CONFIDENTIAL

OPEN UNIVERSITY
MALAYSIA
SEPTEMBER SEMESTER 2011 FINAL EXAMINATION

COURSE CODE DATE DURATION TIME

STRATEGIC MANAGEMENT BMST5103 20 DECEMBER 2011 3 HOURS 2.00 PM - 5.00 PM

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of TWO Parts - PART A and PART B. Read the instructions for each part carefully. 2. Write your answers in the Answer Booklet provided.

This question paper consists of FIVE PAGES of questions printed on both sides of the paper, excluding this page.

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PART A INSTRUCTIONS: 1. THERE ARE TWO {2) QUESTIONS IN THIS PART. 2. ANSWER BOTH QUESTIONS.

The Shakeout at Tenneco

A sprawling

conglomerate,

Tenneco

operates

in such

businesses

as natural gas,

shipbuilding, auto parts, chemicals, and farm equipment. In 1991, the company, which is based in Houston, Texas, was ranked twenty-seventh in the Fortune 500, with sales at more than US $14 billion. Nevertheless, when Michael H. Walsh became president of Tenneco in 1991, he entered a company that had experienced falling earnings for years and was expected to post a net loss of $732 million in 1991. His mission was to turn Tenneco around and restructure its assets.

Walsh was used to the challenge of changing a large company. He had successfully turned around Union Pacific, a large railroad company, and it was on the basis of his reputation as a change agent that Tenneco's board of directors had hired him. On taking over the restructuring effort, Walsh's first step was to analyse Tenneco's problems in order to find out their causes. What he found were serious flaws in the company's structure and culture, which led to poor performance in the various operating divisions. For example, Case, the company's agricultural equipment maker, was in very poor financial shape and was a major contributor to poor corporate performance. To keep Case afloat, top management had continually siphoned off the profits of the chemicals and auto parts divisions, which were doing well. As a result, managers in these divisions had little incentive to improve divisional performance or to cooperate with one another and share resources or capabilities.

Over the years top management had failed to institute a rigorous system of financial and output controls to monitor and control divisional performance. Divisional managers had been allowed to run their operations with little corporate oversight. Consequently, they had made investments that supported their own interests, not those of the corporation. With few checks on their activities, the divisions had become top heavy and non-competitive. Furthermore, as mentioned, they lacked any incentive to cooperate and improve corporate performance together.

Walsh recognised that the way Tenneco's structure and culture were working had become a powerful obstacle to change. He realised that to change divisional managers'

behaviour and overcome the inertia that had brought the company continual losses, he would have to restructure the corporate divisional relationship. He started from the top by changing managers' attitudes and behaviour. First, he instituted a set of output controls and made it clear that these goals would be monitored and enforced. Second, he created a system of teams in which the managers from the different divisions met together to criticise each other's performance. Third, he flattened the corporate hierarchy, wiping out three layers of corporate mangers to bring him closer to the divisions and to let the heads of the divisions function as the company's top management team. Previously, divisional managers had met one-on-one with the CEO, now they operated as a corporate team. After this restructuring, Walsh decentralised more control to divisional mangers. At the same time, he made them more accountable for their actions, since each manager's performance was now more visible to the CEO and to other top managers. As a result, divisional managers had more incentive to improve corporate performance. These changes effectively destroyed the inertia permeating Tenneco's old organisational structure and led to the evolution of a new culture, in which corporate, not divisional goals and values guided divisional behaviour. Walsh continued these change efforts at all levels of the company. To change attitudes and behaviour at the functional level, he instituted a system of quality teams in every division in the company. In these cross-functional teams, employees are expected to search for solutions to improve quality and reduce costs, and Walsh regularly videotapes messages to Tenneco's employees to exhort them to find new ways of improving performance. He also set an example by wiping out top management's perks such as private dinning rooms, luxury yachts, jets, and cars. Throughout the company, Walsh has tried to destroy the old culture of apathy, under which managers and employees were content to maintain the status quo and avoid confronting the company's problems. So far, Walsh's efforts to change the company have been spectacularly successful. Tenneco has been making record profits in the 1990s, and analysts forecast steadily increasing gains over the years from his restructuring efforts. Overcoming obstacles to change in a company may be a very difficult process, but as Tenneco's experience suggests, managers, employees, and shareholders can reap big dividends from it.
(Source: Charles W L. Hill, University of Washington, Gareth R. Jones, Texas A&M University, "Strategic Management: An Integrated Approach, Fourth Edition, Houghton Mifflin Company, Boston, New York, 1998, Chapter 14, Implementing Strategic Change, pp. 452-453 Modified by Dr. Chin Tiam Pok)

Question 1 What had contributed to the huge corporate loss sustained by Tenneco in 1991? Give lWO

(2) reasons to substantiate your answer. Identify and discuss THREE (3) measures
undertaken by Walsh to re-structure Tenneco.

