The final exam (90 mins) consist of 3 parts:

Part 1. True/False Questions (from Question 1 to 15)

Part 2. Multiple Choice Questions (from Question 16 to 36)

Part 3. Case Discussion Questions (from Question 37 to 39)

1-20: 1.5 marks/each

21-30: 2,5 marks/each

37-39: 10 marks/each

Review the following chapters in your textbook:

Chapter 1. Strategic Leadership: Managing the Strategy-Making Process for Competitive

Advantage
Chapter 2. External analysis: The identification of opportunities and threats
Chapter 3. Internal Analysis: Resources and Competitive advantage
Chapter 4. Competitive advantage through functional-level strategy
Chapter 5. Business-level strategy
Chapter 6. Business-level strategy and the industry environment
Chapter 8. Strategy in the global environment
Chapter 9. Corporate-level strategy: Horizontal integration, vertical integration and
strategic outsourcing
Chapter 10: Corporate-level strategy: related and unrelated diversification
Chapter 12: Implementing strategy through organization

Example of case study

Verizon wireless: Competitive advantage

Established in 2000 as a joint venture between Verizon Communications and Britain’s
Vodafone, over the last 18 years Verizon Wireless has emerged as the largest and consistently
most profitable enterprise in the fiercely competitive U.S. wireless service. Today, the company
has over 150 million subscribers and a 36% market share.
One of the most significant facts about Verizon is that it has the lowest churn rate in the industry.
Customer churn refers to the number of subscribers who leave a service within a given time
period. Churn is important because it costs between $400 and $600 to acquire a customer (with
phone subsidies accounting for a large chunk of that). It can take months just to recoup the fixed
costs of a customer’s acquisition. If churn rates are high, profitability is eroded by the costs of
acquiring customers who do not stay long enough to provide a profit to the service provider. The
risk of churn increased significantly in the United States after November 2003, when the Federal
Communications Commission (FCC) allowed wireless subscribers to transfer their phone
numbers when they switched to a new service provider. Over the next few years, Verizon
Wireless emerged as the clear winner in the battle to limit customer defections. For example, in
early 2018, Verizon’s churn rate was 1.18% per month, compared to a rate of 1.32% at AT&T,
2.39% at Sprint, and 2.42% at T-Mobile. Verizon’s low churn rate has enabled the company to
grow its subscriber base faster than its rivals, which allows the company to better achieve
economies of scale by spreading the fixed costs of building a wireless network over a larger
customer base.
The low customer churn at Verizon is due to a number of factors. First, it has the most extensive
network in the United States, blanketing 95% of the nation. This means fewer dropped calls and
dead zones as compared to its rivals. For years, Verizon communicated its coverage and quality
advantage to customers with its “Test Man” advertisements. In these ads, a Verizon Test Man
wearing horn-rimmed glasses and a Verizon uniform wanders around remote spots in the nation
asking on his Verizon cell phone, “Can you hear me now?” Verizon claims that the Test Man
was actually the personification of a crew of 50 Verizon employees who each drive some
100,000 miles annually in specially outfitted vehicles to test the reliability of Verizon’s network.
Second, the company has invested aggressively in high-speed wireless networks, including most
recently 4G LTE, enabling rapid download rates on smartphones. Complementing this, Verizon
has a high-speed, fiber-optic backbone for transporting data between cell towers. Verizon has
invested some $150 billion in its wireless and fiber-optic network since 2000. The company also
looks set to be a leader in next generation 5G wireless networks, set to start rolling out in 2019,
that will have download rates up to 1,000 times faster than 4G networks. For customers, this
means a high-quality user experience when accessing data such as streaming video on their
smartphones. To drive this advantage home, in 2011, Verizon started offering Apple’s
marketleading iPhone in addition to the full range of Android smartphones it was already
offering (the iPhone was
originally exclusive to AT&T).
To further reduce customer churn, Verizon has invested heavily in its customer care function. Its
automated software programs analyze the call habits of individual customers. Using that
information, Verizon representatives will contact customers and suggest alternative plans that
might better suit their needs. For example, Verizon might contact a customer and say, “We see
that because of your heavy use of data, an alternative plan might make more sense for you and
help reduce your monthly bills.” The goal is to anticipate customer needs and proactively satisfy
them, rather than have the customer take the initiative and possibly switch to another service
provider.
Discussion questions:
1. What resources underlie Verizon’s strong competitive position in the U.S. wireless
telecommunications industry?
2. Explain how these resources enable Verizon to improve one or more of the following:
efficiency, quality, customer responsiveness, innovation.
Efficiency:
- Widespread network: achieve efficiency by reducing operating and maintainence costs. They
can also spread the fixed costs of building and maintaining over a large customers base, reducing
the unit cost.
- Technology investment: These investments improve network efficiency, provide a better user
exp and reduce data processing costs.
- Economic of scale: Purchasing equipment and services at lower costs and spreading the costs
across a large customer base
Quality:
- Extensive network: ensures better service quality for customers by minimizing dropped calls
and deadzones.
- Technology investment: Bring a high quality and better network
Customer responsiveness:
- Outstanding customer service: They invested heavily on customer care functions
- Strong brand: Verizon’s strong brand contributes to low churn rates and retain customers.
Innovation:
- Investment in technology: Verizon has invested heavily in new technologies such as 4G LTE,
5G, and fiber-optic backbone networks, allowing them to deliver advanced services and maintain
their leadership position in the wireless telecommunications industry.
3. How sustainable are Verizon's advantages? Can competitors easily replicate their network
infrastructure or customer service strategies? What are the barriers to imitation?

