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Strategic Management for the
Primary Discussion Response is due by Friday (11:59:59pm Central), Peer Responses are due by Tuesday (11:59:59pm Central).
Primary Task Response: Within the Discussion Board area, write 300-600 words that respond to the following questions with your thoughts, ideas, and comments. This will be the foundation for future discussions with your classmates. Be substantive and clear, and use examples to reinforce your ideas.
Review the Industry Conditions Report and CapStone Courier found in the Reports section of the left hand menu in the CapSim simulation. Also, review the CapStone Team Member Guide. Based on your initial review of the CAPSIM Capstone Business Simulation, what have you have identified as the key business issues that will impact your company? Prepare to discuss this issue with the other members of your team.
Your discussion should include the following:
Discuss the current situation in the CapSim simulation and the recent changes to the industry and competitive environment.
What competitive challenge is faced by your company? What are the opportunities and threats (Pettus, Ch. 4)?
Applying the business level strategies discussed in Pettus, Chapter 4, and market segment strategies discussed on page 24 of the Team Member Guide, explore possible strategic directions for your company and various sensor products. Reading and responding to the posts of your teammates is highly recommended.
Responses to Other Students: Respond to at least 2 of your fellow classmates with at least a 100-word reply about their Primary Task Response regarding important concepts to further explore. To help you with your discussion, please consider the following questions:
What additional insights or alternative perspectives can you offer your colleague?
What additional questions do you have after reading the posting?
What differences or similarities do you see between your posting and other classmates' postings?
Reference
CAPSIM. (2013). Retrieved from http://www.capsim.com
Capstone Business Simulation® and
Comp-XM®:
Analysis and Assessment
Michael L. Pettus, Ph.D.
ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon may be reproduced or
used in any form or by any means- graphic, electronic, or mechanical, including photocopying, recording,
taping, Web distribution, or information storage and retrieval systems without the written permission of the
author, Michael L. Pettus. mpettus@millikin.edu
Copyright 2012
® is a registered trademark of Management Simulations, Inc.
6th Edition
2
“I like this new 6th edition” Professor Renee English
Webster University
“This text is excellent as a strategic management text which uses the Capstone
simulation and cases to explain the linkages of strategic management concepts to
real world business problems.”
Joseph Mahoney, Ph.D.
Caterpillar Chair in Strategic Management
University of Illinois
Associate Editor, Strategic Management Journal
“If you use the Capstone simulation this strategic management text must be used.
No other strategic management text can drive the concepts of strategic management
into a real world based simulation.”
Peter Wright, Ph.D.
Free Enterprise Chair in Strategic Management
University of Memphis
3
Acknowledgments
I would like to thank many people for their hard work and dedication to the
construction of this book. First, I would like to thank Dan Smith, founder of the
Capstone Business Simulation, for giving me the opportunity to prepare the book.
Second, I would like to thank all the students who spent hundreds of hours
word processing this book: Karen Knight and Tim Wiggenbach deserve special
recognition. Amanda Walker was especially helpful in the construction of this
second edition. Denisa Smaldone was very helpful in the development of the third
edition. Victoria Dudleston was instrumental in the constructing of the fourth
edition. Kelsey Lee was very important, and made significant contributions, in the
construction of the 5 th
edition. Audra Davis was crucial in terms of assistance of the
updated 5 th
edition. Maddison Harner was outstanding in terms of assistance in
creating the 6th edition. Someday all of you will walk with industry giants.
Third, there are two people who were vital to the construction of this book:
May Zelner of Capstone Business Simulation and Hans Royal-Hedinger of Millikin
University. Without the hard work of these individuals, this book would never have
been accomplished. If I were to pick a number of individuals to start a business,
May and Hans would be among my ten top picks in the world! Someday both of
you will walk with captains of industry.
Fourth, I would like to thank Eddie Schwertz of Webster University for his
review of the 6th edition
4
Michael L. Pettus earned a PhD in strategic management from the University of
Illinois in 1997 and has more than 30 years of global experience in airline, airfreight
and trucking industries. He is published in the Academy of Management Journal, the
Strategic Management Journal, and many leading practitioner journals. He is the
author of Growth from Chaos (2003: Praeger) which explores corporate growth in
deregulated transportation industries. This book, Strategic Management for the
Capstone Business Simulation and Comp - XM, which is now in its 6th edition,
explains how the content of strategic management is integrated into business
simulations.
5
This book is dedicated to CAT.
6
Summary Table of Contents
Chapter 1 ..................................................................................................... 15
Managing Environmental Turbulence ..................................................... 15
Chapter 2 ..................................................................................................... 37
Industry Analysis and Industry Evolution for the 21 st Century ............ 37
Chapter 3 ..................................................................................................... 59
Utilizing Internal Analysis to Build Competitive Advantage Over
Rivals ............................................................................................................ 59
Chapter 4 ..................................................................................................... 79
Business Level Strategy .............................................................................. 79
Chapter 5 ..................................................................................................... 97
Analysis of Markets and Positioning......................................................... 97
Chapter 6 ................................................................................................... 121
Growth by Internal Development ........................................................... 121
Chapter 7 ................................................................................................... 141
Corporate Level Strategies and Restructuring ...................................... 141
Chapter 8 ................................................................................................... 167
Growth Via Strategic Alliances ............................................................... 167
Chapter 9 ................................................................................................... 191
Acquisition Strategies ............................................................................... 191
Chapter 10 ................................................................................................. 215
International Strategies ............................................................................ 215
Chapter 11 ................................................................................................. 245
Strategic Leadership Decision Making ................................................... 245
Chapter 12 ................................................................................................. 267
Wealth Creation ........................................................................................ 267
Chapter 13 ................................................................................................. 283
Conducting Case Analysis: An Exercise in Wealth Creation ............... 283
Chapter 14 ................................................................................................. 295
Comp-XM® ............................................................................................... 295
Appendix .................................................................................................... 313
Glossary ..................................................................................................... 315
Index ........................................................................................................... 321
7
Detailed Table of Contents
Chapter 1 ..................................................................................................... 15
Managing Environmental Turbulence ...................................................... 15 Learning and Assessment Goals .....................................................................................16 U.S. Economic Collapse ...................................................................................................18 U.S. Government Stimulus Plan .....................................................................................20 U.S. Auto Industry ...........................................................................................................20 International Recession ...................................................................................................21 The "Secret" Global Bailout ...........................................................................................23
Economic Status as of 3 rd
Quarter 2011 ........................................................................25
Economic Conditions During 1 st Quarter 2012 .............................................................26
Discussion Questions .......................................................................................................31
References .........................................................................................................................32
Harvard Business Cases for Chapter 1 ..........................................................................36 Professor Case for Chapter 1 ..........................................................................................36
Chapter 2 ..................................................................................................... 37
Industry Analysis and Industry Evolution for the 21 st Century ............ 37
Learning and Assessment Goals .....................................................................................38 The Competitive Environment in the 21
st Century ......................................................39
Industry Structure ...........................................................................................................40
Industry Classification ....................................................................................................40 Porter’s Five Forces .........................................................................................................42
Potential Entrants (Threat of New Entrants) ............................................................. 42 Bargaining Power of Suppliers ................................................................................. 43 Bargaining Power of Buyers ..................................................................................... 43 Threat of Substitutes ................................................................................................. 43 Degree of Rivalry ...................................................................................................... 44
Industry Analysis Using Porter’s Five Forces Model ...................................................45 Industry Evolution ...........................................................................................................46
Introduction Stage ..................................................................................................... 47 Growth Stage ............................................................................................................ 47 Maturity Stage ........................................................................................................... 47 Decline Stage ............................................................................................................ 48 Industry Forces During Introduction Stage............................................................... 50 Industry Forces During Growth Stage ...................................................................... 50 Industry Forces During Maturity Stage .................................................................... 51 Industry Forces During Decline Stage ...................................................................... 51 The Upside of Declining Industries .......................................................................... 52
Discussion Questions .......................................................................................................53 References .........................................................................................................................54 Intel Mini Case .................................................................................................................55 Harvard Business Cases for Chapter 2 ..........................................................................57
8
Professor Case for Chapter 2 ..........................................................................................57
Chapter 3 ..................................................................................................... 59
Utilizing Internal Analysis to Build Competitive
Advantage Over Rivals ............................................................................... 59 Learning and Assessment Goals .....................................................................................60 The Resource-Based View ...............................................................................................61
Criteria for Competitive Advantage .......................................................................... 61 Value Chain Analysis and Capstone Simulation ..........................................................68
Technology Development ......................................................................................... 68 Human Resource Management ................................................................................. 69 Firm Infrastructure .................................................................................................... 69 Procurement .............................................................................................................. 69 Inbound and Outbound Logistics .............................................................................. 70 Operations ................................................................................................................. 70 Marketing and Sales .................................................................................................. 70 Service....................................................................................................................... 71
