Question Paper

Business Policy & Strategy (MB311) : April 2005

Section A : Basic Concepts (30 Marks)
• This section consists of questions with serial number 1 - 30.
• Answer all questions.
• Each question carries one mark.
• Maximum time for answering Section A is 30 Minutes.
< Answer >
1. If Reliance Textiles purchases DCM Textiles (which is a smaller firm compared to Reliance) what is
this process of purchasing a small firms by a bigger firm is known as?
(a) Acquisition (b) Merger (c) Buy off (d) Synergy (e) Buy out.
< Answer >
2. Analyse, how HLL’s decision not to sell its soap manufacturing unit but to buy ITC agro division is
different from its strategy of running its cosmetic division?
(a) The first one is a business level strategy while the second one is a corporate level strategy
(b) The first one is a strategy implementation while the second one is a strategy formulation
(c) The first one is a deliberate strategy while the second one is an emergent strategy
(d) The first one is a corporate level strategy while the second o ne is a business level strategy
(e) The first one is an emergent strategy while the second one is a deliberate strategy.
< Answer >
3. Rolex watches are handmade of gold and stainless steel and are subjected to strenuous tests of quality
and reliability. This example has relevance to one of the Porter’s generic strategies Which of the
following is that?
(a) Differentiation strategy (b) Cost leadership strategy
(c) Focus strategy (d) Prospector strategy (e) Threat of substitutes.
< Answer >
4. Advertisements for products and services such as life insurance policies, mouthwash and deodorants
play upon fear. By showing the unfortunate consequences that a consumer faces if he does not use the
service or product, thereby, advertisers force the consumers to purchase the product or service. Which
of the following powers such ads use?
(a) Legitimate power (b) Coercive power (c) Expert power
(d) Referent power (e) Reward power.
< Answer >
5. The organization’s purpose of fundamental reason for existence is known as _________.
(a) Vision (b) Mission (c) Goal (d) Sub Goal (e) Objective.
< Answer >
6. A strategy that describes a company’s overall direction in terms of its general attitude towards growth
and management of its various businesses and product lines is known as
(a) Business strategy (b) Functional strategy
(c) Corporate strategy (d) Firm strategy
(e) Directional Strategy.
< Answer >
7. The process by which strategies and policies are put into action through the development of programs,
budgets, and procedures is known as
(a) Strategy formulation (b) Strategy implementation
(c) Strategy control (d) Strategy manipulation (e) Strategy direction.
< Answer >
8. Which of the following involves the ruthless use of power, coercion and manipulation to attain personal
goals?
(a) Machiavellianism
(b) Politics
(c) Organizational development
(d) Quinn’s incremental model
(e) Re-engineering.
< Answer >
9. A popular strategy that occurs when two or more companies form a temporary partnership for the
purpose of capitalizing on some opportunity is called a(n)
(a) Merger (b) Joint venture (c) Takeover
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 (d) Acquisition (e) Proxy contest.
< Answer >
10. In which of the following stages is the rivalry between companies intensified?
(a) Beginning stage (b) Growing stage (c) Mature stage
(d) Shakeout stage (e) Decline stage.
< Answer >
11. The reasons for mergers and acquisitions are
(a) To increase managerial staff and to minimize economies of scale
(b) To reduce tax obligations and increase managerial staff
(c) To create seasonal trends in sales and to make better use of a new sales force
(d) To provide improved capacity utilization and to gain new technology
(e) To divest assets.
< Answer >
12. Which of these, according to Porter, is not a support activity in a manufacturing firm's value chain?
(a) Firm infrastructure (b)
Marketing and sales
(c) Human resource management (d) Procurement
(e) Technology and systems development.
< Answer >
13. _____________ are arrangements whereby, for a fee, one company provides personnel to perform
general or specialized management functions for another company
(a) Franchise agreements (b) Management contracts
(c) Joint ventures (d) Export agreements
(e) Licensing agreement.
< Answer >
14. All of the following are factors that often trigger companies to increase sales through international
expansion except
(a) Maturity of their domestic markets
(b) Slower domestic than foreign growth rates
(c) Ability to gain foreign product capabilities
(d) The desire to provide foreign aid to underdeveloped countries
(e) Capture new market opportunities.
< Answer >
15. When increased economies of scale provide major competitive advantages, which of these strategies
would be effective?
(a) Backward integration (b) Product development (c) Horizontal integration
(d) Forward integration (e) Leveraged buyout.
< Answer >
16. Which of the following, refers to economic conditions that may adversely affect a company's ability to
operate profitably and use its funds to meet its strategies?
(a) Economic risk (b) Political risk (c) Cultural risk
(d) Technological risk (e) Legal risk.
< Answer >
17. If ITC (Tobacco division) starts its own chain of retail stores from where it sells its cigarettes, it is an
example of
(a) Horizontal Integration (b) Backward Integration
(c) Forward Integration (d) Conglomerate diversification
(e) Concentric diversification.
< Answer >
18. Suppliers have more bargaining power in all of the following situations except
(a) Their products have few substitutes and are important to buyers
(b) The buyer’s industry is not an important customer to the supplier
(c) Differentiation makes it costly for buyers for switching to other suppliers
(d) Suppliers have distinct marketing and sales function
(e) Buyers can integrate backwards.
< Answer >
19. Merger means any transaction that forms one economic unit from two or more previous ones. Which of
the following takes place between firms engaged in different stages of production operation?
(a) Horizontal merger (b) Conglomerate merger
(c) Vertical merger (d) Synergy (e) Acquisition.
< Answer >
20. An industry in which no firm has a large market share and each firm serves only a small piece of the
total market in relation with other competitors is known as
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 total market in relation with other competitors is known as
(a) Multidomestic (b) Fragmented (c) Global
(d) Transnational (e) International industries.
< Answer >
21. In which of the following stages of an industry life cycle, the technological know-how diminish as an
entry barrier?
(a) Embryonic stage (b) Growth stage (c) Shake out stage
(d) Mature stage (e) Decline stage.
< Answer >
22. An organization has various objectives like profits, employees well being, and customer satisfaction.
The objective of organizational development is
I. Greater trust and collaboration between managers and business units
II. Effective decision making
III. Increased innovation
IV. Better customer service and higher profits

