C89ST / C89IM

STRATEGIC MANAGEMENT / INTERNATIONAL STRATEGIC MANAGEMENT

Semester 2 2013/14

SOLUTIONS

Section A (40 marks)

(a) Construct a strategic group map using service quality and pricing policy as axes to
illustrate the competitive position of the various retailers discussed in the retail
industry for eyeglasses in the Kingdom of Val Verde.

Figure 1
Strategic group map for the Kingdom of Val Verdes eyeglass retail industry by service
quality and pricing policy
(b) Construct another strategic group map of the retail industry for eyeglasses in the
Kingdom of Val Verde using frame range and retail stores as axes.

Figure 2
Strategic group map for the Kingdom of Val Verdes eyeglass retail industry by number of
stores and Breadth of Range

(c) Evaluate what the two strategic group maps show about the competitive conditions
confronting Optimeyes within the retail industry for eyeglasses in the Kingdom of Val
Verde.

It is clear from the case study that Optimeyes is deliberately trading-off pure performance in
favour of simplicity, convenience and affordability. They offer products that are
acceptable solutions to customers at a reduced price. In terms of personal service and
advice, and choice of designer frames Optimeyes offers an inferior service than a physical
retail outlet, so are unlikely to immediately satisfy the requirements of mainstream
customers. Even so the performance dimensions offered by Optimeyes are likely to appeal
to price sensitive customers who have previously curtailed or avoided eye tests for either
new or replacement glasses, because it has been too expensive. Therefore, Optimeyes is
probably appealing to a new set of price sensitive customers over and above existing low-
end price sensitive customers who have gone to traditional retail outlets. In contrast
traditional incumbents have largely used a differentiation strategy with some modest price
discounting (i.e. relative to the prices offered by Optimeyes). Specifically, this differentiation
strategy has relied on eye testing as an entry point for sales. Once mainstream customers
have had their eye test they are then offered advice about optical issues from a qualified
optician. Next a sales consultant will offer advice about the selection of an appropriate style
of spectacle frame; this decision is enhanced if the retail outlet supports a variety of well-
known designer brands. These activities attempt to encourage customer loyalty toward an
individual retail outlet. These differentiating factors are further enhanced by a price
discount (i.e. a two for one offer), because it suggests to the customer that he or she is
getting value for money as well. Optimeyes competitors have a large network of stores
with convenient locations that enables them to service the requirements of the majority
eyeglass customers, who are in the main still willing to pay a bit more for service quality.

(d) Use Porters Five Forces model to analyse the competitive conditions for Optimeyes
within the retail industry for eyeglasses in the Kingdom of Val Verde. Base your Five
Forces analysis on the pricing policy and service quality strategic group map featured
in Question A1(a).

The case study highlights that Optimeyes inferior service and low prices is attracting new
and existing low-end price sensitive customers. The low-cost sector and the Big four
occupy different competitive spaces in the service quality and pricing policy. Mainstream
customers of the Big four are liable to stay loyal due to the superior service and choice
available. However, in the future due to improving technology, wider customer acceptance
and confidence with the Internet-based model, and a wider choice of designer frames that
more mainstream customers will be attracted to purchase from Optimeyes or other similar
Internet-based firms. With these issues in mind the following analysis using Porters five
forces was constructed for the Low-cost sector.

Supplier bargaining power: moderate

Moderate switching costs because there are a number of eyeglass manufacturing

laboratories in the Kingdom of Val Verde, which gives Optimeyes some choice and
influence. Nonetheless, there are few eyeglass manufacturing laboratories suppliers
against a relatively large number of optical retailers in general within the Kingdom of
Val Verde. It is also likely that the Big four purchase substantial volumes from the
eyeglass manufacturers so they can probably negotiate preferential terms. Optimeyes
ability to hold an advantage in the low-cost sector will also be determined by the
readiness of eyeglass manufacturing laboratories to supply copycat ventures.

Threat of substitutes: low/moderate

Contact lenses, laser eye surgery and doing without represent the major forms of
substitutes. Doing without is not a sensible alternative as this will in all probability get in
the way of an individuals work and social life. Laser surgery is expensive as it costs
around 1000-1500 per eye and as with any operation there are risks of serious
complications (between 0.1% and 1%) or milder problems (about 5%). In particular, the
cost of the surgery is almost certain to put-off the price sensitive customer. Contact
 lenses represent are high threat of substitution. However, contact lenses are not
without their drawbacks. For example, contact lenses must be properly cleaned and
disinfected when you remove them to kill germs and prevent infections. Adhering to
contact lens guidelines for wear, disinfecting and cleaning can test an individuals
patience and motivation. Contact lenses and laser eye surgery are selected or not
selected for various reasons apart from price. Thus the existence of these substitutes
does not mean customers will switch to them in response to changes in price. For many
customers of Optimeyes the switching costs of the above substitutes are likely to be too
high.

