ST370: Business Strategy
Outline Solutions – May 2015
Question 1
What are the two main sources of a firm’s profitability? Explain each by using examples of
your choice. Which source could provide a firm with a sustainable competitive advantage?
Why?
Indicative answer:
Two main sources of profitability are (i) industry attractiveness and (ii) a firm’s resources and
capabilities.
Industry attractiveness should be explained by using Porter’s five forces framework (see Figure 1),
which determine the extent of profitability of firms operating in an industry. These forces are as
follows:
1- Bargaining power of suppliers, 2- bargaining power of customers, 3- threat of new entrants, 4threat of substitute products and 5- the level of competition.
Figure 1- Porter’s five forces framework, Porter (2008)
Students are expected to explain each of these factors briefly. They are encouraged to provide
examples to support their arguments. For instance, they could refer to firms in the nascent growing
mobile app industry (i.e., low barriers to entry, moderate power of buyers, low power of suppliers
moderate rivalry and limited substitutes). Alternatively, more prosaic industries such as me-too
drugs, coffee houses and bicycle design and manufacturing (e.g. Giant), to identify but a few.
The second source is based on Resource-Based View, which argues that firms can generate value
through their strategic resources and capabilities compared to their competitors, which could help
them to sustain their competitive advantage. Students are expected to explain the significance of
resources and capabilities to firms through some examples, e.g., brand resource and innovative
capability of Apple.
Finally they should argue that due to the complexity and changeability of todays’ business world,
the internal resources and capabilities are more reliable and secured sources, (compared to the
first source which is based on external environment), so they are more likely to equip firms with a
durable and a more sustainable competitive advantage. Competitive advantage created based on
industry attractiveness is more likely to be temporary and once other competitors start to replicate,
it tends to erode.
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ST370: Business Strategy (MS)
May 2015
Question 2
Using the Grant’s framework of resource-based strategy development, evaluate the
significance of “filling resource gap” to the strategic positioning of a company of your
choice.
Indicative answer:
Grant (1991) proposes his framework on competitive strategy formulation based on the notion of
‘resources and capabilities as a source of direction and the foundation for strategy’. In the extant
literature on strategic management, this has been termed ‘Resource-Based View’ (RBV) of the
firm. This view is the synergistic combination and integration of sets of resources that result in a
sustainable competitive advantage (compared to market driven strategy which tends to not be a
source of “sustainable” competitive advantage in todays’ turbulent environment).
Figure 2- Strategy development framework of Grant (1991)
Grant posits a five-step framework (see Figure 2), starting with evaluating the firm’s resources and
capabilities (as the most reliable and enduring bases for developing competitive strategies), which
is followed by assessing the ability of resources and capabilities to provide competitive advantage.
The fourth step is called strategy selection, which deals with exploiting internal resources and
capabilities and external opportunities in the optimum way. The final step of the framework is the
need to extend and upgrade the firm’s resources. He reckons that not only resources and
capabilities need to be considered to develop strategies, but also they are to be renewed and
maintained by strategies. The return flow implies the fact that strategy selection is an iterative
process due to constant changes in the external environment. This has been referred to as filling
‘resource gaps’ in strategy literature or ‘resource maintenance’. Therefore, the return flow from
strategy to a firm’s internal determinants stresses organisational learning which is tightly integrated
with resource maintenance.
Students can expand their explanation by using an example. For instance, they can refer to what
Apple has done after the loss of their leader, Steve Jobs (as he was one of the key strategic
resources of Apple). Apple had to deal with filling a massive resource gap in their organisation to
maintain their competitive position. Students can evaluate the extent to what they believe Apply
was/not successful in this regard.
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ST370: Business Strategy (MS)
May 2015
Question 3
To what extent does diversification improve organisational performance? What is the role
of contingency factors on the relationship between diversification and performance?
Indicative answer:
Students are expected to explain the relationship between diversification and performance.
They should argue that although some believe that there is no consistent relationship, others found
a curvilinear relationship between these two constructs, i.e., first diversification increases
profitability, but beyond a point further diversification reduces profitability (mainly due to increased
complexity). In other words, the research highlights that moderate diversification benefits
performance, while too much diversification could harm the organizational performance. Students
could support their argument by using some examples, e.g., Virgin as a highly diversified company
which some of its diversification strategies have not been successful, e.g., Virgin Cola, Brides and
Vie.
Following the discussion above, they should argue that related (or concentric) and limited
diversifiers usually outperform their un-diversifiers peers (or specialised companies) and unrelated
(conglomerate) or highly diversifiers (see Figure 3).
Figure 3: The relationship between divarication and performance (Johnson, et al. 2014)
Finally it should be referred that based on “Contingency theory”, the relationship between
diversification and performance is not universal, which means that organisational (e.g., firm size,
age, business model, industry type, etc.) and environmental factors (e.g., nature of environment,
rate of change in customers’ taste and preference, technological changes, etc.) may strengthen or
weaken this relationship. So it is important to address any strategic diversification decision within
its contexts, as there is no general solution for that (e.g., unsuccessful market development move
of Tesco to US due to the impact of environmental factors).
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ST370: Business Strategy (MS)
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Question 4
Consider the following statement: “Corporate Social Responsibility...I don’t think it is
working. It’s been taken over by the big management houses...I think it is the word
‘corporate’; when I was part of the social responsibility movement, that was an
alternative...it had...progressive academics, philanthropists, it worked alongside start-up
businesses that were really creative like the Body Shop and Ben and Jerry’s that had a
social purpose.” (Anita Roddick, founder of the Body Shop, speaking in 2009 –
globalissues.org)
Is it necessarily wrong for firms to implement CSR policies where ‘social purpose’ is not the
primary objective?
