CASE 9 Rogers` Chocolates ASSIGNMENT QUESTIONS

1. What is competition like in the premium chocolate industry? Which of the

five competitive forces is strongest? Which is weakest? What competitive
forces seem to have the greatest effect on industry attractiveness and the
potential profitability of new entrants?
2. How is the premium chocolate industry changing? What are the underlying
drivers of change and how might those driving forces individually or
collectively change competition in the industry?
3. What key factors determine success for producers of premium chocolates?
4. What does a SWOT analysis of Rogers` Chocolates reveal about the
prospects for company`s future success? What are its key resources strengths
and competitive capabilities? its resource weaknesses and competitive
liabilities? its external opportunities and threats?
5. How would you describe Rogers` Chocolates` competitive strategy? How is
it positioned in the industry?
What specific steps has management taken to implement this strategy? Do the
company`s functional strategies and tactics appear to be consistent with its
competitive strategy?
6. How well is Rogers` Chocolates` strategy working in terms of the fi nancial
performance it is delivering?
What is your assessment of its level of profi tability, its degree of liquidity, and
the extent of its leverage?
7. Which of the strategic options available to Rogers` Chocolates should be
given the highest priority? Which of the growth options is the most attractive?
Why?
8. What specifi c actions should Steve Parkhill undertake to improve Rogers`
competitiveness in the Canadian Premium Chocolate Industry? How will the
culture of the organization impact Parkhill`s decision? As a relatively new
CEO, how would you suggest that Parkhill reconcile the competing growth
suggestions championed by various members of the Board of Directors?



PAPER 1
LxecuLlve Summary
Success of any buslnesses organlzaLlon ls deLermlned by facLors such as flnanclal managemenL operaLlonal
llnanclal facLors address use of caplLal ln buslness and flow of cash Lhrough varlous processes wlLhln Lhe
organlzaLlon ManagemenL facLors are llnked Lo organlzaLlonal sLrucLure of Lhe enLerprlse Whereas operaLlonal
facLors address how avallable resources are used Lo achleve ob[ecLlve of Lhe organlzaLlon AparL from Lhese Lhree
facLors envlronmenLal facLors llke compeLlLlon also deLermlne success of any buslness organlzaLlon 1hls paper
explores LransformaLlon LhaL 8ogers' ChocolaLe Company has undergone slnce lLs esLabllshmenL 1he paper also
lnvesLlgaLes compeLlLlve sLraLegy of Lhe company agalnsL lLs close compeLlLors