Network infrastructure:
- Difficult to imitate: Verizon have a wide network infrastructure which require a huge
investment and a lot of times.
- First mover advantage: Give it a reputation for quality and reliability, attracting customers and
barrier to entry.
- Adaptability: They always upgrade their network, maintaining a competitive advantage
Customer service strategies:
- Corporate culture: Verizon’s superior customer service come from a corporate culture that
values customers. Imitating this will need lots of efforts.
- System and processes: They have developed a complex systems and processes. This will not
easy to replicate.
Barriers:
- Strong brand: Verizon has built its reputation for quality and reliability, creating customers
loyalty.
- Economies of scale: Verizon’s large scale allows them to take advantage of economies of scale,
providing services at lower costs than their competitors
4. What role have mergers and acquisitions played in Verizon's growth and competitive
advantage? Consider their acquisition of Alltel and their joint venture with Vodafone.
- Expanded Horizon’s coverage and customer base, cementing it market leadership position
- Provided resources and expertise needed to build its network and grow its business
- Eliminate competitors
- Access to new technology
5. What are the biggest threats to Verizon's continued success? How might new technologies,
changing consumer preferences, or regulatory changes impact their competitive position?
(Source: Hill, Charles W.L., , Schilling, Melissa A., Jones, Gareth R. (2020), Strategic
Management: An Integrated Approach: Theory and Cases, 13th ed., Cengage Learning, pp
C.234-235).
New technology:
- Alternative technology
- Growing demand for data speed
- Technological convergence: the lines between the telecommunication, media and technology
are blurring.
Changing consumer preferences:
- Demand for flexible data plans
- Rise of OTT services
Regulatory changes:
- Antitrust laws
-net neutrality laws

