Guide Answer Test 2 Fall 2005
The following represent the guidelines used to grade the second test in Business 1301, Fall 2005. For reference purposes please consider the following as you compare your test answers to these answers in the Guide: Answers to the questions include, where appropriate, materials from the class, from the readings and from the chapters. Answers to questions require some use of business language (examples are provided). Answers to questions require some linking of course materials (examples are provided). Answers provided in this guide are not intended to be "the" answer. However, they do indicate the direction and depth of answers that are considered to be good answers to the test questions. For example, your tests were not graded using a precise comparison of terms provided in this guide and terms used in your answers. For future reference: As I indicated in class, you must do the following to successfully navigate these types of exams: 1. 2. 3. 4. Learn the language of the trade Read all materials assigned and use all class materials presented Learn to apply class materials to specific situations Learn to integrate materials from different parts of the course
These will be requirements in many subsequent classes you take. Improving on these kinds of competencies will help you in the future. Question 1 You are the product manager for an auto parts manufacturer. Your firm received a large contract to manufacture axles to be used in a new line of front wheel drive automobiles made by a large automaker. The contract is very important to your company which has recently experienced some market share erosion. Prior to receiving the contract, your firm had developed plans to downsize several hundred employees one month before Christmas. Final testing of the axles was completed last week and the first shipment is scheduled for three weeks. When you examined the test report, you discovered that the axles failed when loaded at twenty percent over the rated capacity and subject to strong torsion forces (hard turns). Conditions for failure could occur for a breaking vehicle on a curve downhill. The automaker's specifications call for the axle to carry 130 percent of its rated capacity without failing. You show the results to your boss and to the vice president. Both tell you they knew of the report. Both also indicate that the likelihood of the conditions for failure occurring is low and there is no time to redesign the axle for the first scheduled delivery date. Failure to deliver would result in a loss of the contract and the loss of many jobs. List five ethical practices that may have been lacking in this company that led to these problems evident in this situation. Develop a strategy to resolve these issues (you can create one general strategy for all, but make sure that your answer refers to each issue cited). For bullet 1, there are many ethical issues involved in this scenario including the following: 1) product deception, 2) promotion deception, 3) misrepresentation to customers and clients, 4) product safety, 5) whistleblowing. The key ethical responsibility in this case revolves around how you will handle the circumstances given that you know what is going on, your bosses know what is going on, and you are at
odds with your bosses about how to manage the situation. A key question that should always be asked when dealing with ethical issues is "Does it pay to be ethical?" For bullet 2, the strategy you develop includes creation of a code of ethics that outlines acceptable or unacceptable behaviors in the firm. A code must avoid becoming too legalistic if it is to be effective. In any code, the following elements must be evident: Ethical issues pertinent to the firm and its constituents must be understood Code statements cannot be vague. Even though ethical beliefs vary from one person to the next, statements regarding ethics must be specific regarding marketplace and workplace behaviors but broad enough to encompass belief differences and cultural differences. Firms should monitor conformance to codes. Employees should be held accountable for their actions. A reward structure should be established to encourage ethical behaviors. A search process should be implemented to learn about new ethical challenges. Training should occur to sensitize employees as to the nature of ethical problems and methodologies available for handling those problems. Part of this strategy should include the benchmarking of other firms that have high ethical standards and reputations. It should also contain a provision for continuous revision as circumstances change and new ethical issues arise. Overall, an ethics program should include high expectations of all members of the organization. Part of this strategy requires a recognition of the factors that influence ethical decision making: 1) characteristics of decision makers, 2) situations, 3) outcomes, 4) significant influences on people's behavior, and 5) the decision itself. Part of the strategy must also include top management's commitment to the provisions of the code. Codes, by themselves, do not work. Top management must, through their actions, be supportive of the code if the code is to have merit and be able to result in such things as increased public confidence in the company, lessening the potential for government regulation, and the like. Question 2. Gateway has just promoted a person to become its first Chief Imagination Officer. Meet Gretchen Rogers. Among Gateway's creative concepts developed through imagination are the cow-patterned boxes that Gateway ships all over the world. The idea was suggested by a combination of the cattleman's rugged independence and high-tech engineering. Gretchen's job is to try to stop the intellectual atrophy that often occurs as organizations grow rapidly and people's jobs become more specialized. Her charge is to supply the building blocks of creativity. Gretchen says she does her best imagining on her skis or on her bike. What might Gretchen use as critical thinking/creativity enhancers? How compatible are technology and critical thinking/creativity? How do you think Gretchen and her work can help Gateway remain entrepreneurial even tough it is a large company? How can Gretchen work to remove barriers to critical thinking/creativity?
