978-1259278211 Chapter 3 Solution Manual Part 2

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II. Resource-Based View of the Firm

The resource-based view of the firm (RBV) combines two perspectives: (1) the internal

analysis of phenomena within a company, and (2) an external analysis of the industry and its

EXHIBIT 3.5 addresses the types of resources that firms possess: tangible resources,

intangible resources, and organizational capabilities.

Discussion Question 20: What are some examples of firms that are particularly strong

(or weak) with regard to the items in Exhibit 3.5?

Discussion Question 21: Can you provide examples of firms that have effectively (or

ineffectively) integrated their strengths regarding some of the items in Exhibit 3.5?

Throughout this section we focus on the importance of integrating value-creating

A. Types of Firm Resources

This rather brief section discusses each of the three types of resources—tangible,

Tangible resources are assets that are relatively easy to identify and include financial,

Intangible resources are much more difficult for competitors to account for or imitate.

At the end of this section, we discuss how various social networking sites can severely

damage a firm’s (Comcast) reputation.

Discussion Question 22: What are some examples of other companies whose reputation

was damaged when a product failure or other mishap became public knowledge? What

were the strategic implications for those companies?

Discussion Question 23: In general, what steps should companies (as well as students!)

take to protect their reputations?

Organizational capabilities are not specific tangible or intangible assets. They are

competencies or skills that a firm employs to transform inputs into outputs. We present the

B. Firm Resources and Sustainable Competitive Advantages

For a firm to earn a sustainable competitive advantage, a resource must be: valuable, rare,

To encourage student discussion, ask the students:

Discussion Question 24: What are some examples of products (and services) that did not

possess these four characteristics and subsequently did not provide sustainable

advantages for the firm?

The SUPPLEMENT below addresses the vast variety of consumer products on the

 Extra Example: The Vast Variety of Consumer Products

Imitation products have proliferated the consumer products market with 31,000 new consumer products in 2000

alone. The average grocery store stocks 40,000 items. There are 16 flavors of Kellogg Eggo waffles, nine kinds of

Kleenex brand tissue, 19 varieties of Colgate toothpaste, and innumerable garbage can liners in scented, unscented

with twist, drawstring, and handle ties.

Procter & Gamble offers 19 varieties of Pert shampoo and 72 varieties of Pantene hair care products. Unilever has

bucked the trend by decreasing its consumer products from 1,600 products to a mere 970 in the year 2000. The

bottom line: It’s not possible to attain sustainable advantages if your products don’t satisfy the four RBV criteria.

Source: Nelson, E. 2001. Too many choices. The Wall Street Journal, April 23: B1, B4.

We will now discuss each of the four criteria.

1. Is the Resource Valuable?

Resources are valuable when they enable a firm to formulate and implement strategies

Discussion Question 25: What are some other examples of resources that were once

valuable—but are now less valuable (or a liability)?

2. Is the Resource Rare?

If competitors or potential competitors also possess the same valuable resource, it is not a

source of competitive advantage because all of these firms have the capability to exploit the

3. Can the Resource Be Imitated Easily?

Inimitability is a key to value creation because it constrains competition. If a resource is

We discuss the example of Iowa Beef Processors (IBP). Although this firm was the first

to modernize its facilities and capabilities, competitors easily duplicated its efforts. This drove

1.)

Discussion Question 26: What action(s) should Groupon take (in addition to firing its

founder and CEO, Andrew Mason, in early 2013)? How would such actions address the

four sustainability criteria?

The SUPPLEMENT below addresses some issues that point out why some firms may

have difficulty succeeding in the “deal site” industry.

 Extra Example: Why It Will Be Hard to Succeed in the “Deal Site” Industry

Some consumers might see a 52 percent discount on dinner at a local Malaysian restaurant and ask: How good can it

be if they need to slash prices so much to pull people through the door?

In other words, extreme discounts leave consumers questioning the “long run value of the advertised product or

service,” wrote Rafi Mohammed, a pricing strategy consultant, in a Harvard Business Review article. It also

becomes less likely that customers return to the same merchant to pay full price, he said.

Mohammed also noted that drastic discounts attract the “wrong customers.” Super-bargain hunters often decide to

buy the rock-climbing class simply because of the low price—they have no intention of coming back to pay full

price. Indeed, in Raymond James’ survey, 67 percent of merchants found that Groupon customers’ spending habits

are “lower” than their typical customers.