(a) Only (I) above (b) Only (II) above

(c) Both (I) and (II) above (d) (I), (II) and (III) above
(e) All (I), (II), (III) and (IV) above.
< Answer >
23. Which of the following is not a financial defensive measure against acquisition?
(a) Adjustments in asset and ownership structure
(b) Leveraged recapitalization
(c) Golden parachutes
(d) Good cash flow relative to current stock prices
(e) Poison puts.
< Answer >
24. Which of the following reveals a firm’s financial risk statement?
(a) Leverage ratio (b) Liquidity ratio (c) Activity ratio
(d) Profitability ratio (e) None of the above.
< Answer >
25. The major advantage of the large business organization compared to small business organization is
(a) Economies of scale (b) Research and Development
(c) Logistics (d) Profit margin (e) Human resource
management.
< Answer >
26. Which among the following is studied with reference to the size, growth rate, age, composition, sex
composition, life expectancy etc. of the population?
(a) Social environment (b) Cultural environment
(c) Ethical environment (d) Demographic environment
(e) Economic environment.
< Answer >
27. Which power is used in the advertisements of shirts like Van Heusen and Arrow to show how group
acceptance takes place through wearing their shirts?
(a) Expert power (b) Coercive power (c) Legitimate power
(d) Referent power (e) Reward power.
< Answer >
28. In which of the following structures, functional and product forms are combined simultaneously at the
same level of the organization?
(a) Divisional structure (b) Functional structure (c) Simple structure
(d) Matrix structure (e) Geographic structure.
< Answer >
29. Which of the following ratios measures effective utilization of a firm’s resources?
(a) Liquidity ratios (b) Activity ratios (c) Profitability ratios
(d) Leverage ratios (e) Turnover ratios.
< Answer >
30. Which of the following control reflects the need to thoroughly reconsider the firm’s basic strategy based
on a sudden unexpected event?
(a) Implementation control (b) Special alert control
(c) Premise control (d) Operational control (e) Strategic surveillance.

END OF SECTION A
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4
 Section B : Caselets (50 Marks)
• This section consists of questions with serial number 1 – 7.
• Answer all questions.
• Marks are indicated against each question.
• Detailed explanations should form part of your answer.
• Do not spend more than 110 - 120 minutes on Section B.