Trouble at McDonald’s

For most of its history, McDonald’s has been an extraordinarily successful enterprise. It began in
1955, when the legendary Ray Kroc decided to franchise the McDonald brothers’ fast-food
concept. Since its inception, McDonald’s has grown into the largest restaurant chain in the
world, with almost 37,000 stores in 120 countries.
For decades, McDonald’s success was grounded in a simple formula: Give consumers value for
money, good quick service, and consistent quality in a clean environment, and they will return
time and time again. To deliver value for money and consistent quality, McDonald’s
standardized the process of order taking, making food, and providing service. Standardized
processes raised employee productivity while ensuring that customers had the same experience
in all branches of the restaurant. McDonald’s also developed close ties with wholesalers and
food producers, managing its supply chain to reduce costs. As it became larger, buying power
enabled McDonald’s to realize economies of scale in purchasing and pass on cost savings to
customers in the form of low-priced meals, which drove increased demand. There was also the
ubiquity of McDonald’s; their restaurants could be found everywhere. This accessibility, coupled
with the consistent experience and low prices, built brand loyalty.
The formula worked well until the early 2000s. By then, McDonald’s was under attack for
contributing to obesity. Its low-priced, high-fat foods were dangerous, claimed critics. By 2002,
sales were stagnating and profits were falling. It seemed that McDonald’s had lost its edge. The
company responded with a number of steps. It scrapped its supersize menu and added healthier
options such as salads and apple slices. Executives mined data to discover that people were
eating more chicken and less beef. So McDonald’s added grilled chicken sandwiches, chicken
wraps, Southernstyle chicken sandwiches, and more recently, chicken for breakfast to their
menu. Chicken sales doubled at McDonald’s between 2002 and 2008, and the company now
buys more chicken than beef. McDonald’s also shifted its emphasis on beverages. For decades,
drinks were an afterthought, but executives couldn’t help but note the rapid growth of Starbucks.
In 2006, McDonald’s decided to offer better coffee, including lattes. McDonald’s improved the
quality of its coffee by purchasing high-quality beans, using better equipment, and filtering its
water. The company did not lose sight of the need to keep costs low and service quick, however,
and continues to add coffee-making machines that produce lattes and cappuccinos in 45 seconds,
at the push of a button. Starbucks it is not, but for many people a latte from the McDonald’s
drivethrough window is comparable. Today, the latte machines have been installed in almost half
of the stores in the United States. All of these strategies seemed to work. Revenues, net profits
and profitability all improved between 2002 and 2013. By 2014, however, McDonald’s was once
more running into headwinds. Same-store sales declined in 2014, impacting profitability.
Among the problems that analysts identified at McDonald’s was an inability to attract customers
in the 19- to 30-year-old age group. Rivals offering healthier alternatives, such as Chipotle
Mexican Grill, and “better burger” chains that appeal tothis demographic, such as Smashburger,
are gaining ground at the expense of McDonald’s. A recent Consumer Reports survey ranked
McDonald’s burgers the worst among its peers. Another problem is that the quality of customer
service at McDonald’s seems to have slipped. Many customers say that employees at McDonalds
are rude and unprofessional.
One reason why McDonald’s employees might be feeling stressed out is that the menu has
grown quite large in recent years, and many restaurants are not longer staffed given the diversity
of the menu. In 2015, management at McDonald’s took steps to fix these problems. The
company emphasized a number of “velocity growth accelerators” including (1) an “Experience
of the Future” layout, which features a combination of ordering flexibility (including counter,
kiosk, Web, and mobile ordering), customer experience (including a blend of front counter, table
service, and curbside delivery), and a more streamlined menu (but one that still allows for
personalization); (2) mobile ordering and payments; and (3) delivery alternatives. The results of
these initiatives have been promising, with McDonald’s starting to see faster growth and better
profitability.
CASE DISCUSSION QUESTIONS
1. What functional-level strategies has McDonald’s pursued to boost its efficiency?
To improve operational efficiency, McDonald's has pursued several functional-level strategies,
including:

• Standardization of chemical processes: McDonald's has standardized the process of setting up

goods, diets, and providing services. This helps increase employee productivity Standardization
also helps reduce waste and optimize processes, contributing to improved operational efficiency.

• Management of chain effects: McDonald's has built close relationships with suppliers and food
manufacturers to control costs and ensure the quality of input materials. As the business
expanded, McDonald's took advantage of its scale to bring more favorable prices to suppliers,
reduce procurement costs, and improve operational efficiency.

• Technology adoption: McDonald's has invested in technology to improve operational efficiency

• Store layout optimization: McDonald's has improved store layout to increase service speed and
operational efficiency.