For bullet 1, Gretchen can use a variety of creativity enhancers including breaking down barriers, technology, personal barriers created by individuals, and the like. She must not adopt the "we're too busy for ideas" phenomenon that seems to be a tremendous barrier to creative thought. She must be observant. Further, she will have to continuously encourage creativity via brainstorming sessions in which no policies, procedures, etc. are considered sacred. Further, Gretchen will have to encourage good and bad ideas, build a tolerance for bad ideas and develop a program for eliminating ideas only after their worth has
been objectively evaluated. Finally, she will have to do something in the way of assembling the knowledge of the firm, as a whole so that some assessment of the intellectual assets of the firm can be made. As we discussed in class, and referring to bullet 2, creativity/critical thinking can be enhanced by technology, but technology is not either of these. Ideas occur with people not technology and the best ideas occur when we can free our minds of the daily clutter of our activities. In bullet 3, Gretchen can develop a frame of mind to be creative. This can include: Observation Desire to learn Ability to identify things others miss Generating large numbers of ideas Questioning of norms Perseverance Gretchen will have to engage in activities that promote the worth of new ideas and the value of those ideas to the firm and to individuals. We can borrow from the ethics section of the course with the following activities to help Gretchen: 1) surround yourself with experience and wisdom, 2) expect results, but not at any cost, 3) encourage criticism through proper channels and in proper format, 4) encourage mistakes, but limit their scope, and 5) deal with problems straightforwardly and quickly. Overcoming resistance involves such things as: Education and communication Willingness to take risks by allowing people to maximize their capabilities Providing support Providing opportunities for participation and involvement making people feel they are part of the team In bullet 4, Gretchen must develop a process that helps to overcome the barriers mentioned above and use the ideas for overcoming those barriers. As simple as it may sound, awareness of the need for ideas is critical. Pressures from inside and outside the organization imply the need for change, but leaders and followers must recognize these pressures as indicators of needed for creativity/critical thinking. Elements of learning to learn are also relevant here, including comments on mistakes, competence and active learning initiatives Question 3 (20 points) You have been retained as a consultant for a large department store chain. This chain is having some financial difficulties and they are asking you to try to resolve their problems. Part of their problem has been in company philosophy about pricing. They have always tried to sell at low prices and with the goal of making profits on volume. Similarly, they have engaged in mark-up pricing, banking on the large mark-ups to result in high profits. What specific information can you provide that would indicate to this company that these two philosophies of doing business are in error? Describe for them how price, costs, and demand are the foundations for the creation of income statements, balance sheets, and cash flow statements that are critical to managing the financial side of their business. For bullet 1, it is critical to have an understanding of margins. Selling at low prices reduces margins a on unit basis. Total margins may increase if the reduced price is sufficient to stimulate a significant increase in demand. In other words, the demand is elastic. For example, if you buy an item for $1.00 and sell it for $2.00, your gross margin is $1.00. If you sold 1000 nits, your total gross margin would be $1000. If you reduce your price from $2.00 to $1.50 for example, your gross margin is now $0.50 per unit. At this price,
you would have to sell 2000 units to achieve the same total gross margin. Is the price reduction capable of doubling demand? Their strategy of mark-up pricing is based on costs. If they are engaging in this approach for the purpose of gaining a large gross margin per unit, they cannot be selling at low prices. Further, mark-up pricing is based on cost and, as such, does not take into account customer's willingness to buy at various prices. Customer's willingness to buy is a judgment call made by business people. Clearly, prices must be set in such a way to be profitable, but price setting must go beyond simple mathematics. For bullet 2, price and demand, together, will determine the total sales revenue for the business. This figure is the top line in a business' income statement. These two factors also impact cash flow, but cash flow and revenue are not the same as the business may allow customers to pay by credit. Thus, cash from sales in a short time period will be reduced by the amount of the sales that are paid by credit. In the business' balance sheet, revenues will affect assets (either cash on hand or accounts receivable) depending on how the business collects its payments for products sold. The business' costs will allow for the determination of margins. Further, business' do not necessarily pay cash for everything, so accounts payable will change on the liabilities side of the balance sheet. Further costs can be divided into fixed and variable. How costs are allocated between these two categories of expenses, along with prices and margins will allow the business to calculate a break even point. Question 4 (20 points) The city of Waco wants to sell itself. More specifically, the mayor, the city council, and others instrumental in the promotion and development of the community have targeted three areas of growth: a) tourism, b) new business, and c) city services. Briefly describe the type of competition that Waco faces with respect to each of these three areas of community promotion and development. In learning about Waco's competitors develop a plan that focuses on information you want to collect about competitors, why that information is important and how it could be used by Waco. Describe a way in which Waco can begin development of a sustainable competitive advantage in each of these three areas. For bullet 1, the type of competition can be first divided into direct and indirect competitors. Direct competitors are those firms that are employed working on behalf of cities similar to Waco in size, economy, etc. Indirect competitors are cities unlike Waco (e.g. Dallas, Houston), that must be considered as they have resources that can overwhelm smaller cities. A key aspect of describing competition is the examination of the needs and wants being served in each of these three areas. For example, what do tourists need and want? What do business willing to re-locate or expand need and want? What do members of the community need and want to improve the quality of the community? For bullet 2, there is much information that should be maintained about competitors. Who are the competitors? cannot compete against "invisible" competitors; profiling to the extent possible provides valuable insights about how they compete, how effective they are (or can be), etc. What are their strengths/weaknesses? basis for S.W.O.T. Are they growing/declining/flat in terms of growth? need an understanding of what is happening and why Who are the strongest competitors? need to know who will be aggressive/passive in the marketplace Is the market for tourism/business development/city services growing? state of market determines business strategies to be adopted