Caselet 1
Read the following caselet carefully and answer the following questions:
1. What are the opportunities and threats in the external environment?
(6 marks) < Answer >
2. Is the president correct in refusing the suggestions of sales and marketing people? What are the factors that may
hinder the success of the firm in future?
(6 marks) < Answer >
Gilbert Brown, the president of IMC, leaned back in his chair and reflected with well-deserved satisfaction on the
success of his company, which produces and distributes a line of farm machinery. At a meeting of distributors from
various parts of the world, Brown had been urged to introduce new models to satisfy the changing needs of customers.
The president, who had an engineering background (did his B.Tech degree from Transworld University, USA),
recognized the implications of the distributors’ suggestion. It would require greater investments in research and
development, because R & D is an inevitable area to compete in today’s marketing scenario. Furthermore, the changes
in the highly automated production line would be very costly indeed. Also having a greater variety of models would
require stocking many more spare parts. Depending on the kinds of changes, mechanics also might need to be retrained.
Unless and until the front line supporters and workforce understand the changes that are occurred in the organization,
the objective for any change would be meaningless.
Reflecting on previous staff meetings, the president realized that sales and marketing people always wanted a greater
variety of models but have not acknowledged the costs involved in changing models. After all, the company had been
extremely successful with just a few models. Some of the models are currently successful in western parts of the
country and creating tremendous records in the respective areas. Consequently, the President decided against the
introduction of new models. Instead, he considered improving the current models and reducing the cost and price. He
felt that what the customer really wants is value. Nevertheless, to test his judgment, the president asked a consultant for
an opinion.
Caselet 2
Read the following caselet carefully and answer the following questions:
3. What are the advantages and limitations of planning under a decentralized system such as Sysco’s?
(8 marks) < Answer >
4. Discuss the corporate level strategies in the context of Sysco.
(6 marks) < Answer >
5. Do you think Sysco had a good blend of strategic and operational planning? Discuss with appropriate examples
from the caselet.
(8 marks) < Answer >
In 1969 John Baugh, president of Houston based Zero Foods, persuaded a former Ford Motor and Cooper Industry
executive, John Woodhouse, and the owners of eight other food wholesalers to form a national food distribution
company. Sysco’s (the name comes from Systems and Services Company), sales and number of employees stands at
$10 billion and 24,000 respectively which is 70 times higher than what it was at the time of inception.
Sysco is the largest marketer and distributor of food service products in the United States. Its more than 3,000 suppliers
coming from different countries. It has about sixty operating companies selling 150,000 products to a quarter of a
million customers in North America.
In late 1992 Sysco expanded its customer base and product offerings to include medical and surgical supplies when it
contracted with a major Memphis, Tennessee, hospital group for $25 million worth of annual business. Restaurants
comprise more than half of Sysco’s sales, and hospitals and nursing homes make up more than 10 percent. Schools and
colleges along with hotels and motels also account for more than
5 10 percent of sales.
colleges along with hotels and motels also account for more than 10 percent of sales.
Sysco’s growth has been not only through internal expansion but also through a total of more than forty carefully
chosen acquisitions. Each acquired firm must be profitable, and the management must plan to stay. Indeed, part of
every purchasing price is to be earned through future profits of the firm as a Sysco operating company. Although Sysco
tends to sell any manufacturing parts of acquired companies, it also tends to treat each acquisition as a new partner in
the business and maintains a decentralized managerial planning and operating system.
This decentralized system is necessary to ensure that Sysco accounts for local tastes–chicory coffee in Louisiana and
baked beans in molasses in New England–as well as fosters innovation. Indeed, Sysco’s move into medical supplies
actually began when the Nebraska sales force began shipping supplies to nursing homes because their customers were
unhappy with their regular suppliers. Sysco’s Tennessee unit in Memphis restricted salespeople to certain geographic
districts in an effort to reduce travel time and thereby increase selling time. It worked. Its success led to its adoption by
other Sysco operating companies. Despite the success of these endeavors, however, no operating manager has been
ordered to adopt them. The heads of the operating companies are free to adopt or not adopt such practices as they see
fit.
Pay-for-performance is one of the few central policies employed by Sysco. Bonuses for all managerial personnel are
based on exceeding planned levels of profits as a percentage of revenues and return on capital. That ensures that
everyone is striving for the same set of objectives for the overall organization growth.
Sysco continues to expand, although it also prunes units that prove not to be profitable. It expects to continue to
maintain its performance, especially because it is several times the size of its top five competitors added together.
Caselet 3
Read the following caselet carefully and answer the following questions:
6. Describe the strategies used by Dow and Du Pont. What are the advantages and disadvantages?
(8 marks) < Answer >
7. What strategies Dupont adopted to survive in the changed environment?
(8 marks) < Answer >
Du Pont (E.I. du Pont de Nemours & Co. of Wilmington, Delaware) was founded as a gunpowder manufacturer early in
the 1800s. Explosives dominated its business through World War I. After the war, it began to diversify. Acquisitions
and joint ventures became more prominent during the last fifteen years. In 1981 it acquired Conoco, a major oil
company. In 1991 Du Pont joined with prescription drug company Merck & Co. In 1992, in a joint venture with Crop
Genetics, Du Pont moved into the bioinsecticide field. In 1993 it bought Imperial Chemical’s nylon business, and today
it remains the largest chemical company in the United States.
Dow (The Dow Chemical Co. of Midland, Michigan) was formed in the late 1800s. Its first product was chlorine
bleach, and numerous others soon followed. The need for chemicals during each of the world wars resulted in Dow
emerging as the second-largest chemical company in the United States. During the 1980s, Dow made several
acquisitions, most notably Merrell pharmaceuticals, Texise cleaning products, and Essex Chemical, a leading producer
of automotive sealants and adhesives. In the late 1980s, Dow joined with Eli Lilly and Company’s fungicide business to
create Dow Elanco, a major producer of agricultural chemicals. Thus, like Du Pont, Dow became a diversified chemical
giant.
For more than forty years, both Dow and Du Pont employed a similar strategy. Both borrowed heavily and used the
funds for expansion, relying on rising demand coupled with price increases to maintain healthy levels of profit. The
huge cash flow necessitated by this strategy could sometimes lead to problems. If the expansion was more rapid than
the increase in demand, prices would have to be cut and profits would suffer. Although that happened occasionally, it
began to occur more and more frequently by the end of the 1980s.
In 1991 Du Pont decided to change its strategy by reducing both capital spending and costs. This focused the company
on getting cash back quickly. By 1993 Du Pont was able to provide for all capital funding without any substantial
borrowing. And 1994 was even better. Analysts were expecting Du Pont to raise its dividend payments to stockholders
in 1994.
Du Pont also reorganized. It eliminated nearly 14,000 employees early in 1994. Du Pont also decentralized into twenty
strategic business units (SBUs) based on products and industry, and it changed its pattern of marketing from a
technology-driven approach to a market-driven one.
Dow, on the other hand, remained with the traditional strategy. In 1990 it expanded basic chemicals, and the resulting
glut caused a drop in prices. As a result, earnings fell in 1992. To raise cash to cover expansion and dividends, Dow had
to sell assets-a billion dollars worth in 1993 alone. It also announced that it would focus on global competitiveness and
cut back its corporate headquarters workforce.
Thanks to cutting back on spending in 1994 and a rebound in ethylene prices, Dow was in good financial shape that
year, although analysts were not expecting Dow to be able to raise its dividend payments for several years. Dow did,
however, seem to be recognizing the need to change its strategy, too.
6
however, seem to be recognizing the need to change its strategy, too.
Du Pont recognized the need to change strategy before Dow did. Given the high cost of capital, a strategy of focusing
on return on assets seemed to make more sense than the one that focused on market share.
END OF SECTION B

