endorsers



Developing new but related products to take advantage of its iconic brand

External Threats to Yeti’s Future Well-Being 

The ease of copying Yeti‘s business strategy



Increasing strength of competition among well-known industry rivals which could squeeze profit margins



Despite Yeti‘s high quality, new and existing competitors had been able to match and surpass its quality



Likely continuing entrance of new rivals, and price-based competition for some products



Aggressive competitive pressure in domestic and foreign markets

Conclusions Regarding the Combined Impact of These Forces on Yeti’s Future Profitability Yeti had a winning strategy, a very strong financial position in terms of both liquidity and profitability, a very strong and well-known brand and company reputation, and domestic market leadership as well as a growing international market. As a two-product company (plus accessories) Yeti was able to devote all of its time and resources to fine-tuning its cooler and drinkware innovations and marketing those products, however, the danger of this was that the company had ―all its eggs in two related baskets.‖ The company was seeing increased competition, and some competitors were able to leapfrog Yeti‘s products with new features, lower costs, and equal or superior quality.

The company did, however, have a significant following and domestic market leadership due to its iconic brand name. Yeti‘s high prices were shown as both a strength and a weakness: the high prices were a strength as long as Yeti could continue to sell its brand name, and the Yeti name remained iconic in the market. However, as the company sold into markets interested in the product and its performance and unwilling to pay for status, the high prices could be a weakness.

The large and growing cooler and drinkware industry provided Yeti with the opportunity to

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expand its global coverage, increase revenue, profits, and market share, Yeti‘s strengths and few weaknesses equipped the company to take advantage of the opportunities and defend the threats, and it should be able to continue its positive trends in sales and the profitability.

Describe Yeti’s competitive strategy. Does it appear to be well-matched to the competitive conditions of the coolers and equipment industry?

Yeti‘s competitive strategy was to expand existing product groups and enter new product categories by designing new offerings based on its consumers‘ visions and product knowledge. The company followed a temporal progression in expanding their product line: first was introduction of an anchor product; and second, product expansions, such as new colors and sizes, and then offering accessories. To ensure continued success in bringing products to market, Yeti‘s product development and marketing teams collaborated to identify consumer needs and wants, and then employed its research and development center to design prototypes and evaluate performance. Yeti‘s development process was designed to provide reliable quality control while enhancing product speed-to-market. The company‘s products were familiar products with renewed utility that could be employed in a number of ways. The company focused on introducing new categories of products and bringing innovation into the market through performance, durability, quality, and design. Yeti did not target a particular audience, rather it attracted new audience segments. This strategy appeared to work—a May 2018 Yeti owner study, indicated that 95 percent said they had proactively recommended Yeti products to their friends, family, and others through social media or by word-of-mouth.

In February 2020, Market Watch ranked Yeti number one in insulated coolers.

Yeti collaborated with its ―YETI Ambassadors,‖ which was a diverse group of men and women throughout the U.S. and select international markets, comprised of world-class anglers, surfers, hunters, rodeo cowboys, barbecue pitmasters, and various outdoor adventurers who embodied its brand. Yeti worked hard to cultivate relationships with experts, serious enthusiasts, and everyday consumers, including a combination of traditional, digital, social media, and grassroots initiatives to support the premium-priced brand, in addition to original short films and high-quality content for YETI.com.

Having learned from the 2016–2017 inventory disaster, Yeti began increasing its concentration on direct-to-consumer sales, through the company‘s direct-to-consumer strategy including its websites and Amazon Marketplace. This strategy immediately showed positive results: the direct-to-consumer channel grew from 8 percent of revenue in 2015, to 30 percent in 2017, 26 percent in 2018, 42 percent in 2019, to 55 percent in 2021. As comparison, Dick‘s Sporting Goods, Yeti‘s largest retail partner, accounted for 14 percent of revenue in 2017, and 15 percent in 2019. The move from brick-and-mortar retail outlets to increasingly direct-to-consumer sales provided Yeti with benefits beyond improved revenue.

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Customers dealt directly with the company rather than a retail intermediary, brand loyalty increased, the company had better ability to manage inventory, there was no retail middleman taking part of the profit, and thus gross margins were higher. In February 2020, Market Watch ranked Yeti number one in insulated coolers.

Yeti‘s strategy passes the three tests of a winning strategy. 

The Fit Test: Yeti‘s strategy was well matched to the cooler and drinkware industries and competitive conditions, as the industry moved from start-up to maturing. The strategy had good external fit and was in sync with the prevailing market conditions. There was also good internal fit: the strategy matched the company‘s resources and competitive capabilities and was well supported by its functional activities. Yeti‘s strategy appeared compatible with the company‘s ability to execute in a competent manner. The Yeti strategy exhibited dynamic fit as it evolved over time and kept close alignment with the company‘s situation as new external opportunities were exploited with innovative new products.



The Competitive Advantage Test: Yeti‘s strategy had enabled the company to achieve a competitive advantage over its rivals that showed no sign of weakening, up through fiscal 2021. Sales from fiscal 2019 to 2021 were up 29 percent CAGR suggesting the Yeti products and its brand name were providing an advantage over competitors.



The Performance Test: Yeti‘s strategy had produced outstanding performance and catapulted the company to the dominant market position in insulated coolers, domestically, strongly increasing international sales, and a healthy 29 percent CAGR increase in revenue from 2019 to 2021. Also, Yeti‘s net profit had increased by 35 percent CAGR from fiscal 2019 to 2021. Clearly Yeti‘s strategy had led the company to a high level of performance.



This strategy appeared to be well-suited for Yeti in 2021, and moving in to 2022, as it had provided the market-leading position in the insulated coolers domestic industry, with sales and profitability increasing yearly. The international markets were also growing and had increased by over 100 percent in 2021. The strategy was also a winner when judged by profitability and stock price trends. The company profitability was increasing (35 percent CAGR from 2019 to 2021) and its stock price showed a generally upward trajectory, with share prices reaching $108.82 in November of 2021.

Does your analysis indicate that Yeti has a sustainable competitive advantage in the coolers and equipment industry? If so, describe the nature of its advantage.

Students will have widely varying answers, and many will argue against sustainable

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competitive advantage for Yeti. More astute students will be able to identify Yeti has several current competitive advantages but may be in jeopardy of losing this advantage as competition increases in in the premium segment of the cooler industry.

Yeti had a competitive advantage largely because of its tremendously popular, iconic brand name, strong and increasing global scope of operations, and strategy execution capabilities.

The market responded well to Yeti‘s initial hard side coolers, and the company gained dominant market share in the United States, which helped it to build a good reputation and create strong brand loyalty. Yeti had been able to outcompete its rivals on the basis of differentiating features steadily flowing from its highly innovative engineers and its Yeti Innovation Center. There is obviously diminishing returns from innovation at some point on a given product, but Yeti‘s brand name, high quality, leading-edge features, and technological superiority were unmatched in the industry.

The company made strategic distributor concentrations among its retail distributors: Dick‘s Sporting Goods accounted for 16 percent and 15 percent of gross sales in 2018 and 2019, respectively. Yeti‘s wholesale channels sold to several large, national retailers, including Dick‘s Sporting Goods, Bass Pro Shops, REI, Academy Sports + Outdoors, and Ace Hardware, other retailers with a significant regional presence, and independent retail partners throughout the United States, Canada, and Australia.

In addition, the company sold in a direct-to-customer channel to consumers on YETI.com, au.YETI.com, and YETI Authorized on Amazon Marketplace. Customized products with licensed brand marks and original artwork were sold through its corporate sales program and at YETIcustomshop.com. A full line of Yeti products was also sold in Austin, Texas at the company‘s first retail store, which opened during fiscal 2017, and in corporate stores in Dallas, Charleston, SC, and Chicago, IL. Yeti‘s direct to consumer e-commerce channel allowed the company to directly interact with customers, more effectively control its brand, better understand consumer behaviors and preferences, and offer exclusive products and customization. According to Doug Schmidt, Director of Retail Operations, the goal was to ―immerse customers in the Yeti brand. The company believed its control over its e-commerce channel provided customers the highest level of brand engagement, and built customer loyalty, while generating attractive revenues. Yeti generated a customer loyalty and brand following that its rivals could not match.

Yeti‘s experience, know-how, and specialized capabilities, including the Innovation Center, which had been developed and perfected over its corporate life, plus the differentiating features of higher quality, excellent performance, a world-class group of endorsers, and the iconic brand name gave Yeti sustainable advantage in the cooler industry.

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The essence of Yeti‘s relative competitiveness was succinctly set out as brand image: ―If you already know you want the name, then buy the name. Yeti makes a good product. It‘s more expensive than it needs to be or maybe even should be. But it‘s also the brand that everyone recognizes, and many people covet. If that‘s important to you, at least you know it‘s also well-made.‖ What is your assessment of the company's financial situation? Does your financial analysis of the company disclose resource strengths or weaknesses? Does the company's current financial situation support future growth?

Examination of Yeti‘s financial statements indicated a sound and improving financial condition. Sales were increasing and careful cost and expense management resulted in increasing profits. The company was liquid and the debt structure was well situated. An analysis of the Yeti‘s income statements (below) reveals sound financial management.

Yeti‘s income statement showed sales increasing at a compound average growth rate (CAGR) of 24.27 percent for the period 2019–2022—see Table 1. The absolute increase in cost of goods was 16.48 percent over that period, which was far below the increase in sales.

The company‘s lowering cost of goods sold allowed gross profit to increase at 31.03 percent CAGR over the three-year period 2019–2022. Increasing sales, judicious cost management, and an improved debt structure also led to a 105.32 percent CAGR.

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Table 1 Compound Average Growth Rate for Yeti Holding Inc.’s Income Statement Items, 2019–2021 CAGR (2019–2021) Sales 24.27% Cost of goods sold 16.48% Gross profit 31.03% Operating income 75.00% Net income 105.32%

Calculated from case Exhibit 1.

Table 2 Liquidity and Leverage Ratios for Yeti Holdings, Inc., 2021 and 2022

2022

2021

Current Ratio

1.89

1.64

Working Capital

517,823

228,418

8.7%

15%

($1,000s) Long-term debt-toassets Calculated from case Exhibit 2.

Table 2 indicates that Yeti‘s has a high degree of liquidity with a current ratio of 1.89. The company‘s working capital increased 126 percent between 2021 and 2022, which will provide internal funds for debt payment and increased operations without the necessity of increasing debt. The reasonable debt to assets ratio of 8.7 percent in 2022 shows that excessive debt has not been used to finance the company‘s operations.

What recommendations would you make to Yeti’s CEO, Matthew Reintjes, to enhance its competitive position in the industry, drive future growth, and improve profitability. Please provide ample detail to allow Yeti management to carry out your recommendations.

There are several strategies that Yeti could adopt to enhance its competitive position in the industry, drive future growth, and improve profitability. Yeti could strengthen its competitive

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position by focusing on increasing the global market share and producing lower priced models to attract the emerging market buyers. Mr. Reintjes should concentrate on capturing additional global market share now rather than giving it up to the competition. Increasing global market share would help improve Yeti‘s dominant position, and thus its profitability.

In more affluent counties, Yeti could export the glamor of its world-class endorsers, and thus its brand image, plus add other high-profile ―Yeti Ambassadors‖ who represented popular sports and activities around the world. Soccer, because of its global popularity, would be a natural place to start.

Yeti was already a sponsor of professional soccer in the United States, and would thus have familiarity with the sport and contacts that could help expand the Yeti brand into the global soccer community. Cricket, hockey (ice and field), and tennis are other sports that Yeti could target. Capturing market share may well position the company for more profitable growth in the future, while increasing competitive pressure on its rivals. Yeti should attempt to find distribution partners for other areas of the world, establish a presence, and use the company‘s excellent, well-known brand name and quality products to increase penetration in affluent markets and attempt to increase its global market share. Growing in affluent markets would allow the company to continue to charge the high prices for its products and its brand name.

Yeti should carefully build its website payment mechanism and structure its delivery operation to match its growing international markets.

Yeti could also move into other markets in the United States and grow by targeting a different customer demographic. The typical Yeti consumer was an outdoors person. Yeti became an official NASCAR partner, a sponsor of the Professional Bull Riders (PBR), and entered into a partnership with USA Climbing. Yeti Ambassadors were world-class anglers, surfers, hunters, rodeo cowboys, barbecue pitmasters, and various outdoor adventurers who embodied its brand. Yeti should consider expanding into other domestic sports such as football, volleyball, tennis, and baseball. Many pickup trucks had Yeti stickers in their back windows—the company should aim for having their stickers on soccer moms‘ SUVs, and the BMWs and Mercedes of the tennis crowd. Enlisting high-profile athletes from these sports as Yeti Ambassadors would likely increase sales and thus profits.

While maintaining strict management of costs and expenses to preserve profitability, Yeti should emphasize consumer and market research to help focus the Yeti Innovation Center‘s work. There should be continued emphasis on innovation. There were little practical differences in Yeti‘s products and those of its competitors—the differences were in the ‗sizzle‘ and prestige of the brand name. Yeti‘s Innovation Center should maintain its focus on consistently broadening its premium-priced product line to meet its expanding customer base.

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Although Yeti should not leave its retail partners, the company should concentrate on increasing its direct-to-consumer sales, through the company‘s direct-to-consumer strategy including its websites and Amazon Marketplace. This strategy has showed positive results: the direct-to-consumer channel grew from 8 percent of revenue in 2015, to 30 percent in 2017, 26 percent in 2018, 42 percent in 2019, to 55 percent in 2021. As comparison, Dick‘s Sporting Goods, Yeti‘s largest retail partner, accounted for 14 percent of revenue in 2017 and 15 percent in 2019. The move from brick-and-mortar retail outlets to increasingly direct-toconsumer sales provided Yeti with benefits beyond improved revenue. Customers dealt directly with the company rather than a retail intermediary, brand loyalty increased, the company had better ability to manage inventory, there was no retail middleman taking part of the profit, and thus gross margins were higher. E-commerce was rapidly becoming the preferred method of shopping, and Yeti should work to make its e-commerce operations as perfect as possible, with the goal of immersing customers in the Yeti brand. Control over its e-commerce channel would provide customers with the highest level of brand engagement, build customer loyalty, while generating attractive revenues.

EPILOGUE Yeti continued to achieve revenue growth despite the challenges of COVID-19 during the first nine months of 2021. A summary of the company‘s performance for the three months ended April 2, 2022, are provided below: 

Sales increased 19 percent to $293.6 million, compared to $247.6 million during the same period last year.



Direct-to-consumer (―DTC‖) channel sales increased 23 percent to $156.0 million, compared to $126.8 million in the prior year quarter, led by strong performance in Drinkware. The DTC channel grew to 53 percent of sales, compared to 51 percent in the prior year period.



Wholesale channel sales increased 14 percent to $137.7 million, compared to $120.8 million in the same period last year, driven by both Coolers & Equipment and Drinkware.



Drinkware sales increased 24 percent to $184.0 million, compared to $148.9 million in the prior year quarter, primarily driven by the continued expansion of our Drinkware product offerings, including the introduction of new colorways and sizes, and strong demand for customization.



Coolers & Equipment sales increased 10 percent to $103.0 million, compared to $93.5 million in the same period last year, driven by strong performance in bags, outdoor living products, hard coolers and cargo

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Gross profit increased 7 percent to $154.9 million, or 52.7 percent of sales, compared to $145.2 million, or 58.6 percent of sales, in the first quarter of 2021. The 590 basis point decrease in gross margin was primarily driven by higher inbound freight, including a 220 basis point impact of a nonrecurring true-up of prior year freight costs, and an unfavorable impact of the nonrenewal of the Global System of Preferences (―GSP‖) program on import duties, partially offset by price increases and a favorable mix shift to our DTC channel.

Selling, general, and administrative (―SG&A‖) expenses increased 16 percent to $121.6 million, compared to $105.1 million in the first quarter of 2021. As a percentage of sales, SG&A expenses decreased 110 basis points to 41.4 percent from 42.5 percent in the prior year period, primarily driven by non-variable expense leverage on higher sales, partially offset by higher variable expenses by our increase in DTC sales mix during the quarter.

Operating income decreased 17 percent to $33.3 million, or 11.3 percent of sales, compared to $40.0 million, or 16.2 percent of sales during the prior year quarter.

Adjusted operating income decreased 13 percent to $38.0 million, or 13.0 percent of sales, compared to $43.8 million, or 17.7 percent of sales during the same period last year.

Net income decreased 16 percent to $25.7 million, or 8.7 percent of sales, compared to $30.5 million, or 12.3 percent of sales in the prior year quarter; Net income per diluted share decreased 17 percent to $0.29, compared to $0.35 per diluted share in the prior year quarter.

Source: YETI reports third quarter 2020 results. Accessed at YETI Reports First Quarter 2022 Results

Case 5 Teaching Note

Beyond Meat in 2022: What Can It Do to Rejuvenate Revenue Growth and Stem Mounting Losses?

OVERVIEW Going into 2022, Beyond Meat, a producer and marketer of plant-based protein products intended as a substitute for animal-based meat products, was experiencing something of a crisis.

Its once-rapid growth in unit sales and revenues had evaporated, and losses were unexpectedly mounting. Beyond Meat‘s 2021 revenues in the United States, its largest geographic market, were below those in 2020. The COVID-19 pandemic had precipitated a significant falloff in

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sales to restaurants and food service enterprises beginning in March 2020 and continuing into 2022 (although this was offset to some extent by the company‘s entry into the markets of more countries in 2020–2021). Beyond Meat had lost money every year from 2016 through 2021.

Although the company‘s stock price soared after its initial public stock offering in May 2019 to an all-time high of $238 in July 2019 (largely on inflated investor expectations regarding the company‘s prospects for sustained rapid growth and long-term profitability), the stock price fell abruptly in the last half of 2019, then quickly evolved into a wild roller-coaster ride with five peaks and valleys before reaching the fifth peak of $150 in mid-2021, at which point the stock price trended steadily downward, to trade in the $54–$63 range the last week of January 2022.

Then in late February 2022, after Beyond Meat announced a larger-than-expected loss of $179 million for full-year 2021 and a downbeat forecast for 2022, the stock price dropped to the low $40s.

While investor sentiment about Beyond Meat‘s business prospects in early 2022 was bearish, stockholders were hoping for highly favorable customer responses to new Beyond Meat products making an appearance on the menus of three high-profile fast-food chains—KFC (formerly Kentucky Fried Chicken), Pizza Hut, and McDonald‘s. Such a response would not only trigger a high level of repeat purchases of these menu items but could also stimulate consumers to buy more Beyond Meat products for in-home consumption when shopping at supermarkets and grocery stores—thereby putting the company back on track to grow its revenues more rapidly and move toward sustained profitability. 

Beyond Meat’s New Menu Item at KFC. KFC had tested the response of earliergeneration Beyond Meat‘s plant-based chicken nuggets at multiple locations that met with good (but not good enough) success to justify a national or international rollout.

However, on January 11, 2022, KFC began selling the latest reformulated Beyond Chicken nugget menu item at all of its 4,000 locations in the United States. The plantbased fried chicken nuggets were offered in six- and 12-piece orders, as well as part of a combo meal. According to foodie publication Eater.com:iv . . . when Beyond Fried Chicken is dunked into the signature KFC Sauce it is pretty indistinguishable from a nugget that is made with actual chicken. The flavor is observed to be appropriately meaty and seasoned well, although the texture is not a perfect match with real chicken. KFC is making clear that Beyond Fried Chicken is not being made specifically for vegans and vegetarians . . . For plant-based meat alternatives to have a real, meaningful future in the world of fast food, chains like KFC have to figure out how to better mimic the texture of the meats they‘re seeking to replace.



New Beyond Meat Menu Selections at Pizza Hut. On January 11, 2022, following a successful market test in Toronto and Edmonton, Pizza Hut Canada launched Beyond

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Italian Crumbles as a permanent menu item at its 450 Canadian locations. Pizza Hut Canada believed the Crumbles delivered a meaty texture and savory taste that made them an attractive substitute for Pizza Hut‘s traditional Italian pork sausage ingredient for customers wanting a plant-based meat ingredients in their pizzas. The Beyond Meat menu selections at Pizza Hut included: 

The Great Beyond™: A specialty pizza crafted with savory Beyond Italian Sausage Crumbles, paired perfectly with fresh veggie toppings that include sliced red onions and tangy banana peppers, served up on any Pizza Hut crust.



Beyond Italian Sausage™ Alfredo Loaded Flatbread: A crispy flatbread topped with flavor-packed Beyond Italian Sausage Crumbles, roasted red pepper, creamy alfredo sauce, and mozzarella cheese.



Beyond Creamy Alfredo: A savory pasta Alfredo dish layered with Beyond Italian Sausage Crumbles, onions, mushrooms, and mozzarella cheese that delivers a creamy, delicious bite.

Beyond Italian Sausage Crumbles could also be added as a topping to any existing pizza offerings of any size. Canada was the second market to permanently offer the Beyond Meat Crumble menu items nationally. After a successful trial of Beyond Meat Pizzas in the United Kingdom in the first half of 2021, Pizza Hut brought them back as a permanent menu option at all Pizza Hut UK Delivery locations in July 2021. 

McDonald’s New McPlant Burger. Beyond Meat had worked with McDonald‘s for years to codevelop a meaty and tasty plant-based burger that McDonald‘s management believed was worthy of becoming a permanent menu offering and satisfying growing customer desires for a tasty plant-based burger option. In 2021, McDonald‘s concluded that it, in cooperation with Beyond Meat, had come up with a plant-based burger patty named McPlant that was made of ingredients like peas, rice, and potatoes, that would be exclusive to McDonald‘s, and that was ready for launch.v The McPlant Burger included a McPlant patty served on a sesame seed bun with tomato, lettuce, pickles, onions, mayonnaise, ketchup, mustard, and a slice of American cheese—customers who preferred burgers with 100 percent plant-based ingredients could ask to hold the mayonnaise and American cheese, or any other ingredient. In early 2021, after market trials in 250 European locations where new items were frequently offered for limited times to learn customer responses, McDonald‘s introduced the McPlant burger in locations throughout Sweden, Denmark, the Netherlands, Austria, Ireland, and Great Britain. In November 2021, McDonald‘s tested the McPlant Burger in eight locations in the United States, mainly to better understand how offering a burger with a plant-based patty impacted the kitchens in its

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restaurants in the United States. Because of the success of the trial, beginning in February 2022, McDonalds put the McPlant burger on its menu in 600 additional locations in the San Francisco Bay and Dallas-Fort Worth areas.vi In July 2022, McDonald‘s began a limited time test run of the McPlant burger at 270 locations in Victoria, Australia.

These three ―potential‖ sales growth stimulants for Beyond Meat were the latest in a series of launches of Beyond Meat products in high-profile quick-service food enterprises. In late January 2020, Denny's Corp. announced it would give away free Beyond Meat Burgers, dressed with sliced tomatoes, lettuce, onions, pickles, All-American sauce, and American cheese on a multigrain bun, with the purchase of any beverage on January 30 from 11 a.m. to 10 p.m. while supplies lasted. The promotion, following on the heels of a highly successful market test of the Beyond Burger in Denny‘s restaurants in Los Angeles, served to launch the Beyond Burger menu item nationwide at all 1,700-plus Denny's locations in the United States and Canada.

Denny‘s announcement triggered a rush on the part of investors to purchase Beyond Meat shares, driving the stock price up 8 percent.

In February 2020, Starbucks added a Beyond Sausage sandwich to its breakfast menu at all of its store locations in Canada. In April 2020, Starbucks debuted a new menu in its 4,200 stores in China that included Beyond Meat‘s plant-based beef products in three menu selections: Beyond Beef Pesto Pasta, Beyond Beef Classic Lasagna, and a Beyond Beef Sour and Spicy Wrap. In September 2020, Starbucks added additional Beyond Meat products (along with several plantbased products by its chief competitor, Impossible Foods) to its menus at store locations in Hong Kong, Taiwan, Singapore, Thailand, and New Zealand. The new menu items in Taiwan included a Beyond Crumbles Bolognese penne, a Beyond Sausage sandwich, and a Beyond Meatball sandwich. In January 2021, Starbucks began selling two new Beyond Meat sandwiches at its Middle East store locations in the United Arab Emirates and Kuwait. In October 2021, Panda Express, the largest family-owned and operated Asian dining enterprise in the United States, announced that its collaborative partnership with Beyond Meat would introduce ―Beyond the Original Orange Chicken™‖ to menus in 70 locations in 10 states, signaling that the Panda Express chain would likely initiate a national rollout if the Beyond Chicken item proved sufficiently popular with customers—Panda Express had 2,200 locations in 12 countries. In early 2022, Panda Express began testing two Beyond Beef menu items at its Innovation Kitchen location in Pasadena, California. On February 14, 2022, A&W Canada began a five-week test of a Jalapeno Lime Beyond Meat® burger at all its 1,000-plus locations across Canada; the burger featured a 7-grain bun, tomato, lettuce, red onion, Beyond Burger® patty and a spicy, tangy Jalapeno lime aioli.

In July 2022, McDonald‘s ended its 622-unit test of the McPlant burger in the United States due to lackluster customer orders for the plant-based burger; investor expectations of a nationwide

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rollout of the McPlant burger in the United States later in 2022 vanished. In the first week of September 2022, Beyond Meat‘s stock price was trading in the $21–$23 per share range, down from the low $40s in February 2022.

Copyright © 2022 by Arthur A. Thompson. All rights reserved.

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SUGGESTIONS FOR USING THE CASE This case has all the ingredients for generating considerable student interest and provoking a lively, interesting class discussion with divergent opinions among class members. The case presents students with the challenge of assessing the long-term growth prospects of the makers of plant-based meat substitutes and, in particular, Beyond Meat‘s prospects for long-term growth and profitability. Students who review the company‘s financial statements will also note that there are number of serious issues that must be addressed to achieve profitability and ensure financial viability of the company.

The Beyond Meat case is probably best assigned after you have covered Chapters 1–7, but it can be successfully used after students have read just Chapters 3–5. It is definitely a good case for drilling students in the tools of analysis covered in Chapters 3 and 4. The material in Chapters 5 and 6 is pertinent to student identification and assessment of Beyond Meat‘s strategy and competitive approaches. And, with Beyond Meat‘s ambitions to grow its international presence, the material in Chapter 7 regarding competing in foreign markets comes into play as well.

The Beyond Meat case provides an opportunity for class members to evaluate industry and competitive conditions in the animal meat and plant-based meat substitute industry segments, think strategically about Beyond Meat‘s resources and capabilities versus those of its main rivals, crunch some numbers in the financial exhibits, and make action recommendations regarding Beyond Meat‘s future competitive strategy and courses of action to compete successfully, both domestically and internationally, against the makers of animal meats and plant-based meat substitutes.

There is enough material in this case and enough opportunities to drill students in applying the concepts and analytical tools in Chapters 3 and 4 to fill two class periods should you opt to devote this much class time to covering the case thoroughly.

The Connect-Based Exercise for the Beyond Meat Case. We developed an exercise for Under Armour for inclusion in the publisher‘s Connect Management web-based assignment and assessment platform because: The case ties tightly to many of the topics covered in Chapters 3 through 7.  One of the purposes of the case exercises is to drill students in applying the concepts and analytical tools discussed in the chapters to the circumstances posed in the cases.

What to Tell Students in Preparing the Beyond Meat Case for Class. To give students guidance in what to do and think about in preparing the Beyond Meat case for class discussion, we strongly recommend two things:

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Have class members complete the Connect-based exercise for the Beyond Meat case in the event you have adopted the Connect software for your course.

OR Provide class members with assignment questions and insist that they prepare good notes/answers to these questions before coming to class. Our recommended assignment questions for the Beyond Meat case are presented in the next section of this TN and tell students which assignment questions you want them to concentrate on in preparing the case. Asking them to prepare answers to all of the assignment questions is likely to require more time than they will spend.

To facilitate your use of assignment questions and making them available to students, we have posted a file of the Assignment Questions contained in this teaching note in the instructor resources section of the Connect Library. (You should be aware that there is a set of assignment questions posted in the Connect Library for each of the cases included in the 8th edition.) In all instances, these assignment questions correspond to the assignment questions in the teaching note for the case.

In our experience, it is quite difficult to have an insightful and constructive class discussion of an assigned case unless students have conscientiously made use of pertinent core concepts and analytical tools in preparing substantive answers to a set of well-conceived study questions before they come to class. In our classes, we expect students to bring their notes to the study questions to use/refer to in responding to the questions that we pose. Moreover, students often find that a set of study questions is useful in helping them prepare oral team presentations and written case assignments—in addition to whatever directive question(s) you supply for these assignments. Hence, we urge that you provide students with assignment questions—either those we have provided or a set of your own questions—for all those aspects of a case that you believe are worthy of student analysis or that you plan to cover during your class discussion of the case.

Utilizing the Guide to Case Analysis. If this is your first assigned case, you may find it beneficial to have class members read the Guide to Case Analysis that is posted in instructor resources section of the Connect library. The content of this Guide is particularly helpful to students if your course is their first experience with cases and they are unsure about the mechanics of how to prepare a case for class discussion, oral presentation, or written analysis.

Suggested Assignment Questions for an Oral Team Presentation or Written Case Analysis.

We definitely recommend use of the Beyond Meat case for written assignments and oral team presentations. Our suggested assignment questions are as follows: 

Beyond Meat CEO Ethan Brown has employed you as a consultant to assess the

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company‘s overall situation and recommend a set of actions to improve the company‘s future prospects. Please prepare a report to Mr. Brown that includes (1) an evaluation of the strength of each of the five competitive forces facing Beyond Meat, (2) an assessment of Beyond Meat‘s strengths, weaknesses, opportunities and threats as of 2022, (3) an evaluation of Beyond Meat‘s financial performance as shown in case Exhibit 3, and (4) a set of action recommendations that Beyond Meat should pursue to capitalize on its opportunities and improve its financial performance. Your report should be five to six pages, plus it should include an assortment of charts, tables, and exhibits to support your analysis and recommendations. 

Prepare a brief report to Beyond Meat CEO Ethan Brown outlining the three to four top priority issues that Beyond Meat management needs to address and the actions you think Ethan Brown should initiate to address these issues. Your report should contain detailed and convincing reasons in support of each one of your recommendations. It is imperative that the support offered for each of your recommendation be based on (a) conclusions drawn from application of the concepts and analytical tools discussed in Chapters 3 and 4 and (b) the content of Chapters 5–7 regarding strategic moves that may be suitable for Beyond Meat to achieve profitability and compete successfully against its rivals in the years just ahead.

ASSIGNMENT QUESTIONS Are plant-based meat substitute products just a passing fad? How likely is it that an attractively large percentage of the world‘s consumers will switch away from eating animal meats to mostly or wholly eating plant-based meat substitutes instead of animal meat?

What is your assessment of the strength of the competitive forces Beyond Meat faces? Do a five-forces analysis to support your answer.

What are the key success factors for Beyond Meat and the other makers of plant-based meat substitutes?

Does the outlook for the plant-based meat substitute industry segment present Beyond Meat with sufficiently attractive opportunities for competitive success and long-term profitability? Why or why not?

What does a SWOT analysis reveal about the overall attractiveness of Beyond Meat‘s situation in 2022?

What are the key elements of Beyond Meat‘s strategy?

Which one of the five generic competitive strategies discussed in Chapter 5 most closely approximates the competitive approach that Beyond Meat is employing?

What is your assessment of Beyond Meat‘s financial performance, as shown in Exhibits 1–3? What finance-related strengths and weaknesses do you see?

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What are the key issues confronting Beyond Meat‘s top management team in 2022?

What recommendations would you make to Ethan Brown regarding the company‘s strategy and actions that should be taken to achieve profitability and strengthen the company‘s efforts to compete successfully against its rivals?

TEACHING OUTLINE AND ANALYSIS Are plant-based meat substitute products just a passing fad? How likely is it that an attractively large percentage of the world’s consumers will switch away from eating animal meats to mostly or wholly eating plant-based meat substitutes?

The value of asking this question first is to gauge the size of the divide between class members as to how well the general population will likely take to eating plant-based substitutes on a regular basis and their stance on purchasing a plant-based meat product to see what it tastes like?

Alternatively, you could open the discussion by asking: 

How many of you have eaten one or more brands of plant-based meat substitutes? Which brand or brands? How many of you have eaten a dish that containing one or more brands of plant-based meat substitutes?



What did you think—were you favorably or unfavorably impressed?



Would you try a different brand and, if so, which one? How about a different product of the same brand?

You could then follow up with one or more of the following questions: 

Are plant-based meat substitute products just a passing fad?



How likely is it that an attractively large percentage of the world‘s consumers will switch away from eating animal meats to mostly or wholly eating plant-based meat substitutes instead of animal meat?



Do you believe an attractively large number of consumers are likely to purchase plantbased meat products because of the nutritional characteristics of some brands?



Based on the nutritional data in case Exhibits 3 and 4, what is your assessment of how the plant-based brands compare against the animal meat brands? How significant are the differences? What do you see as the nutritional benefits of consuming plant-based meat products as opposed to animal meat products?

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

Do you believe an attractively large number of consumers are likely to purchase plantbased meat products because of the more positive environmental impacts they have as compared to the allegedly negative impacts of animal meats?



Are the positive environmental impacts of consuming plant-based meat substitutes as opposed to animal meats likely to cause a meaningful percentage of consumers to purchase plant-based meat products as opposed to animal meat products?

Consider winding up this phase of the class discussion by polling the class on the following question: 

How would you rate the importance of the following three factors—taste, nutritional benefits, environmental benefits—on a scale of 1 to 3 in influencing consumers to purchase plant-based meat products, where 1 is most important and 3 is least important?

What is your assessment of the strength of the competitive forces Beyond Meat faces? Do a fiveforces analysis to support your answer.

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Rivalry among the producers and distributors of plant-based meat products—a strong competitive force currently that almost certainly will intensify in the years ahead

In assessing this competitive force, students should be directed to refer to and utilize the presentations in Table 3.2, Figure 3.4, and the associated discussion on rivalry in Chapter 3.

Students should conclude that rivalry among Beyond Meat, Impossible Foods, Pure Foods, Kroger‘s Emerge brand, and other makers of plant-based is already strong and will grow stronger. All competitors are scrambling to attract the patronage of individuals/households that are attracted to eating (or at least trying out) plant-based meat substitutes. Rivalry is centered on such factors as 

Taste



Individual health and nutritional benefits, plus planet-based environmental and agricultural sustainability benefits



Price (as compared to both rival brands and traditional animal meats)



Breadth of distribution and geographic coverage—number of food retailers stocking each brand and the capability of various food distributors to convince restaurants and other food service enterprises to put plant-based meat dishes on their menu offerings.



Advertising and promotion expenditures



Marketing capabilities—especially as concerns getting restaurant chains (McDonalds, Burger King, A&W, and others) to run trial promotions for menu selections featuring plant-based burgers and chicken products



Power of brand name and reputation

Most streaming competitors pursue some version of a differentiation strategy to try to set themselves apart on the basis of one or more competitive factors—typically taste, price, breadth of product selection, and brand recognition and reputation.

Several factors were working to intensify rivalry among industry participants: 

Most of the plant-based producers (but especially Beyond Meat and Impossible Foods) are periodically launching new/improved product versions with better taste, flavors, texture, and additional product selections. To accomplish this, they are allocating substantial funding to R&D, which put more competitive pressure on rivals to follow suit or else risk falling behind.

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

239

Most producers and food distributors are striving hard to increase their product availability in retail groceries and in restaurants and other types of food service outlets. Beyond Meat and Impossible Foods are aggressively pushing to expand their distribution reach both domestically and internationally. A large number of fresh, ongoing strategic initiatives on the part of various rivals heightens rivalry.

Low switching costs on the part of buyers—it is easy for people to switch their purchases from one plant-based brand to another. Low or negligible switching costs among the consumers of plant-based meat brands heightens rivalry. 

Threat of new entry in the production of plant-based meat substitutes—a moderately strong to very strong competitive force

In assessing this competitive force, students should be directed to refer to and utilize the presentation in Figure 3.5 and the related text discussion.

Going forward, it is likely that a number of animal protein suppliers like Tyson Foods, JBS, WH Group subsidiaries, and Hormel will opt to introduce their own brand of plant-based meat substitutes, especially if combined sales of the current plant-based meat brands continue to grow rapidly and win more widespread acceptance among consumers.

Barriers to entry, while not trivial can certainly be hurdled by most of the major animal protein suppliers. These suppliers have the resources and the distribution muscle to gain access to the shelves of retail grocers and to attract the patronage of many restaurants (who are longstanding buyers of animal meats), both in the United States and internationally.

Class members cannot fail to understand that the major suppliers of animal meats have the resources, capabilities, reputation, and name recognition it takes to compete successfully alongside Beyond Meat, Impossible Foods, and the other plant-based meat brands. 

Competition from substitutes (namely animal meats)—a very strong competitive force.

In assessing this competitive force, students should be directed to refer to and utilize the presentation in Figure 3.6 and the related text discussion.

Clearly, there are many readily available animal meat substitutes that sell at prices acceptable to the vast majority of consumers. Moreover, and most importantly, these animal meat products have a widespread following among consumers across the world— consumer loyalty to animal meats is likely to remain strong for years to come. A very large fraction of the consumers will not be easily persuaded to give up eating animal meat products

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altogether, although some number may well begin eating plant-based meat substitutes several meals weekly, and some fraction (likely small for some time to come) will slowly/maybe rapidly switch over to plant-based meat substitutes for a rising fraction of their meals.

All things considered, class members should conclude that the animal protein substitutes for plant-based meat products are a strong, if not fierce, competitive force, given that 

cceptable substitutes for plant-based meat products are readily available and typically (for the time being at least) lower priced.



Buyer costs to switch to plant-based meats are comparatively/relatively ―high.‖



Individuals and households are familiar with and relatively comfortable with eating animal meats—many consumers will exhibit a strong preference for animal meats and has a strong attachment to including them is some fairly high fraction of their meals.

It will take some time for plant-based meats to win a 30 percent or higher market share away from animal meats.

But while competition from substitutes is definitely strong, it is not so strong as to undermine the attractiveness of being a company that produces and distributes plant-based meat substitutes. Very likely, plant-based meat substitutes will capture a rising market share over time—how fast and how big this share will get is yet to be determined. 

The bargaining power and leverage of suppliers—a weak to moderate competitive force, depending on what plant-based raw materials are being supplied

n assessing this competitive force, students should be directed to refer to and utilize presentation in Figure 3.7 and the related text discussion.

Class members should recognize that the pricing power of the suppliers of raw materials used to make plant-based meat substitutes depends on how fast supplies of these materials can be expanded as the market for plant-based meat products grows. The forces of supply and demand will rule here. Mushrooming demand for plant-based meat substitutes could result in temporary shortages of certain raw materials. But these shortages are likely to be short-lived and may can be mitigated by shifting to other types of plant proteins. So far there is little evidence in the case that raw materials shortages have had a big impact on the prices of raw materials used by the producers of plant-based meats. Moreover, there is little evidence that the plant-based meat producers have encountered much problem with securing comanufacturers to make their products for them (until they can build their own manufacturing capabilities).

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For the most part, the supplies of packaging and flavorings are commodities that are readily available from multiple suppliers at the going market prices. 

The bargaining power and leverage of retail grocers and food service distributors—a weak to moderate competitive force

In assessing this competitive force, students should be directed to refer to and utilize the presentation in Figure 3.8 and the related text discussion. Large retail grocery chains undoubtedly have some power to bargain for a lower price or other favorable terms in return for granting shelf space to the producers of plant-based meat products. On the other hand, this power is mitigated to some extent by the need of food retailers to keep shoppers for these products happy by having such products available in their stores. The more that consumer demand grows for plant-based meat substitutes, the more necessary it is for supermarkets and grocery stores to stock them for their customers. The case does not make mention of supermarkets who are unwilling to stock at least some brands of plant-based meat products and gauge consumer demand for them—those that sell well will remain on their shelves and the slow-sellers will gradually disappear from their shelves/display cases. The popularity and frequency with which consumers purchase various plant-based brands and product versions will determine the space they command on grocery shelves and in meat display cases. 

The extent to which food service distributors will stock plant-based meat products will ultimately depend on the number of restaurants that elect to put plant-based dishes on their menus and the popularity of such dishes. The number of food service enterprises that decide to serve plant-based meat dishes will ultimately govern the decisions of food distributors to include plant-based meat products in their product offerings.

Conclusions concerning the overall strength of competitive forces: Competitive pressures in the

market for plant-based meat substitutes have recently increased with the appearance of more brands and more product varieties; these pressures could grow stronger in upcoming years as new brands/producers enter and as existing rivals compete more aggressively—there seems little likelihood of competition becoming weaker unless consumer interest in buying/eating plant-based meat proteins begins to evaporate. Currently, we see rivalry as the strongest of the five competitive forces, followed closely by the competitive pressures between plantbased and animal-based meats and, somewhat further back, competition from the threat of new entrants into the production of plant-based meat substitutes.

But while collective competitive pressures are strong and might intensify further, they do not

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seem potent enough to prevent many of the producers of plant-based meat products— especially Beyond Meat and Impossible Foods—from being profitable and competitively successful in the years just ahead. In this sense, the industry environment is attractive and merits aggressive investment for Beyond Meat and others.

Nonetheless, class members should recognize that the future is full of risk and uncertainty for all the producers and distributors of plant-based meat substitutes. Future rates of growth in consumer demand for plant-based meat products and the durability of this demand are most assuredly uncertain. There is uncertainty regarding how many animal meat producers will introduce their own plant-based products and the resources they will devote to marketing and promoting them. There is uncertainty about whether plant-based meat producers can develop a tasty and competitively successful chicken product and a steak product. There is uncertainty about how efficiently producers can manufacture plant-based meat products and price them more competitively against animal meats—currently plant-based products are priced substantially above the comparable animal meat products, which presents a problem for consumers with tight food budgets.

What are the key success factors for Beyond Meat and the other makers of plant-based meat substitutes?

Students should identify most all of the following as key success factors in the plant-based meat industry: 

The capability to create and produce products with such an appealing taste, texture, and flavor that an attractively large number of individuals will switch some of their animal meat consumption over to plant-based meat products.



Good R&D and product development capabilities (in order to create and produce products with such an appealing taste, texture, and flavor that an attractively large number of individuals will switch some of their animal meat consumption over to plantbased meat products). Strong R&D and product development capabilities are further needed to generate a stream of ongoing product improvements (in flavor, taste, and texture) and to introduce new plant-based meats products (like chicken, steak, roasts, etc.).



Adequate marketing capabilities



National and international distribution capabilities



The capability to produce plant-based meat products efficiently and cost-competitively (so as to be able to sell profitably at prices competitive with animal meat products)

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Does the outlook for the plant-based meat substitute industry segment present Beyond Meat with sufficiently attractive opportunities for competitive success and long-term profitability? Why or why not?

It should be apparent from the case that Beyond Meat definitely has an attractive opportunity to be competitively successful and to grow its revenues and profits over the next several years. The company has come a long way in a short period of time. It seems to have a bright future.

But Beyond Meat still has quite a long way to go to establish a secure and long-lasting industry position. Will consumer interest in plant-based meats prove durable or will it be a fad that dies a fast or slow death? The failure of McDonald‘s 622-unit test of the McPlant burger in the United States in July 2022 due to lackluster customer orders for the plant-based burger is a disturbing development regarding widespread consumer interest in plant-based meat substitutes.

Students should question how fast demand for plant-based meat products will continue to grow.

What does a SWOT analysis reveal about the overall attractiveness of Beyond Meat’s situation in 2022?

Beyond Meat’s Resource Strengths and Competitive Assets 

Rapidly growing points of points of distributions in both retail grocery channels and food service channels (restaurants and other types of food service enterprises)



Proven R&D and product development capabilities in plant-based meat products (as compared to most rivals other than Impossible Foods)



A first-mover advantage over more recent entrants



Rapidly growing geographic coverage, both domestically and internationally



Growing manufacturing capability, domestically and internationally



A more widely recognized brand name in plant-based meat products than most other plant-based rivals



Beyond Meat‘s products have appeal to consumers who are concerned about (1) the health impact of red meat consumption and (2) the adverse environmental and agricultural sustainability impacts of raising animal meat. From the standpoint of numerous consumers, plant-based meat products have the aura of being nutritionally

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and environmentally correct.

Beyond Meat’s Resource Weaknesses and Competitive Liabilities 

Limited financial resources, especially compared to leading producers of animal meats, with which to fund R&D, new product development, investment in production capacity in multiple countries/regions of the world, and marketing and promotional efforts



Relatively limited coverage of retail channels and food service channels as compared to leading producers of animal meats



Limited brand name recognition among consumers (Beyond Meat is still a relatively new brand that many consumers know little or nothing about)



Beyond Meat products have a relatively high-saturated fat content (as do the products of other plant-based meat producers)—see case Exhibit 4.



The failure of McDonald‘s 622-unit test of the McPlant burger in the United States in July 2022 may reflect a weakness in the appeal of the company‘s products.

Beyond Meat’s Market Opportunities 

Increase distribution coverage, both domestically and internationally



Secure more partnerships (product trials) with fast-food enterprises to help boost consumer awareness and consumer trials of Beyond Meat products—thereby creating a bigger path to retail sales growth in retail grocery channels



Introduce a wider range of plant-based meat products (such as fried and grilled chicken, pork chops, and beef steaks and roasts)



Expand manufacturing capability to all regions of world, to help capture scale economies, lower production/distribution costs, and ultimately lower selling prices to levels comparable to (or ideally below) the prices of comparable animal meats

Beyond Meat’s External Threats 

Consumer interest in eating plant-based meat substitutes proves to be limited to a narrower-than-expected segment of the population, thus resulting in slowing demand growth and limited growth opportunities for Beyond Meat and other producers of plant-based substitutes for animal meat

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245

Several large animal meat producers launch appealing-tasting plant-based meat brands/products and support their introduction with well-financed and competitively successful marketing and advertising campaigns, thus capturing much of the growth in consumption of plant-based meat products for themselves

Conclusions: While Beyond Meat has definitely What are the key elements of Beyond Meat’s strategy?

In our view, Beyond Meat‘s strategy is underpinned by the following initiatives: 

Grow the distribution of Beyond Meat products as fast as the company is able, both domestically and internationally. International expansion should initially be concentrated in Europe and Asia



Rapidly expand the company‘s lineup of products (with a near-term focus on chicken). This will require continuing to devote a high percentage of the company‘s resources to R&D and new product development.



Convince fast-food enterprises to enter into partnerships to experiment with putting Beyond Meat products on their menus as a means of stimulating consumer interest in trying out plant-based burgers, sausages, and other products (chicken, steaks, etc.) and thereby helping grow retail grocery sales of Beyond Meat products—success here will entice consumers migrate a portion of their meat purchases away from animal meat to plant-based meats.



Continue to improve the taste and texture of the company‘s existing products— introduce improved and better-testing product versions as fast they can be developed.

Which one of the five generic competitive strategies discussed in Chapter 5 most closely approximates the competitive approach that Beyond Meat is employing?

We think the best answer is a focused differentiation strategy if they prefer to define the relevant industry segment narrowly as plant-based meat products. However, they can make an argument for a broad differentiation strategy, if they opt to lump the plant-based and animal-based segments together (because they are close substitutes).

In either case, it is clear that Beyond Meat is trying to differentiate its products from those of rivals. But it will be difficult to achieve strong differentiation, because of the close similarity in the ingredients, nutritional characteristics, and many of the products offered by rival plantbased brands. The primary differentiating factor is taste/texture/cooked appearance—and there are apparently meaningful taste/appearance/texture differences. Even so, the jury is

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out on how much the taste/texture/appearance differences matter to consumers because the taste preferences of consumers can differ substantially. Preliminary indications are that Impossible Meat products and Beyond Meat products have the best taste/texture/appearance characteristics, with some ―experts‖ saying the edge goes to Impossible Meats.

What is your assessment of Beyond Meat’s financial performance, as shown in Exhibit 2? What finance-related strengths and weaknesses do you see?

You should push class members to use the financial ratios in the Appendix following Chapter 10 in performing calculations to determine what aspects of Beyond Meat‘s financial performance qualify are issues that need top management attention.

Students should cite many of the following: 

Beyond Meat‘s rapid growth in revenues from approximately $88 million in 2018 to $464.7 million in 2021. (As shown in case Exhibit 2 and in case Exhibit 3).



However, students should note that the company‘s revenue growth slowed significantly beginning in Quarter 3 2020. In fact, revenues decreased from $101.9 million in Quarter 4 2020 to $100.7 million in Quarter 4 2021—see case Exhibit 3.



Students who examine case Exhibit 1 will see that overall U.S. net revenues declined from $324.9 million in 2020 to $319.8 million in 2021. The company‘s growth in total net revenues between 2020 and 2021 resulted from strong growth in international retail and foodservice distribution channels.



Students should also note that the company‘s gross profit declined from $122.275 million in 2020 to $117.281 million in 2021. Its loss from operations skyrocketed from $(49.345) million in 2020 to $(174.933) million in 2021. Similarly, students should note its dramatic change of its net loss from $(52.572) million in 2020 to $(182.105) million in 2021—see case Exhibit 3.



Beyond Meat significantly boosted spending for research and development each year between 2017 and 2021.



Selling, general and administrative costs have grown from 29.1 percent of revenues in 2019 to 45.1 percent of revenues in 2021.



Beyond Meat‘s cash and cash equivalents at the end of 2021 were far higher than at year-end 2020 due to the addition of $1.152 billion in debt in 2021. The strong cash balance of $733 million helps provide liquidity, but the additional long-term liabilities have increased its debt-to-assets ratio from 2.6 percent in 2020 to 83.6 percent in

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2021. The company‘s debt-to-equity ratio changed from 3.3 percent in 2020 to 870.0 percent in 2020. Students may suggest that the change in the company‘s financial structure from nearly no long-debt financing to long-term debt 8.7 times greater than equity is likely to become problematic for the company. 

The company‘s current ratio of 3.73 in 2020 was quite respectable, but the infusion of debt financing improved its current ratio to 7.79 in 2021.



Students should note that despite Beyond Meat‘s strong liquidity in 2021, its cash and cash equivalents will likely decrease rapidly given the company‘s cash flows used in operations of $307.370 million in 2021.



The company had 109 days of inventory at the end of 2020, compared to 190 days at the end of 2021. Both numbers may strike students as ―too high.‖

Students may conclude that Beyond Meat is nearing a financial crisis as U.S. revenue growth has stalled, costs are increasing, an important product test rollout has failed, its debt has increased significantly, and its cash burn rate is accelerating.

What are the key issues confronting Beyond Meat’s top management team in 2022?

Students ought to cite most of the following: 

What key customer satisfaction findings caused McDonald‘s to abandon the test of the McPlant burger?



How to reduce the company‘s cost structure and reduce its cash burn rate.



How to accelerate the expansion of distribution in the retail grocery and food service channels in Europe and in Asia



How fast to invest in manufacturing capacity additions in Europe and Asia, and where to locate them?



What further actions to take to improve sales in the United States?

What recommendations would you make to Ethan Brown regarding the company’s strategy and actions that should be taken to achieve profitability and strengthen the company’s efforts to compete successfully against its rivals?

Students should note that while Beyond Meat has put together a potent strategy, its declining sales in the United States, its increasing costs, the failure of the McPlant burger, and its negative cash flows from operations require a major overhaul in strategy. But there is room

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for further actions; these include: 

Continuing an all-out effort to grow sales in International Retail and Foodservice distribution channels. The company has achieved strong growth outside the United States between 2017 and 2021, and Europe and Asia may prove to be the company‘s most important markets.



Moving forward with the establishment of manufacturing capacity in Europe and Asia (necessary to keep shipping costs of Beyond Meat products to international destinations to a tolerable minimum).



Press forward in recruiting fast-food enterprises in Europe and Asia to test Beyond Meat products in some of their menu selections. Where the tests are especially successful, then partner with the fast-food establishments to keep these dishes on their menus, and maybe expand the number of plant-based meat substitutes to other of their dishes.



Continue to introduce new products (such as chicken, meatballs, and breakfast sausage) as fast as is feasible—capture first-mover advantages over rivals whenever possible!!!



Strive for good profitability in 2022 and beyond, but be wary of increasing prices to do so. The company must focus on eliminating non-value-adding costs from its cost structure to reduce its loss from operations. The company should also investigate why cost of goods sold increased at a faster rate than revenues between 2020 and 2021.

Non-value-adding costs in manufacturing should also be eliminated to help achieve profitability.



Students should suggest that the company maintain its investments in R&D to improve the appeal of its products and to introduce new meat substitutes.



Growth in the company‘s selling, general and administrative costs have far outpaced growth in revenues and have increased from 29.1 percent of revenues in 2019 to 45.1 percent of revenues in 2021. The company came closest to operating at breakeven in 2019 when its net loss narrowed to approximately $12.5 million. Students should suggest that the company‘s chief managers return its selling, general, and administrative expense rate to 29 to 30 percent.



Continue to aggressively promote consumer awareness of the health, nutritional, and environmental benefits of plant-based meat substitutes—the greater the awareness of these benefits among consumers across the world, the better!!!

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EPILOGUE For the latest information on developments at Beyond Meat, please visit the Investor Relations section at www.beyondmeat.com and check out the company‘s recent press releases and financial results.

Case 6 Teaching Note Spotify Technology in 2022: Will Its Strategy Lead to Profitability with Growth?

Overview Spotify was founded in 2006 by Daniel Ek and Martin Lorentzon in response to the growing piracy in the music industry. The company began as a small start-up in Stockholm, Sweden, and within two years, they were offering free music with advertising in hopes that music fans would upgrade to the £10 a month ad-free subscription. The initial launch as a streaming service was not successful; Spotify reported a loss of 4.4 million in 2008. The free and paid subscriptions were available only in the United Kingdom until 2009 when Spotify launched on the Apple App Store. This platform is what catapulted Spotify to the global competitive company it has become.

As of the first quarter of 2022, Spotify had 182 million subscribers worldwide, up from 158 million in the last quarter of 2021. Revenue grew at a compound annual growth rate (CAGR) of 26 percent and gross profit grew at a CAGR of 35 percent during the same time period. Music revenues, which include premium subscriptions, ad-supported music, and the Marketplace suite of artist tools grew at 24 percent CAGR. The company also reported having more than 4 million podcasts on its platform (up from 3.2 million at the end of Q3 of 2021). Today, podcasting is expected to exceed $2.1 billion in 2022; the market is expected to double by 2024 to reach $4.2 billion. Spotify also expanded across 184 markets and manages and shares 82 million tracks making Spotify the world‘s most popular audio streaming subscription service.

Since the onset of the COVID-19 pandemic, Spotify saw an increase in music and podcast listening across different devices, specifically themed playlists. The company responded to

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listeners‘ needs, in general, through special interest podcasts such as COVID-19 hub, Coronavirus: Fact vs. Fiction, and Science Vs. Spotify‘s focus is on driving engagement with a dynamic customer service strategy. The company has found a place in our everyday lives through different social media platforms. They have an active presence on Facebook, Twitter, Instagram, YouTube, and LinkedIn and have been touted as the next social network. The company has revolutionized the world of music distribution by shifting how we consume audio content and ensuring that artists are paid royalties for their work. With nearly 422 million subscribers worldwide, Spotify has been dubbed the Netflix of the audio world. _____ * This teaching note reflects the thinking and analysis of Professor Diana R. Garza, University of the Incarnate Word. We are most grateful for her insight, analysis, and contributions to how the case can be taught successfully.

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The company‘s initial business model included a freemium and subscription-based service where subscriptions accounted for around 91 percent of the revenues and freemium made up approximately 9 percent. In 2016, Spotify expanded the business model to include new advertising formats (branded moments, branded playlists, sponsored playlists, sponsored sessions, and traditional). Spotify‘s brand strategy targets all demographics through partnerships, engagement, and utilizing multi-channel marketing. Advertising has become a key growth driver with a target revenue of more than €10 billion annually.

As with all industry disruptors, Spotify will continue to be challenged by established and new players in the industry.

Suggestions for Using the Case The Spotify Technology in 2022 case should generate student interest since the company will be well-known among students with many being subscribers to Spotify or a similar music streaming service. The case should provoke a well-thought-out discussion of the appeal and future of streaming services, namely in the music industry.

The case is intended to introduce students to a global company‘s evolving strategy with a freemium and subscription business model. This case works especially well after covering Chapters 1–6. Students will be able to utilize concepts from Chapters 1, 2, and 5 in evaluating the company‘s business model and strategy, select tools from Chapter 3 in assessing industry attractiveness and competitive rivalry in the industry, Chapter 4 company situation analysis tools, and Chapter 6‘s discussion of strategies for strengthening a company‘s competitive position.

The assignment questions and teaching outline presented below reflect our thinking and suggestions about how to conduct the class discussion and what aspects to emphasize.

To provide students with guidance on what to think about and which analytical tools to utilize in preparing the Spotify Technology in 2022 case for class discussion, we strongly recommend providing class members with a set of study questions and insisting that they develop good notes/answers to these questions in preparing for class discussion of the case.

To facilitate your use of study questions and to make them available to students, we have posted a file of the assignment questions contained in this teaching note for the Spotify Technology in 2022 case in the instructor resources section of the Connect Library. (We should also point out that there is a set of study questions posted in the student section of the OLC for each of the 27 cases included in the 8th edition.)