Are there new competitors? a forward thinking outlook Who might become new competitors? more forward thinking Have existing competitors changed any aspects of their business? analysis rather than simply reporting of information How does your business differ from that of competitors? What is your competitive advantage? What is the competitive advantage offered by Waco? How does it vary from one situation (e.g. tourism vs. business development) to the next? how will you develop a competitive advantage that is sustainable? For bullet 3, competitive advantage is something Waco does better than others cities. Advantage is defined by customers. Most advantage is temporary as most businesses compete on the basis of features. Product/service features are often easily copied. Businesses that focus on imitation are doomed to being second. They focus on competitors, and overlook the importance of the customer. Businesses that engage in initiation or value innovation focus on customers. They still must know about competitors, but a focus on customers is the only way to know =what the customer is thinking. Question 5 (20 points) You are a small business owner and have become convinced that the key to developing a long term competitive advantage with your customers is getting to know your customers better. You have been heard to say to your employees, "If we only knew our customers better, we could provide better products and services to them." In addressing the three bullets, you can create a table if that will help. Also, one or two sentences piece of information can be sufficient is addressing the second and third bullets. . List the kinds of information you would want to collect about your customers in order to get to know them better. For each of the information areas identified, describe how it affects how your customers view your business. For each of the information areas identified, describe how you might use this information to develop advantage for your business. For bullets 1-3, the kinds of information to be collected about customers is listed (bullet 1), an example how it affects customers' views of a business (bullet 2) along with an example of how it can be used (bullet 3): Customer profile (1) geographic, cultural/ethnic, age, values/attitudes/beliefs, knowledge and awareness, buying patterns, media used (2) factors such as age, where we live, etc. affect customer viewpoints in a variety of ways. For example, older people view things differently than younger people (3)often the basis for differentiation between market segments (groups of customers) and target markets (groups of customers a business chooses to serve) Customer decision making (1) awareness, knowledge, liking, preference, conviction, purchase, post-purchase; (2) lack of information or poor information or wrong information can lead a customer to stop going through the stages of the decision process, resulting in lost sales and perhaps even customer ill will. (3) businesses face problems at any of these stages depending on what is happening with customers. For example, if a customer is simply not aware of the existence of a business, this is a business problem that must be solved and represents a different kind of problem than one that comes up in post-purchase evaluation of a purchased product/service Customer problem recognition (1) a difference between a customer's actual situation and desired situation (2) this difference can trigger search behavior to solve the problem, (3) a business wants to at least get into the evoked set of viable alternatives specified by the customer. This means that the business must be known and the business must know how customers ultimately make decisions (e.g. planned vs. impulse) so that appropriate strategies can be developed.
Group/social variables - (1) families, reference, culture, and subculture all may influence what people buy (2) a family, rather than an individual may make purchase decisions and various groups affect the decisions made by many customers (3) these influences are important as business strategies must take them into account and use them (directly or indirectly) to be attractive to customers. Individual/psychological variables - (1) learning, conditioning, memory, attitudes, perception, risk all affect how customers behave in the marketplace (2) such variables affect decision making learning leads customers to repeat purchase or stop purchasing based on experiences, memory allows customers to recall (sometimes inaccurately experiences (3) each of these individual variables may be strongly related to willingness or unwillingness to buy, to come to the business, etc. Individual variables often explain buying behavior in the marketplace Self-concept/Situational influences/Lifestyle- (1) provide additional insight into what customers think about themselves (2) often dictate how customers behave in the marketplace (e.g. hedonistic lifestyle leads people to engage in buying for pleasure rather than real need (3) businesses who can understand what people think about themselves or how they live can target strategies to impact these viewpoints Motivation- (1) why people do what they do the energy and direction behind marketplace behavior (2) customers are motivated by needs and wants and depending on the strength pf needs and wants and the nature of the needs/wants, they will be energized to satisfy them (3) businesses can examine features and benefits of products/services/locations to ascertain what motivates people to buy what they do and behave in the marketplace the way they do In general, businesses would like to focus on their best customers as they develop strategies deigned to be influential on those customers in their target markets.