Global Outsourcing .........................................................................................................71 Discussion Questions .......................................................................................................74 References .........................................................................................................................75 Ryder Mini Case ..............................................................................................................77 Harvard Business Cases for Chapter 3 ..........................................................................78 Professor Case for Chapter 3 ..........................................................................................78
Chapter 4 ..................................................................................................... 79
Business Level Strategy .............................................................................. 79 Learning and Assessment Goals .....................................................................................80 Key Success Factors .........................................................................................................81
Determining Key Success Factors ............................................................................ 81 Utilizing Key Success Factors over Time ................................................................. 82
Generic Business Level Strategies ..................................................................................82 Cost leadership .......................................................................................................... 83 Focused low cost ....................................................................................................... 83 Differentiation ........................................................................................................... 83 Focused differentiation ............................................................................................. 84
Walmart Expansion ................................................................................................... 85
Competitive Dynamics .....................................................................................................87 SWOT Analysis ........................................................................................................ 87 Strengths ................................................................................................................... 87 Weaknesses ............................................................................................................... 88 Opportunities............................................................................................................. 88 Threats....................................................................................................................... 88
SWOT Analysis of American and Southwest Airlines ............................................. 89
Competitive dynamics over time .............................................................................. 90
Discussion Questions .......................................................................................................93 References .........................................................................................................................94 Dell Mini Case ..................................................................................................................95 Harvard Business Cases for Chapter 4 ..........................................................................96
9
Professor Case for Chapter 4 ..........................................................................................96
Chapter 5 ..................................................................................................... 97
Analysis of Markets and Positioning......................................................... 97 Learning and Assessment Goals .....................................................................................98 Market Segmentation ......................................................................................................99
Market Segmentation of the Airline Industry…………………….………………99
Product Positioning…………………………………………………………………101
Sales Forecasting ............................................................................................................103 Sales Forecasting Methods ..................................................................................... 103
Sales Forecasting and Capstone Simulation ................................................................104 Marketing Mix Variables ..............................................................................................110
Product Variable ..................................................................................................... 110 Price Variable.......................................................................................................... 111 Promotion Variable ................................................................................................. 111 Distribution Variable .............................................................................................. 113
Discussion Questions .....................................................................................................115 References .......................................................................................................................116 Proctor and Gamble (P&G) Mini Case .......................................................................117 Harvard Business Cases for Chapter 5 ........................................................................119 Professor Case for Chapter 5 ........................................................................................119
Chapter 6 ................................................................................................... 121
Growth by Internal Development ........................................................... 121 Learning and Assessment Goals ...................................................................................122 Internal Development Strategies ..................................................................................123
Market Penetration .................................................................................................. 123 Market Development .............................................................................................. 125 Product Development.............................................................................................. 127 Diversification......................................................................................................... 129
Competition ....................................................................................................................129 Internal Development and Capstone Simulation ........................................................130
Growth by Market Penetration................................................................................ 130 Growth by Market Development ............................................................................ 131 Growth by Product Development ........................................................................... 133 Growth by Diversification ...................................................................................... 135
Discussion Questions .....................................................................................................136 References .......................................................................................................................137 Starbucks Mini Case ......................................................................................................139 Harvard Business Cases for Chapter 6 ........................................................................140 Professor Case for Chapter 6 ........................................................................................140
10
Chapter 7 ................................................................................................... 141
Corporate Level Strategies and Restructuring ...................................... 141 Learning and Assessment Goals ...................................................................................142 Diversification ................................................................................................................143
Diversification and Performance ............................................................................ 143 Diversification and Value Chain Analysis .............................................................. 145
Same Industry Diversification ......................................................................................146 Related Industry Diversification ..................................................................................147 Unrelated Industry Diversification ..............................................................................148
Diversification and Risk ......................................................................................... 148 Business Strengths and Industry Attractiveness ........................................................149
Industry Attractiveness ........................................................................................... 150 Business Strength .................................................................................................... 151
Restructuring .................................................................................................................152 Downsizing ............................................................................................................. 152 Downscoping .......................................................................................................... 153 Realignment ............................................................................................................ 154
Restructuring and the Capstone Simulation ...............................................................154 Discussion Questions .....................................................................................................160 References .......................................................................................................................161 General Electric (G.E.) Mini Case ...............................................................................165 Harvard Business Cases for Chapter 7 ........................................................................166 Professor Case for Chapter 7 ........................................................................................166
Chapter 8 ................................................................................................... 167
Growth Via Strategic Alliances ............................................................... 167 Learning and Assessment Goals ...................................................................................168 Trust ................................................................................................................................170 Scale of Coverage ...........................................................................................................171 Relationship-Specific Assets .........................................................................................171 Complementary Capabilities ........................................................................................171 Interfirm Knowledge Sharing ......................................................................................171 Scale Alliances ................................................................................................................172 Link Alliances .................................................................................................................174 Joint Ventures ................................................................................................................176 The Downside of Strategic Alliances and Joint Ventures ..........................................177
Strategic Alliances and the Recession ..........................................................................177 The Future of Strategic Alliances .................................................................................178 Strategic Alliances and Capstone Simulation .............................................................179 Discussion Questions .....................................................................................................183 References .......................................................................................................................184 Oneworld Airline Strategic Alliance Mini Case .........................................................188 Harvard Business Cases for Chapter 8 ........................................................................189
11
Professor Case for Chapter 8 ........................................................................................189
Chapter 9 ................................................................................................... 191
Acquisition Strategies ............................................................................... 191 Learning and Assessment Goals ...................................................................................192
Impact of the Global Recession on Mergers and Acquisitions .................................193
Attributes of Successful Acquisitions ...........................................................................197 Access to International Markets.............................................................................. 197 Synergies Resulting from Economies of Scale ....................................................... 198 Synergies Resulting from Economies of Scope ...................................................... 198 Reduce Costs of New Product Development .......................................................... 198 Entry into More Attractive Industries ..................................................................... 199
Problems with Acquisitions ..........................................................................................199 Paying Too Much .................................................................................................... 199 Inability to Achieve Synergies ................................................................................ 199 Failure to Retain Key Personnel ............................................................................. 200 Too Much Debt ....................................................................................................... 200 Invest in Mature Industries ..................................................................................... 201