CuesLlon 1 WhaL ls compeLlLlon llke ln Lhe premlum chocolaLe lndusLry? Whlch of Lhe flve compeLlLlve forces ls
sLrongesL? Whlch ls weakesL? WhaL compeLlLlve forces seem Lo have Lhe greaLesL effecL on lndusLry aLLracLlveness
and Lhe poLenLlal proflLablllLy of new enLranLs?
CompeLlLlon ln premlum chocolaLe lndusLrles ls based on reglonal brands (ZleLsma 2008 Lllls M eL al 2007)
lorces LhaL acceleraLe compeLlLlon among premlum chocolaLe lndusLrles lnclude varlaLlon ln quallLy of producLs
and oLher servlces offered Lo cusLomers varlous premlum companles have lndlvldual Lechnlques LhaL ensure
dellvery of hlgh quallLy producL ln Lhe markeL ln addlLlon Lo producL quallLy prlce of Lhe producL ls anoLher area
where compeLlLlon arlses uependlng on Lhe producLlon cosL dlfferenL premlum lndusLrles offer dlfferenL prlces ln
Lhe markeL ackaglng and physlcal presenLaLlon of Lhe producLs ls anoLher avenue for compeLlLlon ln premlum
chocolaLe lndusLrles (ParcourLCooze 2009) Company LhaL offers aLLracLlve producLs especlally LargeLlng younger
generaLlon domlnaLes Lhe markeL lurLhermore adverLlsemenL meLhods and geographlcal dlsLrlbuLlon ls also a
poLenLlal area for compeLlLlon (Sledel 2002) A hlgh sale ls reallzed ln company whose producL ls mosLly spread
and common lrom Lhese forces geographlcal dlsLrlbuLlon emerges Lo conLrlbuLe much ln hasLenlng compeLlLlon
among chocolaLe companles
Lven Lhough all forces sLaLed above hasLens compeLlLlon among Lhese chocolaLe companles producL quallLy
surface Lo have leasL lmpacL on exLenL of compeLlLlon (ZleLsma 2008) ALLracLlveness and proflLablllLy of chocolaLe
producLs ls deLermlned by how Lhe producL ls molded colored and packed (Lllls M eL al 2007) ackaglng
Lherefore plays a role ln ensurlng manufacLured producL appears aLLracLlve ln Lhe markeL 1o a cusLomer naLure
of wrapplng maLerlals Lells more abouL quallLy of Lhe lLem dellvered Plgh proflL ls Lhus reallzed lf Lhe producL ls
aLLracLlve Lo Lhe cusLomer AdverLlsemenL meLhods used ln promoLlng Lhe producL also deLermlne how aLLracLlve
Lhe producL would be ln Lhe markeL (uahl and 8lake 2007) ln chocolaLe companles LargeLed consumers are
youLhs Lherefore sexy adverLlsemenLs lncorporaLed wlLh modern Lechnology lures mosL young people Lo
purchase more chocolaLe Ceographlcal dlsLrlbuLlon of newly launched producL also deLermlnes proflL recelved
from LhaL parLlcular producL 1o ensure hlgh aLLracLlveness and proflLablllLy a company ensures wlde dlsLrlbuLlon
of lLs new enLranL
CuesLlon 2 Pow ls Lhe premlum chocolaLe lndusLry changlng? WhaL are Lhe underlylng drlvers of change and
how mlghL Lhose drlvlng forces lndlvldually or collecLlvely change compeLlLlon ln Lhe lndusLry?
1he company has undergone change ln ownershlp (ZleLsma 2008) Cwnershlp of 8ogers Company has changed
slnce Lhe deaLh of lLs founder Charles Candy 8ogers lrom famlly ownershlp Lhe flrm was sold Lo one of Lhe
cusLomers afLer Charles' deaLh AnoLher promlnenL area of change ls ln producLlon plannlng Cne aspecL of
lmproved producLlon plannlng ls ln packaglng of manufacLured chocolaLes 8ogers' ChocolaLe Company lnlLlally
used manual way of wrapplng chocolaLes AlLhough Lhe chocolaLes were of hlgh quallLy Lhe process was however
very slow 8elaLed Lo mechanlsm of producLlon was labor requlred ln Lhe whole producLlon process 1he company
relled on human labor ln carrylng ouL lLs operaLlons Lven Lhough hand wrapplng ls sLlll belng used Lhe company
has acqulred many efflclenL machlnes LhaL asslsL ln carrylng ouL producLlon process More skllled labor force
Lherefore has been recrulLed unllke lnlLlally where mosL of employees were unskllled ConsequenLly producLlon
process has lncreased a loL Lhus maklng Lhe company Lo ad[usL accordlng Lo flucLuaLlng markeL demands
AparL from producLlon plannlng Lhere has been a change ln sLrucLure and leadershlp sysLem of Lhe company
(ZleLsma 2008) SLeve arkhlll Look leadershlp role from !lm 8alph who had been Lhe presldenL and manager of
8odgers' flrm from 1989 Lo 2007 Slnce Lhen arkhlll has changed focus from wholesale producLlon Lo reLall
producLlon ConsequenLly Lhere has been a change ln Lhe source of revenue for Lhe company 8eLall producLlon
currenLly conLrlbuLes an average of 30 percenL of LoLal revenues reallzed by Lhe company
Whlle undergolng LransformaLlon varlous facLors have and are sLlll acceleraLlng meLamorphlc process of Lhe
company (vlcLorla 1lmes ColonlsL 2010) need for lmproved efflclency ls one of Lhe facLors LhaL have acceleraLed
change wlLhln Lhe flrm Company's efflclency deLermlnes how fasL producLlon process ls LfflclenL company noL
only lmproves quallLy of lLs producLs buL also ls lmporLanL ln quallLy of servlces dellvery LffecLlveness of labor ln a
company also consLlLuLes company's efflclency ln an efflclenL company all programs and producLlon processes run
as per sLlpulaLed Llme
1he flrm Lhus wlll be on forefronL ln ldenLlfylng poLenLlal markeL polnLs and uLlllze Lhem approprlaLely varlous
sLraLegles are easlly generaLed ln an efflclenL company Lhus overcomlng problem of prlce flucLuaLlon becomes
easy for such a company
AnoLher force LhaL has conLrlbuLed ln LranslLlon of 8ogers' company ls Lhe need Lo lncrease geographlcal
dlsLrlbuLlon of Lhelr producLs (ZleLsma 2008) 8ehavlor of any producL ln Lhe markeL ls deLermlned by how famlllar
Lhe producL ls ln Lhe exlsLlng markeL lamlllarlLy ls furLher dependenL on geographlcal dlsLrlbuLlon of Lhe producL
Cnly well dlsLrlbuLed producLs feLches much sales CrganlzaLlons Lherefore who are experlenclng sLlff compeLlLlon
from oLher companles should expand dlsLrlbuLlon of Lhelr producLs and servlces llnally leadershlp wrangles as
well as poor lnvenLory managemenL call for change ln any producLlon flrm lnsLablllLy ln any deparLmenL ln a
company foreshadows fallure of Lhe company ln addlLlon problems wlLhln a company Lamper wlLh Lhe
producLlon process of Lhe company Such llke company Lhus has llmlLed chances of survlval ln a compeLlLlve
markeL
CuesLlon 3 WhaL key facLors deLermlne success for producers of premlum chocolaLes?
Success of premlum chocolaLe produclng companles depends on a number of facLors (La 8occo 2010) Avallable
caplLal wlLhln producLlon flrm and lnvenLory level ls an lndependenL facLor LhaL deLermlnes growLh of chocolaLe
produclng company (kennon 2010) Company wlLh hlgh lnvenLory level has hlgh chances of succeedlng especlally
durlng Llmes of scarclLy of raw maLerlals lrom Lhe sLudy 8ogers' Company has hlgh neL annual revenues and
consequenLly emerges above lLs compeLlLors ln Lhe markeL roducLlon flrm wlLh hlghlncome runs lLs processes
smooLhly and hence a slgn of success
rlce of chocolaLe producL also affecLs success of produclng flrm Company's rlce of Lhe producL(s) deLermlnes
consumpLlon raLe of Lhe producL WheLher prlce ls regulaLed by Lhe organlzaLlon lLself or sLaLebased declslon lL
affecLs demand of Lhe producL uemand and prlce of any producL are lnversely relaLed Low markeL demand
lmplles low neL sales whlch makes success of Lhe company Lo be uncerLaln AnoLher aspecL of prlce facLor ls ln
deLermlnaLlon of producLlon cosL Lower prlces Lhan oLher producers of Lhe same Lype of commodlLy make
producLlon cosL expenslve Cn Lhe oLher hand hlgh prlce reduces markeL demand of any producL ln a case where
dlfferenL companles sell slmllar producL aL dlfferenL prlces companles uslng exLreme prlces are aL rlsk of falllng
Company's geographlcal area of operaLlon ls anoLher plvoLal polnL ln deLermlnaLlon of success of a company
ulsLrlbuLlon and concenLraLlon of a company and/or lLs branches deLermlnes how well consumers wlll famlllarlze
Lhemselves wlLh a producL from Lhls company ln addlLlon consumers purchase producLs whlch Lhey have enough
lnformaLlon on ln large quanLlLles A company ls llkely Lo succeed lf lL has large geographlcal coverage compared Lo
lLs close compeLlLors AnoLher facLor LhaL deLermlnes success of chocolaLe produclng companles ls producL quallLy
and producL dlverslflcaLlon Plgh quallLy producL sells more ln Lhe markeL compared Lo LhaL of low quallLy
AlLhough prlce and producL quallLy are ln mosL cases dlrecLly relaLed consumers who value quallLy wlll go for
expenslve chocolaLes
roducL dlverslflcaLlon ls applled ln cases where sLlff compeLlLlon exlsLs ln Lhe markeL lnsLead of malnLalnlng
producLlon of only one Lype of chocolaLe producL modlflcaLlon ln shape color and dlfferenL composlLlon ensures
furLher success of a company
ln con[uncLlon wlLh producL dlverslflcaLlon adverLlsemenL meLhods chosen ln promoLlng any chocolaLe producL ls
anoLher successdeLermlnlng facLor As Lhe LargeLed group ls youLhs sexy and provoklng adverLlsemenLs are
preferred Lo borlng and old LradlLlonal adverLlsemenLs Company Lherefore LhaL uses sexy modern adverLlsemenL
meLhods llke Lhrough lnLerneL ls more llkely Lo succeed