Videos for Use with the Spotify Case. There are three videos of the case study that you may consider having students view before the class discussion (or you may choose to open the class

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discussion with one of the three videos). All videos are posted on YouTube and can be accessed through the following links: 

A 4.24-minute video from 2022 entitled ―Spotify CEO Daniel Ek discusses fourth-quarter amid 18 percent stock slide.‖ It can be accessed at https://youtu.be/u8PCb5TUeDg.



A 8.24-minute video from 2022 entitled ―How Is Spotify paying Its Bills‖ that can be accessed at https://www.youtube.com/watch?v=yeH_gkks23w.



A 10.30-minute video from 2021 entitled ―Spotify CEO reveals goal to reach 1 billion users!‖ It can be accessed at https://youtu.be/YKlhhQkw3Rs.



A 6.48-minute video from 2020 entitled ―Spotify Chief Content Officer on Podcast Expansion, Growth and More.‖ It can be accessed at https://www.youtube.com/watch?v=QuZlQnD7nY0.

Suggested Assignment Questions for an Oral Team Presentation or Written Case Analysis.

The Spotify case is well-suited for written assignments and/or oral team presentations. The suggested assignment questions are as follows: 

Spotify CEO Daniel Ek has employed you as a consultant to assess the company‘s overall situation and recommend a set of actions to further improve the company‘s future prospects and competitive position. Prepare a report to Mr. Ek that includes: 

An evaluation of competitive forces in the market for the digital music platform



An assessment of Spotify‘s strengths, weaknesses, opportunities, and threats



An identification of the primary components of Spotify‘s value chain, and



A set of actionable recommendations that Spotify‘s top executive team should initiate to sustain the company‘s growth and performance.

Your report should be 5+ pages and should include an assortment of original (not copied from the case!) charts, tables, and exhibits to support your analysis and recommendations. 

Prepare a brief report to Spotify‘s CEO Daniel Ek outlining the two to three top priority issues that the company management needs to address and the actions that need to be initiated to address these issues. Your report should contain detailed and convincing reasons to justify each of your recommendations. Each recommendation needs to be based on (a) conclusions drawn from the application of the concepts and analytical tools discussed in Chapters 1–6 (those applicable).

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Assignment Questions 1. What are the key elements of Spotify‘s strategy? What keeps them competitive compared to other streaming platforms?

2. How would you describe Spotify‘s business model considering its subscription tiers? What makes it different?

3. What are the value chain components of Spotify as a streaming music platform and how does the company deliver value?

4. What does a SWOT analysis reveal about the overall attractiveness of Spotify‘s situation?

5. How do you characterize Spotify‘s growth strategy? Have they achieved a stronger position and how?

6. What recommendations would you make to Daniel Ek to sustain the rate of growth at Spotify?

Teaching Outline and Analysis kkk. What are the key elements of Spotify‘s strategy? What keeps them competitive compared to other streaming platforms?

Access Worldwide: Spotify is an international media services provider that includes digital music, podcasts, and video streaming. The company allows access to millions of songs and other content from artists to subscribers all over the world. Spotify prides itself in transforming how people listen to music by offering what they call an "access-based" model allowing users to stream music versus buying music.

Freemium: The company's subscription plans include a standard plan, a family plan, and a student plan. The subscription-free plan provides ad-supported users limited online access to its catalog on a range of devices, including computers, phones, tablets, speakers, TVs, and cars. Listeners have the opportunity to try Spotify risk-free, enabling the company to build a funnel toward establishing a larger and growing subscriber base.

Personalization: This is the ability to introduce the user to the next favorite song and artist.

This is one of the top reasons Spotify listeners sign up for the service. Subscribers can access

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tracks and podcasts free or upgrade to Spotify premium to access more exclusive features that include improved sound quality and on-demand, offline, and ad-free listening.

Ubiquity: Spotify‘s goal is to be available to anyone on any device. The company has gone from 250 partners to more than 2000, with integrations ranging from wearables to all facets of connected life, including cars and kitchen appliances. This new move has proven to be a significant driver of new users to the Spotify platform, with 20% of all new subscribers coming from these partners.

Podcast Innovation: Format innovation allowed the integration of music tracks into shows and generated payment for music rights holders. Video podcasts allow listeners to not only listen but also watch their favorite podcasts. Interactivity creates a direct, on-platform connection between listeners and creators. Spotify Live allows top Podcasters to live stream audio to their fans and reach their listeners where they are. Monetization includes advertising, podcast subscriptions that unlock a meaningful revenue model for many creators, and Spotify Open Access.

LTV—Lifetime Value: This metric provides insight into the true value provided to consumers, creators, and the company business. It is a powerful instrument that predicts which continent yields longer-term retention engagement and happiness, with a goal to maximize the value of all Spotify users.

Vision Statement: Crafting and executing a strategy is an ongoing process that Spotify understands well. Starting with its vision statement, Spotify‘s focus and direction are on facilitating a cultural exchange through digital content made available to all users. Spotify believes they are the promoter of international societal improvements via cultural relations.

Culture is the focus of the company's direction; they view themselves as promoting harmonious relationships.

Mission Statement: The company's mission statement describes its business as one that supports the work of human creativity; in this case, the artist; Spotify allows consumers to enjoy and be inspired by such creative work. The company's mission statement includes two stakeholder groups, creators, and consumers. As a music marketplace and global platform, Spotify offers profitable opportunities for artists to sell music and for consumers to access enjoyment through its many subscription tiers. This approach sets the stage for Spotify's business model.

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To set itself apart from the competition, Spotify employs a cost-leadership strategy by offering different subscription tiers to meet the needs of different consumer markets. A lowcost provider strategy involves a low-cost position and a broad scope. The low-cost position creates a strategic advantage by offering an attractive price, and the broad scope targets the growing number of online subscribers. This strategy contributes to Spotify‘s rapid growth strategies, which include market penetration and market development. lll. How would you describe Spotify‘s business model considering its subscription tiers? What makes it different?

Business Model & Generic Strategy A company‘s business model outlines a company‘s customer value proposition and the company‘s profit formula. Spotify‘s business model includes its premium service and unlimited access to its streaming service. The value in this model includes the subscription tiers and the removal of advertisements. This model's design focus is on the customer's recurring payments to access its value-added services.

Spotify‘s freemium business model is a revenue-generating model based on the company‘s user base. Spotify‘s streaming service has two tiers, the advertisement-supported free tier, and the premium tier. Subscribers who access free streaming music, access intermittent advertisements integrated into their listening experience. The goal of the ad-supported model is to enhance the adoption and create a self-serving funnel where free users become premium subscribers.

The premium business tier has a lower number of subscribers yet generates many times the revenues of the ad-supported business tier. For example, in Q1 2022, the premium tier generated almost six times more revenue than the ad-supported free tier.

Spotify also employs a platform business model. A platform business model facilitates interactions across a large number of consumers. Global digital technology infrastructures mostly support platform business models. Unlike linear models, which take in raw materials, create components or services and sell them, a platform model facilitates a value exchange between two groups, allowing both groups to gain value. In Spotify‘s case, the artist and consumer gain value from the transaction. Other examples of companies using platform business models are Facebook, Airbnb, Uber, Lyft, and Google.

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This company also takes advantage of network effects. Network effects occur when a product or a service‘s perceived value increases as more consumers use the product or service. For Spotify, the perceived value increases as more artists (content creators) and subscribers (content consumers) join its music platform. mmm. What are the value chain components of Spotify as a streaming music platform, and how do they deliver value? What are Spotify‘s resources and capabilities?

A company‘s business model and strategy need to be well matched to its resources and capabilities to create and deliver value. Spotify‘s resources and capabilities are similar to major rivals‘ core competencies such as Apple Music, Google Play, Pandora, and Amazon.

The music streaming market and digital music platform are evaluated using a VRIO and VRIN analysis. Value, rarity, inimitability, and organization are used in the VRIO framework. Non-substitutability (vs organization) is used in the VRIN framework. The organization of the VRIO framework encompasses the company‘s organized management systems, processes, structures, and culture.

Spotify‘s core competencies and competitive advantage support the multinational expansion of the music streaming service. The VRIO framework points to the company‘s core competencies as being imitable and the VRIN points to possible substitutability. Spotify needs to address the threat of possible imitation services by continuing to differentiate its business and online services.

Is the resource or capability competitively valuable?

Spotify‘s noncore competencies considered valuable include a wide market reach, wide accessibility, wide reach to online advertisers, IT assets that support the company‘s growth of streaming operations, and the company‘s creative and empowering culture.

Is the resource or capability rare?

The company‘s partnerships with a multitude of right holders, and a strong operational presence in major markets, make up Spotify‘s valuable and rare resources and capabilities.

Is the resource or capability inimitable and non-substitutable?

The company‘s sustained core competencies include high-brand popularity, a major streaming music market that leads to network effects, and partnerships with device

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manufacturers (Samsung and others). A long-term competitive advantage stems from the company‘s strong digital content distribution brand. This advantage cannot be substituted with non-platform operations and value chains of the same scale. Its strategic partnerships with device manufacturers establish a strong market presence intensifying market penetration that increases the number of subscribers to its on-demand music streaming service.

Temporary Noncore Competencies.

The noncore competencies are related to information technologies and systems.

Competencies such as wide market reach, wide accessibility, and wide reach to advertisers provide only a temporary competitive advantage because competitors possess the ability to develop the same competencies for the value chain operations of their respective platforms‘ value chain operations. For Spotify, its noncore competencies do not allow the company to maintain a sustained competitive advantage when compared to rivals such as Apple and Amazon.

Does Spotify have the organizational capability to exploit resources?

Spotify‘s brand is an organizational resource that provides a sustainable and long-term competitive advantage. The company‘s major market share is also an organization core competency. As the user base population increases, so does the service attractiveness, and the value chain benefits to its users.

Spotify‘s partnerships with device manufacturers is the third organization core competency identified in the value chain. This capability strengthens the company‘s market position and optimizes the value chain by making Spotify the default in devices like Samsung smartphones.

Spotify uses customers‘ inputs as data analytics to provide value-added services and fulfill its nnn.

What does a SWOT analysis reveal about the overall attractiveness of Spotify‘s situation?

Spotify’s SWOT Analysis Evaluating a company‘s overall situation requires examining the company‘s resources and capabilities and the degree to which the company pursues opportunities, defends against external threats, and how it capitalizes on its strengths and corrects its weaknesses.

Internal Strengths

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Spotify has a number of strengths it needs to continue to build on: 

The company is a multinational streaming music provider with a strong brand that enjoys a wide reach and accessibility based on its infrastructure. The company also enjoys demand-side economies due to its market share and subscriptions.

Spotify‘s brand name is based on the popularity of its streaming music platform and the value it delivers to consumers through free music or subscription-based tiers.

Spotify uses its brand name as a competitive advantage as it continues to increase its user base.



The wide reach and accessibility are part of its value proposition of providing streaming services around the world via its website or mobile app using the Internet and online devices. Being able to access music via Spotify‘s website or mobile app creates customer loyalty and strengthens the relationship with consumers who are less likely to leave the company.



The company has also captured demand-side economies of scale through its streaming music platform. Because of the strong brand and wide accessibility, Spotify enjoys a major share of the market along with its accompanying large user base.

Despite payments to rights holders, its market size and user base are conditions necessary to reach economies of scale.



Spotify‘s technology personalizes music selection through its selection algorithm which uses mobile-machine learning, artificial intelligence, and data sifting technology to recommend new artists and track past listening history. The algorithmic recommendations allow the discovery of new artists and the creation of customized playlists.



Spotify has an early mover advantage. Since its inception in 2006, the company continues to grow its music library and international reach into new markets. Its business model, extensive content library including podcasts and audiobooks, user interface, and high visibility have allowed the company to create a strong brand reputation.

Internal Weaknesses

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There are three main weaknesses Spotify must focus on as well: being dependent on technology and internet connectivity, the company‘s noncore competencies that can be imitated, and payment agreements to right holders. 

The benefit of streaming services is dependent on the speed of a customer's connectivity to access such services. In developing countries, Internet connectivity is slow, and high costs will reduce Spotify‘s perceived value. This is an internal factor that is difficult to overcome; however, there is a trend to improve connectivity worldwide, reducing the adverse effects of this weakness.



The fact that other streaming music companies can imitate Spotify's noncore competencies is also considered a weakness. Spotify will need to continue strengthening its unique brand and service and continue growing its already vast music collection.



For Spotify to distribute music, the company must pay for two licenses; a sound recording license agreement to cover the right to a particular recording, and a Musical Composition License Agreement, to protect the people who own the rights to the song. Each of these licenses may include other licenses such as performance rights and mechanical royalties that fall under a Composition license. The Recording license has allowed Spotify to enter into deals with three record labels: Universal Music Group, Sony Music Entertainment, and Warner Music Group.

External Threats Spotify‘s external threats are based on stakeholders‘ and competitors‘ actions. 

One of Spotify‘s threats is the competition with the major technology companies.

Platforms such as Google Play, Amazon, Apple, Pandora/SiriusXM, and YouTube are the top competitors in the music streaming industry and can potentially hinder Spotify‘s growth.



Government issues such as legal disputes and challenges in terms of costs and legal restrictions with competitors; these disputes require funds and threaten public relations and the company‘s brand image.



Negative relationship with stakeholders will discourage artists and music producers from allowing their content on Spotify further leading to reduced profitability.

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

Several artists have ended licensing agreements with Spotify over the amount of payouts. Such actions can cause backlash and give the perception of unfair business practices.



Security issues: As of 2021, Spotify has suffered from at least two cyberattacks.

Cybercriminals have been able to steal data from various popular companies. Such attacks prompted the company to issue password reset notices.

External Opportunities Spotify‘s opportunities shape its strategic trajectory. 

Spotify has a limited presence in developing countries. In light of this market position. Spotify needs to look into establishing operations in additional markets and intensifying market penetration in its existing markets. Further growth will improve profitability, as economies of scale are increased in streaming music operations.



Spotify‘s platform includes music and podcasts with the opportunity to diversify through the development of new products such as offering other digital content.



New partnerships will allow Spotify to increase its market reach. Such partnerships must deliver mutual benefits and create a competitive advantage. Spotify is the primary music streaming service included in Samsung‘s consumer electronics; Spotify can look for other such partnerships with consumer electronics manufacturers.



The music streaming industry is projected to grow to record double digits between 2022 and 2027 period. With the expanding geography of high-speed Internet and 5G technologies, the company can grab market share from traditional linear radio.

Spotify needs to continually improve its business strengths and product features and address its weaknesses. The year 2022 has increased the number of subscribers on different digital platforms. Spotify needs to take advantage of opportunities to diversify and reach new markets through new products and services. ooo. How do you characterize Spotify‘s growth strategy? Have they achieved a stronger position?

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Spotify has been able to constrain its competitor‘s ability to grow on a global scale. Amazon has only reached about 45 markets relative to the 92 in which Spotify is present. Apple has been constrained by its iOS operating systems and has not gained any traction.

Superior data collection provides Spotify with a competitive advantage. Spotify collects data four times more than Apple enabling the company to feed these data to its recommendation engines further compounding its advantages and increasing its listening utility and global reach. Aside from music data, the company also collects data on other audio categories including books, courses, meditations, sports, news, talk radio, podcasts, concerts, and live events. By aggregating this content, Spotify has become a one-stop shop for audio content.

Spotify‘s push into podcasting aligns with vertical integration to publish and distribute content and potentially become the preferred platform for podcast discovery. The company has deals with Michelle Obama, DC Comics, Kim Kardashian, and the Joe Rogan Experience, among others. Between 2019 and 2020, Spotify acquired Gimlet (original podcast content), The Ringer (pop culture and sports content), Parcast (original content), and Anchor (distribution and monetizing of podcast content).

In late 2020, Spotify acquired Megaphone platform. Megaphone offers a suite of powerful podcasting tools that will help publishers create, monetize, and measure their podcast business. Whooshkaa‘s broadcast-to-podcast technology, a separate company acquisition, will be integrated into the Megaphone platform, allowing radio broadcasters to more easily turn existing audio content into a podcast. In 2022, Spotify also acquired Podsights, a podcast that will help advertisers understand how podcast ads drive relevant action; and Chartable, an analytics platform to help publishers grow their audiences.

From podcasts to digital audiobooks, Spotify has also acquired Findaway, a global leader in digital audiobook distribution. This new move will accelerate Spotify‘s entry into the audiobook industry, enabling faster innovation and bringing audiobooks to Spotify‘s existing listeners.

The company‘s vertical integration offers the potential for Spotify to be the Google of audio search. This growth also leads to a change in its cost structure with more fixed costs replacing variable costs paid to music labels. A drive to more in-house content will also drive operating leverages.

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Spotify‘s growth has grown in line with user growth and the gross profit has tripled over the last five years. The company has generated positive operating cash each year, including more than 1 billion in cumulative free cash flow.

The company‘s goal over the next three to five years and long term (the next decade) is to deliver more than 20% revenue growth. The favorable margin drivers have led to further expansion of the music margin. ppp. What recommendations would you make to Daniel Ek to sustain the rate of growth at Spotify?

It will be good to encourage students to think of ways to keep Spotify as the number one music streaming platform, especially with the plethora of emerging platforms becoming available. 

Look for new partnership opportunities. The next phase of growth will be driven by emerging platforms such as connected cars, gaming devices, workout equipment, and smart speakers. The integration of music via any of these devices increases the value of music streaming and moves from a nice-to-have to a must-have service.

New partnerships will allow Spotify to increase its market reach. Such partnerships must deliver mutual benefits and create a competitive advantage. Spotify is already the primary music streaming service included in Samsung‘s consumer electronics.

The company can look for other such partnerships with consumer electronics manufacturers.



Continue to use social media to cultivate strong and lasting relationships.

Continue to engage with millennials in ways that feel authentic and real. An example of this is Spotify‘s twitter handle @SpotifyCares, where the company listens to customer‘s experiences, and Spotify‘s Snapchat channel, where the company engages fans through short messages and short music video clips.



Focus on data analytics and content curation. The company needs to continue focusing on data analytics. Spotify has a treasure trove of data from over 406 million users that it can use to deliver value to artists and record companies by showing demand and preference by geography and demographics that can potentially optimize label spending.

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Discovery and curation are essential components for Spotify. By providing personalization, the company drives engagement that leads to feeding more data algorithms which further improves playlist personalization and keeps listeners engaged. 

Continue to focus on podcasting. Podcasting is still relatively new with incredible growth potential. For Spotify, podcasting provides a new form of scalable content without the high marginal costs (i.e., paying out royalties to labels). There are endless ways to entertain, educate, challenge, and inspire while breaking down cultural barriers.

EPILOGUE There was nothing new to report at the time that this TN went to press. The company‘s latest press releases and financial reports can be found at investors.spotify.com.

Case 7 Teaching Note Tesla’s Strategy in 2022: Can It Deliver Sustained Revenue Growth and Profitability?

Overview Tesla‘s strong financial and operating performance in 2021 signaled that the company may have reached a stage where the company was poised to be competitively successful and on track to deliver the profitability that investors were hoping for. 

Tesla delivered over 936,000 new vehicles to customers in 2021, an 87 percent increase over the 499,647 vehicles delivered in 2020. Buyer demand for Tesla‘s models was so strong that the company spent zero dollars on advertising to achieve its record sales volumes.



The company‘s automotive revenues rose from $27.2 billion in 2020 to $47.2 billion in 2021, and Tesla‘s 2021 net income was a record $5.5 billion, up from $721 million in 2020 and a net loss of $862 million in 2019.

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

Tesla generated $5.0B of free cash flow in 2021—after spending $6.5B to build out new factories and on other capital expenditures.



The company had annualized production capacity of 1.22 million vehicles as of February 2022 and was preparing to begin production in two new plants—one in Austin, Texas and one on the outskirts of Berlin, Germany, both of which would initially be used to produce the company‘s best-selling Model 3 sedan and its recently introduced Model Y, an SUV version of the Model 3. The Model Y was expected to become Tesla‘s most popular vehicle. Tesla CEO Elon Musk said that within a few years he expected that worldwide annual demand for Model 3 and Model Y would be on the order of 750,000 and 1.25 million units, respectively. Production at the Austin plant would be used to supply Model 3 and Model Y buyers in the eastern United States and also to produce the company‘s forthcoming Cybertruck and Tesla Semi truck, while the Berlin plant would supply vehicles to customers all across Europe, Scandinavia, and the Middle East.



Due to continuing improvements in operating efficiencies and the ability to spread fixed costs over a much higher production and sales volumes, Tesla's operating profit margin went from ˗03 percent in 2019 to 6.3 percent in 2020 to 12.1 percent in 2021 and was expected to rise comfortably above 15 percent in 2022.



Tesla‘s software engineering team made significant headway in achieving full selfdriving capability for Tesla vehicles. During the last quarter of 2021, the team released seven updates of its full self-driving (FSD) Beta software and increased the number of FSD Beta vehicles on the road from several thousand to over 60,000 in January 2022.

CEO Elon Musk predicted that Tesla would achieve full self-driving capability for Tesla vehicles equipped with FSD software sometime in 2024.

Following the January 26, 2022 announcement of Tesla‘s 2021 financial results and management‘s outlook for 2022, Tesla‘s stock price closed at $937 per share, equal to a lofty 165 times 2021 earnings per share. However, this was 34 percent below Tesla‘s 52-week high share price of $1,243 achieved on November 1, 2021. Over the next two months, in the midst of Russia‘s invasion of Ukraine and growing investor concerns about 8 percent inflation, Tesla‘s stock price rose back to over $1,100 per share on news that production of the Model Y had begun at the plants in Austin and Berlin.

SUGGESTIONS FOR USING THE CASE Tesla is an intriguing company headed by a very intelligent CEO, Elon Musk, who has an affinity for making bold and strategically astute decisions about how Tesla is going to revolutionize the global automobile industry and supplant gasoline-powered vehicles with

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battery-powered vehicles. In all likelihood, students will find this a fascinating case and will be quick to express their opinions/convictions about the company, about Elon Musk‘s strategic vision, about the strategy that Tesla is pursuing, and about the company‘s prospects for longterm competitive success. As you and a number of your students probably know, Tesla is one of the most widely watched companies in the world, and news of its every move and every quarterly report attracts widespread attention and rapt investor interest.

The content of the Tesla case ties tightly to Chapters 1–7 and is best suited for the second half of your module on business strategy when students will likely have a bit stronger command of how to apply the concepts and analytical tools covered in the first seven chapters of the text. Students definitely need to have read Chapter 7 before being assigned the Tesla case because Tesla is pursuing a global strategy in a globally competitive industry that is dominated by global competitors.

The case contains detailed information on Tesla‘s emergence as an important and fast growing company, the various elements of Tesla‘s strategy, and the company‘s performance—both financially and strategically. While the case is a bit lengthy (25 pages), the full story of what Tesla is doing, the scope of its ambitions, and the rationales underlying the company‘s assorted strategic initiatives all need to be laid out in order for class members to have enough information to draw conclusions about the soundness of Tesla‘s strategy and the company‘s prospects for market success. The analysis that students need to do in this case is not particularly demanding or extensive. The big debate—which certainly can be argued both pro and con—is whether Tesla can ―pull it off‖ and be the disruptive catalyst for transforming the world‘s automobile industry in the manner that Elon Musk envisions. This calls for thoughtful business judgment on the part of class members and whether the company is or is not likely to be able to surmount all the hurdles it faces.

The Connect-Based Exercise for the Tesla Case. We developed an exercise for Tesla case for inclusion in the publisher‘s Connect Management web-based assignment and assessment platform because: 

The content of the case ties links nicely with many of the topics covered in Chapters 1 through 7.



One of the purposes of the case exercises is to drill students in applying the concepts and analytical tools discussed in the chapters to the circumstances posed in the cases.

It should take class members roughly 45–60 minutes to complete the exercise, assuming they have done a conscientious job of reading the case and absorbing the information it contains. Be aware that there is ample room for differing views as to whether Tesla is or is not likely to be

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competitively successful in the upcoming years.

What to Tell Students in Preparing the Tesla Case for Class. To give students guidance in what to do and think about in preparing the Tesla case for class discussion, we strongly recommend two things: 1. Have class members complete the Connect-based exercise for the Tesla case in the event you have opted to make the Connect package for the 8th edition a part of the materials required for your course.

OR 2. Provide class members with assignment questions and insist that they prepare good notes/answers to these questions before coming to class. Our recommended assignment questions for the Tesla case are presented in the next section of this TN. You may wish to have the class concentrate their attention on a subset of these questions, depending on how you want to handle the class discussion.

To facilitate assigning study questions and making them available to students, we have posted a file of the Assignment Questions contained in this teaching note in the instructor resources section of the Connect Library. (You should be aware that there is a set of assignment questions posted in the Connect Library for each of the cases included in the 8th Edition.) In all instances, these assignment questions correspond to the assignment questions in the teaching note for the case.

In our experience, it is quite difficult to have an insightful and constructive class discussion of an assigned case unless students have conscientiously made use of pertinent core concepts and analytical tools in preparing substantive answers to a set of well-conceived study questions before they come to class. In our classes, we expect students to bring their notes to the study questions to use/refer to in responding to the questions that we pose. Moreover, students often find that a set of study questions is useful in helping them prepare oral team presentations and written case assignments—in addition to whatever directive question(s) you supply for these assignments. Hence, we urge that you provide students with assignment questions—either those we have provided or a set of your own questions—for all those aspects of a case that you believe are worthy of student analysis or that you plan to cover during your class discussion of the case.

Utilizing the Guide to Case Analysis. If this is your first assigned case, you may find it beneficial to have class members read the Guide to Case Analysis posted in the Connect Library.

The content of this Guide is particularly helpful to students if your course is their first experience with cases and they are unsure about the mechanics of how to prepare a case for class discussion, oral presentation, or written analysis.

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Suggested Assignment Questions for an Oral Team Presentation or Written Case Analysis.

We definitely recommend use of the Tesla case for written assignments and oral team presentations. Our suggested assignment questions are as follows: 

Tesla CEO Elon Musk has employed you as a consultant to assess the company‘s overall situation as of mid-2022 and recommend a set of actions to improve the company‘s future prospects. Please prepare a report to Mr. Musk that includes (1) the pros and cons of Tesla‘s strategy, (2) an evaluation of Tesla‘s financial performance as shown in case Exhibit 2, and (3) your recommendations to further improve Tesla‘s competitive standing a financial performance. Your report should be five or six pages, plus it should include an assortment of charts, tables, and exhibits to support your analysis and prospects for longterm success.



Prepare a brief report to Tesla CEO Elon Musk outlining (1) the three or four top priority issues that Tesla management needs to address in the second half of 2022 and on into 2023–2024 and (2) what changes/adjustments in Tesla‘s strategy that you would recommend that Elon Musk consider to further improve the company‘s competitive standing and financial performance.

ASSIGNMENT QUESTIONS 1. What are the key elements of Tesla‘s strategy?

2. Which one of the five generic competitive strategies discussed in Chapter 5 most closely approximates the competitive approach that Tesla is employing?

3. Are you impressed by the strategy Elon Musk has crafted for Tesla? Why or why not?

4. What is your assessment of Tesla‘s financial performance as shown in case Exhibit 2?

Use the financial ratio information in Appendix following Chapter 10 to assist you in calculating a revealing set of financial ratios and interpreting them.

5. What do we learn from the data in case Exhibits 4 and 5 and the accompanying discussion of the electric vehicle segment of the global automotive industry?

6. What are the issues/problems that Elon Musk and other members of Tesla‘s top management team need to address as of mid-2022?

7. What changes/adjustments in Tesla‘s strategy would you recommend that Elon Musk consider? You answer should include all of the recommended actions Musk and Tesla should take to continue to improve the company‘s competitive standing and financial performance.

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TEACHING OUTLINE AND ANALYSIS qqq.

What are the key elements of Tesla‘s strategy?

Class members should have little trouble identifying the following key elements of Tesla‘s strategy: 

Product line strategy—Offer a number of models for customers to choose from—the Model S, the Model X crossover, the mass-market Model 3, and the mass market Model Y crossover. Follow the Model Y with other models—the Cybertruck, Tesla Semi, and a new Roadster 2 model.

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Distribution Strategy—This strategy element initially entailed selling its vehicles directly to buyers and also providing them with after-sale service through a network of companyowned sales galleries and service centers. This contrasted sharply with the strategy of rival motor vehicle manufacturers, all of whom sold vehicles and replacement parts at wholesale prices to their networks of franchised dealerships that in turn handled retail sales, maintenance and service, and warranty repairs. Management believed that integrating forward into the business of traditional automobile dealers and operating its own retail sales and service network had three important advantages: 7. The ability to create and control its own version of a compelling buying customer experience, one that was differentiated from the buying experience consumers had with sales and service locations of franchised automobile dealers. Having customers deal directly with Tesla-employed sales and service personnel enabled Tesla to (a) engage and inform potential customers about electric vehicles in general and the advantages of owning a Tesla in particular and (b) build a more personal relationship with customers and, hopefully, instill a lasting and favorable impression of Tesla Motors, its mission, and the caliber and performance of its vehicles.

8. The ability to achieve greater operating economies in performing sales and service activities. Management believed that a company-operated sales and service network offered substantial opportunities to better control inventory costs of both vehicles and replacement parts, manage warranty service and pricing, maintain and strengthen the Tesla brand, and obtain rapid customer feedback.

9. The opportunity to capture the sales and service revenues of traditional automobile dealerships. Rival motor vehicle manufacturers sold vehicles and replacement parts at wholesale prices to their networks of franchised dealerships that in turn handled retail

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sales, maintenance and service, and warranty repairs. But when Tesla buyers purchased a vehicle at a Tesla-owned sales gallery, Tesla captured the full retail sales price, roughly 10 percent greater than the wholesale price realized by vehicle manufacturers selling through franchised dealers. And, by operating its own service centers, it captured service revenues not available to vehicle manufacturers who relied upon their franchised dealers to provide needed maintenance and repairs.

Furthermore, Tesla management believed that company-owned service centers avoided the conflict of interest between vehicle manufacturers and their franchised dealers where the sale of warranty parts and repairs by a dealer were a key source of revenue and profit for the dealer but where warranty-related costs were typically a substantial expense for the vehicle manufacturer. 

In February 2019 Tesla unexpectedly announced it was closing most of its sales galleries in malls and shopping centers and would henceforth sell its cars only online.

The shift was made partly to reduce employee headcount and operating expenses and partly to relax lobbying efforts in states that did not permit manufacturers to own and operate their own dealerships. As part of the shift, new owners were granted up to a week to return their newly purchased Tesla vehicle if they were not satisfied. In the same announcement, Tesla said it would be shifting resources to improve its repair service systems, with the goal of providing same-day service to Tesla owners.



Tesla expected that dealer associations in some states would continue to challenge the company‘s efforts to sell directly to customers and to own and operate its own service locations, but Tesla management intended to actively fight such efforts. To sell vehicles to residents of states where the company could not be licensed as a dealer, Tesla made arrangements to conduct the transfer of title out of the state. In these states, it also opened ―galleries‖ that served the purpose of educating prospective buyers about Tesla products and how to obtain them (but such galleries did not take any orders for vehicles or perform any title transfer services).



In 2020, Tesla provided the owners of Tesla vehicles with needed repair and maintenance service at Tesla Service Centers and via Mobile Service Technicians.

Tesla Roadster owners could upload data from their vehicle and send it to a service center on a memory card; all other Tesla owners had an on-board system that could communicate directly with a service center, allowing service technicians to diagnose and remedy many problems before ever looking at the vehicle. When maintenance or service was required, a customer could schedule service by contacting a Tesla service center or, in a growing number of locations, use the Tesla mobile app to make

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arrangements to have service performed at their home, office, or other remote location by a Tesla Mobile Service technician who had the capability to perform a variety of services that did not require a vehicle lift. Some service locations offered valet service, where the owner‘s car was picked up, replaced with a well-equipped loaner car, and then returned when the service was completed—there was no additional charge for valet service. Mobile service technicians could perform most warranty repairs, but the cost of their visit was not covered under the New Vehicle Limited Warranty. Mobile service pricing was based on a per visit, per vehicle basis; there was a $100 minimum charge per visit. Tesla‘s mobile service fleet consisted of 743 vehicles at year-end 2019, with coverage of all of North America. In early 2018, the company reported its mobile service fleet in North America was completing 30 percent of all service jobs at a cost below the average fees charged at its service centers. 



A major component of Tesla‘s strategy to build rapidly growing long-term demand for its vehicles and to provide good customer service was to make battery recharging while driving long distances convenient and worry-free for all Tesla vehicle owners.

Tesla‘s recharging solution was to establish an extensive geographic network of Supercharger recharging stations that were strategically placed along major highways connecting city centers, usually at locations with such nearby amenities as roadside diners, cafes, and shopping centers thereby enabling owners to have a brief rest stop or get a quick meal during the recharging process—about 90 percent of Model S and Model X buyers opted to have their vehicle equipped with supercharging capability when they ordered their vehicle. Tesla owners charged their vehicles at home more than 90 percent of the time and used Supercharger stations mainly for trips or when they needed extra range. All Model S and Model X owners were entitled to free supercharging service at any of Tesla‘s Supercharging stations; Model 3 and Model X owners had to pay a recharging fee. In March 2018, Tesla announced price increases for its Supercharging stations to about $0.25 per kWh. A 50 percent recharge took 20 minutes, an 80 percent recharge took 40 minutes, and a 100 percent recharge took 75 minutes. As of year-end 2019, Tesla had a total of 1,821 Supercharger stations globally; most Tesla stations had between 6 and 30 charging spaces, but newer stations in high-traffic corridors had as many as 50 spaces, a customer lounge, and a café.

Technology and product development strategy—Spend aggressively enough on R&D to design, develop, test, and refine the components and systems for updated versions of the Model S, Model X, and Model E to get production for the Model Y geared up and meeting the desired production volume targets unit production cost targets, and to push

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along the development of the Cybertruck, Tesla Semi, and new Roadster 2.

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

Headed into 2022, Tesla had spent $11 billion on R&D activities to design, develop, test, and refine the components and systems needed to produce top quality electric vehicles and, further, to design and develop prototypes of the Tesla Roadster, Model S, Model X, Model 3, Model Y, Cybertruck, and Tesla Semi vehicles (see Exhibit 2 for R&D spending from 2017 through 2021).

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Tesla executives believed that the company had developed core competencies in powertrain and vehicle engineering and manufacturing.



The company‘s core intellectual property was contained in its electric powertrain technology—the battery pack, power electronics, induction motor, gearbox, and control software that enabled these key components to operate as a system. Tesla personnel had designed each of these major elements for the Tesla Roadster and Model S; much of this technology had been further improved and refined in the powertrain systems being used in the Model X, Model 3, Model Y, and the prototypes for the Cybertruck and Tesla Semi.



Although Tesla had more than 500 patents and pending patent applications domestically and internationally in a broad range of areas, in 2014, Tesla announced a patent policy whereby it irrevocably pledged the company would not initiate a lawsuit against any party for infringing Tesla‘s patents through activity relating to electric vehicles or related equipment so long as the party was acting in good faith. Elon Musk said the company made this pledge in order to encourage the advancement of a common, rapidly evolving platform for electric vehicles, thereby benefiting itself, other companies making electric vehicles, and the world.

Battery Pack. In February 2014, Tesla announced that it and various partners, principally Panasonic—Tesla‘s supplier of lithium ion batteries since 2010—would invest $4 to 5 billion through 2020 in a ―gigafactory‖ capable of producing enough lithium ion batteries to make battery packs for 500,000 vehicles. Tesla expected the new plant (named the Tesla Gigafactory, later changed to Gigafactory 1) to reduce the company‘s battery pack cost by more than 30 percent—battery packs were the most expensive component in the company‘s electric vehicles. In 2019, Tesla announced it would continue expanding Gigafactory 1 over the next few years so that its battery-making capacity would significantly exceed the volume needed for 500,000 vehicles per year when construction first started. Tesla had already added space at Gigafactory 1 to enable the manufacture of Tesla Energy‘s primary energy storage products (Powerwall, Powerpack, and Megapack) and the manufacture of Model 3 and Model Y drive units.

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In August 2019, Tesla agreed to purchase lithium ion batteries from LG Chem, a South Korean firm with a battery-making plant in China about 200 miles from Shanghai, that would be used to manufacture the battery packs for the Model 3 and Model Y vehicles produced at the new Shanghai plant—LG Chem was the world‘s second largest manufacturer of lithium ion battery cells. Earlier in 2019 Tesla acquired Maxwell Technologies, a maker of ultracapacitors—energy storage devices that could charge and discharge rapidly, perform at a wide range of temperatures, had high power density, and long operational life; Maxwell‘s dry electrode technology could be applied to batteries of varying chemistries and offered the advantages of higher battery performance at a lower cost.

Going forward, Tesla believed it had the capabilities to quickly incorporate the latest advancements in battery technology and continue to optimize battery pack system performance and cost for its current and future vehicles. It already had proprietary technology and expertise in optimizing the design of the lithium ion cells used in its battery packs and in achieving high energy density in its battery packs at progressively lower cost, while also maintaining safety, reliability, and long life. In addition, its proprietary technological know-how included capabilities relating to systems for high-density energy storage, cooling, charge balancing, structural durability, and electronics management. Tesla had pioneered and then continuously refined its advanced manufacturing techniques to produce large quantities of high-quality battery packs at progressively lower cost per unit.

Plus, it had extensive testing and R&D capabilities for battery cells, packs, and systems, along with an expansive body of knowledge on lithium ion cell chemistry types, their performance characteristics, and lithium ion cell vendors. 

Power Electronics. As of March 2022, all of Tesla‘s models utilized an all-wheel drive powertrain with two electric motors: one mounted on the front axle and one on the rear axle. Tesla‘s powertrain design digitally and independently controlled torque to the front and rear wheels, which resulted in the vehicle having a low center of gravity and enabled near-instantaneous response of the motors to the driver‘s placing more or less pressure on the accelerator. These design features produced greater traction control and gave drivers more control of the vehicle‘s performance. Tesla engineers were engaged in developing a three-motor powertrain that would provide further increases in performance.

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Control and Infotainment Software. The battery pack and the performance and safety systems of Tesla vehicles required the use of numerous microprocessors and sophisticated software. For example, computer-driven software monitored the charge state of each of the cells of the battery pack and managed all of the safety systems. The flow of electricity between the battery pack and the motor had to be tightly controlled in

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order to deliver the best possible performance and driving experience. There were software algorithms that enabled the vehicle to mimic the ―creep‖ feeling that drivers expected from an internal combustion engine vehicle without having to apply pressure on the accelerator. Other algorithms were used to control traction, vehicle stability, acceleration, regenerative braking, and the interior climate. Drivers used the vehicle‘s information and control systems to optimize performance, customize vehicle behavior, manage charging modes and times, and control all infotainment functions. Almost all of the software programs had been developed and written by Tesla personnel. 

Starting in 2014, Tesla began devoting progressively larger fractions of its programming resources and expertise to developing and enhancing its software for vehicle autopilot functionality, including such features as auto-steering, traffic aware cruise control, automated lane changing, automated parking, driver warning systems, automated braking, object detection, a Smart Summons feature that enabled vehicles to be remotely summoned over short distances in parking lots and driveways, and fully automated selfdriving. In October 2016, Tesla began equipping all models with hardware needed for full self-driving capability, including cameras that provided 360-degree visibility, updated ultrasonic sensors for object detection, a forward-facing radar with enhanced processing, and a powerful onboard computer. Wireless software updates periodically sent to the microprocessors on board each Tesla owner‘s vehicle, together with field data feedback loops from the onboard camera, radar, ultrasonic sensors, and GPS, enabled the autopilot system in Tesla vehicles to continually learn and improve its performance. In 2019, Elon Musk said he expected Tesla‘s autopilot software to be able to handle all modes of driving within two years.

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Vehicle design and engineering strategy. Tesla had devoted considerable effort to creating significant in-house capabilities related to designing and engineering portions of its vehicles, and it had become knowledgeable about the design and engineering of those parts, components, and systems that it purchased from suppliers. Tesla personnel had designed and engineered the body, chassis, and interior of its current models. All Tesla vehicles incorporated the latest advances in mobile computing, sensing, displays, and connectivity.

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Manufacturing strategy. In May 2010, Tesla purchased the major portion of a recently closed automobile plant in Fremont, California, for $42 million; months later, Tesla purchased some of the plant‘s equipment for $17 million. Tesla executives viewed the facility—officially named the Tesla Factory—as one of the largest, most advanced, and cleanest automotive production plants in the world, and the space inside the 5.5 million square-foot main building was deemed sufficient for Tesla to produce about 500,000

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vehicles annually (approximately 1 percent of the total worldwide car production), thus giving Tesla plenty of room to grow its output of electric vehicles. 

Tesla‘s manufacturing strategy was to source a number of parts and components from outside suppliers but to design, develop, and manufacture in-house those key components where it had considerable intellectual property and core competencies (namely lithium ion battery packs, electric motors, gearboxes, and other powertrain components) and to perform all assembly-related activities itself.

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In 2014, Tesla began producing and machining various aluminum components at a 431,000-square-foot facility in Lathrop, California; an aluminum castings operation was added in 2016. Aluminum parts and components were used extensively to help reduce the weight of Tesla vehicles.

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In late 2015, Tesla completed construction of a new high-volume paint shop and a new body shop line capable of turning out 3,500 Model S and Model X bodies per week (enough for 175,000 vehicles annually). In 2016 and 2017, Tesla made significant additional investments at the Tesla Factory, including a new body shop with space and equipment for Model 3 final assembly. Shortly thereafter, Tesla leased a neighboring 500,000-square-foot building, and began a series of efforts to expand its Tesla Factory site to 10 million square feet, partly to accommodate higher-volume production of the Model S and Model X but mainly to enable high-volume production of the Model 3 and Model Y.



A key element of Tesla‘s manufacturing strategy was to make extensive use of robotics equipment to assemble its models at the Tesla Factory and at the new Shanghai Gigafactory.

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From 2016 to 2019, efforts to expand production capacity at the Tesla Factory were ongoing, partly to accommodate production of the Model S and Model X but mainly to enable high-volume production of the Model 3 and Model Y.

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In 2018–2020, the Tesla Factory contained several production-related activities, including stamping, machining, casting, plastics molding, drive unit production for the Model S and Model X, robotics-assisted body assembly, paint operations, final vehicle assembly, and end-of-line quality testing. In addition, the Tesla Factory manufactured lithium ion battery packs, electric motors, gearboxes, and certain other components for its Model S and Model X vehicles. While some major vehicle component systems were purchased from suppliers, there was a high level of vertical integration in the manufacturing processes at the Tesla Factory in 2018–2019.

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

In December 2012, Tesla opened a new 60,000-square-foot facility in Tilburg, the Netherlands, about 50 miles from the port of Rotterdam, to serve as the final assembly and distribution point for all Tesla vehicles sold in Europe and Scandinavia.

The facility, called the Tilburg Assembly Plant, received nearly complete units shipped from the Tesla Factory, performed certain final assembly activities, conducted final vehicle testing, and handled the delivery to customers throughout the European market. It also functioned as Tesla‘s European service and parts headquarters. Tilburg‘s central location and its excellent rail and highway network to all major markets on the European continent allowed Tesla to distribute to anywhere across the continent in about 12 hours. The Tilburg operation had been expanded to over 200,000 square feet in order to accommodate a parts distribution warehouse for service centers throughout Europe, a center for remanufacturing work, and a customer service center. A nearby facility in Amsterdam provided corporate oversight for European sales, service, and administrative functions.



Tesla‘s manufacturing strategy at Fremont was to source a number of parts and components from outside suppliers but to design, develop, and manufacture in-house those key components where it had considerable intellectual property and core competencies (namely lithium ion battery packs, electric motors, gearboxes, and other powertrain components) and to perform all assembly-related activities itself. In 2018– 2020, the Tesla Factory contained several production-related activities, including stamping, machining, casting, plastics molding, drive unit production for the Model S and Model X, robotics-assisted body assembly, paint operations, final vehicle assembly, and end-of-line quality testing. In addition, the Tesla Factory manufactured lithium ion battery packs, electric motors, gearboxes, and certain other components for its Model S and Model X vehicles. While some major vehicle component systems were purchased from suppliers, there was a high level of vertical integration in the manufacturing processes at the Tesla Factory in 2018–2019.



In 2018, Tesla began efforts to establish a new manufacturing facility in Shanghai, China, to produce and assemble Model 3 and Model Y models for Tesla customers in China and other parts of the Southeast Asia region. Construction of the new Shanghai Gigafactory began in early 2019 and production began in early 2020. The firstgeneration production line for the Model 3 in Shanghai was Tesla‘s first step in building a manufacturing platform that could be replicated quickly and cost efficiently across all vehicle types and in different geographic locations. Design and construction of a second production line in Shanghai were underway in 2019–2020 to add Model Y manufacturing capacity. Tesla executives believed that the second

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production line would be at least 50 percent cheaper per unit of capacity than the current Model 3–related assembly lines in Fremont. The major gains in production efficiency and approximately 50 percent lower unit costs for the Model 3‘s second production line at the Shanghai Gigafactory were attributable to the installation of a much simplified production process and even greater use of robot-assisted assembly.

Production costs for Model Y vehicles at the Shanghai Gigafactory were expected to be even lower than those for Model 3 because of ongoing improvements in the manufacturing platform at the Shanghai facility.



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In 2020, Tesla launched construction of a new Gigafactory in Germany to supply Model 3 and Model Y vehicles to Tesla customers across all of Europe and Scandinavia. Production began in the Gigafactory in Germany in March 2022.



Production began in March 2022 in the Giga Texas plant in Austin, Texas, that produced Model 3 and Model Y vehicles and would build the new Cybertruck, Tesla Semi and Roadster 2 models.

Supply chain strategy Tesla‘s various models used thousands of parts and components sourced from hundreds of suppliers across the world. Certain components purchased from these suppliers were either identical or very similar across the company‘s growing number of models, which opened opportunities for volume-based price reductions and related cost-saving efficiencies. Tesla worked to qualify multiple suppliers for each such component where it was sensible to do so, in order to reduce the bargaining power of any one supplier and to minimize production risks associated with being dependent on a single supply source. In many cases, however, components and systems were sourced from single suppliers. In such cases, the company mitigated single-source supply risk by maintaining safety stocks for key parts and assemblies and die banks for components with lengthy procurement lead times. But in some instances (like lithium ion battery cells, battery packs, and drive trains), the company opted to produce needed parts and components internally. 



Tesla‘s products also required purchasing such raw materials as steel, aluminum, cobalt, lithium, nickel, and copper. Pricing for these materials was governed by market supply and demand conditions, and sometimes by the activities of speculators—factors outside of the company‘s control. Management believed that, while the company was vulnerable to periodic spikes in the prices of particular raw materials, it nonetheless had sufficiently adequate access to supplies of raw materials to meet the needs of its operations.

Marketing strategy. From 2014 through year-end 2019, Tesla‘s principal marketing goals

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and functions were to: 

Work with interested buyers as needed either in sales galleries or online to arrange for a test drive, view existing inventories at nearby sites, or place an order for a customequipped vehicle.

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Build long-term brand awareness and manage the company‘s image and reputation.

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Develop and nurture brand loyalty among existing owners of Tesla vehicles and help generate customer referrals.

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Obtain feedback from the owners of Tesla vehicles and make sure their experiences and suggestions for improvement were communicated to Tesla personnel engaged in designing, developing, and/or improving the company‘s current and future vehicles.

As the first company to commercially produce a federally compliant, fully electric vehicle that achieved market-leading range on a single charge, Tesla had been able to generate significant media coverage of the company and its vehicles. Management expected this would continue to be the case for some time to come. So far, the extensive media coverage, largely favorable reviews in motor vehicle publications and Consumer Reports, praise from owners of Tesla vehicles and admiring car enthusiasts (which enlarged Tesla‘s sales force at zero cost), and the decisions of many green-minded affluent individuals to help lead the movement away from gasoline-powered vehicles had all combined to drive good traffic flows at Tesla‘s sales galleries and create a flow of orders and preproduction reservations.

As a consequence, starting in 2012 and continuing into early 2020, Tesla had achieved a growing volume of sales without traditional advertising and at relatively low marketing costs.

Nonetheless, Tesla did make use of pay-per-click advertisements on websites and mobile applications relevant to its target clientele. It also displayed and demonstrated its vehicles at such widely attended public events as the Detroit, Los Angeles, and Frankfurt auto shows.

In early 2018, Tesla negotiated marketing agreements with both Home Depot and Lowe‘s to stock and help promote its innovative Solar Roof tiles for residential and commercial roof applications. 

Vehicle leasing program. Tesla, in partnership with various financial institutions, began leasing vehicles to customers in 2014; the number and percentage of customers opting to lease Model S vehicles increased substantially in 2015. By year-end 2015, Tesla was not only offering loans and leases in North America, Europe, and Asia through its various partner financial institutions, but it was also offering loans and leases directly through its own captive finance subsidiaries in certain areas of the United States, Germany, Canada,

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and Great Britain.

Some of Tesla‘s current financing programs outside of North America in 2015–2017 provided customers with a resale value guarantee under which those customers had the option of selling their vehicle back to Tesla at a preset future date, generally at the end of the term of the applicable loan or financing program, for a predetermined resale value. In certain markets, Tesla also offered vehicle buyback guarantees to financial institutions that could obligate Tesla to repurchase the vehicles for a predetermined price. These programs, when first introduced in 2015 and 2016 had been widely publicized and attracted numerous buyers, but Tesla determined in late 2016 and 2017 to back away from these offers in most countries because they were proving unprofitable, had unattractive accounting requirements, and exposed Tesla to the risk that the vehicles‘ resale value could be lower than its estimates and also to the risk that the volume of vehicles sold back to Tesla at the guaranteed resale price might be higher than the company‘s estimates—such risks had to be accounted for by establishing a contingent liability (in the current liabilities section of the balance sheet) deemed sufficient to cover these risks. 

Selling regulatory credits to other automotive manufacturers—Because Tesla‘s electric vehicles had no tailpipe emissions of greenhouse gases or other pollutants, Tesla earned zero emission vehicle (ZEV) and greenhouse gas (GHG) credits on each vehicle sold in the United States. It also earned corporate average fuel economy (CAFE) credits on its sales of vehicles because of their high equivalent miles per gallon ratings. All three of these types of regulatory credits had significant market value because automotive manufacturers whose vehicle sales did not meet prevailing emission and mileage requirements were allowed to achieve compliance by purchasing credits earned by other automotive manufacturers. Tesla had entered into contracts for the sale of ZEV and GHG credits with several automotive manufacturers, and it also routinely sold its CAFE credits. Tesla‘s sales of ZEV, GHG, and CAFE credits produced revenues of $594 million in 2019, $419 million in 2018, $360 million in 2017, $302 million in 2016, and $169 million in 2015. In case Exhibit 2, these amounts were included on Tesla‘s income statement in the revenue category labeled ―Automotive sales‖; without these revenues, as frequently noted by Wall Street analysts, Tesla‘s losses in 2015 through 2019 would have been significantly higher.

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Tesla Energy. In 2015, Tesla formed Tesla Energy, a new subsidiary that would begin producing and selling two energy storage products in 2016—Powerwall for homeowners and Powerpack for industrial, commercial, and utility customers. Powerwall was a lithium ion battery charged either by electricity generated from a home‘s solar panels or

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from power company sources when electric rates were low. Powerwall home batteries could also be used as a backup power source in case of unexpected power outages.

Powerpack models were rechargeable lithium ion batteries that industrial, commercial, and utility enterprises could use for energy storage or backup power.

Production and deliveries of Powerwall 2 and Powerpack 2 began in late 2016. Both products had the capability to receive over-the-air firmware and software updates that enabled additional features. In 2018, these two energy storage products were being used for backup power, independence from utility grids, peak demand reduction, generating power to cover periods when solar and/or wind generating sources were unavailable, and supplying wholesale electricity to select customers.

When Solar Energy was merged into Tesla, the company arranged to lease a facility, called Gigafactory 2, in Buffalo, New York, to produce (1) solar energy systems sold to residential and commercial customers and (2) its freshly developed Solar Roof, which used esthetically pleasing and durable glass roofing tiles designed to complement the architecture of homes and commercial buildings, to turn sunlight into electricity. A thirdgeneration Solar Roof was introduced in 2019 that was marketed directly to residential customers and through an assortment of distribution partners. Installation capabilities had been enhanced by training both company personnel and the installers of third-party partners. To facilitate the growth of its solar roof business, Tesla Energy had developed proprietary software to reduce solar energy system design and installation timelines and costs and had also designed the new generation of the Solar Roof to work seamlessly with its Powerwall product.

Tesla Energy‘s solar energy systems included solar panels that converted sunlight into electrical current, inverters that converted the electrical output from the panels to a usable current compatible with the electric grid, racking that attached the solar panels to the roof or ground, electrical hardware that connected the solar energy system to the electric grid, and a monitoring device. The majority of the components were purchased from vendors; the company maintained multiple sources for each major component to ensure competitive pricing and adequate supplies.

Tesla Energy had an in-house engineering team that designed its energy storage products and created customized energy storage solutions and solar energy systems for customers.

In the United States, it used its national sales organization, channel partner network, and customer referral program to market and sell its residential solar and energy storage systems. Outside the United States, Tesla Energy used its international sales organization and a network of channel partners to market and sell Powerwall 2, and it had recently

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launched pilot programs for the sale of residential solar products in certain countries. It also sold Powerwall 2 directly to utilities, who then installed the product in customer homes.

In the United States, Tesla Energy sold its solar and energy storage products through its website and sales galleries as well as through its national sales organization, channel partner network, and customer referral program. Outside the United States, Tesla Energy used its international sales organization and a network of channel partners to market and sell Powerwall 2 to residential customers; some Powerwall 2 units were sold directly to utilities, who then installed the product in customer homes. Powerpack and Megapack systems were sold to commercial and utility customers through its international sales organization.

In December 2017, Tesla completed installation of a 100-megawatt lithium ion battery hooked into the electricity grid in South Australia to relieve power shortages created by a tornado in 2016. Elon Musk had promised that once the contract was signed, Tesla would complete the project in 100 days or it would be furnished free of charge—Tesla completed the installation in 60 days. According to Musk, the battery was three times more powerful than the world's next biggest battery. In late 2019, Tesla Energy began selling a Megapack product, multiple units of which could be grouped together to form energy generating and energy storage installations big enough to supply the needs of large industrial customers, utilities, energy generation firms, communities, and large neighborhoods. In 2019, Tesla Energy deployed more than 1.65 Gigawatt hours of energy storage systems, an amount greater than in all previous years combined.

Tesla‘s revenues from energy generation and storage products were $1.1 billion in 2017, $1.6 billion in 2018, $1.5 billion in 2019, $2.0 billion in 2020, and $2.8 billion in 2021 (Exhibit 2), resulting in gross profits of $242 million in 2017, $190 million in 2018, $190 million in 2019, and $18 million in 2020, and a gross loss of $129 million in 2021. rrr. Which one of the five generic competitive strategies discussed in Chapter 5 most closely approximates the competitive approach that Tesla is employing?

We think Tesla‘s strategy has historically been one of focused differentiation (because the Model S and the Model X were aimed at the luxury segment of the automotive industry), but one that is now rapidly evolving into broad differentiation with the growing volume of Model 3 and Model Y sales and with the forthcoming Cybertruck, Tesla Semi, and Roadster 2, all of which make the market for Tesla vehicles much broader in terms of the company‘s target customers. Even then, though, Tesla will produce electric-only vehicles—so an element of focus will still prevail. Students should certainly recognize that Tesla is pursuing a highly

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differentiated distribution strategy.

You might want to point out to the class that Tesla‘s electric vehicles have been deliberately designed to incorporate a disruptive technology and thereby revolutionize the worldwide market for motorized vehicles—in this sense, Tesla is pursuing a ―technologically disruptive strategy‖ and its battery-powered vehicles constitute a ―disruptive product.‖ sss. Are you impressed by the strategy Elon Musk has crafted for Tesla? Why or why not?

Class members are likely to be highly impressed by Elon Musk and the strategy he has crafted for Tesla. In our view, the strategy is 

Bold



Exceptionally innovative



Well-conceived and well thought out

The pieces fit together very, very nicely. And, so far, it seems to be working (except for the fact that the company has yet to prove it can operate profitably. Otherwise, we see very little to criticize or second guess as the company heads into the second half of 2020 and beyond.

To stimulate class debate, you might ask some of the following questions: 

Is the strategy risky? Too risky?



Is the market for electric-powered vehicles likely to become as big and as popular as Elon Musk envisions? Will continued low gasoline prices cut into buyer demand for Tesla vehicles or will heightened environmental concerns about the use of gasoline and other fossil fuels spur consumer demand to significantly higher levels and begin to diminish consumer preferences for gasoline-powered vehicles?



Are the odds of the strategy failing overly high or comfortably low?



What do you believe the buyers of Tesla‘s common stock think about the strategy?

Do you think they believe in the strategy and in Elon Musk?



Are the buyers of Tesla‘s common stock investing in Elon Musk or in the expectation of the bright future for Tesla vehicles or both?



What makes you nervous about the strategy or some part of the strategy?