Small businesses aren’t pinning hopes of a sales boost on daily deal offerings during the holiday season. A Manta

survey of small businesses found that the majority (82 percent) of businesses have not, and will not, run promotions

with Groupon or other daily deal sites this year. And only 3 percent of respondents said these types of promotion

sites have brought them repeat business.

Perhaps aware that daily deals on yoga classes and laser-hair removal won’t be its bread and butter much longer,

Groupon is moving beyond the 40-percent -off-a-romantic-Italian-dinner-for-two type of offerings it’s known for. It

is now trying to become more of a traditional online marketplace. In its third-quarter earnings report, Groupon

touted “rapid growth” in Groupon Goods, a retail marketplace selling things like toys, apparel, cameras and jewelry

that was launched a year ago. Groupon subscribers have been noticing the email offers.

During the summer in 2012, Groupon opened its first concept store in Singapore, and this month it opened one in

Hong Kong. And in an attempt to get in on the holiday shopping frenzy, Groupon just launched its first holiday and

toy catalogs, along with free shipping and free returns (when purchases meet certain restrictions).

Source: Scherzer, L. 2012. Groupon and deal sites see skepticism replacing promise. finance.yahoo.com. November

29: np.

For imitation to be avoided, four conditions need to be satisfied:

Physical uniqueness. By definition it is inherently difficult to copy. Examples would

Path Dependency. This means that resources are unique and therefore scarce because of

The SUPPLEMENT below points out an important caveat regarding path dependency

and competitive advantage. That is, tight interrelationships among value-chain activities that

 Extra Example: When a Competitive Advantages Built on Path Dependency Becomes a Handicap

Changing a tightly linked system of value-creating activities means dismantling the very synergies that management

worked so hard to build and putting the organization at risk during the transition to a new strategy. For this reason,

many managers either ignore change or make changes at the margin. However, neither approach works. Once stable

markets change, entrenched strategic positions tend to falter. Change forces managers to dismantle their existing

resource systems to reassemble them in new strategic positions. This is difficult and time-consuming—a

combination that can potentially be lethal because performance may not improve until the pieces are reassembled

and linked.

Consider Liz Claiborne, an apparel company. It relied on a strategy in which production, distribution, marketing,

design, presentation and sales resources were all tightly linked. However, when the industry changed, the firm’s

relationships with department stores were disrupted. In an effort to adopt, Claiborne executives changed resources

such as their “no reordering” process that had antagonized department stores. But since this process was

synergistically entwined with other resources like overseas logistics and distant manufacturing locations, the “no

reordering” process could not be undone without damaging system coherence. Financial performance sank

precipitously. Only after Claiborne executives dismantled their existing resources and started reconnecting new ones

did positive performance begin to return.

Source: Bingham, C. B., Eisnehardt, K. M. & Furr, N. R. 2011. Which strategy when? Sloan Management Review,

Fall: 71-78.

Causal Ambiguity. This means that would-be competitors may be thwarted because it is

impossible to disentangle the causes (or possible explanations) of either what the valuable

STRATEGY SPOTLIGHT 3.5 discusses how Amazon has created Amazon Prime—an

extremely effective “free delivery” program. For a fee of $79 per year, customers are guaranteed

two-day delivery on their purchases. Analysts contend that this has been a key driver in the

Discussion Question 27: Have you used Amazon Prime? Are you satisfied with it and

has it caused you to increase your purchases through Amazon? Do you see how some

firms could successfully imitate this service? Why? Why not?

The SUPPLEMENT below provides some additional up-to-date information on Amazon

 Extra Example: Updated Information on Amazon Prime

Amazon Prime continues to be a huge success! Growth in Amazon Prime memberships propelled Amazon to a

profitable 2014 fourth quarter (was after two consecutive quarters of steep losses). In 2014, the company raised the

Prime subscription fee to $99 from $79—but the number of subscribers dramatically increased anyway. An

estimated 10 million new customers signed up during the holiday season alone!

The Prime shoppers are doing some serious shopping. After paying the annual fee for the service, Prime

members are in turn spending a lot more on products on the site. There are about 40 million Amazon Prime members

in the United States, and they spend about $1,500 a year. Non-Prime members spend about $625 over the same

period.

Amazon is trying to keep Prime members locked in with new perks. The firm now offers Prime members

unlimited photo storage in Amazon’s cloud, a new show produced by Woody Allen exclusively for Prime members,

and in some areas a two-hour delivery service called Prime Now.