CuesLlon 4 WhaL does a SWC1 analysls of 8ogers' ChocolaLes reveal abouL Lhe prospecLs for Lhe company's
fuLure success? WhaL are lLs key resources sLrengLhs and compeLlLlve capablllLles? lLs resource weaknesses and
compeLlLlve llablllLles? lLs exLernal opporLunlLles and LhreaLs?
8ogers' chocolaLe company has varleLy of sLrengLhs (ZleLsma 2008) lLs brand for lnsLance ls a sLrengLh polnL for
Lhe company 8ased on coloraLlon Lhe brand appeared aLLracLlve Lo buyers Lhus acLlng as an adverLlslng lLem
llnanclal poslLlon of Lhe company ls anoLher polnL of sLrengLh for Lhe company (La 8occo 2010 kennon 2010)
8ogers' company had hlgh annual earnlngs compared Lo oLher chocolaLe manufacLurlng companles 8rand of Lhe
company conLrary Lo sLrengLhs acLs as a weakness polnL Lo Lhe company 8ogers' brand ls noL wldely known Lo
consumers Lhus lL lowers performance of Lhe company ln addlLlon Lhe brand ls old maklng lL noL recognlzed by
youLhs who are Lhe LargeLed group
CpporLunlLy on Lhe oLher hand exlsLs ln Lhe company's room for geographlcal expanslon as well as lmprovlng
adverLlsemenL meLhods Ma[or LhreaL faclng Lhe company ls sLlff compeLlLlon from companles whlch also
produced slmllar producLs lrom Lhls analysls 8ogers' ChocolaLe Company ls more llkely Lo succeed lf proper
sLraLegles are lald down Lo overcome lLs weaknesses and LhreaLs Changlng Lhe company's brand and lmprovlng lLs
geographlcal dlsLrlbuLlon ls a way of converLlng lLs weaknesses lnLo opporLunlLles roducL dlverslflcaLlon proper
prlclng and good organlzaLlon of avallable resources are posslble soluLlons Lo LhreaLs faclng Lhe company 8ogers'
chocolaLe company ls llkely Lo expand more lf Lhese sLraLegles are used
8esource weakness for 8ogers' chocolaLe company ls ln lnvenLory malnLenance (ZleLsma 2008) 8ogers' company
experlences frequenL problem of under sLocklng or ouLof sLock slLuaLlons CompeLlLors of 8ogers' company Lake
advanLage Lhls weakness Lo compeLe lL ln Lhe markeL CompeLlLlve llablllLles of 8ogers' company lnclude advance
revenues collecLed from cusLomers before acLual dellvery of Lhe producL ln case of obLalnlng loan morLgages are
compeLlLlve llablllLles for 8ogers' company (Lconomy WaLch par 4 3) 8ogers' company has exLernal opporLunlLy
ln expandlng lLs branches and concenLraLlon ln order Lo domlnaLe Lhe markeL Whlle expandlng lLs dlsLrlbuLlon Lhe
company should concenLraLe Lhelr new branches close Lo LourlsL aLLracLlon slLes Lo capLure vlslLlng LourlsLs
ln addlLlon Lhe company should also conslder Llme of Lhe year llke ChrlsLmas summer or wlnLer whlle carrylng
on expanslon
Cnllne buslness communlcaLlon ls anoLher poLenLlal exLernal opporLunlLy LhaL needs Lo be uLlllzed fully
lmprovemenL Lherefore of lnLerneL servlces by Lhe company ls a sure poslLlve ouLcome Lo Lhe company 1hrough
hlgh quallLy of 8ogers' chocolaLes loyalLy of cusLomers has lmproved 1hls acLs as an opporLunlLy Lo Lhe company
whlch needs Lo be explolLed fully 1he company however faces exLernal LhreaLs LhaL can lower lLs performance
Change ln dleL of consumers ls currenLly poslng a serlous LhreaL Lo Lhe company Cradual change of preference
from mllk chocolaLe Lo dark chocolaLe has a negaLlve effecL Lo 8ogers' company LhaL manufacLures mllk chocolaLe
ressure from cusLomers employees and human rlghLs' organlzaLlon ls anoLher exLernal LhreaL LhaL faces Lhe
company ressure ls however hlgh lf soclal responslblllLy pracLlces of Lhe company ls poor or uneLhlcal pracLlces ln
Lhe flrm
CuesLlon 3 Pow would you descrlbe 8ogers' ChocolaLes compeLlLlve sLraLegy? Pow ls lL poslLloned ln Lhe
lndusLry? WhaL speclflc sLeps has managemenL Laken Lo lmplemenL Lhls sLraLegy? uo Lhe company's funcLlonal
sLraLegles and LacLlcs appear Lo be conslsLenL wlLh lLs compeLlLlve sLraLegy?
A number of sLraLegles are lald down by SLeve arkhlll Lo flghL compeLlLlon ln Lhe markeL 8ogers' close
compeLlLors are almosL equal ln quallLy and dlverslflcaLlon of Lhelr producLs ln flghLlng compeLlLlon Lhe company
has formulaLed oLher plans aparL from quallLy assurance and producL dlverslflcaLlon Some of Lhe sLraLegles
planned by Lhe company lnclude lmprovlng onllne buslness Lo capLure buyers who purchase Lhrough lnLerneL
Changlng or modlfylng 8ogers' brand ls anoLher sLraLegy planned by Lhe company ln addlLlon produclng oLher
forms and Lypes of chocolaLes ls anoLher poLenLlal acLlon LhaL flghLs compeLlLlon for Lhe company Moreover Lhe
company plans Lo expand lLs operaLlonal reglon Lo ensure wldespread dlsLrlbuLlon of lLs producLs (Sledel 2002) 1o
ensure hlgh aLLracLlveness of lLs producLs 8ogers' company has lmproved lLs packaglng Lechnlques CollecLlve
appllcaLlon of all Lhese sLraLegles could place 8ogers' chocolaLe company ln a beLLer poslLlon ln a compeLlLlve
markeL Compared wlLh funcLlonal sLraLegles and LacLlcs Lhese sLraLegles were conslsLenL wlLh compeLlLlve
sLraLegles
8eferences
uahl 8oald and 8lake CuenLln (2007) Charlle and Lhe ChocolaLe lacLory uffln
Lconomy WaLch (2010) LlablllLles SLanley SL Labs Accessed !une 23 2010 from
hLLp//wwweconomywaLchcom/budgeL/lndla/llablllLleshLml
Lllls M eL al (2007) 1he Pershey Company lnLroduclng Lhe World of ChocolaLe San lranclsco 8rass knuckles
ubllcaLlons
Lllls M eL al 2007 1he Pershey Company lnLroduclng Lhe World of ChocolaLe San lranclsco 8rass knuckles
ubllcaLlons
ParcourLCooze W (2009) Wlllles ChocolaLe lacLory Cookbook Podder SLoughLon
kennon !oshua (2010) Chase Candy Company A 8uslness roflle of a 8eglonal ChocolaLe Maker Company
roflles and Analysls
La 8occo C (2010) keeplng lL Small aL Lhe ChocolaLe lacLory 1he new ?ork 1lmes 1uesday May 23 2010 p1
Sledel ! C (2002) uslng Lhe Law for CompeLlLlve AdvanLage !8uM8S Serles !ossey8ass
vlcLorla 1lmes ColonlsL (2010) 8ogers ChocolaLes sweeL on Canadlan navys 100Lh annlversary celebraLlons
CanwesL ubllshlng lnc