Do you see any parts of the strategy that, in retrospect, Elon Musk might/should have

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crafted differently? ttt. What is your assessment of Tesla‘s financial performance as shown in case Exhibit 2? Use the financial ratio information in the Appendix following Chapter 10 to assist you in calculating a revealing set of financial ratios and interpreting them.

Even a cursory look at the numbers in case Exhibit 2 make it clear that Tesla has had bottomline problems since 2015. But we are strong believers in having students crunch some numbers and form an analysis-based opinion (as opposed to letting them get by with an offthe-cuff opinion).

Here is what some modest number-crunching reveals: 

Automotive sales at Tesla have (not surprisingly) mushroomed since 2017, jumping from $8.535 billion in 2017 to $44.125 billion in 2021, an impressive compound average growth rate (CAGR) of 50.8 percent.



Total revenues from all sources climbed from $11.579 billion 2017 to $53.823 billion in 2021, a CAGR of 46.3 percent.



Gross profit is up from $2.223 billion in 2019 to $13.606 billion in 2021, a CAGR of 57.3 percent.



Tesla‘s R&D expenses climbed from almost $1.378 billion in 2017 to $2.593 billion in 2021—big, but not alarming, increases due to costs associated with the Model 3, Model Y, Roadster 2, Cybertruck and Tesla Semi, battery technology, supercharger technology and other initiatives.



Selling, general, and administrative expenses jumped from $2.477 billion in 2017 to $4.517 billion in 2021—also sizeable, but actually a very big improvement as a percentage of total revenues (21.4 percent in 2017 versus only 8.4 percent in 2021).



Tesla‘s income from operations of $(1.632) billion in 2017 to $6.523 billion in 2021—very clearly a major improvement.



The company‘s net income improved from $(1.962) in 2017 to $5.519 in 2021— evidence that the company‘s business model and strategy have proven successful as scale economies and volume have been achieved.



As indicated in the text of the case, Tesla‘s sales of ZEV, GHG, and CAFE credits produced revenues of $169 million in 2015, $302 million in 2016, $360 million in 2017, $419 million in 2018, $594 million in 2019, $1.58 billion in 2020 and $1.46

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billion in 2021. Without these revenues, Tesla’s net income would still be commendable but less impressive. 

The company ended 2019 with cash and cash equivalents of $17.576 billion, with $11.497 billion generated from operations—see the cash flow data at the bottom of case Exhibit 2.

Students should conclude that Tesla‘s recent financial performance has become quite impressive as its sales volume has grown to nearly 1 million units. The company‘s profitability, liquidity, and leverage all are very acceptable. However, there is still a question about whether its stock price is overvalued. Continuing sales volume increases will be required to allow the company to provide an attractive return on investment to shareholders. uuu. What do we learn from the data in case Exhibits 4 and 5 and the accompanying discussion of the electric vehicle segment of the global automotive industry?

The data in case Exhibit 4 reveal the growing sales of electric vehicles in the United States and across the world. This growth seems likely to continue and may even accelerate as more electric vehicles models hit the market and more governments put added pressure on for consumers to switch from gasoline-powered vehicles to electric-powered vehicles.

Exhibit 5 and the accompanying discussion reveals that significant stronger competition is coming in the electric vehicle segment—all major manufacturers have recently introduced multiple models of hybrid and battery-powered electric vehicles and many more models with improved features are forthcoming. The growing array of electric vehicles that prospective buyers have to choose from will put added competitive pressure on sales of Tesla‘s brand of vehicles and the relatively high prices that Tesla charges for its models (especially those that are equipped with the features that many buyers will want). Tesla has not yet faced formidable competitive pressures from other brands of electric vehicles (as students can confirm from looking at the figures in case Exhibits 4 and 5). But the relatively weak competitive pressure that Tesla has encountered so far is definitely about to end. The period 2023–2028 will provide Tesla with a much tougher competitive test from rival electric vehicle manufacturers in China, Europe, and the United States.

It remains to be seen how many buyers in the United States, China, and Europe will opt to purchase other brands of electric vehicles, especially if/when the models offered by other manufacturers have meaningfully lower price tags than those offered by Tesla. One suspects that demand for Tesla vehicles will weaken significantly in Europe, due to much more intense competition from BMW, Mercedes, and Volkswagen. It is virtually certain that the Chinese manufacturers will pose strong competition, and many Chinese buyers may decide

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to purchase a more competitively priced Chinese brand as opposed to a premium-priced foreign brand like Tesla, notwithstanding the fact that Tesla vehicles for sale in China will have been made at Tesla‘s Shanghai Gigafactory. vvv. What are the issues/problems that Elon Musk and other members of Tesla‘s top management team need to address as of mid-2022?

Students ought to come up with a ―worry list‖ of issues/problems that includes most all of the following: 

Will buyer demand for Tesla‘s electric-powered vehicles remain robust and growing over time, given the rapid introduction of new electric car models by rival automotive manufacturers in the United States, Europe, and China?



What actions might Tesla initiate to counter or better insulate itself from growing and potentially intense competitive pressures from rivals?



How fast to boost production capabilities for the Model 3 and Model Y at the Shanghai Gigafactory? Should Tesla‘s expansion plans be based on annual sales of 500,000 vehicles (or more) in China by 2025?



How best to obtain the batteries Tesla will need for the vehicles being made at the Shanghai Gigafactory and to be made at the new plant in Germany, given that Tesla‘s battery-making capabilities in the United States will need to be used in vehicles manufactured in the United States? Should the batteries needed for vehicles produced in China and Europe be made in-house or outsourced? If the latter, then from which battery makers—a Chinese supplier for the Shanghai plant and a supplier in Europe for the plant in Germany?



Whether to give top priority to R&D spending for the Tesla Semi and the Cybertruck?

And how fast to proceed with constructing the facilities and installing the production equipment needed to get these two vehicles into the marketplace?



Does Tesla have the financial strength to raise all the capital needed to fund the planned development, production, and introduction of the Cybertruck and Tesla Semi? Should the required capital be raised by selling additional shares of stock or by issuing additional debt or a combination of both? How risky are all these investments from an investor standpoint? Can Tesla borrow at attractively low interest rates on any additional debt that it takes on?



How fast to expand the network of recharging stations in the United States, Europe, and China? To what extent will ―driving range anxiety‖ restrict buyer use of electric vehicles

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for long-distance trips? Will a big majority of current and future Tesla owners accept the inconvenience of spending added travel time for battery recharging? Will most Tesla buyers use their electric vehicles primarily for local travel and steer away from using them for long-distance travel, thus curtailing use of (and need for) an extensive geographic network of Tesla Supercharging stations? 

As Tesla begins to sell tens of thousands more vehicles annually in the United States, will traditional automobile dealers start to clamor loudly for strict enforcement of state laws prohibiting automobile manufacturers from selling direct to motor vehicle buyers and/or providing repair/maintenance services, thus forcing a major change in Tesla‘s online sales strategy and its strategy of providing maintenance and repair services to Tesla owners? Will conventional automobile dealerships in the United States stand idly by and watch Tesla‘s annual sales grow towards 1 million+ vehicles annually without putting strong pressures on local government officials to enforce existing laws prohibiting automobile manufacturing from integrating forward into retail vehicle sales and manufacturer-owned and -operated maintenance and repair services?

www. What changes/adjustments in Tesla‘s strategy would you recommend that Elon Musk consider? You answer should include all of the recommended actions Musk and Tesla should take to continue to improve the company‘s competitive standing and financial performance.

There‘s really nothing on the above worry list that Elon Musk and Tesla management are not fully aware of. Tesla management can be expected to address these issues and be proactive in making strategy adjustments. We think the action recommendations of students should include most of the following: 

Investing aggressively in additional production capacity to get more Model 3s and Model Ys into the marketplace quickly and fill customer orders for them should certainly be a top priority action initiative at Tesla.



Unless and until higher buyer demand materializes in China and Southeast Asia, a capacity of 500,000 vehicles should be adequate; Tesla can expand the production capacity at the Shanghai facility as need to meet buyer demand in excess of 500,000 vehicles annually.



Tesla should devote sufficient R&D expenditures to the Cybertruck and Tesla Semi to get these models into the marketplace in North America as fast as possible (late 2021 or early 2022 for the Cybertruck and shortly thereafter for the Tesla Semi). Exports of these two models can begin as soon as production volumes permit.

Many students may argue that the Cybertruck should be redesigned to resemble that of a

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more traditional pickup truck—the current design is extreme and unnecessarily offputting, thereby likely resulting in lower sales volume than might otherwise be achieved. 

Tesla should probably plan to keep production of Models 3 and Y at near-capacity levels at the Tesla Factory and the Shanghai Gigafactory for 2022–2023 and beyond; if demand for these models in China lags what can be produced at the Shanghai Gigafactory, the surplus can be exported to buyers in other countries in Southeast Asia or to Europe.

Because production costs for the Model 3 and Model Y are presumably a good bit lower at the Shanghai plant than the Fremont plant, it is more economic for the exports of these models to Europe to come mainly from Shanghai rather than from Fremont.



Tesla may need to institute price cuts for the Model S and Model X to stimulate/sustain buyer demand.



To counter growing competition from the initiatives of rival automakers to introduce a growing array of electric vehicles and grow their sales of battery-powered vehicles, Tesla should consider the following:





Make sure that it offers Model 3s and Model Ys that are price competitive with the models offered by rivals. This means having models available that are not so heavily loaded with options and that sell for close to the base prices, thereby enabling it to attract price-conscious buyers.



If rivals are attracting buyers by offering models below the base prices of Tesla‘s Model 3 and Model Y, then Tesla has to consider lowering its base prices for these two models.



Tesla should promote the performance, quality, and reliability of its vehicles, perhaps even developing performance comparisons of Tesla models versus specific models of rivals on its website.



To educate buyers to the features and performance characteristic of Tesla models versus those of bestselling rival models, Tesla my need to engage in media advertising.

Because it does not make any economic sense for each manufacturer to establish its own network of charging stations for use by buyers of its brand of vehicles, it may be time for Tesla to take the lead and propose that one or more third parties develop chains of charging stations for use by the owners of any brand of battery-powered electric vehicle.

Tesla could then sell some/all of its supercharger stations to one or more of these third parties. The widespread availability of charging stations that can serve all electric vehicle

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owners would do much to relieve the range anxiety of electric vehicle owners when traveling several hundred miles or more. 

So far, Tesla management is currently contending fairly well with the efforts of automobile dealer associations to attack Tesla‘s sell-direct and service-direct strategy— although the jury is definitely out on how long this success will continue when Tesla‘s sales volumes become a bigger percentage of the market in more and more states.

Clearly, Tesla needs to retail the ability to sell directly to buyers and to provide them with service. Having to establish a Tesla dealer network across the United States would put Tesla at a competitive disadvantage (at least temporarily) because its market penetration is too low in most all geographic locations to support independent dealers to operate profitably

The point here is that students will likely have a hard time suggesting new/different actions beyond those that are fairly obvious to Tesla management. Many class members are likely to conclude that Tesla should continue with the present strategy and then respond boldly and promptly when conditions in the marketplace change in unanticipated ways or when it encounters problems or stumbling blocks that call for strategy adjustments of one kind or another.

EPILOGUE For the very latest information on developments at Tesla, we urge that you check the press releases and the investor relations section at www.tesla.com. Information on sales of electric vehicles by model is accessible at www.insideevs.com.

Case 8 Teaching Note Ulta Beauty’s Race to Win in an Omnichannel World* OVERVIEW Ulta Beauty Inc. (Ulta) was founded in 1990 by Richard E. George and Terry Hanson. For the company‘s first 22 years, consumers could only buy its cosmetics and beauty products from company bricks-and-mortar stores, primarily located in shopping malls. In 2012, Ulta developed and rolled out an omnichannel strategy enabling consumers to purchase solely in stores, online for in-store pickup, or online for home delivery. Led by CEO Mary Dillon, Ulta devoted its efforts in the years that followed toward training its employees in product knowledge and customer service, revamping its in-store locations, creating virtual try-on tools via its mobile app, all with the intention of providing improved consumer experiences.

Coincident with the onset of the COVID-19 global pandemic, on March 11th, 2020 Ulta named

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former company president Dave Kimbell to be its new CEO to replace Dillon, who in turn was promoted to executive chair of the company‘s board of directors. In August 2020, as an attempt to continue its leadership in the omnichannel world, Ulta announced the partnership with Target to create ―Ulta Beauty at Target,‖ a store-within-a-store.

By 2021, Dillon and Kimbell were considering which channels Ulta‘s consumers would be most likely to use in the future. In late October 2021, Ulta unveiled a $20 million Digital Innovation Fund to form closer partnerships with innovators, entrepreneurs, early-stage investors, and other agents of change to transform the future of beauty, retail, and commerce. At the same time, Ulta announced that it was embarking on new, multiyear cost savings targets of $150 million to $200 million in order to fund investments in future growth initiatives.

Notwithstanding these measures, top management remained uncertain if Ulta was correctly positioned to succeed in an omnichannel industry, much less if COVID-19 and the restrictions imposed by government officials to protect public health and safety were likely to be lifted any time soon. Dillon and Kimbell had difficult decisions to make in early 2022 to improve Ulta‘s competitive position in an unprecedented trading environment, while crafting the optimal strategic mix to propel their company towards omnichannel leadership. Should Ulta should focus on store-within-a-store locations in the partnership with Target to increase target markets and foot traffic? Alternatively, the should Ulta focus on e-commerce exclusively, thereby minimizing investments in new store locations while maintaining the Target partnership on life support?

There‘s ample detail in the case for students to evaluate: 

Ulta‘s strategy before and after its current CEO, Dave Kimbell, was promoted



The attractiveness of the company in light of societal shocks, its current situation, and future prospects



The company‘s financial performance

* This teaching note reflects the thinking and analysis of Professor Armand Gilinsky, Sonoma State University. We are most grateful for his insight, analysis and contributions to how the case can be taught successfully.

SUGGESTIONS FOR USING THE CASE This new case should generate considerable student interest and provoke a lively, interesting class discussion of Ulta‘s struggle to maintain its prominence in the intensely competitive cosmetics, beauty, and fragrances industry. How much further can the company grow now and what can it do to deter rivals from taking away market share? Is Ulta‘s push towards

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omnichannel retail segments to appeal to different segments for cosmetics products sustainable or will the company‘s bricks-and-mortar operations at shopping malls, establishments experiencing highly uncertain demand at best and closures at worst become a drag on company earnings and stock price appreciation? In particular, what moves must CEO Dave Kimbell make to keep the company back on track and outdistance its major direct rival, Sephora? Should the partnership with Target be continued, beefed up, or dropped? What, if any, further changes in strategy are needed at Ulta?

The Ulta case is probably best assigned after you have covered Chapters 3–5. The topics covered in Chapters 3 and 4 are pertinent to student identification and assessment of Ulta‘s external and internal operating environments.

As a consequence, you‘ll find that Ulta is a good case for drilling students in (1) applying the tools of analysis covered in Chapters 3 and 4, (2) identifying and evaluating a company‘s strategy, and (3) identifying strategic issues/problems that merit top management attention and the proposing action recommendations to resolve these issues/problems.

The case provides an opportunity for class members to evaluate industry and competitive conditions, weigh an assortment of competitive factors, draw a strategic group map, identify driving forces and key success factors, think strategically about Ulta‘s resources and capabilities versus those of its main rivals, crunch some numbers in the financial exhibits, and make action recommendations regarding Ulta‘s future course of action.

Videos and Podcasts for Use with the Ulta Case There are numerous ―Shop with Me! Ulta Beauty Haul‖ YouTube videos that you can find on the web and show in class (or have students view on their own in an online class). However, the first video listed below probably best sets the stage for the case and could be used at the beginning of class for that purpose, while the second is also helpful: 

A 15:56 video dated May 3, 2021, that is entitled ―Mary Dillon, CEO of Ulta Beauty,‖ Dillion discusses her strategy to grow the company in retail stores and online and the future of the cosmetics industry. The presentation also covers the company‘s partnership with Target, the company‘s sustainability efforts, and Dillon‘s advice for incoming CEO Dave Kimbell.

This video can be accessed at: https://www.youtube.com/watch?v=22iylcC-HY0.



A 34:47 podcast that consists of an extensive interview with CEO Dave Kimbell, entitled ―Ulta‘s Remarkable Growth Story featuring Dave Kimbell, CEO‖ that was recorded on January 7, 2022. This podcast and/or the transcript of the interview can be accessed at: https://remarkable-retail-a0721f60.simplecast.com/episodes/ultas-remarkable-growth-

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story-featuring-dave-kimbell-ceo-4vGQvB_V. The Connect-Based Exercise for the Ulta Case. We developed an exercise for Ulta for inclusion in the publisher‘s Connect™ Management web-based assignment and assessment platform because: 

Many of the topics in this case bear directly on the material in Chapters 3 through 5.



One of the purposes of the case exercises is to drill students in applying the core concepts and analytical tools discussed in the chapters to the circumstances posed in the cases.

This particular Connect-based exercise focuses on the following five questions: 10. What does a SWOT analysis reveal about the attractiveness of Ulta‘s situation and future prospects?

11. What do PESTEL and five-force analyses along with a careful examination of case Exhibits 1, 4, and 5 reveal about Ulta‘s current and prospective operating and competitive environments?

12. What are the chief elements of Ulta‘s strategy?

13. Which one of the five generic competitive strategies discussed in Chapter 5 most closely approximates the competitive approach that Ulta is employing? Has that generic strategy evolved, and if so, how so?

14. What do the operating and financial data in case Exhibits 2, 3, 6, 7, and 8 reveal about Ulta‘s performance?

It should take class members roughly 30–45 minutes to complete the exercise, assuming they have done a conscientious job of reading the case and absorbing the information it contains. All of the questions are automatically graded, and the grades are automatically recorded in your Connect grade book, which makes it easy for you to evaluate each class member‘s ability to apply many of the concepts and analytical methods in Chapters 3–5.

Suggested Assignment Questions for an Oral Team Presentation or Written Case Analysis.

We believe the Ulta case is quite well-suited for written assignments and/or oral team presentations. Our suggested assignment questions are as follows: 

Ulta‘s CEO Dave Kimbell has employed you as a consultant to assess the company‘s

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overall situation and recommend a set of actions to improve the company‘s future prospects. Please prepare a report to Mr. Kimbell that includes: (1) an evaluation of competitive forces in the market for cosmetic products, (2) an assessment of Ulta‘s strengths, weaknesses, opportunities and threats, (3) an identification of the primary components of Ulta‘s strategy, (4) an evaluation of Ulta‘s financial and operating performance as displayed in case Exhibits 6–8, and (5) a set of action recommendations that Ulta‘s top executive team of Kimbell and Dillon should initiate in order to sustain the company‘s growth and performance. Your report should be five to six pages, plus it should include an assortment of original (not copied from the case!) charts, tables, and exhibits to support your analysis and recommendations. 

You are a consultant to Dave Kimbell, CEO and Mary Dillion, Chairperson of Ulta Beauty. Your report to Mr. Kimbell and Ms. Dillion needs to contain recommendations for keeping or restructuring Ulta's business model, building the company‘s competitive advantage, and a recommendation about its future direction. You should include an evaluation of Ulta's strategy, an assessment of its external and competitive environments, and a financial analysis. Your report should be five to six pages, plus it should include an assortment of original (not copied from the case!) charts, tables, and exhibits to support your analysis and recommendations.

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ASSIGNMENT QUESTIONS 15. What grade would you give to CEO Dave Kimbell for his efforts thus tar to guide Ulta through the COVID-19 pandemic?

16. What does a SWOT analysis reveal about the attractiveness of Ulta‘s current situation and future prospects?

17. What do PESTEL and five-force analyses along with a careful examination of case Exhibits 1, 4, and 5 reveal about Ulta‘s current and prospective operating and competitive environments? How strong are those macro-economic and competitive forces?

18. What are the major elements of Ulta‘s strategy?

19. Which one of the five generic competitive strategies discussed in Chapter 5 most closely approximates the competitive approach that Ulta is employing? Has that generic strategy evolved, and if so, how so?

20. What do the operating and financial data in case Exhibits 2, 3, 6, 7, and 8 reveal about Ulta‘s performance?

21. What three to four top priority issues do Mary Dillon, Chair of Ulta‘s Board, and Dave Kimbell, CEO need to address?

22. Based on all of the above assessments, what recommendations would you make to Ulta‘s top management to allow this company to strengthen its position in its most important markets?

TEACHING OUTLINE AND ANALYSIS xxx. What grade would you give to CEO Dave Kimbell for his efforts thus tar to guide Ulta through the COVID-19 pandemic? 

By early 2022, almost two years after the pandemic began in March 2020, Ulta Beauty did not remain complacent and always sought new ways to improve after witnessing considerable growth prior to 2019.



Kimbell thereupon correctly determined that the Beauty, Cosmetic, and Fragrance Store industry had irreversibly transitioned into an omnichannel market.



To separate themselves from their conventional mall surroundings, Sephora has teamed

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with Kohl's to construct smaller Sephora outlets within Kohl's, thus boosting rivalry in an already competitive sector. 

In response to the COVID-19 outbreak, Ulta has had to make significant changes to their business. To adapt to the emerging "omnichannel" sector, companies are expanding their business models to incorporate a better digital experience for clients, as well as delivering a greater range of items.



Sephora, Sally Beauty, and Bath and Body Works are Ulta's key competitors.



Ulta boasted the biggest market share of all the companies in the category in 2021 with 21.8 percent.



Its looming challenge in gaining a competitive advantage against indirect competitors like Amazon, Target, Walgreens, and CVS.



These businesses provide a one-stop-shop experience, making Ulta's omnichannel marketing approach of necessity.



In the not-too-distant future, physical storefronts will be phased away, leaving just ecommerce as a viable option.



In future years, investments in the development new retail sites should be reduced, with more money moving to e-commerce.



Ulta may achieve a good balance between the two rather than spending all of its time, money, and resources to store-within-a-store locations or exclusively pursuing ecommerce.



While in-store locations can help with product/brand exposure and foot traffic, ecommerce should be the major focus because it is the way of the future.



Our society has been driven into an e-trade environment as a result of the Covid-19 pandemic, with all kinds of new digital assets being generated.



We believe that Dave Kimbell has done an excellent job under the circumstances of preserving Ulta's portfolio of products, responding to unanticipated events, making a $20 million investment in digital technology, particularly in the post–COVID era, when many individuals will want to buy from the comfort of their own homes.



Kimbell thus deserves an ―A‖ grade for his efforts thus far, and although some of the members of the class may quibble with this assessment due to some less-than-rosy changes in the company‘s financial position (which will be covered in question #6),

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Kimbell has kept the company moving in the right direction while not making any radical moves that might enable company rivals to see an opening to purloin Ulta‘s categoryleading market share. yyy. What does a SWOT analysis reveal about the attractiveness of Ulta‘s current situation and future prospects?

This is an ideal opportunity to drill students on frameworks in Chapters 4 and 5, and preview strategy implementation concepts that will be covered in later chapters. It‘s also an ideal place to ask students to read the case exhibits carefully, not just gloss over them particularly case Exhibits 2 and 5.

SWOT analysis is a simple but powerful tool for sizing up a company's strengths and weaknesses, its market opportunities, and the external threats to its future well-being. See Table 1, however, please remind students that a SWOT analysis is much more than ―placing bulleted lists in boxes,‖ that is, the analysis technique involves making conclusions that lead to generation of strategic alternatives for the company.

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Table 1 SWOT ANALYSIS for ULTA Strengths

  

Industry leader with 21.8% share Well-known brand w/customer loyalty Innovative omnichannel model

Conclusion about Ulta Beauty’s situation: While Ulta Beauty is doing well as an industry leader, it still adheres to a focus on brick-and-mortar stores located in shopping malls. Its online presence lags rivals that are also currently navigating the new omnichannel world and creating strategic partnerships.

Weakness

  

Online presence and social media clout Supply chains and cost of goods sold Declining foot traffic in retail store locations, leading to decreasing same-store sales, and sales per sq. ft.

Opportunities

  

New strategic partnerships Influencers via social media Cost reductions

Threats

  

Implications for improving Ulta Beauty’s strategy Establish and reorganize its business portfolio to focus solely on e-commerce while maintaining its Target collaboration. Invest in expanding its social media presence by using influencers to draw customers to its products.

Direct rivals, e.g., Sephora Indirect rivals, e.g., Amazon Prolonged societal shocks e.g., COVID-19

Conclusions about Ulta’s Competitive Assets and Resource Strengths: 

Most popular beauty site, averaging 44 percent over Amazon‘s at 22 percent of industry e-commerce sales



Ulta leads the cosmetics industry with the greatest number of retail outlets, i.e., more than double Sephora‘s store count



Ulta had an omnichannel presence before the COVID-19 pandemic, and were not inundated with learning new systems as those had already been established



Ulta also partnered with Target, one of the nation‘s largest retailers, to have mini locations within the retailer to make it a one-stop shop for all needs



Strong loyalty rewards system and with that, great savings/discounts on many brands

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

Section 6 Case Teaching Note for Case 09

Ulta is at the top of its industry with a strategic omnichannel business plan, but to continue having as much success as it has enjoyed, it needs to maintain its partnership with Target to make their brand even more prevalent than before

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Conclusions about Ulta’s Competitive Liabilities and Resource Weaknesses: 

Ulta does not carry as extensive of luxury cosmetics/beauty items as Sephora.



Ulta‘s high-growth phase is likely to come to a near end as the company already had retail outlets in all major U.S. markets.



Same-store revenue and in-store revenue per square feet declined despite the increased number of stores from 2017 to 2021.



Ulta has a weak social media presence in comparison to Sephora.

Conclusions about Ulta’s Current and Future Market Opportunities: 

To differentiate from its competitors, Ulta needs to team up with beauty influencers who recommend Ulta-specific products and Ulta-branded products in order to generate greater brand awareness.



Ulta can also host influencer events during which customers can watch through vlogs/videos to shop where their favorite influencer shops.



Ulta‘s product portfolio sales share, by product in 2021 reveals that its cosmetics line attributed to almost the most of their sales (44 percent); Ulta has the opportunity to expand on this and push its conscious beauty product line.



Expanding into more Target stores and possibly with other general retailers to gain greater exposure

Conclusions about Ulta’s Current and Future Market Threats: 

Other beauty stores such as Sephora have partnered with another major retailer: Kohl‘s.



Instagram and Facebook attribute the most to e-commerce shopping in social media, yet Sephora beats Ulta in terms of number of followers.



Sephora‘s has superior social media usage and ratings and is recognized for a quality product selection.

Implications for Improving Ulta’s Strategic Position: 

Before investing in hundreds of thousands of dollars in sponsorship/brand deals, Ulta needs to carefully conduct research on the influencers they want to bring on board and use data-driven analysis regarding their followers—not only to guarantee a positive ROI on these investments but also to ensure their channel and audience aligns with Ulta‘s

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Section 6 Case Teaching Note for Case 09

values. 

If Ulta does not act early enough to obtain influencers, it will struggle in advertising its products online. Ulta and Sephora will begin competing for top name influencers. Ulta will experience limited social media impact if it allows its competitors to gain a monopoly on influencers.



If not done correctly, Ulta could face some serious backlash from consumers and can easily lose its foothold as the top cosmetic/beauty/fragrance company in the United States.



Dave Kimbell and his executive team also need to consider how competitor pressure is intensifying from both direct and indirect incumbents. Absent needed focus on the social media segment and supporting accelerated direct-to-consumer growth, the Ulta brand is unlikely to stand out in an increasingly crowded market segment for cosmetics products.

zzz. What do PESTEL and five-force analyses along with a careful examination of case Exhibits 1, 4, and 5 reveal about Ulta‘s current and prospective operating and competitive environments? How strong are those macro-economic and competitive forces?

Students should at a minimum be able to assess the impact of macro--environmental forces on the cosmetics marketing and retail industry using a PESTEL analysis and a five-force analysis.

Advanced students should also be able to gauge the impact of those forces on ULTAs operations, which with the exception of its product supply chains that are reliant upon manufacturers in China, are all located in the United States (U.S.).

Macro-environmental forces A good understanding of the U.S. macro-environment is necessary to understand Ulta‘s situation in 2022. Three of the six major macro-economic forces stand out: economic, sociocultural, and technological. See Table 2, ―PESTEL Assessment of the U.S. Cosmetics Industry.‖ Following Table 2 is a more detailed explanation of the four most salient macroeconomic forces that shape the industry and Ulta‘s operating environment.

Table 2 PESTEL Assessment of the U.S. Cosmetics Industry MacroEnvironmental Force

U.S. Cosmetics Industry

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Potential Impact on ULTA Beauty

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Section 6 Case Teaching Note for Case 09

MacroEnvironmental Force

U.S. Cosmetics Industry

Potential Impact on ULTA Beauty

+/+

  

Political



Import policies & tariffs Inward investment & JV policies Bureaucratic ―wait-states‖ for cosmetics product manufacturers located in China De-globalization due to COVID-19 pandemic and conflicts in allied nations

+/−

++

   

Economic

Socio-cultural

   

Projected changes in per capita income Consumer debt Inflation & currency exchange rates Labor costs

++

++

Changing nature of the workplace Consumer attitudes & preferences Millennial and Gen-Z preferences for healthier lifestyles Demographic projections

++

+ Technological

  

New product innovation Social media usage and influencers E-commerce trends



Sustainable sourcing of raw materials and ingredients used in cosmetics products Recyclable packaging of cosmetics products Climate change, natural disasters that may disrupt supply chains

++

+/− Ecological

 

Legal/regulatory

  

+/−

+/−

Minimum wage laws Patent protection laws Urban & suburban zoning laws with respect to shopping malls

KEY:

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+/−

300

Section 6 Case Teaching Note for Case 09

++ = Strong impact + = Moderate impact +/− = Possible impact Political forces refer to the stability of the political environment and attitude of the political parties and decision makers toward the operation of a company. Political factors are inevitably entwined with legal factors that Ulta needs to comply with. The political and legal forces comprise government agencies and pressure groups that influence Ulta‘s operations, its tax policies and national and international laws as well as potential hostilities or pandemics that may impede the demand and supply chains that Ulta relies upon.

Economic factors affect the ability of a company to grow or at least maintain profitability.

The economic environment assesses the purchasing power of the people in an economy, which depends on current prices, credit availability, comparative foreign exchange rates, and business cycles. In 2022, Ulta must contend with macro factors such as rising real estate prices, high employment rates, rising prices for gasoline, and inflationary pressures that impact consumers‘ discretionary income for cosmetic products.

Sociocultural factors represent the culture of the society that comprises customs, taboos, language, beliefs, values, attitudes, norms, gender, and demographics of the population that affect the business of a company. Predominant among Ulta‘s target customer base are millennial and Gen-Z consumers that value healthier lifestyles, experience-based shopping, and recommendations from social media influencers on TikTok, Facebook, and Instagram.

Technological factors include innovations brought to market via research and development, changes in information technology, and government spending on research. These factors impact the quality of goods and services offered by a company inasmuch as they enable a company to stay ahead of its competitors. Advances in natural product formulations, recyclable or reusable packaging, virtual and artificial reality (VR and AR), cloud-based computing, customer purchase prediction algorithms, and meta-analysis of large datasets are all key technologies that companies like Ulta will need to investigate and potentially invest in to maintain a competitive advantage in the 2020s and beyond.

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Section 6 Case Teaching Note for Case 09

Industry and competitive forces Figure 1 The Five Forces Model for the Cosmetics Industry

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Section 6 Case Teaching Note for Case 09

303

Figure 1 is a representative five-forces model of competition for companies that market and retail cosmetics products (the portion of the larger beauty, fragrances, and cosmetics products industry in which Ulta competes). These forces are discussed in turn, below: 

Rivalry among the marketers and retailers of cosmetic products—a moderate to strong competitive force In assessing this competitive force, students should draw upon the information in Figure 3.4 in Chapter 3 (and the related text discussion).

Students should be pressed to identify the following rivalry-related competitive pressures at work in the cosmetics marketing and retailing: 

Rivalry-related competitive pressures are being intensified by the efforts of rivals to expand their product lines and offer wider selection to those people, including males who are increasingly a target customer for cosmetics retailers.



Rivalry-related competitive pressures are being intensified by the active efforts of companies to relaunch their websites, craft customized or ―natural‖ products for millennial and Gen-Z consumers, and use influencers on social media to promote the benefits of these products.



Rivalry-related competitive pressures are being intensified by the active efforts on the part of the cosmetics marketers and retailers to build and strengthen the appeal of their product offerings via lower prices.



There are four major corporations in the industry—Ulta, Spehora, Sally Beauty, and Bath and Body Works—that together serve to intensify rivalry in this industry.



Rivalry-related competitive pressures are being intensified by efforts on the part of Ulta and its major rival Sephora to revamped retail practices via store-within-a-store partnerships with Target and Kohl‘s, respectively.

On balance, however: 

Rivalry is weakened by the differentiation that exists from one brand of cosmetics to another (as concerns product selection, brand image, product spokespersons, quality, design, and styling) as well as the presence of both low-end and luxury brands available from other retailers, both in stores and online—such differentiation creates buyer preferences for the features of certain brands, thus inhibiting brand switching and giving rise to buyer loyalty to their preferred brand.

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Section 6 Case Teaching Note for Case 09



Uncertain demand for cosmetics products, for example, due to increased numbers of employees working at home or performing hybrid work via telecommuting platforms (such as Zoom and Vimeo) acts to weaken the rivalry among rivals because there is questionable new demand to enable each rival to grow its own sales/market share without having to steal customers away from rival brands in a head-to-head battle for the business of beauty-conscious buyers. While cosmetics products are always in some demand regardless of the necessities of in-person work and social life, a rapid return to pre-pandemic levels of human interactions impacting demand is quite difficult to predict.

On the whole, we think it is fair to say that the competitive pressures associated with rivalry among the retailers of cosmetics and related beauty products are moderate to strong.

Class members should recognize that there is little evidence in the case that indicates the competitive pressures associated with rivalry are so potent as to make it difficult for even lower-end rivals to earn attractive profits in cosmetics, which are generally high-markup, high-margin products. In market circumstances where rivalry is very strong or even fierce, then the profitability of rival sellers is definitely adversely impacted and industry profitability tends to be more modest.

For Ulta, however, it is fair to say that recent erosion of its profits from fiscal years 2019 to 2021 likely occurred less because of competitive rivalry and more due to recent societal shocks that:





Attenuated foot traffic in-store sales, even with its partner, Target,



Resulted in temporary or even permanent closures of shopping malls, impacted its supply chains,



Hampered Ulta‘s ability to attract entry-level labor to work in its bricks-and-mortar stores, and



Increased expenses associated with beefing up its e-commerce and social media platforms to meet increased at-home shopping demand.

Competitive pressures associated with the threat of new entry into marketing and retailing cosmetic products—a weak competitive force. In assessing this competitive force, students should draw upon the information in Figure 3.5 in Chapter 3 (and the related text discussion).

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Section 6 Case Teaching Note for Case 09

305

There are very few companies that see beauty products as an option for a new business because there are already huge competitors and suppliers, and cost of entry is very high.

While there is room for growth in cosmetics retailing, self-care products have shown to be highly competitive, yet, e-commerce, social media, and AI technology may act together to redefine and serve to raise the barriers to entry in this industry in the near future. 

Competitive pressures associated with substitutes for marketers and retailers of cosmetic products—a moderate competitive force In assessing this competitive force, students should draw upon the information in Figure 3.6 in Chapter 3 (and the related text discussion).

There are plentiful substitutes for cosmetics retailers including big box retailers, department stores, e-commerce retailers, and salons that can displace beauty supply stores, so most consumers have a wide range of options when it comes to purchasing and applying beauty products



Competitive pressures associated with the bargaining power of suppliers to firms that market and retail cosmetic product—a weak competitive force In assessing this competitive force, students should draw upon the information in Figure 3.7 in Chapter 3 (and the related text discussion).

There are many alternative suppliers that provide raw materials, packaging, and labor to manufacture cosmetics products that are sold to retailers like Ulta and Sephora, however, the fact that many suppliers are located in China and Southeast Asia could pose future supply chain and tariff barriers should COVID-19 persist and should the political situation in those developing nations worsen. In sum, packaging and labor can be supplied through many different routes. Disruptions to this industry are not unique due to the economic environment in 2022. That said, there is a very low threat of forward integration by suppliers into retail except as niche marketers.



Competitive pressures associated with the bargaining power of customers of firms that market and retail cosmetic products—a strong competitive force In assessing this competitive force, students should draw upon the information in Figure 3.8 in Chapter 3 (and the related text discussion).

There are a range of preferences customers may have for their self-care beauty and cosmetics products and a range of providers. Customers have low switching costs,

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Section 6 Case Teaching Note for Case 09

except for those that wish to purchase luxury branded products from high-end department stores or airport duty-free shops. Offering customers unique shopping options provide a fair playing field. E-commerce and partnerships allow for increased volume in orders, further increasing the power of consumers. The only potential offset to customer power is buyer loyalty to a particular brand and company programs that promote loyalty via special offers, discounts, and events. Consumers are also unlikely to create their own beauty and cosmetics products, limiting the threat of forward integration. 



Overall industry attractiveness for incumbent firms marketing and retailing cosmetic products—moderate to low 

The beauty, cosmetic, and fragrance store industry is a competitive one. While there are only a handful of direct rivals, there are numerous competitors and substitutes making the buyers cost to switch brands low.



The cosmetics and beauty industry has become highly saturated due to the plethora of cosmetic products and due to the emergent semi-oligarchy of four major players that together has resulted in a two-tiered industry.



The industry has seen a lot of change in the recent years driven by the new millennial and Gen-Z consumers, as well as the push toward e-commerce.



There are a handful of bigger corporations that primarily retail products via mall stores and via stores-within-stores, while smaller niche companies sell to specific consumers.

Key cosmetics and beauty marketing and retailing industry characteristics at-aglance Class members who have done some good strategic analysis and thinking should be able to make a convincing argument for why one or more of the following qualify as being key industry drivers and key success factors in the marketplace for cosmetics and related beauty products.

See Table 3 ―Key Drivers of Change in the Cosmetics and Beauty Industry‖ and Table 4, ―Key Success Factors in the Cosmetics and Beauty Industry.‖

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Section 6 Case Teaching Note for Case 09

Table 3 Key Drivers of Change in the Cosmetics and Beauty Industry INDUSTRY DRIVER 1. E-commerce Sales

Impact on Ulta Beauty Digital Marketing, Customer Experience, Customer Satisfaction Promise

2. Revenue by location

Nail products, accessories, & other products

3. # Customers Aged 20–64

Social Media Marketing Efforts to gain exposure

4. Per Capita Disposable Income

Sales, Promotions, Loyalty Programs

Table 4 Key Success Factors in the Cosmetics and Beauty Industry Key Success Factors (KSFs)

Beauty, Cosmetic, and Fragrance (KSFs)

On what basis do buyers of the industry’s product choose between the competing brands of sellers. That is, what product attributes and service characteristics are crucial?

The Beauty, Cosmetic, and Fragrance Store industry consumers choose are based on availability in their area, pricing, promised satisfaction, and sustainability.

Given the nature of competitive rivalry prevailing in the marketplace, what resources and competitive capabilities must a company have to be competitively successful?

Given the nature of competitive rivalry prevailing in the marketplace, a company must have a strong social media presence in order to be competitively successful.

What shortcomings are almost certain to put a company at a significant competitive disadvantage?

Shortcomings that are almost certain to put a company in the Beauty, Cosmetic, and Fragrance industry at a significant competitive disadvantage is not having a niche, thus not knowing their targeted audience, and finally, not knowing how to market to their audience.

To summarize: 

Competitive advantage: Deliver products across all price points for all demographics in one location, Loyalty program, Product quality



Key drivers: Increased e-commerce, Millennial and Gen-Z consumers, Changing nature of the workplace



Key success factors: Repeat customer purchases, fast and cost-effective shipping

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

Section 6 Case Teaching Note for Case 09

Ulta‘s positioning vis-à-vis the competitive forces 

Ulta has nevertheless been able to remain a top competitor and differentiate itself through the convenience that it offers its customers



It delivers various services and brand products that range from drugstore to high-end at various price points all in one location



This strategy along with its loyalty program, one that be beefed up and can continue to be used through an online platform to serve the changing needs of customers, as will be discussed in greater detail in the next question

aaaa. What are the major elements of Ulta‘s strategy? 

Ulta‘s broad differentiation strategy (covered in the next question and in Chapter 5 of the textbook) so far fostered the phenomenal growth of its brick-and-mortar stores 

However insufficient focus has been placed on building its online presence and consumer engagement via social media, at least compared to Sephora



E-commerce is being used as a way of generating more direct sales, as well as a tool to drive consumer traffic to its brick-and-mortar stores and website



E-commerce has also brought new challenges; it has increased competition as shoppers can now easily browse for better prices or offers directly from brand websites, drug stores, or department stores



Social media platforms are also currently an underutilized tool.





Sephora, one of Ulta‘s biggest rival has a market share at 16 percent versus Ulta at 21.8 percent yet has been able to create a monumental following in comparison to Ulta. Ulta could use their Conscious Beauty line to further market and engage millennials and Gen-Z online, as they have shown an interest in sustainable and clean products



Partnerships with social media influencers has also become a go-to marketing strategy, especially in the beauty industry

The partnership begun in November 2020 with Target stores represents a great opportunity to grow foot-traffic and reach new demographics, however this strategy will require a large investment to secure new store locations, purchase and store inventory, and hire and train new personnel.

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Section 6 Case Teaching Note for Case 09

309



Coming off a fiscal year that had a decrease in sales of 23.8 percent which left the company with $151.9 million in investment cash, less than half the cash available the previous two years, it might be beneficial to wait for more investment capital to be available before proceeding.



Instead Ulta should focus its efforts on creating a smooth omnichannel experience through its physical stores, application, website, and social media to ensure repeat customer purchases.



The company has done well to invest in a rapid fulfillment center.



With an increased focus on e-commerce, however, a top-notch execution of this strategy to implement fast and cost-effective shipping, flash sales, online events and promotions, and testimonials by social media influencers will be needed to provide yet another incentive for shoppers to choose Ulta over its competitors.

bbbb. Which one of the five generic competitive strategies discussed in Chapter 5 most closely approximates the competitive approach that Ulta is employing? Has that generic strategy evolved, and if so, how so? 

As discussed in Chapter 5 and in the previous question, while Ulta Beauty has maintained a broad differentiation strategy that has worked in the past, over time this generic strategy can become threatening to the business when it comes to targeting certain consumer segments as well as informing the public of what the company has to offer and what it can do better than its competitors



Initially, having a broad differentiation strategy may appear to have been a defensible strategy for Ulta pre-pandemic, as it was trying to reach and cater to multiple consumer segments, yet it is since evident that broad differentiation can lead to unpredictable outcomes in a highly saturated and an increasingly competitive market



Problems with a broad differentiation strategy also occur when systemic challenges such as the COVID-19 pandemic occur, and these occurrences add to the idea that Ulta‘s strategy should become more focused to protect its market share when industry sales are slackening



If diversification is too broad this can lead to customer confusion and can have a negative impact on customer loyalty



A strategy that would help frame the concept behind Ulta Beauty would be to shape the portfolio of business to increase its focus on more upscale brand name consmetics products and to market services in salons and online that encourage customers to trade up

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Section 6 Case Teaching Note for Case 09

to those higher margin products 

Ulta has a slight competitive advantage in the sense that it is set up as a one stop shop for cosmetic products and only one other business model, held by Sephora, has a similar concept

cccc. What do the operating and financial data in case Exhibits 2, 3, 6, 7, and 8 reveal about Ulta‘s performance?

You should expect students to use the financial ratios in Table 4.1 of Chapter 4 in performing calculations to determine which aspects of Ulta‘s financial performance might be characterized as impressive, improving, or not. See Table 5 below for highlights: Table 5 Ulta Beauty Inc. Financial Ratios, 2017–2021

Profitability Gross margin % Operating margin % ROS % ROA % Operating ROA % ROE % Activity Total Asset Turnover (x) COGS: Inventories (x) Fixed Asset Turnover (x) Average sales per day ($000) Accounts Receivable, days (days' sales outstanding) Financial Leverage Total Debt: Total Assets (%) Total Debt: Equity (%) Long-Term Debt: Equity (%) Liquidity Working Capital ($millions) Current ratio (x) Quick ratio (x)

2021

2020

2019

2018

2017

31.68% 3.85% 2.86% 3.45% 4.65% 8.79%

36.24% 12.18% 9.54% 14.51% 18.53% 37.11%

35.87% 12.72% 9.80% 20.64% 26.76% 36.18%

35.63% 13.35% 9.44% 19.09% 27.00% 31.29%

35.99% 13.49% 8.44% 16.06% 25.66% 26.43%

1.21 3.60 6.18 16,855 11.46

1.52 3.65 6.14 20,269 6.87

2.10 3.55 5.48 18,402 7.40

2.02 3.45 4.95 16,122 6.19

1.90 3.29 4.83 13,301 6.66

60.72% 154.56% 87.36%

60.89% 155.71% 95.92%

42.96% 75.32% 30.06%

39.00% 63.94% 27.75%

39.25% 64.61% 30.47%

$ 1,171 1.87 1.00

$ 918 1.81 0.67

$ 1,091 2.32 0.85

$ 1,052 2.64 0.93

$ 1,007 2.90 1.12

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Section 6 Case Teaching Note for Case 09

Growth rates - year-on-year Net revenues Operating income Net income

−16.8% −73.7% −75.1%

Growth rates—4-Year Compound Annual, 2017–2021 Net revenues Operating income Net Income Total assets

6.1% −22.5% −19.1% 18.8%

Other Average sales per employee—Total Average sales per full-time employee # Stores open, end of year Average sales per store ($000) Average total sq. ft., end of year Average sales per sq. ft.

$ 151,900 $ 246,078 1,264 $ 4,867 13,260,705 $ 463.92

10.1% 5.5% 7.2%

14.1% 8.8% 18.6%

$ 168,138 $ 284,541 1,254 $ 5,900 12,804,98 8 $ 577.75

$ 170,689 $ 293,944 1,174 $ 5,721 11,893,41 3 $ 564.73

21.2% 19.9% 35.5%

$

176,978

$

301,770

n/a n/a n/a

1,074 $ 5,479 10,742,874

974 $ 4,984 9,641,367

$ 547.76

$ 503.53

Sources: Calculated from data in case Exhibits 3, 6, and 7 n/a = not available The following aspects of Ulta‘s financial and operating performance ought to be identified by class members: 

All company profitability ratios have deteriorated significantly between 2017 and 2021



Despite pandemic-related pressures on supply chains and customer traffic, inventory turnover has remained stable during this period



There has been some but not meaningful declines in sales per day and accounts receivables collection periods



Debt leverage via long-term borrowings has increased significantly and it remains unclear whether these borrowings are being used for improving operations or for stock buybacks to boost per share prices

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Section 6 Case Teaching Note for Case 09



While company working capital (in dollars) remains stable, liquidity deteriorated significantly



Year-on-year growth rates in revenues and profits have shown marked declines and the company‘s four-year compound annual growth rate (CAGR) in all categories was negative



Operating statistics (primarily from case Exhibit 3, supplemented by data in case Exhibit 6) show declines in sales per store, sales per sq. ft., and sales per employee, both part time and full time, each of which is an important indicator of success or underachievement in the retail industry

Advanced students should be encouraged to evaluate Ulta‘s financial performance since fiscal 2021 ended by using a Common-size income statement approach.

Since CEO Dave Kimbell began his tenure in the position since March 2020, Ulta‘s performance for three quarters has told a much more positive story.

Your class should be able to see Ulta‘s rebound in profitability (e.g., gross margin, operating margin, pre-tax margin, and return on sales), as shown in Table 6, ―Ulta‘s Profitability Ratios, First Three Quarters of Fiscal 2021.‖ Profitability ratios from fiscal year 2020 are shown at the right for purposes of comparison to the 2021 results.

Table 6 Ulta’s Profitability Ratios, First Three Quarters of Fiscal 2021 3rd Quarter 10/30/2021 Net sales Cost of sales Gross profit (loss) Operating income (loss) Income (loss) before income taxes Income tax expense (benefit) Net income

% of Sales

2nd Quarter 07/31/2021

% of Sales

1st Quarter 05/01/2021

FY 2021 % of Sales

% of Sales

$ 1,995,775 1,206,301 $ 789,474

100.0% 60.4% 39.6%

$ 1,967,207 1,169,244 $ 797,963

100.0% 59.4% 40.6%

$ 1,938,519 1,184,731 $ 753,788

100.0% 61.1% 38.9%

$ 6,151,953 $ 4,202,794 $ 1,949,159

100.0% 68.3% 31.7%

$

284,239

14.2%

$

332,307

16.9%

$

305,324

15.8%

654,824

10.6%

$

283,826

14.2%

$

331,882

16.9%

$

304,966

15.7%

$

231,085

3.8%

$

68,537 215,289

3.4% 10.8%

$

80,989 250,893

4.1% 12.8%

$

74,677 230,289

3.9% 11.9%

$

55,250 175,835

0.9% 2.9%

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Section 6 Case Teaching Note for Case 09

313

(loss)

Source: Calculated from data in case Exhibits 6 and 7 dddd. What three or four top priority issues do Mary Dillon, Chair of Ulta‘s Board, and Dave Kimbell, CEO need to address? 

Ulta must focus on how to outperform their most intense rival, Sephora, in what is likely to become a two-team race. 

Staying ahead of competitors and preserving any advantages is especially important in an industry that has so many substitutes and little differentiation.



The company should focus its efforts on growing and expanding through e-commerce and social media.



In order to remain a top competitor in the beauty, cosmetic, and fragrance store industry, Ulta Beauty must be able to agilely adjust its strategies to meet the changing needs and demographic makeup of its customers, particularly as they begin to return to normal social lives and workplaces.



As its cash flows improve, some consideration should also be given to curtailing new U.S. store openings, and instead use a combination of borrowings and internally generated cash flows to initiate a stock buyback program that will reduce dilution of ownership shares and increase returns on equity and thereby boost per share prices.

Rationale 

Strategic orientation, as covered in Chapter 5, will play a key role in Ulta‘s decisionmaking process when deciding in which direction the top two managers want to take their business.



Promoting the service characteristics and defining those more accurately to the public through marketing will open up the chance for consumers to take full advantage of those services offered.



Acting in accordance with making a more defined name brand product of the company will also provide greater leverage over suppliers and help to curtail cost expenditures while improving company gross, operating, and net margins, thereby resulting in increasing returns to its shareholders.

eeee. Based on all of the above assessments, what recommendations would you make to Ulta‘s top management to allow this company to strengthen its position in its most important markets?

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Section 6 Case Teaching Note for Case 09

We believe that Ulta has been successful in 

Preserving the most promising aspects of its pre-pandemic way of business—in-person retail—in order to maintain its market position over its competitors by choosing to pay attention to the areas that matter.



Expanding its social media presence on all platforms, collaborating with influencers to gain more followers and sales, developing algorithms understand and promote consumer choices, getting in the forefront of AR implementation of product testimonials and demonstrations, and most of all, expanding its environmentally friendly cosmetic line and packaging to appeal to health-and-planet conscious millennial and Gen-Z consumers



Continuing to lead the category as a driver of cosmetic product and service delivery innovation and customer loyalty

Favorable factors 

As the largest specialty beauty retailer, Ulta has access to leading brands and exclusive products. Its merchandising encourages frequent store visitation and draws shoppers from struggling department stores.



Ulta‘s loyalty program of more than 37 million active members is getting a boost from its expanding Target shop-in-shops. It can use consumer data to improve its marketing, merchandising, and e-commerce.



Ulta benefits from the declining sales and store closures of U.S. department stores, the traditional retailers of prestige beauty.

Unfavorable factors 

Beauty products are available through many retail channels, putting Ulta in competition with the largest retailers in the United States. Attracted by the favorable margins, some of them are expanding their beauty offerings.



Online competition from Amazon, established cosmetics brands, and new brands makes it easier for consumers to find products and lessens the need for a physical store base.



The new Sephora stores within Kohl‘s stores provide it with a stronger partnership than it had with JC Penney and will increase Sephora‘s presence in U.S. suburbs, where it has historically trailed Ulta.

On balance

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

While Ulta faces intense competition and is affected by innovation and product cycles in cosmetics, we think it has developed a following that has allowed it to take share from mall-based stores while competing effectively against Amazon and other e-commerce purveyors of cosmetics owing to its broad differentiation generic strategy.



We believe teen girls and women alike enjoy sampling products in Ulta‘s stores and that its salons, selection, promotions, and service encourage frequent visitation.



It remains to be seen if that customer group will become receptive to purchase in volume via e-commerce channels or further down the line partake in AR or VR versions of those experiences in Ulta‘s salons, which represented about 3 percent of its current business in early 2022.



We believe Ulta still has opportunities for growth and cost reductions on the basis of its 2017–2020 lackluster financial performance and despite its margin improvements in the first three quarters of fiscal 2021.



While Ulta‘s high-growth phase is likely over, as it currently has stores in all major U.S. markets, it continues to open stores (about 50 in fiscal 2021), expand its e-commerce (24 percent of 2021 revenue), and open shops within more Target locations.



We believe Ulta can attract new customers and increase its share of customers‘ annual beauty budgets via new store openings and its recent investments in e-commerce and new ventures, part and parcel of its omnichannel approach. 

There is, however, a danger that opening new retail outlets near established Ulta store locations and promoting more at-home shopping could serve to cannibalize its existing mature store operations

EPILOGUE Ulta‘s fiscal year 2021 annual results (as of January 29, 2022) were reported to investors on March 25, 2022 (retrieved from https://www.ulta.com/investor/sec-filings/all-secfilings?page=3).

Highlights of fiscal 2021 included: 

A 40.3 percent year-on-year improvements in net sales, from $6.2 billion in 2020 to $8.6 billion in 2021



A 460.7 percent year-on-year improvements in net profits, from $175.8 million in

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2020 to $985.8 million in 2021 

A 3.5 percent year-on-year increase in the number of retail outlets, from 1,264 stores in 2021 to 1,308 stores in 2021

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For the most recent financial and operating news about this company, please go to Ulta‘s investor relations website at: https://www.ulta.com/investor.

Recap and outlook of Ulta's fiscal 2022 first-quarter results (ending April 30, 2022) from industry analyst David Swartz, ―Ulta Beauty, Inc.,‖ Morningstar, June 2, 2022: In early June 2022, David Swartz, an industry analyst for Morningstar, noted, ―Although it faced tougher comparisons and an inflationary environment, we have lifted our 2022 sales growth forecast to 10 percent from 6 percent and EPS estimate to $20.08 from $18.49. Our fair value estimate implies fiscal 2022 price/earnings and EV/EBITDA of about 16 and 10 times, respectively.‖ For the first quarter of fiscal 2022 (ending April 30, 2022), Ulta‘s same-store sales jumped 18 percent and its operating margin reached 40 percent in the period as makeup sales recovered to pre-pandemic levels.

Swartz estimated that Ulta would achieve 7 percent compound average sales growth over the next 10 years (2022–2032), below its 18 percent average annual sales growth over the previous decade. Swartz wrote, ―We forecast 4.5 percent yearly same-store sales growth in the long term. ― Swarts continued: ―Past results were aided by many new stores that matured over time, improved marketing, an improved loyalty program, and brand additions. Now, though, Ulta has a larger number of mature stores, and we expect new stores in existing markets will reduce sales at existing stores.‖ In June 2022, Swartz forecasted Ulta‘s average gross and operating margins at 38 percent and 14 percent, respectively, over the next decade. ―We forecast its selling, general, and administrative expenses as a percentage of sales of about 24 percent over the next 10 years, in line with the fiveyear historical average. Ulta‘s costs have generally risen on higher e-commerce and additional staff and services in its stores. However, its operating margins may get some benefit from its cost-reduction plan, which includes reductions in areas like logistics and technology, lower real estate costs, greater supply chain efficiency, and improved pricing and product mix,‖ he wrote.

Finally, Swartz predicted that capital expenditures would moderate after a spike to 4.2 percent of sales in 2021. ―We forecast this spending as a percentage of sales will drop to about 3.5 percent annually after 2022 as store openings slow and less in-store investment is needed,‖ he wrote.

CASE 9 TEACHING NOTE

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Section 6 Case Teaching Note for Case 09

PepsiCo‘s Diversification strategy in 2022 OVERVIEW PepsiCo was the world‘s largest snack and beverage company, with 2021 net revenues of approximately $75.5 billion. The company‘s portfolio of businesses in 2022 included Frito-Lay salty snacks, Quaker Chewy granola bars, Pepsi soft drink products, Stacy‘s pita chips, Gatorade, Propel, Bubly, Sabra hummus, Quaker Oatmeal, Cap‘n Crunch, Aquafina, Mountain Dew, RiceA-Roni, and many other regularly consumed products. The company viewed the lineup as highly complementary since most of its products could be consumed together. For example, Stacy‘s pita chips and Sabra hummus might make a nice snack, and Doritos and an Aquafina might be part of someone‘s lunch. While PepsiCo‘s shares had underperformed relative to companies competing in high growth industries, the company had shown resilience and achieved growth in revenues and earnings during economic turbulence brought about by the COVID-19 pandemic.

