HERIOT-WATT UNIVERSITY

STRATEGIC PLANNING – DECEMBER 2021

GRADING GUIDE

The three questions have been designed to provide the candidate with the opportunity to
apply ideas from the core business disciplines within a strategic framework. There is no right
or wrong, and candidates are not penalised for arriving at ‘wrong’ conclusions; instead, they
are rewarded for identifying that a model can be applied and attempting to do so.

The main points relevant to each question are contained in the Solution. However, student
answers can vary greatly in how models are applied, and often points are made in an
original fashion. Credit is also awarded for integrating ideas from the other disciplines: for
example, the appropriate use of accounting techniques, investment appraisal, theories of
market structure, motivational theories, marketing techniques.

Each question is graded individually in the first instance and all three questions are given an
equal weighting. The marks for individual questions should be allocated in 5% ranges; it is
not meaningful to allocate finer divisions of marks for individual questions. The criteria are:

• 44% and below: a clear fail, where the candidate demonstrates little understanding of
the use of models or knowledge of strategic terminology.
• 45% – 49%: a clear fail, but the candidate demonstrates some knowledge of the
terminology and attempts to apply ideas; the question is of ‘compensatory’ standard.
• 50% – 54%: a clear pass; the candidate applies one or more models such as Five
Forces, portfolio analysis, strategic planning process model, financial analysis, value
chain, generic strategies, etc. There is no hard and fast rule for the minimum
requirement, but it is typically fairly clear when the student has understood the basic
strategy ideas.
• 55% – 59%: a clear pass that contains application of some models and draws limited
conclusions.
• 60% – 64%: clear understanding and some good applications. Contains a variety of
models applied correctly with relevant conclusions drawn.
• 65% – 69%: as above but demonstrates further insight and/or application.
• 70% – 74%: applies models correctly and consistently. The argument is clear and
consistent, with conclusions at each point and drawn together to address the question.
Clear understanding and good applications throughout. A variety of models used to
develop different perspectives.
• 75% and above: candidates in this range demonstrate a mastery of the field of strategic
management in a variety of settings, with thorough and systematic application, insightful
conclusions and/or recommendations and evidence of creative thinking. It is very rare to
award more than 80 for an individual question, but for exceptional answers it is
acceptable.

When grading strategy papers, write a brief reason for failing any question. If the paper fails
on the basis of simple addition of the three marks, review the paper as a whole and decide
whether the candidate has demonstrated an adequate knowledge of the subject and ability
to apply ideas. For these papers, write a brief overall review justifying your decision on either
pass or fail. For example, a candidate may demonstrate a good knowledge of the subject in
two questions and miss the point on the third; you may judge that the candidate has
demonstrated sufficient grasp of the subject and the ability to apply concepts in the two
questions answered well to justify a pass.

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Do not be afraid to award high marks for good discussions. This examination is a severe test
of the student’s ability to apply relevant concepts under a time constraint. Grading is not
simply a matter of adding up the number of points made or models applied: pay attention to
the quality of the argument.

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 HERIOT-WATT UNIVERSITY

STRATEGIC PLANNING – DECEMBER 2021

Question 1

1) Building on the Strategy Director’s comment – There is a need to establish ACME’s

competitive position by a proper strategic planning process, before taking any short-
and long-run courses of action. This should be done by applying strategic models
and developing a SWOT analysis.

Corporate finances

1. Operating surplus is 67% of the Gross Profit. Also, Total Overheads are 6% of
COGS. This suggests that overheads may be fairly low and a not particularly top-
heavy structure. However, Wage Costs are significantly higher than other outlay
costs.
2. Return on Total Assets is 5.5%, which is lower than the 8% cost of capital.
3. Return on Equity is 10%, marginally above the cost of capital. The Net Cash Flow
is small in relation to the debt of $250 million (12% of Operating Surplus). This
raises questions of interest rate exposure and when the debt will be repaid.
4. Gearing ratio is 45% using total assets and 81% using owners’ equity. It is likely
that ACME will have difficulty financing more resources.
5. A significant outlay is interest on loans, which is about 65% of the Operating
Surplus.
6. Corporate HQ costs are 4% of total COGS; it is an open question whether the
parenting advantage of the corporate development activities is justified.

It could be argued that ACME now has little room for expanding its resources further.
However, this also raises the question of how effectively current resources as a
whole are being allocated.

Product finances

WPG EMM FDM

Return on Sales 17 11 9
% of Gross Profit 80 9 11
% of COGS 21 44 35

The WPG still makes the highest contribution to profitability. EMM and FDM
profitability is in question and their costs and/or pricing should be further assessed.

Since the debate is on the distribution of the marketing and development budgets, a
proportional distribution of budget ratio by each product’s costs shows the following:

Percentage of COGS
Cost WPG EMM FDM
Marketing 2 15 21
Development 2 14 24

In relative terms, very little (4%) is spent on developing and marketing WPG, while
FDM is spending 45% of COGS on development and marketing.

The product finances raise questions regarding the allocation of resources. Insight
into their prospects can be gained by the application of strategic models to assess
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how value is created at the product level.