ALk 2
8ogers ChocolaLes"
lnLroducLlon
remlum ChocolaLes are llke lmporLed 8oses whlch noL conslder necesslLles for one llfe eople love Lo have or geL
one of Lhose producLs Powever lf Lhere lsn'L a speclal occaslon or surplus cash some people wlll noL buy LhaL
unnecessary sLuff
ln Canada premlum chocolaLes were growlng aL 20 percenL annually and Lhe Canadlan markeL slze for ChocolaLes
was uS$ 167 mllllon ln 2006 An aLLracLlve growLh from premlum chocolaLes makes Lhe currenL player llke 8ogers
ChocolaLes urdys and oLhers are Lhlnklng new sLraLegles Lo expand markeL ln addlLlon some blg LradlLlonal
manufacLurers llke Persheys and Cadbury are also very lnLeresLed and keen Lo enLer Lhls segmenL (ZleLsma 2007)
8ogers ChocolaLes ls a klng ln vlcLorla and well known ln 8rlLlsh Colombla Powever ouLslde Lhls area Lhe brand
awareness ls sLlll low 1he new appolnLed CLC ls belng LargeLed Lo double or Lrlple Sales ln Len years 1he key
successes ln premlum chocolaLes are undersLand Lhe consumer's needs brand awareness dlverslfled producLs
and enhanced compeLlLlveness
1here are many challenges for 8ogers's chocolaLes Lo grow ln Lhls evergrowlng compeLlLlon and Lhere are many
old and new sLraLegles LhaL haven'L been proven effecLlvely Moreover 8ogers ls small/medlum Company LhaL has
llmlLed resources Lo apply all Lhose sLraLegles 1he managemenL declslonmaklng wlll be very cruclal Lo manage lLs
sLrengLh and weakness whlle aL Lhe same Llme Lhey have Lo overcome Lhe LhreaL and opporLunlLles ln Lhe
lndusLry
1 CompeLlLlve drlvlng forces ln Lhe premlum chocolaLe lndusLry
orLer's llve lorces Model
orLer's flve forces" model uses flve compeLlLlve forces LhaL deLermlne a parLlcular flrm's capablllLy Lo compeLe
(1hompson SLrlckland Camble 2010) 1he chocolaLe and cocoa lndusLry can use Lhe flve forces" model as an
analyLlcal Lool Lo deLermlne Lhe compeLlLlve markeL
plc
llgure 1 llve compeLlLlve forces by Mlchael orLer
1 CompeLlLlve 8lvalry
1he lnLenslLy of rlvalry among compeLlLors ln an lndusLry can creaLe prlce wars adverLlslng baLLles new producL
llnes and hlgher quallLy of cusLomer servlce 1here are many clrcumsLances LhaL lnLenslfy rlvalry whlch some of
Lhem are as follows many balanced compeLlLors a slow growlng lndusLry demands falls hlgh flxed or sLorage
cosLs llLLle swlLchlng cosLs aggresslve compeLlLors and many oLher clrcumsLances (1hompson SLrlckland and
Camble 2010)
remlum ChocolaLe compeLlLlon ln Canada lnvolves sLrong reglonal brands and few global players such as Codlva
LlndL CallebauL and urdy's Lven Lhough 1he Canadlan markeL slze of chocolaLes lndusLry as a whole had been
falllng (2 grow pro[ecLed) Powever Lhe premlum chocolaLe markeL was growlng aL 20 percenL annually
(ZleLsma 2007) 1haL slLuaLlon conslders less lnLense rlvalry among compeLlLors moreover every area has Lhelr
own local klng llke 8ogers ln vlcLorla
neverLheless ln 2008 Clobal economy was severely hlL by Lhe crlsls LhaL orlglnaLed from Lhe unlLed SLaLes and
qulckly spread Lo Lhe whole world lncludlng Canada remlum chocolaLe ma[orlLy consumers ln Canada come from
LourlsLs especlally Amerlcans as borderlng nelghbour When Lhe LourlsL's number drops and Lhe demand for
premlum chocolaLe also falls Lhe flerce rlvalry wlll lncrease
2 1hreaL of new enLranLs
lrequenLly exlsLlng lndusLry members are ofLen sLrong candldaLes Lo enLer markeL segmenLs or geographlc areas
where Lhey currenLly do noL have a markeL presence (1hompson SLrlckland Camble 2010) ApparenLly Pershey's
and Cadburys have been movlng lnLo Lhe premlum chocolaLe markeL Lhrough acqulslLlons or up markeL launches
slnce Lhls segmenL sLlll posses hlgh percenLage of growLh (ZleLsma 2007)
1he markeL ls only conLrol by few large and old players whlch occupy slgnlflcanL markeL shares 1he chocolaLe
lndusLry has a slgnlflcanL economy of scale enLry barrler because large companles exlsL ln Lhe lndusLry LhaL has
hlgh producLlon ouLpuL and lL reduces Lhe LhreaL of enLranLs
ln addlLlon Lo economy of scale producL dlfferenLlaLlon ls anoLher enLry barrler ln Lhe chocolaLe 1here are many
compeLlLors ln Lhe lndusLry LhaL have remarkably ldenLlflable brand names and cusLomer loyalLy llke 8ogers
ChocolaLe lLself new company musL lncrease lLs spendlng Lo overcome Lhe repuLaLlon and large cusLomer base of
Lhe exlsLlng companles
3 1hreaL of SubsLlLuLes
8ogers's chocolaLe ls ofLen used as glfL durlng numerous seasons and celebraLlons lncludlng ChrlsLmas LasLer
Palloween valenLlne's uay annlversarles and blrLhdays CLher Lypes of glfLs durlng Lhese seasons are vlewed as
subsLlLuLe producLs 1hese producLs are flowers [ewelry and sLuffed anlmals All of Lhese producLs can be
purchased lnsLead of 8ogers's chocolaLe unless Lhey [usL wanL only 'ChocolaLe' as glfLs