The company‘s top managers were focused on sustaining growth in revenues and earnings through strategies keyed to product innovation, international expansion, and strategic acquisitions. New product innovations that addressed consumer health and wellness concerns were important contributors to the company‘s 7.4 percent annual growth rate in U.S. revenues between 2019 and 2021. PepsiCo‘s focus on growth in international markets allowed the company‘s total revenues to increase by 8.8 percent annually between 2019 and 2021.

International markets with the highest annual growth rates in revenues between 2019 and 2021 included China with a 43.6 percent annual growth rate, South Africa with a 122.7 percent annual growth rate, and the United Kingdom with a 10.5 percent annual growth rate.

In addition to focusing on strategies designed to deliver revenue and earnings growth, the company maintained an aggressive share repurchase and dividend policy, with more than $7 billion returned to shareholders in 2020 through share repurchases of $2 billion and dividends of approximately $5.5 billion. The company‘s common share repurchases totaled $106 million in 2021, with dividend payments increasing to $5.8 billion. The company bolstered its cash returns through carefully considered capital expenditures and acquisitions and a focus on operational excellence. Its investments were focused on manufacturing automation, a rationalized global manufacturing plan, and reengineered distribution systems to drive efficiency. In addition, the company‘s Pep+ (PepsiCo Positive) sustainability plan focused on minimizing the company‘s impact on the environment by lowering energy and water consumption and reducing its use of packaging material, meeting internal Diversity, Equity, and Inclusion (DEI) goals, and supporting and investing in the local communities in which it operated. For example, the company was transitioning to renewable energy sources with a goal of achieving net zero emissions by 2040. The company also planned to reduce water use and replenish more water

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than it used by 2030 and to cut virgin plastic use by 50 percent between 2020 and 2030.

The company continued to manage its portfolio of food and beverage brands to focus on growth.

Many of its spikes in revenue growth in the past two decades had followed major acquisitions such as its $13.6 billion acquisition of Quaker Oats in 2001, the 2010 acquisition of the previously independent Pepsi Bottling Group and PepsiCo Americas for $8.26 billion, the acquisition of Russia‘s leading food-and-beverage company, Wimm-Bill-Dann (WBD) Foods for $3.8 billion in 2011, the 2020 acquisitions of Pioneer Foods in South Africa for $1.2 billion and Rockstar energy drink for $3.85 billion. The company also shifted the makeup of its portfolio to eliminate slow growth businesses, including the spin-off of Tropicana and Naked juices as a joint venture with noncontrolling interest in 2022. Management of PepsiCo‘s brand lineup was essential to future growth as annual consumption of carbonated soft drinks fell each year.

SUGGESTIONS FOR USING THE CASE This case is ideal for module on corporate diversification strategies. The case teaches well because the majority of students are likely to be regular consumers of PepsiCo‘s products. Class debate should center on whether PepsiCo‘s diversification strategy has contributed to increased shareholder value. Analysis of the case data will lead students to conclude that PepsiCo‘s top managers have built a fine collection of businesses capable of delivering impressive earnings and cash flows. Students will recognize the success PepsiCo management has achieved in exploiting strategic fit opportunities across business units, acquiring new businesses to strengthen the overall quality of its business line up, and increasing revenues and earnings in international markets. The issue in 2022 is what further modifications to PepsiCo‘s corporate strategy are needed to increase shareholder value.

The case contains ample data for students to prepare a nine-cell industry attractiveness/business strength matrix and to go through the steps of analyzing a diversified company‘s business portfolio that are described in Chapter 8. Following their analyses of industry attractiveness and business strengths, students are able to analyze opportunities for economies of scope, costsharing, and skills transfer across businesses, and examine the cash flow requirements of the businesses included in the portfolio. Students will need to make recommendations regarding what actions PepsiCo management should take to sustain the company‘s growth and how it should best utilize its free cash flows. Student recommendations should also include actions to improve strategic fit, improve the overall healthiness of PepsiCo‘s snacks and beverages, and further internationalize Gatorade and Quaker Oats brands.

The assignment questions and teaching outline presented below reflect our thinking and suggestions about how to conduct the class discussion and what aspects to emphasize.

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Section 6 Case Teaching Note for Case 09

To give students guidance in what to think about and what analytical tools to utilize in preparing the PepsiCo‘s Diversification Strategy in 2022 case for class discussion, we strongly recommend providing class members with a set of study questions and insisting that they prepare good notes/answers to these questions in preparing for class discussion of the case.

To facilitate your use of study questions and making them available to students, we have posted a file of the assignment questions contained in this teaching note for the PepsiCo’s Diversification Strategy in 2022 case on the Instructor’s section of the Connect Library for the 8th edition.

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The Connect-Based Exercise for the PepsiCo’s Diversification Strategy in 2022 Case. The auto-

graded exercise for the PepsiCo case requires that students answer a series of multiple-choice questions related to the assignment questions presented in this teaching note. It should take class members roughly 35–45 minutes to complete the exercise, assuming they have done a conscientious job of reading the case and absorbing the information it contains.

You will find that this case works well for oral team presentations and for a written assignment outside of class. Our suggested assignment questions are PepsiCo‘s Board of Directors has employed you as a consultant to assess PepsiCo‘s diversified business portfolio in 2022 and to make recommendations as to what actions PepsiCo‘s top management team should now take to increase shareholder value to new highs. Your report should contain a three-page executive summary of your recommendations, which are fully supported by the use the concepts and analytical tools presented in Chapter 8. Supplement your executive summary with additional charts and tables as needed to support your analysis and recommendations. It is strongly suggested that you follow the analytical steps covered in Chapter 8 in developing your paper. Your supporting exhibits and executive summary of recommendations will be given equal weighting in your grade for the written assignment.

What is your evaluation of PepsiCo‘s lineup of businesses? Has the company diversified into attractive industries? What is the competitive strength of its business units? Do they have adequate strategic and resource fit to contribute to increases in shareholder value? How should PepsiCo management best allocate management operating cash flows? Should the company consider new acquisitions? Do some businesses need to be divested? What other corporate strategies would you recommend to PepsiCo management to increase shareholder value? Please develop a five- to six-page report to PepsiCo management detailing your analysis and action recommendations.

ASSIGNMENT QUESTIONS: What is PepsiCo‘s corporate strategy? Briefly identify the business strategies that PepsiCo is using in each of its consumer business segments in 2022.

What is your assessment of the long-term attractiveness of the industries represented in PepsiCo‘s business portfolio?

What is your assessment of the competitive strength of PepsiCo‘s different business units?

What does a nine-cell industry attractiveness/business strength matrix displaying PepsiCo‘s business units look like?

Does PepsiCo‘s portfolio exhibit good strategic fit? What value-chain matchups do you see? What opportunities for skills transfer, cost sharing, or brand sharing do you see?

Does PepsiCo‘s portfolio exhibit good resource fit? What are the cash flow characteristics of each of PepsiCo‘s seven segments? Which businesses are the strongest contributors to PepsiCo‘s free cash flows?

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Section 6 Case Teaching Note for Case 09

Based on the preceding analysis, what is your overall evaluation of PepsiCo‘s business portfolio in 2022?

Does the portfolio provide the company‘s shareholders with an opportunity for above-average market returns?

What strategic actions should PepsiCo management take to improve the corporation‘s financial and market performance? Should its free cash flows be used to fund additional share repurchase plans, pay higher dividends, make acquisitions, expand internationally, or for other purposes? What other strategic actions should be pursued by corporate level management?

TEACHING OUTLINE AND ANALYSIS What is PepsiCo’s corporate strategy? Briefly identify the business strategies that PepsiCo is using in each of its consumer business segments in 2022.

PepsiCo’s corporate strategy. 

Basic approach: related diversification (of highly complementary products)



The businesses are all concerned with consumer foods and beverages and share key success factors: branding, importance of advertising, new product development, operating efficiencies, and strong distribution.



Capture cost-sharing benefits among the business units where possible.



Grow all the businesses by expanding into foreign markets.



Utilization of free cash flows to make strategic acquisitions, increase dividend payments, and fund share repurchase programs.

Common aspects of business strategy among PepsiCo’s divisions. All of PepsiCo‘s businesses pursue broad differentiation strategies keyed to brand image and reputation, product differentiation, marketing innovations, and extensive distribution networks.

What is your assessment of the long-term attractiveness of the industries represented in PepsiCo’s business portfolio?

It is important to recognize that, with the exception of a few Quaker products, PepsiCo has diversified into convenience food and beverage industries rather than the broader processed foods industry. Students should recognize that the company‘s snacks and beverages offer more growth potential and are more profitable than the overall food and beverage industry based upon the case discussion of the snack food and beverage industries. Students should notice from case Exhibit 6 that all divisions focused on snack foods and beverages have generated consistent revenue growth between 2019 and 2021. Only Quaker Foods North America and Latin America have experienced inconsistent revenues and operating profits

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during the 2019-2020 period. It should be difficult for students to successfully argue that the industries in which PepsiCo competes are unattractive. The carbonated soft drink industry is highly mature with low single digit growth in overall demand, but total operating profits remain quite healthy.

Students are most likely to rate food and beverage categories as attractive to highly attractive.

These categories include almost all snack categories, carbonated soft drinks (because of the industry‘s size), bottled water, ready to drink tea, energy drinks, and nutritional beverages.

Product categories likely to be rated as moderately attractive include flavored grains, ready to drink coffees, hot cereals, and other breakfast products. Some students may rate flavored grains, ready-to-eat cereals, other breakfast products, and hot cereals as unattractive because of industry maturity, but these categories have some appealing characteristics—strategic fit with other PepsiCo/Quaker products and exceptionally high profit margins. Table 1 presents our industry attractiveness ratings for each industry that PepsiCo has diversified into.

What is your assessment of the competitive strength of PepsiCo’s different business units?

Students will have little trouble determining that PepsiCo has done an exceptional job of building a lineup of businesses with strong competitive positions in their respective industries. The company holds number one market shares in almost every convenience food and beverage category while Pepsi Cola trails only Coca-Cola in soft drink market share.

You may wish to point out that all businesses have built much of their strength on their product innovation skills and marketing and promotion expertise and that PepsiCo‘s marketing-related success has provided the company with worldwide name recognition for most of its businesses and products. The company has added to its competitive strength by developing a healthier lineup of snacks and beverages. PepsiCo also has very good worldwide distribution capabilities in all of its businesses even though its Quaker brands have yet to expand outside the United States and Canada to a meaningful degree. Table 2 presents our competitive strength calculations for PepsiCo‘s major business units.

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TABLE 1 Industry Attractiveness Assessment for PepsiCo’s Businesses (Scale 1 = very low attractiveness, 5 = average attractiveness, 10 = very strong attractiveness)

Unweighted/Weighted Ratings for Industries Represented in PepsiCo’s Portfolio

Attractiveness Measure

Energ Nutritio y nal Drink Beverage s s

RTD Tea

RT D Coff ee

Salty Snac Hot RTE ks Cereals Cereals

Flavor ed Grains

Other Breakf ast

Weight

Soft Drinks

Bottled Water

Market size and growth rate

.20

8/1.6

8/1.6

6/1.2

6/1.2

6/1.2

2/.4

8/1.6

4/.8

4/.8

2/.4

2/.4

Industry

.20

8/1.6

8/1.6

6/1.2

6/1.2

6/1.2 8/1.6

9/1.8

8/1.6

8/1.6

8/1.6

8/1.6

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profitability Intensity of competition Emerging opportunities and threats Resource requirements Product innovation Social, political, and environmental, factors TOTALS

.25

6/1.5

7/1.8

6/1.5

6/1.5

9/2.25 9/2.3

9/2.3

9/2.3

5/1.3

9/2.3

8/2.0

.05

8/.4

10/.5

6/.3

8/.4

3/.2

8/.4

8/.4

8/.4

5/.3

5/.3

5/.3

.15

8/1.2

7/1.1

7/1.1

7/1.1

5/.8

5/.8

8/1.2

6/.9

6/.9

6/.9

6/.9

.10

8/.8

5/.5

8/.8

8/.8

9/.9

7/.7

8/.8

5/.5

3/.3

1/.1

1/.1

.05

9/.45

9/.45

9/.45

9/.45

9/.45 9/.45

9/.45

8/.4

8/.4

8/.4

8/.4

1.00

7.6

7.6

6.55

6.65

8.5

6.9

5.6

6.0

5.7

7.2

6.7

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TABLE 2

Section 6 Case Teaching Note for Case 09

Competitive Position/Business Strength Calculations for PepsiCo’s Business Units (Scale 1 = very weak, 5 = average, 10 = very strong)

Unweighted/weighted Strength Ratings

Weigh Strength Measures t

PepsiCola

Aquafi na/LIF EWTR /Bubly

Relative market share Marketing and promotion

.20

9/1.8

10/2.0

10/2.0

10/2.0

10/2.0

10/2.0

10/2.0

10/2.0

4/.8

10/2.0

10/2.0

.20

10/2.0

10/2.0

8/1.6

10/2.0

8/1.6

8/1.6

10/2.0

6/1.2

4/.8

5/1.0

5/1.0

Rocks tar

Gator ade

Lipton

Starb ucks Frapp ucino

FritoLay

Quake r Oatme al

Quake r Cereal s

RiceARoni

Pearl Milling

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Section 6 Case Teaching Note for Case 09

Product innovation capabilities Distribution capabilities How well resources are matched to industry KSFs Brand name recognition/image TOTALS

.15

6/.9

7/1.05

9/1.35

9/1.35

6/.9

6/.9

10/1.5

6/.9

3/.45

3/.45

3/.45

.15

9/1.35

9/1.35

9/1.35

9/1.35

7/1.05

7/1.05

10/1.5

9/1.35

9/1.35

9/1.35

10/1.5

.15

9/1.35

8/1.2

8/1.2

8/1.2

8/1.2

8/1.2

10/1.5

10/1.5

7/1.05

9/1.35

9/1.35

.15

10/1.5

9/1.35

9/1.35

10/1.5

8/1.2

10/1.5

10/1.5

9/1.35

6/.9

9/1.35

9/1.35

1.00

8.9

8.95

8.85

9.4

7.95

8.25

10.0

8.3

5.35

7.5

7.65

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Section 6 Case Teaching Note for Case 09

What does a nine-cell industry attractiveness/business strength matrix displaying PepsiCo’s business units look like?

Construction of a nine-cell industry attractiveness/business strength matrix for PepsiCo using rigorous methodology, requires students to calculate industry attractiveness ratings for each of the industries in which PepsiCo competes and do competitive strength ratings for each of PepsiCo‘s business units. These ratings should then be used to plot the location of the bubbles on the nine-cell grid. Otherwise, students end up locating the bubbles on the basis of ―judgment,‖ which may or may not match up well with a well-done set of ratings. To encourage students to practice applying the tools and concepts in Chapter 8 when they prepare a case, we suggest spending class time here learning and practicing the development of industry attractiveness ratings and business strength ratings and then using these ratings to draw the nine-cell matrix. However, if time is tight you can resort to the judgment approach.

Table 1 of this note shows our industry attractiveness ratings and Table 2 presents our business strength ratings. Figure 1 shows a nine-cell GE-style matrix where the location of the bubbles is based on the industry attractiveness and business strength ratings shown in Tables 1 and 2.

There‘s ample room for judgmental differences regarding selection of the factors, the weights, and the ratings used to draw a nine-cell GE matrix depicting PepsiCo‘s portfolio.

Therefore, you should expect that student opinions will vary and the matrices they come up with will vary. In this instance, however, the variations should not be very great since it is clear that the industries represented in PepsiCo‘s portfolio are all relatively attractive. It is also clear from the case that all of PepsiCo‘s businesses except Quaker ready-to-eat cereals have strong competitive positions. Hence, most bubbles on the nine-cell matrix representing PepsiCo‘s businesses cluster in the top left of the grid: strong competitive strength/business position and moderate to high long-term industry attractiveness.

The nine-cell GE-style matrix analysis (Figure 1) indicates that PepsiCo‘s portfolio consists chiefly of ―grow and build‖ businesses that should be given a high priority for investment.

Students should conclude that ready-to-eat cereals should be given a medium investment priority. None of PepsiCo‘s business units need to be considered for divestiture based on industry attractiveness. Students may be able to argue that ready-to-eat cereals should be considered for divestiture based upon its relatively weak competitive position in the cereal

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industry. However, once students prepare cash flow estimates for PepsiCo‘s business units, they will determine that Quaker Oats is a cash cow that doesn‘t currently require investments beyond what is supported by internal cash flows.

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Section 6 Case Teaching Note for Case 09

FIGURE 1: SAMPLE INDUSTRY ATTRACTIVENESS/COMPETITIVE STRENGTH MATRIX OF PEPSICO’S DOMESTIC BUSINESSES

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Does PepsiCo’s portfolio exhibit good strategic fit? What value-chain matchups do you see? What opportunities for skills transfer, cost sharing, or brand sharing do you see?

Substantial cost sharing and skills transfer opportunities exist between PepsiCo‘s beverage brands and between its various snack brands, but there appear to be less strategic fit opportunities across business platforms. The operating processes vary greatly between bottled water and functional beverage bottling, soft drink concentrate production, grain-based food products production, and snack food production. Students may suggest that beyond PepsiCo‘s corporate-wide purchases for ingredients and packaging materials, it is unlikely that PepsiCo managers could find ways to share costs or transfer skills between these businesses. It should also be noted, however, that there are ample opportunities to share costs and transfer skills within broad product categories. The company‘s research and development activities directed at creating healthier products can likely benefit all businesses within a division. PepsiCo‘s transfer of best practices between its 200 plants, 3,500 distribution systems, and 120,000 service routes around the world is another example of such strategic fit.

The company estimated that synergies among its business units generated approximately $1 billion annually in productivity savings. Students should also note that marketing innovation plays a major role in PepsiCo‘s competitive strategy in each of its lines of business.

PepsiCo management shares market research and relies heavily on marketing innovations to position their brands in each market in which it competes. Consumers in each of these markets have much in common and it should be expected that PepsiCo managers share skills and information in crafting and implementing the strategies of each of the businesses. There are also cost sharing opportunities in the distribution of Quaker snacks and Frito-Lay products.

The operations, sales and marketing, and advertising/promotion of Quaker‘s hot and RTE cereals, flavored grains, and other breakfast products have little in common with value chain activities of PepsiCo‘s convenience foods and beverages but do offer cost sharing and skills transfer opportunities among themselves. Figure 2 provides a list of cost sharing, skills transfer, and brand sharing opportunities along the value chains of PepsiCo‘s business units with the value chain of its core beverage business.

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Section 6 Case Teaching Note for Case 09

FIGURE 2

ASSESSMENT OF STRATEGIC FIT POTENTIALS BETWEEN PEPSICO’S BUSINESS UNITS

CS = cost sharing benefits ST = skills transfer opportunities Value Chain Activities

Pepsi Cola

None

None

None

Frito-Lay

Some potential cost sharing with Quaker Snacks

None

Aquafina/LIF EWTR/Bubly

None

Cost sharing among hot fill operations

Rockstar/Star bucks

Some potential cost

Cost sharing among hot fill

Cost sharing with all convenience snacks/ST with convenience beverages Cost sharing with all convenience beverages/ST with convenience snacks Cost sharing with all

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Cross-selling with FritoLay products/ST with all convenience products Cross-selling with Pepsi products/ST with all convenience products

ST/CS with all convenience products

ST with all convenience products

ST/CS with all convenience products

ST with all convenience

ST/CS with all

ST/CS with all convenience products

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Section 6 Case Teaching Note for Case 09

Frappucino

Gatorade

Quaker snacks

Quaker hot cereals

Quaker RTE cereals

sharing with hot fill beverages

convenience beverages/ST with convenience snacks Some Cost sharing Cost sharing potential cost among hot fill with all sharing with operations convenience hot fill beverages/ST beverages with convenience snacks Some Possible ST Cost sharing potential cost with RTE and with all sharing with hot cereals convenience Frito-Lay snacks/ST with convenience beverages CS with RTE Possible ST CS with RTE cereals, with RTE cereals, Quaker cereals, Quaker flavored snacks snacks grains, and other breakfast

CS with hot cereals, Quaker

operations

Possible ST CS with hot with RTE cereals, cereals, Quaker flavored

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products

convenience products

ST with all convenience products

ST/CS with all convenience products

ST with all convenience products

ST/CS with all convenience products

ST/CS with RTE cereals, flavored grains, Quaker snacks, and other breakfast products ST/CS with hot cereals, flavored

ST/CS with Quaker branded products

ST/CS with Quaker branded

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Section 6 Case Teaching Note for Case 09

snacks

snacks

Quaker flavored grains

None

None

Quaker other breakfast

None

None

grains, and other breakfast

grains, Quaker snacks, and other breakfast products CS with RTE ST/CS with and hot RTE and hot cereals and cereals, other Quaker breakfast snacks, and other breakfast products CS with RTE ST/CS with cereals, RTE cereals, flavored flavored grains, and grains, hot cereals Quaker snacks, and hot cereals

products

ST/CS with Quaker branded products

ST/CS with Quaker branded products

Does PepsiCo’s portfolio exhibit good resource fit? What are the cash flow characteristics of each of PepsiCo’ seven segments? Which businesses are the strongest contributors to PepsiCo’s free cash flows?

Students who have reviewed case Exhibit 3 should easily recognize that the portfolio has very good resource fit, with the company‘s businesses generating free cash flows of $6.4 billion in 2020 and $nearly $7.2 billion in 2021. Table 3 presents the cash flow estimates of each of the seven business units before contributions to corporate demands on cash—interest and income tax expense and dividend payments. Students who have made calculations similar to those in Table 3 will note that Frito-Lay North America and PepsiCo Beverages

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Section 6 Case Teaching Note for Case 09

335

North America business units generate the vast majority of cash flows. However, all business units produce ample cash flows with Europe and Latin America each contributing approximately $1 billion in free cash flows in 2021.

In addition, students should be quite impressed with the operating profit margins of Frito-Lay North America and Quaker Foods North America presented in Table 4. Even though Quaker Oats‘ brands compete in mature processed food categories that offer little growth potential, the brands provide hefty operating profit margins. PepsiCo Beverages North America unit has far lower operating profit margins relative to Frito-Lay North America and Quaker Foods North America but compares favorably with PepsiCo‘s Europe business units. The strong profit margins produced in PepsiCo‘s remaining international units should allow students to conclude the operating profit margin margins of all PepsiCo units are strong and contribute to shareholder value.

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Section 6 Case Teaching Note for Case 09

Table 3 Estimated Cash Flow before Interest and Income Tax Expense and Dividend Payments for Pepsico’s Business Units, 2015–2017

2021

2020

2019

Frito-Lay North America Operating profit + Amortization of intangible assets + Depreciation and other amortization − Capital spending Estimated cash flow contributed by business unit

$5,633 11 594 1,411 $4,827

$5,340 10 550 1,189 $4,711

$5,258 7 492 1,227 $4,530

Quaker Foods North America Operating profit + Amortization of intangible assets + Depreciation and other amortization − Capital spending Estimated cash flow contributed by business unit

$ 578 0 46 92 $532

$ 669 0 41 85 $625

$ 544 0 44 104 $484

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Section 6 Case Teaching Note for Case 09

PepsiCo Beverages North America Operating profit + Amortization of intangible assets + Depreciation and other amortization − Capital spending Estimated cash flow contributed by business unit

2,442 25 926 1,275 $2,118

1,937 28 899 1,245 $1,619

2,179 29 857 1,053 $2,012

Latin America Operating profit + Amortization of intangible assets + Depreciation and other amortization − Capital spending Estimated cash flow contributed by business unit

1,369 4 283 461 $1,195

1,033 4 251 390 $898

1,141 5 270 557 $859

1,292 37 364

1,353 40 350

1,327 37 341

Europe Operating profit + Amortization of intangible assets + Depreciation and other amortization

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338

Section 6 Case Teaching Note for Case 09

− Capital spending Estimated cash flow contributed by business unit

752 $941

730 $1,013

613 $1,092

858 5 181 325 $719

600 3 149 252 $500

671 2 116 267 $522

Asia Pacific, Australia and New Zealand, and China Operating profit 673 + Amortization of intangible assets 9 + Depreciation and other amortization 102 − Capital spending 203 Estimated cash flow contributed by business $581 unit

590 5 91 230 $456

477 1 76 195 $359

Africa, Middle East, South Asia Operating profit + Amortization of intangible assets + Depreciation and other amortization − Capital spending Estimated cash flow contributed by business unit

Source: Calculated from case Exhibit 6.

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Section 6 Case Teaching Note for Case 09

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340

TABLE 4

Section 6 Case Teaching Note for Case 09

Operating Profit Margins by Pepsico Business Segment, 2019–2021

Frito-Lay North America Quaker Foods North America PepsiCo Beverages North America Latin America Europe Africa, Middle East, South Asia Asia Pacific, Australia and New Zealand, and China

2021

2020

2019

28.7% 21.0% 9.7% 16.9% 9.9% 14.1%

29.4% 24.4% 8.6% 14.9% 11.3% 13.1%

30.8% 21.9% 10.0% 15.1% 11.3% 18.4%

14.6%

17.1%

16.3%

Calculated from case Exhibit 6.

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Based on the preceding analysis, what is your overall evaluation of PepsiCo’s business portfolio in 2022? Does the portfolio provide the company’s shareholders with an opportunity for aboveaverage market returns?

Students will likely commend PepsiCo‘s chief managers for building a collection of food and beverage brands capable providing shareholders with the opportunity for above-average market returns. The company‘s businesses all hold impressive positions in their respective industries and some have outstanding potential for growth. However, the slow growth of its core business units has caused PepsiCo‘s common shares to trail the S&P 500 by a considerable margin between May 2017 and May 2022. However, case Exhibit 2 shows that the company‘s shares have grown rather steadily from approximately $120 per share in January 2018 to about $170 in May 2022.

It is unlikely that the domestic sales of soft drinks or snack foods will grow much more quickly than current annual growth rates, but Gatorade, Propel, Aquafina, LIFEWTR, Stacy‘s Chips, KeVita, bubly Sparkling Water, Rockstar, SodaStream, and Pure Leaf offer growth opportunities in North America. Students should question whether the markets for these products are large enough to offset the slow growth of vast carbonated soft drink and snack foods industries. PepsiCo has the potential to increase Gatorade‘s sales outside of the United States and Frito-Lay‘s focus on developing healthier snacks is likely to contribute to revenue and volume gains in developed countries where health and fitness are growing concerns of consumers.

There is also some question concerning the ability to gain synergistic benefits between some of Quaker‘s food businesses and PepsiCo‘s convenience food and beverage businesses, but the cash flow analysis and operating profit margins presented in Tables 3 and 4 suggest that these businesses do have the ability to contribute to increased shareholder value through their impressive cash flows and stellar profit margins.

What strategic actions should PepsiCo management take to improve the corporation’s financial and market performance? Should its free cash flows be used to fund additional share repurchase plans, pay higher dividends, make acquisitions, expand internationally, or for other purposes?

What other strategic actions should be pursued by corporate level management?

Students may struggle with what moves are needed next at PepsiCo but should be able to recommend most of the following: 

Students are likely to recommend that the company accelerate its expansion of snack brands into rapidly growing markets located in Asia Pacific, Latin America, and Africa, Middle East, and South Asia. Many of PepsiCo‘s products have universal taste appeal and become consumed widely outside of North America.



Similarly, students should recognize the importance of further internationalizing Gatorade and non-carbonated soft drink brands. There are likely many attractive markets outside North America for healthier beverage brands such as Gatorade, SodaStream, KeVita Probiotic, and Pure Leaf.

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

Students are also likely to suggest that PepsiCo push Propel, Rockstar, and Aquafina into additional markets in Europe and Asia, Middle East and Africa.



Students may recommend that the company divest its Quaker ready-to-eat cereals, flavored grains, and other breakfast products because of low industry growth rates.

However, students should not be too forceful in arguing for a rapid liquidation of these business since analysis of Quaker‘s financials suggest these businesses have handsome operating profit margins and free cash flows.



Students should suggest that the company should utilize its free cash flows to support the ongoing $2 billion share repurchase program and dividend payments of approximately $5.5 billion.



Students are also likely to suggest that the company should utilize its free cash flows to make additional ―tuck-in‖ acquisitions of producers of healthier snacks and beverages.



Students will likely recommend that the company continue to develop better-for-you snacks and beverages.



While there should be little argument about most recommendations to increase international sales, capture strategic fit opportunities, make small acquisitions and develop new healthy products, the prospect of a major acquisition may be more hotly debated in the class. The company‘s small ―tuck-in‖ acquisitions have helped build a stronger portfolio and brands and may in time add to its lineup of $1 billion brands.

EPILOGUE You can check for the company‘s latest financial reports and press releases at its investor website (www.pepsico.com).

Case 10 Teaching Note

Robin Hood Overview This two-page case is a classic that works great in the classroom. It forces students to think outside the box, challenging them to analyze Robin Hood‘s crusade against the Sheriff of Nottingham in business terms. As the case unfolds, Robin Hood‘s problems are multiplying. His main source of revenue is declining as travelers are beginning to avoid coming through the forest (The market is in decline! The present strategy has run out of gas. Does Robin Hood need to expand into new geographic markets to maintain and grow revenues?). Yet, because the fame of his Merrymen is spreading, new recruits are pouring in. The size of his band is beginning to exceed the food capacity of the forest and the band‘s camp, because of its increasing size, is easier to detect. Discipline is becoming harder to enforce. (In other words, costs are rising and diseconomies of scale have set in—Robin Hood is caught in a classic profit squeeze! Moreover, the culture is being eroded because all the newcomers do not have the same values and beliefs as © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

343

the original members who had a common bond of opposing the evil Sheriff and trying to redress grievances of the downtrodden at the hands of the ruling class. Furthermore, the Sheriff‘s forces are growing stronger (i.e., competition is intensifying!). Robin needs an action plan to deal with the deteriorating situation, and he needs to implement it quickly.

Suggestions for Using the Case We positioned this case as the lead off case for the strategy execution section (Chapters 10) for three reasons. One, the case is short—something that students always appreciate. Two, and more importantly, it is an excellent transition case—there are elements of both crafting strategy and executing the chosen strategy for students to consider in arriving at their action recommendations. The implementation/execution issues lurking in this case cut across a wide front—organization, culture, motivation and commitment, policies, control, and leadership.

Some kind of action on Robin Hood‘s part is urgently needed—indeed, some pretty big decisions are needed. The twin issues of ―what to do‖ and ―how to achieve good results quickly‖ are pervasive. Three, in teaching this case over the years, we‘ve seen time and again that the Robin Hood case has all of the ingredients for producing an exceptionally lively, entertaining class discussion. It‘s a case that is virtually certain to be popular with students, and it‘s a fun case to teach.

However, you can also use the Robin Hood case as a leadoff case for the course. The case involves issues relating to mission, objectives, strategy, and decisive strategic leadership; the need for an action plan is obvious—these are the very things one looks for in a good leadoff case. And the nature of the case virtually guarantees the stimulating kind of class discussion one needs to get the course off on the right foot.

What to Tell Students in Preparing the Robin Hood Case for Class. To give students guidance in what to do and think about in preparing the Robin Hood case for class discussion, we strongly recommend that you provide class members with assignment questions and insist that they prepare good notes/answers to these questions before coming to class. Our recommended assignment questions for the Robin Hood case are presented in the next section of this TN.

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To facilitate your use of assignment questions and making them available to students, we have posted a file of the Assignment Questions contained in this teaching note in the instructor’s resources section of the Connect Library. (You should be aware that there is a set of assignment questions posted in the Instructor Resources section of the Connect Library for all 12 cases included in the 8th edition.)

In our experience, it is quite difficult to have an insightful and constructive class discussion of an assigned case unless students have conscientiously have made use of pertinent core concepts and analytical tools in preparing substantive answers to a set of well-conceived study questions before they come to class. In our classes, we expect students to bring their notes to the study questions to use/refer to in responding to the questions that we pose. Moreover, students often find that a set of study questions is useful in helping them prepare oral team presentations and written case assignments—in addition to whatever directive question(s) you supply for these assignments. Hence, we urge that you provide students with assignment questions—either those we have provided or a set of your own questions—for all those aspects of a case that you believe are worthy of student analysis or that you plan to cover during your class discussion of the case.

Utilizing the Guide to Case Analysis. If this is your first assigned case, you may find it beneficial to have class members read the Guide to Case Analysis that is posted in the instructor’s resources section of the Connect Library. The content of this Guide is particularly helpful to students if your course is their first experience with cases and they are unsure about the mechanics of how to prepare a case for class discussion, oral presentation, or written analysis.

Suggested Assignment Questions for an Oral Team Presentation or Written Case Analysis.

The length of the case makes it ideal for an in-class written case or a final exam case. Our suggested written assignment questions are as follows: 1. As Robin Hood‘s most trusted advisor (and as someone knowledgeable in the ways of crafting and executing effective strategies), please prepare an action plan for Robin Hood‘s consideration. It is your job to convince him to pursue your proposed plan; hence your report should include full justification and arguments to support your recommended course of action.

2. Since you are Robin Hood‘s most trusted advisor and are most knowledgeable about crafting and implementing effective strategies, he has called upon you to advise him on how to proceed in light of the situation. Within the next few hours, Robin Hood expects you to provide him with: ffff.

A rundown of the issues he needs to address

gggg.

An appropriate action plan that includes



a mission,



a set of performance objectives,



a strategy for dealing with the issues/problems he confronts, and

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345



the action steps that will need to be taken to implement the strategy effectively.

Please provide supporting analysis and persuasive argument for your recommended course of action (you must convince him to do what you suggest!) and you need to be specific about what to do and how to do it.

Assignment Questions 133.

What problems does Robin Hood have? What issues need to be addressed?

134.

Do Robin Hood and the Merrymen need a new mission? new objectives? a new strategy?

135. What strategic options does Robin Hood have? Is continuing with the present strategy an option or is the present strategy obsolete?

136.

Why not try to end the campaign by killing the Sheriff?

137. What are the pros and cons of accepting the offer of the barons to assist in securing King Richard‘s release from prison?

138.

What action plan would you recommend to Robin?

139. How should Robin implement the recommended plan? What action steps will need to be taken to make the recommended strategy work successfully?

Teaching Outline and Analysis 1. What problems does Robin Hood have? What issues need to be addressed?

Robin Hood and his Merrymen are caught in a classic ―profit‖ squeeze. Revenues are down because travelers are avoiding routes through Sherwood Forest. Costs are rising as new recruits pour in and as foraging for food supplies must reach out farther and farther from the main encampment. Students ought to see that diseconomies of scale are becoming a serious problem. As a consequence, Robin has to be concerned about the Merrymen‘s ability to continue to succeed at its mission of ―rob from the rich and give to the poor.‖ There are fewer ―customers‖ to rob. Falling revenues combined with rising costs means there is less ―profit‖ (or dividends) to distribute to the poor (or ―shareholders‖).

Moreover, there are cracks appearing in the culture. Robin Hood and his original small closeknit band of Merrymen shared a common bond and set of values: oppose the evil Sheriff and try to redress grievances of the downtrodden at the hands of the ruling class. However, do all the new recruits who are showing up voluntarily in droves have these same values? Are perhaps they being attracted to join up for less noble reasons—the excitement, the prospects of sharing in the spoils, ambitions to become a thief (as opposed to engaging in honest, hard work), or not having anything better to do (being unemployed). Discipline is suffering. Will the new recruits be loyal to Robin Hood or will they look out for their own personal interests? As Robin noted, ―Why, I don‘t know half the men I run into these days.‖ Several issues have to be addressed: © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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

Whether to institute the fixed transit tax (and shift to a new business purpose or mission).



How to avoid detection (given the growing size of the encampment) and ensure the security of the organization.



Whether to accept the offer of several barons to join in a move to secure King Richard‘s release from jail in Austria.



What to do about the growing strength of the Sheriff‘s forces.

2. Do Robin Hood and the Merrymen need a new mission? new performance targets? a new strategy?

The issue of whether a whole new strategic direction (mission, objectives, and strategy) is needed should be explored fairly early in the class discussion because the conclusions reached will drive the action plan that emerges. You can attack the issue of strategic direction by asking the class whether the band‘s traditional mission of robbing the rich and giving to the poor is fast becoming obsolete in light of events. 

Will there soon be any bounty to distribute to the poor? With revenues on the decline and costs on the rise, won‘t ―profits‖ dry up?



Can Robin Hood and his Merrymen continue to count on support from their constituency (the poor, the downtrodden, and the townspeople) if the distribution of the ―profits‖ slows to a trickle? Will Robin Hood‘s popularity and ―hero‖ image suffer as he becomes less and less able to redistribute income from the rich to the poor.



The Merrymen‘s common bond and shared values involve their mutual desire to oppose the Sheriff and his administration. Robin Hood forged his original band from men who were united in enmity against the Sheriff, had a deep sense of justice, and were willing to live outside the law to accomplish their goals. Their motto of ―rob from the rich and give to the poor‖ was viewed as noble and, in their eyes, gave them legitimacy. However, there are some key questions that you can pose to the class:



Do the new recruits share the same values as the Robin and other key members of his band?



Are they coming to join up because of grievances against the Sheriff and a desire to serve the Merrymen‘s original purpose or because of other attractions—the desire to take up professional thievery as an occupation (because they are unemployed and have no attractive job prospects), because they are enamored with the excitement of provincial banditry, or because they want to share in Robin Hood‘s glory by being associated with his band of Merrymen?



What is the strength of their commitment to the organization‘s original purpose and mission?

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347 

Why is discipline becoming harder to enforce?

As the class considers these points, there is likely to be a growing realization that Robin Hood needs to consider whether the organization‘s purpose and mission needs to be expanded or changed.

You can shed further light on whether there is a need for a new strategic direction by getting the class to contemplate the organization‘s objectives and current strategy. 

If the mission-purpose-motto is ―rob from the rich and give to the poor,‖ then what are the appropriate objectives or performance targets?





From a business standpoint, an argument can be made that to achieve the purpose and mission to the fullest, the organization must try to maximize its profits—which requires low operating costs so that most of the revenues gained from robbing the rich can then be redistributed to the poor in the form of 100% ―dividends.‖ The greater the amount there is to distribute to the poor, the more the mission is fulfilled.

What is the most appropriate strategy for achieving this objective?



The basic strategic approach would be to try to maximize revenues (rob as many rich travelers as is feasible), minimize operating costs (i.e., employ a classic low-cost provider strategy), and have a 100 percent dividend payout of profits. To contain costs, the band should be large enough to function effectively, yet not so overstaffed that scale diseconomies are encountered. Yes, there is strength in numbers, but only up to the point where profits can be maximized.



So far, Robin Hood has pursued a focus strategy. The target market is only rich merchants and abbots traveling through Sherwood Forest. The problem Robin now faces is that the target market is drying up and that his organization has grown too big for a focus strategy tied solely to Sherwood Forest.

As these aspects become more apparent to the class, students should begin to understand that Robin cannot ―stay the course‖ and stick with the ways and methods that have made the organization successful to date. The current strategy has run its course. Strategic changes are definitely needed. Once the class reaches these conclusions, you are ready to tackle the question of what to do and can call upon students for recommendations.

3. What strategic options does Robin Hood have?

Continuing with the present strategy is not a viable option. A SWOT analysis can help sort out the alternative courses of action Robin Hood needs to consider: Strengths 

The increasing size of the band



The fame of the Merrymen is spreading

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

So far, the organization has operated with success

Weaknesses 

The increasing size of the band (raises costs and increases the chances of detection by the Sheriff‘s forces)



Discipline is becoming harder to enforce—the culture has some disturbing cracks



Game is becoming scarce



Food has to be transported from greater distances



The encampment is so large that it can be detected from miles away



Diseconomies of scale are setting in, causing costs to rise

Opportunities 

Impose a fixed transit tax



Expand operations to geographic areas outside Sherwood Forest (to escape declining market opportunities in Sherwood Forest)



Accept the offer of the barons to help in securing King Richard‘s release



The Sheriff is growing stronger in terms of money, men, and facilities



Travelers are avoiding routes through Sherwood Forest; the target market is drying up



Prince John may decide to reinforce the Sheriff

Threats

4. Does it make sense to impose a fixed transit tax to counter the decline in revenues?

The fixed transit tax would entail an altogether new business definition and business purpose.

While it might rejuvenate revenues if the tax is viewed by travelers as an acceptable price to pay for safe passage through the forest, a fixed transit tax is a questionable alternative. The Merrymen will resist such a radical redefinition of the band‘s purpose; they are proud of their motto: ―Rob from the rich and give to the poor.‖ A transit tax, imposed uniformly on rich and poor travelers alike, would antagonize the band‘s main source of support and information (the poor and the townspeople) in addition to its lack of cultural fit or temperamental fit.

Besides the transit tax is not a legitimate function for ―provincial bandits‖—levying and collecting taxes is a governmental function. For the Merrymen to try to horn in on the government‘s tax collection function could attract the ire of Prince John and cause him to reinforce the Sheriff. Prince John might choose to ignore the actions of a provincial bandit (even a successful one like Robin Hood) since he has more important matters to concern his attention. But a bandit who tries to set up a rival tax collection function and divert taxes away © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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from the royal treasury cannot be tolerated since it represents treason against the Crown and the potential budding of a revolution.

In short, the option of a fixed transit tax is unappealing. The cons outweigh the pros by a hefty margin.

5. What about expanding the band’s operations to geographical areas to the north, south, east, and west of Sherwood Forest as a way of rejuvenating revenues and cash flows?

At first blush, this option has some appeal. Expanding into new geographic areas could provide a much needed revenue boost and thwart the efforts of rich travelers and abbots to use routes around Sherwood Forest. It would also capitalize on the increasing size of the band and provide jobs for the new recruits pouring in.

But geographic expansion would pose serious problems for Robin Hood and his functional organization structure. With the present organization, Robin Hood can maintain tight personal control over all operations and supervise his key lieutenants (Will Scarlett, Little John, Scarlock, and Much the Miller‘s Son). Shifting to a strategy of geographic expansion to the north, south, east, and west of Sherwood Forest would probably require shifting to a geographical organization structure. 

Who would be put in charge of the geographical units? Are Will Scarlett, Little John, Scarlock, or Much the Miller‘s Son ready to assume general management responsibility— their skills and experiences are limited to a single functional areas? Could anyone other than a loyal lieutenant be trusted with the job of heading up a geographic unit?



Would not each band need to operate on a decentralized basis and assume responsibility for handling its own intelligence-gathering, security, discipline, provisioning, and financial controls? If each band handles its own intelligence-gathering, for example, then what is Will Scarlett‘s role? Does he provide advice, counsel, and staff support from headquarters? Should the intelligence-gatherers for each band report to Will Scarlett or to the geographical head?

Similar issues arise for the appropriate roles for Scarlock, Little John, and Much the Miller‘s Son in their respective areas of responsibility.



How would the operations of the geographical units be coordinated?



How would Robin Hood and/or his chief financial officer maintain proper financial controls?

What would prevent some of the geographic units from not reporting all of the take?



Should the geographic units be operated as profit centers? How would Robin Hood measure the performance of each geographic unit?



Would geographic decentralization tend over time to weaken Robin Hood‘s position as a strong leader? Should Robin Hood be willing to move to decentralized geographic decision making? Does this really make sense in light of his personal campaign against the Sheriff and the growing strength of the Sheriff‘s forces? Which decisions would it make sense for Robin to decentralize; for instance should he be willing to delegate authority for specific ―raids‖ to his geographic heads or should all plans for raids be cleared with Robin first? Should he

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350 simply set policies and guidelines and concern himself mainly with supervising the geographic heads? How often should he expect reports from them—daily, weekly, monthly?

You should raise as many of the above questions with the class as seems necessary to get the class to see the range of managerial and organizational issues that a geographic expansion strategy entails. This phase of the discussion gives you a golden opportunity to stress the fundamental point that structure follows strategy—in other words, a new strategy typically creates a need for changes in organizational structure, competencies, and capabilities.

It will not be a simple matter for Robin Hood to pursue a strategy of geographic expansion from an organizational standpoint. It would cause a major upheaval in the way Robin Hood and his band currently function. Just as important, though, is the question of whether geographic expansion makes good strategic sense. Expanding operations over a wider area could accelerate the strengthening of the Sheriff‘s forces since Robin Hood‘s activities would pose a bigger threat. To the extent that Robin Hood succeeded in expanding his activities beyond the boundaries of Sherwood Forest, his exploits could attract increasing attention from Prince John and prompt Prince John to take an active interest in seeing that the Sheriff was amply reinforced. Robin should not risk activities that would encourage a strategic alliance between the Sheriff and the Prince. He has a big enough problem with the growing strength of the Sheriff‘s forces without getting Prince John involved.

6. Why not try to end the campaign by killing the Sheriff?

While the case states that killing the Sheriff would ―not solve the basic problem,‖ some members of the class may not see why this option holds out no solution for Robin. Or, they may disagree with the statement in the case. So this is an issue you may want to explore briefly.

Killing the Sheriff has numerous problems as a solution. To begin with, should ―murder‖ or ―assassination‖ be countenanced? Is this a legitimate purpose of the organization? Is it compatible with the band‘s mission/motto of ―rob from the rich and give to the poor‖ (which, it might be argued, is a ―nobler purpose‖)? Is killing the sheriff ethical or socially responsible? How would it affect Robin‘s image? Would engaging in premeditated murder necessarily make Robin a ―bad guy‖ as opposed to a ―good guy?‖ Second, even if the hated Sheriff is killed, would not the next Sheriff, probably someone appointed by Prince John, simply continue to pursue Robin Hood and his band? Is there any reason to believe that the next Sheriff would not be from the same mold as the current Sheriff? Might the next Sheriff come after Robin with equal or greater vengeance? Might not killing the Sheriff trigger a move to strengthen the forces of the next Sheriff against Robin?

Given these considerations, the class should see that killing the Sheriff is, at best, no more than a short-term solution and in the long term would produce no fundamental change in Robin Hood‘s deteriorating strategic position.

7. What are the pros and cons of accepting the offer of the barons to assist in securing © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

351

King Richard’s release from prison?

While this option may not have seemed appealing at the outset, by this point in the class discussion it starts to loom as something that must be considered very seriously. None of the other options have stood up under careful scrutiny. We like to dig into this option by asking the class why the barons have approached Robin for his assistance. The obvious reason, it seems to us, is because Robin Hood‘s activities put him in a position to provide some of the ransom. He might also serve as an emissary to deliver the ransom and some expertise from members of his organization could prove valuable as well. But, Robin‘s primary value to the barons is likely the assist he could provide in collecting the necessary monies for the ransom.

There‘s likely to be no disagreement from the class on this point.

The benefit of Robin joining with the barons is the promise of amnesty for himself. Amnesty gives Robin a way out of his dilemma and offers a way to successfully end his campaign against the Sheriff. Yes, there are risks but they seem no greater than are posed by the other options he has.

But there are some difficulties that some class members may not have thought about. 

If Robin gets amnesty, then he has his golden parachute. But what about the rest of the Merrymen? Is Robin to abandon them to fend for themselves?



What loyalty does Robin owe the other stakeholders—the Merrymen and the poor people he has benefitted through his efforts at income redistribution?



Can Robin Hood, as leader, just up and walk away because he has been offered a better deal?

Even if he can, should he?



Is Robin ethically and morally obligated to look out for the well-being of his organization as best he can before he departs? Should he try to get the organization in good shape before he departs? Should he be the first to bail out and try to save only himself?



Should he try to arrange amnesty for his chief lieutenants? for all the Merrymen? even the new recruits whom he doesn‘t know?

The point of this discussion is to highlight the leader‘s role and responsibility for looking out for the best interests of the organization‘s stakeholders and also to indicate the need for a plan to implement whatever course of action is chosen.

8. What action plan would you recommend to Robin?

Very likely, the majority will see the merits of joining with the barons to secure King Richard‘s release. A few may argue for other courses of action.

9. How should Robin implement the recommended plan? What action steps will need to be taken to make the recommended strategy work successfully?

Assuming that the choice is to pursue negotiations with the barons and participate in their efforts to restore King Richard to the throne, there are several actions that Robin should take: © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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

Have a meeting with the Merrymen and explain fully the strategic dilemma that the organization finds itself in for the long term and the tough choices that have to be made. Let everyone know that the future does not look promising, that things cannot continue going as they have been, and that the time has come to chart a new course.



Stop accepting recruits immediately and begin a program to downsize the organization.



Encourage people to leave the organization voluntarily. Perhaps Little John should come down hard on those who are not inclined to observe strict discipline as a way of making some people unhappy enough to leave.



Employ a harvest strategy to maximize short-term cash flow. Perhaps make scattered raids outside Sherwood Forest to shore up sagging revenues.



Pursue negotiations with the barons to secure amnesty for all the remaining Merrymen, the justification being that their efforts have helped generate the monies that Robin Hood can contribute to the ransom for King Richard.



Avoid further conflict with the Sheriff and lessen the urgency for the Sheriff to secure reinforcements. Try to buy enough time in the campaign against the Sheriff for the efforts to secure the King‘s release to bear fruit.



Prepare to cease operations as soon as circumstances permit. Help the Merrymen find alternative career occupations. Try to bring the organization to a graceful end. Have key lieutenants develop an orderly exit strategy.



Robin should personally devote most of his time and effort to assisting the barons gain King Richard‘s release and making sure that the promise of amnesty is honored.

Case 11 Teaching Note Macy’s, Inc. in 2022: Has the Implementation of Its Polaris Strategy Produced a Successful Turnaround?

Overview In 2022, Macy‘s, Inc. was in the third year of its Polaris turnaround strategy that had been developed to reverse the company‘s multi-year decline in revenues. The company‘s plateau in annual revenues began in the mid-2000s and ranged from approximately $27 billion in Fiscal 2007 to $25 billion in Fiscal 2019. The company‘s achieved record revenues of $28. 1 billion in Fiscal 2015. Macy‘s stagnant sales largely reflected a change in shopping preferences from mallbased department stores to online retailing. The convenience of shopping for nearly every type of consumer good at Amazon or other online retailer sites had radically transformed the retail © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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industry. Consumer needs continued to allow for variations in strategy that allowed for distinctive retailer approaches to meeting customer expectations. Consumers had become to expect even the most highly differentiated retailers to have an online presence in addition to their prestigious brick-and-mortar locations.

Macy‘s had struggled as badly as nearly any retailer in adapting from a brick-and-mortar business model to meeting the needs of consumers favoring online shopping. The company‘s revenues collapsed to $18.1 billion in 2020 as the COVID-19 pandemic and stay-at-home orders by state and local governments had created unprecedented challenges for all traditional brickand-mortar retailers.

Macy‘s, Inc. turned to 34-year company veteran Jeff Gennette in 2018 to develop a strategy to improve the company‘s online retailing experience for consumers. Gennette unveiled a turnaround strategy called Polaris in February 2020, just as the world was learning of a frightening novel SARS-Coronavirus-2 later to become known as COVID-19. The results of Polaris plan were overshadowed by the decline in brick-and-mortar retail sales globally in 2020 and were difficult to assess in the Macy‘s 2020 performance. The plan, however, was showing promise in 2022 as the company focused on six key initiatives to transform the company‘s operations and marketing approach to meet the needs of consumers.

The six key pillars of the Polaris strategy were to (1) Win with fashion and style; (2) Deliver clear value; (3) Excel in digital shopping; (4) Enhance store experience; (5) Modernize supply chain; and (6) Enable transformation.

The company‘s 2021 performance rebounded sharply as shoppers became more comfortable returning to pre-pandemic routines, including shopping in malls and department stores. The implementation of Macy‘s Polaris strategy was also showing positive results as its revenues from online purchases increased by 45 percent from 2019. The company expected digital sales to grow to $10 billion by year-end 2022. The company‘s performance had given investors confidence in the Polaris strategy with the company‘s shares increasing from a low of $5.08 in October 2020 to about $24.00 in April 2022. However, the company‘s shares were still trading at a fraction of their July 2015 high of $70. While the Polaris strategy was well-matched to the retail environment of 2022, the company‘s implementation of the strategy would determine whether Macy‘s could sustain its improved competitiveness and financial performance.

Suggestions for Using the Case This is a high-interest case because of students‘ familiarity with department stores in general and Macy‘s in particular. Students will also have an opportunity to consider and debate the efficacy of its six-pillar Polaris turnaround strategy to modernize its merchandising strategy and shift from a predominantly brick-and-mortar retail strategy to a greater reliance on online retailing.

Also, students will likely have personal views as shoppers about the appeal of Macy‘s merchandising strategy, online retailing experience, store ambiance, and customer service and to what extent changes brought about by the Polaris strategy are evident to consumers. The Macy‘s case is thus one that will certainly trigger lively classroom discussions over Macy‘s decline and © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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the effectiveness of its current Polaris strategy.

This case is crafted for use in your business strategy or strategy execution module. The case is meant to illustrate the following concepts and frameworks and provide students with ample opportunities to use the tools of analysis: 

Assess the U.S. retail industry, including analysis of the major macroenvironmental forces as well as identification of the industry‘s Key Driving Forces (covered in Chapter 3).



Identify which generic strategy Macy‘s is pursuing (covered in Chapter 1 and discussed in greater detail in Chapter 5) and understand the benefits and limits of its generic strategy.



Perform a thorough situation or SWOT analysis of Macy‘s and understand the contribution of resources and capabilities to this company‘s success (covered in Chapter 4). The SWOT analysis summary presented in Table 4.2 of the text should be a very valuable guide for students in conducting their assessment of Macy‘s situation.



Analyze Macy‘s financial health using ratio analysis. We strongly recommend that students assess the financial ratios provided in the case to lend support to their analysis of Macy‘s situation (Chapter 4).



Evaluate how well Macy‘s management has implemented the Polaris strategy using the 8 Components of Strategy Execution framework (presented in Chapter 10).

The assignment questions and teaching outline presented below reflect our thinking and suggestions about how to conduct the class discussion and what aspects to emphasize.

To guide students in thinking about which analytical tools can be used to prepare the Macy‘s case for class discussion, we strongly recommend (1) providing class members with a set of study questions and (2) insisting that they prepare good notes/answers to these questions.

To facilitate your use of study questions and making them available to students, we have posted a file of the assignment questions contained in this teaching note for the Macy’s, Inc. in 2022 case on the Instructor’s section of the Connect Library for the 8th edition.

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The Connect-Based Exercise for the Macy’s, Inc. in 2022 Case. The autograded exercise for the Macy’s, Inc. case requires that students answer a series of multiple-choice questions related to the assignment questions presented in this teaching note. It should take class members roughly 35–45 minutes to complete the exercise, assuming they have done a conscientious job of reading the case and absorbing the information it contains.

The case is also suitable for a written case or group presentation. Our recommended assignment questions for Macy‘s are as follows: 140. You have been asked to prepare an analysis of Macy‘s competitive position in the retail marketplace and the effectiveness of its Polaris strategy. Your report should contain three pages of recommendations for improving the company‘s strategy execution efforts, overall competitiveness and financial performance. Your executive summary may be accompanied by supporting exhibits such as a competitive strength assessment, an evaluation of its strategy execution efforts, and a financial analysis.

141. Macy‘s CEO Jeff Gennette has learned of your considerable skills in strategic analysis and has hired you as a consultant to prepare a progress report on the implementation of the company‘s Polaris strategy. Your report should assess Macy‘s competitive position in the retail industry, its recent financial performance, and its effectiveness in implementing each of the six pillars of its Polaris strategy. The report should also offer specific, actionable recommendations to address any shortcomings in strategy execution that you identify and to improve overall competitiveness and financial performance. Your report should include four to six pages of recommendations and whatever supporting charts, tables, or exhibits you deem useful.

Assignment Questions What are the strategically relevant components of the macroenvironment for the U.S department store industry? What external forces are driving change in the industry?

142. Is Macy‘s generic strategy best characterized as a low cost, differentiation, broad, focused, or best-cost strategy? How well is this strategy working for Macy‘s?

143. What does a SWOT analysis reveal about Macy‘s competitive standing in the U.S. department store industry? Is Macy‘s well positioned? Explain.

144. What is your assessment of Macy‘s financial performance over the 2019–2021 period?

(Use the financial ratios in the Appendix of the text as a guide in preparing your financial analysis.)

145. How well has Macy‘s management led the implementation of the company‘s Polaris strategy? Evaluate the effectiveness of actions taken in various components of strategy execution as described in Chapter 10.

146. What strategic issues confront Macy‘s in 2022? What external or internal issues should most concern CEO Jeff Gennette and his company‘s senior leadership team?

147.

What recommendations would you make to Gennette to address strategic issues and

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improve strategy execution and overall performance at Macy‘s in 2022?

Teaching Outline and Analysis 10. What are the strategically relevant components of the macroenvironment for the U.S department store industry? What external forces are driving change in the industry?

You may wish to have students gauge the impact of macroenvironmental forces on Macy‘s and its affiliated brands. Table 1 presents a PESTEL Assessment for the U.S. department store industry.

While political, ecological, and legal/regulatory factors are not discussed in the case, students should recognize that sociocultural, technological, and economic forces are having a major impact on the U.S. department store industry. Key observations likely to be made by students are listed below: Sociocultural Forces 

Consumer attitudes shifting away from in-store shopping



Trend towards higher quality options at a lower price (private labels)



Mall traffic was declining with the exception of outdoor outlet malls and upscale outdoor lifestyle malls featuring beautiful architecture and landscaping along with a strong mix of aspirational luxury brands.