Section C : Applied Theory (20 Marks)

• This section consists of questions with serial number 8 - 9.
• Answer all questions.
• Marks are indicated against each question.
• Do not spend more than 25 -30 minutes on section C.

8. Explain the economic and financial factors that stimulate Leveraged Buy Outs (LBOs). What are the typical
characteristics of firms that can be good targets for LBOs?
(10 marks) < Answer >
9. The development of the Tablet PC has revolutionized the way individuals will work with Laptop. Briefly discuss
the different stages of Product Life Cycle.
(10 marks) < Answer >
END OF SECTION C

END OF QUESTION PAPER

Suggested Answers
Business Policy & Strategy (MB311) : April 2005
Section A : Basic Concepts
1. Answer : (a) < TOP >

Reason : Acquisition is the process of acquiring a smaller firm by a relatively larger firm.
2. Answer : (d) < TOP >

Reason : HLL’s strategy for running its cosmetic or food products is a business level strategy which is
formulated to meet the goals of a particular business also called line of business strategy
while its decision to buy ITC agro division is a corporate level strategy which addresses
what business the organization will operate, how the strategies of these business will be co-
ordinated to strengthen the organization’s competitive position and how resources will be
allocated.
3. Answer : (a) < TOP >

Reason : A generic business level strategy outlined by Michael E. Porter that involves attempting to
offer products or services that are unique in the industry.
4. Answer : (b) < TOP >