Inventory

Inventory levels:
• WPG: Meeting all orders (JIT).
• EMM: Running down inventories.
• FDM: Increasing inventories.

The cost of FDM increased inventory is $7,308 × 1,250 = $9.135 million.

Approach to inventories seems to be undefined, resulting in a poor inventory

management.

Product life cycle

WPG EMM FDM

Marketing & Development % of Low Relatively High
COGS high
Price vs Competing Price Equal Below Below

• WPG: Maturity. Labour force and inventories are stable, so WPG is being
managed consistently with its PLC position.
• EMM: Maturity. Inventories are declining and next year there will not be sufficient
output to meet demand. Labour force is not aligned with production requirements.
The management of WPG is haphazard and is not consistent with either the
growth or maturity stages.
• FDM: Growth. Inventories are produced in anticipation of further increases in
demand. There is high overtime working and turnover. The FDM is being
managed like a star.

Portfolio – BCG position

• WPG: The market leader in a mature market (despite 6% loss of market share in
last three years) and, therefore, a cash cow. The primary requirement is to
defend its position. Relatively little has been spent on Marketing and Product
Development; 2% of COGS may not be sufficient to defend WPG in a mature
market. Costs have been minimised by JIT and 100% working time.
• EMM: Has a relatively low market share in a stable market and is therefore a
dog. The haphazard management noted above could be an attempt to improve
the dog to cash cow, but this is unlikely to succeed given the dominance of
EnviroTech Inc. The decision must be taken as to whether it should be divested.
• FDM: Has a relatively high market share in a growth market and is, therefore, a
star (although it could still be regarded as a question mark, unless its market
share will indeed increase before the growth in the market stops). In order to
maintain or increase market share, the relatively high expenditure on marketing
and development is essential, as is the competitive pricing. As a result, it is to be
expected that FDM will not generate a high level of return in the short run.

Price differentiation

• WPG: Was originally in the success area but with its low marketing and lack of
development it is losing market share and shifting towards the uncertain area.
• EMM: Has been overtaken by competitors, and the fact that it has been unable
to increase market share suggests it is in the fail area.

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• FDM: Has high marketing and development and low competing price. The fact
that it has achieved 15% market share suggests that it is in the success area.

Five Forces

Competitive force WPG EMM FDM

Threat of new entrants Low: mature High: growing Low: mature
Threat of substitutes High Low Low
Bargaining power of buyers Low High High
Bargaining power of suppliers - - -
Rivalry High High High

It emerges that the markets are highly competitive but that the profiles are different,
with the implication that competitive responses in each should be different, in terms
of pricing, marketing and development.

Experience curve

The high levels of attrition on EMM and FDM mean that labour productivity is not as
high as it could be and hence costs are higher.

Value chain

There are weaknesses in primary activities, such as operations, where EMM is

running out of resources, and poor inventory management in EMM and FDM.

In support activities, human resource problems are not being addressed, and EMM
requires technological development.

FDM is still an unrelated diversification, as a result of acquisition of SenseIT.

Competence-wise: overtime work on FDM supports the Operations Director’s
comment on the different skill-sets for FDM, which are not available internally.

There are no value chain linkages among the products and no synergies. There is
limited efficiency – the business is perceived as three independent activities rather
than one integrated production system.

Competitive position

SWOT analysis

Strengths Opportunities

WPG cash cow Differentiate WPG further

FDM star Develop FDM into cash cow
Weaknesses Threats

EMM dog Technological change in WPG

High gearing Entrants into FDM growing market
Inefficient resource allocation Interest rate increase
Interest rate exposure
Inefficient value chain
Unrelated diversification (FDM)
Labour productivity
ROA lower than cost of capital

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 There is direct alignment (Type A) with clear implications for ACME to mobilise
strengths to take advantage of opportunities and tackle weaknesses to counter
threats; in particular, the weaknesses will made it difficult to counteract the threats.

In the short run, the CEO is advised to deal with issues related to survival and
marginal efficiency improvements.

In the long run, management is advised to deal with issues related to sustainable
competitive advantage.

2) The Finance Director focuses on the distribution of the marketing and development
budgets, believing that by maximising returns in the short run, ACME will become
efficient and financially sustainable in the long run. He demonstrates no
understanding of strategic models and hence of the basis for competitive advantage.
For example, his profitability analysis suggests that EMM and FDM are similar,
whereas in terms of the BCG they are in fact in different quadrants. By adopting his
approach, FDM will not be developed into (or maintain its position as) a star. Nor
does he understand the need to differentiate the products, or recognise the need for
expenditure on better working conditions, training and HR generally.

In the analysis of each strategic model it has been shown that the Finance Director’s
tight financial control policy would exacerbate the problems, or cause problems
where none already exist. ACME’s focus should be on further differentiation and
development and not on expenditure efficiency; otherwise, its competitive advantage
would be undermined.

(Total 100 marks)

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Question 2

An examination of the strategy process at McDonald’s reveals a number of issues:

Who Decides to Do What

Strategists

Mr Easterbrook seemed to be a reactor; there was little evidence to show that he had a clear
plan to either expand into new markets or defend existing ones.