Economic Forces 

A declining birthrate in the United States and many developed countries resulted in fewer shoppers for an increasing number of goods.



The retail trade sector had grown at an average annual rate of 0.7 percent in the years 2015–2020 to reach $5.3 trillion in industry revenues.



The onset of Coronavirus in early 2020 was projected to lead to a 3.3 percent decline in revenues for the entire 2020 calendar year as retailers were required to temporarily close stores.



Analysts believe that the retail sector would return to a strong 1.8 percent annual growth rate for 2021 through 2025 as COVID-19 became contained and mitigated.



Retail sector growth was expected to increase to $5.9 trillion as post-pandemic economies strengthen



While the entire retail sector had enjoyed a 0.7 percent annual growth rate between 2015 and 2020, the department store segment of the retail sector had declined 11 percent annually during those years.



Analysts projected that the department store segment of the retail industry would continue

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357 to decline by 7.5 percent annually, falling from $100 billion in 2020 to $67.7 billion in 2025.

Technological Forces 

Internet technologies have facilitated online and mobile transactions in the retail industry



24-hour online shopping availability via smartphone applications

This is a logical place to introduce the concept of Key Drivers of Industry Change in Chapter 3 of the textbook. Students who have read Chapter 3 carefully should be able to enumerate and evaluate the key drivers of change in the supermarket industry, to support the contention that this industry has become (1) at best, moderately attractive, (2) more intensely competitive, and (3) less profitable. Table 1 presents Key Drivers of Change in the U.S. Department Store Industry.

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TABLE 1 Key Drivers of Change in the U.S. Department Store Industry Key drivers of industry change Changes in the long-term industry growth rate Increasing globalization Emerging new Internet capabilities & applications Changes in who buys the product & how they use it Technological change & manufacturing process innovation Product & marketing innovation Entry or exit of major firms Diffusion of technical know-how across companies & countries Changes in cost & efficiency Increases in uncertainty & business risk Regulatory influences & government policy changes Changing societal concerns, attitudes, & lifestyles Combined effects

Impact of major factor on industry segment

✔ Major determinant ✔ Major determinant

✔ Major determinant

✔ Major determinant ✔ Major determinant Increasing intensity of rivalry and decreasing profitability

Students should be able to assess the impact of driving forces from macro-environmental factors will continue to increase intensity of rivalry and decrease industry profitability.

11. Is Macy’s generic strategy best characterized as a low-cost, differentiation, broad, focused, or best-cost strategy? How well is this strategy working for Macy’s?

This is a good time to review Michel E. Porter‘s generic concepts introduced in Chapter 1 of the textbook and covered in greater detail in Chapter 5. We think that, given the elements of its Polaris turnaround strategy, students should conclude that Macy‘s strategy has drifted from (1) its historical broad differentiation to (2) a lack of a clear strategy to (3) the Polaris best-cost strategy.

You should recap the six pillars of the Polaris strategy and ask students if each of these support broad differentiation, a low-cost provider strategy or a best cost approach. 

Win with fashion and style—highlights differentiating elements



Deliver clear value—aligned with a best cost or low-cost strategy



Excel in digital shopping—aligning retailing strategy to the preferences of convenienceminded consumers © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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

Enhance store experience—adds differentiation or elimination of a competitive deficiency



Modernize supply chain—focus on lowering non-value-adding costs and improving merchandise availability



Enable transformation—focus on data analytics and IT capabilities necessary to understand consumer behavior and improve online retailing capabilities

Students might want to make arguments—pro and con—characterizing Macy‘s current competitive strategy approach as one of focused cost versus broad differentiation. 

Focused cost brands: STORY, The Outlet, & Backstage



Broad differentiation brands: Macy‘s, Bloomingdale‘s, & Bluemercury

A number of students may argue that Macy‘s Polaris strategy is an attempt to pursue a bestcost provider strategy. 

Remind students that, best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes, while also beating customer expectations on price. Is Macy‘s actually doing this through the implementation of its Polaris strategy?



To profitably employ a best-cost provider strategy, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals. Is there evidence that Macy‘s has developed these capabilities?

12. What does a SWOT analysis reveal about Macy’s competitive standing in the U.S. department store industry? Is Macy’s well positioned? Explain.

This point in the discussion is a good time to bring in the SWOT analysis concepts and tools from Chapter 4. Students should be able to identify: Macy‘s Resource Strengths and Competitive Assets 148.

Macy‘s Resource Weaknesses and Competitive Liabilities

149.

Macy‘s Market Opportunities

150.

External Threats to Macy‘s Future Well-Being

For ease of reference, highlights of the SWOT analysis for Macy‘s are shown in Table 2.

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TABLE 2 SWOT Analysis for Macy’s, Inc.    

Strengths/Competitive Assets Brand names (Macy’s and Bloomingdale’s) in brick-and-mortar retail that appeal to Baby Boomers Organic growth in digital commerce under a different brand name (Bluemercury) Improving online retailing capabilities Successful Star Rewards loyalty program

Weaknesses/Competitive Deficiencies      

Lack of long-term commitment to company vision or mission Muddled generic strategy straddling low cost and differentiation Reliance on mall locations Uninspiring store formats and merchandising tactics Management team that has yet to prove it has the capabilities to implement a successful turnaround C-Suite and below management team expertise—unknown

  

Increasing interest for at-home shopping Many direct rivals are in bankruptcy or are exiting the industry due to the shakeout High brand recognition for Macy’s and Bloomingdale’s

Opportunities/Favorable External Factors

    

Threats/Unfavorable External Factors Increasing dominance of e-commerce and online retailers such as Amazon Diminished demand for professional clothing as people are increasingly working from home Millennials and Gen Z customers have little interest in mall-based stores Accelerated demise of shopping malls Economic recession & downturns in travel & housing markets

The major conclusion of the SWOT analysis is that, despite CEO Gennette‘s turnaround efforts, Macy‘s has not built capabilities to capture market opportunities nor has it resolved internal weaknesses and competitive deficiencies. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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That is, Macy‘s is neither truly differentiated nor verifiably low cost, notwithstanding its move into discounted lines, which serve customers at price points higher than all of its deepdiscount rivals with the possible exception of JC Penney.

13. What is your assessment of Macy’s financial performance over the 2019–2021 period?

(Use the financial ratios in the Appendix of the text as a guide in preparing your financial analysis.)

Students should be able to use the financial information provided in case Exhibits 2 and 3, as well as the ratios provided in the Appendix of the text, in order to make calculations similar to those shown in Table 3.

TABLE 3 Selected Financial Statistics and Ratios for Macy’s, 2017–2019 Gross profit margin Operating profit margin Net profit margin Return on assets Return on equity Current ratio Long-term debt-to-assets ratio Long-term debt-to-equity Inventory turnover

Days of inventory

2021 2020 38.9% 29.2% 9.6% −25.8% 5.8% −22.7% 8.1% −22.3% 39.5% −154.5% 1.25 1.15

2019 38.2% 3.9% 2.3% n.a. n.a. n.a.

18.7% 91.0% 3.4

24.9% 172.6% 3.3

n.a. n.a. n.a.

107.0

112.1

n.a.

_____ n.a. – Not available.

Calculated using data from case Exhibits 2 and 3.

Students who have calculated financial rations shown in Table 3 should note that Macy‘s gross margins (not including the impact of net credit card revenues) returned to the prepandemic level by 2021. Students should also note evidence that the company‘s Polaris strategy has resulted in operating efficiencies as the 2021 operating profit margin and net profit margin are more than twice as size of comparable margins in 2019.

However, students should note that while there is evidence that the Polaris strategy has produced positive financial results, there has not been a notable effect on net sales (which remain slightly lower in 2021 than in 2019) and leverage ratios, liquidity ratios and activity ratios remain troubling in 2021. Specifically, students should comment on the low number of inventory turns, high days of inventory, minimal liquidity, and excessive long-term debt to equity ratios. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Students should note that while profitability ratios in 2021 are much improved from 2019, Macy‘s remains in a precarious financial situation and that further efforts are needed to complete a turnaround of the company.

14. How well has Macy’s management led the implementation of the company’s Polaris strategy? Evaluate the effectiveness of actions taken in various components of strategy execution as described in Chapter 10.

Students should review the components of strategy execution described in Chapter 10 when assessing the quality and effectiveness of the implementation of the Polaris strategy by Macy‘s management team. 





Allocating ample resources to strategy-critical activities. 

Macy’s allocated resources to improve merchandising by adding new styles that would appeal to long-term and new Macy’s shoppers.



The company made financial investments to add brands that offered a balance of value for customers while ensuring adequate margin for Macy’s. Key national brands offered by Macy’s included Calvin Klein, Columbia, 7 for All Mankind, Steve Madden, Cotton On, Citizens of Humanity, and Michael Kors.



Macy’s made investments in better quality private-label brands. The company believed that it could build four $1 billion private-label brands.



The company opened eight off-mall stores in 2021 to attract customers who normally shopped as smaller retail centers rather than malls. Brands targeted for off-mall retail centers included Market by Macy’s, Backstage, Bloomie’s, and Bloomindale’s Outlet.



The company planned to add 10 additional off-mall locations in 2022.

Instituting policies and procedures that facilitate strategy execution. 

Macy’s changed promotional tactics and policies to signal clear value to customers. Changes included easy-to-understand pricing and promotions and a more personalized loyalty program.



The company expanded its Star Rewards program to add a Macy’s Bronze segment. The new level increased loyalty among infrequent Macy’s customers added 3.5 million new members during the fourth quarter of 2021.

Adopting process management programs that drive continuous improvement in strategy execution activities 

The company emphasized continuous improvement in the customer experience in its stores.

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



To better respond to its customers’ shopping desires, the Bluemercury division expanded its private brand Lune+Aster and M-61 cosmetics and skincare products. The two private-label brands accounted for more than 10 percent of total sales at Bluemercury.



The emphasis on improving the customer experience resulted in 7.2 million new customers across Macy’s retail brands during the fourth quarter of 2021—an 11 percent increase from the fourth quarter of 2019.



In 2022, the company was implementing an omnichannel sales model to allow Macy’s customers to shop online for home delivery, make purchases online and pickup merchandise in the store, or buy online and ship to a store for pickup.



Macy’s omnichannel model was designed to integrate local brick-and-mortar locations into order fulfillment for nearby digital customers.



In some cases, distribution centers were also relocated to speed deliveries to high volume omnichannel markets such as Houston, Texas, San Francisco, California, Riverside, California, Phoenix, Arizona, Philadelphia, Pennsylvania, and Miami, Florida. Macy’s had determined that omnichannel customers shopped three times more often and spend three times as much as single-channel customers shopping exclusively online or in a store.



The company implemented a direct vendor fulfillment process to speed delivery of some items to online shoppers and allowed third-party sellers to sell merchandise at macys.com and bloomingdales.com. The results of the improvements to Macy’s digital channels allowed digital sales to increase by 39 percent between 2019 and 2021, with 58 percent of new Macy’s customers making purchases through the company’s digital channels in the fourth quarter of 2021

Installing information and operating systems that enable company personnel to carry out their strategic roles proficiently 

Macys.com, Bloomingdales.com, and other digital shopping sites were redesigned to offer a frictionless digital shopping journey through seamless user interfaces and convenient delivery and returns.



Macys.com, Bloomingdales.com, and other digital shopping sites were redesigned to offer a frictionless digital shopping journey through seamless user interfaces and convenient delivery and returns.



Mobile apps for all sites were redesigned to allow users to customize their style preferences, check online prices against in-store prices, build favorites lists, manage their Star rewards accounts, and track orders. The downloads of the improved Macy’s app increased by 81 percent between the third quarter of 2020 and the same period in 2021.



The company’s use of data analytics to gain a better understanding of consumer behavior and buying tendencies of its frequent and infrequent customers was also essential to instore and digital sales.

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



Tying rewards and incentives directly to the achievement of performance targets 

Macy’s increased the minimum wage rate for in-store personnel to $15 per hour.



The company also invested $35 million between 2021 and 2025 in an employee tuition reimbursement program.

Instilling a corporate culture that promotes good strategy execution 

Macy’s management expected the improved compensation and benefits to support a corporate culture committed to in-store customer service.

15. What strategic issues confront Macy in 2020? What market or internal circumstances should most concern CEO Jeff Gennette and his company’s senior leadership team?

Students should conclude from the analysis of the case that the following issues remain highpriority matters for upper management to address. 



Challenges in the U.S. Department Store Industry 

The widespread adoption of smartphone technology will continue to migrate shopping from in-store locations to online retailing.



Online retailing can be expected to continue to cannibalize sales of bricks-and-mortar department store sales, resulting in less efficient retail margins as stores reduce fixed costs via store closures and layoffs.



Investments in brick-and-mortar locations will require investments to improve store ambiance. Also, investments in new stores located in outdoor lifestyle and outdoor outlet centers are likely to be required.

Macy‘s financial performance 

While Macy’s operating profit margin and net profit margin have improved, the company has no growth in net sales between 2019 and 2021.



The company’s lack of growth in net sales and improvement on other financial metrics has pushed its stock price into a trading range that is less than one-half of its 2015 peak—see case Exhibit 1.



Students should comment that the company’s liquidity is acceptable but at a minimal safe level.



The company’s inventory turnover of 3.4 times per year and 107 days of inventory are inconsistent with the need to roll out the latest fashions on at least a quarterly basis.

Students should comment that the Polaris strategy pillar of “Win with fashion and style,” will be difficult to achieve with slow inventory turns.

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



Students may also suggest that the company’s gross margins have failed to improve between 2019 and 2021 because of the company’s excess inventory. It is likely that Macy’s is forced to deeply discount apparel through clearance sales which results in an overall lower gross margin on all items sold.



Students should also comment that the company’s leverage relative to equity is concerning and may limit resources available for Polaris initiatives.

Implementation of the Polaris strategy 

While the company has improved its online retailing capabilities (Polaris pillars “Excel in digital shopping,” Modernize supply chain,” and “Enable transformation,” students should conclude that Macy’s has failed in the implementation of Polaris strategy pillars focused on brick-and-mortar stores.



The company’s revenues from online purchases increased by 45 percent between 2019 and 2022. However, net sales were slightly lower in 2021 that 2019. This discrepancy discloses that the sales of brick-and-mortar stores declined by amount equivalent to the increase in online sales.



There is little evidence that the company has made progress in the Polaris strategy pillar of “Enhance the store experience.”



Macy’s slow inventory turns suggests that the company has failed to significantly improve its reputation related to “fashion and style.”



Students may also suggest that Macy’s has likely been unable to “Deliver clear value” without a reliance on clearance sales.

16. What recommendations would you make to Gennette to address the strategic issues confronting Macy in 2020?

Macy‘s presents an outstanding example of why good strategy execution requires continuously building and upgrading an organization‘s resources and capabilities (previewing concepts in Chapter 10). Students should be able to offer a specific action plan to address the issues presented in Assignment Question 6 and improve upon execution of the six pillars of the Polaris strategy. 

Macy‘s must continue to make investments in its online retailing capabilities. Ongoing investments in IT capabilities is necessary to compete against more established online retailers such as Amazon and rivals in the U.S. department store industry.



The company should continue to invest in its growing private label brands. The company should also extend the assortment of its proprietary private label brands sold online.



Macy‘s has yet to demonstrate that its merchandising strategy is aligned with the ―Win with fashion and style‖ imperative. Macy‘s senior management should bring in top-level

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merchandising managers to revitalize the appeal of the company‘s merchandise. A revitalized merchandising strategy would also allow the company to have a greater number of inventory turns per year and rely less on clearance sales to reduce days of inventory. 

Students should also make financial investments in improving formats and displays in brick-and-mortar locations. It is not clear in 2022 that Macy‘s has made progress in ―Enhancing the store experience.‖



Macy‘s management should also eliminate non-value-adding selling, general, and administrative expenses to allow for better everyday pricing in alignment with its ―Deliver clear value‖ Polaris pillar.

EPILOGUE Macy‘s latest press releases and financial reports can be found at https://www.macysinc.com/.

Case 12 Teaching Note

Meta Platforms, Inc.: Will the Company‘s Name Change Resolve Ethical Issues at Facebook and Instagram?

Overview Meta Platforms, Inc. was created in October 2021 through the renaming of Facebook, Inc. and reflected CEO Mark Zuckerberg‘s grand vision of the future of the internet. The newly named company would continue to operate Facebook‘s family of apps—Facebook, Instagram, Messenger, and WhatsApp and develop and market the company‘s Oculus VR googles. Mark Zuckerberg called the renaming as ―the beginning of the next chapter of the Internet, and it‘s the next chapter for our company too.‖vii His vision was an extensive online world that would exist across several technology platforms. The metaverse was a concept based upon science-fiction novels such as Ready Player One and Snow Crash and would allow people to exist in a shared digital space using avatars that would live as those in the physical world. Digital avatars of users would not only engage in video games, but could attend digital concerts, try on digital clothes in digital stores, and work in digital offices. Meta Platforms, CEO Mark Zuckerberg explained ―We‘ve gone from desktop to web to phones, from text to photos to video, but this isn‘t the end of the line. The next platform and medium will be even more immersive and embodied internet where you‘re in the experience, not just looking at it.‖viii Analysts believed that the company‘s shift to a focus on the metaverse was largely in response to the declining growth of its flagship apps, Facebook and Instagram. While the company had more than 3.59 billion monthly active person (MAP) users in 2021, the amount of time users spent of © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Facebook and Instagram was decreasing, new user growth was declining, and annual advertising revenue growth was projected to slow from 37 percent in 2021 to 12 percent by 2024.

Opportunities for growth in social media usage in the United States and Canada was almost nonexistent since saturation rates were near 100 percent for Facebook and Instagram. Also, teens were reducing the number of sessions on Instagram as they shifted to new platforms. The amount of time users of all ages spent on TikTok during 2021 had doubled since 2020. Meta expected the use of Facebook to experience an overall decline of 4 percent by 2024, with usage among teens expected to decline by 45 percent within the upcoming two-year period.

The company‘s name change also quickly followed the September–October 2021 publication of ―The Facebook Files‖ by The Wall Street Journal—an investigative journalism series that chronicled information gathered from internal Facebook documents disclosed by whistleblowers within the company. The investigative series profiled unethical business practices at the company and focused on the company‘s algorithm changes that fostered discord, the company‘s rules that favored elites, the use of the company‘s apps by drug cartels and human traffickers, and Instagram‘s effects on teenage girls. ―The Facebook Files‖ was followed in October 2021 by a U.S. Senate Hearing that further investigated Facebook‘s business practices and heard testimony by former Facebook product manager and whistleblower, Frances Haugen. Ms. Haugen met before investigative committees in the U.S. Congress and lawmakers in the United Kingdom and European Union. Ms. Haugen stated that her intention was not to bring harm to Facebook, but to make it better and that ―Until we bring in a counterweight, things will be operated for the shareholder‘s interest and not for the public interest.‖ix Suggestions for Using the Case The Meta Platforms, Inc.: Will the Company’s Name Change Resolve Ethical Issues at Facebook and Instagram? case works especially well to illustrate business ethics and social responsibility concepts presented in Chapter 9. You will find that Meta Platforms, Inc. case will generate a lively classroom discussion as many students may have strong opinions about the appeal of Facebook versus Instagram and why Facebook‘s growth in users and advertising revenue have declined. Some students may find Facebook/Instagram‘s lack of action on important social issues such as human trafficking quite disconcerting while others are largely indifferent. Students may also have strong views on life in a metaverse and what societal problems might arise from Meta Platform‘s new focus.

The case provides an opportunity for class members to evaluate the company‘s competitive standing and financial performance, weigh an assortment of social responsibility and ethical issues, identify strategies to minimize or avoid ethical problems, and make action recommendations regarding Meta Platform‘s future course of action with respect to ethical issues with its family of apps and particularly its flagship Facebook and Instagram social media platforms.

What to Tell Students in Preparing the Meta Platforms, Inc. Case for Class. To give students guidance in what to do and think about in preparing the Meta Platforms case for class discussion, we strongly recommend two things: © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

368 1.

Have class members complete the Connect-Based exercise for the Meta Platforms, Inc. case in the event you have adopted the Connect software for your course.

OR 2.

Provide class members with assignment questions and insist that they prepare good notes/answers to these questions before coming to class.

To facilitate your use of assignment questions and making them available to students, we have posted a file of the Assignment Questions contained in the instructor resources section of the Connect Library. (You should be aware that there is a set of assignment questions posted in the Connect Library for each of the cases included in the 8th edition.) In all instances, these assignment questions correspond to the assignment questions in the teaching note for the case.

Utilizing the Guide to Case Analysis. If this is your first assigned case, you may find it beneficial to have class members read the Guide to Case Analysis that is posted in the Instructor Resources section of the Connect Library. The content of this Guide is particularly helpful to students if your course is their first experience with cases and they are unsure about the mechanics of how to prepare a case for class discussion, oral presentation, or written analysis.

Suggested Assignment Questions for an Oral Team Presentation or Written Case Analysis.

We believe the Meta Platforms, Inc. case is well-suited for written assignments and/or oral team presentations. Suggested assignment questions are as follows: 

What grade would you give to management at Meta Platforms, Inc. (Facebook, Instagram, Messenger, and WhatsApp) for its efforts to operate the company in an ethical and socially responsible manner? Prepare a report that includes: (1) an evaluation of the competitive standing and financial performance of Meta Platforms, (2) an assessment of Meta Platform‘s commitment to business ethics and corporate social responsibility, and (3) a set of action recommendations that address triple bottom line metrics. Your report should not exceed 5-6 pages, plus an assortment of charts, tables, and exhibits that support your analysis and recommendations.



Prepare a brief report to the Meta Platform‘s top managers that describes the company‘s track record for behaving in an ethical and socially responsible manner and your recommendations for resolving ethical issues at the company. Outline 3–4 top priority issues that Meta Platforms should address to better safeguard against harm to users of its family of apps (Facebook, Instagram, Messenger, and WhatsApp). Your report should contain detailed and convincing reasons in support of each one of your recommendations.

It is imperative that the support offered for each of your recommendations be based on conclusions drawn from application of the concepts discussed in Chapter 9.

Assignment Questions What are trends in the competitive position and user activity for Meta Platform‘s family of apps (Facebook, Instagram, Messenger, and WhatsApp)?

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369 Evaluate the Meta Platform‘s financial performance for the 2019 through 2021 period. Does it appear that the company‘s business model is delivering strong growth in revenues and earnings?

Does it seem that Meta Platforms has made a commitment to operating in an ethical and socially responsible manner? How does it address the needs of all of its stakeholders? Explain.

How has Meta Platforms exercised strong ethical leadership? Do policies and procedures safeguard against harm to the users of its apps? Does it appear that its top management has created a culture of accountability and vigilance for potential harm to users of its social media platforms? Explain.

What grade would you give to Meta Platforms for its efforts to become a socially responsible and highly ethical corporation?

What recommendations would you make to Meta Platforms management to increase its triple bottom-line performance? Provide a justification for these recommendations.

Teaching Outline and Analysis What are trends in the competitive position and user activity for Meta Platform’s family of apps (Facebook, Instagram, Messenger, and WhatsApp)?

Students should be able to comment on several discouraging metrics related to Meta Platform‘s family of apps in 2022. 

In 2021, the company had more than 3.59 billion monthly active persons (MAPs) accessing Facebook, Instagram, WhatsApp, and Messenger worldwide and annual revenues of $117.9 billion.



While the company had more than 3.59 billion monthly active person (MAP) users in 2021, the amount of time users spent of Facebook and Instagram was decreasing, new user growth was declining, and annual advertising revenue growth was projected to slow from 37 percent in 2021 to 12 percent by 2024.

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Opportunities for growth in social media usage in the United States and Canada was almost non-existent since saturation rates were near 100 percent for Facebook and Instagram.

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Teens were reducing the number of sessions on Instagram as they shifted to new platforms.

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Meta expected the use of Facebook to experience an overall decline of 4 percent by 2024, with usage among teens expected to decline by 45 percent within the upcoming two-year period. The amount of time users of all ages spent on TikTok during 2021 had doubled since 2020.

Evaluate the Meta Platform’s financial performance for the 2019 through 2021 period. Does it appear that the company’s business model is delivering strong growth in revenues and earnings?

Students who have examined case exhibits 1–3 will note that the company has achieved remarkable growth in revenues, profitability and free cash flows between 2019 and 2021. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Financial highlights are listed below: 

Revenues have increased from $70.697 billion in 2019 to $117.929 billion in 2021—a 29.2 percent compounded annual growth rate.



Net income has increased from $18.485 billion in 2019 to $39.370 billion in 2021—a 45.9 percent compounded annual growth rate.

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Free cash flow has increase from $20.660 billion in 2019 to $38.439 billion in 2021—a 36.4 percent compounded annual growth rate.

Student should assess that by any measure, Facebook‘s historical performance between 2019 and 2021 has been outstanding. Also, there is evidence that the company is very wellmanaged as its Income from Operations, Net Income, and Free Cash Flow have grown at much faster rates than revenue—see Table 1.

However, many students will note that the company‘s ability to maintain these impressive growth rates will become increasingly difficult as the growth in number of users and advertising revenue stalled. As stated in the case, MAPs, DAPs, and user engagement were essential to gathering data helpful to advertisers and, ultimately, Meta‘s annual advertising revenues. Beginning in 2017, the company‘s key managers began to notice a decline in user engagement. Meta Platforms‘ annual advertising revenue growth was projected to slow from 37 percent in 2021 to 12 percent by 2024.

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Table 1 Compound Annual Growth Rates for Items in Meta Platform’s Consolidated Statements of Income, 2019–2021 CAGR Revenue

29.2%

Costs and expenses: Cost of revenue

33.2%

Research and development

34.7%

Marketing and sales

19.2%

General and administrative

-3.1%

Total costs and expenses

23.4%

Income from operations

39.6%

Interest and other income, net

-19.8%

Income before provision for income taxes

38.0%

Provision for income taxes

11.8%

Net income

45.9%

Free cash flow

36.4%

_____ Calculated from case Exhibits 1 and 3.

Does it seem that Meta Platforms has made a commitment to operating in an ethical and socially responsible manner? How does it address the needs of all of its stakeholders? Explain.

Students may suggest that there is little evidence Facebook management has ever demonstrated a concern for the impact of its family of apps on its users or society. The company‘s focus seems to have been singularly focused on growth in MAPs, DAPs, user engagement, and advertising revenue.

The company‘s declining engagement and threat of a drastic slowdown in advertising revenue growth seem to have pushed the company‘s chief managers further from fulfilling social responsibility and business ethics expectations.

Examples that students may note to support a contention that Facebook has become more unethical as its growth have slowed include: 

Facebook‘s algorithm change promoted posts or articles that might elicit an anger reaction button (earning five points) or a lengthy, hostile comment (earning 30 points), placing the post higher in News Feeds. Facebook internal memos showed that the

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algorithm change had not affected the amount of time that users spend on the app but did significantly boost the DAP (daily active persons) metric for Facebook which was essential to generating advertising revenue. 

An internal report developed by Facebook employees in 2019 also showed that the algorithm encouraged hostile, negative communication in the political environment. The report found engagement on positive and policy posts has severely reduced, leaving parties increasingly reliant on inflammatory posts and direct attacks on their competitors.



Facebook‘s AI developed to identify harmful content could not consistently identify firstperson shooting videos or racist rants or distinguish between a car crash and cockfighting.

However, students should be able to argue convincingly that the reliance on AI was a result of financial considerations. Despite the limitations of AI in detecting harmful content, a Facebook internal document showed that the shift from human content reviews to AI had saved the company $2 million per week or $52 million in personnel costs for the first half of 2019.



Students may note that Facebook employees were baffled by XCheck, which exempted up to 5.8 million Facebook account holders. Users in the XCheck program could readily share misinformation without consequences. An internal review at Facebook found that XCheck was indefensible.



Students should comment that in 2020, Facebook employees and contractors spent more than 3.2 million hours searching and taking down posts the company deemed to be misinformation. Although more than 90 percent of Facebook‘s users were outside the United States, only 13 percent of those hours were spent working on content outside the United States. The company seemed to have little regard for user protection in developing markets.



Between 2019 and 2021, Facebook conducted studies to determine how Instagram and Facebook affected its younger users. The conclusion of the interviews and surveys conducted by the company was that made body image issues worse for one in three teen girls and that teens blame Instagram for increases in the rate of anxiety and depression.

Despite this finding, Facebook elected to build its user base across younger age groups, resulted in a recommendation to complement its family of apps with a six-age bracket bundle of products targeted to adults, late teens aged over 16, teens aged 13–15, tweens aged 10–12, children aged 5 to 9, and children aged 0–4.



Students may note that teens complained that Instagram damaged their self-confidence and emotional development. The case suggests teens viewed a small number of Instagram followers diminished their self-worth and that using Instagram‘s Beautification filters ultimately damaged self-esteem since the images could be quite different from a user‘s unenhanced appearance.



The effect of social media on teen mental health had long been of concern among the health care community, with bullying and other unhealthy dialog was known to affect the © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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self-esteem and emotional development of children and teens. As early as 2012, the United States National Institutes of Health published studies considering the link between social media and teen suicides, which were reaching historic highs. Students will likely suggest that these studies were known to Facebook management. 

The BBC and Apple began pressuring Facebook in 2019 to detect and eliminate ads and posts for human trafficking after an investigative team found more than 300,000 instances of human trafficking violations. Students may be quite dismayed that Facebook responded by launching a software tool that identified a dozen human trafficking networks by the end of 2020, but deactivated the program.



Facebook employees had discovered posts on Facebook and Instagram, as well as private messages using WhatsApp by the notorious Cartél Jalisco Nueva Generación (CJNG) that captured vast criminal activity. Employees complained that CJNG met all criteria for a ―Dangerous Individuals and Organizations‖ designation by Facebook and should be removed from platforms. After five months, some CJNG content was removed although new CJNG pages and posts appeared.

You may wish to poll the class on which of the drivers of unethical strategies and behaviors discussed in Chapter 9 are at play at Meta Platforms. It is likely that students may find all of the following factors contributing to the company‘s ethical lapses. 

Faulty oversight, enabling the unscrupulous pursuit of personal gain and other selfish interests.



Heavy pressures on company managers to meet or beat performance targets.



A company culture that puts profitability and good business performance ahead of ethical behavior.

How has Meta Platforms exercised strong ethical leadership? Do policies and procedures safeguard against harm to the users of its apps? Does it appear that its top management has created a culture of accountability and vigilance for potential harm to users of its social media platforms?

Explain.

Students are likely to note that it appears senior management has been dismissive of internal complaints about unethical behavior discovered by company personnel. There also seems to have been a deliberate effort to hide unethical behavior from Facebook‘s Oversight Board. In addition, students may find the comments of Facebook‘s chief show a complete lack of concern for any impact of the company‘s family of apps on the well-being of its users.

Specific quotes from Facebook executives that should be noted by students in arguing that the company has not exercises strong ethical leadership include: 

When confronted by a publisher about algorithm changes that pressured publishers but was pressuring publishers to ―make bad content.‖x Facebook‘s CEO, Mark Zuckerberg, said that the algorithm change was to strengthen bonds between users and improve their

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well-being.xi 

Despite internal Facebook estimates that AI had successfully removed 3 percent to 5 percent of hate speech posts, and 0.6 percent of all content violating Facebook‘s policies against violence and incitement, CEO Mark Zuckerberg had expressed confidence in AI to detect ―the vast majority of problematic content.‖xii



When confronted with the illogical XCheck program that exempted 5.8 million users from Facebook‘s terms of service standards, Mark Zuckerberg stated publicly that Facebook treated its billions of users equally in terms of standards of behavior and freedom of expression, regardless of their status or fame.xiii



In 2021, Facebook had informed its Oversight Board, which was created to ensure accountability in enforcement of its rules, that the number of XCheck accounts was small, while the actual number was approximately 5.8 account holders.



A former Facebook vice president commented to The Wall Street Journal that Facebook treats harm in developing countries as ―simply the cost of doing business.‖xiv



Despite internal Facebook and Instagram studies concluding that ―We make body image issues worse for one in three teen girls‖ and that ―teens blame Instagram for increases in the rate of anxiety and depression.‖xv a Facebook team was assigned to study preteens and given a three-year goal to increase usage among younger age groups.



In testimony during a March 2021 Congressional Hearing focused on Facebook‘s impact on children, CEO Mark Zuckerberg was asked if the company had studied the likely effect of Instagram Kids on children under age 13. Mr. Zuckerberg‘s reply was a sarcastic, ―I believe the answer is yes.‖xvi



Facebook responded to the Congressional request about the impact of its apps on children with a six-page letter that didn‘t include information from any internal studies conducted by the company and concluded ―We are not aware of a consensus among studies or experts about how much screen time is too much.‖xvii



Facebook internal documents showed that when Facebook employees notified superiors of users using the company‘s apps to facilitate human trafficking, the alert may or may not be acted upon.



Facebook internal documents also revealed that Facebook employees were increasingly frustrated as decision-makers in the company that allowed users to post videos of murders, incitements to violence, threats against pro-democracy candidates, and advertisements for human trafficking.xviii



When confronted by Facebook employees and The Wall Street Journal about the company‘s lack of action against cartel users of Instagram, Facebook officials blamed the employees who issued the complaints by commenting that ―employees know that they can improve their anti-cartel efforts and that the company is investing in artificial © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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intelligence to bolster enforcement against such groups.xix What grade would you give to Meta Platforms for its efforts to become a socially responsible and highly ethical corporation?

Students will find it difficult to suggest that Meta Platforms should receive a passing grade for its commitment to social responsibility and high business ethics standards. The company‘s culture and priorities of senior leadership appear to have been always exclusively focused on growth in users and advertising revenue to support appreciation in its lofty stock price.

Some students may suggest that the company should receive a grade of C for its ethical behavior during its rapid growth stage, but that a grade of F is appropriate as the company has become desperate to resolve its declining growth rate and prevent a collapse in the price of its shares.

Some students may also suggest that social media is a relatively new industry with few regulatory restrictions and that Facebook management has exploited the lack of oversight to grow at all costs.

Most students will concur that there is scant evidence that Facebook leadership has taken action on any of the internal studies showing the ill-effects of its family of apps.

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376 What recommendations would you make to Meta Platforms management to increase its triple bottom-line performance? Provide a justification for these recommendations.

While the nature of the software application industry does not directly impact the environmental sustainability, students should be able to make recommendations regarding improving Meta Platforms‘ triple bottom-line performance. Appropriate recommendations are highlight below: Environmental Sustainability 

While the connection is indirect, Meta Platforms could incorporate consideration of environmental sustainability into its strategy-making activities. Specifically, the company could undertake concerted actions to operate businesses in a manner that protects and maybe even enhances natural resources and ecological support systems, guards against outcomes that will ultimately endanger the planet, and is therefore sustainable for centuries.



For example, Meta Platforms could provide financial support for infrastructure needs in the developing countries where the majority of its users reside. With 90 percent of its users residing outside the Unities States and 40 percent of total users in India and Asia, Meta Platforms could make financial contributions to important clean water projects, programs and technology resulting in the reduction in CO2 emissions, and sustainable waste disposal projects.

Sustainability and Social Impact 

Students should note that this element of triple bottom-line performance is perhaps the area where Meta Platforms could make its largest impact.



Students are likely to suggest that Meta Platforms abided more closely to the requirements of the EU-U.S. Privacy Shield Framework and the Swiss-U.S. Privacy Shield Framework which required that ―individual users have the right to opt out of (i) disclosures of their personal information to third parties; or (ii) uses of their personal information for a purpose that is materially different from the purpose(s) for which it was originally collected or subsequently authorized by the individual.‖xx Students may also suggest that Meta make it more evident to users that the opt-out right exists.



Students will likely recommend that the company revise its algorithm to lessen the impact of hateful speech rather than assign a greater weight to inflammatory comments.



Students will likely note that the company study the ill-effects of its family of apps on vulnerable members of society such as children. The company should ensure that its users are of an age to handle criticism and unfavorable comparisons with celebrities and influencers.



The company might also develop tools that disable features that have potential to cause psychological harm to users. For example, teen users or those who do not wish to be

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subjected to hateful comments could disable comment features that might be damaging to emotional development. 

The company should also develop tools and policies to better limit content that causes physical harm to users. Specifically, the company should develop AI or boost budgets for human assets to immediately remove posts or accounts that enable illegal activities such as human trafficking and illegal drug sales.



Students may also suggest that the company‘s chief managers should also develop policies that allow cartels, human traffickers, and other dangerous individuals and organizations not only to have accounts removed but to be reported to arresting authorities.



The company should revise its XCheck program to align with its stated philosophy of treating all users equally while considering context. Students may suggest that XCheck be eliminated and replaced with a system to evaluate the context of all users, not only 5.8 million users who were approved for the program.



Students are likely to recommend that Meta Platforms employ budgets supporting user protection in developing countries on the number of users rather than focus its user protection efforts on wealthier markets with powerful governments and media institutions.xxi



Students will likely suggest that the ethical issues at Meta Platforms must be resolved before moving aggressively with metaverse apps. It is quite likely that the ethical considerations will have a far greater impact on metaverse users who will likely be engaged more hours per day that social media users.

Economic Performance and Corporate Governance 

Students may have trouble recommending a solution to the slowing growth in users as Facebook and Instagram have reached saturation rates in most markets.

Recommendations will likely be focused on ongoing expansion into new international markets. However, students may also suggest that Meta Platforms redesign its flagship apps (Facebook and Instagram) or launch new social media apps that resonate with users.



Students will also find that advertising revenues cannot sustain historical growth rates with the company‘s current business model. Meta Platforms should consider a revision to its business model that will allow for additional revenue sources beyond advertising.

Absent a revision of the company‘s business model, students may conclude that the price of Meta Platforms‘ common shares have reached a peak.



Students will also suggest that senior management meet ethical obligations and no longer deceive its Oversight Board. In fact, some students may suggest that the company replace senior level executives who ignored employees alerting the company to its ethical concerns.

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

There may also be recommendations that Meta Platforms replace its Board of Directors and bring in a greater number of external board members who will serve as watch dogs to missteps by management.



Students may suggest that Meta Platforms take a lead in the industry by working with legislative branches of government in the United States, the European Union, and other countries where it operates to build a set of rules to regulate social media companies.

With the exception of the EU-U.S. Privacy Shield Framework and the Swiss-U.S. Privacy Shield Framework, students may note that social media applications lack the governmental oversight found in other industries such as the consumer goods industry, the food and beverage industry, banks, and public utilities. Students who have conducted research outside the case may comment that there is a discussion of the Federal Communications Commission (FCC) regulating social media companies, but as of late2022 the FCC did not regulate online content. Social media companies are, however, subject to anti-trust regulations and consumer protections (such as fraud and deceptive advertising) under the U.S. Federal Trade Commission.

EPILOGUE You can find Meta Platforms‘ latest press releases and financial statements at https://investor.fb.com/home/default.aspx.

i

Airbnb, Inc., About us—Airbnb Newsroom. (n.d.). Retrieved February 15, 2022, from https://news.airbnb.com/about-us/

ii

Lululemon athletica Inc. earnings call transcript. Retrieved at www.seekingalpha.com (accessed April 4, 2022).

iii

Ibid.

iv

Amy McCarthy, ―KFC‘s Beyond Meat Nuggets Taste like Chicken, Eat Like Rubber‘‖ posted at www.eater.com, January 10, 2022 (accessed February 4, 2022).

v

Jelisa Castrodale, ―McDonald‘s McPlant Burger Makes Its Debut Overseas.‖ posted at www.foodandwine.com, September 9, 2021 (accessed January 26, 2022); see also Beyond Meat press release, February 25, 2021.

xxiAmelia Lucas, ―McDonald‘s expands test of McPlant burger created with Beyond Meat,‖ posted at www.cnbc.com January 20, 2022 (accessed February 4. 2022).

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SECTION 1 Instructor Resources, Chapter Features, and Case Overview

INSTRUCTOR RESOURCES We strived to achieve four goals in preparing this package of Instructor Resources for the 8th Edition of Essentials of Strategic Management: 1. To equip you with all the resources and pedagogical tools, you‘ll need to design and deliver a course that is on the cutting edge and solidly in the mainstream of what students need to know about crafting and executing winning strategies.

2. To give you wide flexibility in putting together a course syllabus that you are comfortable with and proud of.

3. To give you a smorgasbord of options to draw from in keeping the nature of student assignments varied and interesting.

4. To help you deliver a course with upbeat tempo that wins enthusiastic applause from students.

We believe the contents of the package will be particularly informative and helpful to faculty © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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members teaching the strategy course for the first time, but we have also tried to embellish the content with ideas and suggestions that will prove valuable to experienced faculty looking for ways to refurbish their course offering and/or to keep student assignments varied and interesting.

A QUICK OVERVIEW OF THE ENTIRE INSTRUCTOR RESOURCE PACKAGE The Instructor‘s Manual for Essentials of Strategic Management contains: 

A quick look at the topical focus of the text‘s 10 chapters (Section 1).



An overview of the 12 cases in the text, along with a grid profiling the strategic issues that come into play in each case (Section 1 and Section 3).



A discussion of the reasons to use a strategy simulation as an integral part of your strategy course. The two web-based strategy simulations—The Business Strategy Game or GLOBUS—that are companions to this text incorporate the very kinds of strategic thinking, strategic analysis, and strategic decision making described in the text chapters and connect beautifully to the chapter content. The automated online nature of both simulations entails minimal administrative time and effort on the instructor‘s part. You will be pleasantly shocked (and pleased!!) at the minimal time it will take you to incorporate the use of GLO-BUS or The Business Strategy Game and the added degree of student excitement and energy that either of these competition-based strategy simulations brings to the course—see Section 2 for more details.



Tips and suggestions for effectively using either GLO-BUS or The Business Strategy Game in your course (covered in both Section 2 and Section 3).



The merits of incorporating the use of the Connect Management assignment and assessment platform accompanying the 8th edition into your course requirements. Connect includes chapter quizzes, case assignment exercises for all 12 cases, and two learning assurance exercises for all 10 chapters of the 8th Edition. Connect offers automatic grading for all chapter quizzes, one learning assurance exercise per chapter, and all 12 cases in the text. Also, in this edition is a set of Connect Exercises for Simulation Participants.

Connect offers an easy-to-administer approach to testing and assessing individual-level student mastery of chapter concepts and case analysis (covered in Section 3).



Ideas and suggestions on course design and course organization (Section 3 and Section 4).



Recommendations for sequencing the case assignments and guidance about how to use the cases effectively (Section 3).

Our recommendations regarding which cases are particularly appropriate for written case assignments and oral team presentations (Section 3). 

Two sample course syllabi (Section 4) © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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

A variety of schedules of activities for face-to-face, hybrid, and online courses (Section 4)      

Two sample schedules of class activities and assignments for face-to-face courses offered during a 15-week term; Two sample schedules of activities for hybrid courses offered during a 15-week term; One sample schedule of class activities for face-to-face courses offered during a 10week term; One sample schedule of class activities for hybrid courses offered during a 10-week term; One sample schedule of class activities for a 7-week online course; and One sample course schedule for face-to-face course offered in 5-week terms.



Lecture Notes for all 12 chapters in the text (Section 5).



A comprehensive teaching note for each of the 12 cases in Essentials of Strategic Management (Section 6).

In addition to the Instructor’s Manual, the support package for adopters also includes several important features that should be of interest. A 600+ question test bank is available for printed or online exams in McGraw Hill’s Test Builder web-based application.

Connect® The 8th edition package includes a robust collection of chapter quizzes, chapter

learning assurance exercises, and case preparation exercises that should prove to ease instructors’ grading and assessment obligations. Student understanding of chapter concepts can be assessed at the individual-level through chapter quizzes and applied learning assurance exercises that record each student’s grade in a web-based grade book.

All chapter quizzes are automatically graded and one Assurance of Learning exercise for each of the 10 chapters is automatically graded.

Features of the Connect package for the 8th edition include: 

Autograded chapter quizzes consisting of 20 multiple-choice questions that students can take to measure their grasp of the material presented in each of the 10 chapters.

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SmartBook 2.0 is an adaptive learning solution that provides personalized learning to individual student needs, continually adapts to pinpoint knowledge gaps, and focuses learning on concepts requiring additional study. It fosters more productive learning, takes the guesswork out of what to study, and helps students better prepare for class. Our adaptive reading experience has been made more personal, accessible, productive, and mobile.

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WhiteBoard Videos: These brief, contemporary, and engaging videos offer dynamic, studentcentered introductions, illustrations, and animations that guide students through challenging concepts with assignable assessment questions.

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A variety of cases, found in most chapters, provide an opportunity for students to delve further into the topical content and read about real-life products and companies. Accompanied by assignable, thought-provoking questions that check students’ ability to apply the course material to these

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scenarios, these case analyses help students foster their critical thinking abilities and develop their workplace readiness skills. 

Interactive versions of two Assurance of Learning Exercises for each chapter that drill students in the use and application of the concepts and tools of strategic analysis. There is both an autograded and open-ended short-answer interactive exercise for each of the 10 chapters.

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Application-Based Activities: These highly interactive, automatically graded exercises provide students a safe space to practice using problem-solving skills to apply their knowledge to realistic scenarios. Each scenario addresses key concepts and skills that students must use to work through and solve course specific problems, resulting in improved critical thinking and relevant workplace skills. Students take on specific roles to complete a strategy-related task within a real-world context. These tasks often involve multiple decision-making paths that students can take as they work to complete the task. Students see the impact of their decisions immediately and feedback is provided all along the way.

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New integration of Exercises for Simulation Participants into Connect. Students are required to apply concepts presented in all 10 chapters to business simulation participation in both autograded and open-ended assignment questions

Included in this edition is a set of autograded exercises for all 12 cases in the text. The automatically graded case exercises follow the assignment questions in the case TN to fully prepare students to make meaningful contributions to class discussions of the cases. The Connect case exercises may also be used as graded assignments or a portion of graded case assignments—allowing the instructor to grade only students’ recommendations for written case assignments. All students who purchase a Connect Plus eBook or a new copy of the text are automatically provided access to Connect at no additional charge.

PowerPoint Slides To facilitate delivery preparation of your lectures and to serve as chapter outlines, you‘ll have access to comprehensive PowerPoint presentations for each of the 10 chapters. The collection includes 350+ professional-looking slides displaying core concepts, analytical procedures, key points, and all the figures in the text chapters.

A Comprehensive Test Bank and Test Builder Software There is a 600+-question test bank, consisting of both multiple-choice questions and short answer/essay questions. All of the test bank questions are also accessible via Test Builder. Available within Connect, Test Builder is a cloud-based tool that enables instructors to format tests that can be printed or administered within an LMS. Test Builder offers a modern, streamlined interface for easy content configuration that matches course needs, without requiring a download.

What to Expect in the 8th Edition The distinguishing mark of the 8th edition is its enriched and enlivened presentation of the material in each of the 10 chapters, providing as an up-to-date and engrossing discussion of the core concepts and analytical tools as you will find anywhere. As with each of our new editions, there is an accompanying lineup of exciting new cases that bring the content to life and are sure to provoke interesting classroom discussions, deepening students’ understanding of the material in the process. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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While this 8th edition retains the 10-chapter structure of the prior edition, every chapter—indeed every paragraph and every line—has been reexamined, refined, and refreshed. New content has been added to keep the material in line with the latest developments in the theory and practice of strategic management. Scores of new examples have been added, along with fresh Concepts and Connections illustrations, to make the content come alive and to provide students with a ringside view of strategy in action. The result is a text that cuts straight to the chase in terms of what students really need to know and gives instructors a leg up on teaching that material effectively. It remains, as always, solidly mainstream and balanced, mirroring both the penetrating insight of academic thought and the pragmatism of real-world strategic management.

A standout feature of this text has always been the tight linkage between the content of the chapters and the cases. The lineup of cases that accompany the 8th edition is outstanding in this respect—a truly appealing mix of strategically relevant and thoughtfully crafted cases, certain to engage students and sharpen their skills in applying the concepts and tools of strategic analysis. Many involve high-profile companies that the students will immediately recognize and relate to; all are framed around key strategic issues and serve to add depth and context to the topical content of the chapters. We are confident you will be impressed with how well these cases work in the classroom and the amount of student interest they will spark.

Organization, Content, and Features of the Text Chapters Our objective in undertaking a major revision of this text was to ensure that its content was current, with respect to both scholarship and managerial practice, and presented in as clear and compelling a fashion as possible. We established five criteria for meeting this objective, namely that the final product must: 

Explain core concepts in language that students can grasp and provide first-rate examples of their relevance and use by actual companies.

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Thoroughly describe the tools of strategic analysis, how they are used, and where they fit into the managerial process of crafting and executing strategy.

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Incorporate the latest developments in the theory and practice of strategic management in every chapter to keep the content solidly in the mainstream of contemporary strategic thinking.

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Focus squarely on what every student needs to know about crafting, implementing, and executing business strategies in today’s market environments.

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Provide an attractive set of contemporary cases that involve headline strategic issues and give students ample opportunity to apply what they’ve learned from the chapters.

We believe this 8th edition measures up on all five criteria and that you‘ll be amply convinced that no other leading text does a better job of setting forth the principles of strategic © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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management and linking these principles to both sound theory and best practices.

Differentiation from Other Texts in the Field 1. Our integrated coverage of the two most popular perspectives on strategic management positioning theory and resource-based theory is unsurpassed by any other leading strategy text. Principles and concepts from both the positioning perspective and the resource-based perspective are prominently and comprehensively integrated into our coverage of crafting both single-business and multi-business strategies. By highlighting the relationship between a firm‘s resources and capabilities to the activities it conducts along its value chain, we show explicitly how these two perspectives relate to one another. Moreover, in Chapters 3 through 8, it is emphasized repeatedly that a company‘s strategy must be matched not only to its external market circumstances but also to its internal resources and competitive capabilities.

2. Our coverage of business ethics, core values, social responsibility, and environmental sustainability is unsurpassed by any other leading strategy text. Chapter 9, ―Ethics, Corporate Sustainability, and Strategy,‖ has been updated with fresh content so that it can better fulfill the important functions of (1) alerting students to the role and importance of ethical and socially responsible decision making and (2) addressing emerging issues affecting the social mission and sustainability efforts of large and small businesses.

Moreover, discussions of the roles of values and ethics are integrated into portions of other chapters to further reinforce why and how considerations relating to ethics, values, social responsibility, and sustainability should figure prominently into the managerial task of crafting and executing company strategies.

3. The caliber of the case collection in the 8th edition is truly unrivaled from the standpoints of student appeal, teachability, and suitability for drilling students in the use of the concepts and analytical treatments in Chapters 1 through 10. The 12 cases included in this edition are the very latest, the best, and the most on-target that we could find. The ample information about the cases in the Instructor‘s Manual makes it effortless to select a set of cases each term that will capture the interest of students from start to finish.

4. Connect is tightly linked to the text chapters, business simulations, and case lineup. The Connect package for the 8th edition allows professors to assign autograded quizzes and select chapter-end Assurance of Learning Exercises to assess class members‘ understanding of chapter concepts. In addition, our texts have pioneered the extension of the Connect platform to case analysis. The Connect package for the 8th edition also includes open-ended and autograded Exercises for Simulation Participants. The autograded case exercises for each of the 12 cases in this edition are robust and extensive and will better enable students to make meaningful contributions to class discussions.

The autograded Connect case exercises may also be used as graded assignments in the course.

5. The two cutting edge and widely used strategy simulations—The Business Strategy Game and GLO-BUS—that are optional companions to the 8th edition give you unmatched capability to employ a text-case-simulation model of course delivery. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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The following rundown summarizes the noteworthy features and topical emphasis in this new edition: 

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Chapter 1 serves as an introduction to the topic of strategy, focusing on the managerial actions that will determine why a company matters in the marketplace. We introduce students to the primary approaches to building competitive advantage and the key elements of business-level strategy. Following Henry Mintzberg‘s pioneering research, we also stress why a company‘s strategy is partly planned and partly reactive and why this strategy tends to evolve. The chapter also discusses why it is important for a company to have a viable business model that outlines the company‘s customer value proposition and its profit formula. This brief chapter is the perfect accompaniment to your opening-day lecture on what the course is all about and why it matters.

Chapter 2 delves more deeply into the managerial process of actually crafting and executing a strategy—it makes a great assignment for the second day of class and provides a smooth transition into the heart of the course. The focal point of the chapter is the five-stage managerial process of crafting and executing strategy: (1) forming a strategic vision of where the company is headed and why, (2) developing strategic as well as financial objectives with which to measure the company‘s progress, (3) crafting a strategy to achieve these targets and move the company toward its market destination, (4) implementing and executing the strategy, and (5) evaluating a company‘s situation and performance to identify corrective adjustments that are needed. Students are introduced to such core concepts as strategic visions, mission statements and core values, the balanced scorecard, and business-level versus corporate-level strategies. There‘s a robust discussion of why all managers are on a company’s strategy-making, strategy-executing team and why a company‘s strategic plan is a collection of strategies devised by different managers at different levels in the organizational hierarchy.

Chapter 3 sets forth the now-familiar analytical tools and concepts of industry and competitive analysis and demonstrates the importance of tailoring strategy to fit the circumstances of a company‘s industry and competitive environment. The standout feature of this chapter is a presentation of Michael Porter‘s ―five forces model of competition‖ that has long been the clearest, most straightforward discussion of any text in the field. Chapter revisions include an improved discussion of the macro-environment, focusing on the use of the PESTEL analysis framework for assessing the political, economic, social, technological, environmental, and legal factors in a company‘s macroenvironment. New to this edition is a discussion of Michael Porter‘s Framework for Competitor Analysis used for assessing a rival‘s likely strategic moves.

Chapter 4 presents the resource-based view of the firm, showing why resource and capability analysis is such a powerful tool for sizing up a company‘s competitive assets.

It offers a simple framework for identifying a company‘s resources and capabilities and explains how the VRIN framework can be used to determine whether they can provide the company with a sustainable competitive advantage over its competitors. Other topics covered in this chapter include dynamic capabilities, SWOT analysis, value chain analysis, benchmarking, and competitive strength assessments, thus enabling a solid appraisal of a company‘s relative cost position and customer value proposition vis-à-vis its rivals.

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Chapter 5 deals with the basic approaches used to compete successfully and gain a competitive advantage over market rivals. This discussion is framed around the five generic competitive strategies—low-cost leadership, differentiation, best-cost provider, focused differentiation, and focused low cost. It describes when each of these approaches works best and what pitfalls to avoid. It explains the role of cost drivers and value drivers in reducing a company‘s costs and enhancing its differentiation, respectively.

Chapter 6 deals with the strategy options available to complement a company‘s competitive approach and maximize the power of its overall strategy. These include a variety of offensive or defensive competitive moves, and their timing, such as blue ocean strategy and first-mover advantages and disadvantages. It also includes choices concerning the breadth of a company‘s activities (or its scope of operations along an industry‘s entire value chain), ranging from horizontal mergers and acquisitions, to vertical integration, outsourcing, and strategic alliances. This material serves to segue into that covered in the next two chapters on international and diversification strategies.

Chapter 7 explores the full range of strategy options for competing in international markets: export strategies; licensing; franchising; establishing a subsidiary in a foreign market; and using strategic alliances and joint ventures to build competitive strength in foreign markets. There‘s also a discussion of how to best tailor a company‘s international strategy to cross-country differences in market conditions and buyer preferences, how to use international operations to improve overall competitiveness, the choice between multidomestic, global, and transnational strategies, and the unique characteristics of competing in emerging markets.

Chapter 8 introduces the topic of corporate-level strategy—a topic of concern for multibusiness companies pursuing diversification. This chapter begins by explaining why successful diversification strategies must create shareholder value and lays out the three essential tests that a strategy must pass to achieve this goal (the industry attractiveness, cost of entry, and better-off tests). Corporate strategy topics covered in the chapter include methods of entering new businesses, related diversification, unrelated diversification, combined related and unrelated diversification approaches, and strategic options for improving the overall performance of an already diversified company. The chapter‘s analytical spotlight is trained on the techniques and procedures for assessing a diversified company‘s business portfolio—the relative attractiveness of the various businesses the company has diversified into, the company‘s competitive strength in each of its business lines, and the strategic fit and resource fit among a diversified company‘s different businesses. The chapter concludes with a brief survey of a company‘s four main post-diversification strategy alternatives: (1) sticking closely with the existing business lineup, (2) broadening the diversification base, (3) divesting some businesses and retrenching to a narrower diversification base, and (4) restructuring the makeup of the company‘s business lineup.

Although the topic of ethics and values comes up at various points in this textbook, Chapter 9 brings more direct attention to such issues and may be used as a standalone assignment in either the early, middle, or late part of a course. It concerns the themes of ethical standards in business, approaches to ensuring consistent ethical standards for companies with international operations, corporate social responsibility, and

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sustainability. The contents of this chapter are sure to give students some things to ponder, rouse lively discussion, and help to make students more ethically aware and conscious of why all companies should conduct their business in a socially responsible and sustainable manner. The chapter also includes a section on how to exercise good corporate governance and examines the conditions that led to recent high-profile corporate governance failures.