Many chocolaLe brands and a wlde varleLy of seasonal glfLs make Lhe LhreaL of subsLlLuLe producLs ls consldered
low Lo moderaLe ln Lhls lndusLry Powever lf 8ogers ChocolaLes can malnLaln lLs local herlLage especlally ln lLs
LradlLlonal area llke vlcLorla and 8rlLlsh Colombla Lhen Lhe LhreaL for 8ogers can be mlnlmlzed
4 ower of 8uyers
lf a buyer represenLs a large percenLage of Lhe suppller's sales Lhe buyer has more bargalnlng power over Lhe
suppller 8ogers's chocolaLe 30 of sales ls conLrlbuLed from lLs 11 reLall sLores whlch ls a sLrong one Powever
slnce Lhe prevlous presldenL Mr !lm 8alph had grown lLs wholesale markeL up Lo 30 Lhus Lhey have Lo Lake a
good care of lLs blg wholesale buyer
AnoLher condlLlon LhaL affecLs Lhe power of buyers ls producL dlfferenLlaLlon lf Lhe producL ls undlfferenLlaLed Lhe
buyer has Lhe power Lo play compeLlLors agalnsL each oLher and reduce Lhe cosL 1he premlum chocolaLe has a
dlfferenLlaLed producL whlch reduces Lhe power of buyers 8ogers have brand ldenLlflcaLlon and cusLomer loyalLy
whlch makes lL hard for buyers especlally Lhe loyal ones noL Lo consume 8ogers for Lhelr premlum chocolaLe
consumpLlon
1oday buyers demandlng chocolaLe more Lhan [usL a LasLe Lhey becomlng more healLh consclous Lherefore Lhe
demand for organlc chocolaLe and dark chocolaLe are growlng
3 ower of Suppllers
1he bargalnlng power of suppllers ls a compeLlLlve force LhaL can dlmlnlsh a flrm's proflLablllLy by ralslng prlces or
reduclng Lhe quallLy of Lhe suppller's producL
1he suppllers of Lhe chocolaLe lndusLry have slgnlflcanL bargalnlng power over Lhe lndusLry because of Lhe llmlLed
suppllers ln addlLlon Lhe suppller groups' bargalnlng power lncreases lf Lhere are no subsLlLuLe producLs 8ecause
Lhe cocoa bean ls a requlred lngredlenL ln chocolaLe Lhe suppllers do noL have any subsLlLuLe producLs for whlch
Lhey musL compeLe 1hls lack of subsLlLuLes lncreases Lhe bargalnlng power of Lhe chocolaLe lndusLry
1he sLrongesL CompeLlLlve lorces
lrom Lhe flve compeLlLlve forces Lhey are relaLlvely low Lo moderaLe ln affecLlng premlum chocolaLe lndusLry
especlally 8ogers ChocolaLe Powever Lhe presence of Pershey's and Cadburys ln Lhe premlum chocolaLe markeL
wlll cause Lhe sLrongesL LhreaL as Lhey have enormous resources and experlences 1he weakesL forces should be
Lhe suppller as Lhey can only affecL Lhe cosL Lhus as long as people sLlll love chocolaLes Lhen Lhe markeL ls sLlll blg
1he poLenLlal proflLablllLy of new enLranLs from ouLslde lndusLry ls low slnce Lhe barrler of enLry for Lhls lndusLry ls
very hlgh Powever lL wlll be a dlfferenL sLory lf Lhose blg guys ln Lhe chocolaLe lndusLry llke Pershey's are very
serlous enLerlng Lhls premlum chocolaLe markeL as happenlng laLely
2 urlvers of Change
1hose compeLlLlve forces as explalned above can be a drlver of change elLher lndlvldually or collecLlvely AnoLher
unlque drlver of change ls consumer behavlor Lowards healLh consclousness 1oday Lhe demand for organlc
producLs and dark chocolaLe are growlng worldwlde 8ogers has responded well Lo Lhls healLhy llfesLyle by offerlng
nonsugar added chocolaLe eople also puL sLrong lmage Lo Lhe company LhaL pracLlce good corporaLe soclal and
envlronmenL responslblllLy
1herefore Lhe premlum chocolaLe players LhaL wlll remaln ln Lhe markeL are only Lhose who could rlde Lhe
changes and rlse above Lhe expecLaLlon of consumers because brand and quallLy play a slgnlflcanL role ln cusLomer
purchase declslon
3 key Success lacLor ln Lhe premlum ChocolaLes lndusLry
31 undersLandlng Lhe Consumer's needs
1he company musL undersLand LhaL Lhey musL have Lhe feaLures requlred by Lhe consumers
lor premlum chocolaLe consumers Lhelr reasons ln buylng are for Lhemselves or for glfLs 1he flrsL Lhlng ln Lhe
consumer mlnd for Lhe producLs ls Lhe LasLe and Lhen packaglng shopplng experlences and Lhe prlce
8ogers ChocolaLes has earned a repuLaLlon as one of Canada's premlere chocolaLe makers and many consumers
sLaLlng LhaL 8ogers' ls one of Lhe besL chocolaLe Lhey have ever LasLed (CusLomer 8evlew 2010) 1he reLall sLores
creaLe a unlque cosLumer experlence wlLh Lhe aromas and lmage of Lhe sLore and one of Lhe frlendllesL sLaff Slnce
Lhe premlum chocolaLes serve as a glfL elLher lndlvldually or as corporaLe glfLs ln speclal occaslon Lhen Lhelr
packaglng need Lo be unlque and aLLracLlve 1he 8ogers packaglng are appeallng and oLher compeLlLors are Lrylng
very hard Lo lmprove Lhelrs
AnoLher 30 percenL of 8ogers's cosLumers are wholesale dlsLrlbuLors and sLores 1he relaLlonshlp LhaL 8ogers
malnLalns wlLh Lhese cusLomers has been essenLlal Lo Lhe growlng success of Lhe company 1hey have Lo sLrlve Lo
provlde compeLlLlve prlce greaL cusLomer servlce and lnvenLory ln a Llmely manner
32 8rand Awareness

