978-1259278211 Case 11 Solution Manual Part 2

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1. SECONDARY QUESTION: What forces in the external environment might affect

GreenWood’s choice of strategy?

NOTE this section does not have any accompanying PowerPoint slides.

Referencing Chapter 2: Analyzing the External Environment

Organizational leaders must become aware of factors in the overall environment that might affect

their ability to create a competitive advantage. So how do managers become environmentally

Environmental scanning involves surveillance of a firm’s external environment to predict

environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint

Environmental monitoring is a firm’s analysis of the external environment that tracks the

evolution of environmental trends, sequences of events, or streams of activities. Leaders need to

What factors or trends might be most important to GreenWood? To assess how the external

environment might affect GreenWood’s strategy, it’s necessary to take a look at the factors in the

Sociocultural/Demographic: Worldwide there was more awareness of the need for forests – tree

plantations were under increasing scrutiny by environmental groups and expected to use

sustainable practices. On the other hand, there was more and more demand for wood and wood

Technological: Technological advances in the biological sciences as well as in planting and

harvesting techniques all helped improve the efficiency of tree plantation production: the

Political-Legal: Political-legal issues, especially the issues around country regulations for

Considering the cultural and institutional distances between the U.S. and China, as reflected in

the location disadvantages (i.e., weak intellectual property protection, complex ownership

Just as Brian pointed out:

Since the No. 9 state council decree was promulgated to encourage Chinese people to go

out and grow trees in 2003, a lot of entrepreneurs jumped in. The market was

overwhelmed. Some entrepreneurs were doing the wrong thing. For example, “Wanli

The above indicates that GreenWood’s patience and caution seemed to be warranted. On the

other hand, one can argue that the company moved too slowly. For example, some students may

argue that GreenWood could have taken advantage of China’s accession to the World Trade

Overall, instructors can allude to GreenWood’s then small-scale operation in the home country

and its limited resource base, which probably makes a slow process necessary to avoid serious

blunders. Instructors may also refer to the statement in the case of Hunter Brown, the COO of

2. SECONDARY QUESTION: What business-level and corporate-level strategies did

GreenWood pursue? And how did GreenWood adopt entrepreneurial strategies in its

quest for growth?

Referencing Chapter 5: Business-Level Strategy

The question of how to compete in a given business to attain competitive advantage requires an

assessment of the types of competitive strategies, including the three generic strategies that are

used to overcome the five forces and achieve a competitive advantage:

●Overall cost leadership

oLow-cost-position relative to a firm’s peers

●Differentiation

oCreate products and/or services that are unique and valued

●Focus strategy

oNarrow product lines, buyer segments, or targeted geographic markets

Ask the students which strategy they think GreenWood Resources should pursue, and why.

Although any company in a commodity-based industry must keep costs low, if only to achieve

parity with competition, GreenWood Resources has chosen to compete through differentiation.

Referencing Chapter 6: Corporate-Level Strategy

Thinking about combining resources to achieve a competitive advantage, corporate strategy

focuses discussion on the questions of what businesses a corporation should compete in, and how

Diversification is the process of firms expanding their operations by entering new businesses. In

related diversification, a firm enters a different business in which it can benefit from leveraging

core competencies, sharing activities, or building market power. Some possibilities include:

●Mergers and acquisitions

●Strategic alliances

Whatever the choice, it should create value for all stakeholders – employees, suppliers,

Companies can achieve synergy through diversification in two ways:

Through related businesses (horizontal relationships)

●Sharing tangible resources

Or through unrelated businesses (hierarchical relationships)

●Value creation derives from corporate office

Core competencies reflect the collective learning in organizations – how to coordinate diverse

production skills, integrate multiple streams of technologies, and market diverse products and

Sharing activities means that value chain elements are shared across business units, so that two

GreenWood’s strategy included significant focus on internal development and also well-planned

As previously stated, Greenwood Resources had started with a poplar plantation in the

northwestern U.S. While managing that tree farm, Dr. Brian Stanton, a renowned expert in poplar

hybridization and genetic improvement, had joined the team to research the development of

As a result of acquiring these skills, and demonstrating the ability to share activities, GreenWood

Referencing Chapter 8: Entrepreneurial Strategy and Competitive Dynamics

Entrepreneurship involves the creation of new value by an existing organization or new venture

For an entrepreneurial venture to create new value, three factors must be present – an

entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or

Entrepreneurs need to understand the concept of opportunity recognition: the process of

discovering and evaluating changes in the business environment, such as a new technology,

sociocultural trends, or shifts in consumer demand that can be exploited. Changes in the external

Resources are an essential component of a successful entrepreneurial launch. The most important

resource is usually money, but human resources, strong and skilled management, is also an

Launching a competitive venture requires a special kind of leadership involving courage, belief

in one’s convictions, and having the energy to work hard. Three characteristics of entrepreneurial

leaders are:

●Vision

To achieve excellence, venture founders must understand the customer, provide quality products

Regarding off-shore entrepreneurial ventures, technological advances in telecommunications and

transportation have made it temptingly easy for entrepreneurial or relatively new ventures to go

GreenWood had been careful and patient in trying to understand the Chinese market and business

practices prior to making its commitment. Given the internal (financial and human) resource

constraints, the relatively slow pace of the industry, and the uncertainties and challenges of doing

Was Jeff an atypical optimist or was he representative of many ambitious entrepreneurs in

international expansion?

3. OPTIONAL QUESTION: Which is the best investment partner: Luxi or Dongii?

NOTE: This discussion is perhaps best conducted with advanced students who have

experience with financial analysis.