Chapter 10 is anchored around a pragmatic, compelling conceptual framework: (1) building dynamic capabilities, core competencies, resources, and structure necessary for proficient strategy execution; (2) allocating ample resources to strategy-critical activities; (3) ensuring that policies and procedures facilitate rather than impede strategy execution; (4) pushing for continuous improvement in how value chain activities are performed; (5) installing information and operating systems that enable company personnel to better carry out essential activities; (6) tying rewards and incentives directly to the achievement of performance targets and good strategy execution; (7) shaping the work environment and corporate culture to fit the strategy; and (8) exerting the internal leadership needed to drive execution forward. The recurring theme throughout the chapter is that implementing and executing strategy entails figuring out the specific actions, behaviors, and conditions that are needed for a smooth strategy-supportive operation—the goal here is to ensure that students understand that the strategy-implementing/strategy executing phase is a make-it-happen-right kind of managerial exercise that leads to operating excellence and good performance.

Chapter-by-Chapter Changes In this latest edition, we have put our utmost effort into ensuring that the 10 chapters are consistent with the latest and best thinking of academics and practitioners in the field of strategic management and hit the bull’s eye in topical coverage for senior- and MBA-level strategy courses. An overview of chapter-by-chapter changes in the 8th edition is provided below.

Chapter 1 Strategy, Business Models, and Competitive Advantage  Revised Concepts & Connections 1.1 illustration of three contrasting business models of Spotify, Sirius XM, and over-the-air broadcast radio.  Revised Concepts & Connections 1.2 discussion of Apple‘s strategy keyed to product innovation, brand image, and reputation for social responsibility.

Chapter 2 The Strategy Formulation, Strategy Execution Process  Integration of David Collis‘ thesis published in Harvard Business Review in 2021 on why the quest for innovation and sustainable competitive advantage requires a company‘s chief strategy makers to consider the complete strategy landscape. A well-crafted strategy encompasses coordinated choices about pursuing attractive market opportunities, determining key elements of the company‘s business model, capturing value through industry positioning and predicting the moves of rivals, implementing the strategy, and building and deploying resources needed to support future strategic initiatives. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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 Revised Concepts & Connections 2.3 presentation of strategic and financial objectives of three prominent companies.

Chapter 3 Evaluating a Company’s External Environment  Discussion of the importance of being alert to industry-shaping anomalies when assessing the macroenvironment. Examples from the article of Reeves, Goodson, and Whitaker‘s 2021 Harvard Business Review article ―The Power of Anomaly‖ are included.  New examples of how emerging social issues and changing attitudes and lifestyles may qualify as industry driving forces.

Chapter 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness  New Concepts & Connections illustration of the representative costs for various activities performed by Everlane, Inc., an American clothing retailer selling primarily online.  Updated examples of how companies are able to improve value chain activities of forward channel allies to improve the customer value proposition.  New Assurance of Learning Exercise to assist students in calculating and interpreting financial ratios as needed to conduct a financial analysis.

Chapter 5 The Five Generic Competitive Strategies  Updated Concepts & Connections illustrations for broad low-cost, focused low-cost, and focused differentiation strategies.  New Concepts & Connections illustration for best-cost provider strategy.  Updated Assurance of Learning Exercises.

Chapter 6 Strengthening a Company’s Competitive Position: Strategic Moves, Timing, and Scope of Operations  Repositioning of Timing of a Company‘s Offensive and Defensive Strategic Moves section to better highlight the importance of when to launch strategic moves.  Updated Concepts & Connections illustrations for blue ocean strategies, horizontal acquisitions, and vertical integration.  New Assurance of Learning Exercises related to outsourcing and strategic alliances.

Chapter 7 Strategies for Competing in International Markets  Updated Concepts & Connections illustrations for international expansion via strategic alliances and transnational strategies.  New Assurance of Learning Exercises related to the use of international operations to improve overall competitiveness.

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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 Updated examples of how companies craft new strategic moves to improve overall corporate performance.

Chapter 9 Ethics, Corporate Sustainability, and Strategy  Revision of Corporate Sustainability and the Triple Bottom Line section to include Environmental, Social, and Governance (ESG) strategies and practices.  Revision of Sustainability and Social Impact section to include examples of diversity, equity, and inclusion (DEI) strategies and programs.  Addition of Economic Performance and Governance section that highlights good corporate governance and the balance between the economic responsibilities to shareholders and the environmental and social duties to relevant stakeholders.  Updated Concepts & Connections illustrations of corporate social responsibility strategies and corporate governance failures.  New Assurance of Learning Exercise related to the ethical obligations of social media companies to prevent illegal or harmful content promoted on its platforms.

Chapter 10 Superior Strategy Execution—Another Path to Competitive Advantage  Updated Concepts & Connections illustrations of the use of rewards in motivating employees, and culture change.

THE CASE COLLECTION IN THE 8th EDITION The 12-case lineup in this edition is flush with interesting companies and valuable lessons for students in the art and science of crafting and executing strategy. 

There’s a good blend of cases from a length perspective—about one-third are under 10 pages, yet offer plenty for students to chew on; about a third are medium-length cases; and the remaining one-third are detail-rich cases that call for more sweeping analysis.

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All cases involve companies, products, or people that students will have heard of, know about from personal experience, or can easily identify with.

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The lineup includes at least on five cases that will provide students with insight into the special demands of competing in industry environments where technological developments

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are an everyday event, product life cycles are short, and competitive maneuvering among rivals comes fast and furious. 

All of the cases involve situations where company resources and competitive capabilities play as large a role in the strategy-making, strategy-executing scheme of things as industry and competitive conditions do.

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Scattered throughout the lineup are eight cases concerning non-U.S. companies, globally competitive industries, and/or cross-cultural situations; these cases, in conjunction with the globalized content of the text chapters, provide abundant material for linking the study of strategic management tightly to the ongoing globalization of the world economy.

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Eleven cases involve public companies, thus allowing students to do further research on the Internet regarding recent developments at these companies.

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All of the 12 cases have accompanying Connect-based case preparation exercises. The exercises are based on the entire set of recommended assignment questions for the respective case and call upon a student to develop thoughtful, analysis-based answers (as opposed to stating seatof-the-pants opinions).

A grid showing the issues that are prominent in each of the 12 cases in this edition is presented in Table 1.

Suggestions for sequencing the case assignments can be found in Section 3 of this IM. The eight sample course outlines and schedules of class activities in Section 4 provide further suggestions about the sequencing of case assignments and how to integrate your coverage of the 10 chapters, the various case assignments, and use of a strategy simulation.

Specific details about how to utilize each case (including recommended assignment questions and recommended oral team presentation assignments) are contained in the teaching notes for each of the cases (the TNs appear in Section 6).

Sample course syllabi displaying possible case sequencing and suggested case assignments are presented in Section 4 of this volume of the IM. It is worth mentioning at this juncture that there is a comprehensive table of financial ratios in the Appendix that provides the formulas and brief explanations of what each ratio reveals. Adopters of prior editions have told us that students find this table extremely helpful in guiding their analyses of the financial statements contained in the cases. You will probably want to call this table to the attention of class members and urge that they make full use of the information it contains.

We believe you will find the collection of 12 cases quite appealing, eminently teachable, and very suitable for drilling students in the use of the concepts and analytical treatments in Chapters 1 through 10. With this case lineup, you should have no difficulty whatsoever assigning cases that will capture the interest of students from start to finish.

TABLE 1 A Quick Profile of the Cases in the 8th Edition of Essentials of Strategic Management © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Case 1: Airbnb in 2022 X X X X X X

Case 2: Costco Y L X X X X X Wholesale in 2022: Mission, Business Model, and Strategy X X

Case 3: Lululemon Athletica‘s Strategy in 2022: Can the Retailer Continue to Deliver Growth Despite the Headwinds?

Y L X X

X X X X

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. leadership Making action recommendations

Diversification strategies and the analysis of multiconditions and Financial business corporations analysis financial Staffing, people management, structure, Organizationalincentives rewards and core competencies, procedures, Policies, capabilities, competitive best systems, operating Corporate staffing culture issues practices, continuous Ethics, values, social improvement responsibility Exerting strategic

analysis Company resources and capabilities Global or multinational strategy E-business strategy issues

objectives Crafting strategy in companies single-business Industry and competitive

Connect Case Exercise (Y N = No) yes;Small = (S), Medium Size: Large (L) role in (M), The manager’s strategyrole in crafting The manager’s strategy executing and Vision, mission,

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X

X X

Y L X X X X X X X X

Case 4: Yeti in Y M X 2022: Will its Strategy Lead to Sustainable Advantage and Growth?

X X X X X X X

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Case 5: Beyond Meat in 2022: What Can It Do to Rejuvenate Revenue Growth and Stem Mounting Losses?

Y M

X X

X

X

X

X

Case 6: Spotify Y L Technology in 2022: Will Its Strategy Lead to Profitability with Growth?

X X

X

X X

X

X

Case 7: Tesla‘s Strategy in 2022: Can It Deliver Sustained Revenue Growth and Profitability?

Y M

X X

X

X X

X

X

Case 8: Ulta Y M Beauty‘s Race to Win in an Omnichannel World

X X

X

X

X

X

Case 9: PepsiCo‘s Y L Diversification Strategy in 2022

X

X

X

X

Case 10: Robin Hood

X

Y S X X X X X

X

X X

X X X X X

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Case 11: Macy‘s Inc. Y L X X X X in 2022: Has the Implementat ion of Its Polaris Strategy Produced a Successful Turnaround?

X

Case 12: Meta Platforms, Inc.: Will the Company‘s Name Change Resolve Ethical Issues at Facebook and Instagram?

X

Y L X X X

X X

X

X

X X

X

X

X X

X X X

VALUE-ADDING STUDENT SUPPORT MATERIALS FOR THE 8th EDITION OF ESSENTIALS OF STRATEGIC MANAGEMENT The text and text website include several kinds of support materials to help students grasp the material.

Key Points Summaries At the end of each chapter is a synopsis of the core concepts, analytical tools and other key points discussed in the chapter. These chapter-end synopses help students focus on basic strategy principles, digest the messages of each chapter, and prepare for tests.

Connect® Connect chapter quizzes, learning assurance exercises, and case exercises can be used as a graded component of the course, an assessment mechanism, or as an effective way to prepare students for chapter exams, in-class discussions of cases, written case assignments, or oral case presentations. Whether Connect assignments are calculated into students‘ grades for the course or not, our robust collection of chapter quizzes, chapter learning assurance exercises, and case preparation exercises will give students valid and timely feedback about their mastery of the concepts and analytical tools presented in the text. All students who purchase a Connect Plus eBook or a new copy of the text are automatically provided access to Connect at no additional charge.

The Business Strategy Game and GLO-BUS Online Simulations Using one of the two companion strategy simulations is a powerful and constructive way of emotionally connecting students to the subject matter of the course. We know of no more effective and interesting way to stimulate the competitive energy of students and prepare them for the rigors of real-

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world business decision making than to have them match strategic wits with classmates in running a company in head-to-head competition for global market leadership. In Section 2 of this IM, we outline why using a competition-based strategy simulation as a course centerpiece makes great sense and provide you with detailed suggestions for successfully incorporating either The Business Strategy Game or GLO-BUS in your strategic management course.

SECTION 2 Using a Strategy Simulation in Your Course

What‘s Involved, the Compelling Benefits, and How to Proceed

Since 2005, impressive numbers of strategy instructors at business schools worldwide have transitioned from a purely text-cases course structure to what we contend is a more robust and energizing text-cases-simulation course structure. Incorporating a competition-based strategy simulation has the strong appeal of providing class members with an immediate and engaging hands-on opportunity to apply the concepts and analytical tools covered in the chapters and personally assume responsibility for crafting and executing a strategy for a virtual company they have been assigned to manage.

Two of the world‘s most widely used and pedagogically effective online strategy simulations, The Business Strategy Game and GLO-BUS, are optional companions for this text. 

The Business Strategy Game is the world‘s most popular strategy simulation, having been used over the past 35 years by nearly 3,900 different instructors for courses involving over 1 million students at 1,380+ university campuses in 77 countries. A freshly updated and much-enhanced version of The Business Strategy Game was introduced in August 2018. In 2022, this latest version of BSG was used by some 45,000 students in courses on 450+ campuses in 43 countries.

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GLO-BUS, a somewhat simpler strategy simulation first introduced in 2004 and freshly revamped in 2017 has been used by close to 2,000 different instructors for courses involving roughly 400,000 students at 800+ university campuses in 52 countries. In 2022, this latest version of GLO-BUS was used by about 31,000 students in courses on 250+ campuses in 24 countries.

Arthur A. Thompson, a senior author of this text and the lead coauthor of both The Business Strategy Game and GLO-BUS, designed both simulations to provide instructors with an appealing and proven means of: 

Getting class members personally engaged in thinking strategically and applying the chapter content.

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Giving students valuable practice in synthesizing a variety of functional and operating decisions into an overall strategy and competitive approach that produces good financial and strategic results.

The remainder of this section provides you with information about the two strategy simulations and offers suggestions for successfully using either BSG or GLO-BUS in your course. Here is a quick reference guide to the contents of this section: How the Strategy Simulations Work......................................................................................................... 20 A Birdseye View of The Business Strategy Game .................................................................................. 22 A Birdseye View of GLO-BUS ........................................................................................................................ 27 Special BSG/GLO-BUS Features and Noteworthy Extras .................................................................... 32 The Compelling Benefits of Incorporating Use of a Strategy Simulation in Your Course ...... 37 How Much Time Will It to Learn About and Conduct a Simulation for Your Course? ............. 39 Which Simulation Makes the Most Sense for Your Course? ............................................................. 42 The 4-Step Course Setup Procedure ......................................................................................................... 46 How Do Class Members Register and Gain Full Access to the Simulation Website? ............... 47 How Much Should a Simulation Exercise Count in the Total Course Grade? ............................. 48 How Company Performances Are Scored: A Balanced Scorecard Approach ............................. 49 What To Do If You Decide to Use Either of the Companion Simulations .................................... 52

HOW THE STRATEGY SIMULATIONS WORK In both The Business Strategy Game (BSG) and GLO-BUS, one to five class members are assigned to run a company that competes head-to-head against companies run by other class members. 

In BSG, team members run athletic footwear companies that produce and market both branded and private-label footwear in a global market arena with four distinct geographic regions—Europe-Africa, North America, Asia-Pacific, and Latin America.

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In GLO-BUS, team members operate companies that design, assemble, and market professional quality action-capture video cameras and unmanned camera-equipped copter drones in a global market arena that also consists of four distinct geographic regions—Europe-Africa, North America, Asia-Pacific, and Latin America.

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In both simulations, each management team is called upon to craft a strategy for their company and make decisions relating to production capacity, plant operations, workforce compensation, pricing and marketing, social responsibility/citizenship, and finance.

Company co-managers are held accountable for their decision making. A balanced scorecard approach is used to evaluate each company‘s performance on the basis of earnings per share, return on equity investment, stock price, credit rating, and image rating. Rankings of company performance, along with a wealth of industry and company statistics, are available to company co-managers after each decision round to use in making strategy adjustments and entering decisions for the next competitive round. You can be certain that the market environment, strategic issues, and operating challenges that company co-managers must contend with in running their simulation company are very tightly linked to the concepts, analytical tools, and strategy options they encounter in the text chapters for this 8th edition.

We suggest that you schedule one or two practice rounds and anywhere from six to 10 regular (scored) decision rounds (six to 10 rounds are better than three to five rounds because requiring class members to run their companies for a greater number of decision rounds prompt them to consider the long-term impact of their decisions and strategies rather than to focus on short-term decision making and immediate outcomes/financial results. Each decision round represents a year of company operations and will entail roughly two hours of time for company comanagers to complete. Decision rounds can be scheduled weekly, bi-weekly, or at whatever intervals instructors wish. Sample schedules for courses of varying length and numbers of class meetings are provided.

When the instructor-specified deadline for a decision round arrives, the simulation server automatically accesses the saved decision entries of each company, determines the competitiveness and buyer appeal of each company‘s product offering relative to the offerings of rival companies, and then allocates sales and market shares, geographic region by geographic region. The unit sales volumes awarded to each company are totally governed by: 

How a company‘s prices compare against the prices of rival brands.

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How its product quality compares against the quality of rival brands.

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How its product line breadth and selection compare.

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How its advertising effort compares to rivals’ advertising, and so on for a total of 11 competitive factors that determine a company’s unit sales and market shares in each of the four geographic regions.

The competitiveness and overall buyer appeal of each company‘s product offering in comparison to the product offerings of rival companies is all-decisive—this algorithmic feature is what make © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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BSG and GLO-BUS ―competition-based‖ strategy simulations. Once each company‘s sales and market shares are awarded based on the competitiveness and buyer appeal of its overall product offering vis-à-vis the offerings of rival companies, the various company and industry reports detailing the outcomes of the decision round are then generated. Company co-managers and course instructors can access the results of the decision round 15–20 minutes after the decision deadline.

Rest assured that both simulations were meticulously designed to be instructor friendly. You‘ll be pleasantly surprised—and we think quite pleased—at how little time it takes to gear up for and to administer an automated online simulation like The Business Strategy Game or GLO-BUS. Special Note: Both simulations work especially well for online classes or in distancelearning situations where students are not on campus. This is because team members running the same company who are logged-in simultaneously on different computers at different locations can easily have an online meeting by using two tremendously valuable built-in capabilities:

1. They can click a button to work collaboratively in viewing reports and making decision entries. When in ―Collaboration Mode,‖ each team member sees the same screen at the same time as all other team members who are logged-in and have joined Collaboration Mode. If one team member chooses to view a particular decision screen, that same screen appears on the monitors for all team members engaged in collaboration. Each team member controls their own color-coded mouse pointer (with their first name appearing in a color-coded box linked to their mouse pointer) and can make a decision entry or move the mouse to point to particular on-screen items.

2. They can click a second button to talk to one another (using the built-in real-time VOIP audio chat feature). Chat capability among team members working in Collaboration Mode enables team members to debate and discuss the merits of alternative decision entries and strategies. In effect, they can have an online meeting to conveniently and effectively collaborate in running their simulation company (as opposed to meeting face-to-face and gathering around a single computer).

Moreover, instructors have capability to use their own computers to join any company’s online meeting. They can not only talk online to the managers of a company but also utilize the Collaboration feature that enables all attendees to view the same screen. When in Collaboration Mode instructors have their own red-colored mouse pointer linked to a red box labeled Instructor. This instructor-friendly feature curtails having to schedule meetings with team members in your office should something arise that requires your participation.

Even if you are teaching an in-person class rather than an online course, you will find that a big majority of class members will opt to take advantage of the built-in collaboration and voice chat features because the members of many company teams will like the convenience of having an online meeting to prepare their decision entries as opposed to having face-to-face meetings and gathering around a single computer either in the computer lab or at some other location of their

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choosing.

A BIRDS-EYE VIEW OF THE BUSINESS STRATEGY GAME The Business Strategy Game (BSG) is modeled to mirror the global athletic footwear industry (where the longtime industry leaders are Nike and Adidas-Reebok). Athletic footwear makes an excellent setting for a simulation because it is a product that students are intimately familiar with and the workings of the industry can easily be grasped by students—conditions which greatly enhance the effectiveness of a simulation from a teaching/learning perspective. The global athletic footwear industry is particularly suitable for a strategy simulation because the product is used worldwide, there‘s competition among companies from several continents, production is concentrated in low-cost locations, and the real-world marketplace is populated with companies employing a variety of competitive approaches and business strategies.

Using a strategy simulation with a global industry setting is especially desirable because globalization of the marketplace is an ever-widening reality and global strategy issues are a standard part of the strategic management course. Plus, of course, accreditation standards for business school programs routinely require that the core curriculum include international business topics and the managerial challenges of operating in a globally competitive marketplace.

Company Operations Companies begin the simulation producing branded and private-label footwear in two production facilities, one in North America and one in Asia. Both facilities can be operated at overtime to boost annual capacity by 20 percent. Management has the option to establish production facilities in Latin America and Europe-Africa as the simulation proceeds. At management‘s direction, a company‘s design staff can come up with more footwear models, new features, and stylish new designs to keep the company‘s branded product line fresh and in keeping with the latest fashion.

Private-label footwear must be produced to the specifications of chain footwear retailers with private label brands.

Each company markets its brand of athletic footwear to footwear retailers worldwide and to individuals buying online at the company‘s website. If a company has more production capacity than is needed to meet the demand for its branded footwear, it can enter into competitive bidding for contracts to produce footwear sold under the private-label brands of large chain retailers.

Company co-managers exercise control over production costs based on the styling and quality they opt to manufacture, plant location (wages, incentive compensation, and import tariffs vary from region to region), the use of best practices and six sigma programs to reduce the production of defective footwear and to boost worker productivity, and compensation practices.

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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All newly produced footwear is shipped in bulk containers to one of four regional distribution centers (North America, Latin America, Asia-Pacific, and Europe-Africa). All incoming orders from Internet customers and retailers in a geographic region are filled from footwear inventories in that same regional distribution center. Since Internet and retailer orders cannot be filled from inventories in a distribution center in another region (because of prohibitively high shipping and distribution costs), company co-managers have to be careful to match shipments from production facilities to the expected Internet and retailer demand in each geographic region. Costs at the four regional distribution centers are a function of inventory storage costs, packing and shipping fees, import tariffs paid on incoming pairs shipped from foreign plants, and exchange rate impacts.

Many countries have import tariffs on footwear produced at plants outside their geographic region; at the start of the simulation, import tariffs average $4 per pair in North America, $6 in Europe-Africa, $10 per pair in Latin America, and $8 in the Asia-Pacific region. Instructors have the option to alter tariffs as the game progresses.

In running their footwear companies, the challenge for each management team is to craft and execute a competitive strategy that results in a respected brand image, keeps their company in contention for global market leadership, and produces good financial performance as measured by earnings per share, return on equity investment, stock price appreciation, and credit rating.

All companies begin the exercise with equal sales volume, global market share, revenues, profits, costs, product quality and performance, brand recognition, and so on. Global demand for athletic footwear grows at the rate of 7 to 9 percent annually for the first five years and 5 to 7 percent annually for the second five years. However, market growth rates vary by geographic region, and growth rates are also affected by the aggressiveness with which companies go after additional sales by making their product offerings more appealing.

The Decisions That Company Managers Have to Make In BSG, company co-managers make up to 57 types of decisions each period, spread across the functional spectrum as follows: 

Production operations (up to 11 decisions for each plant, with a maximum of four plants)

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The addition of facility space, equipment, and production improvement options (up to six decisions per plant)

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Worker compensation, supervision, and training (up to six decisions per plant)

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Shipping and distribution center operations (five decisions per geographic region)

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Pricing and marketing (up to nine decisions in each of four geographic regions)

 Bids to sign celebrities (two decision entries per bid) © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Corporate social responsibility and citizenship (up to eight decision entries)

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Financing of company operations (up to eight decision entries)

Plus, there are 10 entries for each region pertaining to assumptions about the upcoming-year actions and competitive efforts of rival companies that factor directly into the forecasts of a company‘s unit sales, revenues, and market share in each of the four geographic regions.

Experience confirms that having such a ―large‖ number of decisions is right on the money—enough to keep company co-managers engaged and challenged but not too many to confuse and overwhelm.

On-Screen Support Calculations Each time co-managers make a decision entry, an assortment of on-screen calculations instantly shows the projected effects on unit sales, revenues, market shares, total profit, earnings per share, ROE, unit costs, and other operating outcomes. All of these on-screen calculations help comanagers evaluate the relative merits of one decision entry versus another. Company managers can try out as many different decision combinations as they wish in stitching the separate decisions into a cohesive whole that is projected to produce good company performance.

If company co-managers want additional help/assistance in making decision entries, they can watch the two- to four-minute video tutorials for each decision screen and/or consult the comprehensive Help sections that explain cause–effect relationships, provide tips and suggestions, explain how the numbers in the company and industry reports are calculated, and otherwise inform company co-managers how things work.

The Quest for a Winning Strategy All companies begin the exercise with equal sales volume, global market share, revenues, profits, costs, product quality and performance, brand recognition, and so on. Global demand for athletic footwear grows at the rate of 7 to 9 percent annually for the first five years and 5 to 7 percent annually for the second five years. However, market growth rates vary by geographic region, and growth rates are also affected by the aggressiveness with which companies go after additional sales by making their product offerings more appealing.

Each company typically seeks to enhance its performance and build competitive advantage based on some combination of selling its footwear at more attractive prices, offering a bigger selection of footwear styles and models, having more appealing footwear styling and quality, outspending rivals on advertising, offering bigger mail-in rebates, outbidding rivals in signing celebrities to endorse its brand, and so on for each of the various determinants of competitiveness. providing more merchandising and promotional support to retailers, shorter shipping and delivery times, and more aggressive promotion of online purchases at its website. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Competition among rival athletic footwear manufacturers centers around 13 factors that affect each company‘s branded footwear sales volumes and market shares in each of the four geographic market regions. Five of the 13 factors affect both wholesale sales to footwear retailers and online sales at company websites, five of the factors affect only wholesale sales, and three of the factors affect only Internet (or online) sales: 

The five competition-related factors that affect both branded wholesale sales to footwear retailers and branded online sales at company websites pertain to footwear styling and quality, number of models/styles offered, expenditures for brand advertising, appeal of celebrity endorsers, and brand image/reputation.

The five competition related factors that pertain exclusively to wholesale sales of branded footwear to footwear retailers in each region are the average wholesale prices at which companies sell their branded footwear to retailers in each region, the size of the mail-in rebates companies offer to buyers of their branded footwear in each region, the number of retailers in each region carrying each company‘s brand of footwear, the number of weeks each company chooses to take to deliver orders for branded footwear to footwear retailers in each region, and the comparative amounts of merchandising and promotional support that companies provide to the retailers stocking their brand in each region.

The three competition-related factors that govern each company‘s website sales to online shoppers in each region are the average online price per model offered, comparative expenditures for search engine advertising, and whether a company‘s offers free shipping or requires customer-paid shipping.

Any and all competitive strategy options—low-cost leadership, differentiation, best-cost provider, focused low-cost, and focused differentiation—are viable choices for pursuing better company performance and competitive advantage in the branded footwear segment.

There’s no built-in bias favoring any one strategy and no ―secret set of strategic moves or decision combinations‖ that are sure to result in a company becoming the industry leader. A company can try to gain an edge over rivals in the branded footwear segment with a lower average wholesale price, or bigger expenditures on brand advertising or a wider selection of models or more appealing styling/quality or bigger mail-in rebates or securing more appealing celebrity endorsements, and so on. It can focus sales efforts on one or two geographic regions or strive to build strong market positions in all four geographic regions. It can pursue essentially the same branded strategy worldwide or craft slightly or very different strategies for each of the four geographic regions. It can put more or less emphasis on selling branded shoes to footwear retailers as opposed to selling to individual consumers at the company‘s website.

Most any well-conceived, well-executed competitive approach in branded footwear is capable of succeeding, provided it is not overpowered by the opposing strategies of competitors or defeated by the presence of too many companies pursuing copycat strategies that dilute its effectiveness. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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However, vigorous price competition prevails in the private-label segment. For obvious reasons, chain retailers prefer to source their requirements for private-label footwear from companies offering the best (lowest) prices. Companies desirous of winning a contract to supply private-label footwear to chain retailers across the world must first agree to produce shoes that meet globally set buyer specifications for quality and variety of models/styles. Then they must be successful in bidding against rival companies for contracts. Companies offering to supply specified quantities of private-label footwear with lower price bids are awarded contracts over companies that bid higher prices. A low-cost, low-price strategy is thus mandatory in the private-label segment if a company expects to be profitable (but this does not require pursuing this same strategy/competitive approach in the branded athletic footwear segment).

How the Outcomes Are Determined Instructors specify a deadline (date and time) for company co-managers to complete for each decision round and other related assignments. Instructors have the flexibility to change the deadlines at any time for any reason. Decision rounds can be scheduled once per week, twice per week, daily, or even twice daily, depending on how you want to conduct the exercise. You will be able to peruse sample decision schedules when you are settling on the times and dates for the deadlines.

When the instructor-specified deadline for a decision round arrives, the BSG algorithms allocate sales and market shares to the competing companies, region by region. How many branded pairs a company sells in each geographic region is governed by: how its branded footwear price compares against the prices of rival brands, how its branded footwear styling and quality compares against the styling/quality of rival brands, how its expenditures for brand advertising match up against the brand advertising expenditures of its rivals, and so on for each of the other competitively relevant factors listed above.

For instance, a company‘s branded footwear price in a region is determined to be more competitive the further it is below the average price in that region charged by all companies and less competitive the further it is above the regional average. A company‘s styling/quality is determined to be more competitive the further its styling/quality rating is above the average styling/quality rating of all companies competing in the region and less competitive the further its rating is below the industry average in the region. The overall competitiveness of a company’s product offering in a region is a function of the combined strength of its competitive efforts on all 13 competitive factors affecting sales of branded footwear versus the strength of the competitive efforts exerted by rival companies in that region. For example, a © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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company can offset the adverse impact of an above average price with above-average styling/quality, and/or above-average brand advertising expenditures. The greater the differences in the overall

competitiveness of the branded product offerings of rival companies, the bigger the differences in their resulting sales volumes and market shares. Conversely, the smaller the overall competitive differences in the offerings of rival companies, the smaller the differences in sales volumes and market shares. This algorithmic approach is what makes BSG a ―competitionbased‖ strategy simulation and why the sales and market share outcomes for each decision round are always unique to the particular strategies and decision combinations employed by the competing companies.

Once branded sales volumes and market shares are awarded based on the strength or weakness of each company‘s overall competitive effort and the outcomes of the bidding to supply privatelabel footwear are determined, then each company‘s performance is calculated and all the various company and industry reports are generated.

The scoring of each company’s performance is based on a balanced scorecard that includes brand image, earnings per share (EPS), return on equity investment (ROE), stock price appreciation, and credit rating.

The results of the decision round are available to class members and the instructor about 15– 20 minutes after the deadline passes.

Special Note: The cause–effect relationships and underlying algorithms in The Business Strategy Game are based on sound business and economic principles and are closely matched to the real-world athletic footwear market. The “real-world” character of the competitive environment and company operations that have been designed into The Business Strategy Game allows company co-managers to think rationally and logically as they go about the tasks of diagnosing and responding to the competitive moves of rival companies, making strategy choices and adjustments, and deciding how to manage their athletic footwear company. The Business Strategy Game is predicated on the principle that the more BSG mirrors real-world market conditions and real-world managerial decision making, the more pedagogical value it has. Why? Because tight linkages between the functioning of BSG and “the real world” provide class members with an authentic learning experience, a bona fide means of building their skills in analyzing markets and the actions of competitors, and a true-to-life way to practice making business-like decisions and applying the knowledge they have gained in business school.

Time Requirements for Company Co-Managers Data from our servers indicates that each company team spends an average of about 2.5 hours working on each decision round. The first couple of decision rounds take longer not only because co-managers have to explore the menus, familiarize themselves with the information on the screens, and absorb the relevance of the calculations shown whenever new decisions are © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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entered but also because it takes time for them to establish a working relationship with one another and debate what sort of long-term direction and strategy to pursue.

The total workload for each team of students/participants ends up between 20 and 30 hours, given an average of 2.5 hours per decision round, nine to 12 decision rounds (including practice rounds), and the time needed to complete optional assignments (quizzes, strategic plans, company presentation, and peer evaluations). As discussed earlier, you can offset the hours students spend on the simulation by trimming the number of case assignments, eliminating a written case assignment (which can take students 10–15 hours to prepare), and perhaps allocating one or more regularly scheduled class periods to having class members meet in teams (in or outside of the classroom) to work on their decisions or a Three-Year Strategic Plan assignment.

It will consume part of a class period to introduce class members to the simulation and get things under way. Thereafter, the simulation becomes an out-of-class group exercise where comanagers spend most of their time working as a team on a PC (in a computer lab or at a comanager‘s place of residence or other location of their choosing) or in collaboration mode on their own individual PCs. All activity for The Business Strategy Game takes place at www.bsg-online.com.

A BIRDS-EYE VIEW OF GLO-BUS In GLO-BUS, class members run companies that are in a neck-and-neck race for global market leadership in two product categories: (1) wearable video cameras smaller than a teacup that deliver stunning video quality and have powerful photo capture capabilities (comparable to those designed and marketed by global industry leader GoPro) and (2) sophisticated cameraequipped copter drones that incorporate a company designed and assembled action-capture camera and that are sold to commercial enterprises for prices in the $850 to $2,000+ range.

Global market demand for action cameras grows at the rate of 6 to 8 percent annually for the first five years and 4 to 6 percent annually for the second five years. Global market demand for commercial drones grows briskly at rates averaging 18 percent for the first two years, then gradually slowing down over the next eight years to a rate close to 5 percent.

Company Operations Companies assemble action cameras and drones of varying designs and performance capabilities at a Taiwan facility and ship finished goods directly to buyers in North America, Asia-Pacific, Europe-Africa, and Latin America. Both products are assembled usually within two weeks of being received and are then shipped to buyers no later than two to three days after assembly. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Companies maintain no finished goods inventories and all parts and components are delivered by suppliers on a just-in-time basis (which eliminates the need to track inventories and simplifies the accounting for plant operations and costs).

Company co-managers determine the quality and performance features of the cameras and drones being assembled. They impact production costs by raising/lowering specifications for parts/components and expenditures for product R&D, adjusting work force compensation, spending more/less on worker training and productivity improvement, lengthening/shortening warranties offered (which affects warranty costs), and how cost-efficiently they manage assembly operations. They have options to manage/control selling and certain other costs as well.

To capitalize on ongoing technological advances and the pipeline of product enhancement capabilities flowing from the company‘s expenditures for new product R&D, the company typically introduces new and/or improved models each year, changes the specs for important components, adds/modifies performance features, upgrades the internal software, makes other design-related changes, and strives to price and market its brand of cameras and drones in ways that management believes will improve buyer appeal for its camera/drone models and enhance the company‘s ability to compete more effectively with the offerings of rival companies.

The Decisions that Company Managers Have to Make Each decision round, company co-managers make some 50 types of decisions relating to the design and performance of the company‘s two products (21 decisions, 10 for cameras and 11 for drones), assembly operations and workforce compensation (up to eight decision entries for each product), pricing and marketing (seven decisions for cameras and five for drones), corporate social responsibility and citizenship (up to six decisions), and the financing of company operations (up to eight decisions). In addition, there are 10 entries for cameras and 7seven entries for drones involving assumptions about the competitive actions of rivals; these entries help company co-managers to make more accurate forecasts of their company‘s unit sales (so they have a good idea of how many cameras and drones will need to be assembled each year to fill customer orders). Plus, company managers have accounting and cost data to examine, import duties and exchange rate fluctuations to consider, and shareholder expectations to satisfy.

On-Screen Support Calculations Each time co-managers make a decision entry, an assortment of on-screen calculations instantly shows the projected effects on unit sales, revenues, market shares, total profit, earnings per share, ROE, costs, and other operating outcomes. All of these on-screen calculations help co-managers evaluate the relative merits of one decision entry versus another. Company managers can try out © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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as many different decision combinations as they wish in stitching the separate decision entries into a cohesive whole that is projected to produce good company performance.

Just as with The Business Strategy Game, there are video tutorials and comprehensive Help sections.

The Quest for a Winning Strategy All companies begin the GLO-BUS exercise on the same footing from a global perspective— with equal sales volume, global market share, revenues, profits, costs, product quality and performance, brand recognition, and so on. Competition in action cameras revolves around 11 factors that determine each company‘s unit sales/market share: 1. How each company’s average wholesale price to retailers compares against the allcompany average wholesale prices being charged in each geographic region.

2. How each company’s camera performance and quality compares against industrywide camera performance/quality.

3. How the number of week-long sales promotion campaigns a company has in each region compares against the regional average number of weekly promotions.

4. How the size of each company’s discounts off the regular wholesale prices during sales promotion campaigns compares against the regional average promotional discount.

5. How each company’s annual advertising expenditures compare against regional average advertising expenditures.

6. How the number of models in each company’s camera line compares against the industry-wide average number of models.

7. The number of retailers stocking and merchandising a company’s brand in each region.

8. Annual expenditures to support the merchandising efforts of retailers stocking a company’s brand in each region.

9. The amount by which a company’s expenditures for ongoing improvement and updating of its company’s website in a region is above/below the all-company regional average expenditure.

10. How the length of each company’s camera warranties compare against the warranty periods of rival companies.

11. How well a company’s brand image/reputation compares against the brand images/reputations of rival companies. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Competition among rival makers of commercial copter drones is more narrowly focused on just nine sales-determining factors: 1. How a company’s average retail price for drones at the company’s website in each region compares against the all-company regional average website price.

2. How each company’s drone performance and quality compares against the allcompany average drone performance/quality.

3. How the number of models in each company’s drone line compares against the industry-wide average number of models.

4. How each company’s annual expenditures to recruit/support third-party online electronics retailers in merchandising its brand of drones in each region compares against the regional average.

5. The amount by which a company’s price discount to third-party online retailers is above/below the regional average discounted price.

6. How well a company’s expenditures for search engine advertising in a region compares against the regional average.

7. How well a company’s expenditures for ongoing improvement and updating of its website in a region compares against the regional average.

8. How the length of each company’s drone warranties in a region compares against the regional average warranty period.

9. How well a company’s brand image/reputation compares against the brand images/reputations of rival companies.

Each company typically seeks to enhance its performance and build competitive advantage via its own custom-tailored competitive strategy based on more attractive pricing, greater advertising, a wider selection of models, more appealing performance/quality, longer warranties, a better image/reputation, and so on. As with BSG, all the various generic competitive strategy options—low-cost leadership, differentiation, best-cost provider, focused low-cost, and focused differentiation—are viable choices for pursuing competitive advantage and good company performance. A company can have a strategy aimed at being the clear market leader in either action cameras or UAV drones or both. It can focus on one or two geographic regions or strive to build strong market positions in all four geographic regions. It can pursue essentially the same strategy worldwide or craft customized strategies for the Europe-Africa, Asia-Pacific, Latin America, and North America markets. Just as with The Business Strategy Game, most any well-conceived, well-executed competitive approach is capable of succeeding, provided it is not overpowered by the strategies of competitors or defeated by the presence of too many copycat strategies that dilute its effectiveness. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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How the Outcomes Are Determined When the instructor-specified deadline for a decision round arrives, the GLO-BUS algorithms allocate sales and market shares in the action-camera and UAV drone segments to the competing companies, region by region. The factors governing how many units a company sells in each geographic region are based on the competitiveness and overall buyer appeal of its product offering vis-à-vis the product offerings of rivals for each of the 11 competitive factors for cameras and the nine competitive factors for drones.

For instance, a company‘s price in a region is determined to be more competitive the further it is below the average price in that region charged by all companies and less competitive the further it is above the regional average. A company‘s product performance and quality is determined to be more competitive the further its performance/quality rating is above the average performance/quality rating of all companies competing in the region and less competitive the further its rating is below the regional average. The overall competitiveness of a company’s product offering in a region is a function of its combined competitive standing across all competitive factors for that product. For example, a company can offset the adverse impact of an above average price with above-average performance and quality, more advertising, longer warranties, and so on.

The greater the differences in the overall competitiveness of the product offerings of rival companies, the bigger the differences in their resulting sales volumes and market shares.

Conversely, the smaller the overall competitive differences in the product offerings of rival companies, the smaller the differences in sales volumes and market shares. This algorithmic approach is what makes GLO-BUS a ―competition-based‖ strategy simulation and accounts for why the sales and market share outcomes for each decision round are always unique to the particular strategies and decision combinations employed by the competing companies.

Once sales and market shares are awarded, the company and industry reports are then generated and all the results become available 15–20 minutes after the decision deadline passes.

Company performance is judged on five criteria: earnings per share, return on equity investment (ROE), stock price, credit rating, and brand image.

All activity for GLO-BUS occurs at www.glo-bus.com.

Special Note: The time required of company co-managers to complete each decision round in GLO-BUS is typically about 15–30-minutes less than for The Business Strategy Game because

1. there are only eight market segments (versus 12 in BSG), 2. co-managers have only one plant to operate (versus as many as four in BSG), and © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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3. newly assembled cameras and drones are shipped directly to buyers, eliminating the need to manage finished goods inventories and operate distribution centers.

Guidance about which simulation might be best for your course is provided later in this section.

SPECIAL BSG/GLO-BUS FEATURES AND NOTEWORTHY EXTRAS The Internet delivery and user-friendly designs of both BSG and GLO-BUS make them incredibly easy to administer, even for first-time users. And the menus and controls for BSG and GLO-BUS are so similar that you can readily switch between the two simulations or use one in your undergraduate class and the other in an MBA class. If you have not yet used either of the two simulations (or any other strategy simulation), you may find the following of particular interest:

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Each simulation has a video tour that introduces students to the simulation, takes them through the website, and helps them to a successful start. For instructors, there are two video tours that introduce instructors to the each of the simulation websites—one of the student site and one of the instructor site; these will help you in previewing the what the simulation involves for students and the many features and options available to instructors in conducting the simulation and monitoring the results.

Instructors who are considering use of either simulation can attend any of the 30 or so author-conducted webinars/demos scheduled throughout each year—these run 60–75 minutes, allow ample time for Q&A, and provide essentially all of the ―training‖ you need.

Our Instructor Support team is always readily available to assist you throughout the term, should you have questions or need assistance of any kind.

In the course of running their company (making decision entries and viewing reports), class members have one-click access to 2- to 5-minute video tutorials for each decision screen and each page of each report. In addition, they have one-click access to ―Help‖ sections containing detailed explanations of (a) the information on each decision entry screen and all relevant cause– effect relationships, (b) the information on each page of the Industry Reports, and (c) the numbers presented in the Company Reports. The Help pages for each decision entry screen also contain tips and suggestions for making wise decision entries. The video tutorials and full-blown Help page discussions allow company co-managers to figure things out for themselves, thereby relieving instructors of having to answer questions about ―how things work.‖ It is quick and easy to set up either simulation for your course. Setting up the simulation for your course is done online and takes about 30-minutes the first time you do it and about 15–20 minutes thereafter. There is on-screen guidance for each of step of the straightforward/easy-tounderstand Course Setup Procedure; should you encounter any issues or have questions, you can easily call Tech Support for hands-on assistance in completing the Course Setup procedure, getting answers to questions, or resolving any problems you are having.

Sample course outlines for integrating BSG or GLO-BUS into your strategy course can be found in Section 4 of this Instructor‘s Manual and also online at the simulation websites. There are sample outlines for semester-long courses, 10-week or quarter-long courses, and 5-week courses; © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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each course outline consists of suggested activities and assignments for each and every class meeting. These provide useful guidance on incorporating use of the simulation and preparing a syllabus in your course.

There’s also a three-page, author-prepared document titled ―Instructor Best Practices for Successfully Using the Simulation‖ written especially for first-time users. Plus, there is an Instructor‘s Manual that provides comprehensive explanations and guidance, and the author team for the two simulation is always available via e-mail or telephone to provide whatever assistance you need.

An online Instructor Center serves as your hub for conducting all administrative activities and monitoring the results of the company decisions. The Instructor Center is the screen you are sent to when you enter your user name and password to log in. Every function and feature that you need for using the simulation in your course is on the Instructor Center page or accessible from it. Online grade books provide you with scores indicating each company’s and each participant’s performance on each phase of the simulation. Once you enter percentage weights to put on each performance measure, overall scores are automatically calculated (which you can scale or not as you see fit). No other administrative actions on your part are required beyond that of moving participants to a different team (should the need arise), keeping tabs on the outcomes of the decision rounds and how well the companies are doing (to whatever extent desired), and using the automatically calculated numerical averages in the online grade book to determine the overall grades to assign class members on the entire simulation exercise.

Both participants and instructors conduct all activities online (at www.bsg-online.com for The Business Strategy Game and at www.glo-bus.com for GLO-BUS). All materials are delivered digitally to class members and instructors. 

Students gain full access to everything needed during the course of the simulation, including the Participant‘s Guide, immediately upon registering—students can read the Participant‘s Guide and other accompanying content on their monitors or make print outs, as they prefer.



Likewise, instructors gain full access to all menus and materials on the website immediately upon creating an Instructor Account at the website home page.

Both simulations offer integrated text chat, audio chat, and collaboration features for team members (students) who are logged-on simultaneously to facilitate online team meeting and collaboration among company co-managers. 



Use of the built-in audio-chat capability requires that each team member work from a computer with a built-in microphone (if they want to be heard by the rest of the team) and speakers (so that they may hear their teammates) or else have a headset with a microphone. A headset is recommended for best results, but most laptops now are equipped with a built-in microphone and speakers that will support full use of the voice-chat capability.

When in ―Collaboration Mode,‖ each team member sees the same screen at the same time as all other team members who are logged-in and have joined Collaboration © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Mode. If one team member chooses to view a particular decision screen, that same screen appears on the monitors for all team members engaged in collaboration. 

Each team member controls a color-coded mouse pointer (with their first name appearing in a color-coded box linked to their mouse pointer) and can make a decision entry or move the mouse to point to particular on-screen items.



A decision entry change made by one team member is seen by all, in real time, and all team members can immediately view the on-screen calculations that result from the new decision entry.



If one team member wishes to view a report page and clicks on the menu link to the desired report, that same report page will immediately appear for the other team members engaged in collaboration.

Instructors have built-in capability to join the online meetings of any company directly from their own computers. Instructors who wish not only to talk but also enter Collaboration (highly recommended because all attendees are then viewing the same screen) have a red-colored mouse pointer linked to a red box labeled Instructor. The ability of instructors and company comanagers to have an online meeting at a mutually agreeable time is often more convenient than scheduling face-to-face meetings during an instructor‘s office hours.

The audio and collaboration features make the simulations highly suitable for use in distancelearning or online courses (and are currently being used in many such courses).

The deadlines for each decision round and other related assignments are set and totally controlled by the instructor (and can be changed at any time for any reason). Decision rounds can be scheduled once per week, twice per week, daily, or even twice daily, depending on how you want to conduct the exercise.

The management teams for each company can range from one to five co-managers, and the number of companies competing head-to-head in a single market group or ―industry‖ can range from four to 12. If you have a large class and need more than 12 companies, the Course Setup procedure makes it simple to create two or more industries for your class. In a small class, there can be no fewer than four company teams—two-person teams will work just fine. (For classes with fewer than eight students, please call us at 205-722-9149 or e-mail techsupport@glo-bus.com to discuss how best to proceed.)

The decision entries that co-managers make are saved directly to the simulation server when a student-user clicks the Save button. When a decision round deadline passes, the decision entries of all companies are then ―processed‖ automatically. Complete results are available to company co-managers and the instructor 15–20 minutes after the decision deadline. 

Participants and instructors are immediately notified via e-mail as soon as the decision outcomes are ready. Company co-managers learn the details of ―what happened‖ in a seven-page Industry Report, a Competitive Intelligence report for each geographic region, and a set of Company Reports (consisting of assorted sales, cost, and operating statistics and a set of financial statements—income statement,

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balance sheet, and cash flow statement).

A ―scoreboard of company performance‖ incorporates two performance measures: (1) how well each company meets ―investor expectations‖ on earnings per share, return on shareholders‘ equity (ROE), stock price appreciation, credit rating, and image rating and (2) how well each company stacks up against the ―best-in-industry performer‖ on each of these same five measures.

You have the option to assign two ―open-book‖ multiple-choice tests of 20 questions. Quiz 1 covers the contents of the Participant’s Guide. Quiz 2 measures understanding of key aspects of company operations and student command of ways to improve company performance. The selfscoring quizzes are taken online by each student individually, with scores reported instantaneously to participants and recorded in your online grade book. Requiring completion of both quizzes is very highly recommended.

There is a built-in three-year strategic plan feature that entails having each company‘s management team (1) articulate a strategic vision for their company (in a few sentences), (2) set performance targets for EPS, ROE, stock price appreciation, credit rating, and image rating for each of the next three years, (3) state the competitive strategy the company will pursue, (4) cite data showing that the chosen strategy either is currently on track or requires further managerial actions, and (5) develop a projected income statement for the each of the next three years based upon expected unit sales, revenues, costs, and profits. Each company’s strategic plan is automatically graded on a scale of 1 to 100, with points being earned for meeting or beating the performance targets that were established. The scores are recorded in your online grade book.

Assigning completion of three-year strategic plans is entirely optional—you can have company managers complete no plan, one plan, or two plans.

At the conclusion of the simulation, you can choose to have each company management team prepare a slide presentation reviewing their company’s performance and strategy. A Company Presentation link in each co-manager‘s Corporate Lobby provides explicit slide-by-slide suggestions of what to cover in the presentation. Company co-managers may easily download and insert any of the graphs/charts appearing in the reports.

There is a comprehensive 12-question peer evaluation form that co-managers can complete midway through the exercise and/or at the end of the exercise to help you gauge the caliber of effort each co-manager has put into the exercise. Peer evaluations are automatically scored on a scale of 1 to 100, and the scores are recorded in your online grade book.

There is an Activity Log that provides an informative summary of each co-manager’s use of various parts of the website—the frequency and length of log-ons, how many times decision entries were saved to the server each decision round, and how many times each set of reports was viewed each decision round. The combined information from the peer evaluations and the Activity Log provides good evidence about whether a co-manager was a strong or weak contributor.

An end-of-simulation Learning Assurance Report (LAR) provides you with solid empirical data concerning how well your students performed versus students playing the simulation at all schools/campuses worldwide over the past 12 months. The report measures nine areas of © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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student proficiency, business know-how, and decision-making skill and provides potent benchmark evidence valid for gauging the extent to which your school‘s academic curriculum is delivering the desired degree of student learning as concerns accreditation standards. The LAR is useful in two very important respects. 

It provides you with a clear overview of how well your students rank relative to students at other schools worldwide who have gone through this same competitionbased simulation exercise over the past 12 months.



Because the report provides highly credible evidence regarding the caliber of business proficiency and decision-making prowess of your students, it can be used to help assess whether your school‘s academic curriculum in business is providing students with the desired degree of business understanding and decision-making acumen.

Professors, department chairs, and deans at many business schools worldwide are engaged in developing ongoing evidence of whether their academic programs meet the Assurance of Learning Standards now being applied by the Association to Advance Collegiate Schools of Business (AACSB); a prime goal of this Learning Assurance Report is to contribute significantly to this effort.

There is a weekly ranking of the best-performing companies worldwide posted on the homepage—all co-managers and instructors whose companies appear in the rankings are automatically notified by e-mail. You can browse through the latest rankings by clicking on the Global Top Performers icon on the left center of the homepage.

At the conclusion of the simulation, the co-managers of the overall best-performing company in your class are automatically e-mailed an ―Industry Champion‖ certificate suitable for framing. This certificate serves to document an award or achievement that each co-manager of a champion company can put on their résumé.

The co-managers of each industry-winning company playing the two simulations across the world are invited to participate in the ―Best Strategy Invitational.‖ The BSIs for GLO-BUS and The Business Strategy Game are held three times each year—in late April/early May, in August, and in late November/early December. Those teams that accept the invitation to participate are divided into industries of eight to 12 companies and compete for a period of 10 decision rounds for ―Global Industry Championships.‖ All participants who complete the competition receive frameable certificates and the industry winners get a ―Grand Champion‖ certificate. Receipt of these certificates also merits a line on a student‘s résumé.

Comprehensive support, question-answering, and problem-solving is provided to all adopters of the two simulations by co-authors Greg Stappenbeck and Art Thompson—just use the tech support link in the Instructor Center to send an e-mail, call us at 205-722-9149, or send an e-mail to athompso@cba.ua.edu to learn more about either simulation. We will be glad to provide you with a personal tour of either or both of the websites (while you are on your PC) and walk you through the many features that are built into the simulations. If there are multiple instructors at © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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your school who teach the course, we will be happy to set up a special webinar for you and your colleagues, give you a guided tour of the website, and answer whatever questions you may have.

Alternatively, you can go to www.bsg-online.com and/or www.glo-bus.com, register as an Instructor, and gain full access to the websites and all of the materials you will need to conduct the simulation. Once you register (there‘s no obligation), you‘ll be able to access the videos tours of the website, the Instructor’s Guide and the Participant’s Guide for the simulations, explore the Instructor Center menus on your own, and complete the Course Setup procedure (which is necessary in order to get everything ready for students to register, should you decide to use the simulation in an upcoming course).

We are more than happy to give personal assistance to new and ongoing users any time questions or problems arise and in completing the Course Setup procedure.

For those who are worried about ―bugs‖ or flaws, we are long past the stage where software ―glitches‖ and system malfunctions are still being ironed out. There is a staff that monitors and maintains the functioning of the two websites 24/7/365—if a user can get connection to the Internet, then the chances of the system being ―down‖ are virtually nil.

Adopters of the 8th edition of Essentials of Strategic Management who also want to incorporate use of one of the two simulation supplements can either have students register at the simulation website via a credit card or you can instruct your bookstores to order the ―book-simulation package‖—the publisher has a special ISBN number for new copies of the 8th Edition that contain a special card shrink-wrapped with each copy; printed on the enclosed card is a prepaid access code that student can use to register for either simulation and gain full access to the student portion of the website. Please consult with your McGraw Hill sales representative for details about the bundled book-simulation package. However, be aware that bookstore markups on the book-simulation package often result in a $10–$15 higher student cost for the simulation than will registering via credit card at the website.

THE COMPELLING BENEFITS OF INCORPORATING USE OF A STRATEGY SIMULATION IN YOUR COURSE There are three exceptionally important teaching/learning benefits associated with using a competition-based simulation in strategy courses taken by seniors and MBA students: 1. A three-pronged text-case-simulation course model delivers significantly more teaching-learning power than the traditional text-case model. Using both cases and a strategy simulation to drill students in thinking strategically and applying what they read in the text chapters is a stronger, more effective means of helping them connect theory with practice and develop better business judgment. What cases do that a simulation cannot is give class members broad exposure to a variety © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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of companies and industry situations and insight into the kinds of strategy-related problems managers face. But what a competition-based strategy simulation does far better than case analysis is thrust class members squarely into an active, handson managerial role where they are totally responsible for assessing market conditions, determining how to respond to the actions of competitors, forging a longterm direction and strategy for their company, and making all kinds of operating decisions. Because they are held fully accountable for their decisions and their company’s performance, co-managers are strongly motivated to dig deeply into company operations, probe for ways to be more cost-efficient and competitive, and ferret out strategic moves and decisions calculated to boost company performance.

Consequently, incorporating both case assignments and a strategy simulation to develop the skills of class members in thinking strategically and applying the concepts and tools of strategic analysis turns out to be more pedagogically powerful than relying solely on case assignments—there’s stronger retention of the lessons learned and better achievement of course learning objectives.

To provide you with quantitative evidence of the learning that occurs with using The Business Strategy Game or GLO-BUS, there is a built-in Learning Assurance Report showing how well each class member performs on nine skills/learning measures versus tens of thousands of students worldwide who have completed the simulation in the past 12 months.

2. The competitive nature of a strategy simulation arouses positive energy and steps up the whole tempo of the course by a notch or two. Nothing sparks class excitement quicker or better than the concerted efforts on the part of class members at each decision round to achieve a high industry ranking and avoid the perilous consequences of being outcompeted by other class members. Students really enjoy taking on the role of a manager, running their own company, crafting strategies, making all kinds of operating decisions, trying to outcompete rival companies, and getting immediate feedback on the resulting company performance. Lots of back-and-forth chatter occurs when the results of the latest simulation round become available and co-managers renew their quest for strategic moves and actions that will strengthen company performance. Co-managers become emotionally invested in running their company and figuring out what strategic moves to make to boost their company’s performance. Interest levels climb. All this stimulates learning and causes students to see the practical relevance of the subject matter and the benefits of taking your course.

As soon as your students start to say ―Wow! Not only is this fun but I am learning a lot,‖ which they will, you have won the battle of engaging students in the subject matter and moved the value of taking your course to a much higher plateau in the business school curriculum. This translates into a livelier, richer learning experience from a student perspective and better instructor-course evaluations.

3. Use of a fully automated online simulation reduces the time instructors spend on course preparation, course administration, and grading. Since the simulation exercise involves a 20- to 30-hour workload for student teams (roughly two hours per decision round times 10 to 12 rounds, plus optional assignments), simulation adopters often compensate by trimming the number of assigned cases from, say, 10 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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to 12 to perhaps four to six. This significantly reduces the time instructors spend reading cases, studying teaching notes, and otherwise getting ready to lead class discussion of a case or grade oral team presentations. Course preparation time is further cut because you can use several class days to have students meet in the computer lab to work on upcoming decision rounds or a three-year strategic plan (in lieu of lecturing on a chapter or covering an additional assigned case). Not only does use of a simulation permit assigning fewer cases, but it also permits you to eliminate at least one assignment that entails considerable grading on your part.

Grading one less written case or essay exam or other written assignment saves enormous time. With BSG and GLO-BUS, grading is effortless and takes only minutes; once you enter percentage weights for each assignment in your online grade book, a suggested overall grade is calculated for you. You’ll be pleasantly surprised—and quite pleased—at how little time it takes to gear up for and administer The Business Strategy Game or GLO-BUS. In sum, incorporating use of a strategy simulation turns out to be a win-win proposition for both students and instructors. Moreover, a very convincing argument can be made that a competitionbased strategy simulation is the single most effective teaching/learning tool that instructors can employ to teach the discipline of business and competitive strategy, to make learning more enjoyable, and to promote better achievement of course learning objectives.

