978-0078025532 Chapter 2 Lecture Note

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Chapter 2 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map

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Chapter 2

Implementing Strategy: The Value Chain, the Balanced Scorecard,

and the Strategy Map

Teaching Notes for Cases

2-1. Atlantic City Casino: Value Chain Analysis; The Balanced Scorecard

Most cases in value chain analysis are in the retailing or manufacturing industries. This case gives

an opportunity to develop a value chain for a service firm and to see the differences in application in that

context. The point is to show the students that the value chain concept has useful application in both

contexts.

Some useful background information regarding the actual case situation is provided below. This

information can be used to enhance the discussion when needed. A good starting point of the discussion is

to have the students describe the competitive environment of Atlantic City gambling casinos, at which

time, much of the following information may emerge. If not, the information can be supplied during the

discussion, or if desired it can be added to the case material given to the students to prepare.

Background Information:

Customer surveys indicated that a vast majority of the visitors to Atlantic City gambling casinos

are middle-age adults who live within 150 miles of Atlantic City. Further, there are 2 distinct groups of

visitors. Approximately 17 percent of the visitors are frequent visitors, averaging 24 visits per year and

accounting for 67 percent of all visits. The remaining 83 percent of the clientele are infrequent visitors

averaging 2 to 3 visits per year and accounting for 33 percent of total visits. The firm found that

approximately 11 percent of the people living within a 150 mile radius visit Atlantic City annually. This

compares with 14 percent of the people living in Las Vegas’ primary marketing area who visit Las Vegas

annually. Thus it appears that future market expansion is possible.

The firm also noted that there has been a change in the mix of mode of transportation for visitors.

Initially 92 percent of all visitors arrived by private car, now 44 percent arrive by bus. This change is

significant as there is a difference in spending patterns. Auto travelers tend to spend a couple of days in

the city. Hence they eat more meals and need lodging. Bus travelers are usually day trippers who come

only to gamble. They do not need lodging and generally only eat lunch, some snacks and beverages.

Casino winnings average $37 per visit for bus travelers and $120 per visit for auto travelers.

Chapter 2 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map

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1. The value chain for the Atlantic City Casino (ACC) follows, both with and without the theme park. The

class discussion of strategy will likely have a number of divergent views. Many will say ACC competes

on differentiation, thinking that gambling is not a “cost–sensitive” business. However, I push the class to

look carefully about what brings a customer into one casino rather than another. Some students will say

that gamblers only want access to gambling, and that service and other enhancements (as in a

differentiation strategy) will not be important. They will also point to the fact that the case says the ACC

has “no distinguishing characteristics.” On balance, most students argue that what brings customers into a

casino is the “pizzaz” and excitement generated by the casino, and they observe that most casinos have a

theme, such as a tower or a circus, etc. It is important in this discussion to distinguish Las Vegas and

Atlantic City, as the style of the casinos is quite different on the average. While theme-based casinos are

the norm in Las Vegas, those in Atlantic City are more oriented to “just for gambling” types of customers.

Most Atlantic City visitors come by bus in ones or twos and do not stay long, while in contrast, the Las

Vegas visitor is likely to stay longer and to bring the family. Thus, the differentiation concept probably

applies more clearly to Las Vegas and less so for Atlantic City.

Looking at the steps in the value chain, one can target possibilities for cost reduction and/or value

enhancement. For example, a close look at steps two and three in the chain can help to study and identify

the most effective forms of advertising and promotion⎯types of advertising for example which are more

targeted to the types of customer and the mode of transportation they use to come to the casino.

Chapter 2 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map

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STEPS IN

THE VALUE

CHAIN

ACTIVITIES AT

EACH STEP IN THE

VALUE CHAIN:

WITHOUT THEME

PARK

ACTIVITIES AT EACH

STEP IN THE VALUE

CHAIN: WITH THEME

PARK

DIFFERENCE ;

STRATEGIC ISSUES

Step 1: Obtain

the right to

compete: federal

and local laws

and ordinances

Licenses, fees, and other

activities and reports to

support compliance

Licenses, fees, and other

activities and reports to

support compliance

Little difference: potentially

some additional compliance

required for new services for

children; baby-sitting, etc.

Step 2:

Advertising and

promotion

Advertising focused on

traditional media locations;

mostly local, and targeted to

specific audiences – those

living within 150 miles, and

are middle aged or older

Advertising and promotion

focused on a younger

audience, those with kids,

promotions for families (kids

stay free etc…)

Probably little difference in

the amount of advertising and

promotion, though the nature

of the advertising will differ.

Will younger adults be

attracted to the casino as older

adults have been?

Step 3: Local

and regional

transportation

Most visitors now arrive by

bus and stay one day (not

overnight); the proportion of

bus visitors is also

increasing ⎯from less than

5% when the casino opened

to more than 44% currently.