Reason : Advertisements for products and services such as life insurance policies, mouthwash, and
deodorants play upon fear. By showing the unfortunate consequences that a consumer faces
if he doesn’t use the service or product, advertisers force the consumers to purchase the
product or service. Such ads use Coercive power. This is the power to influence behavior
through punishment or by withholding rewards. (a) Legitimate power stems from a
member’s perception that the group has the legitimate right to influence him (c) Expert
power results from the expertise gained in due course of time either by an individual or a
group. (d) Referent power is the power that results from being admired, personally identified
with, or liked by others. (e) Reward power is based on the perception one has about
another’s ability to reward him.
7
 another’s ability to reward him.
5. Answer : (b) < TOP >

Reason : Mission is the organization’s purpose of fundamental reason for existence

6. Answer : (c) < TOP >

Reason : Corporate strategy describes the company’s overall direction in terms of its general attitude
toward growth and the management of its various businesses and product lines. Corporate
strategies fit in the three main categories of stability, growth, and retrenchment. Answers a,
b, d, e are incorrect since, business strategy, functional strategy and firm strategy do not deal
with the overall direction of the firm in terms of its general attitude toward growth and
management of its various businesses and product lines.
7. Answer : (b) < TOP >

Reason : Strategy implementation is the process by which strategies and policies are put into action
through development of programs, budgets and procedures. Strategy implementation is
conducted by middle and lower management. Answers a, c, d, e are incorrect since, strategy
formulation stage is a prerequisite for implementation and control is the post requisite to
implementation.
8. Answer : (a) < TOP >

Reason : Machiavellianism involves the ruthless use of power, coercion and manipulation to attain
personal goals.
9. Answer : (b) < TOP >

Reason : In a Joint venture, two or more companies form a temporary partnership for the purpose of
capitalizing on opportunities like market access, technology etc. The other cases of merger,
takeover or acquisition result in a permanent relationship, as the identity of one of the
entities is lost after the event. Proxy contest is a bid for gaining membership on the board of
directors of a company, or to unseat the current management.
10. Answer : (d) < TOP >

Reason : Rivalry between companies intensifies as an industry enters the shakeout stage.
11. Answer : (d) < TOP >

Reason : Two reasons for.

Mergers and acquisitions are sometimes attempted to increase capacity utilization through
accessing new markets for the products, and to gain new technology, which gives a
competitive edge in the industry.
12. Answer : (b) < TOP >

Reason : According to Porter, marketing and sales is not a support activity in a manufacturing firm's
value chain. It is a primary activity in the value chain. Infrastructure, Human resource
management, procurement and Technology and systems development are considered as the
supporting activities.
13. Answer : (b) < TOP >

Reason : Management contracts are arrangements whereby, for a fee, one company provides
personnel to perform general or specialized management functions for another company.
14. Answer : (d) < TOP >

Reason : The factors that often trigger companies to increase sales through international expansion are
the maturity of their domestic markets, slower domestic than foreign growth rates, ability to
gain foreign product capabilities and the incentive to capture new market opportunities.
15. Answer : (c) < TOP >

Reason : Horizontal integration, which involves the merger with a competitor in the same industry,
will provide increased economies of scale and competitive advantage to a company, due to
higher scale of operations.
16. Answer : (a) < TOP >

Reason : Economic risk refers to the economic conditions that may adversely affect a company's
ability to operate profitably and use its funds to meet its strategies.
17. Answer : (c) < TOP >

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 Reason : ITC (Tobacco division) starting its own chain of retail stores from which it sells its
cigarettes is an example of a forward integration strategy, as the company which is primarily
into manufacturing, is moving forward towards its immediate customers in the value chain.
In horizontal integration the firm’s long-term strategy is based on growth through the
acquisition of one or more similar firms operating at the same stage of production-marketing
chain. Backward integration takes place when a firm assumes a function previously provided
by a supplier. Conglomerate diversification is diversification into a new business area that
has no obvious connection with any of the company’s existing areas. It is also called
unrelated diversification. Concentric diversification occurs when an organization diversifies
into a related, but distinct business. In other words, it involves the acquisition of business
that are related to the acquiring firm in terms of technology, markets or products.
18. Answer : (e) < TOP >

Reason : Suppliers cannot have bargaining power when buyers can integrate backwards.
19. Answer : (c) < TOP >

Reason : Vertical merger takes place between firms engaged in different stages of production
operations.(a)A horizontal merger is a merger between two firms involved in the same kind
of business activity.(b) Conglomerate mergers involve firms engaged in unrelated types of
business activity.(d)Synergy is situation in which the whole is greater than its parts. In
organizational terms, the fact that departments that interact cooperatively can be more
productive than if they operate in isolation. (e) An acquisition is defined as the purchase of a
controlling interest in a firm, via a tender offer for the target shares
20. Answer : (b) < TOP >