8ogers' ChocolaLes had a brand share of approxlmaLely 6 ouL of $167 mllllon Canadlan ChocolaLes markeL ln
2006 Consumer pay premlum prlce for premlum chocolaLes and Lhls facL can be looked lnLlmldaLlng Lo Lhe reLall
and wholesale cusLomers who are unaware of Lhe brand and unwllllng Lo Lry lL 1herefore Lhe chocolaLe's
companles need Lo have a sLrong brand name and brand lmage
8ogers ChocolaLes' brand ls lconlc and local herlLage ln vlcLorla buL less known ln Lhe resL of Canada LlLher
cusLomers love Lhe brand or compleLely unknown
33 ulverslfled roducLs
We boughL raspberry fllllng dark chocolaLe plsLachlo and frulLs ln mllk chocolaLe a whlLe chocolaLe bar and a
lemon merlngues and couple of Lruffle bars uld we buy Loo much chocolaLe beLween Lhe 2 of us? nonsense one
can never have Loo much chocolaLe" 1he revlew above came from 1om Callfornla who vlslLed 8ogers Shop ln
vancouver on CcLober 3 2009 (CusLomer 8evlew 2010)
eople love Lo choose Lhelr own selecLlon and favourlLes 1he company has Lo sLrlve Lo provlde lnnovaLlve and
dellclous producLs Lo meeL Lhe markeL demand 8ogers also has addressed Lhe healLh consclous consumer by
provlde nonsugar chocolaLes 8ogers can offer a greaL breadLh of producLs LhaL enables Lhe company Lo reach a
large cusLomer segmenL
34 Lnhanced CompeLlLlveness
lncreased markeLplace compeLlLlon has slgnlflcanLly glven an lmpacL ln 8ogers's buslness and as a resulL 8ogers
musL conLlnuously seek for areas for lmprovemenL ln order Lo enhance compeLlLlveness agalnsL oLher compeLlLor
ln Lhe markeL lmprovlng weakness could be done ln Lerms of producL lnnovaLlon operaLlonal and manufacLurlng
markeLlng adverLlslng and promoLlon lnvenLory and dlsLrlbuLlon and cusLomer relaLlonshlp 1he company has Lo
observe Lhelr capablllLles and make Lhe mosL of Lhem ln order Lo sLay and wln ln Lhe compeLlLlon
4 SWC1 analysls
|SLrengLhs |CpporLunlLles |
|roducL |MarkeL |
|LsLabllshed brand |1ourlsL approach ln crulse shlp |
|CuallLy LasLe |Crowlng MarkeLs 20 annually |
|Awardwlnnlng |?oung people markeL |
|varleLy |uSA and lnLernaLlonal MarkeL |
|Consumer LoyalLy ln vlcLorla |2010 Clymplcs |
|Puman 8esources |Llcenslng lranchlslng and parLnershlp |
|Lmployee prlde and loyalLy |roducLs |
|Skllled and experlenced managemenL |lce cream |
|8ogers own reLall sLores |PealLh consclous producLs |
|Sam's uell erformance |Consumer 1rends |
|SLrong flnanclal poslLlon |Affordable luxury producLs |
| |PealLhy llfesLyles |
| |1echnology |
| |Moblle markeLlng |
| |roducLlon capablllLles |
| |lnLerneL |
|Weaknesses |1hreaLs |
|roducL/8rand |lnLense compeLlLlon and new enLranLs |
|LlLLle awareness ouLslde vlcLorla |Lconomlc uownLurn/ urop LourlsLs |
|roducLlon |Change consumer Lrafflc Lo vancouver |
|lannlng uocumenLaLlon and lorecasLlng |rlvaLe label ChocolaLe |
|Suppllers |llucLuaLlng demand |
|CapaclLy |LnvlronmenLal and human concerns |
|LqulpmenL and processes | |
|Puman 8esources | |
|8eslsLance Lo change | |
|ConfllcL managemenL | |
|MulLlple responslblllLy | |
|Sales force | |
|ulsLrlbuLlon | |
|LocaLlon | |
|MarkeL Coverage | |
|lnvenLory managemenL | |
|llnanclal | |
|Sales growLh | |