[TOTAL: 20 MARKS]

Question 2 Why had the turnaround strategy initiated by Walsh been so successful? Discuss lWO (2) factors that had contributed towards the success of the turnaround strategy. To what extent had the changes undertaken by Walsh been effective and successful to enable Tenneco to have a turnaround in the 1990s? Relate lWO (2) observations to support your answer.

[TOTAL: 20 MARKS]

PARTB

INSTRUCTIONS:

1. THERE ARE FIVE (5) QUESTIONS IN THIS PART. 2. ANSWER THREE {3) QUESTIONS ONLY.

Question 1

"Strategic management is the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organisation to achieve its objectives". a. What are the main components of strategic management? Give relevant examples to support your answer. [10 marks] Why have many corporations implementing strategic management ultimately failed? Give TWO (4) reasons to support your answer. [10 marks]
[TOTAL: 20 MARKS]

b.

Question 2

"The Board of directors is held legally accountable for a company's actions. Its position at the apex of decision making within the company allows the board to monitor corporate strategy decisions and ensure that they are consistent with the stockholders' interests". a. Examine the importance of the functions and roles of the BOD. [10 marks] b. To what extent can the BOD play an effective role in strategic management? [10 marks]
[TOTAL: 20 MARKS]

Question 3

"Forward integration, backward integration, and horizontal integration are collectively known as integration strategies. Vertical integration strategies allow a company to gain control over distributors, suppliers, and/or competitors". a. b. What are integration strategies? [10 marks] Compare and contrast between a merger and a strategic alliance in the context of an external growth strategy. [10 marks]
[TOTAL: 20 MARKS]

Question 4

"In strategy implementation, it is important that organisational structure should match the strategy and support it. In many cases, a good strategy can ultimately fail because of a rigid and bureaucratic organisational structure". a. b. What is organisational structure? [10 marks] How can organisational structure influence the effectiveness of strategy [10 marks]
[TOTAL: 20 MARKS]

implementation?

Question 5

"According to Kaplan and Norton who developed the Balanced Scorecard Model in 1993, financial information on corporate performance is important, but is not enough by itself. If strategic managers are to obtain a true picture of organisational performance, financial information must be supplemented with performance measures that indicate how well an organisation has been achieving in dimensions such as efficiency, quality, customer responsiveness, and inoovation". a. What is the Balanced Scorecard? What are its advantages? [10 marks] b. Examine critically TWO (2) limitations of the Balanced Scorecard. [10 marks]
[TOTAL: 20 MARKS]

QUESTION PAPER ENDS HERE

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PART A INSTRUCTIONS: 1. THERE ARE FOUR (4) QUESTIONS IN THIS PART. 2. ANSWER ALL QUESTIONS.

The Goodyear Tire & Rubber Company

By the end of 1992 Goodyear Tire and Rubber, the largest tire manufacturer in the United States, posted a profit of more than US $340 million on record sales of more than $11 billion. This was a far cry from the situation in 1991, when the company had a record loss. For a while it looked as if Goodyear, languishing under a debt of more than $3.7 billion, might go bankrupt. What altered its fortunes was a combination of a new CEO, who restored the companys competitive advantage, and a change in the nature of competition within the industry. Throughout the 1980s Goodyears sales had fallen as the company lost market share to its two main competitors, Michelin of France and Bridgestone of Japan. These companies had expanded rapidly into the United States, launching an aggressive strategy to build market share and penetrate the market. Their entry started a price war in the U.S. tire market, which especially hurt Goodyear because of the companys high costs. Goodyear also had a poor record in product innovation and had been slow to bring out new products that would attract its customers back. After the companys huge losses in 1991, its board of directors forced out the CEO, Tom Barrett, and replaced him with Stanley Gault, who had been the CEO of Rubbermaid. Gault immediately began to change the way Goodyear operated to restore its competitive advantage. First, he embarked on a strategy of massively reducing operating costs. Gaults predecessor, Barrett, had started this process by investing more than $4 billion in the 1980s in new, more efficient plant and equipment and by decreasing the size of the workforce by more than 20 percent. By 1991 output per worker had climbed 51 percent. However, Gault took this process much further and began to slash costs everywhere. By example, he showed managers how to reduce costs. He began by eliminating limousines for top executives and replacing them with family sedans. He sold off three of the corporate jets and eliminated the Goodyear airship, based in Houston, Texas. He even removed most of the light bulbs from his office to demonstrate his commitment to lower costs. The other Goodyear managers followed his lead and systematically began their cost-cutting efforts, with the spectacular results previously noted.