Reason : In a fragmented industry, no firm has a large market share and each firm serves only a small
piece of the total market in competition with others. Hence it is difficult for any single
company to have a dominant position in the market A multi-domestic industry is one in
which the competition within the competition within the industry is essentially segmented
from country to country. A global industry is one in which competition within the industry
crosses national borders. International industries can be characterized along a continuum
from multi-domestic to global. Transnational are organizations, which operates in different
continents.
21. Answer : (b) < TOP >

Reason : By the time an industry enters its growth stage, the importance of technological know-how
as an entry barrier diminishes. Other entry barriers also tend to be low because few
companies manage to achieve significant economies of scale or have differentiated their
product sufficiently to guarantee brand loyalty. An industry that is just beginning to develop
is referred to as an embryonic industry. Growth at this stage is slow due to factors such as
buyers unfamiliarity with the industry’s product etc. In the Shake out stage the rate of growth
slows down in course of time. In Mature stage the market is completely saturated and
demand is limited to replacement demand.
< TOP >
22. Answer: (e)
Reason: The objective of organizational development is, greater trust and collaboration between
Managers and business units, effective decision-making, increased innovation and better
customer service and higher profits.
< TOP >
23. Answer : (d)
Reason : Organizations generally put some financial defenses to thwart acquisitions. They are,
adjustments in asset and ownership structure; leveraged recapitalizations; golden parachutes;
and poison puts. But, good cash flow relative to current stock prices make the firm attractive
for acquisition.
24. Answer : (a) < TOP >

Reason : Leverage ratio reveals a firm’s financial risk statement.(b) Liquidity ratios measure a firm’s
capacity to meet its short-term financial obligations.(c) Activity ratios reflect a firm’s
efficiency in resource utilization.(d) Profitability ratios provide a firms overall economic
performance.
25. Answer : (a) < TOP >

Reason : The major advantage for the large business organization compared to small business
organization is economies of scale ,where the large organization can produce product or
service in large numbers thus reducing the unit cost of product.(b) Research and
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 service in large numbers thus reducing the unit cost of product.(b) Research and
Development is the work directed towards the innovation, introduction, and improvement of
products and processes.(c) Logistics is the organization of services and supplies or
organization of any complex operations.(d) Profit margin is the relationship of gross profits
to net sales in a business (e) Human resource management is the management of various
activities designed to enhance the effectiveness of an organization’s work force in achieving
organizational goals.
26. Answer : (d) < TOP >

Reason : Demographic environment is studied with reference to the size, growth rate, age,
composition, sex composition, life expectancy etc. of the population.(a)Social environment
has an impact on the strategic management process with in the organization in the areas of
mission, setting of objectives and decisions related to products and markets.(b) Cultural
environment often helps to pinpoint market opportunities. Companies often gain a
competitive edge by meeting the cultural needs that have been so far ignored by their
competitors. (c) Ethical environment is the identification of the moral principles and
standards that guide behavior in the world of business.(e) Prime interest rates, inflation rates
and trends in the growth of the Gross National Product(GNP), the general availability of
credit, the level of disposable income and the propensity to spend at the national and
international levels influence the strategic planning of the organization. All these factors
constitute the economic environment of the organization
27. Answer : (d) < TOP >

Reason : Referent power is used in the advertisements of shirts like Van Heusen and Arrow to show
how group acceptance takes place through wearing their shirts. i.e. referent power is the
power that results from being admired , personally identified with or liked by
others.(a)Expert power is the power that is based on the possession of expertise that is valued
by others.(b)Coercive power is the negative side of reward power, based on the influencers
ability to punish the influence.(c) Legitimate power is the power that stems from a position’s
placement in the managerial hierarchy and the authority vested in the position. (e)Reward
power is the power based on the capacity to control and provide valued rewards to others.
28. Answer : (d) < TOP >

Reason : Matrix structures are functional and product forms combined simultaneously at the same
level of the organization.(a) Divisional structure is a type of departmentalization in which
positions are grouped according to similarity of products, services or markets. The
Divisional structure does not promote specialization of labor (b) Functional structure is a
type of departmentalization in which positions are grouped according to their main
functional area or specialized area.(c) In simple structure all the strategic and operating
decisions are under the control of the owner-manager(e)Geographic structure is a form of
divisional structure involving divisions designed to serve different geographic areas.
29. Answer : (b) < TOP >