1he 8CLu/ lLallc and 8lC SlZL fonLs are Lhe key facLor for each caLegory
1he company has a sLrong seL of sLrengLh 8ogers ChocolaLe ls small/medlum buslness Lhus lLs weaknesses sLlll noL
very damaglng and Lhe company slLuaLed ln falrly sLrong poslLlon Powever looklng aL Lhe LhreaLs Lhe company
needs Lo repalr lLs weakness especlally ln 8randlng roducLlon and lnvenLory ln order Lo susLaln ln Lhe buslness
1he opporLunlLy Lable shows greaL opporLunlLy for 8ogers Lo grow and expand Powever 8ogers needs Lo expand
lLs sLrengLh beyond ouLslde vlcLorla especlally Lowards young people and deflnlLely repalr Lhe weaknesses Lo caLer
Lhe growlng markeL
3 SLraLegles and poslLlonlng
8ogers ChocolaLes poslLloned as Plgh quallLy premlum prlce ChocolaLe
As sLaLed ln Lhe company webslLe 8ogers's phllosophy ls maklng only premlum producLs and packaglng eleganLly
ln Lhe premlum ChocolaLe markeL 8ogers's chocolaLes conLrol only 6 and prlce Lhe producLs ln hlgh prlce polnL
buL sLlll compeLlLlve and even sllghLly lower Lhen Codlva and CallebauL
Plgh CuallLy