Instructors who have used state-of-the-art simulations in their strategy courses quickly become enthusiastic converts because the added spark to the course and student excitement surfaces rapidly and the resulting teaching/learning benefits are undeniable. Moreover, the value and effectiveness of using a top-notch strategy simulation in senior-level and MBA courses in strategic management seems to be spreading throughout the community of instructors teaching these courses.

HOW MUCH TIME WILL IT TAKE TO LEARN ABOUT AND CONDUCT A SIMULATION FOR YOUR COURSE? One of the biggest factors probably weighing on your mind if you are contemplating being a first-time user is ―how much time will it take me to learn about The Business Strategy Game or GLO-BUS, conduct the simulation exercise for my course, and assign grades on the simulation exercise?‖ Here are some honest estimates of what you can expect: You should probably spend 30 minutes viewing two orientation videos: (1) the introductory tour of the student portion of the website (which is also readily available to all class members) and (2) the introductory tour of the instructor portion of the website. These are both accessible directly by clicking on the Instructor Essentials menu item on the left side of your Instructor Center screen.

You should read the first 20 pages of the Instructor‘s Guide (written expressly for first-time users) to get a solid overview of the simulation and learn how things work in the most timeefficient manner. You should also skim through the Participant’s Guide to familiarize yourself with what running a company is all about from a student perspective—but this can be deferred © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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until later if you wish.

To launch either one of the simulations for your course and prepare everything for students to register and gain access to the website and the simulation materials they will be using, you must complete the Course Setup procedure that entails deciding what size management teams you want (anywhere between one and five persons), specifying the number of companies you want to create (which is a function of expected class size and how many people you want to comanage each company), selecting dates/times for each decision round to be completed, indicating which optional assignments you want company co-managers to complete (the quizzes, strategic plans, peer evaluations, and company presentation exercise), and distributing company registration codes and/or registration procedures to class members. Recommendations for handling each of the options are provided in the Course Setup procedure. It will take you 30–40 minutes or so to complete the Course Setup procedure the first time you do it and 10–5 minutes each time thereafter.

It will take you 15–20 minutes to familiarize yourself with the Class Presentation PowerPoint slides that can be used to introduce the features and mechanics of the simulation to class members (no more than 20–30 minutes of class time is needed to cover these slides adequately, but it will take a few more minutes of class time to assign class members to the various companies).

You will find there‘s little need to spend much class time on introducing class members to all the mechanics and features of the simulation or to field questions from class members about ―how things work.‖ Why? 

Because there is a 17-minute introductory video that provides students with an overview of the simulation and a quick tour of the student side of the website.



Because navigation of the student side of the website is straightforward and students can readily figure it out.



Because incorporating two practice rounds in your decision round schedule is the very best way to acquaint class members with how the simulation software works and what running their company is all about.



Because all class members should be required to read the Participant’s Guide that covers what company co-managers need to know about the simulation, the industry, and the company they are running to get ready to begin work on the first practice decision round.



Because there are brief Video Tutorials for every decision screen and there are more video tutorials explaining every page of every report provided to all class members (and the instructor) after each decision round—these videos run 2–5 minutes each and, in total, amount to 80+ minutes of video tutorials.



Because whenever company co-managers are puzzled about something or want to know more about some aspect of company operations than is contained in the video tutorial, they can get the answers by clicking on the Help button and reading the Help

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pages that accompany every decision screen and every page of every report. The Help sections provide 1. detailed explanations of the information on each decision entry screen and all relevant cause–effect relationships, 2. detailed explanations of the information on each page of the Industry Reports, 3. detailed explanations of the numbers presented in the Company Reports, and 4. analytical guidance and decision-making tips.

If a few of your students seem to be full of questions, it is because they are coming to you for handholding and not taking the time to watch the video tutorials and/or to read and absorb the comprehensive information in the Help sections. (Note: You have one-click access to all these same Help pages and all the video tutorials directly from the menu on the left side of your Instructor Center screen—just click on the menu item labeled ―Video Tutorials and Help.‖)

Once you complete the Course Setup Procedure, class members are registered, and the decision rounds are underway, everything occurs automatically based on the schedule and deadline times you specified during the Course Setup Procedure. While the simulation is underway, it’s your call on how much time to spend in monitoring what is going on—you can simply be an interested observer or play a more active, hands-on role. Expect to spend no more than 10–20 minutes per decision round if you just want to provide encouragement, review the scoreboard of company performances on your Instructor Center web page, solicit feedback from co-managers about the experience they are having, and deal with special problems—like moving co-managers to another team if there‘s conflict among team members or adjusting the dates for decision deadlines for whatever reason.

If you want to follow the competition among the rival companies more closely, you can spend 15–20 minutes after each decision round browsing the industry report (which shows the details of each company‘s performance and provides assorted financial and operating statistics), the Comparative Competitive Efforts of Rival Companies section of the Competitive Intelligence Report (which shows what competitive efforts the various rival companies undertook to win sales and market share in each geographic region), and the special Administrator‘s Report (which provides a quick, convenient summary of select decisions and outcomes for each company that will keep you abreast of ―what‘s happening‖).

Should you opt to be even more proactive and intimately involved, then after each decision round you can hold a 5- to 10-minute ―in-class debriefing‖ on what‘s happening in the industry (using information you‘ve gleaned from the industry report, portions of the Competitive Intelligence Reports, and the Administrator‘s Report).

Because there is tight connection between the issues that co-managers face in running their companies and the chapter content in this text (and most every other mainstream © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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strategy text), there is ample opportunity—if you are so inclined—to use the happenings and managerial challenges class members encounter in the simulation as examples for your lectures. You can also opt to issue special news flashes altering certain costs or import tariffs, and you may wish to offer to coach the co-managers of troubled companies on how to achieve better company performance.

When all the decision rounds are completed, you will have to spend perhaps 30 minutes assigning grades (maybe longer if your class has 40+ students and you elect to peruse each class member‘s peer evaluations and/or activity log). Your online grade book automatically records and reports performance scores for all companies for all decision rounds and also contains each co-manager‘s scores for all assignments (quizzes, strategic plans, and peer evaluations). Once you enter weights for each of the assignments, final scores for each class member are automatically calculated. You will have to decide whether to scale the scores or not.

If you want to examine data pertaining to each co-manager‘s use of the simulation website as part of the grade assignment process, there‘s an activity log that reports the frequency and length of log-ons, how many times decision entries were saved to the server each decision round, and how many times each set of reports was viewed each decision round.

WHICH SIMULATION MAKES THE MOST SENSE FOR YOUR COURSE? Both The Business Strategy Game and GLO-BUS are suitable for either senior-level or MBAlevel courses. Whether to use The Business Strategy Game or go with GLO-BUS is really a matter of preference, how much time you are comfortable with having class members spend working on the simulation exercise, and the degree to which the faculty believe that there should be a clear distinction between the content and rigor of a senior-level course in strategy and the MBA-level course in strategy.

The time that class members will spend on GLO-BUS typically works out to be a bit less than for The Business Strategy Game. With GLO-BUS, you can expect that class members will spend an average of 1½–2 hours per decision. With BSG, it will take company co-managers about 2–2¼ hours per decision. Company co-managers can speed through their GLO-BUS decision-making a bit quicker than in BSG because all production/assembly of cameras and camera-equipped drones takes place at a single location (Taiwan) and there are no finished goods inventories to manage or regional distribution centers to operate (newly assembled products are built-to-order and shipped directly to buyers).

The Business Strategy Game is a bit more robust because: Company co-managers have the option to build and operate up to four plants (one in each geographic region of the world). In GLO-BUS, companies only have one plant to manage. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Each company management team must operate four distribution centers (one in each geographic region) and manage the finished goods inventories in these centers. In GLO-BUS, there are no finished goods inventories or distribution centers to operate—all units produced are immediately shipped to buyers.

Companies compete in 12 market segments (versus eight in GLO-BUS).

Both simulations have two built-in quizzes, strategic plan assignments, company presentation capabilities, and peer evaluations (each of which can be required or skipped as you see fit). See Table 1 for comparisons of the two simulations.

TABLE 1 A Comparison of GLO-BUS versus The Business Strategy Game GLO-BUS

The Business Strategy Game

Industry setting Companies that design, assemble, and market action cameras and camera-equipped drones

Worldwide. Production occurs Worldwide. Both production and at a single location and sales are sales activities can be pursued in made to buyers in four major any or all of four major geographic geographic regions segments North America North America Latin America Latin America Europe-Africa Europe-Africa Asia Pacific Asia Pacific

Market scope

Number of market segments

Athletic footwear industry

8

12

• sales of action cameras to retailers in each of the four major geographic regions • sales of unmanned aerial view drones to buyers in each of the four major geographic regions

• four segments for branded footwear sales to retailers in each geographic region • four segments for online sales of footwear direct to consumers in each geographic region • four segments for private-label footwear sales to chain retailers in each region

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Number of decision variables

Competitive variables used to determine market share

• Design and performance of and drones (up to 10 decision entries for cameras and 11 entries for drones) • Assembly operations and workforce compensation (up to eight decision entries for each product) • Camera pricing and marketing (up to seven decision entries in each of the four geographic regions) • Drone pricing and marketing (up to six decision entries in each of the four geographic regions) • Financing of company operations (up to eight decision entries) • Social responsibility and citizenship (as many as six decision entries)          

Price Number of camera/drone models Performance/quality rating Number of weekly sales promotions Promotional discounts Advertising Size of retailer network Warranty period Retailer support Brand image/reputation

All sales and market share differences are the direct result of differing competitive efforts among rival companies Time frame of decisions

One year

• Production (up to 13 decision entries for each plant, with a maximum of four plants) • HR/compensation (up to three decisions each plant) • Shipping (up to eight decisions each plant) • Pricing and marketing (up to 10 decision entries in each of the four regions) • Internet marketing (up to three decision entries in each of the four regions) • Financing of company operations (up to eight decision entries) • Social responsibility and citizenship (as many as six decision entries)

         

Price Number of models/styles Styling/quality rating Advertising Size of retail dealer network Celebrity endorsements Delivery time Retailer support Mail-in rebates Shipping charges (Internet sales only) All sales and market share differences are the direct result of differing competitive efforts among rival companies

One year

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Measures on which company performance is judged (all company scores are automatically recorded in instructor’s online grade book for each decision period)

    

Earnings per share Return on shareholders‘ equity Stock price Credit rating Image rating

Scoring standards Choice of  Investor Expectations (benchmarked against industry growth)  Best-in-Industry • A combination of both, with instructors determining the weights for each (50-50 is recommended)

    

Earnings per share Return on shareholders‘ equity Stock price Credit rating Image rating

Choice of

Investor Expectations (benchmarked against industry growth)  Best-in-Industry • A combination of both, with instructors determining the weights for each (50-50 is recommended) 

More robust/“complex” than GLODegree of Moderate complexity Less complex than BSG because BUS because all production is in a single plant  Companies can operate up to four plants (one in each and there are no finished goods geographic area) and plant inventories to manage or regional operations are a bit more distribution centers to operate involved (newly assembled products are built-to-order and shipped  Shipments are made to company distribution centers in each directly to buyers) region and there are finished goods inventories to manage • There are 12 market segments instead of eight

Time required to About 1.75 to 2.0 hours per make a complete decision (once players gain decision familiarity with software and

2.0 to 2.5 hours per decision (once players gain familiarity with software and reports)

reports)

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Industry reports (automatically provided to all participants at website within 15 minutes following each decision deadline)

A six-page report that includes 

  

Complete scoreboard of company performances on all five performance measures (three pages) Selected industry statistics Financial statistics for each company Benchmarking statistics

A seven-page report that includes 

   

A one-page competitive intelligence report for each geographic region that shows

Each company‘s publicly visible competitive effort (prices, advertising, warranties, etc.)

• Strategic group maps of the positioning of competitors in both the camera and drone segments 

Company reports (automatically provided to all participants at website within 15 minutes following each decision deadline)

A one-page competitive intelligence report for each geographic region that shows 

     

Performance highlights An income statement A balance sheet A cash flow statement Assembly operations Market segment statistics— Cameras Market segment statistics— Drones

Participant’s 36 pages manual (delivered online)

Each company‘s publicly visible competitive effort (prices, models, advertising, rebates, etc.)

Strategic group maps of the positioning of competitors in the branded footwear segment

A six-page report that includes 

Complete scoreboard of company performances on all five performance measures (three pages) Selected industry statistics Financial statistics for each company Benchmarking statistics Status of celebrity endorsements

A five-page report that includes

An income statement  A balance sheet  A cash flow statement  Plant operations statistics  Distribution and warehousing statistics  Branded and private-label sales statistics • Detailed marketing and administrative costs 

36 pages

Usage data confirms that you can have a successful experience with either simulation in both senior and MBA courses. Students are turned on by managing a company that sells action cameras and drones, and they are equally excited about competing in global athletic footwear—a product category they are personally familiar with and can easily understand. We have adopters who are using GLO-BUS on an ongoing basis for undergraduate courses and for © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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graduate courses. Likewise, we have adopters who are using BSG on an ongoing basis for undergraduate courses and for graduate courses. Here are our thoughts about which simulation to use: If you want the simulation to count no more than 20 percent of the course grade and to keep the simulation workload down to a ―minimum,‖ then GLO-BUS is perhaps the better choice.

GLO-BUS is definitely the better choice for courses below the senior level.

If you want the simulation to be a truly major part of the course (and count 25 to 30 percent of the course grade), then our recommendation would be to use The Business Strategy Game.

We see little reason for you to be concerned that the slightly longer decision times for BSG mean that it is ―too much‖ for or ―above the heads‖ of senior-level undergraduates. During the past five years, BSG has been used for undergraduate courses at well over 700 campuses worldwide.

You can peruse the schools of the best-performing companies worldwide by clicking on the Global Top Performers icons in the bottom left side of the homepages for the two simulations (http://www.bsg-online.com and www.glo-bus.com)—these listings will let you confirm for yourself that the best-performing companies involve a wide diversity of schools/campuses.

The Business Strategy Game is definitely the better choice for an MBA-level class. (Our data indicate that BSG is used for graduate-level courses far more frequently than is GLO-BUS.) If many of your school‘s undergraduate students also go on to be part of your school‘s MBA program (thus making it desirable to provide them with a differentiated strategy simulation experience in the undergraduate versus the graduate courses), then we definitely recommend using GLO-BUS for the undergraduate strategy class and BSG for the MBA strategy class. This is especially true if it is school policy is to maintain a clear-cut distinction between the content and rigor of the senior-level course and the MBA-level course.

Since the instructor-related aspects of conducting the two simulations are virtually identical (in the sense that the course setup procedures, features and menu options, and administrative tasks are virtually mirror images of one another), you will have no problem in using both simulations at the same time if you teach both the undergraduate course and MBA course in the same term. We made a point of designing the Instructor Centers for BSG and GLO-BUS to be as much alike as possible—moreover, the quiz features, the scoring of company performance, the strategic plan feature and scoring, the company presentation feature, and the peer evaluation form are also very close to identical.

Either simulation can be used for executive courses; participants will definitely be able to make a complete decision in half a day—one in the morning and one in the afternoon. But if the time available for decisions is constrained to less than half a day (say, 2½ hours or maybe less), then we recommend use of GLO-BUS.

THE FOUR-STEP COURSE SETUP PROCEDURE Setting up either of the two simulations for your course entails:

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1. Specifying a Course/Section ID and indicating the whether the participants will be primarily undergraduates, graduate students, corporate trainees, or ―other.‖ 2. Specifying the number of companies you want to create for your class members to run—a minimum of four companies and a maximum of 12 companies can compete head-to-head in a single group or ―industry.‖ You can assign one to five class members to run each company (assigning three to four persons to manage each company is recommended). If you need more than one industry for your course (because you want to divide the class into more than 12 company teams), you have the option to do so.

3. Using the built-in calendar to specify deadlines for the practice and regular (scored) decision rounds—you can have either one or two practice rounds and anywhere from four to 10 decision rounds that are scored and used in calculating individual grades for the simulation exercise. You will also need to indicate whether you want to have students (a) complete either or both of the two optional quizzes, (b) do one or two three-year strategic plans for their company, (c) prepare a PowerPoint presentation about their company’s performance and operations at the conclusion of the simulation exercise, and (d) complete Peer Evaluations of their comanagers. You always have the option to come back to this screen for scheduling decision rounds and other assignments later and make changes in the assignments and/or the deadline dates. Our recommendations for handling these optional assignments are presented inside the Course Setup procedure 4. Generating and printing the company registration codes that you will need to give each class member to use in registering for the simulation. You must give each class member on each team/company the appropriate company registration code prior to having them register because this code is used to (1) enroll the student in your class, (2) designate the student as a co-manager of the assigned company, (3) restrict a comanager’s access to only the industry and company you assigned them, and (4) enter the student’s name in your online grade book. When students register, they will be asked to enter the company registration code you provide them—class members cannot register without the registration code for their particular industry and company.

That’s all there is to it. You‘ll find that you can complete the Course Setup routine in no more than 30 minutes the first time you use the simulation. Once you have used been through the Course Setup routine and become comfortable with how you want to administer the exercise, it should take no more than 15 minutes in succeeding terms to have everything ready to go.

You’ll need to remember to take a printout of the company registration codes to class and make sure each student is given the appropriate code for their assigned company. A good procedure is to give each class member a copy of the printout of the company registration codes and have them circle the code for the company they have been assigned to manage. Each different company goes by a letter of the alphabet (A, B, C, etc.). Each co-manager of Company A will need the registration code ending in the letter A to complete the registration © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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process; each co-manager of Company B will need the code ending in B, and so on. If you have 6 companies, then the corresponding company letters appearing at the each of each code number will be A, B, C, D, E, and F. Once co-managers register, they can create a name for their company that begins with their corresponding company letter.

HOW DO CLASS MEMBERS REGISTER AND GAIN FULL ACCESS TO THE SIMULATION WEBSITE? When class members complete the registration process at either www.bsg-online.com or www.glo-bus.com, they gain instant access to the website, ability to view/print the Participant’s Guide, and full navigation privileges to everything needed to run their company and complete the various optional assignments. For co-managers to register, you will first have to provide them with their Company Registration Code in the manner just discussed in the prior section.

Registration is accomplished in one of three ways: 1. Credit Card Registration—When a student creates a user account, the registration fee plus applicable sales taxes can be paid online by credit card (Visa, MasterCard, or American Express) during the registration process. (Credit card payment is currently used by about 75 percent of all registrants.) Rest assured that the website for credit card payment is fully secured; credit card registrants will receive a receipt confirming their payment.

2. Prepaid Access—If you adopt a McGraw Hill text or create a custom McGraw Hill text for your course, you have the option of ―packaging‖ prepaid use of The Business Strategy Game or GLO-BUS with your text. A bundled text-simulation package is ordered through your local bookstore using a special ISBN code provided by McGraw-Hill. When your bookstore places an order for the textsimulation bundle, McGraw Hill will shrink-wrap a Prepaid Access Code card for the simulation with the new or custom text and ship it to your bookstore where class members purchase the text-simulation package in the normal manner. Class members then register online using the Prepaid Access Code printed on the card.

However, you should be aware that aggressive bookstore markups often result in class members paying the bookstore as much as $10–$15 more for the simulation in a combination text-simulation package than they would pay via credit card at the website. About 20 percent of all registrants use a prepaid access code. To obtain the special ISBN for the text-simulation package and place a bookstore order, please contact your local McGraw Hill account representative for details, call the instructor support number (205-722-9149), or send an e-mail to athompso@cba.ua.edu.

3. Direct-Billing—If your college/university includes the cost of text books and other course materials in the tuition fee for the course (and a McGraw Hill text-simulation package has not been ordered for your course), then you or an appropriate school official can obtain Prepaid Access Codes for student registration (one for each class member) and your department/college/university can be direct-billed, with payment © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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by credit card, check, or wire transfer as preferred. For your convenience, we can supply you or your school with the desired number of Prepaid Access Codes within minutes of receiving a request. For more information on this direct-billing option, please call simulation co-author Greg Stappenbeck at (205) 722-9149 or send an email to Greg at either greg@glo-bus.com or greg@bsg-online.com.

If some of your students do not have a credit card or a Prepaid Access Code, the easiest way for them to register is to arrange to use a friend’s or co-manager’s credit card and reimburse them directly with cash or a check.

The Corporate Lobby Webpage for Company Co-Managers. Upon completing the registration

process, company co-managers are immediately transferred to their company‘s ―Corporate Lobby‖ page. Each time they log on at the simulation home page (by entering their e-mail address and password), they are also sent directly to their Corporate Lobby page. The Corporate Lobby is the gateway or hub that co-managers use to access all needed information and work on all assigned tasks.

HOW MUCH SHOULD A SIMULATION EXERCISE COUNT IN THE TOTAL COURSE GRADE? Whether class members take the simulation exercise seriously hinges in large part on whether you make their performance count enough in the overall course grade to get their attention. As a general rule, we recommend having performance on the simulation count at least 20 percent of the overall course grade and probably no more than 40 percent of the total grade. If it counts less than 20 percent, then class member effort is weakened to an undesirable extent (because their performance on the simulation has a ―small‖ impact on their grade in the course) and some of the learning potential slips through the cracks. If it counts more than 40 percent, then the simulation exercise may take something away from the emphasis you want to give to other aspects of the course.

However, growing numbers of users are making an online strategy simulation the dominant centerpiece of their courses (particularly in online and distance learning courses where case analysis is difficult to use effectively). When the simulation functions as the primary part of the course (aside from the content of the chapters in the textbook you have adopted), then counting the simulation as 50 to 60 percent (or more) of the final grade is reasonable, given that you can use the quizzes, one or two three-year strategic plan assignments, and perhaps an end-ofsimulation presentation to an invited panel of three or four persons (who act as a company board of directors) as a substitute for assigning students a larger number of cases to analyze.

HOW COMPANY PERFORMANCES ARE SCORED: A BALANCED SCORECARD APPROACH Each company‘s performance is tracked annually against five performance measures which, taken together, constitute a ―balanced scorecard‖ set of performance measures (the balanced © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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scorecard concept is discussed in Chapter 2 of this text). Given the nature of growing market demand, board members and shareholders/investors expect the company‘s new management team to meet or beat the following performance standards: Grow earnings per share at least X% annually. (The target rate of growth in EPS is different for BSG versus GLO-BUS.) Maintain a return on equity investment (ROE) of 15 percent or more annually. All companies start the simulation with an ROE above 15 percent.

Maintain a B+ or higher credit rating. All companies start the simulation with a B+ credit rating.

Achieve an “image rating” of 70 or higher. All companies start the simulation with an image rating of 70. A company‘s image rating is a function of (1) the quality of its product offerings, (2) its market shares in each of the four geographic regions of the world market, and (3) the degree to which it conducts its operations in a socially responsible manner and strives to be a good corporate citizen.

Achieve stock price gains averaging about X% annually. The expected stock price gains are definitely within reach if the company meets or beats the annual EPS targets and pays a rising dividend to shareholders. Each company’s stock price is a function of EPS growth, ROE, credit rating, dividend per share growth, and management’s ability to consistently deliver good results (as measured by the percentage of these five performance targets that each company achieves over the course of the simulation exercise).

The default weight placed on each of the five performance targets is 20 percent. The five 20 percent weights translate into 20 points out of 100 for each of the five performance measures, with the sum of the points adding to a total of 100 points. There is an option on your Administrative Menu for each ―industry‖ that allows you to alter these weights however you see fit. The scoring weights are reported to students on their scoreboard of company performance; hence, they always know what the weights are.

Using the assigned weights (or corresponding number of points out of 100), each company’s performance on the five measures is tracked annually and company performance scores are calculated from two different angles: the ―investor expectations‖ standard and the ―best-in-industry‖ standard.

1. The Investor Expectations Standard. The investor expectations standard involves calculating an annual ―Investor Expectation Score‖ based on each company’s success in meeting or beating the five expected performance targets each year.

There is also a Game-to-Date or ―all-years‖ Investor Expectation Score that shows each company’s success in achieving or exceeding the expected performance targets over all years of the exercise completed so far. Meeting each expected performance target is worth some number of points based on the scoring weight selected by the © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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instructor (the default scoring weights are 20 percent or 20 points for each of the five performance measures). For example, if the scoring weight for EPS is 20 percent or 20 points, meeting the EPS target earns a score of 20 on the EPS performance measure. Beating any of the five scoring targets results in a bonus award of 0.5 percent for each 1 percent the annual target is exceeded (up to a maximum bonus of 20 percent). Thus, if achieving the EPS target is worth 20 points, a company can earn a score of 24 points by beating the annual EPS target by 40 percent or more. Failure to achieve a target results in a score equal to a percentage of that target’s point total (based on its weight out of 100 points).

For instance, if a company earns $1.33 per share of common stock at a time when the EPS target is $2.67 and achieving the $2.67 EPS target is worth 20 points, then the company’s score on the EPS target would be 10 points (50 percent of the 20 points awarded for meeting the EPS target). Exactly meeting each of the five performance targets results in an Investor Expectation Score of 100. With potential point bonuses of up to 20 percent for exceeding each performance target, it is possible to earn an Investor Expectation Score of 120.

2. The Best-in-Industry Standard. The best-in-industry scoring standard is based on how each company’s performance compares to the industry’s best performer on earnings per share, return on equity (ROE), stock price, and image rating and to the ultimate credit rating of A+. After each decision round, each company’s performance on EPS, ROE, Stock Price, and Image Rating is arrayed from highest to lowest. The best-in-industry performer on each of these four measures earns a perfect score (the full number of points for that measure as determined by the instructor-chosen weights)—provided the industry leader’s performance on that measure equals or exceeds the performance target established by company Boards of Directors). Each remaining company earns a fraction of the points earned by the best-in-industry performer that is equal to its performance (on EPS, ROE, stock price, and image rating) divided by the performance of the industry-leading company (on EPS, ROE, stock price, and image rating). For instance, if ROE is given a weight of 20 points, an industry-leading ROE performance of 25 percent gets a score of 20 points and a company with an ROE of 20 percent (which is 80 percent as good as the leader’s 25 percent) gets a score of 16 points (80 percent of 20 points). Likewise, if EPS is given a weight of 20 points, an industry-leading EPS performance of $5.00 gets a score of 20 points and a company with an EPS of $2.00 (which is 40 percent as good as the leader’s $5.00) gets a score of 8 points (40 percent of 20 points). The procedure for assigning best-in-industry scores for credit rating is a bit different. Each credit rating from A+ to C− carries a certain number of points that scales down from the maximum number of points for an A+ credit rating to 1 point for a C− rating. Each company’s combined point total on the five performance measures is its score on the best-in-industry standard. Each company receives an annual best-in-industry score and a best-in-industry score for all years completed. In order to receive a score of 100, a company must (1) be the best-inindustry performer on EPS, ROE, stock price, and image rating; (2) achieve the targets for EPS, ROE, stock price, and image rating set by the company’s Board of Directors, and (3) have an A+ credit rating. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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After each decision round, you and all class members will be able to review every company‘s performance scores on both the investor expectations standard and the best-in-industry standard for each year completed, along with an overall ―game-to-date‖ (G-T-D) score for each standard. Each company will also receive annual and game-to-date Overall Scores that are determined by combining the Investor Expectation Score and the Best-in-Industry Score into a single score using whatever weighting you chose (50-50 is recommended). After each decision round, all company co-managers can view or print a complete Company Scoreboard showing each company‘s performance on every aspect of the scoring, including all the scoring weights. The Help sections for each page of the threepage Company Scoreboard provide detailed, easy-to-understand explanations of the scoring so company co-managers should encounter no ―mystery‖ factor about how the scoring works or where each company stands in the industry performance rankings.

Concluding Comment on How Company Performances Are Scored Company co-managers are provided an array of information that makes it easy for them to track the performance of their company and all other companies over time. Both students and instructors always have plenty of information to gauge exactly how well every company in the industry is performing. It is always clear which companies are in the ranks of the industry leaders and which companies are being outcompeted and outperformed.

One very important point about the scoring methodology warrants emphasis: It is a company’s overall score that matters (how close a company‘s score is to 100–120 in the case of the Investor Expectations Standard and how close it is to 100 in the case of the Best-in-Industry Standard), not whether a company is in first or third or fifth or tenth place. Some company must necessarily be in last place, but what is truly telling is whether it is in last place with a score of 85 (which clearly signals a strong performance and a deservedly good grade) or in last place with a score of 17 (which clearly signals an abysmal performance and possibly a very disappointing grade).

The scoring method for the two simulations has the considerable advantage of not ―requiring‖ that some companies always receive low scores. Scores are based entirely on (1) whether companies achieve the benchmark performances that investors expect for EPS, ROE, credit rating, stock price appreciation, and image and (2) whether the race to be the market leader is very close from the first-place company to the last place company or whether there is quite a wide disparity in the caliber of performances (with the bottom-performing companies turning in truly bad results).

As a general rule, we think that companies with an overall performance score of 90 or above should get an A. Companies with an overall performance score of 80–89 should get a B (or better if there are no companies with scores of 90 or more). Companies with an overall performance score of 70–79 above should typically get a C (or maybe better, depending on how many teams have higher scores). You may find it desirable to scale the scores if competition turns out to be so fierce or cutthroat that most all companies in the industry fail to earn good profits and meet investors‘ performance expectations. If one or more companies have truly low performance scores relative to the other companies, we leave it up to you to decide what sort of scale to apply © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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and thus how much to raise their grade. You‘ll find that there‘s plenty of information provided to you in your online grade book to decide what grades to assign. In most of our classes, we end up scaling the performance scores of companies with scores below 70, but there is usually at least one company (and often more) that end up with a score above 90 and thus clearly merit a grade of A (thus there is little need for scaling the final company scores on the upper end of the spectrum).

WHAT TO DO IF YOU DECIDE TO USE EITHER OF THE COMPANION SIMULATIONS The preceding discussion is intended to give you some detailed information about the two companion simulations, how they work, and what value they add to a first course in strategy for seniors and MBA students.

If you are persuaded that using either BSG or GLO-BUS in your course would make a positive contribution, then (if you have not already done so), you should go to www.bsg-online.com or www.glo-bus.com (or both) and create an instructor account. This account gives you full access to the all the materials and information needed to run the simulations in your class. Once you have created an account, we recommend that you do three things: 1. Click on the Video Tutorials and Help menu item on the left side of your Instructor Center screen and watch the video tour of the Instructor site and the video tour of the student site.

OR Sign up for one of our upcoming webinars for faculty that involve author-conducted tours of the website, explanations of how things work, and Q&A. These tours, which involve about an hour, are conducted by one (sometimes two) of the simulation co-authors.



If you are located in the United States or Canada, you can view the schedule of future web conferences and sign up by going to the homepage for either simulation and clicking on the ―Signup for Webinar/Demo‖ link in the white box for Instructors— this will take you directly to the schedule of upcoming webinars., and then clicking on the button on the right side of the screen labeled ―Signup for Webinar/Demo.‖ If attending one of these web conferences proves problematic or inconvenient for you, then by all means please call Art Thompson or Greg Stappenbeck at 205-722-9149 or e-mail us at athompso@cba.ua.edu or greg@glo-bus.com and we will arrange a personal web conference or Zoom meeting at a time that works best for you.



If you are located outside the United States or Canada, we can also schedule a special webex or Zoom meeting for you and other faculty teaching the—this online conferencing approach enables us to conduct essentially the very same kind of webinar and provide you with a personalized tour of the website, explain how things work, and answer any questions or address any concerns you might have. Just send an

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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e-mail to greg@glo-bus.com if you would like to set up a special webinar for you and other interested faculty.

1. Click on the Instructor Resources menu item on the left side of your Instructor Center screen and read/skim the first 23 pages of the Instructor’s Guide.

2. Click on the Instructor Essentials menu item on the left side of your Instructor Center screen and read/skim the three-page ―Instructor Best Practices for Successfully Using the Simulation in Your Course.‖ Moreover, you can rest assured that the simulation co-authors will be only a phone call or email away throughout the term, as you conduct the simulation. Do not hesitate to contact us at any time. Greg Stappenbeck, who is a co-creator of both simulations, is also the lead support person for instructors. The simplest way to reach us is to click on the green Instructor Support box on the bottom left of the Instructor Center page. It provides a telephone number and an email message system. We reply to all e-mails as quickly as we possibly can—usually within a few hours. Alternatively, call us at 205-722-9149 or send an e-mail to greg@bsg-online.com (or to greg@bsg-online.com) or athompso@cba.ua.edu.

We will be most happy to answer whatever questions you have, provide advice and guidance, help you resolve a particular problem, and otherwise be responsive to whatever issues and concerns you may have.

SECTION 3 Organizing Your Course and Settling on Specific Assignments

THE ROLE AND OBJECTIVES OF COURSES IN STRATEGY The cornerstones of courses in strategic management involve looking at the job of managing © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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through strategic eyes and drilling students in the whys and hows of utilizing the tools and techniques of strategic analysis to craft, implement, and execute company strategies. The central theme of the strategic management course is that a company‘s chances for sustained success are greatly improved when managers (1) develop an astute, timely strategic ―game plan‖ for running the company and then (2) implement and execute the strategic plan with great proficiency.

The overriding pedagogical objectives are to sharpen students‘ abilities to ―think strategically,‖ to evaluate a company‘s situation from the perspective of its competitiveness and performance prospects, and to draw sound conclusions about what actions a company‘s management needs to take in light of all the relevant circumstances. Accomplishing these objectives entails introducing students to how an enterprise must in fact deal with all of the complexities and constraints of the business environment in which it operates, why none of these can be assumed away or ignored, and how situational factors impact strategic decisions. It means pushing students to grapple with many determining factors at once and forcing them to weigh how they shape what actions need to be taken from the perspective of the total enterprise. It means drilling students thoroughly in the tools of strategy analysis and exercising them in the managerial tasks of sizing up a company‘s competitive position in the marketplace. It means systematically exposing them to the rigors of industry and competitive analysis, to the process of evaluating a company‘s resources and competitive capabilities, to the ins and outs of crafting an attractive strategic plan, and to the varied managerial and leadership tasks associated with implementing and executing the chosen strategy as well as circumstances permit. It means deliberately putting them in managerial shoes and forcing them to make decisions (in an ethical and socially responsible manner!) and concoct concrete action plans capable of producing good results. The excitement and fun of it all comes from seeing the lights turn on in students‘ eyes and the ―a-ha, now I get it‖ results that signal the lessons of the course are being driven home.

In the midst of all this, another major purpose of the course is being served: helping students synthesize and integrate much of the knowledge gained in the core business curriculum. Unlike most other required business courses, strategic management is a big picture course. Virtually all other business courses are narrower in scope and somewhat specialized—principles of accounting, corporate finance, principles of marketing, and so on. Some concern the ―hard side‖ and others the ―soft side‖ of managing. Some relate to important concepts and information, while others involve skills building. But none can match courses in strategy in covering so much of the spectrum of managing. Weighing the ins and outs of crafting, implementing, and executing company strategies forces a total enterprise perspective, demands that many internal and external situational considerations be dealt with at once, and calls for judgments about how all the relevant factors add up. This trait is what makes strategic management an integrative, capstone course.

Suggested Course Learning Objectives We see courses in crafting and executing strategy as having eight very relevant objectives: 1. To develop students‘ capacity to think strategically about a company, its present business position, its long-term direction, its resources and competitive capabilities, © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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the caliber of its present strategy, and its opportunities for gaining sustainable competitive advantage.

2. To build students‘ skills in conducting strategic analysis in a variety of industries and competitive situations and, especially, to provide them with a stronger understanding of the competitive challenges of a global market environment.

3. To give students hands-on experience in crafting business strategy, reasoning carefully about strategic options, using what-if analysis to evaluate action alternatives, and making sound strategic decisions.

4. To acquaint students with the managerial tasks associated with implementing and executing company strategies, drill them in the range of actions managers can take to promote competent strategy execution, and give them some confidence in being able to function effectively as part of a company‘s strategy-implementing team.

5. To integrate the knowledge gained in earlier core courses in the business school curriculum, show students how the various pieces of the business puzzle fit together, and demonstrate why the different parts of a business need to be managed in strategic harmony for a company to operate in winning fashion.

6. To develop students‘ powers of managerial judgment, build their skills in assessing business risk, and improve their ability to create results-oriented action plans.

7. To have students become more proficient in using personal computers to do managerial analysis and managerial work.

8. To make students more conscious about the importance of exemplary ethical principles, sound personal and company values, and socially responsible management practices.

STRUCTURING YOUR COURSE The Essentials of Strategic Management, 8th edition not only provides 10 chapters of conceptual material in an easy-to-read style and 12 cases that allow students to develop analysis-based decision-making skills, but also includes an array of experiential learning and pedagogical tools to enhance student success. All materials were developed to support in-person, hybrid, and fully online courses.

You may choose to include some or all of the following elements in structuring your course in strategic management: A business simulation such as GLO-BUS or The Business Strategy Game as an integral part of your course. Using one of the two companion simulations is a powerful and constructive way of emotionally connecting students to the subject matter of the course.

There is no more effective and interesting way to stimulate the competitive energy of students and prepare them for the rigors of real-world business decision making than to have them match strategic wits with classmates in running a company in head-to-head competition for global market leadership. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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9. Outside readings and, if so, what readings to assign.

10. Selecting an appropriate number of case studies to assign.

11. Determining whether to assign one or more written case analyses.

12. Whether to require class members to do an oral team presentation of an assigned case.

13. Determining which Connect activities and assignments to utilize.

14. What sort of examinations to use.

If you are a veteran in teaching the course, you undoubtedly have some experience in what works for you and which pieces of the overall text package are most intriguing. But if you are wrestling with teaching the course for the first time or are looking for new ways to design your course, you may find some of the following thoughts and suggestions helpful in selecting a comfortable, suitable approach.

Why Incorporating a Strategy Simulation Makes Sense Insofar as use of a simulation is concerned, we believe—based on our own experiences and the mushrooming use of simulations in strategy courses worldwide—that incorporating a simulation as a course centerpiece definitely adds major value. As was discussed at some length in Section 2 of this IM, a strategy simulation steps up the tempo of the course a notch, emotionally involves students in the subject matter, and gives them much-needed hands-on practice in (a) applying what they have read in the 10 chapters and (b) making sound business decisions and being held accountable for the results they produce.

Competition-based strategy simulation games give students every bit as much valuable practice as do cases in thinking strategically, diagnosing market and competitive circumstances, appraising a company‘s competitiveness and financial performance, and coming up with concrete actions to improve a company‘s market position and performance. What a simulation does that a case cannot is give students immediate and incontrovertible feedback of the caliber of their decisions to improve a company‘s performance—in light of competitive circumstances and the company‘s product offering, costs, and other situational circumstances.

Since in the course of playing a simulation, students have to live with the financial results of their decisions, simulations are powerful devices for teaching students the importance of responsible, results-oriented decision making. In contrast, in analyzing cases and making action recommendations for the company being studied, there little way to provide students with credible feedback on their caliber of their action recommendations/decisions beyond that of telling them what‘s happened at the company since the case was written. We think this is why professors of strategy at many business schools have concluded that supplementing coverage of the text chapters with use of both cases and a strategy simulation is more pedagogically powerful than just relying on traditional case assignments alone.

Use of either GLO-BUS or The Business Strategy Game is likely to add net time to the course requirements from a student perspective. To adjust for these time requirements, you may want to have the simulation substitute for a written case assignment or a couple of class discussions of cases or an hour exam or some combination of these.

Should you decide to incorporate one of the two simulations in your course, the simplest (and © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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usually the cheapest) way for students to obtain the simulation is via a secured credit card transaction at www.bsg-online.com (if you opt to use The Business Strategy Game) or at www.glo-bus.com (if you opt to use GLO-BUS). Purchasing the simulation direct at the simulation web site allows students to bypass paying sometimes hefty bookstore markups (a savings that can amount to $10-$15). The second way for students to register for the simulation is by using a prepaid access code that comes bundled with the 8th Edition when you order the combination text-simulation package through your bookstore—this requires use of a separate ISBN (the 8th Edition bundled with either simulation has a different ISBN number than just the 8th Edition ordered alone). Your McGraw Hill rep can provide you with the correct ISBN for ordering the text-simulation package.

Using the Connect Package Accompanying the 8th Edition The author team has developed additional Connect content to support in-person, hybrid, and fully online courses. We believe that you will find the array of chapter interactive exercises, chapter quizzes, case exercises, and exercises for simulation participants value in developing your course.  









Autograded chapter quizzes consisting of 20 multiple-choice questions that students can take to measure their grasp of the material presented in each of the 10 chapters.

SmartBook 2.0 is an adaptive learning solution that provides personalized learning to individual student needs, continually adapts to pinpoint knowledge gaps, and focuses learning on concepts requiring additional study. It fosters more productive learning, takes the guesswork out of what to study, and helps students better prepare for class. Our adaptive reading experience has been made more personal, accessible, productive, and mobile.

WhiteBoard Videos: These brief, contemporary, and engaging videos offer dynamic, student-centered introductions, illustrations, and animations that guide students through challenging concepts with assignable assessment questions.

A variety of cases, found in most chapters, provide an opportunity for students to delve further into the topical content and read about real-life products and companies.

Accompanied by assignable, thought-provoking questions that check students‘ ability to apply the course material to these scenarios, these case analyses help students foster their critical thinking abilities and develop their workplace-readiness skills.

Interactive versions of two Assurance of Learning Exercises for each chapter that drill students in the use and application of the concepts and tools of strategic analysis. There is both an autograded and open-ended short-answer interactive exercise for each of the 10 chapters.

Application-Based Activities These highly interactive, automatically graded exercises provide students a safe space to practice using problem-solving skills to apply their knowledge to realistic scenarios. Each scenario addresses key concepts and skills that students must use to work through and solve course specific problems, resulting in improved critical thinking and relevant workplace skills. Students take on specific roles to complete a strategy-related task within a real-world context. These tasks often involve multiple decision© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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making paths that students can take as they work to complete the task. Students see the impact of their decisions immediately and feedback is provided all along the way.  Inclusion of Exercises for Simulation Participants into Connect. Students are required to apply concepts presented in all 10 chapters to business simulation participation in both autograded and open-ended assignment questions.  Connect case exercise are provided for all 12 cases in the text. The automatically graded case exercises follow the assignment questions in the case TN to fully prepare students to make meaningful contributions to class discussions of the cases. The Connect case exercises may also be used as graded assignments or a portion of graded case assignments—allowing the instructor to grade only students‘ recommendations for written case assignments.

The Connect-Based Case Exercises. A unique feature of Essentials of Strategy Management Connect package is the inclusion of auto-graded case exercises for all 12 cases. All of the exercises are based on the complete set of assignment questions for the respective case and call upon a student to develop thoughtful, analysis-based answers (as opposed to stating seat-of-the-pants opinions). Each exercise is different, depending both on the circumstances of the case and the content of the chapters to which it is closely linked. The exercises relate to such things as 

Identifying and critiquing a company‘s strategic vision or objectives or strategy



Doing a five-forces analysis



Identifying driving forces (industry dynamics) and evaluating their impact



Drawing a strategic group map and assessing the positions of the companies/strategic groups



Identifying key success factors



Doing a SWOT analysis



Doing a competitive strength analysis



Calculating financial ratios and doing other number-crunching to determine a company‘s financial performance and the strength of its balance sheet



Evaluating the performance potential of a diversified company‘s lineup of businesses



Identifying and critiquing the policies, practices, principles, and approaches management is using to implement and execute the company‘s strategy.



Drawing conclusions from the analysis of the case to identify a list of high-importance strategic issues.



Making recommendations to address strategic issues and improve the company‘s competitive position and financial performance.

The exercises can typically be completed in 45–60 minutes, assuming a student has done a conscientious job of reading the case and absorbing the information. The exercises were deliberately crafted in a manner that allowed many (sometimes all) of the answers to be judged as ―right‖ or ―wrong‖; this has the distinct appeal of enabling each student‘s work to be automatically graded and recorded in your electronic grade book. You may find that the case exercises are suitable for use as substitutes for a written case analysis, with a portion

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of the exercise being automatically graded and a portion requiring instructor grading.

Having class members complete some or many of the Connect-based case exercises serves several teaching/learning purposes and has multiple benefits:



The nature and content of a case exercise signals students that they need to do more than come to class having read an assigned case (this is particularly beneficial if the case assignments for your course are a student‘s first encounter with the case method of teaching/learning). There is no way that students can score well on the case exercises without doing some serious thinking and putting forth effort; guessing at the answers or relying on seat-of-the-pants opinions won‘t get them very far.



The exercises are yet another means of drilling students in how to apply the chapter content in managerial situations and helping them bridge the gap between theory and practice. We think a good argument can be made that the learning potential of an assigned case is more likely to be fully achieved by having students use an interactive tool that ―tutors‖ them in the process of (a) thinking strategically, (b) using the concepts and methods of strategic analysis to evaluate a company, and (c) arriving at analysis-based action recommendations.



Students that do a conscientious job of completing the Connect exercise for a case will be better prepared to make meaningful contributions to the class discussion of that case, as opposed to merely giving off-the-cuff opinions. Letting students know that you fully expect them to come to class truly well-prepared in terms of developing solid answers to the assignment questions will put more students in position to give meaningful, content-filled answers to the questions you pose in class.

Suggestions for Examinations over the 10 Text Chapters We suggest having two exams covering the text material and perhaps having a comprehensive final (although our preference is to use a comprehensive case as a final exam as opposed to a comprehensive final covering the content of just the 10 chapters). If you opt for two chapterrelated exams, we recommend that the first one cover Chapters 1–5 and that the second one cover Chapters 6–10. If the number of class periods is too short for two exams, a single exam covering all 10 chapters is the next best option—it can be given at the end of the course or shortly after your lectures on all the assigned chapters.

We prefer giving a test on the assigned chapters immediately following the conclusion of the lectures and before covering most of the related cases so that you can be assured that students have sufficient acquaintance with the concepts and analytical tools covered in the chapters and concepts to apply them in the course of preparing and discussing the cases. The sample course outlines in Section 4 indicate possible locations in the class schedule where exams on the chapters fit in.

There‘s a test bank of 600+ multiple-choice and short-answer/essay questions you can choose from in making out exams. The full test bank is in both this volume of the IM. The test companion software enables you to quickly setup an online exam or print out a test master. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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The Case Collection for the 8th Edition

The 8th edition includes 12 cases covering topics presented in all 10 chapters of the text. The grid in Table 2 and sample daily class schedules in Section 4 are intended to help you determine how best to position coverage of the chapters and sequence the case assignments in your course. Each case teaching note also contains a section on ―Suggestions for Using the Case‖ that provides ideas on case sequencing and case use.

TABLE 2 A Quick Profile of the Cases in the 8th Edition of Essentials of Strategic

Case 2: Costco Y L X X X X X X Wholesale in 2022: Mission, Business Model, and Strategy

X

X X X

Ethics, values, social responsibility Exerting strategic leadership Making action recommendations

X X X X X X

Staffing, people management, incentives and rewards Organizational structure, core competencies, competitive capabilities, staffing Policies, procedures, operating systems, best practices, continuous improvement Corporate culture issues

Y L X

Company resources and capabilities Global or multinational strategy E-business strategy issues Diversification strategies and the analysis of multi-business corporations Financial conditions and financial analysis

Vision, mission, and objectives Crafting strategy in single-business companies Industry and competitive analysis

Case 1: Airbnb in 2022

Connect Case Exercise (Y = yes; N = No) Size: Small (S), Medium (M), Large (L) The manager’s role in crafting strategy The manager’s role in executing strategy

Management

X X

X

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

X X

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Case 3: lululemon Y L X Athletica‘s Strategy in 2022: Can the Retailer Continue to Deliver Growth Despite the Headwinds?

X X X X X

X

X

X X X X X

X

X

Case 4: Yeti in 2022: Will its Strategy Lead to Sustainable Advantage and Growth?

Y M X

Case 5: Beyond Meat in 2022: What Can it Do to Rejuvenate Revenue Growth and Stem Mounting Losses?

Y M

X X X X

X

X

Case 6: Spotify Technology in 2022: Will its Strategy Lead to Profitability and Growth?

Y L

X X X X X

X

X

Case 7: Tesla‘s Strategy in 2022: Can it Deliver Sustained Revenue Growth and Profitability?

Y M

X X X X X

X

X

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Case 8: Ulta Beauty‘s Y M Race to Win in an Omnichannel World

X X X X

Case 9: PepsiCo‘s Y L Diversification Strategy in 2022

X X

Case 10: Robin Hood

X

X

X

X

X

Y S X X X X X X

Case 11: Macy‘s Inc. in Y L X X X X 2022: Has the Implementation of its Polaris Strategy Produced a Successful Turnaround?

Case 12: Meta Y L X X X Platforms, Inc.: Will the Company‘s Name Change Resolve Ethical Issues at Facebook and Instagram?

X

X

X

X X X X X

X

X

X

X X X X

X

X

X X

X X X

Making Use of the Guide to Case Analysis Generally speaking, before initiating discussion of the cases, you should encourage students to read the “Guide to Case Analysis” posted in the Connect Instructor Resources Center. Having students read the Guide is especially important when many of the class members are not familiar with the case method and with how to prepare a case for class discussion or for written analysis. Most students need explicit direction in the mechanics of coming to class adequately prepared for class discussion of an assigned case—otherwise, they are likely to do no more than read the case and respond to your questions with off-the-cuff opinions. The hints and pointers in the Guide to Case Analysis should help students get off to a better start and orient them to the traditional analytical sequence of (1) identify, (2) evaluate, and (3) recommend.

In explaining how you plan to handle class discussion of the cases, you can easily highlight those points discussed in the Guide to Case Analysis which best reflect your own thinking and preferences. And you can do the same with regard to the suggestions for preparing a written case analysis and doing an oral team presentation.

The Table of Financial Ratios. There is a summary table in the Appendix of the text that © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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presents and explains the array of standard financial ratios that come into play in sizing up a company’s financial situation. We suggest calling this table to the attention of students so they can utilize it in analyzing the financial statements in the cases.

A big majority of students will likely make extensive use of the Financial Ratio table in calculating and properly interpreting financial and operating ratios appropriate for assigned cases.

How Many Cases to Assign How many cases to use varies with whether you use a simulation game, how much class time you wish to spend on the text chapters, whether you like to assign additional readings from either a readings supplement or from library resources, how many times your class meets per week, and whether the course runs for a quarter, a semester, or two quarters.

Generally speaking, we recommend covering four to eight cases in a semester-long course meeting twice weekly (25 or so class meetings). In a one-quarter course you may find it more comfortable to cover only four to six cases in a class meeting twice weekly for 75 minutes. If you are using a strategy simulation, then assigning a lesser number of cases than you otherwise would makes sense.

Aside from the number and length of the class meetings each term, the ―right‖ number of cases to try to cover is very much a function of your choices about using a simulation game and how much (if any) time you opt to spend on the simulation in class, whether you decide to assign outside readings, the amount of class time you want to spend covering the basic concepts and analytical tools (the material in Chapters 1–10), and whether you decide to spend more than one class period covering one or two of the longer/issue-rich cases.

Deciding How to Sequence the Case Assignments In selecting what sequence in which to assign the cases, we suggest at least a rough adherence to the order in which the cases appear in the book—particularly the first time you use the book.

In sequencing the cases under each topic heading, we have tried to follow some logical order based on central teaching points, key issues, analytical complexity, and overall pedagogical purpose.

In Section 4 of this IM are sample course schedules that provide specific suggestions for sequencing your case assignments. In addition, each case teaching note contains a section on ―Suggestions for Using the Case‖ that provides further details and guidance on where a particular case fits and the central teaching points it contains. But to simplify things a bit in choosing the cases and sequencing that might work for you and to further supplement the Table 1 grid showing the strategic issues that are prominent in each case, we have provided some groupings below that you may find helpful.

Cases that make especially good lead-off cases and/or that are easier to analyze: Lead-Off Cases © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Airbnb in 2022

Robin Hood

Costco Wholesale in 2022

Cases which are good follow-ons to ―lead-off‖ cases and only moderately difficult for students to analyze: Follow-On Cases Costco Wholesale in 2022

lululemon athletica in 2022

Yeti in 2022

Beyond Meat in 2022

Robin Hood

Ulta Beauty’s Race to Win in an Omni Channel World

Cases that are most comprehensive nature and somewhat greater analytical requirements: Comprehensive Cases Tesla’s Strategy in 2022

Beyond Meat in 2022

Macy’s Inc. in 2022

PepsiCo’s Diversification Strategy in 2022 Meta Platforms, Inc.: Will the Company’s Name Change Resolve Ethical Issues at Facebook and Instagram?

Yeti in 2022

Costco Wholesale in 2022

Spotify Technology in 2022

The Merits of Providing Students with Assignment Questions Prior to the Discussion of Cases

In assigning cases for either oral discussion or written analysis, we‘ve found it advisable to provide students with a set of assignment questions.

Assignment questions direct students toward what to be alert for in the case, push them to do the kind of strategic thinking and analysis that is required, and let them know what things you intend to bring up in leading class discussion of the case. Making it crystal clear that students are absolutely expected to prepare substantive answers to each of the assignment questions is pretty much essential if you want students to speak with authority and make meaningful comments on the questions you pose. Otherwise, your class discussions are likely to involve a lot of shootingfrom-the-hip, instant analysis, and uninformed opinion on the part of students, none of which does much in the way of building their analytical skills or teaching them to probe deeply into the decision-making issues posed in the case. Without assignment questions to guide their thinking and analysis, too many students tend merely to read the case and come to class without having done any thoughtful analysis and evaluation—a condition which lowers the overall caliber and value of the case discussion. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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To facilitate your providing class members with study questions for the assigned cases, we have created a PDF file of Assignment Questions for each case and posted the files for all 12 cases in the Instructor Resources section of the Connect Library. The assignment questions for each case are identical to the suggested assignment questions that are part of our teaching note for each of the 12 cases in this edition (the teaching notes are in Section 6 of the IM).

Written Case Assignments

It is our practice during the term to assign two, sometimes three, written reports on assigned cases. Written reports are a valuable requirement from several perspectives. They give students a formal workout in diagnosing a company‘s situation, sizing up what problems/issues need to be addressed, deciding what analysis to conduct to probe the identified problems and issues, making use of the appropriate core concepts and analytical tools in the text chapters to thoroughly describe the ins and outs of the company‘s situation, evaluating the pros and cons of various action alternatives, setting forth a practical, workable set of action recommendations (that are within the financial means and resource capabilities), and putting their thoughts in writing—and doing so in a persuasive, professional manner.

Moreover, a written report gives students valuable practice in (a) preparing charts, graphs, and other visuals, (b) organizing their thoughts, and (c) communicating their analysis and conclusions in a manner suitable for top management. And, finally, written reports provide feedback to students on how well they are doing and to the instructor on how well the class in progressing.

To accomplish these objectives, you can choose among three different types of written case analyses: 1.

Short executive summary-style reports of about 500 words. These reports are prepared in response to a specific question and do not require a broad-ranging analysis and set of recommendations. Generally, we ask such questions as: What is the firm‘s strategy?

What actions would you recommend management take to deal with its problem of . . .?

Does the company need to change its organization structure to accommodate its change in strategy? Is this an attractive industry to be in? What is your appraisal of competitive conditions? What issues do you think management needs to be worried about most?

Short reports can be assigned for almost any case. The primary value of short assignments is in preparing students to do a better job on longer, more comprehensive written analyses.

2.

Comprehensive reports of about 1,000 to 2,000 words (three to six pages) plus exhibits.

These reports require that students go through the entire process of identifying (or

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diagnosing), evaluating, and recommending. We stress to students that their reports should deal with all of the major problems and issues raised in the case. Normally, we insist that these analyses be prepared as ―reports to management‖ rather than as the commentary of a student analyst to the instructor. We think it is important for students to assume the posture of a professional manager writing to an audience of other practicing managers. On occasions we like to focus the entire assignment on ―what to do and why.‖ Making students center their report on a set of well-supported recommendations to management has the advantage of involving them more directly in the case situation and keeping the student‘s analysis action oriented.

3.

In-class written analyses. It is often useful to require students to do an in-class written analysis of either a case which has been discussed earlier (in part or in whole) or a case that is completely new. Because of the time constraints, it is obviously imperative here to select a case that can be read and analyzed in the allotted time. It is a matter of preference whether students are given a narrowly focused question to answer or a broadranging analysis to conduct. The amount of time available for the exam (as well as the length and complexity of the chosen case) should determine which approach is taken.

We use an in-class written case as a final examination and schedule it over a four-hour period. We have opted for closed-book instead of open-book exams; the only aid students can use is a calculator to expedite calculations and financial analysis. As an alternative to giving students a sight-unseen case for in-class analysis, you can assign the case to be read and studied beforehand and use the whole class-time for answering questions posed by the instructor. This technique works quite well when the class time available for examination is only 50–75 minutes, but it has the disadvantage of not testing the student‘s abilities independent of opportunities to consult with others.

To avoid chronic problems with late cases, it is our policy to reduce the grade on each late paper by two letters; thus the maximum grade on a late paper is a C (and that only if the paper would otherwise be an A paper). We feel such a policy is entirely justified because it is not a great achievement for students to attend the class discussion of the assigned case, take copious notes, and then hand in a paper which does little more than summarize the class discussion. The latter tactics subvert the pedagogical value of written cases and cannot be tolerated. Our automatic two-letter grade penalty on late papers has worked well in discouraging overdue reports, and you may wish to experiment with it if you are plagued with late papers.