Process for Achieving Successful Acquisitions ............................................................202 Due Diligence ......................................................................................................... 202 Engage in Friendly Acquisitions ............................................................................. 202 Maximize Resource Utilization .............................................................................. 202 Diversify Into Firms That Have Strong Brand Names ........................................... 203 Acquire High Growth Firms ................................................................................... 204
Hostile Acquisitions .......................................................................................................204 Are Acquisitions Beneficial? .........................................................................................205 Acquisitions as a Source of Innovation ........................................................................206 Discussion Questions .....................................................................................................208 References .......................................................................................................................209 Pfizer Mini Case .............................................................................................................212 Harvard Business Cases for Chapter 9 ........................................................................213 Professor Case for Chapter 9 ........................................................................................213
Chapter 10 ................................................................................................. 215
International Strategies ............................................................................ 215 Learning and Assessment Goals ...................................................................................216 Factors Encouraging International Expansion ...........................................................217 Innovation in Domestic Market ....................................................................................220 Determining International Country Attractiveness ...................................................220 Role of Government .......................................................................................................221 Determination of International Industry Attractiveness ...........................................223 Determination of Firms’ Business Strengths ..............................................................226 Adaptation Versus Standardization .............................................................................228 Determination of International Modes of Entry .........................................................228
12
Exporting................................................................................................................. 228 Licensing/Franchising ............................................................................................. 230 Strategic Alliances .................................................................................................. 231 Acquisitions ............................................................................................................ 231 Foreign Direct Investment ...................................................................................... 232
Competition within International Markets Intensifies ..............................................233 Relocate to Low Cost Markets ......................................................................................233 New Innovation in Home Markets ...............................................................................233 Discussion Questions .....................................................................................................235 References .......................................................................................................................236 IKEA Mini Case .............................................................................................................239 L’Oreal Mini Case .........................................................................................................241 Harvard Business Cases for Chapter 10 ......................................................................243 Professor Case for Chapter 10 ......................................................................................243
Chapter 11 ................................................................................................. 245
Strategic Leadership Decision Making ................................................... 245 Learning and Assessment Goals ...................................................................................246 Strategic Leadership ......................................................................................................247 Customers .......................................................................................................................249 Employees .......................................................................................................................250 Collective Bargaining Organizations ...........................................................................251 Shareholders ...................................................................................................................252 Board of Directors .........................................................................................................252 Investment Community .................................................................................................253 Senior Managers and Ethical Decision Making ..........................................................253
Strategic Leadership and Growth ………………………………………………......255
Scandals and Strategic Leadership ..............................................................................257 Industry Evolution and Strategic Leadership .............................................................258
Introduction ............................................................................................................. 258 Growth .................................................................................................................... 259 Maturity................................................................................................................... 259 Decline .................................................................................................................... 260
Discussion Questions .....................................................................................................261 References .......................................................................................................................262 Hershey Mini Case .........................................................................................................264 Harvard Business Cases for Chapter 11 ......................................................................265 Professor Case for Chapter 11 ......................................................................................265
13
Chapter 12 ................................................................................................. 267
Wealth Creation ........................................................................................ 267 Learning and Assessment Goals ...................................................................................268 Balanced Scorecard and Wealth Creation ..................................................................269 Customer Wealth ...........................................................................................................271
Consumer Costs ...................................................................................................... 272 Firm Costs ............................................................................................................... 272
Shareholder Wealth .......................................................................................................273 Liquidity Ratios ...................................................................................................... 274 Asset Management Ratios....................................................................................... 274 Debt Management Ratios ........................................................................................ 275 Profitability Ratios .................................................................................................. 275 Economic Value Added (EVA) and Market Value Added (MVA) ........................ 275
Employee Wealth ...........................................................................................................276 Positioning for Future Wealth ......................................................................................277 Capstone Simulation Measures of Wealth Creation ..................................................280 Discussion Questions .....................................................................................................281
References …………………………………………………………………………..282
Chapter 13 ................................................................................................. 283
Conducting Case Analysis: An Exercise in Wealth Creation ............... 283 Industry Structure .........................................................................................................286 Competitive Dynamics for the Capstone Simulation .................................................289 Wealth Creation Measures ...........................................................................................290 Conclusion ......................................................................................................................291 Recommendations ..........................................................................................................293
Chapter 14 ................................................................................................. 295
Comp-XM® ............................................................................................... 296 Balanced Scorecard .......................................................................................................301 Board Query Questions .................................................................................................308
Appendix .................................................................................................... 313 U.S. Domestic Data Sources ..........................................................................................313 International Data Sources ...........................................................................................314
Glossary ..................................................................................................... 315
Index ........................................................................................................... 321
14
15
Chapter 1
Managing Environmental Turbulence
16
Learning and Assessment Goals
1. Understand why we are in a recession within the U.S.
2. Understand why a global recession has occurred.
3. Understand the role the U.S. Government is playing to improve economic conditions with its economic stimulus plan.
4. Understand the economic state of affairs as of 2011.
5. Understand, at the firm level, what has to happen to be able to grow in turbulent economic environments.
6. Understand how firms can maintain competitive positions in times of economic turbulence.
17
We live in a chaotic, changing world. The economic ramifications of 2007-2010
have had a negative economic impact on most emerging and fully developed countries
throughout the world. The United States has been very significantly impacted by this
economic downturn. Some economists believe that the 2007-2010 time period
represented a depression rather than a recession.
Are the 1930’s depression conditions upon us during 2007-2010? The Great
Depression of the 1930’s may have a more modern version. However, the solutions to
this current economic crisis need 2011 solutions. This chapter will address ways of
dealing with current economic conditions. If firms are to be successful in current
economic times, a number of decisions will need to be made which address conditions
specific to modern times. The first question that needs to be raised is, “Are we in a
depression or a recession?” In the United States, the Business Cycle Dating Committee
of the National Bureau of Economic Research (NBER) is generally seen as the authority
for dating U.S. recessions. The NBER defines an economic recession as: “a significant
decline in [the] economic activity spread across the country, lasting more than a few
months, normally visible in a reduction in real GDP growth, real personal income,
employment (non-farm payrolls), industrial production, and wholesale-retail sales 1 .”
Academics, economists, policy makers, and businesses defer to the determination
measurement by the NBER for the precise dating of a recession’s onset and end 2 . A
depression is a severe economic downturn that results in a decline in real GDP exceeding
10% and is a recession lasting three or more years 3 . Table 1.1 identifies the conditions in
the Great Depression of the 1930’s and current (2007-2010) economic condition.
Table 1.1
Comparison of the Great Depression (1930s) to the Current
(2007-2010) Economic Conditions
Factor 2007-2010 1930’s
GDP Less than 5% Down 30%
Unemployment 5-10% 25-30%
Consumer prices Fairly stable Down 20-30%
During the 1930’s depression gross domestic product fell by over 30 % 4 . Since
2007 gross domestic product has fallen by less than 5 %. While in 2007-2010
unemployment hovered about 5-10 %, unemployment during the 1930’s depression was
approximately 25-30 %. In the 2007-2010 time period, consumer prices have held fairly
stable; however, during the Great Depression there was between a 20-30 % reduction in
consumer prices. Fortunately, this economic downturn does indeed appear to be a
recession as opposed to a depression. However, the U.S. economy is currently
experiencing its worst crisis since the Great Depression 5 . The U.S. Government has
played a very significant role (e.g. Chrysler and G.M.) throughout this period of
recession.
In essence, the government has been regulating economic conditions (e.g.
economic stimulus package). As the government reduces its regulatory role, firms will
18
need to learn how to adjust to the new economic environment. These new economic
conditions (2007-2010) have had a significant impact upon industries and firms. Let us
begin with what caused the current (2007-2009) economic crisis.