Reason : Activity ratios measure how effectively a firm is using its resources I, e to say this reflects a
firm’s efficiency in resource utilization.(a) Liquidity ratios measures a firm’s capacity to
meet its short-term financial obligations.(c) Profitability ratios provide a firm’s overall
economic performance. (d) Leverage ratios indicate a firm’s financial risk.
30. Answer : (b) < TOP >

Reason : Special alert control reflects the need to thoroughly reconsider the firm’s basic strategy
based on a sudden unexpected event.(a) Implementation control determines whether or not
the overall strategy should be changed in light of the unfolding events and results associated
with incremental steps and actions that implement the overall strategy.(c)Premise control
helps to check systematically and continuously whether or not the premises set during the
planning and implementation are still valid.(d) Operational control are concerned with
“steering” the company’s future direction and they are concerned with provide action
controls.(e) Strategic surveillance is designed to monitor a broad range of events inside and
outside the company that are likely to threaten the course of a firm’s strategy.

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 Section B : Caselets
1. The marketing environment includes the forces of competition, policies, society, economic conditions and
technology. These external forces directly or indirectly influence the organizations’ activities.
IMC has the following opportunities:
• As a well-experienced company, IMC has a fair chance to enter into new markets as well as new products.
• The company has the opportunity to improve its technological capabilities that will improve the product
quality.
• There is a good chance to acquire new customers easily.
Threats:
• As the company has no plans to improve new models, competitors may take advantage of this opportunity.
• New-comers will enter the segment with niche strategies.
• Changing customer needs, fashion and styles.
• Cut-throat competition
< TOP >
2. In an open system the companies are always open to the ideas, suggestions and views given by the employees,
customers, distributors etc. The type of open climate will improve the identity of employees where they can feel
the sense of belongingness to the organization. Customers will understand the efforts of organization in providing
high quality goods and distributors will be encouraged to get their goods according to their specifications and
requirements.
In the case, it is clear that the company is not encouraging an open system. Mr. Brown has not shown interest in
taking ideas of its distributors and he insists on developing the existing products instead of introducing new
models. As change is a continuous process. Any organization in today’s competitive environment has to
constantly adopt to the changing environment. The president is not correct in his decision to refuse change.
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3. Advantages of decentralization
i. Relieves the top-level management of some burden of decision-making.
ii. Encourages decision-making and assumption of authority and responsibility
iii. Gives managers more freedom & independence in decision-making.
iv. Promotes establishment and use of broad controls that increases motivation.
v. Comparisons of different departments made possible.
vi. Facilitates setting up of profit centers
vii. Facilitates product diversification
viii. Facilitates the development of general managers.
ix. Aids in adapting to changing environments.
Limitations of Decentralization:
i. It becomes difficult to have a uniform policy.
ii. More complexity in coordination of decentralized units
iii. The upper-level management may lose control
iv. May be limited by inadequate control techniques
v. May be constrained by inadequate planning and control system.
vi. Can be limited by availability of qualified managers.
vii. Involves considerable expenses on training for managers
viii. May be limited by external sources, such as government.
ix. Economies of scale of operations may not favor
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4. Corporate level strategy addresses the businesses that the organization will be in and how the strategies of those
businesses will be coordinated to strengthen the firm’s competitive position and also for a better allocation of
resources among businesses. A company, such as Sysco, which is operating in different lines of businesses with
about sixty operating companies, cannot do without a corporate strategy. Sysco seems to follow a value based
approach. Value based strategies provide general guidelines rather than a narrowly focused plans. That is why the
heads of operating companies are given freedom to adopt a policy or practice of their choice while they contribute
to the overall organizational goals.
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5. Strategic planning is the top-management level activity whereas operational planning is taken care by the lower