There is a need to focus on

travel agents and on

providing affordable bus

trips for this audience

New focus likely to be on car

traffic (is there sufficient

parking?) and some air travel

for families, in addition to the

bus traffic. Affordable air-fare

packages for families might

be a good idea.

The transportation patterns are

likely to be quite different and

the need for parking, taxi

service, and the like will be

different. What are current

airport facilities like? How

close is the casino to the

airport?

Step 4: Casino

operations

Traditional coverage and

security

While the coverage of the

casino operations is likely to

be same as without the theme

park, with more children

around, security will need to

be increased

Is the area around the casino

safe for children? Will parents

worry about safety?

Step 5: Hotel

Operations

Traditional coverage and

security

While the coverage of the

hotel operations is likely to be

same as without the theme

park, with more children

around, security will need to

be increased. Also there will

be a demand for new services:

baby-sitting, activities for

children, …

New mix of services;

increased need for security?

Step 6: Theme

Park

NOT APPLICABLE

The theme park will attract

additional visitors to the

casino and to the hotel; also,

the theme park is expected to

be profitable as well.

Strategic issues:

Does management have the

ability to manage a theme

park; can it acquire this

expertise?

Are there other theme parks in

the area which would complete

with this one?

Chapter 2 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map

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2. The value chain analysis above, and in particular the right-hand column comparing the options and

indicating strategic issues can be used to help understand the strategic issues in the choice facing Atlantic

City Casinos. Perhaps noting the increase in the number of visitors coming by bus (and not staying

overnight), casino management is looking for ways to attract a different audience who will also use the

hotel. If the theme park is successful, it will provide the needed new audience⎯parents with children who

will use the hotel. Of course, there are a number of related questions. For example, will parents be willing

to bring their children to a theme park which is on the grounds of a casino? What security issues will

arise? And, will the casino’s current guests be put off by the presence of a theme park and more children

around the area. It is likely that casino and hotel management can respond to these issues, but is there a

specific and reasonable plan?

The benefit of the value chain for management analysis is that it helps to show how the theme

park will affect current operations “upstream” of the casino, i.e., the effect on transportation patterns and

the like.

In addition to the value chain analysis, an analysis can be done on the data in the tables in the

case. Exhibit 1 illustrates an example of a type of data analysis. Note that Atlantic City Casino is currently

near the median of the 10 casinos on all the reported descriptors (note also that the data for Casino #9 is

only part year and should be either ignored are extrapolated). In contrast, Casino #6 is clearly the

differentiator, with higher prices, less space, and higher operating costs. Also, least squares regressions on

this data show no significant relationships except for a strong positive relationship between room revenue

and casino revenue (which make sense; many casino visitors choose to stay at the hotel), and between

casino revenue and beverage revenue (again, many of the casino visitors are also likely to order

beverages). Also, note that ACC is among the highest hotel revenue per room and casino revenue per

square foot. This suggests that it is more upscale than some of the other casinos. This is a plus for the

environment of security desired for families, but then the price might be too high for families.

Exhibit 1

Casino Room

Casino Number of Net Revenue Revenue

Sq Ft Rooms Restaurants Casino Rooms

Beverages

Income per Sq ft per Rm

ACC 50,850 521 7 220,183 14,862 36,833 23,921 4.3300492 28.52591

1 59,857 727 9 254,753 17,604 36,457 40,979 4.2560269 24.2145

2 59,296 645 9 224,077 14,836 34,493 18,834 3.7789564 23.0015

3 59,439 512 9 237,700 15,787 35,168 47,146 3.9990579 30.83398

4 49,639 501 14 158,602 9,897 18,788 1,574 3.1951087 19.75449

5 52,083 750 7 210,848 13,870 35,265

64,765 4.0483075 18.49333

6 40,814 504 8 251,675 17,665 33,867 17,904 6.166389 35.04960

7 50,516 500 5 147,037 10,191 35,020 (9,075) 2.9107016 20.38

8 34,408 504 6 121,581 13,469 21,836 2,246 3.5335096 26.72420

9 60,000 612 8 123,947 12,157 22,643 (1,176) 2.0657833 19.86437

Revenues

Chapter 2 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map

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3. Four areas of the balanced scorecard, and potential critical success factors:

a. Financial Performance: hotel revenue per room, casino revenue per visitor, trend in earnings

by month, trend in revenues (casino, hotel, food services) by month,

b. Customers: survey of customer satisfactions, number of visitors per month relative to other

casinos, number and nature of customer compliments and complaints, changes in customer

demand for different types of games,

c. Learning and innovation: training hours for employees, log of employee suggestions and how

these are used, etc.

d. Operational Performance: employee complaints, injuries; security violations, etc

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2-2. Sovera Enterprises: Strategic Analysis

1. At least four general characteristics that differentiate the three Sovera Enterprises subsidiaries include:

• Growth potential

• Profitability

• Discretionary cash flow

• Level of risk

These characteristics influenced the formulation of a different strategy for each subsidiary in the

following manner:

• LaBue Videodiscs subsidiary has promise to be a leading player in the videodisc market if it can

develop a moderately priced videodisc record/player before its competition. Because of LaBue’s

profit potential, the corporation has placed a high priority on the growth of this subsidiary by

allocating discretionary resources to support its product development efforts and growth.