U.S. Economic Collapse What happened was caused by a combination of two factors. The first factor was
people losing their jobs causing them not to be able to pay their mortgages. In the U.S.,
significant job losses have been going on since December 2007 and have accelerated in
September 2008. In 2008, 2.6 million jobs were lost. From January through April of
2009, 2.6 million jobs were also lost.
The rise of advanced economies in Russia, Brazil, India, and China increased the
total global labor pool dramatically. Recent improvements in communication and
education in these countries has allowed workers to compete more effectively with
workers in traditionally strong economies, such as the United States. This surge in labor
supply has provided downward pressure on wages and contributed to unemployment.
The second factor that has contributed to the challenging economic conditions is
falling housing prices in the U.S. Historically, the U.S. housing market has been very
strong. From the mid-1990 to 2005, housing prices grew. During the same period of
time, the U.S. gross domestic product (GDP) per capita was rising.
Housing prices stopped increasing in 2006, started to decrease in 2007, decreased
in 2008 and have fallen about 25% from the peak in 2005 6 . During 2007-2010, the
decline in prices meant that homeowners had more difficulty refinancing their mortgage
rates. This action caused delinquencies and defaults of mortgages to increase sharply,
especially among subprime borrowers. Sub-prime loans were made to customers who
had spotty credit histories. In 2006, it was estimated that over half of the loans were sub-
prime. Banks who had financed these mortgages tried to sell the loans to other banking
institutions. In order to sell the loans, these institutions had to lower the price. These
actions made the initial bank and the bank who acquired the loans worse off. In general,
this is what led to the demise of Bear Stearns and Lehman Brothers. Many other firms
were also dramatically affected. From Table 1.2, the top U.S. bankruptcy filings of all
times included six firms in 2008 and 2009.
19
Table 1.2
Top 10 U.S. Bankruptcy Filings of all Time
Company
Bankruptcy
Date Assets ($ billions)
1. Lehman Brothers 6/15/2009 691
2. Washington Mutual 9/26/2008 328
3. Worldcom Inc. 7/21/2002 104
4. General Motors 6/1/2009 91
5. Enron 12/2/2001 66
6. Conseco Inc. 12/17/2002 61
7. Chrysler 4/30/2009 39
8. Thornburg Mortgage 5/1/2009 36
9. Pacific Gas and Electric 4/6/2009 35
10. Texaco Inc. 4/12/1987 34
Although the economic crisis started in the home mortgage market, it spread to
commercial real estate, corporate junk bonds, and other forms of debt. Total losses to
U.S. banks reached as high as one-third of the total bank capital. The crisis has led to a
sharp reduction in bank lending, which in turn caused a severe recession in the U.S.
economy 7 . How mortgages were affected needs to be discussed.
Borrowers were given low mortgage rates from banks for the first two to three
years (these initial low rates were called “teaser rates”) 8
. The strategy was that by the
time the teaser rates expired and the rates were to be adjusted upward, the value of their
homes would have increased enough so that a new mortgage could be taken out and the
old mortgage paid off. However, this strategy worked only as long as housing prices
were increasing.
When housing prices stopped increasing in 2006, this strategy no longer worked 9 .
Old mortgages could no longer be refinanced, so the borrowers were stuck with higher
mortgage rates that they could not afford, and the default rates started to increase. From
the first quarter of 2006 to the third quarter of 2008, the percentage of mortgages in
foreclosure more than doubled from 4.5 % to 10 % 10
. This foreclosure rate was the
highest since the Great Depression. 11
According to data from Bankruptcy Data.com, a division of New Generation
Research, Inc., bankruptcy filings among publicly traded companies surged 74 % in
2008 12
. There were 136 bank bankruptcy filings in 2008, compared with 78 in 2007.
While the year-over-year growth in bankruptcies rose quickly, the value of the firms
seeking protection grew much faster. The 136 banks seeking bankruptcy protection in
2008 had about $1.16 trillion in assets, compared with just $70.5 billion in assets for
banks filing for bankruptcy protection in 2007 13
.
20
U.S. Government Stimulus Plan The U. S. government has tried to stabilize this economic crisis. President
Obama’s economic stimulus package, $787 billion, has been an attempt to get the
economy back on track. On February 10, 2009, the Senate voted 61-37 to approve
President Obama’s economic stimulus bill. The first piece of the plan would create one
or more banks that would rely on taxpayer and private money to purchase and hold the
banks’ bad assets 14
. In the credit markets, the administration and the Fed are proposing
to expand a lending program that would spend as much as $1 trillion to make up for the
$1.2 trillion decline created between 2006 and 2009 by issuing securities backed
primarily by consumer loans 15
.
The second major component of the plan would give banks capital with which to
lend. Banks that receive new government assistance will have to cut the salaries and
perks of their executives and sharply limit dividends and some corporate acquisitions 16
.
The third piece of the plan would use the last $350 billion that the Treasury has
allocated for the bailout to rely on the Federal Reserve’s ability to create money. The
Fed’s money will enable the government to become involved in the management of
markets and banks 17
.
By comparing the first six months of 2006 with the first six months of 2009,
results have not been promising. Retail sales have decreased from $360 billion in 2006 to
$340 billion in 2009 18
. Construction of new homes has declined from approximately 2
million in 2006 to less than 500,000 in 2009 19
. The purchasing managers’ index shows
the manufacturing sector activity has declined significantly since 2006 20
. Orders for
nondefense capital goods have decreased from over $60 billion in 2006 to less than $50
billion in 2009 21
. Jobless claims have increased from 300,000 to over 600,000 22
. In
2009, the number of people who are receiving jobless benefits rose to 670,000 million
individuals. This is the highest total since 1967 23
. The impact of the recession upon the
U.S. auto industry has been especially severe.
U.S. Auto Industry G.M. and Chrysler have received billions of dollars in government funds to try to
return to profitability. As of mid 2009, nothing positive has happened. Chrysler has
emerged from Chapter 11 bankruptcy (7 th
largest filing of all time: Table 1) and G.M. has
had to receive several billion dollars in additional government aid. G.M. is in a
particularly difficult position. On March 30, 2009, Rick Wagoner, the CEO of G.M. was
forced to resign. This was one of the first times that a U.S. government has forced out a
CEO of a publically held company 24
. This would appear to have been a necessary move.
G.M. has not turned a profit since 2004. Between 2004-2008, G.M. has lost 82
billion dollars 25
. G.M.’s stock was trading at $70/share in June 2000. On March 30,
2009 the stock was trading at $3.62. In May 2009, the stock was trading at $0.75 26
.
Because of these conditions, G.M. has had to borrow money from the
government. As part of President Obama’s bailout plan, G.M. borrowed $15.4 billion 27
.
In addition, G.M. was forced to borrow an additional $4 billion during the first quarter of
2009 to stay in business 28
. In addition, G.M. eliminated its Pontiac division and cut
21,000 employees 29
. On May 16, 2009, G.M. began to close 1100 of its dealerships 30
.
On June 1, 2009, GM went into Chapter 11 bankruptcy protection (4 th
largest filing of all
time: Table 1.2).
Several other businesses of G.M. were affected. The Saturn brand was
discontinued in 2009. In 2010, the Hummer brand was discontinued. G.M. has exited
21
Chapter 11 Bankruptcy Protection and has been increasing revenues, earnings and
earnings per share in 2010 and 2011.
Chrysler has taken a somewhat different approach. Chrysler has obtained $9
billion in bailout funds and exited Chapter 11 bankruptcy protection after 45 days on June
12, 2009. Chrysler has looked to Fiat for assistance. The U.S. Government has put in
place goals for Fiat if it desires to increase its ownership of Chrysler. Fiat will be
allowed to expand its ownership of Chrysler up to a majority stake if the Italian auto
maker meets certain goals 31
.