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 level. The strategic planning provides the guidance and boundaries for operational planning. Strategic planning is
concerned about (effectiveness) doing the right things, such as acquisition of new business units and pruning the
unprofitable one, whereas, operational planning deals with (efficiency) getting those things done right. At Sysco,
the top management lays down the rules of profitability and return in form of salaries and incentives and the
operational planning decides upon the usage of resources in day-to-day operations
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6. Both Du Pont and Dow companies were contemporaries, each started with a single product in 1800s. Over the
years both the companies have expanded through diversification. The diversification was through mergers,
acquisitions and joint ventures.
For more than 40 years both the companies pursued the same strategy of funding the expansion: they borrowed
heavily for the expansion, relying on the rising demand coupled with price increases to maintain healthy levels of
profit. Some times the expansion was more rapid than the demand, which led to price cuts that affected profits. It
seems that both the companies were trying to increase their market shares.
In 1991 Du Pont changed its strategy of expansion. The company chose to use Return on Investment (ROI) rather
than market share as the criterion for capital investments. The company also took measures to control and reduce
costs. The company eliminated nearly 14,000 employees, went for reorganization in terms of decentralization and
setting up of SBUs based on products and industry. Its marketing approach has changed from technology -driven to
market-driven.
The strategy of borrowing funds for expansion, adopted by both Du Pont and Dow, yields better results when the
ROI is greater than the cost of funds. The return on shareholders capital will be more with the use of leverage.
Using debt capital does not allow dilution of ownership control.
Use of debt capital leads to the cash flow problems and has adverse effect on shareholders wealth. When the
demand is less than the supply the company will not be able to service the debt it results in erosion of capital.
Du Pont’s new strategy proves to be successful compared to the traditional strategy followed by Dow. The SBUs
will be able to assess the performance of each product or industry. The decentralized approach leads to better and
quick decision making at unit level. However, the new structure may prove to be costly.
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7. The traditional approach followed by Dow is useful in growing markets and when the company’s portfolio of
products is small. The expansion can be funded with debt instead of equity so that ownership remains in the same
hands. However, when the market is stagnating or becoming very competitive ROI approach proves to be better,
as the market share may not guarantee a rate of return.
When the company is small it need not have SBUs as it cannot afford. But when the company diversified into so
many products and industries the decentralized organization structure and SBUs will be of immense help to the
management.
In a competitive market it is better to have market-driven approach than a technology driven-approach. Cost
control is very much essential in such markets.
Its has also taken the following steps to survive in the changed environment:
1. Layoffs
2. Decentralization
3. Diversification
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Section C: Applied Theory
8. General economic and financial factors stimulating LBOs
– Responses to threat of unwanted takeovers
– Q-ratio declining sharply — cheaper to buy capacity in financial markets than in real asset markets
– Opportunities to realize tax savings through recapitalization
– Financing innovations — high-yield bonds (junk bonds) making public financing available to companies
below investment grade
Typical target industries
• Basic, non-regulated industries
– Predictable and/or low financing requirements
– Predictable/stable earnings
– Low income elasticity of demand
– Sales fluctuate less with GNP
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 – Mature industry with limited growth opportunities
• High-tech industry less appropriate
– Shorter history of profitability
– Greater business risk
– Fewer leveragable assets
– Command high P/E multiples well above book value
• Likely industries for LBOs
– Retailing, Textiles, Food processing, Apparel, Soft drinks, FMCG
Other target characteristics
• Track record of capable management
• Strong market position within industry to enable it to withstand economic fluctuations and competition
• Highly liquid balance sheet
– Little debt, either short or long term
– Large unencumbered asset base — for collateral
– High proportion of tangible assets with fair market value above net book value
Sources of MBO targets
• Divestitures of divisions by public companies
• Private companies with low growth records
Public corporations selling at low P/E multiples representing large discounts from book values

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9. A product that is just beginning to develop (for example Tablet P.C) is referred to as introductory stage. Growth at
this stage is slow due to factor such as buyers unfamiliarity with the product, inability of companies to reap any
significant economies of scale resulting in high prices a nd poorly developed distribution channel. At this stage in a
product evolution, barrier to entry tend to be based access to key technological know- how, rather than cost
economies or brand loyalty. As a product develops and it enters the growth stage, the demand of the product picks
up. As several new customers enter the market, first time demand of Tablet P.C will expand taking the product
from introductory to growth stage. In growth stage consumer’s familiarity with Tablet P.C increases, prices fall
due to attainment of experience and economies of scale by companies and the distribution channel starts
developing.
As the Tablet P.C enters the growth stage the importance of technological know -how as an entry barrier for
companies diminishes. Other entries barrier also tend to be low because few companies manage to achieve
significant economies of scale and are not in a position to differentiate their product to create brand loyalty. Threat
from potential competitor is therefore highest at this point. Usually, however, high growth in the product means,
that new entrants can be easily absorbed in the industry without any significant increase in competitive pressure
.In this stage the Tablet P.C market will expand.
The rate of growth in product slows down in course of time and it enters the maturity stage were demand
approaches the saturation level. Most of the demand that exist is replacement demand. Here rivalry among
industry intensifies due excess supply and often price war can be seen between the companies in this stage.
The end of the maturity stage leads to decline stage where, the market is completely saturated and demand is
limited. Growth is limited and it’s due to demographic factor.

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