2. What functional-level strategies has McDonald’s pursued to boost its customer

responsiveness?
To improve customer satisfaction, McDonald's has adopted several functional-level strategies,
including:
• Menu expansion
• Coffee quality improvement
• Fast service
• Diversify ordering options
• Flexibility in service delivery

3. What does product quality mean for McDonald’s? What functional-level strategies has it
pursued to boost Its product quality?
For McDonald's, product quality is understood as providing value for money, fast service and
consistent quality in a clean environment. To achieve this, McDonald's has adopted a number of
functional-level strategies, including:
• Standardization of processes
• Improving product quality
• Investing in technology
4. How has innovation helped McDonald’s improve its efficiency, customer responsiveness, and
product quality?
Innovation plays an important role in helping McDonald's improve operational efficiency,
customer responsiveness and product quality.
Improving operational efficiency:
- Standardizing processes: McDonald's application of standardized processes for ordering, food
preparation and service provision has helped increase employee productivity, while minimizing
waste and optimizing processes, thereby improving operational efficiency.
- Automation technology: McDonald's has been investing in automation technology to improve
productivity and reduce labor costs. For example, the use of automatic coffee machines allows
for quick preparation of Latte and Cappuccino in 45 seconds, reducing customer waiting time
and increasing service efficiency.
- Information systems: The use of information systems helps McDonald's manage order tracking,
forecast demand, optimize inventory and reduce waste.
Enhance customer responsiveness:
- Menu diversification: McDonald's has proactively changed its menu to meet customer needs
and tastes. For example, they have eliminated the supersized menu, added healthy options,
increased chicken dishes, and upgraded the quality of their coffee.
- Order diversification: McDonald's has introduced the "Future Experience" with self-service
kiosks, online ordering, and mobile ordering to give customers more ordering options, reduce
wait times, and increase satisfaction.
- Service flexibility: McDonald's has experimented with different service formats, including table
service and home delivery to meet diverse customer needs.
Improve product quality:
- Tight control of supply chain: McDonald's has built close relationships with suppliers and food
manufacturers to control the quality of input materials and ensure product consistency.
- Improve product quality: McDonald's has proactively upgraded product quality to meet the
increasing expectations of customers. For example, they have used high-quality coffee beans,
better equipment and water filtration to improve coffee quality.
In general, innovation has played an important role in helping McDonald's adapt to market
changes and maintain its competitive position.
5. Do you think that McDonald’s has any rare and valuable resources? In what value creation
activities are these resources located?
McDonald's owns a number of rare and valuable resources that contribute to their long-term
success. These resources are allocated across different value-creating activities in the value
chain:
• Brand: The McDonald's brand is one of the most famous and recognizable brands in the world,
built on providing value for money, fast service and consistent quality in a clean environment. It
represents convenience and consistency, attracting a large number of loyal customers globally.
This resource is located in the Marketing and Sales activities of the value chain.
• Operational Processes: McDonald's is known for its efficient and highly standardized operating
system, which allows them to provide fast service and consistent products globally. The
ordering, food preparation and customer service processes have been optimized for maximum
efficiency, improving labor productivity and ensuring a consistent customer experience. This
resource falls under the Production activity of the value chain.
• Supply Chain: McDonald's has built strong relationships with suppliers and food manufacturers
globally, allowing them to control costs and ensure the quality of their raw materials.
McDonald's sets strict standards for all the raw materials they use to ensure consistency and
quality control. Their extensive distribution system also helps them deliver fresh ingredients to
their stores efficiently. This resource falls under the Logistics activity of the value chain.
• Real Estate: McDonald's owns a large network of real estate in prime locations across the
globe. Owning these locations gives them a competitive advantage over their competitors who
have to rent premises. This resource falls under the Infrastructure category of the value chain.
• Franchising Capabilities: McDonald's successful franchise model allows them to expand
rapidly and enter new markets at low cost. They have developed an effective franchise training
and support system, which helps ensure consistency and quality of service across the globe. This
resource is part of the Infrastructure in the value chain.
6. How sustainable is McDonald’s competitive position in the fast-food restaurant business?
McDonald's competitive position in the fast food industry is considered to be stable, but not
unshakable. Below is an analysis based on McDonald's resources, capabilities and environmental
factors that may impact their position:
Strengths:
• Strong brand: As discussed in the previous question, McDonald's brand is an invaluable asset,
built over decades, representing value, convenience and consistent quality. Customers around the
world trust and choose McDonald's because of these core values.
• Efficient operating system: McDonald's has perfected its operating process, optimizing from
ordering, processing to serving, bringing high efficiency and consistent experience to customers.
• Global supply chain: Close relationships with suppliers, strict raw material standards and
efficient distribution system allow McDonald's to control costs and ensure product quality.
• Scale and reach: With nearly 37,000 stores in 120 countries, McDonald's has the advantage of
scale, creating barriers to entry for new competitors.
• Adaptability: McDonald's has demonstrated its ability to adapt to changing tastes and trends. It
has adjusted its menu, introduced healthier options, upgraded its coffee, and experimented with
new service formats.
Weaknesses and Threats:
• Intense competition: The fast food industry is highly competitive, with major competitors such
as Burger King, Subway, Wendy's, and local chains.
• Changing tastes: Consumers are increasingly health-conscious, looking for fresher, higher-
quality options. McDonald's needs to continually innovate to meet this demand.
• Health concerns: McDonald's continues to face criticism for its high-calorie and high-fat foods,
which affect its brand image.
• Staffing issues: Service quality at some stores is affected by staff shortages and pressure from a
diverse menu.
• Franchise dependency: The franchise model, while effective in expanding, can also create risks
in terms of quality control and brand image.
(Source: Hill, Charles W.L., , Schilling, Melissa A., Jones, Gareth R. (2020), Strategic
Management: An Integrated Approach: Theory and Cases, 13th ed., Cengage Learning, pp.139-
140).