Fiat will get an initial 20% stake in Chrysler and can increase its holdings in
increments of five percentage points, up to 35%, if it achieves three milestones by
January 1, 2013. Fiat will get the first increase once it starts producing Fiat engines in
the U.S. To receive the second increase, Fiat must develop a vehicle in the U.S. that can
go 40 miles on a gallon of gasoline. 32
Fiat can get a third increase if Chrysler is able to generate more than $1.5 billion
in sales outside of North America, according to a “Master Transaction Agreement” that
was filed on May 9, 2009 in the U.S. Bankruptcy Court in Manhattan. 33
The agreement
also gives Fiat the option to purchase an additional 16% of Chrysler. If Fiat meets all
three goals and exercises its options, it could eventually end up with a 51% stake in
Chrysler. 34
Fiat won’t be able to take full control of Chrysler until it pays off the loans
Chrysler has received from the U.S. government. Prior to that point, Fiat’s ownership
will be capped at 49.9%. Until the loans are repaid, any Fiat stake above 35% will be
held in a trust controlled by the U.S. treasury. 35
As of May 2011, Chrysler has some success with repayment of its loans. Chrysler
used a $1.3 billion investment from Fiat to repay its loans. Fiat, which has had
management control over Chrysler since it emerged from bankruptcy protection in 2009,
paid that amount to increase its stake in Chrysler to 46 percent. The refinancing will
allow it to retire a $5.9 billion balance on the U.S. loans and $1.6 billion to the
governments of Canada and Ontario 36
. As of 2011, Fiat has an agreement to buy the U.S.
Treasury’s remaining 6% stake in Chrysler Group LLC, a move that would bring an end
to the U.S. government’s involvement in Chrysler 37
. The Canadian and U.S.
governments had taken stakes in Chrysler after providing the automaker $7.6 billion in
bankruptcy loans. Chrysler formally repaid those loans in 2011 38
. This agreement could
allow Fiat to skip a Chrysler IPO and move forward with its ambitions to combine
Chrysler and Fiat into a single automaker with global footprints.
In 2011, the combination sold 1.4 million vehicles, a 26% increase from the prior
year. For 2011, Fiat/Chrysler generated sales of 59.55 billion Euros and profit of 1.07
billion Euros.
Chrysler is optimistic about its future. Sergio Marchionne, who is CEO of Fiat
and Chrysler, said profit for 2012 should increase to $1.5 billion and revenue rise 18%
over 2011 to $65 billion. As of 2012, the two largest stake holders are Fiat and UAW. As
of 2012, Chrysler is owned by Fiat and the UAW. Fiat has a 53.5 percent share and the
UAW has a 14.5 percent share.
International Recession This recession (2007-2010) has not been experienced solely in the U.S.; it is
having negative impacts in several international markets. During 2006 and 2007 global
investors with significant amounts of cash were looking for ways to invest their funds.
As discussed earlier, Wall Street investment firms began to consolidate investments with
22
both prime and sub-prime loans. As housing prices declined many large and well
established investment and commercial banks in Europe suffered huge losses. This was
the beginning of the global recession. This recession has resulted in a sharp drop in
international trade, rising unemployment and a reduction in commodity prices. This
impacted not only the U.S. investors but international investors as well.
Wall Street hedge funds held by large institutional investors and foreign banks
who had bought some of the consolidated loans had difficulty selling the loans 39
. Banks
stopped lending in an effort to conserve cash. The worldwide recession became worse
because investors who had funds were not investing. This action caused stock markets
worldwide to plummet. As stock prices fell, firms cut expenses to try to keep up with the
declining stock prices. This caused a significant increase in unemployment and
individuals stopped making purchases except for necessities.
The collapse of the housing market in the U.S. had a direct impact not only on the
nation’s mortgage banks but also upon U.S. and international home builders, real estate,
and home supply retail outlets. The continuing development of this crisis led to a global
economic collapse 40
. Beginning with failures caused by misapplication of risk controls
for bad debts, collateralization of debt insurance and fraud, large financial institutions in
the United States and Europe faced a credit crisis and a slowdown in economic activity.
The crisis rapidly developed and spread into a global economic shock, resulting in a
number of European bank failures, declines in various stock indexes, and large reductions
in the market value of equities and commodities.
Other impacts were felt in international markets. In 2009, currency values, oil
prices and other commodity prices increased significantly while housing prices in the
European Union continued to decline. Steep declines in the economies of three of the
U.S.’s biggest trading partners – Mexico, Japan and Germany – underscored the severity
of the global recession and put pressure on major industrialized nations to revive global
trade talks 41
. Mexico has been affected significantly.
Mexico’s gross domestic product fell at an annualized rate of 21.5% in the first
quarter of 2009. This was the worst performance since the 1995 peso crisis which led to
an International Monetary Fund and U.S. Treasury financial rescue. Mexico, during the
past 15 years, has depended on demand for goods from the U.S. to stabilize its economy.
About a fifth of Mexico’s economy depends on manufacturing exports to the U.S., and
this dramatic drop in demand has hit Mexico hard 42
. During the first quarter of 2009,
Mexican auto production slid 41% compared to the same period the year before.
Mexico’s decline was followed by Japan’s as its economy contracted in the first quarter
of 2009 by 15.2%, its worst performance since 1955 43
. Germany’s first quarter of 2009
showed a decline in GDP by 14.5%, which was the worst since 1970. All of these
countries depend heavily on exports to the U.S. This is no longer happening because
U.S. consumers have cut back purchases from these countries.
Many industrialized countries went into recession in 2008. The following
countries went into recession in the third quarter of 2008: Japan, Sweden, Hong Kong,
Singapore, Italy, Turkey and Germany 44
. In addition, the fifteen nations in the European
Union that use the euro went into recession in the third quarter of 2008. The following
countries went into recession in the fourth quarter of 2008: United Kingdom, Spain,
Taiwan, Estonia, Latvia, Ireland, New Zealand, Russia, Netherlands, and Iceland 45
. It is
possible that some of these countries may have obtained funds from the U.S. Federal
Reserve.
23
I would like to thank one of our professors, David Baker, for bringing the following
recent events to my attention.
THE “SECRET” GLOBAL BAILOUT In October of 2011, the government accountability office (GAO) conducted an
audit of the Federal Reserve. Ben Bernanke, chairman of the Federal Reserve vigorously
objected to this audit. He had good reason for his objection. The results of the audit were
shocking. During the period of the recession (2007-2010), the Federal Reserve “loaned”
$16 trillion (000,000,000,000) in funds to U.S. banks, international banks, and
international firms. 46
These funds were loaned at zero percent interest. The Federal
Reserve had not informed the U.S. Congress about this “global bailout.” 47
It does not
seem reasonable that the U.S. Federal Reserve should be loaning this level of funds to
international banks and international firms during a recession within the U.S. The list of
institutions that received the most money from the Federal Reserve can be found on page
131 of the GAO Audit and are as follows:
Economic Status as of Mid-2011
Many economists believe that the global recession ended in 2010. Paul Dales,
senior U.S. economist believes that “the economy is unlikely to grow at a decent rate
anytime in the next year or two.” High oil prices are one reason that consumers are
spending less than they might have on other things, like clothing and household goods.
Consumer spending drives about 70 percent of the economy. A political impasse over
general budget cuts, combined with Europe’s debt crisis, is also creating uncertainty.
Higher gas and food prices have erased any pay raises workers are getting.
Americans have responded by spending less. High energy prices are putting pressure on
businesses to raise their prices. Workers are seeing limited, if any, pay increases because
they lack leverage in a market where jobs are still hard to find. This limits businesses
ability to raise prices, even though many companies are facing higher costs.