Indicative answer:
Corporate Social Responsibility (CSR) is understood as a concept whereby companies integrate
social and environmental concerns in their business operations and in their interaction with their
stakeholders on a voluntary basis. (Frynas and Melahi, 2011: 380). Students might argue that the
role of business is not to have a social purpose, rather it is to make a return for shareholders who
are themselves better able to decide where such investments should be made. Ethics, too, are
difficult, particularly in an international context, as there are no universals.
Students may well discuss what actually is the meaning of ‘social purpose’. In Roddick’s terms,
arguably this means changing the world particularly with respect to consumption of finite resources
and a fair distribution of the wealth emanating from the value chain of products more widely. This
becomes the purpose of the corporation albeit within the limits of a capitalist paradigm.
In the lecture on this Theme, students witnessed the full interview with Anita Roddick. However, it
was contrasted with Corporate Social Responsibility as practised by KLM and McDonald’s. In both
cases, the firms had progressive policies relating to environmental protection (e.g. fuel efficiency,
local sourcing, recycling, etc.); philanthropy (supporting charities and developing countries and the
Ronald McDonald Foundation).
Students will be aware of arguments that CSR can:
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enhance brand value and reputation;
be useful in risk management (stakeholder views as early warning; revealing unrecognised
assumptions);
benefit human capital (retention rates of employees; improving employees understanding
of customer needs, etc.); and
improve revenues – discovering new products for existing products; developing new
products and services
However, students have also been exposed to Carrol’s (1979) four generic strategies of social
responsiveness framework; namely, Reaction, Defence, Accommodation, Proaction. The first
three, arguably generate some degree of scepticism, whereby CSR is practised reluctantly, with
the latter, for whatever reason, potentially having a positive innovation spin-off where firms lead in
standards, new processes and research. Again, that is arguably not social purpose in the Roddick
sense, but is – again arguably – social responsibility with net-positive benefits.
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ST370: Business Strategy (MS)
May 2015
Question 5
Firms internationalise for different reasons and in different ways. What considerations
should inform firms in their composition of coherent, appropriate, viable and sustainable
international strategies?
Indicative answer
Students have been exposed to the International Strategy Framework in Johnson et al (2011)
internationalisation in the following ‘driver-led’ terms:
It is anticipated that students consider these drivers and comment on the dynamics that result in
coherent strategy.
Some degree of contingency recognition is expected. For example, size of firm, age, etc.
Appropriateness will relate to, amongst others, the extent to which the choice of territories and
entry modes – export, licensing, franchising, joint venture, alliance, FDI – for example, fit with the
firm’s existing knowledge and management/governance capabilities. Entry in to China, for
example, may require a partnership of some kind for legal and market knowledge purposes.
Students may also discuss market attractiveness and competitor retaliation as factors in selecting
markets and how they may assess the risk. If competitor retaliation is likely to be high and
effective, this territory may not be viable.
Students may equally draw on the so-called CAGE framework (cultural distance, administrative
and political distance, geographical distance and economic wealth distance) to assess the viability
of a particular strategy.
In terms of sustainability, students would be expected to consider the impact on performance; for
example, in drawing on the inverted U-curve, whereby complexity may erode the advantages of
internationalisation.
Equally, students may discuss whether sustainability is predicated on a staged, Uppsala-type
market expansion, or a global strategy, for example in the context of the so-called ‘Born Global’
firms (where internationalisation is anticipated by founders/owners).
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ST370: Business Strategy (MS)
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Question 6
Why have multi-national firms largely abandoned Matrix structures? What alternative
structures are available that might retain the best of the matrix and dispense with the
worst?
Indicative Answer
Johnson et al (2011) conceptualise matrix structures in the following form:
Students are expected to explain the matrix structure in Multi-nationals in terms of firms’ objectives
of integrating knowledge through multiple reporting channels. They are also characterised as
flexible (in people and change; task and structure – short-term project) and allows for dual
dimensions – authority and orientations (functional managers not getting wrapped up in own
concerns).
The weaknesses, however, are significant. These include: length of time to take decisions; unclear
job and task responsibilities; unclear cost and profit responsibilities and high degrees of conflict.
By way of illustration, in the lecture on this theme students were exposed to the case of Royal
Dutch Shell in 1994 whereby the general manager of Shell’s Berre refinery in France reported to
his country manager and the MD of Shell France and also [his] business sector head, the coordinator of refining as well as the functional head of Shell’s manufacturing.
Students should recognise that the matrix structure for multi-national firms promoted learning
across functions and countries, with the downside being inefficiency arising from multi-reporting,
uncertainty about responsibilities and conflict.
With respect to alternatives, students should consider some form of transnational structure.
Such a configuration might incorporate independent operating entities with shared capabilities (for
example, R&D…). There would remain economies of
scale and support from parent with systems, relationships
and culture to work together as a network.
The network structure, then, is a potential alternative,
especially when firms – depending on the sector –
recognise that innovation, new products and services,
knowledge, etc., are often located beyond the boundaries
of the firm. Competitive advantage, by this thinking, is
achieved by being able to manage these external
resources and develop the capabilities to incorporate
new thinking ideas at an optimal time.
Examples that candidates may consider here might be
P&G, Unilever, ABB, progressively, Nestlè and others.
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ST370: Business Strategy (MS)
May 2015