Industry rivalry: low

Optimeyes is a pioneer company that is establishing the credibility of its Internet-based
business model so rivalry is limited at the moment. However, a number of copy-cat
Internet-based competitors have already entered the market due to the success
achieved by Optimeyes.

Threat of new entrants: low

Barriers to entry to the low-cost sector are relatively low if competitors employ an
Internet business model akin to Optimeyes. By and large, on-line competitors are
confronted with modest infrastructure costs. There will be some barriers to overcome
such as industry knowledge (i.e. absolute advantage), due to increasing sales and market
share Optimeyes would have begun to obtain some economies of scale and its
reputation or company image, but these are not long-term obstacles. Nevertheless the
barriers may prove to be insurmountable if the General Optical Council (GOC) rules that
Internet sales are harmful or potential competitors are unable to gain access to inputs
such as transformed lenses (i.e. eyeglass manufacturers are unwilling to supply them).

Buyer bargaining power final customer: low

High switching costs for price-sensitive customers as customers confront a large price
differential if they decide to purchase eyeglasses from a major high street chain instead
of Optimeyes. However, mainstream customers are still influenced by strong branding
and product differentiation of the high street retailers. These customers are likely to be
loyal to the major retailers if there appeals are in line with expectations.
(e) Construct a radar diagram to summarize the attractiveness of Optimeyes position or
strategic group.

(f) Evaluate the strategic options available to Optimeyess competitors to ensure their
future success in the in the Kingdom of Val Verde.

Currently there are more than sufficient numbers of consumers willing to pay more for the
benefits offered by the incumbent retailers. This means Optimeyess competitors should
intensify their differentiation efforts by offering more benefits (Kumar, 2006). Over time,
they should restructure their companies to reduce the price of the benefits they offer as
well. If possible some of Optimeyess competitors might consider merging with or taking
over rivals to gain additional market power. Merging or acquiring a rival may lower
operational costs through combining operations, i.e. economies of scale.
Section C

Question C1

(a) Discuss why an understanding of socio-cultural differences between countries is

important for international business success.

Grading:
(70% above)
See Chapter 7 International Strategic Management
Candidates will show a wide ranging knowledge and understanding of socio-cultural
differences between countries and use examples to demonstrate their answer.
Candidates will discuss, rather than simply describe, how an understanding of socio-
cultural differences directly impact on international business success. Socio-cultural
differences should include most of the following, with examples and discussion, to gain
70%+:

Business protocols such as ignoring stereotypes, concept of time, lunches, spatial

distance, hand holding and kissing, body language. Impact: Lack of understanding,
offence, missed opportunities, misunderstandings, mis-communication.
Business ethics employment issues child labour, workers rights, environmental
damage, global issues, ethical consumer, ethical dilemmas. Impact: negative PR
at home/brand image damage, exploitation, supporting human rights abuses,
potential conflict between home and overseas approaches
Negotiating with others language barriers, interruptions, formal versus informal.
Impact: People prefer to negotiate in own language, polite, etiquette, avoid offense,
need for personal relationships, trust issues.

(60-70%)
A second class answer will evaluate the importance of socio-cultural differences and
show a good understanding of the issues outlined above, but generally the level of
discussion will be less broad. Some explanations may require further elaboration and/or
examples may be limited.

(50-60%)
Lower second class answers will provide satisfactory coverage of socio-cultural
differences but they will lack detailed insight and be more descriptive than analytical.
Examples may be scarce, weak or occasionally missing. However, the question is broadly
answered.

(40-50%)
A third class answer will largely describe the importance of socio-cultural understanding,
but have limited context to the question, there may be few or no examples and limited
knowledge.
 Below 40%
A failure will possibly identify or list some key ideas, but little else of substance will be
discussed, no examples will be used or attempt at a structured answer given.

(b) Evaluate how one of the following impacts multi-national business: legal systems, tax
laws, OR accounting approaches across nations.

70+
See Chapter 6 International Strategic Management
Candidates will evaluate the differences across nations of ONE of the above in detail,
using examples to make the point. Candidates will discuss, rather than simply describe,
how an understanding of ONE of the systems outlined below directly impact on multi-
national business:

Accountancy variations are dependent on political, social, economic climate of a nation.

Can vary by:
purpose, end user shareholder requirements, direct access eg Switzerland, role of
national government in planning
legal requirements - Code law countries, legalistic v non legalistic, federal v
provincial
inflation stability of country for historical cost accounting, inflation accounting eg
Brazil
economic advancement sophistication of systems, skill of accountants simple v
complex.