Citigroup: $2.5 trillion Morgan Stanley: $2.04 trillion
Merrill Lynch: $1.949 trillion
Bank of America: $1.344 trillion
Barclays PLC (United Kingdom): $868 billion
Bear Sterns: $853 billion
Goldman Sachs: $814 billion
Royal Bank of Scotland (UK): $541 billion
JP Morgan Chase: $391 billion
Deutsche Bank (Germany): $354 billion
UBS (Switzerland): $287 billion
Credit Suisse (Switzerland): $262 billion
Lehman Brothers: $183 billion
Bank of Scotland (United Kingdom): $181 billion
BNP Paribas (France): $175 billion
And many more including banks in Belgium of all places
http://www.scribd.com/doc/60553686/GAO-Fed-Investigation
TABLE 1.3
Institutions Bailed Out by the Federal Reserve
http://www.scribd.com/doc/60553686/GAO-Fed-Investigation
24
U.S. increases in hiring have not manifested themselves in the first half of 2011.
Disappointing U.S. economic data followed poor manufacturing reports around the globe.
The numbers, together with evidence of a continuing downdraft in housing and signs that
companies and consumers remain apprehensive about spending, suggest the economy
recovery will be slow. With unemployment high, the housing market not expanding and
ongoing financial turmoil in Europe, the slowdown could turn into something more
ominous. Despite cautious outlook for 2011, 36 of the 38 economists surveyed oppose
any further efforts by the Fed to invigorate growth. The Fed has already cut short-term
interest rates to near zero. And it’s ending a program to buy $600 billion in Treasury
bonds to keep longer-term rates low to help increase spending and hiring.
Economists say another round of bond-buying wouldn’t provide much benefit, if
any. Some fear it could make things worse by unleashing high inflation and disrupting
financial markets. When it buys bonds, the Fed, in effect, prints massive amounts of
money. All that extra money in the system raises the nominal value of the things we buy,
weakening the dollar, and it can create bubbles in the prices of stocks and commodities.
Some economists believe that the second half of 2011 will show improvement in
economic conditions. The reason is that the main causes of the slowdown – high oil
prices and manufacturing delays because of the disaster in Japan – have started to fade.
Oil prices have been falling since Memorial Day (2011). Economists surveyed by the
Association Press (AP) predicted unemployment would fall to 8.7 percent at year’s end.
However, the economy is still carrying too much baggage from the financial crisis –
damaged banks, depressed home prices, and debt-burdened consumers – to achieve much
liftoff.
The global economy is expected to grow as reported by the Organization for
Economic Co-operation and Development (OECD). This organization’s mission is to
improve the economic and social wellbeing of people around the world. The member
nations of OECD are Australia, Austria, Belgium, Canada, Chile, Czech Republic,
Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel,
Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland,
Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United
Kingdom, and the U.S.
OECD economists expect that economic recovery will take place at different
speeds for different counties. OECD’s projections are identified in Table 1.3.
Table 1.3
Gross Domestic Product (GDP) for 2010 and 2011 Increase (in percent)
Location 2011 2012
United States 2.6 3.1
European Union 2.0 2.0
Japan 0.9 2.2
Rest of the World 4.2 4.6
While the table shows modest growth rates for all nations, the statistics show that
the fully developed nations are expected to grow at lower rates than the remainder of the
25
world. However, there are significant events which could significantly lower all of these
projections. Risks include possibility of further increases in oil and commodity prices,
which could feed into cause inflation; a stronger-than-projected slowdown in China; the
unsettled fiscal situation in the United States and Japan; and renewed weakness in
housing markets in many OECD countries.
The top challenge facing countries is widespread unemployment, which affects
more than 50 million people of OECD nations. Governments must ensure that
employment services match the unemployed to jobs. They should also rebalance
employment protection towards temporary workers; consider reducing taxes on labor via
targeted subsidies for low paid jobs; and promote work-sharing arrangements that can
minimize employment losses during downturns.
Economic Status as of 3 rd
Quarter 2011 In the third quarter of 2011, many analysts took the position that the U.S. may be
entering another recession: this assumes that we came out of the 2007-2010 recession in
2011. In October 2011, Ben Bernanke warned that the “U.S. economic recovery was
close to faltering.” Bernanke noted that job growth had slowed from earlier in the year.
Further, Bernanke state that “a 9 percent unemployment and very slow growth is not a
good situation.”
An article in the October 2011 Wall Street Journal stated that “Stocks Log Worst
Quarter Since 2009.” The Dow Jones industrial average for the third quarter of 2011 was
down by 12 percent. This was the worst percentage decline since the first quarter of 2009.
Many Wall Street analysts are reducing their forecasts for growth and company earnings.
Household income has declined in the third quarter of 2011 to income levels in
1996. Household income has dropped for the third year in a row.
The American dream of homeownership has felt its biggest drop since the Great
Depressions, according to new 2010 census figures. The analysis by the Census Bureau
found the homeownership rate fell to 65.1 percent last year. Analysts say the U.S. may
never return to its housing boom peak in which nearly 70 percent of occupied households
were owned by their residents. The reason: a longer-term economic reality of tighter
credit, prolonged job losses and reduced government involvement. Given depressed
housing values that could continue for at least another four to five years, it now makes
more sense in most cases to rent than own.
The depressed situation in the U.S. is also being felt in international markets.
Europe’s financial crisis has intensified as banks moved to obtain more dollars for loans
to their U.S. customers, and some multinational firms began looking to banks outside the
European Union for loans. In early October, Bernanke stated that “Europe has a debt
crisis and world markets are in turmoil.” The European debt crisis has continued for than
a year. This crisis has made markets worldwide more volatile. Investors globally have
grown alarmed about the risk of financial chaos spreading from Europe where banks are
exposed to the shaky finances of Greece and other governments. Stock markets in the
U.S., Europe, and Japan all posted declines from the second quarter of 2011.
The state of affairs in emerging markets is also unstable. Historically, China has
been a growth market. This market is slowing down. Greece continues to be in a debt
crisis. Indian stocks lost more than four percent in the third quarter of 2011. Indonesian
stocks fell by nine percent and Mexican stocks also dropped by five percent in 2010.
However the 1 st quarter of 2012 showed very positive results within the United
States.
26
U.S. Economic Conditions During First Quarter of 2012 As of the first quarter of 2012, the U.S. economy was moving from a period of
recession to a period of growth.
During these first few months of 2012, financial conditions in the United States
have improved. As of March 1, 2012, the Dow Jones Industrials closed above the 13,000
points for the first time since April 25, 2007. The other industrial averages have also
fared well as of this point in time. The Standard & Poor’s 500 is up 9 percent, the
Russell 2000 index of smaller stocks is up 11 percent , and the Nasdaq composite index,
dominated by technology stocks, is up 14%. 48
The Nasdaq has not traded so high since December 2000, during the bursting of
the bubble in technology stocks. 49
Likewise, the Nasdaq composite index briefly broke
through 3,000 on Wednesday, Feb. 29, 2012. This was the first time since the collapse in
dot-com stocks more than a decade ago. February 2012, was the best month on Wall
Street in 14 years. 50
Apple, Nasdaq’s biggest component, topped $500 billion in market value, the
only company above the half-trillion mark and only the sixth in U.S. corporate history to
grow so big.