Dell Computer and the Personal Computer Industry

The global personal computer industry is very competitive. On a global basis, Dell was the
worldwide market share leader in 2005 with 18.1%, followed by Hewlett-Packard (15.6%),
Lenovo (6.2%), Acer (4.7%), Fujitsu (4.1%), and Apple (2.2%). The remaining 49% of the
market is accounted for by a long list of small companies, some of which focus on local markets
and make unbranded so-called white box computers.

The long list of small companies reflects relatively low barriers to entry. The open architecture of
the personal computer means that key components, such as an Intel compatible microprocessor, a
Windows operating system, memory chips, a hard drive, and so on, can be purchased easily on
the open market. Assembly is easy, requiring very little capital equipment or technical skills, and
economies of scale in production are not particularly significant. Although small entrants lack
the brand-name recognition of the market share leaders, they survive in the industry by pricing
their machines a few hundred dollars below those of the market leaders and capturing the
demand of price-sensitive consumers. This puts constant pressure on the prices that brand-name
companies can charge.

Moreover, most buyers view the product offerings of different branded companies as very close
substitutes for each other, so competition between them often defaults to price. Consequently, the
average selling price of a PC has fallen from around $1,700 in 1999 to under $1,000 in 2006, and
projections are that it may continue to fall, fueled in part by aggressive competition between Dell
computer and Hewlett-Packard.

The constant downward pressure on prices makes it hard for personal computer companies to
have big gross margins, and this factor results in lower profitability. The downward pressure on
prices has been exacerbated by slowing demand growth in many developed nations, including
the world’s largest market, the United States, where the market is now mature and demand is
limited to replacement demand plus an expansion in the overall population.

To make matters worse, personal computer companies have long had to deal with two very
powerful suppliers: Microsoft, which supplies the industry standard operating system, Windows,
and Intel, which supplies the industry standard microprocessor. Microsoft and Intel have been
able to charge high prices for their products, which has raised input costs for personal computer
manufacturers and thus reduced their profitability.

In sum, the personal computer industry is not particularly attractive. The combination of low
entry barriers, intense rivalry among established companies, slowing demand growth, buyers
who are indifferent to the offerings of various companies and often look at price before anything
else, and powerful suppliers who have raised the prices for key inputs all come together to make
it difficult for established companies to earn decent profits. Against this background, the
performance of Dell Computer over the last decade is nothing short of remarkable and illustrates
just how strong the company’s business model and competitive advantage had been.

Questions:

1. How is the nature of competition in the personal computer industry?

Low barriers to entry; Fierce competition; Demand growth slows; powerful suppliers; customers
bargaining power

2. In recent years, which of the five competitive forces has become more positive for personal
computer producers?

Low barriers to entry

3. In recent years, which of the five competitive forces has become less positive for personal
computer producers?

Powerful suppliers

4. What are the primary challenges facing the personal computer industry?

The PC industry faces several key challenges:

• Fierce competition: The PC industry is highly competitive with many competitors, including
large companies such as Lenovo, HP, Dell, and smaller companies that produce unbranded
"white box" computers. This competition often leads to price wars, putting downward pressure
on manufacturers' profits.