Tax variations MNEs come under jurisdiction of more than one tax authority, different
rules and regulations, tax incentives versus higher taxes to encourage/discourage
business entry. Variations depend on:
location of operation
form of operation
transfer pricing
tax havens
double taxation

Legal practices - MNEs subject to laws at home and laws of host country as well as
international laws, laws vary dependent on country dependent on:
Wanting control of foreign business interests
Suspicious of foreign investment
International laws
regional organisation influence

Can be conflict and confusion.

(60-70%)
A second class answer will evaluate one of the above systems and show a good
understanding of the issues outlined, but generally the level of discussion will be less
 broad. Some explanations may require further elaboration and/or examples may be
limited.

(50-60%)
Lower second class answers will provide satisfactory coverage of one of the systems
above but they will lack detailed insight and be more descriptive than analytical.
Examples may be scarce, weak or occasionally missing. However, the question is broadly
answered.

(40-50%)
A third class answer will largely describe the system, but have limited context to the
question, there may be few or no examples and limited knowledge.

Below 40%
A failure will possibly identify or list some key ideas, but little else of substance will be
discussed, no examples will be used or attempt at a structured answer given.

Question C2

(a) Discuss how political risks can influence a companys decision to set up in a country.

Grading
(70% +)
See Chapter 4 International Strategic Management
Candidates will show a wide ranging knowledge and understanding of political risks for
a company setting up abroad and use examples to demonstrate their answer.
Candidates will discuss, rather than simply describe, how an understanding of political
risks directly impacts on an organisation abroad. Political risk considerations should
include most of the following, with examples and discussion, to gain 70%+:

Definition: political risk can be defined as the probability of domestic or foreign firms
activities being adversely affected by the actions taken by the state (p70 International
Strategic Management).
- Political risk:
National (related to government) govt shift in emphasis on foreign trade, change of
leadership and direction, elections, coup detats, revolutions, (related to country)
internal climate in a country eg admin competence, corruption, domestic tensions,
embargos, Govt legitimacy and stability, Labour union power, National finance and
resentments, attitudes to foreign investment, terrorism, war...
Industry level risk greater for strategic industries like oil, power, arms, level of
development of a country lack of knowhow, fear of nationalisation.
Company level if company produces large amount of GNP of host too powerful,
using natural resources eg minerals and oil,
Ability to forecast risk in a country check lists, grand tours, lobbying, mathematical
models
 Reducing risks working with locals, borrow locally, aid local interests, international
law, negotiate with govts
(60-70%)
A second class answer will evaluate the political risk and show a good understanding of
the issues outlined above, but generally the level of discussion will be less broad. Some
explanations may require further elaboration and/or examples may be limited.

(50-60%)
Lower second class answers will provide satisfactory coverage of political risk but they
will lack detailed insight and be more descriptive than analytical. Examples may be
scarce, weak or occasionally missing. However, the question is broadly answered.

(40-50%)
A third class answer will largely describe the issues surrounding political risk, but have
limited context to the question, there may be few or no examples and limited
knowledge.

Below 40%
A failure will possibly identify or list some key ideas, but little else of substance will be
discussed, no examples will be used or attempt at a structured answer given.

(b) Evaluate why governments may intervene in international trade.

See Chapter 5 International Strategic Management

Candidates will show a wide ranging knowledge and understanding of reasons for
government intervention in international trade. Candidates will discuss, rather than
simply describe, why governments intervene in international trade. Answers should
include most of the following, with examples and discussion, to gain 70%+:
National Defence and protection of key assets eg oil
Countering barriers to entry raised by powerful foreign firms
To aid young and inexperienced local industries
International politics eg embargos, boycotts, hostile countries
Protecting local industries eg agriculture
Raising money/helping the economy via foreign business eg tariffs, building
infrastructure, local employment etc, via Regional organisations/groups eg EU,
African
Aggression war, change in Government eg coup, Government policy changes,
nationalism, fear of West/Capitalism

(60-70%)
A second class answer will evaluate government intervention and show a good
understanding of the issues outlined above, but generally the level of discussion will be
less broad. Some explanations may require further elaboration and/or examples may
be limited.
(50-60%)
Lower second class answers will provide satisfactory coverage of government
intervention but they will lack detailed insight and be more descriptive than analytical.
Examples may be scarce, weak or occasionally missing. However, the question is
broadly answered.

(40-50%)
A third class answer will largely describe the issues surrounding government
intervention, but have limited context to the question, there may be few or no
examples and limited knowledge.

Below 40%
A failure will possibly identify or list some key ideas, but little else of substance will be
discussed, no examples will be used or attempt at a structured answer given.