There is good news from an unemployment perspective also. The economy has
been creating more jobs since last fall, producing an average of 223,000 new jobs in the
months of December and January. 51
U.S. companies have emerged from the recession more productive, more
profitable, flush with cash and less burdened by debt. 52
An analysis by the Wall Street
Journal of corporate financial reports finds that cumulative sales, profits and employment
last year among members of the Standard & Poor’s 500-stock index, exceeded the totals
of 2007. This was before the recession and financial crisis. 53
27
Table 1.4
U.S. Recovery 2011
Measure Increase from 2007 to 2011
Revenues 17.1
Net Income 22.7
Employees 5.1
Cash 49.9
Capital Spending 16.3 Source: Standard &Poors 2012
Many measures from firms in the Standard & Poors index have increased
significantly since 2007 (Table 1.4). Increasing cash revenues (49.9%) have led to an
increase in capital spending (16.3%). Net income for the Standard & Poor’s firms has
increased by 22.7%. These are very dramatic indicators which are a sign that the U.S.
economy is now in a growth mode. 54
However, it must be remembered that Europe is
still in the recession and growth in China is slowing. 55
While we may be beyond the global economy recession, turbulent times will
come again. Changing economic conditions can occur all the time. In order to stay
ahead of changing and/or turbulent environments, Figure 1.1 provides a guide to growing
within changing times. Figure 1.1 is also applicable during transition from weak to
strong economies.
28
Figure 1.1: Growth Within Changing or Turbulent Environments
ECONOMIC
CHANGE/TURBULENCE
Identification of Evolving
Strategic Industry Factors
Development of Resources
to Meet Strategic
Industry Factors
Development of New or
Reconfigured Resources
to Grow in the Direction
Dictated by Customers
Capitalize Upon
Errors of
Competitors
Achieving a Series of
Temporary Advantage
Environmental
Scanning
Flexibility
which is built
into Resources
Resource
Reconfiguration to
Capitalize Upon
Competitors
Weaknesses
Learning
Knowledge Base to
Developing in Times of
Economic Chaos
F
I
R
M
D
E
C
I
S
I
O
N
S
29
First, firms must develop the capability to scan the changing environment to
identify how a specific industry is changing and why it is changing in this direction. For
several years, Caterpillar has been experiencing record profits and record growth.
However, its most profitable division, mining equipment, cannot achieve profitability
under current economic conditions (2009-2010). Its mining trucks are used to extract oil
from sand. If the price of oil is greater than $40/barrel, these mining processes are
profitable. If the price is below $40/barrel, the processes are not profitable. Knowing
this fact, Caterpillar is developing mining equipment which could be profitably used at
prices less than $40/barrel. During 2010, the global mining industry became very
profitable throughout the world. Caterpillar now (2011) has an 18 month back log on its
mining trucks. In 2010 and 2011, Caterpillar generated records in terms of revenues and
profits.
Second, during times of economic turbulence, firms must be able to analyze
industries to determine strategic industry factors 56
. Strategic industry factors are factors
which dictate consumer buying decisions. What the firm needs to do is to identify the
current customer needs while developing the capacity to identify emerging customer
needs 57
. Cell phone manufacturers have sequentially added features as the industry has
evolved to require additional technology capabilities.
Third, in an economic crisis, firms need to develop resources which have
flexibility. Resource flexibility is crucial for growth 58
. In many cases, the direction a
firm will grow is not known before the fact. For example, Toyota has been successful
because its production processes are designed to support different models of cars with
minimal modification.
Fourth, a firm needs resources that can be developed to address current strategic
industry factors. In an effort to reduce costs, many universities have developed distance
learning or online courses. This approach is also beneficial to students because they do
not need to incur additional expenses, such as gas or time commuting to a centralized
location.
Fifth, during times of turbulence a firm’s resources need to be combined and
reconfigured to meet the needs of significant environmental change 59
. As this happens
firms develop new resources which have the capability to create new and/or improved
products. As the price of oil continues to climb, global auto manufacturers have
responded by developing alternative forms of fuel which are not dependent upon oil. The
significant point with respect to the creation of new resources is that they make existing
and/or related resources better from a differentiation perspective. The new resources
should be put to their most productive use by developing capabilities which add value
(e.g. process and product R & D). The firms that experience the highest growth rates are
able to develop a sequence of temporary advantages that are linked over time to provide
long-term growth. The pharmaceutical industry is an example of an industry which
requires firms to continuously develop new products to replace existing products which
are coming off patent protection (e.g. Lipitor).
Fundamentally a firm must grow with its customer base over time. It is of critical
importance that the firm stays close to the customer to ascertain how strategic industry
factors change over time. This is becoming increasingly difficult as email and fax
become routine modes of communication. To fully understand the evolutionary needs of
its customer base, the firm must keep in close, personal contact with them. If they do not,
its competitors may develop goods and services which meet customers’ needs and take
significant revenues from the initial firm. This is what happened to the U.S. auto industry
as European and Asian auto manufacturers entered and established strong positions
30
within the U.S. These international firms maintained these positions over time by
continuously developing new automobiles which addressed current consumer needs.
Sixth, take advantage of the strategic errors of competitors. The crux of strategy
is to gain a position of advantage and then sustain that position over time 60
. Established
business models may not work.
The deregulation of the trucking industry was one case. During the initial phase
of the deregulation of the U.S. trucking industry, trucking firms attempted to move into
related industries before they had fully developed their operational infrastructure; all
these firms went out of business. From a trucking prospective, if a firm’s infrastructure is
not fully developed, it is difficult to meet the needs of a customer base which is
expanding geographically. In this industry a fully developed infrastructure is a
prerequisite for growth. In the trucking industry, those firms which established this
complete infrastructure grew after the industry was deregulated. Those firms which did
not went out of business.
The fast food industry provides another example of firms taking share from
competitors. Some customers now prefer fast food restaurants to provide meals which
are low in calories and fat. McDonalds has recognized this need and has developed
several options for its customers seeking healthy options. Hardees’ is a fast food
restaurant which has not.
As these firms continue to grow learning becomes important. Learning from
other firms can be an important factor. The airfreight firms learned from the telephone
companies the benefits of a hub and spoke network. They learned that they could
significantly reduce transit time and overall costs by developing an integrated air-ground,
hub-and-spoke operating system. By developing global hub-and-spoke operating
systems, carriers provide shippers with total global coverage. This learning provides a
knowledge base for firms to make better strategic decisions during periods of significant
economic change.
The role of alliances is becoming increasingly important in the twenty-first
century. Many firms that have grown in volatile environments have developed strategic
alliance networks that provide for global coverage. The Star, One World, and SkyTeam
alliances have provided airlines throughout the world with global coverage. These
alliances permit access to market positions without significant incremental costs being
incurred. Airlines who are members of these international alliances obtain a global
coverage advantage over carriers that have not engaged in international airline alliances.
As firms begin to grow within domestic environments, alliances provide firms with the
capability to grow over time in changing environments. As they move into international
markets, as a result of these alliances, firms continue to learn how to grow in different
types of international environments. This new knowledge base allows firms to grow
based upon what has been learned. The lessons learned in the 2007-2010 recession
provide valuable insights for future recessions.
31
Discussion Questions
1. Explain how the current economic recession differs from the depression in the 1930’s.
2. Why has the U.S. Government taken a significant ($787 billion) role in the current economic recession?
3. What led to the collapse of the economic environment within the U.S.? Answer the same question from an international perspective.
4. What can we learn from Table 1.2?
5. Why has Mexico encountered such a significant collapse from an economic perspective?
6. For a firm of your choice, explain how this firm can grow within turbulent environments using Figure 1.
7. What is one of the single most important factors to judge whether a country is recovering from the global economic recession?
32
References
1 . _______ “Business Cycle Expansion and Contractions.”National Bureau of Economic
Research 2010.
2.
Ibid
3.
Ibid
4.