• Slow demand growth: The PC market in many developed countries is saturated, with demand
coming mainly from replacement of old machines and population growth. This puts pressure on
companies to seek new markets or develop new products to maintain growth.

• The rise of smartphones and tablets: The growing popularity of smartphones and tablets is
directly competing with PCs for consumer demand. Consumers are turning to mobile devices for
many of the tasks they previously used PCs for, leading to a decline in PC sales.

• Supplier power: PC companies are heavily dependent on key suppliers such as Microsoft and
Intel, which provide industry-standard operating systems and microprocessors. The power of
these suppliers allows them to charge high prices for their products, increasing the cost of inputs
for PC manufacturers and reducing their profits.
• Difficulty in Differentiating: Most buyers view branded PC companies' products as substitutes,
so competition is often based on price. This makes it difficult for companies to meaningfully
differentiate their products and charge a premium.

5. Why is the personal computer industry not particularly attractive?

The personal computer industry is not considered attractive for the following main reasons,
which are summarized from our sources and conversation history:

• Low barriers to entry: The personal computer industry has low barriers to entry, which means it
is easy for new companies to enter the market. This increases the competitive pressure and
makes it difficult for established companies to maintain profits.

• Intense competition: The personal computer industry is highly competitive due to the large
number of competitors. Intense competition often leads to price wars, which reduces the profits
of manufacturers. Most buyers view the products of branded PC companies as substitutes for
each other, so competition often focuses on price.

• Slowing demand growth: The growth of demand for PCs in many developed countries has
slowed, leading to downward pressure on prices. The PC market is moving into a mature stage,
with demand coming mainly from replacement of old PCs.

• Supplier power: PC companies rely heavily on key suppliers such as Microsoft and Intel, which
provide industry-standard operating systems and microprocessors. The power of these suppliers
allows them to charge high prices for their products, increasing input costs and reducing profits
for PC manufacturers.

• The rise of substitutes: The growing popularity of smartphones and tablets is directly
competing with PCs, causing a decline in PC sales.

6. How can Dell leverage its competitive advantage to enter new markets or diversify its product
offerings?

Dell can leverage its competitive advantage to enter new markets or diversify its product
offerings in the following ways:

Leverage its operational and supply chain efficiencies:

• Expand into emerging markets: Dell can leverage its efficient direct business model and lean
supply chain to enter emerging markets where demand for personal computers and other
technology products is still growing.

• Target new customer segments: Dell can adapt its business model to target new customer
segments, such as small businesses, schools, and government agencies. Dell has experience
serving the enterprise market, but needs to adapt to the unique needs of new customer segments.
• Provide value-added services: Dell can expand its service portfolio to include value-added
services such as technical support, maintenance, and IT consulting. Dell has begun to develop its
services business, but it still lags behind competitors such as IBM and HP.

Diversify its product portfolio:

• Develop new products: Dell can invest in research and development to create new, innovative
products, such as tablets, smartphones, and wearables. Dell has failed to compete in the tablet
and smartphone markets, but investing in R&D can help Dell create breakthrough products.

• Expand into adjacent markets: Dell can leverage its expertise in computer hardware and
software to expand into adjacent markets, such as cloud computing, data storage, and
cybersecurity. Dell has made strides in cloud computing and is investing in edge computing,
indicating growth potential in these markets.

• Complementary acquisitions: Dell may acquire companies with complementary technologies,

products, or services to diversify its product portfolio. Dell has made several acquisitions in the
IT services sector, indicating this is a strategy Dell may continue to pursue.

IKEA

IKEA may be the world most successful global retailer. Established by Ingvar Kamprad in
Sweden in 1943 when he was 17 years old, the home furnishing superstore has grown into a
global cult brand, with 230 stores in 33 countries that host 410 million shoppers a year and
generated sales of €14.8 billion ($17.7 billion) in 2005. Kamprad himself, who still owns the
private company, is rumored to be world’s richest man.