At the beginning of 2015, global e-commerce exceeded $1.5 trillion according to data compiled by

eMarketer. Amazon accounts for slightly more than 5 percent of that total!

Source: Campione. J. 2015. Amazon is killing it with Prime: Here’s why. Finance.yahoo.com. January 30: np.

Social Complexity. These include “soft” issues such as culture, trust, and leadership.

Examples include interpersonal relations among the employees and managers of a firm, its

The SUPPLEMENT below discusses the market for corporate real estate and the

importance of personal relationships and insider knowledge. It serves to drive home the point

We discuss a Chinese beverage company, Wahaha, which has succeeded in a hotly

contested market against much larger rivals—Coca Cola and PepsiCo. Its well-known secret lies

in its ability to foster very close ties with its distributors. Also, in contrast to its larger rivals,

The SUPPLEMENT below provides more detailed information on Wahaha, a large

Chinese beverage firm, which we address.

 Extra Example: Wahaha Succeeds by Creating Close Relationships with Its Distributors

Wahaha’s distribution network now consists of about 4,000 first-tier domestic wholesalers and a large number of

second and third-tier wholesalers and outlets to ensure that Wahaha’s products reach millions of retailers nationwide

within one week of leaving the factory—no small feat with China’s vast rural areas and provinces as far out as

Xinjiang and Tibet. As CEO Zong Qinghou colorfully points out: “Our rapid and sound network serves as human

blood vessels which circulate in the blood stream to every part of the body once the products are ready.”

In contrast, domestic and multinational companies established their own distribution networks—not

partnerships with local distributors as Wahaha had done. Not surprisingly, Wahaha has managed to capture

impressive market share increases in markets traditionally dominated by Coca Cola and PepsiCo. And, its financial

results have been stunning. Over a recent 6-year period, its revenues have increased from $1.24 billion to $5.2

billion, and its profits have increased from $165 million to $1.5 billion. These figures represent annual compound

rate increases of 27 and 45 percent, respectively!

Source: Anonymous. 2010. Wahaha…China’s Leading Beverage Producer. www.chinabevnews.com. April 11: np;

and, Andersen, M. M., Froholdt, M. & Poulfelt, F. 2010. Return on Strategy. New York: Routledge.

4. Are Substitutes Readily Available?

The fourth requirement for a firm to be a source of sustainable competitive advantage is

Substitutability may take at least two forms. First, although it may be impossible for a

firm to imitate another firm’s resource exactly, it may be able to substitute a similar resource that

EXHIBIT 3.7 illustrates the relationship among the four criteria of sustainability and

Discussion Question 28: What may be example(s) of companies that illustrate each of

the four conditions?

5. Blockbuster, Inc. From Sustainable (?) Advantage to Bankruptcy

On page 94–95, we discuss Blockbuster, Inc., a firm that went out of business because it

failed to recognize the threat posed by virtual services such as Netflix. You might point out that

C. The Generation and Distribution of a Firm’s Profits: Extending the Resource-Based

View of the Firm

The key point in this section is that even though a firm may have a source of competitive

advantage that appears to satisfy the four criteria for sustainability, some (or a good deal) of its

We address four conditions that explain the extent to which managers and employees will

be able to extract a proportionately high level of the profits they generate:

Employee bargaining power

Employee replacement cost

Teaching Tip: The discussion of the generation and distribution of a firm’s profits

between the firm and individual employees is a good opportunity to discuss some of the

career implications for the students and enable them to realize the practical applicability

III. Evaluating Firm Performance: Two Approaches

Here, we address two major approaches to evaluating firm performance. The first is

Second, we address performance from the perspective of a broader stakeholder

A. Financial Ratio Analysis

We address five different types of financial ratios:

Short-term solvency or liquidity

Long-term solvency measures

(All of your students have been exposed to this information in their accounting and

finance classes but it is worthwhile to spend some time in review.)

EXHIBIT 3.8 provides a summary of five types of financial ratios.

The Appendix to Chapter 13 (on Case Analysis) provides detailed definitions for

discussions of each of these types of ratios, as well as examples of how each is calculated.

Next, we address some issues that must be taken into account in order to make financial

1. Historical Comparisons

Comparing a firm’s performance over time helps to provide a means of evaluating trends.