J. Lahart, “How a Modern Depression Might Look if the U.S. Gets There,” Wall Street
Journal, March 30, 2009.
5.
Ibid
6.
F. Moseley, “The U.S. Economic Crisis; Causes and Solutions,” International
Economic Review, March-April 2009.
7.
____________ “Strategic Planning in a Crisis,” McKinsey Quarterly, 2009.
8.
Moseley, 2009
9.
Ibid
10.
Ibid
11.
Ibid
12.
H. Stern, “Bankruptcies have Banner Year in 2008,” Wall Street Journal, February 26,
2009.
13.
Ibid
14.
E. Andrews and S. Labarion, “Bailout Plan: $2.5 trillion and a strong U.S. Hand,”
Wall Street Journal, February 10, 2009.
15.
Ibid
16.
Ibid
17.
Ibid
18.
J. Hahart, “Gauging the Economy’s Engine as it Sputters Again,” Wall Street Journal,
May 19, 2009.
19.
Ibid
20.
Ibid
33
21.
Ibid
22.
Ibid
23.
__________ “6.7 Million Americans Unemployed: Highest Since 1967,” New York
Times, May 19, 2009.
24.
N. King and J. Stoll, “Government Forces Out Wagner at G.M.,” Wall Street Journal,
March 30, 2009.
25.
Ibid
26.
N. King and S. Terlep, “G.M. Collapses into Government Arms,” Wall Street Journal,
June 2, 2009.
27.
____ “U.S. Treasury Lends $15.4 billion to G.M.,” Wall Street Journal, April 25,
2009.
28.
S. Tercep and N. Shirouzu, “G.M. Gets $4 billion in New U.S. Funds,” Wall Street
Journal, May 23, 2009
29.
____ “Pontiac, 21,000 Workers to be cut in G.M. Plan,” New York Times, April 28,
2009
30.
S. Tercep, “G.M. to Close 1,100 Dealerships,” Wall Street Journal, May 16, 2009.
31.
J. Bennett and A. Kellogg, “New Day for Chrylser as Fiat Arrives,” Wall Street
Journal, June 12, 2009.
32.
Ibid
33.
Ibid
34.
Ibid
35.
N. Bunkley, “Fiat Acquires 35% Stake in Chrysler,” New York Times, January 20,
2009.
36.
Ibid.
37.
V. Bajaj, “Stocks are Hurt by Latest Fear: Declining Prices,” New York Times,
November 20, 2008.
38.
B. Davis, “World Economies Plummet,” Wall Street Journal, May 21, 2009.
39.
Ibid
34
40. L. Bryan and D. Farrell, “Leading through Uncertainty,” McKinsey Quarterly,
December 2008.
41.
D. Luhnow and A. Harrup, “Mexico’s Economy Slumps, Dragged Down by the U.S.”
Wall Street Journal, May 21, 2009.
42.
Ibid
43.
Tanneau, 2009.
44.
___ “Financial Crisis of 2007-2009,” www.en.wikipedia.org/wiki/financialcrisis
45.
Ibid
46.
R. Paul. “Audit of the Federal Reserve Reveal 16 Trillion in Secret Bailouts,” 2012.
47. Ibid
48.
Wagner, Daniel, “Dow closes above 13,000, first time since crises”, The Boston
Globe, February 29, 2012
49.
The Herald-Dispatch, “Nasdaq Cracks 3000, but stocks fall”, 03/01/2012,
http://www.herald-dispatch.com/business/x1744743793/Nasdaq-cracks-3-000-but-stocks-
fall
50.
Ibid
51.
Mullaney, Tim, “Jobless Rate Falling Faster than Many Predicted”, The USA Today,
03/06/2012, http://www.usatoday.com/money/economy/story/2012-01-30/cutting-
the-jobless-rate/53390626/1
52.
Thurm,S, “U.S. Firms Emerge Stronger,” Wall Street Journal, April 9, 2012
53.
Ibid
54.
Thurm,S, “For Big Companies, Life is Good,” Wall Street Journal, April 9, 2012
55.
Ibid
56.
R. Amit and P. Schumacher, “Strategic Assets and Organizational Rent,” Strategic
Management Journal, 1993, 14: 33-46.
57.
B. Wernerfelt, “A Resource-Based View of the Firm,” Strategic Management Journal,
1984, 5: 171-180.
58.
R. Sanchez, “Strategic Flexibility in Product Competition,” Strategic Management
Journal, 16: 135-159.
http://www.herald-dispatch.com/business/x1744743793/Nasdaq-cracks-3-000-but-stocks-fall
http://www.herald-dispatch.com/business/x1744743793/Nasdaq-cracks-3-000-but-stocks-fall
35
59. P. Moran and S. Ghosphal, “Markets, Firms, and the Process of Economic
Development,” Academy of Management Review, 1999, 24: 390-412.
60.
R. Rumelt, D. Schendel, and D. Teece, “Strategic Management and Economics,”
Strategic Management Journal, 1991, 12: 5-29.
36
Harvard Business Cases for Chapter 1
Toyota: The Accelerator Crisis
Product Number TB0243
Google’s Andriod: Will it shake up the wireless industry in 2009 and beyond?
Product Number SM176
Professor Case for Chapter 1
General Motors (G.M.)
Discussion Question:
Explain G.M.’s strategy as it exited Chapter 11 bankruptcy protection. Has this been a
viable strategy? Explain why or why not.
37
Chapter 2
Industry Analysis and Industry Evolution for the
21 st Century
38
Learning and Assessment Goals
1. Understand the challenges of the 21 st century.
2. Obtain the ability to conduct an industry analysis.
3. Determine at what stage firms are in from an industry evolution perspective.
4. Understand the relationship between industry analysis and industry evolution.
5. Understand how Porter’s (1980) 5 forces model changes as a firm moves from
one stage of industry evolution to the next.
39
Firms need to have a very clear objective. This objective is referred to as the
mission statement. All stakeholders of the organization should understand the mission
statement. For example, Southwest Airlines mission statement is “dedicated to the
highest quality of customer service delivered with a sense of warmth, friendliness,
individual pride, and company spirit.” In an era of cost-oriented airlines, Southwest
wishes to become the airline that provides its customers the highest quality of airline
transportation service. This mission may be one reason Southwest Airlines is the only
airline that has been profitable every year since the airline industry was deregulated in
1978.
While the mission statement is what the firm wishes to become, the statement of
strategic intent is how a firm is to accomplish its mission. Strategic intent identifies how
the firm uses its resources to achieve advantage within a competitive environment. The
competitive environment of the 21 st century differs significantly from the competitive
environment of the 1990’s.
The Competitive Environment in the 21 st Century
Some believe that the 21 st century will bring significant change. Gary Hamel (co-
author of The Future of Management) believes that strategic leaders will need to greatly
change how they manage. The 20 th
century model of designing and managing
companies, which emphasized hierarchy and the importance of labor and capital inputs, is
no longer applicable 1 . Forward-looking executives will respond to this challenge by
developing new ways to bring innovative products and services to the marketplace 2 . New
approaches to managing employees and organizing talent to maximize wealth creation
may provide companies with a competitive advantage. As companies change the
direction of the firm, they will have to balance revolutionary thinking with practical
experience 3 .
Scholars believe that the management of technology will be crucial for success
within the first few decades of this century. There are three reasons why technology will
be important in the current and future environment 4 . As Lowell (author of Mobilizing
Minds) says, first is the impact of new technology. Technology provides the availability
of powerful new tools for coordinating human effort. Second, increasing global demand
for goods and services will require companies to be adaptable and innovative 5 . Third,
technology can be used to identify unmet consumer needs much more quickly than in the
past (e.g., iPhone) 6 .
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