To increase market share, Gault also worked to increase innovation, quality, and the speed at which the company introduced new products. Goodyear had many tires in development for years, including one named the Aquatread, a tire that performed very well on wet road surfaces. However, it had been slow to bring them to the market. In 1991 Gault decided on a bold strategy: Goodyear would introduce four new tires at once, including the Aquatread. Each tire was directed at a different market segment. For Example, the Aquatread was aimed at the safety-conscious consumers, whereas another tire was constructed to lower petrol consumption. These moves were very successful. Goodyears new tires, which had higher profit margins than its older tires, restored customers perceptions that the firm was a premium tire manufacturer, and sales of the new tires, particularly the Aquatread, surged. Indeed, Goodyear sold more than 1 million Aquatreads in one year, 20 percent more than its forecast. Gaults combined strategy of reducing costs and raising the differentiated appeal of the companys products paid off in the form of a huge increase in profits.

By 1991, the same year Goodyear recorded its record loss, U.S. tire manufacturers had grown weary of the rounds of price cutting and price wars that had plagued the industry and diminished their profits. Tire manufacturers started to support each others attempts to keep prices up and avoid price cutting. They also began searching for new ways to compete that did not reduce the industrys profitability. One strategy they adopted was to develop new kinds of tires and aggressively market them to customers. Gaults strategy of developing innovative products coincided with this change in the industry from price to non-price competition and helped promote Goodyears turnaround and increased sales. Goodyear and its competitors have all benefited from their new strategy of non-price competition, which has been maintained throughout the 1990s. In 1996 Goodyear introduced a new tire that has a lifetime warranty, and its profits continue to increase as it pioneers ever better kinds of tires.

Source: The Goodyear Tire & Rubber Company, closing Case, Pg 242, Chapter 7 Competitive Strategy and the Industry Environment, Strategic Management: An Integrated Approach, 4th Ed. By Charles W.L.Hill (University of Washington) and Gareth R. Jones (Texas AGM University), Houghton Mifflin Company, Boston, New York. 1998.

Question 1

How did the nature of competition in the tire industry cause problems for Goodyear in the 1980s?

[10 marks]

Question 2

What strategies did Gault develop to turn the company around? Discuss. [10 marks]

Question 3

Based on the four key components of competitive advantage: efficiency, quality, customer responsiveness, and innovation, to what extent has Gault successfully regained Goodyears competitive advantage? Explain.

[10 marks]

Question 4

In what ways was the U.S. tire industry in the 1990s different from that in 1980s? Discuss. [10 marks]

[TOTAL: 40 MARKS]

PART B INSTRUCTIONS: 1. THERE ARE FIVE (5) QUESTIONS IN THIS PART. 2. ANSWER THREE (3) QUESTIONS ONLY.

Question 1 a. With the use of a diagram, critically examine Porters THREE (3) generic competitive strategies. [10 marks] b. In times of economic downturn, which type of strategic business decisions should companies make so as to survive and sustain their competitive advantage? Discuss. [10 marks] [TOTAL: 20 MARKS] Question 2

a.

What is strategic planning process? Critically examine its role in strategic management. [10 marks]

b.

Why has strategic management become so important to corporations today? Why have many corporations that implement strategic management ultimately failed? [10 marks] [TOTAL: 20 MARKS]

Question 3

a.

To what extent organisational culture affects strategy formulating, implementing and evaluating? [10 marks]

b.

How is benchmarking used to evaluate corporate performance? Examine ONE (1) limitation of benchmarking in strategy evaluation. [10 marks] [TOTAL: 20 MARKS]

Question 4

a.

What is the relationship between corporate governance and corporate social responsibility (CSR)? [10 marks]

b.

What is the role of board of directors in strategic management? What recommendations would you make to improve the effectiveness of board of directors today? [10 marks] [TOTAL: 20 MARKS]

Question 5

a.

According to Porter, what determines the level of competitive intensity in an industry? [10 marks]

b.

Using Porters Five-Force Model, assess the intensity of competition within any local or international industrial sector that you have known of. [10 marks] [TOTAL: 20 MARKS]

QUESTION PAPER ENDS HERE