GreenWood spent a lot of time building relationships and negotiating with the potential partners

(i.e., Luxi Forestry Bureau and Dongji Lideng Forestry Development Co., Ltd.) and meanwhile

The potential benefits and risks in partnering for both the Luxi and Dongji projects are displayed

in Exhibit IM-3. Despite the potential risks, GreenWood needs the local partners for investment

As one of the important contributors to transaction cost/internalization theories, Hennart (2009)

argues that some form of joint venture is economically desirable if a multinational’s ownership

advantages (esp. the knowledge assets) and the complementary assets held by local owners are

As noted previously, although GreenWood decides to set up a wholly owned subsidiary to

manage its operations in China, Jeff also considers joint ventures. Hennart’s (2009) recent work

The case says: “By March 2009, GreenWood had assessed some twenty potential investment

projects in China. The Luxi and Dongji projects passed the initial phase of screening and became

Since GreenWood has been striving to “achieve [its]vision of maximizing long term returns for

[its] investors and fulfilling the company ’s social and environmental responsibilities,” the

Economic Analysis

As demonstrated in Exhibit IM-4, instructors may ask the students to spell out the economic

pros and cons of the Luxi and Dongji projects without conducting any sophisticated financial

For a more thorough analysis of these two potential investments, net present value (NPV) and

Detailed Financial Analysis

For Year 1 of each rotation, it will cost RMB 1109 (367 + 110 + 632) (see case Exhibit 8) for

planting and crop caring per mu in Luxi and RMB 387 (87 +45+255) per mu in Dongji. For the

The harvest in Luxi will take place at the end of year 7 while for Dongji it will be at the end of

As noted in the case, a discount rate of 10 percent is used in calculating NPV. For many foreign

investments, a higher discount rate is normally used for their Chinese projects. For the broadly

The residual value per mu will be the value of tree assets per mu subtracting accrued expenses

Scenario 1

We assume the growth rates for Luxi and Dongji are 1.8m3/mu/year and 0.9m3/mu/year

In Luxi, the positive cash flow per mu at the end Year 7 will be (RMB 559/m3 * 1.8m3 * 7) –

The investment period is assumed to be seventy years (Note: The longest lease in China is

seventy years). For Luxi, the residual value per mu is:

For year 1 tree assets, it is RMB (559/m3 * 1.8m3 – 1109) = RMB (–102.8);

For year 2 tree assets, it is RMB (559/m3 * 1.8m3 * 2 – 1109-477) = RMB 426.4;

For year 3 tree assets, it is RMB (559/m3 * 1.8m3 * 3 – 1109–477 *2) = RMB 955.6;

Therefore, the average residual value per mu will be the addition of the above numbers divided

by 6, namely RMB 1220.2.

Similarly, the average residual value per mu for Dongji is RMB 1087.5.

The calculation shows that the Luxi project will result in an NPV of RMB 1473.10 per mu and

an IRR of 16.2 percent, while the Dongji project will have an NPV of RMB 815.90 and an IRR

Scenario 2

If we assume the growth rate is 1.5m3 and 0.7m3 per mu/year for Luxi and Dongji respectively,

Scenario 3

We assume that the investment period is about thirty years. To simplify the estimation, we will

Then, the NPV will be RMB 260.14 and RMB 275.98, and the IRR will be 11.3 percent and 12.7

Scenario 4

We assume that the investment period is about thirty years and GreenWood will not be able to

We may also contemplate some absolutely worst-case scenarios. For example, if GreenWood has

to abandon the project due to political risks or reputation risks within the first three years of its

The overall conclusion is that both projects are economically attractive. Although Dongji seems

to have a higher estimated IRR, the case indicates that the growth rate of 0.9m3 per mu per year

(scenario 1) is optimistic whereas it is believed the locally tested GreenWood elite plant

If pedagogically necessary or helpful, instructors might also feel free to discuss the potential

foreign exchange risks which include that (1) the required capital in U.S. dollars could be

Although the analysis of foreign exchange risks will be useful for the students, it may be helpful

to know that the issue is never a main concern for GreenWood and Oriental for two main reasons

NOTE: Students with limited finance knowledge and quantitative skills may feel challenged in

conducting the above quantitative analysis. For a class with different majors and backgrounds,

instructors may ask the students to form diverse teams to work on the analysis. If most students

Social and Environmental Impact Analysis

As noted earlier, Porter and Kramer (2006) argue that firms should adopt a strategic approach to

fulfill corporate social responsibility in which a firm’s long term competitive advantages and

positive social impact will be mutually reinforcing. Specifically, they suggest that firms clear

away as many negative value-chain social impacts as possible such as emissions, waste, and

Among GreenWood’s integrated value chain activities such as tree improvement, nurseries, tree

farm operations, product (i.e., log, lumber, chips) sales, and trading and eco-system services (i.e.,

monetizing carbon credits, biodiversity credits, water quality and renewable energy credits and

Based on the analysis shown in Exhibit IM-6, instructors may conclude that both projects can

contribute to GreenWood’s competitiveness and at the same time, generate substantive social

value. For the Luxi project, the overall strategic value will be somewhat higher because the

Some students may conclude that the economic value of the Dongji project is comparable to that

of the Luxi project and, based on the notes in case Exhibit 9, its environmental (or ecological)

It is OK if some students strongly believe that combating desertification is strategic for

GreenWood. This is a rather complex issue. On one hand, combating desertification may help

enhance GreenWood’s research competencies in the long run. That’s why Dr. Stanton is excited

Other students may argue that the overall differences between the two projects are not that

substantive and GreenWood can make both investments at the same time given the availability of

Two key factors may be (re)emphasized here. First, GreenWood is pursuing a sustainable

business model that incorporates the triple bottom line of performance. Jeff believes that it’s the

right thing to do. Many global institutional investors such as International Finance Corporation