• Ulysses Travel has a high level of risk associated with both profit and growth potential. This is a

mature company in a very competitive business. The plan to divest agencies with the biggest drain on

resources will reduce the risk.

• Reddy Self-Storage’s growth potential is limited as the self-storage market has slowed considerably.

The subsidiary has predictable profits that will allow it to generate cash (cash cow). To maintain

profitability, the subsidiary has been directed to maintain efficient operations and maximize cash flow

to support the expansion and operating plans of the other subsidiaries.

2. The likely effects of these three strategies on the behavior of the top and middle management of each of

the three businesses include the following:

LaBue Videodiscs:

• Top management will be challenged to develop a moderately priced unit and to capture market share

before the competition enters the market.

• Top management and middle management will view the strategy of developing all future officers as a

career opportunity. There will be high morale and loyalty to the group and the company.

Ulysses Travel Agencies:

• Top management will be challenged to efficiently dispose of the resource-draining agencies, to

operate the remaining agencies on a profitable basis, and to grow in geographical areas where

adequate profit potential exists.

• Middle managers, particularly those in the least productive agencies, will view their jobs as

threatened because the method of their agencies’ disposal is not yet defined (e.g., outright closure or

sale to another party).

• Middle managers will view the strategy of developing all future officers in the videodisc subsidiary as

limiting their careers. Morale and motivation are likely to be low.

Reddy Self-Storage:

• Top management will be challenged to operate this subsidiary in an efficient, cash generating manner,

while taking any opportunity to grow as the market may grow. Their motivation will be limited as

little market growth exists, and the excess cash generated will be diverted to other business units.

• Middle managers will view the strategy of developing the corporation’s future officers in the

videodisc subsidiary as limiting their careers.

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2-3. Recreational Products, Inc.: Strategy; International

1. A class discussion of competitive strategy is likely to take many directions. The important thing is to

develop a productive discussion, and to make sure that each idea is well supported, and not to insist on a

specific conclusion. Some important points to raise, if they do not come up in the discussion are that RPI

is known as a very high quality producer with features and prices higher than most in the industry (per the

case) which suggest the differentiation strategy. The critical success factors are likely to follow the

competitive strategy⎯focus on quality and innovative features. This means that the production costs will

not be the first concern, but that the ability to install high quality manufacturing processes would be most

important.

2. The Singapore plan will work as long as the differentiation strategy can be achieved⎯high quality

production and innovative features. Would the Singapore location be an advantage in achieving quality

and innovation, or would there be a potential negative effect? For example, it is possible that the

availability of highly skilled labor in Singapore would be an advantage. Moreover, it is possible that the

government of Singapore would partially or wholly subsidize research into new sailboat features if the

research is conducted in Singapore, using at least in part Singapore facilities and personnel. The

opportunity for an integration of the development of the innovations with the manufacturing operations

would be a further advantage.

3. Some of the key international issues are noted in the case. There are differences in taxes, and Singapore

offers the advantage of a tax holiday (how many years?) and a subsidized loan. Other issues to consider

are the stability of the Singapore dollar relative to the United States dollar. In recent years the Singapore

dollar has been appreciating relative to the US dollar, which has both advantages and disadvantages. As

the Singapore currency appreciates, expenditures in local currency become more expensive from the

standpoint of RPI. Similarly, the retail prices in US dollars in the United States for the completed sailboat

will have to rise to offset these increased costs. RPI can manage the effects of the currency changes by

appropriate financial policies, including long term purchase contracts.

Chapter 2 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map

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Teaching Strategies for Articles

2-1: “How to Report A Company’s Sustainability Activities”

This article explains the concept of sustainability and its role in the corporation. It describes how a firm

can measure and report its outcomes and efforts regarding sustainability within a balances scorecard.

Discussion Questions:

1. What is meant by sustainability? What measures are included in a sustainability report?

The article states that “Sustainability reporting includes economic, environmental, and social

indicators that help monitor progress toward sustainable practices.” Sustainability is the operating

2. How many companies issued sustainability reports in 2005? Cite your source for this information.

3. Are sustainability goals important to shareholders of public companies? Why or why not?

4. How can sustainability be included within the balances scorecard? Base your answer on the Global

Reporting Initiative (GRI) reporting guidelines and its three categories of indicators:

Sustainability can be included as a separate perspective in the balanced scorecard, as illustrated in the text

chapter. Also, as the article shows in Tables 1, 2, and 3, sustainability measures also have a relationship