We provide the example of Apple’s performance over a period of years to point out the

At times, historical comparisons may need to be used with caution. For example, the

SUPPLEMENT below provides some specific information on how percentage increases can, in

 Extra Example: U.S. Car Sales to Japan—The Importance of “Relative” Sales Volume

Percentage increases may imply that U.S. automakers made inroads in the Japanese markets a decade ago. However,

such apparent optimism is eroded when absolute numbers are addressed. Though sales climbed 800 percent between

1985 and the early 1990s, total sales of the Big Three in Japan were only about 17,000 in 1991. (This figure

represents only about one month’s production at a typical automobile plant!) Meanwhile, Japanese automakers sold

approximately 3.3 million cars in the U. S. in 1991—a factor of nearly 200!

Source: Miller, K. L. 1991. What’s this? American cars gaining in Japan. Business Week: July 22: 82-83.

2. Comparisons with Industry Norms

When evaluating a firm’s financial performance, it is important to compare it with

EXHIBIT 3.10 compares financial ratios for three different industries—semiconductors,

grocery stores, and skilled nursing facilities. Although the text provides a brief discussion of why

3. Comparisons with Key Competitors

Referring back to Chapter 2, firms with similar strategies are considered members of

strategic groups in a given industry. Furthermore, competition tends to be more intense among

B. Integrating Financial Analysis and Stakeholder Perspectives: The Balanced

Scorecard

1. The Balanced Scorecard: Description and Benefits

The balanced scorecard helps to provide a meaningful integration of many issues that

come into play when evaluating a firm’s performance. It is a set of measures that provide top

The balanced scorecard enables managers to consider their business from four key

perspectives:

How do customers see us? (customer perspective)

What must we excel at? (internal perspective)

Can we continue to improve and create value? (innovation and learning

perspective)

How do we look to our shareholders? (financial perspective)

EXHIBIT 3.11 depicts the balanced scorecard’s four perspectives.

a. Customer Perspective

Managers must translate their general mission statements on customer service into

b. Internal Business Perspective

Customer-based measures are important. However, they must be translated into indicators

of what the firm must do internally to meet customers’ expectations. The internal measures

c. Innovation and Learning Perspective

Given the rapid rate of change in markets, technologies, and global competition, the

criteria for success are constantly changing. Accordingly, a firm’s ability to improve, innovate,

d. Financial Perspective

Such measures indicate whether the company’s strategy, implementation, and execution

are, in fact, contributing to bottom-line improvement. Typical financial goals include

We discuss the example of Sears, the large U. S. retailer to illustrate the strong causal

relationships among employee attitudes, customer attitudes, and financial outcomes. This should

The SUPPLEMENT below, although dated, serves as a “caveat” to the use of the

 Extra Example: The Tenuous Linkage Between Financial Success and Operating Performance

Over a three-year period between 1987 and 1990, a NYSE electronics company made a significant improvement in

quality and on-time delivery performance. Outgoing defect rates dropped from 500 parts per million to only 50, on-

time delivery improved from 70 percent to 96 percent, and yield soared from 26 percent to 51 percent.

Unfortunately, these breakthrough improvements in quality, productivity, and customer service did not provide

substantial financial benefits to the company.

During the same period of time, the firm’s financial results showed little improvements and the stock price eroded to

one-third of its July 1987 value. Why? The considerable improvements in manufacturing capabilities had not been

translated into increased profitability. Slow releases of new products and a failure to expand marketing to new and

perhaps more demanding customers prevented the company from realizing the benefits of its manufacturing

achievements. The operational achievements were real, but the company failed to capitalize on them.

Source: Kaplan, R. S. & Norton, D. P. 1992. The balanced scorecard—Measures that drive performance. Harvard

Business Review, 70 (1): 77.

Teaching Tip: During the discussion of the Balanced Scorecard, it is important to bring

to the class’ attention that there are inevitable tradeoffs between the elements in the

2. Limitations and Potential Downsides of the Balanced Scorecard

One criticism of the balanced scorecard is that executives will believe that implementing

it provides a “quick fix” to organizational problems. The balanced scorecard takes time to

Teaching Tip: You might consider asking the following question prior to discussing the

material in the supplement above: What do you think are some of the problems that can

potentially be expected with the use of the Balanced Scorecard. Or, if your students, as a

group, have a relatively large amount of business experience, you may ask them: What

has been your experience with the use of the Balanced Scorecard in your organization?

Has it worked well? Why? or Why not?