Significant principal–agent problems existed. There was an issue with the board of directors
acting in their own interest rather than that of the company. The lack of external scrutiny and
relatively low turnover seems to have resulted in groupthink. There was also a principal–
agent problem between McDonald’s at the corporate level and the franchisees. The interests
of the two were no longer aligned and what was once a strength had become a weakness.

Objectives

While a number of initiatives had begun, there was no clear business definition and the
competitive threat has not been addressed.

Analysis and Diagnosis

Macroenvironment

Some relevant issues:

• P: increased regulation of high sugar/fat foods. Minimum wage legislation.

• E: Growing economy stops people looking for cheap options
• S: more awareness of healthy options among younger customers

Overall, the macro environment was pretty unfavourable for McDonald’s and it was not clear
that Mr Easterbrook has addressed any of the issues.

Industry Environment

Porter’s Five Forces

Force Threat Comment

Threat of new entrants H Many new competitors appearing
Buyer power H Lots of choice
Supplier power – –
Threat of substitutes H Variety of alternatives to fast food
Existing rivalry H Increased competition from incumbents

While the details were open to debate, the competitive pressures for McDonald’s were
intense. Mr Easterbrook had not addressed the competitive threat.

Price Differentiation Matrix

The entry of chains such as Shake Shack meant that McDonald’s was seen as inferior
quality. It had slipped into the ‘success uncertain’ area of the price differentiation matrix.

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PLC and BCG

McDonald’s faced a complex set of operating conditions around the world and Mr
Easterbrook’s reorganisation appeared to take account of that. By reorganising the reporting
segments he had effectively restructured the company around BCG quadrants:

• The US - a cash cow with low growth and high market share
• International Lead Markets - another group of cash cows with low growth and high
market share
• High Growth Markets - question marks and stars
• Foundational Markets - possibly profitable dogs

The reorganisation may have allowed managers to focus their efforts on similar challenges
and fitted the logic of the BCG matrix.

Internal Factors

Value Chain

Aspect Issues Actions taken

Operations and Complexity, reducing speed and Some reduction in menu
service accuracy of service items but added complexity
with all-day breakfast
Marketing Poor company image Increased wages for hourly
paid staff
HR Difficult franchisee relations Not addressed

The relationship with franchisees had been a fundamental strength of McDonald’s in the
past but it had turned into a weakness. It had not been addressed by Mr Easterbrook.

Culture

Perhaps a role culture had emerged at McDonald’s HQ, which eroded motivation for
proactive employees.

Capabilities and Competences

It is not clear where McDonald’s competitive advantage came from. A lot of the things that
previously made it successful had been copied by new competitors and improved.

Choice

Generic Strategies

At the corporate level it appears that Mr Easterbrook was looking at an element of both
retrenchment and expansion.

At the business level it was not clear whether McDonald’s was pursuing cost leadership or
differentiation. McDonald’s was stuck in the middle.

Variations

A lot of the moves in the past had involved acquisition of new resources and the
development of new routines, e.g. McCafe and wraps. This was unrelated diversification.

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Implementation and Feedback

Structures

The restructuring of reporting divisions realigned the company around the four BCG
quadrants.

Resource Allocation

Unclear if any major reallocation was occurring.

Evaluation and Control

McDonald’s exerted tight control over its franchisees, which had affected the relationship for
the worse.

Feedback

McDonald’s did not seem to be a learning organisation.

Overall Strategic Process

Mr Easterbrook had made a start by realigning the company structure around the BCG
matrix but the analysis reveals a number of weaknesses in the strategic process, such as
unclear objectives, various value chain weaknesses and an unchecked competitive threat.

(Total 100 marks)

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Question 3

1. To be reasonable the objectives have to be achievable and fair.

It is difficult to see how Marketing can project the same image of high quality and low
cost. The combination of high quality and low price introduces a conflict because it is
typically impossible to achieve high quality while having lower costs than
competitors. The perceived price differentiation model demonstrates that there is a
trade-off between price and differentiation but it is very difficult to shift products
upwards; there is a danger that individual products will lose their focus on either low-
cost leadership or differentiation and end up stuck in the middle.

The definition of high quality can take various forms. The ‘marketing message’ may
not be consistent with the actual quality of the product.

The objective to reduce headcount in all divisions ignores the fact that some divisions
may already be operating at full capacity. The threat of being fired could have a
negative impact on morale with implications for productivity and attrition. The
positions in the product life cycle and the BCG matrix also need to be taken into
account.

Performance management systems are notoriously difficult to implement effectively

and quite often have the opposite of the desired effect because of principal–agent
problems.

2. Objective setting is only part of the strategic process.

The first objective suggests a generic choice which is neither low-cost nor
differentiation and will lead to being stuck in the middle.

The second objective is concerned with resource allocation and takes no account of
efficiency criteria.

The third objective is concerned with improving the value chain but takes no account
of other value chain factors, or linkages among components of the chain.

Building a robust strategic process takes more than focusing on a few (random)
components.

(Total 100 marks)

© Heriot-Watt University, December 2021

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