Suggested written case assignments for these and other cases are provided in the teaching notes for the cases.

Oral Team Case Presentations

There is great merit in selecting several cases for use as in-class presentations by teams or groups of students. We like to assign oral team presentations of cases because such assignments drill students in organizing the work and tasks of several people into a team effort, presenting their ideas, preparing professional caliber PowerPoint slides, and defending their ideas in a Q&A session—all skills that most students will be called on to display in future job assignments.

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In our course, we like to have teams of three to four persons (usually composed of the same students who are playing the simulation exercise together) and presentations that last 15–20 minutes, followed by a 10-minute question and answer session (where class members have responsibility for asking all the questions and can be graded on the caliber of their question for class participation purposes). With this format, two or three teams can be assigned the same case and give their presentations of the case on the same day. This adds a useful bit of competition to the process and also serves to illustrate the different perspectives, analysis, and recommendations that can flow from wrestling with the same case situation (amazingly enough, three presentations of the same case tend to be strikingly different).

Suggestions for Leading a Case Discussion

In the event you want some suggestions on how to lead a case discussion, we highly recommend the following sources: a. V. Kasturi Rangan, ―Choreographing a Case Class,‖ available from Harvard Business School Publishing (can be downloaded free at www.hbsp.harvard.edu). b. Ram Charan, ―Classroom Techniques in Teaching by the Case Method,‖ The Academy of Management Review (July 1976), pp. 116–123. c. Charles I. Gragg, ―Because Wisdom Can‘t Be Told,‖ available from Harvard Business School Publishing (the product number is 9-451-005; it can be ordered by calling 800545-7685, or faxing 617-495-6985, or going to www.hbsp.harvard.edu). Gragg‘s presentation is a classic and is very worthwhile reading. d. Louis B. Barnes, C. Roland Christensen, and Abby J. Hansen, Teaching and the Case Method, Third Edition, Harvard Business School Press, 1994, ISBN 0-87584-565-7 (can be ordered by calling 800-545-7685, or faxing 617-495-6985, or going to www.hbsp.harvard.edu). e. B. P. Shapiro, ―Hints for Case Teaching,‖ available from Harvard Business School Publishing (www.hbsp.harvard.edu). f. Kenneth R. Andrews, ―The Role of the Instructor in the Case Method,‖ in The Case Method at the Harvard Business School, edited by Malcolm P. McNair (McGraw Hill Book Co., Inc., 1954), pp. 98-109. You may also wish to consult the articles by Dewitt C. Dearborn (pp. 121–133) and Robert W. Merry (pp. 132–138) in this same volume.

SECTION 4 Sample Syllabi and Daily Course Schedules © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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This section contains: 6. Two sample course syllabi—The two sample course syllabi are ones that we have used in our own senior-level strategic management courses.

7. A comprehensive set of suggested daily class schedules:      

Sample schedule of class activities and assignments for in-person courses offered during a 15-week term; Sample schedule of activities for hybrid courses offered during a 15-week term; Sample schedule of class activities for in-person courses offered during a 10-week term; Sample schedule of class activities for hybrid courses offered during a 10-week term; Sample schedule of class activities for a 7-week online course; and Sample course schedule for in-person courses offered in 5-week terms.

Should your course involve more or less class meetings than indicated on our sample schedules, you can (1) add or delete case assignments as needed, or (2) devote more/less class time to covering the 10 chapters of text, or (3) schedule more class meetings in the computer lab (in the event you opt to use a strategy simulation).

Having the class meet in the computer lab gives you a great opportunity to personally observe the dynamics of how different companies go about the task of strategizing and making decisions).

If you are inexperienced in teaching first-level strategy courses for seniors and MBA students, we think you will find the contents of the sample syllabi and daily course schedules helpful in developing a syllabus and daily class schedule for your own course that you are comfortable with.

Course Syllabus (Sample 1) Required Materials/Textbook: Gamble, J. E., Peteraf, M. A., & Thompson, A. A. Essentials of Strategic Management: The Quest for Competitive Advantage, 8th Edition Websites Used:

Blackboard Business Strategy Game https://www.bsg-online.com

Course Description Unlike other business courses that concentrate narrowly on a particular function or piece of the business—accounting, finance, marketing, production, human resources, or information systems, strategic management is a big picture course. It cuts across the whole spectrum of business and management. The center of attention is the total enterprise—the industry and competitive environment in which it operates, its long-term direction and strategy, its resources and competitive capabilities, and its prospects for © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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success.

Throughout the course, the spotlight will be trained on the foremost issue in running a business enterprise: “What must managers do, and do well, to make the company a winner in the game of business?” The answer that emerges, and which becomes the theme of the course, is that good strategy making and good strategy execution are the key ingredients of company success and the most reliable signs of good management. The mission of the course is to explore why good strategic management leads to good business performance, to present the basic concepts and tools of strategic analysis, and to drill you in the methods of crafting a well-conceived strategy and executing it competently.

You’ll be called on to probe, question, and evaluate all aspects of a company’s external and internal situation. You’ll grapple with sizing up a company’s standing in the marketplace and its ability to go head-to-head with rivals, learn to tell the difference between winning strategies and mediocre strategies, and become more skilled in spotting ways to improve a company’s strategy or its execution.

In the midst of all this, another purpose is accomplished: to help you synthesize what you have learned in prior business courses. Dealing with the grand sweep of how to manage all the pieces of a business makes strategic management an integrative, capstone course in which you reach back to use concepts and techniques covered in previous courses. For perhaps the first time, you’ll see how the various pieces of the business puzzle fit together and why the different parts of a business need to be managed in strategic harmony for the organization to operate in winning fashion.

The Next Weeks Will Be Exciting, Fun, Challenging, and Filled with Learning Opportunities.

No matter where your primary business interest lies, the content of this course has all the ingredients to be the best course you’ve taken—best in the sense of learning a lot about business, holding your interest from beginning to end, and enhancing your powers of business judgment. As you tackle the subject matter, ponder Ralph Waldo Emerson’s observation, “Commerce is a game of skill which many people play, but which few play well.” The overriding intent of the course is to help you become a savvier player and better prepare you for a successful business career. I sincerely hope this course will prove to be instrumental in making you “competitively superior,” and successful in your career and much wiser about the secrets of first-rate management.

Course Objectives By the end of this course, the students will be able to: Demonstrate the research capabilities and critical thinking necessary to gather and interpret key environmental data.

8. Exhibit the analytical and ethical decision-making skills necessary for dealing with complex strategic planning.

9. Analyze a firm‘s mission, including broad statements about its purpose, philosophy, and goals.

10. Assess a firm‘s external environment, including the general, industry, and competitive environments. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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11. Analyze a firm‘s options by matching its internal resources with external environmental factors; suggest alternative courses of action, and present well-supported recommendations for future action.

12. Illustrate the communication and computer skills necessary to make effective individual and team oral and written presentations.

Major Course Requirements Your course grade will be based on the following components and percentage allocation: Performance on the BSG simulation exercise (including quiz 1, quiz 2, three-year plan, comprehensive exam and the peer evaluations)

25%

Individual written case assignment

25%

Group case presentation

20%

Completion of Connect case exercises for assigned cases

5%

Exam on Chapters 1–5

15%

Class participation

10%

Total

100%

The instructor reserves the right to modify/change course requirements as circumstances dictate. For example, the instructor may wish to change the number and frequency of exams or other assignments if unexpected changes in the class schedule occur. If such a modification is needed, you will be notified by e-mail or through the course website.

Participating in The Business Strategy Game Simulation Peer Evaluations. All students will be required to rate the performance of their The Business Strategy Game team members along with their own performance in The Business Strategy Game simulation. Students’ grades for their performance in the simulation may be lowered by as much as two letter grades if other team members universally rate a student’s knowledge of the mechanics of the simulation and contribution to team success as “poor.”

Terminating a member of your management team. Team members are subject to dismissal from the team if they are unwilling to master the material presented in The Business Strategy Game Players’ Guide or are unwilling to attend team meetings or © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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otherwise participate in the simulation.

Examination Policy The course will include a multiple-choice exam that assesses your knowledge, comprehension, and application of text coverage of strategic management concepts. Exams are to be completed on an individual basis. You are expected to take the examinations when scheduled. The exams are open book/notes. You will have 75 minutes to complete the exam. All make-up exams are scheduled for the date of the final exam for the course.

Completion of the Connect Case Exercises The Connect package for the course includes case exercises. All of the exercises call upon a student to develop thoughtful, analysis-based answers (as opposed to stating seat-of-the-pants opinions). Each exercise is different, depending both on the circumstances of the case and the content of the chapters to which it is closely linked. The multiple-choice exercises are autograded and can typically be completed in 20–25 minutes, assuming a student has done a conscientious job of reading the case and absorbing the information.

Preparation of Written Case Assignment The written case assignment is to be prepared on an individual basis. It is expected that the content of your written case will reflect your thoughts and analysis rather than the work of others. All group work is “out of bounds.” The written portion of the case will be limited to a three-page executive summary of recommendations to address the strategic issues in the case. The purpose of the written case assignments and all case analyses for the course is to help you become proficient in analysis-based decision making. Each assignment will require that you complete the Connect Case Exercise for the assigned case to arrive at the strategic issues confronting the company. The executive summary is your detailed, specific action plan to address such issues. Each recommendation should be supported by facts disclosed by your analysis of the case.

Suggestions regarding the preparation of written case assignments are discussed in “A Guide to Case Analysis” provided in your eBook. The criteria for grading written case presentations include: Identification of key problems/strategic issues.

13. Evidence that the use of appropriate analytical tools and techniques presented in the chapters were used in identifying strategic issues.

14. Presenting realistic, workable, well-supported recommendations for action.

15. Use of good communication skills—failure to use good grammar, spelling, and other written communication skills will result in a full one-letter grade reduction.

16. Evidence of adequate preparation, pride of workmanship, and display of professional attitude and approach. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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The written case assignment should be submitted no later than the due date for the assignment (see the Schedule of Class Activities. Cases turned in after the scheduled due date are eligible for a grade no higher than a C (and that only if the paper is otherwise an A or B+ paper). No late papers will be accepted if submitted more than 48 hours past the scheduled due date (except by prearranged consent of the instructor).

All written cases are to be typed (double-spaced) and should incorporate correct form, spelling, grammar, sentence structure, and communication skills.

Papers which, in the opinion of the instructor, employ disproportionately poor grammar and poor quality written communication skills will be assigned a grade that is a full one-letter lower than would otherwise be assigned.

Required Participation in Class Discussions of Assigned Cases Due to the fact that participation in class discussion of cases counts as a factor in determining your overall grade in the course, each student MUST contribute significantly to in-class analysis and discussion of the cases. Each student is expected to be an active participant in case discussions and to offer meaningful analysis and convincing arguments for the position you stake out. Your grade on class participation is something to be earned by contributing your assessments and judgments to the discussion. Merely coming to class and listening to the discussion of assigned cases is not sufficient; attendance is not participation. You should, therefore, make a conscientious effort to be sufficiently prepared to make intelligent, timely comments regarding the managerial issues raised in the cases—this entails reading the assigned cases and preparing several pages of notes to the assignment questions for the case.

The bare minimum number of assigned cases on which you are expected to display your analytical skills by speaking out and making a meaningful contribution is six (multiple contributions to a single case are averaged into a single grade for participating on that case). A contribution is defined as making a relevant and clearly articulated statement, either in response to a question by the instructor or in response/rebuttal to comments made by another class member. Merely saying “yes” or “no” without any elaboration or without having the full attention of the class does not count as meaningful participation.

On days when there are oral team presentations, class participation is judged on the caliber of the question(s) you pose to one or more of the presenting teams.

Satisfactory contributions on six assigned cases will be judged as a C– (70); and good-toexcellent contributions on six cases will be worth a B– (80). To earn an A on class discussion typically requires contributing meaningfully on 10 to 13 cases (out of the 15 total cases that are assigned) and standing out as a class leader in the discussions of assigned cases. Satisfactory contributions on only two assigned cases will be judged as a 30; satisfactory contributions on just three cases will be judged as a 40; satisfactory contributions on four cases will be judged as a 50; and satisfactory contributions on five cases will be judged as a 60—so failure to have the minimum six case participations will negatively impact your grade in the course.

Oral Team Presentation © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Oral presentations consist of a 20-minute presentation followed by a 10-minute question–answer session. The nature of the presentation is indicated on the schedule of class activities. You and your team members should assume the role of consultants employed to present your analysis and recommendations to the assigned company’s senior management—you do NOT have the option of ignoring this assigned role.

All team members are expected to make roughly equal contributions to the presentation, both the formal 20-minute presentation and the 10-minute Q&A portion.

All presentations should incorporate the use of attractive, effective PowerPoint slides.

Your grade on the presentation will be based on six factors: The clarity and thoroughness with which your team identifies and articulates the problems facing the company and the issues which management needs to address—12 percent, 17. The caliber (depth and breadth) of your team‘s analysis of the company‘s situation and demonstrated ability to use the concepts and tools of strategic analysis in a competent fashion—30 percent, 18. The breadth, depth, and practicality of your team‘s recommendations, degree of detail and specificity of recommended actions, caliber of supporting arguments—20 percent, 19. The caliber of your PowerPoint slides—15 percent, 20. The degree of preparation, professionalism, energy, enthusiasm, and skills demonstrated in delivering your part of the presentation—15 percent, and 21. Your personal contributions to your team‘s answers to the questions posed by the class— how well you defend and support your team‘s analysis and recommendations durin g the Q&A period—8 percent. Every team member is expected to answer at least one question posed by the class (or else there is no individual contribution for the instructor to grade!).

Appropriate dress for presenters is business casual.

Policies Regarding Class Attendance and Makeup of Absences Attendance at all class sessions is expected, but attendance is required on those days an assigned case is discussed in class. Absence from class on case discussion days requires makeup and should be discussed with your instructor, since class roll is taken on case discussion days.

If you must miss class discussion of an assigned case, you are required to turn in answers to the assignment questions for the case. The makeup work for the missed case discussions is due no later than the following class period (except by prearranged consent of the instructor).

Failure to satisfactorily complete and hand in the “makeup” work at the next class meeting will result in a 2-point penalty deduction from your overall course average for each case discussion absence without a satisfactorily completed written makeup (thus if your final average is an 80 and you have three unmade-up absences from case discussions, your final © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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average will be reduced to 74).

More than one absence on case discussion and oral team presentation days (even if made up by turning in written answers to the assignment questions) will be penalized at the discretion of the instructor.

Time Requirements Anyway you look at it, the workload in this course is quite heavy for the five-week period.

The time requirements are demanding and the daily activities are fast-paced (with almost no letup during the term):  There are 10 chapters of text material (about 250 pages) to master and be examined on.

You should plan on taking each of these tests to gauge your command of the material and prepare yourself for the exam on Chapters 1–5.  Expect to spend 1½ to 2 hours per decision round participating in Business Strategy Game.

A few more hours might be needed the first two to three decision rounds to grasp what the simulation is all about and how the software and website work; the three-year strategic plan will probably entail 1–2 hours. You will probably spend 25–30 hours outside of class working with your co-managers on the Business Strategy Game exercise.  Expect to spend 1½ to 3 hours preparing a case for class discussion (you will need to complete the Connect case preparation exercise or prepare two to three pages of notes/answers to the study questions in front of you each day to sparkle and shine in the class discussions!). Trying to wing it by just quickly reading through an assigned case prior to class is ill-advised!  Expect to spend 10 to 15 hours preparing your written case assignment.  Expect to spend 10 to 15 hours preparing for the oral team presentation.

It all adds up to a bunch of hours (probably more than for most other courses) and will constitute a very strenuous workout. You will have to dedicate a considerable amount of your time during the term to this course.

But don’t let the hours/time requirements intimidate you. All of the assignments that comprise the course aim at (a) improving your grasp of important tools and concepts, (b) enhancing your ability to use and apply them correctly, and (c) sharpening your business decision-making judgment. The course has been deliberately designed to push you to do your best under pressure and to be very real world in terms of what you learn and what you can take with you of practical value as you launch your business career. In a very real way, the entire course is your “final exam” for business school and for being cleared to become a “licensed practitioner of business.”

Course SylLabus (Sample 2) Required Texts and Materials Gamble, Peteraf, and Thompson, Essentials of Strategic Management: The Quest for Competitive Advantage, 8th Edition and Connect Management case preparation exercises, learning assurance exercises, and chapter quizzes. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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22. Thompson, et al., The Business Strategy Game or GLO-BUS: Developing Winning Competitive Strategies (register to participate at www.bsg-online.com or www.globus.com). To complete the registration, you will need (1) either a credit card or the Prepaid Access Code on the card that was shrink-wrapped with your copy of the text and (2) the company registration code provided by the instructor.

Course Description Unlike other business courses that concentrate narrowly on a particular function or piece of the business—accounting, finance, marketing, production, human resources, or information systems, strategic management is a big picture course. It cuts across the whole spectrum of business and management. The center of attention is the total enterprise—the industry and competitive environment in which it operates, its long-term direction and strategy, its resources and competitive capabilities, and its prospects for success.

Throughout the course, the spotlight will be trained on the foremost issue in running a business enterprise: “What must managers do, and do well, to make the company a winner in the game of business?” The answer that emerges, and which becomes the theme of the course, is that good strategy making and good strategy execution are the key ingredients of company success and the most reliable signs of good management. The mission of the course is to explore why good strategic management leads to good business performance, to present the basic concepts and tools of strategic analysis, and to drill you in the methods of crafting a well-conceived strategy and executing it competently.

You’ll be called on to probe, question, and evaluate all aspects of a company’s external and internal situation. You’ll grapple with sizing up a company’s standing in the marketplace and its ability to go head-to-head with rivals, learn to tell the difference between winning strategies and mediocre strategies, and become more skilled in spotting ways to improve a company’s strategy or its execution.

In the midst of all this, another purpose is accomplished: to help you synthesize what you have learned in prior business courses. Dealing with the grand sweep of how to manage all the pieces of a business makes strategic management an integrative, capstone course in which you reach back to use concepts and techniques covered in previous courses. For perhaps the first time you’ll see how the various pieces of the business puzzle fit together and why the different parts of a business need to be managed in strategic harmony for the organization to operate in winning fashion.

The Next Weeks Will Be Exciting, Fun, Challenging, and Filled with Learning Opportunities.

No matter where your primary business interest lies, the content of this course has all the ingredients to be the best course you’ve taken—best in the sense of learning a lot about business, holding your interest from beginning to end, and enhancing your powers of business judgment. As you tackle the subject matter, ponder Ralph Waldo Emerson’s © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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observation, “Commerce is a game of skill which many people play, but which few play well.” The overriding intent of the course is to help you become a more savvy player and better prepare you for a successful business career. I sincerely hope this course will prove to be instrumental in making you “competitively superior,” and successful in your career and much wiser about the secrets of first-rate management.

Course Objectives A student who has completed this course will be able to: Integrate previously studied material and apply strategic concepts to solve business problems at the general manager level.

Analyze a firm externally and internally to identify its strengths, weaknesses, opportunities, and threats and propose actions based on that analysis.

Think strategically at functional, business, corporate, and international levels.

Present ideas effectively orally and in writing and as an individual and as a team.

Grading Plan/Performance Evaluations Your course grade will be based on the following components and percentage allocation: Performance on the BSG simulation exercise (including the quizzes, three25% year plan, and the peer evaluations) First written case assignment

15%

Second written case assignment

15%

Completion of Connect case exercises for assigned case

15%

Essay exam on Chapters 1–5/assigned readings

10%

Essay exam on Chapters 6–10/assigned readings

10%

Completion of Connect learning assurance exercises for assigned chapters in the text/discussion group participation

10%

Total

100%

The instructor reserves the right to modify/change course requirements as circumstances dictate. For example, the instructor may wish to change the number and frequency of exams or other assignments if unexpected changes in the class schedule occur. If such a modification is needed, you will be notified by e-mail or through the course website. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Participating in The Business Strategy Game Simulation Peer Evaluations – All students will be required to rate the performance of their The Business Strategy Game team members along with their own performance in The Business Strategy Game simulation. Students’ grades for their performance in the simulation may be lowered by as much as two-letter grades if other team members universally rate a student’s knowledge of the mechanics of the simulation and contribution to team success as “poor.”

Terminating a member of your management team – Team members are subject to dismissal from the team if they are unwilling to master the material presented in The Business Strategy Game Players’ Guide or are unwilling to attend team meetings or otherwise participate in the simulation.

Examination Policy The two exams in this course will be essay exams that require you to integrate assigned readings with text coverage of strategic management concepts. Exams are to be completed on an individual basis. You are expected to take the examinations when scheduled. The exams are open book/notes. You will have 75 minutes to complete the exam and will be available Sunday, 3:00 p.m. and 5:00 p.m. on the assigned exam dates.

All makeup exams are scheduled for the date of the final exam for the course.

Completion of the Connect Learning Assurance Exercises/Discussion Group Assignments The Connect package for the course includes Learning Assurance Exercises that will allow you to further assess your understanding of key chapter concepts and your ability to apply the tools of strategic analysis presented in all 10 chapters. One exercise will be assigned for each chapter to be completed on an individual basis. In addition, the learning assurance exercise will become a discussion group topic with required participation.

Completion of these exercises should further prepare you for the two exams in the course.

Completion of the Connect Case Exercises The Connect package for the course also includes case exercises. All of the exercises call upon a student to develop thoughtful, analysis-based answers (as opposed to stating seat-of-the-pants opinions). Each exercise is different, depending both on the circumstances of the case and the content of the chapters to which it is closely linked. The multiple-choice exercises are auto-graded and can typically be completed in 45–60 minutes, assuming a student has done a conscientious job of reading the case and absorbing the information.

Preparation of Written Case Assignments © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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The written case assignments are to be prepared on an individual basis. It is expected that the content of your written case will reflect your thoughts and analysis rather than the work of others. All group work is “out of bounds.” The written portion of the case will be limited to a three-page executive summary of recommendations to address the strategic issues in the case. The purpose of the written case assignments and all case analyses for the course is to help you become proficient in analysis-based decision making. Each assignment will require that you complete the Connect Case Exercise for the assigned case to arrive at the strategic issues confronting the company. The executive summary is your detailed, specific action plan to address such issues. Each recommendation should be supported by facts disclosed by your analysis of the case.

Suggestions regarding the preparation of written case assignments are discussed in “A Guide to Case Analysis.” The criteria for grading written case presentations include: Identification of key problems/strategic issues.

23. Evidence that the use of appropriate analytical tools and techniques presented in the chapters were used in identifying strategic issues.

24. Presenting realistic, workable, well-supported recommendations for action.

25. Use of good communication skills—failure to use good grammar, spelling, and other written communication skills will result in a full one-letter grade reduction.

26. Evidence of adequate preparation, pride of workmanship, and display of professional attitude and approach.

Written case assignments should be submitted no later than the due date for the assignment (see the Schedule of Class Activities. Cases turned in after the scheduled due date are eligible for a grade no higher than a C (and that only if the paper is otherwise an A or B+ paper). No late papers will be accepted if submitted more than 48 hours past the scheduled due date (except by prearranged consent of the instructor).

All written cases are to be typed (double-spaced) and should incorporate correct form, spelling, grammar, sentence structure, and communication skills.

Papers which, in the opinion of the instructor, employ disproportionately poor grammar and poorly written communication skills will be assigned a grade that is a full one letter lower than would otherwise be assigned.

Copyright/Plagiarism The handouts used in this course are copyrighted. By "handouts," I mean all materials generated for this class, which include but are not limited to self-assessments, exams, lab problems, course content materials, review sheets, and additional problem sets. Because these materials are copyrighted, you do not have the right to copy them, unless I expressly grant permission.

As commonly defined, plagiarism consists of passing off as one's own the ideas, words, writings, and so on that belong to another. In accordance with this definition, you are committing plagiarism if you copy the work of another person and turn it in as your own, even if you have the permission of that person. Plagiarism is one of the worst academic sins, for the plagiarist destroys the trust among colleagues without which ideas and research cannot be safely communicated. If you have any questions regarding plagiarism, © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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please consult the university rules at the above website.

Class Schedule for a 15-Week (or Semester-Length) in-person Course 30 class meetings of 75 minutes

Includes five case assignments for classroom discussion; four cases for oral team presentations; one written case; and weekly BSG or GLO-BUS decision rounds throughout the term Class Assignment/Activity 1

Orientation and course preview; coverage of course syllabus; lecture on Chapter 1.

2

Introduction to The Business Strategy Game using the PowerPoint slides provided; assign class members to company teams; provide company co-managers with company registration codes (required in order for class members to register at www.bsgonline.com). Ask all class members to read The Business Strategy Game Player’s Guide by the next class meeting

3

Class discussion of Airbnb in 2022.

4

Lecture/discussion of Chapter 2; remind class members that they should be meeting with their company co-managers to work on the decisions for the first BSG practice round.

5

Class meets in computer lab so that company co-managers can work on their decisions for the first BSG practice round.

6

Lecture/discussion of Chapter 3 Optional 30-minute debriefing on the results of first BSG practice decision.

7

Lecture/discussion of Chapter 4; deadline for completing decision entries for the second BSG practice round is 11:59 p.m. today

8

Class discussion of lululemon athletica’s Strategy in 2022.

9

Class meets in computer lab so that company co-managers can work on their decisions for the BSG Y11 decision round; deadline for completing Year 11 decision entries for The Business Strategy Game.

10

Lecture/discussion of Chapter 5; Optional 15-minute debriefing on the results of BSG Year 11 decision round.

11

Class meets in computer lab so that company co-managers can work on their decisions for the BSG Year 12 decision entries; deadline for completing BSG Year 12 decision entries.

12

Lecture/discussion of Chapter 6 Optional 15-minute debriefing on the results of Year 12 decision round.

13

Lecture/discussion of Chapter 7; deadline for completing BSG Year 13 decision.

14

Class meets in computer lab so that company co-managers can work on preparing their Three-Year Strategic Plan for Years 14-15-16 for their BSG company and/or their strategy and decision entries for BSG Year 14.

15

Class discussion of Spotify Technology in 2022; deadline for completing both the Strategic Plan for Years 14-15-16 and Year 14 decision entries.

16

Examination covering Chapters 1–5

17

Lecture/discussion of Chapter 8; deadline for completing BSG Year 15 decision entries.

18

Lecture/discussion of Chapter 9 Optional debriefing on the results of the Year 15 decision round and a quick review of how well company teams did in meeting the Year 14 and 15 performance targets set forth in their three-year strategic plan for Years 14-15-16 (these data are contained in the instructor’s online grade book). Co-managers should be challenged to consider what they will need to do to get company performance back on track for Year 16, if performance in Years 14 and/or 15 was sub-par.

19

Class discussion PepsiCo’s Diversification Strategy in 2022; deadline for completing Year 16 BSG decision entries is 11:59 p.m. today.

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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20

Lecture/discussion of Chapter 10

21

Class meets in computer lab so that company co-managers can work on preparing their company’s Three-Year Strategic Plan for Years 17-18-19.

22

Class discussion of Robin Hood; deadline for completing both the Strategic Plan for Years 17-18-19 and Year 17 BSG decision entries.

23

Class meets in computer lab so that company co-managers can work on preparing their company’s Y18 BSG decision.

24

Oral presentation of Macy’s, Inc. in 2022; deadline for completing Year 18 BSG decision entries.

25

Examination over Chapters 6–10

26

Class meets in computer lab so that company co-managers can work on preparing their company’s Y18 BSG decision; deadline for completing Year 19 BSG decision entries.

27

Oral team presentation of Tesla’s Strategy in 2022 case

28

Oral team presentation of Beyond Meat in 2022; deadline for completing Year 20 BSG decision entries.

29

Oral team presentation of Meta Platforms, Inc.

30

Course summary and wrap-up; assessment of The Business Strategy Game exercise; Instructor may wish to share some of the class-wide averages for the nine measures in the Learning Assurance Report.

All company co-managers should have competed their peer evaluations by the beginning of class today.

Final Exam

In-class written case analysis (Costco Wholesale in 2022)

Class Schedule for a 15-Week (or Semester-Length) Hybrid Course One class meeting of 75 minutes and one online assignment each week for 15 weeks Includes one case assignment for classroom discussion; four cases for oral team presentations; weekly BSG or GLO-BUS decision rounds throughout the term.

Week 1

Assignment/Activity Lecture on Chapter 1 Introduction to GLO-BUS Online Activities: Explanation of GLO-BUS simulation using video tutorials and PowerPoint slides provided in Instructor Center; assign class members to teams; provide company co-managers with company registration codes (required in order for class members to register for the GLO-BUS simulation at www.glo-bus.com); ask all class members to read the Participant’s Guide prior to next class meeting

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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2

Lecture/discussion of Chapter 2 and Connect learning assurance exercises or instructor-selected chapter-end exercises (including those exercises for simulation participants, but avoid open discussions where company co -managers are asked to reveal competitive sensitive aspects about their company to their rivals) Optional Q & A session regarding simulation mechanics Online Activities: Co-managers meet in teams in the computer lab or online in Collaboration Mode to prepare their strategy and decisions for the first practice round.

Deadline for completing decision entries for the first GLO-BUS practice round is 11 p.m. on the day before weekly class meeting #3. Deadline for completing online Quiz 1 (covering the contents of the Participant’s Guide) corresponds to the same 11 p.m. deadline for completing the decisions for the first practice round.

3

Lecture/discussion of Chapter 3 and Connect learning assurance exercises or instructor-selected chapter-end exercises (including those exercises for simulation participants, but it is wise to avoid open discussions that call upon company comanagers to reveal competitive sensitive aspects about their company to their rivals) Optional debriefing on the results of the first GLO-BUS practice round—instructor leads a class discussion of the information presented in the GLO-BUS Statistical Review and the Competitive Intelligence Reports showing the outcomes for practice round 1. All class members should bring a copy of these reports to class (or the instructor can provide copies to all class members). The purpose for this debriefing is to make sure that all class members have a good grasp of all the information being provided to them after each decision round is completed (but it should be totally up to each team of co-managers to review the information, digest the meaning of all the numbers and statistics provided, and decide what, if any, actions to take in the next decision round based on this information about the outcomes) Optional Q & A session regarding simulation mechanics and results of first practice decision.

Online Activities: Co-managers meet in teams in the computer lab or online in Collaboration Mode to prepare their strategy and decisions for the second GLO-BUS practice round.

Deadline for completing decision entries for the second practice round is 11 p.m. on the day before weekly class meeting #4.

4

Lecture/discussion of Chapter 4 and Connect learning assurance exercises or instructor-selected chapter-end exercises (including those exercises for simulation participants, but be careful to skirt discussions where company co-managers are asked to reveal competitive sensitive aspects about their company to their rivals) Optional debriefing on the results of the second GLO-BUS practice round—instructor leads a class discussion of the information presented in the GLO-BUS Statistical Review and the Competitive Intelligence Reports showing the second practice round results. All class members should bring a copy of these reports to class. Now is a good time to strongly encourage all class members to get in the habit of carefully and thoroughly reviewing the information in each year’s GLO-BUS Statistical Review, Competitive Intelligence Reports and Company Operations Reports—otherwise, company co-managers lack knowledge of market conditions and their company’s competitiveness vis-à-vis rivals heading into the next decision round (flying blind in a fiercely competitive marketplace is a ticket for disastrous company performance).

Short Q & A session regarding the results of the second practice round.

Data is reset back to Year 5 immediately prior to the beginning of class #4, so that GLO-BUS company co-managers will be able to work on the Year 6 decision round during the class period.

Online Activities: Co-managers meet in teams in the computer lab or online in Collaboration Mode to prepare their strategy and decisions for Year 6.

Deadline for completing GLO-BUS Year 6 decision entries is 11 p.m. on the day before weekly class meeting #5.

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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5

Lecture/discussion of Chapter 5 and Connect learning assurance exercises or instructor-selected chapter-end exercises (including those exercises for simulation participants, but avoid open discussions where company co-managers are asked to reveal competitive sensitive aspects about their company to their rivals) Ask each company to come to class having prepared a two- to three-sentence mission statement or strategic vision for their GLO-BUS company, together with a set of performance targets for the Year 7 decision round. Review/discuss these with each individual company as a way of checking whether they have agreed on a long-term direction for their company and set performance targets (but it is unwise for each company to be required to share this competitively sensitive information with class members who are managing rival companies).

Optional debriefing on the results of the Year 6 GLO-BUS decision round—instructor leads a class discussion of the information presented in the Year 6 GLO-BUS Statistical Review and the Competitive Intelligence Reports showing the Year 6 outcomes. All class members should bring a copy of these reports to class—standard procedure for all debriefings).

Online Activities: Co-managers meet in teams in the computer lab or online in Collaboration Mode to prepare their strategy and decisions for Year 7.

Deadline for completing Year 7 GLO-BUS decision entries is 11 p.m. on the day before weekly class meeting #6.

6

Class discussion of Airbnb in 2022.

Optional debriefing on the results of the Year 7 GLO-BUS decision round.

Online Activities: Co-managers meet in teams in the computer lab or online in Collaboration Mode to prepare their strategy and decisions for Year 8.

Deadline for completing both Year 8 GLO-BUS decision entries and online Quiz 2 (covering understanding of company operations) is 11 p.m. on the day before weekly class meeting #7.

7

Exam over Chapters 1–5 Optional debriefing on the results of the Year 8 GLO-BUS decision round.

Online Activities: Co-managers meet in teams in the computer lab or online in Collaboration Mode to prepare their prepare Three-Year Strategic Plan #1 covering Years 9-10-11 and strategy and decisions for Year 9.

Deadline for completing both Strategic Plan #1 and Year 9 decision entries is 11 p.m. on the day before weekly class meeting #8.

8

Lecture/discussion of Chapter 6 and 7 and Connect learning assurance exercises or instructor-selected chapter-end exercises (including those exercises for simulation participants) Optional debriefing on the results of the Year 9 GLO-BUS decision round and a quick review of how well company teams did in meeting the Year 9 performance targets set forth in their three-year strategic plan for Years 9-10-11. Co-managers should be asked to consider what will need to be done to get back on track for Year 10, if performance in Year 9 was sub-par.—instructor leads a class discussion of the information presented in the Year 9 GLO-BUS Statistical Review and the Competitive Intelligence Reports. All class members should bring a copy of these reports to class.

Online Activities: Co-managers meet in teams in the computer lab or online in Collaboration Mode to prepare their strategy and decisions for Year 10.

Deadline for completing Year 10 GLO-BUS decision entries is 11 p.m. on the day before weekly class meeting #9.

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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9

Lecture/discussion of Chapter 8 and Connect learning assurance exercises or instructor-selected chapter-end exercises (including those exercises for simulation participants) Optional debriefing on the results of the Year 10 decision round and a quick review of how well company teams did in meeting the Year 9 and Year 10 performance targets set forth in their three-year strategic plan for Years 9-10-11. Co-managers should be asked to consider what will need to be done to get back on track for Year 11, if performance in Years 9 and/or 10 was subpar.

Online Activities: Co-managers meet in teams in the computer lab or online in Collaboration Mode to prepare their strategy and decisions for Year 11.

Deadline for completing Year 11 GLO-BUS decision entries is 11 p.m. the day before weekly class meeting #10.

10

Lecture/discussion of Chapter 9 and Connect learning assurance exercises or instructor-selected chapter-end exercises Optional short debriefing on the results of the Year 11 GLO-BUS decision round; instructor briefly discusses company performances on the first three-year strategic plan (this information is in the instructor’s online grade book) and asks class members for ideas and suggestions on how company co-managers can improve on setting and meeting (or beating) the performance targets they set for each year of the second three-year strategic plan.

Online Activities: Co-managers meet in teams in the computer lab or online in Collaboration Mode to prepare their ThreeYear Strategic Plan #2 covering Years 12-13-14 and prepare their strategy and decisions for Year 12.

Deadline for completing both Strategic Plan #2 and Year 12 GLO-BUS decision entries is 11 p.m. on the day before weekly class meeting #11.

11

Lecture/discussion of Chapter 10 and Connect learning assurance exercises or instructor-selected chapter-end exercises Optional short debriefing on the results of the Year 12 decision round and a quick review of how well company teams did in meeting the Year 12 performance targets set forth in their three-year strategic plan for Years 12-13-14. Co-managers should be asked to consider what will need to be done to get back on track for Year 13, if performance in Year 12 was subpar.| Online Activities: Co-managers meet in teams in the computer lab or online in Collaboration Mode to prepare their strategy and decisions for Year 13.

Deadline for completing Year 13 GLO-BUS decision entries is 11 p.m. on the day before weekly class meeting #12.

12

Oral team presentation of Yeti in 2022 or Spotify Technologies in 2022 Optional short debriefing on the results of the Year 13 decision round and a quick review of how well company teams did in meeting the Year 13 performance targets set forth in their three-year strategic plan for Years 12-13-14. Co-managers should be asked to consider what will need to be done to get back on track for Year 14, if performance in Years 12 and/or 13 was subpar.

Online Activities: Co-managers meet in teams in the computer lab or online in Collaboration Mode to prepare their strategy and decisions for Year 14.

Deadline for completing Year 14 GLO-BUS decision entries is 11 p.m. on the day before weekly class meeting #13.

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13

Oral team presentation of Macy’s Inc. in 2022 or Ulta Beauty’s Race to Win in an Omnichannel World Short debriefing on the results of the Year 14 GLO-BUS decision round and whether overall company performances on strategic plan #2 was better than three-year strategic plan #1.

Instructor informs class members of Company Presentation requirements for Weeks 14 and 15 where all GLO-BUS companies will make an 8- to 10-minute PowerPoint presentation to the instructor via WebEx regarding their company’s strategy and operations during the entire GLO-BUS simulation (the merits of such presentations and the suggested content of the presentations is set forth in the Instructor’s Guide; all company co-managers can access the suggested presentation outline from their Corporate Lobby screen). Instructors can modify the suggested presentation content as desired. Each company presentation should be followed by a 10-minute Q&A session, where the instructor poses questions to each team of company co-managers.

Online Activities: Co-managers meet in teams in the computer lab or online in Collaboration Mode to prepare their strategy and decisions for Year 15; out of class preparation of Glo-Bus Company Presentation.

Deadline for completing Year 15 GLO-BUS decision entries is 11 p.m., two days before weekly class meeting #14 (this 1day quicker deadline will give company co-managers more time to prepare their company reports).

14

Oral team presentation of Tesla’s Strategy in 2022 or Costco Wholesale in 2022.

Online Activities: Co-managers meet in teams in the computer lab or online in Collaboration Mode to prepare Glo-Bus Company Presentations. End-of-simulation GLO-BUS company presentations and brief Q&A sessions for each presentation—have two to four such WebEx presentations in Week 14 and remaining company presentations during Week 15 Deadline for completing the peer evaluations of company co-managers corresponds to the beginning of today’s class period.

Oral team presentation of PepsiCo’s Diversification Strategy in 2022 or Meta Platforms, Inc.

15

Course wrap-up and summary of lessons learned from the GLO-BUS simulation exercise; simulation assessment.

Instructor may wish to share some of the class-wide averages for the 9 measures in the Learning Assurance Report.

Online Activities: Remaining end-of-simulation GLO-BUS company presentations (if needed due to large number of companies).

Final Exam

Final Exam (Chapters 6–10)

Class Schedule for a 10-Week (or Quarter-Length) in-person Course Two class meetings per week Includes assignment of five cases for oral team presentations; one written case assignment and weekly BSG or GLO-BUS decision rounds throughout the term

Day 1

Assignment/Activity Orientation and course preview Explanation of GLO-BUS simulation using PowerPoint slides provided in Instructor Center; assign class members to teams; provide company co-managers with company registration codes (required in order for class members to register for the simulation at www.glo-bus.com); ask all class members to read the Player’s Guide prior to next class meeting

2

Lecture on Chapter 1; remind all company co-managers to begin meeting with company co-managers to work on first practice decision

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3

Class meets in computer lab so that company co-managers can work on their strategy and decisions for the practice round; deadline for completing GLO-BUS practice decision entries and online Quiz 1 (covering the contents of the GLOBUS Participant’s Guide) is today at 11:59 p.m.

4

Lecture/discussion of Chapter 2 and Connect learning assurance exercises or selected chapter-end exercises (including those exercises for simulation participants, but avoid open discussions that call upon company co-managers to reveal competitive sensitive aspects about their company to their rivals) Optional 30-minute debriefing on the results of practice round—instructor leads a instructor leads a class discussion of the information presented in the GLO-BUS Statistical Review and the Competitive Intelligence Reports showing practice round outcomes. All class members should bring a copy of these reports to class (or the instructor can provide copies to all class members). The purpose of this debriefing is to make sure that all class members have a good grasp of all the information being provided to them after each decision round is completed (but it should be totally up to each team of comanagers to review the information, digest the meaning of all the numbers and statistics provided, and decide what, if any, actions to be taken in the next decision round based on this information about the outcomes).

5

Class meets in computer lab so that company co-managers can work on their strategy and decisions for the Year 6 GLOBUS decision round (the first regular or scored set of decisions); deadline for completing GLO-BUS Year 6 decision entries is today at 11:59 p.m.

6

Lecture/discussion of Chapter 3 and Connect learning assurance exercises or selected chapter-end exercises (including those exercises for simulation participants, but be careful to skirt open discussions that call upon company co-managers to reveal competitive sensitive aspects about their company to their rivals) Optional 15-minute debriefing on the results of Year 6 decision round—instructor leads a instructor leads a class discussion of the information presented in the Year 6 GLO-BUS Statistical Review and the Competitive Intelligence Reports showing Year 6 outcomes. All class members should bring a copy of these reports to class (or the instructor can provide copies to all class members). Now is a good time to strongly encourage all class members to get in the habit of carefully and thoroughly reviewing the information in each year’s GLO-BUS Statistical Review, Competitive Intelligence Reports and Company Operations Reports—otherwise, company co-managers lack knowledge of market conditions and their company’s competitiveness vis-à-vis rivals heading into the next decision round (flying blind in a fiercely competitive marketplace is a ticket for disastrous company performance).

7

Lecture/discussion of Chapter 4 and Connect learning assurance exercises or selected chapter-end exercises (including those exercises for simulation participants, but be careful to skirt open discussions that call upon company co-managers to reveal competitive sensitive aspects about their company to their rivals); deadline for completing GLO-BUS Year 7 decision entries is today at 11:59 p.m.

8

Lecture/discussion of Chapter 5 and Connect learning assurance exercises or selected chapter-end exercises (including those exercises for simulation participants, but be careful to skirt open discussions that call upon company co-managers to reveal competitive sensitive aspects about their company to their rivals)

9

Lecture/discussion of Chapter 6 and Connect learning assurance exercises or selected chapter-end exercises (including those exercises for simulation participants, but be careful to skirt open discussions that call upon company co-managers to reveal competitive sensitive aspects about their company to their rivals); deadline for completing both GLO-BUS Year 8 decision entries and online Quiz 2 (covering understanding of company operations) is today at 11:59 p.m.

10

Lecture/discussion of Chapter 7 and Connect learning assurance exercises or selected chapter-end exercises (including those exercises for simulation participants, but be careful to skirt open discussions that call upon company co-managers to reveal competitive sensitive aspects about their company to their rivals)

11

Examination over Chapters 1-5; deadline for completing GLO-BUS Year 9 decision entries is today at 11:59 p.m.

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12

Lecture/discussion of Chapter 8 and Connect learning assurance exercises or selected chapter-end exercises

13

Lecture/discussion of Chapter 9 and Connect learning assurance exercises or selected chapter-end exercises (including those exercises for simulation participants, but be careful to skirt open discussions that call upon company co-managers to reveal competitive sensitive aspects about their company to their rivals); deadline for completing GLO-BUS Year 10 decision entries is today at 11:59 p.m.

14

Lecture/discussion of Chapter 10 and Connect learning assurance exercises or selected chapter-end exercises

15

Written case assignment (Costco Wholesale in 2022); deadline for completing GLO-BUS Year 11 decision round is today at 11:59 p.m.

16

Oral team presentations of lululemon athletica’s strategy in 2022 or Beyond Meat in 2022

17

Oral team presentations of Spotify Technology in 2022 or Tesla’s Strategy in 2022; deadline for completing GLO-BUS Year 12 decision entries is today at 11:59 p.m.

18

Oral team presentations of Ulta Beauty’s Race to Win in an Omnichannel World or Macy’s, Inc. in 2022

19

Oral team presentations of Airbnb in 2022 or Meta Platforms, Inc. Deadline for completing GLO-BUS Year 13 decision entries is today at 11:59 p.m.

Oral team presentations of PepsiCo’s Diversification Strategy in 2022 or Yeti in 2022; course wrap-up

20 Final Exam

Chapters 6–10

Class Schedule for a 10-Week (or Quarter-Length) HYBRID Course One class meeting of 75 minutes and one online assignment each week for 10 weeks Includes assignment of four cases for oral team presentations; one written case assignment; and weekly BSG or GLO-BUS decision rounds throughout the term

Week 1

Assignment/Activity Orientation and course preview; Lecture/discussion of Chapter 1 Online Activities: Introduction to GLO-BUS using the video tutorials and PowerPoint slides provided; assign class members to company teams; provide company co-managers with company registration codes (required in order for class members to register at www.glo-bus.com). Ask all class members to read the GLO-BUS Participant’s Guide and have the co-managers of each company team complete their decision entries for the first GLO-BUS practice round three hours prior to the upcoming class meeting. Also have all company co-managers complete online Quiz 1 covering the GLO-BUS Participant’s Guide three hours prior to the upcoming class meeting.

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2

Lecture/discussion of Chapter 2 Optional 45-minute debriefing on the results of the practice decision—instructor leads a class discussion of the information presented in the GLO-BUS Statistical Review and the Competitive Intelligence Reports showing practice decision outcomes. All class members should bring a copy of these reports to class (or the instructor can provide copies to all class members). The purpose of this debriefing is to make sure that all class members have a good grasp of all the information being provided to them after each decision round is completed (but it should be totally up to each team of co-managers to review the information, digest the meaning of all the numbers and statistics provided, and decide what, if any, actions to be taken in the next decision round based on this information about the outcomes).

Optional Q & A session regarding simulation mechanics and results of first GLO-BUS practice decision.

Online Activities: Each team of company co-managers meets as a group in computer lab or online using Glo-Bus Collaboration Mode to work on their strategy and decisions for Year 6.

Deadline for completing Year 6 GLO-BUS decision entries is 11:59 p.m. the evening before the next class meeting.

3

Lecture/discussion of Chapter 3 Optional 30-minute debriefing on the results of the Year 6 decision round—instructor lead a class discussion of the information presented in the Year 6 GLO-BUS Statistical Review and the Competitive Intelligence Reports showing Year 6 outcomes. All class members should bring a copy of these reports to class (or the instructor can provide copies to all class members). Now is a good time to strongly encourage all class members to get in the habit of carefully and thoroughly reviewing the information in each year’s GLO-BUS Statistical Review, Competitive Intelligence Reports, and Company Operations Reports—otherwise, company co-managers lack knowledge of market conditions and their company’s competitiveness vis-à-vis rivals heading into the next decision round (flying blind in a fiercely competitive marketplace is a ticket for disastrous company performance).

Online Activities: Each team of company co-managers meets as a group in computer lab or online using Glo-Bus Collaboration Mode to work on their strategy and decisions for Year 7.

Deadline for completing Year 7 GLO-BUS decision entries is 11:59 p.m. the evening before the next class meeting.

4

Lecture/discussion of Chapter 4 Optional 20-minute debriefing on the results of the Year 7 decision round—instructor leads a class discussion of the information presented in the Year 7 GLO-BUS Statistical Review and the Competitive Intelligence Reports showing Year 7 outcomes. All class members should bring a copy of these reports to class (or the instructor can provide copies to all class members).

Online Activities: Each team of company co-managers meets as a group in computer lab or online using Glo-Bus Collaboration Mode to work on their strategy and decisions for Year 8.

Deadline for completing both Year 8 GLO-BUS decision entries and online Quiz 2 (covering understanding of company operations) is 11:59 p.m. the evening before the next class meeting.

5

Lecture/discussion of Chapter 5 Online Activities: Each team of company co-managers meets as a group in computer lab or online using Glo-Bus Collaboration Mode to work on their strategy and decisions for Year 9.

Deadline for completing Year 9 GLO-BUS decision entries is 11:59 p.m. the evening before the next class meeting.

6

Oral team presentations of Airbnb in 2022 or Yeti in 2022 Online Activities: Video lecture on Chapters 6 and 7; each team of company co-managers meets as a group in computer lab or online using Glo-Bus Collaboration Mode to work on their strategy and decisions for Year 10; preparation of a Three-Year Strategic Plan for Years 10-11-12. Company co-managers will generally need to meet outside of class to complete the three-year strategic plan and their strategy/decisions for Year 10.

Deadline for completing both the Year 10 GLO-BUS decision entries and the strategic plan for Years 10-11-12 is 11:59 p.m. the evening before the next class meeting.

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7

Oral team presentations of lululemon athletica’s Strategy in 2022 or Spotify Technology in 2022 Online Activities: Video lecture on Chapter 8; Each team of company co-managers meets as a group in computer lab or online using Glo-Bus Collaboration Mode to work on their strategy and decisions for Year 11.

Deadline for completing Year 11 GLO-BUS decision entries is 11:59 p.m. the evening before the next class meeting.

8

Oral team presentations of PepsiCo’s Diversification Strategy in 2022 or Macy’s, Inc. in 2022 Online Activities: Video lecture on Chapter 9; Each team of company co-managers meets as a group in computer lab or online using Glo-Bus Collaboration Mode to work on their strategy and decisions for Year 12.

Deadline for completing Year 12 GLO-BUS decision entries is 11:59 p.m. the evening before the next class meeting.

9

Oral team presentations of Beyond Meat in 2022 or Tesla’s Strategy in 2022 Discussion of requirements for preparing end-of-simulation company presentations.

Online Activities: Video lecture on Chapter 10; Each team of company co-managers meets as a group in computer lab or online using Glo-Bus Collaboration Mode to work on their strategy and decisions for Year 13.

Deadline for completing the Year 13 GLO-BUS decision round is 11:59 p.m., two evenings before the next class meeting (having the deadline one day earlier will give class members more time to prepare the PowerPoint slides for their WebEx company presentations during Week 10.

10

Exam (Chapters 1–10) Online Activities: End-of simulation GLO-BUS company presentations to instructor (delivered by students via WebEx).

All GLO-BUS company co-managers should have completed the peer evaluations by the beginning of today’s class period.

Final Exam

Final written case (Costco Wholesale in 2022)

Class Schedule for a 7-Week ONLINE Course Includes use of five Connect Interactive Chapter Exercises, three Connect Case Exercises, two written cases and seven Business Strategy Game or Glo-Bus decision rounds

Week

Assignment/Activity

1

Orientation and course preview; Asynchronous video lecture on Chapters 1 and 2; completion of Connect Interactive Exercises for Chapters 1 and 2; Introduction and discussion of team registration process for The Business Strategy Game.

2

Asynchronous video lecture on Chapters 3 and 4; completion of Connect Interactive Exercises for Chapters 3 and 4; BSG Quiz 1 deadline; Practice Year 11 decision due.

Completion of Connect case exercise for Airbnb in 2022.

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Asynchronous video lecture on Chapters 5 and Practice Y11 debriefing; completion of Connect Interactive Exercises for Chapters 5 and 6; BSG Year 11 decision due.

3

Completion of Connect case exercise for lululemon athletica in 2022 or Yeti in 2022.

Asynchronous video lecture BSG Y11 debriefing; BSG Y12 and Y13 decisions due.

4

Exam 1 (Chapters 1–5).

Video Q&A; BSG Y13 debriefing; BSG Y14 and Y15 decisions due.

5

First written case due (Beyond Meat in 2022 or Tesla‘s Strategy in 202).

Video Q&A; BSG Y15 debriefing; BSG Y16 and Y17 decisions due.

6

Completion of Connect case exercise for Meta Platforms, Inc. or Macy‘s, Inc. in 2022.

Completion of BSG Peer Evaluations.

7

Second written case due (PepsiCo‘s Diversification Strategy in 2022 or Costco Wholesale in 2022); Final Exam (Chapters 6–10)

Class Schedule for a FIVE-Week Course Daily class meetings of 75–90 minutes

Includes assignment of four cases for class discussion, five cases for oral team presentations, and weekly BSG or GLO-BUS decision rounds throughout the term

Day 1

Assignment/Activity Orientation and course preview Introduction to The Business Strategy Game using the PowerPoint slides provided; assign class members to company teams; provide company co-managers with company registration codes (required in order for class members to register at www.bsg-online.com). Ask all class members to read the BSG Player’s Guide prior to the next class meeting.

Remainder of class period: Lecture on Chapter 1

2

Lecture on Chapter 2; remind class members that they should be meeting with their company co-managers to work on the decisions for the upcoming first practice round for The Business Strategy Game simulation.

3

Lecture on Chapter 3; remind class members that they should be meeting with their company co-managers to work on the decisions for the upcoming first practice round for The Business Strategy Game simulation

4

Lecture on Chapter 4. Deadline for completing both decision entries for the first BSG practice round and online Quiz 1 (covering the contents of the Player‘s Guide) is 11:59 p.m. tonight.

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5

Lecture on Chapter 5 Optional 25-minute debriefing on the results of the practice decision—instructor leads a class discussion of the information presented in the Footwear Industry Report and the Competitive Intelligence Reports showing practice decision outcomes. All class members should bring a copy of these reports to class (or the instructor can provide copies to all class members). The purpose of this debriefing is to make sure that all class members have a good grasp of all the information being provided to them after each decision round is completed (but it should be totally up to each team of co-managers to review the information, digest the meaning of all the numbers and statistics provided, and decide what, if any, actions to take in the next decision round based on this information about the outcomes).

Optional Q & A session regarding simulation mechanics and results of first BSG practice decision.

6

Class meets in computer lab so that company co-managers can work on their strategy and decisions for the Year 11 BSG decision round; deadline for completing Year 11 BSG decision entries is 11:59 p.m. tonight.

7

Lecture on Chapter 6 Optional 20-minute debriefing on the results of the Year 11 BSG decision round—instructor leads a class discussion of the information presented in the Year 11 Footwear Industry Report and the Competitive Intelligence Reports showing Year 11 decision outcomes. All class members should bring a copy of these reports to class (or the instructor can provide copies to all class members). Now is a good time to strongly encourage all class members to get in the habit of carefully and thoroughly reviewing the information in each year‘s Footwear Industry Report, Competitive Intelligence Reports, and Company Operations Reports—otherwise, company co-managers lack knowledge of market conditions and their company‘s competitiveness vis-à-vis rivals heading into the next decision round (flying blind in a fiercely competitive marketplace is a ticket for disastrous company performance).

8

Exam covering Chapters 1–5 Lecture on Chapter 7; deadline for completing Year 12 BSG decision entries is 11:59 p.m. tonight.

10

Class discussion of Airbnb in 2022.

11

Class meets in computer lab so that company co-managers can work on their strategy and decisions for the Year 13 decision round; deadline for completing both Year 13 BSG decision entries and online Quiz 2 (covering understanding of company operations) is 11:59 p.m. today.

12

Lecture on Chapter 8; optional 10-minute debriefing on the results of the Year 13 decision round—instructor leads a class discussion of the information presented in the Year 13 Footwear Industry Report and the Competitive Intelligence Reports showing Year 13 decision outcomes. All class members should bring a copy of these reports to class (or the instructor can provide copies to all class members).

13

Class discussion of lululemon athletica in 2022 or Costco Wholesale in 2022

14

Lecture on Chapter 9; deadline for completing Year 14 BSG decision entries is 11:59 p.m. today.

15

Lecture on Chapter 10

16

Class discussion of Meta Platforms, Inc.; deadline for completing Year 15 BSG decision entries is 11:59 p.m. today.

17

Class meets in computer lab so that company co-managers can work on their three-year strategic plan for Years 1617-18

18

Class meets in computer lab so that company co-managers can work on their three-year strategic plan for Years 1617-18 and their strategy and decisions for Year 16

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19

Class discussion of Tesla‘s Strategy in 2022; deadline for completing both Year 16 BSG decision entries and the three-year strategic plan for Years 16-17-18 is 11:59 p.m. today.

20

Oral team presentations of Macy‘s, Inc. in 2022.

21

Oral team presentations of Yeti in 2022; deadline for completing Year 17 BSG decision entries is 11:59 p.m. today.

22

Oral team presentations of Ulta Beaty‘s Race to Win in an Omnichannel World.

23

Oral team presentations of Beyond Meat in 2022.

24

Oral team presentations of Yeti in 2022.

Deadline for completing Year 18 BSG decision entries is 11:59 p.m. today.

Discussion of requirements for preparing end-of-simulation company presentations.

25

Course wrap-up by instructor; assessment of learning and benefits of BSG simulation exercise. Instructor may wish to share some of the class-wide averages for the eight measures in the Learning Assurance Report.

All BSG company co-managers should have completed the peer evaluations by the beginning of today‘s class period.

Final Exam

Exam on Chapters 6–10

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