IKEA’s target market is the global middle class who are looking for low-priced but attractively
designed furniture and household items. The company applies the same basic formula
worldwide: open, large warehouse stores, festooned in the blue and yellow colors of the Swedish
flag, that offer 8,000 to 10,000 items from kitchen cabinet to candlesticks. Use wacky
promotions to drive traffic into the stores. Configure the interior of the stores so that customers
have to pass through each department to get the checkout. Add restaurants and child-care
facilities so that shoppers stay as long as possible. Price the items as low as possible. Make sure
that product design reflects the simple clean Swedish lines that have become IKEA’s trademark.
And then watch the results: customers who enter the store planning to buy $40 coffee table and
end up spending $500 on everything from storage units to kitchen ware.

IKEA aims to reduce the price of its offerings by 2 to 3% per year, which requires relentless
attention to cost cutting. With a network of 1,300 suppliers in 53 countries, IKEA devotes
considerable attention to finding the right manufacturer for each item. Consider the company’s
best-selling Klippan love seat. Designed in 1980, the Klippan, with its clean lines, bright colors,
simple legs, and compact size has sold some 1.5 million units since its introduction. Originally
manufactured in Sweden, IKEA soon transferred production to lower-cost suppliers in Poland.
As demand for the Klippan grew, IKEA then decided that it made more sense to work with
suppliers initiated with shipping the product all over the world. Today there are five suppliers of
the frames in Europe, plus 3 in the United States and 2 in China. To reduce the cost of the cotton
slipcovers, production has been concentrated in four core suppliers in China and Europe. The
resulting efficiencies from these global sourcing decisions enabled IKEA to reduce the price of
the Klippan by some 40% between 1999 and 2005.

Despite its standard formula, however, IKEA has found that global success requires that it adapt
its offerings to the tastes and preferences of consumers in different nations. IKEA first
discovered this in the early 1990s, when it entered the United States. The company soon found
that its European style offerings didn’t always resonate with American consumers. Beds were
measured in centimeters, not the king, queen, and twin sizes that Americans are familiar with.
Sofas weren’t big enough, wardrobe drawers were not deep enough, glasses wre too small,
curtains were too short, and kitchens didn’t fit U.S. size appliances. Since then, IKEA has
redesigned its offerings in the United States to appeal to American consumers, and it has been
rewarded with stronger store sales. The same process is now unfolding in China, where the
company plans to have 10 stores by 2010. The store lay out in China reflects the layout of many
Chinese apartments, and since many Chinese apartments have balconies, IKEA Chinese’s stores
include a balcony section. IKEA has had to adapt its locations to China, where car ownership is
not still widespread. In the West, IKEA stores are generally located in suburban areas and have
lots of parking space, but in China they are located near public transportation, and IKEA offers
delivery services so that Chinese customers can get their purchases home.

Case Discussion Questions:

1.What strategies did IKEA pursue before its global expansion?

IKEA pursue broad differentiation strategy for these reasons

 Low cost: open, large warehouse stores, price the items as low as possible

 Sell attractively designed furniture and household items

 Provide a wide range of products to the customers: 8.000 to 10.000 items from kitchen
cabinet to candlesticks

2.What were the pressures that IKEA had to face in the global market?

 High pressures for local responsiveness: America, China,...

 High pressure for cost reduction

3. How did IKEA respond to pressures for local responsiveness in its foreign markets?

 Developed its products: redesigned its offerings in the US to appeal to American

consumers

 Changed the locations: suburban areas in the West, near public transportation in China

 Changed the layouts of its stores in China with balcony

 Improve its services: provide home delivery in China

4. What is the core of IKEA's business model?

At the core of the IKEA business model is providing beautifully designed, functional furniture at
affordable prices to the global mass market.

5. What are the key factors that have contributed to IKEA's growth and profitability?

Key factors contributing to IKEA's growth and profitability include:

• Market segmentation strategy

• Minimalist design and self-assembly

• Efficient global supply chain

• Unique shopping experience

• Ability to adapt to local markets

6. How does Porter's Five Forces model apply to the home furnishing industry?

Porter's Five Forces Model can be applied to analyze the home furnishings industry as follows:

Threat of entry:

• Barriers to entry are relatively low

• However, existing firms may create barriers

Intensity of competition:

• Fierce competition

• Competition from multiple segments

Bargaining power of buyers:

• Buyers have high bargaining power

Bargaining power of suppliers:

• Bargaining power of suppliers depends on the case

• IKEA has an advantage in negotiating with suppliers

Threat of substitute products:

• Diversified substitute products

• Threat level

Southwest Airlines

Southwest Airlines has long been one of the standout performers in the U.S. airline industry. It is
famous for its low fares, which are often about 30% beneath those of its major rivals. These are
balanced by an even lower cost structure, which has enabled it to record superior profitability
even in bad years such as 2002, when the industry faced slumping demand in the wake of the
September 11 terrorist attacks. Indeed, during 2001 to 2005, quite possibly the worst four years
in the history of the airline industry, when every other major airline lost money, Southwest made
money every year and earned a return on invested capital of 5.8%.

What is the source of Southwest’s competitive advantage? Many people immediately point to the
company’s business model and low cost structure.

With regard to their business model, while operators like American Airlines and United route
passengers through congested hubs, Southwest Airlines flies point-to-point, often through
smaller airports. By competing in a way that other airlines do not, Southwest has found that it
can capture enough demand to keep its planes full. Moreover, because it avoids many hubs,
Southwest has experienced fewer delays. In the first eight months of 2006, Southwest planes
arrived on schedule 80% of the time, compared to 76% at United and 74% at Continental.

As for Southwest’s low cost structure, this has a number of sources. Unlike most airlines,
Southwest flies only type of plane, the Boeing 737. This reduces training costs, maintenance
costs, and inventory costs while increasing efficiency in crew and flight scheduling. The
operation is nearly ticketless and there is no seat assignment, which reduces cost and back-office
accounting functions. There are no meals or movies in flight, and the airline will not transfer
baggage to other airlines, reducing the need for baggage handlers.

The most important source of the company’s low cost structure, however, seems to be very high
employee productivity. One way airlines measure employee productivity is by the ratio of
employees to passengers carried. According to figures from company 10-K statements, in 2005,
Southwest had an employee-to-passenger ratio of 1 to 2,400, the best in the industry. By
comparison, the ratio at United Airlines during 2005 was 1 to 1,175 and at Continental, it was 1
to 1,125. These figures suggest that holding size constant, Southwest runs its operation with far
fewer people than competitors. How does it do this?

First, Southwest devotes enormous attention to the people it hires. On average, the company
hires only 3% of those interviewed in a year. When hiring, it emphasizes teamwork and a
positive attitude. Southwest rationalizes that skills can be taught but a positive attitude and a
willingness to pitch in cannot. Southwest also creates incentives for its employees to work hard.
All employees are covered by a profit-sharing plan, and at least 25% of an employee’s share of
the profit-sharing plan has to be invested in Southwest Airlines stock. This gives rise to a simple
formula: the harder employee work, the more profitable Southwest becomes, and the richer the
employees get. The results are clear. At other airlines, one would never see a pilot helping to
check passengers onto the plane. At Southwest, pilots and flight attendants have been known to
help clean the aircraft and check in passengers at the gate. They do this to turn around an aircraft
as quickly as possible and get it into the air again because an aircraft doesn’t make money when
it is sitting on the ground. This flexible and motivated work force leads to higher productivity
and reduces the company’s need for more employees.

Second, because Southwest because flies point-to-point rather than through congested airport
hubs, there is no need for dozens of gates and thousands of employees to handle banks of fights
that come in and then disperse within a two-hour window, leaving the hub empty until the next
flights a few hours later. The result: Southwest can operate with far fewer employees than
airlines that fly through hubs.

Case Discussion Questions:

1.What are the resources, capabilities of Southwest Airlines?

2. What is the core competence of Southwest Airlines that has allowed it to outperform its
competitors for so long?

3. What are the distinctive competencies of Southwest Airlines?

4. What specific operational practices have contributed to Southwest's high level of operational
efficiency?

5. How can Southwest continue to innovate and adapt to changing market conditions?

6.What are barriers to imitation of the distinctive competencies of Southwest Airlines?