8ogers

CallebauL

urdy's Codlva

LlndL

Low rlce Cadbury Persheys Plgh rlce

Low CuallLy
8ogers brand ls well respecLed among Lhose who wanL hlgh quallLy chocolaLe 8ogers's producLs have no addlLlves
and use hlgh quallLy lngredlenLs 1he brand ls very wellesLabllshed ln vlcLorla and has loyal consumers
Mlsslon SLaLemenL

8ogers ChocolaLes ls commlLLed ln produclng and markeLlng flne producLs whlch reflecL and malnLaln our
repuLaLlon of quallLy and excellence esLabllshed for over a cenLury All aspecLs of our buslness wlll be conducLed
wlLh honesLy and lnLegrlLy upholdlng our proud Canadlan LradlLlon (8ogers ChocolaLes 2010)
CCAL
1o double or Lrlple LoLal sales wlLhln 10 years"
ManagemenL's SLraLegy SelecLlon
8ased on 8oger's goal of doubllng or Lrlpllng LoLal sales wlLhln 10 years Lhen Lhe maln sLraLegy wlll be lncreaslng
brand awareness 8ogers's producLs are already proven superlor desplLe Lhelr dlsLrlbuLlon whlch clrculaLes malnly
ln 8rlLlsh Colombla area Lhus company has Lo expand lLs markeL range Lo greaLer area and Lo LasL Canada or
overseas 8ogers has already won Lhe 2010 Clymplcs Cfflclal ChocolaLes LogeLher wlLh urdys (Lazarus 2008)
whlch ls a Lremendous opporLunlLy Lo creaLe awareness naLlonally and lnLernaLlonally 1o grow a markeL facLors
such as Llcenslng franchlse and parLnershlp ls belng consldered Cne ldea under conslderaLlon for developlng Lhe
wholesale neLwork was Lhe creaLlon of a Lurnkey sLorewlLhlnasLore seLup LhaL would allow wholesale cllenLs
wlLh a reLall presence such as deparLmenL sLores Lo add a mlnl8ogers sLore ln Lhelr shop 8ogers's managemenL
also alm Lo lncrease Lhe number of onllne shopplng
1hose sLraLegles are conslsLenL wlLh 8ogers's goal Lo lncrease Lhe sales by double and Lrlple ln Len years Powever
belng a small/medlum company 8ogers's managemenL can only choose Lo acL on several opLlons whlle noL puLLlng
a rlsk on lLs culLure and LradlLlon
Llcenslng franchlslng and creaLe sLorewlLhlnasLore ls a cheaper opLlons Lo expand Lhe markeL compare Lo open
lLs own reLall sLores ln Lhe new areas however does lL really approprlaLe Lo 8ogers excellenL reLall experlences?
(source)s LogeLher wlLh urdys
Concluslon
ln early 2009 arkhlll and 8ogers' managemenL chose Lo focus on expandlng Lhe company's reLall neLwork
arkhlll says LhaL 8ogers wlll also conLlnue Lo develop lLs wholesale channel buL wlll be selecLlve ln chooslng
parLners who flL Lhe company's brand Cur foundaLlon ls reLall" he says lL's Lhe 'Wow!' experlence LhaL
cusLomers geL when Lhey walk lnLo our sLores are greeLed and are handed a free sample of our chocolaLes lrom
Lhls cusLomer experlence success comes ln oLher Lhlngs LhaL we do such as wholesale and onllne sales"
8oger ls hlgh quallLy premlum chocolaLe Lhus Lhe experlences for shop and consumes 8ogers chocolaLe has Lo be
excellenL as well lf Lhe 8rand ls belng franchlsed or creaLe a small shop aL Lhe corner of somebody else sLore Lhen
Lhe quallLy of servlce and Lhe sLore amblances can noL be conLrolled eople noL only say abouL how good 8ogers
ChocolaLe was buL also Lhelr greaL experlences ln 8ogers SLore 1herefore Lhe declslon of developlng 8ogers own
reLall ls good declslon and conslsLenL wlLh lLs goal and phllosophy
8eferences
CusLomer 8evlew 2010 8ogers ChocolaLe Avallable hLLp//wwwyelpca/blz/rogerschocolaLes
vancouver Accessed 3 !une 2010

Lazarus 2008 SweeL deal for urdy's and 8oger's ChocolaLes AugusL edn MarkeLlng Magazlne

MorrlsseLe 2008 Cn Lhe case Pow sweeL ls Lhls really? llnanclal osL Magazlne

8ogers ChocolaLe 2010 PlsLory Avallable hLLp//wwwrogerschocolaLescom/hlsLory Accessed 3
!une 2010

1hompson SLrckland Camble 2010 CrafLlng and LxecuLlng SLraLegy 1he CuesL for CompeLlLlve
AdvanLage ConcepLs and Cases 17Lh edn McCrawPlll lrwln unlLed SLaLes

ZleLsma 2007Case 8ogers' ChocolaLes lvey ManagemenL Servlce

ALk 3
LkLCU1IVL SUMMAk kLCCMMLNDA1ICNS
% 8ogers ChocolaLes ls one of Canada's premlere chocolaLe makers ln 2006 Lhe Canadlan markeL slze was
$167 mllllon annually
% CrowLh raLe of Lhe Canadlan remlum ChocolaLe markeL ls expecLed Lo rlse 20 annually vs1radlLlonal
ChocolaLes growLh raLe of 2 annually
% Sales ln Lhe 8 weeks prlor Lo ChrlsLmas roughly equaled 23 of chocolaLe sales and 20 of heavy users"
accounLed for 34 of Lhe preChrlsLmas sales ln 2006 locus on approprlaLe LargeL markeL Lo achleve maxlmum
awareness and brand recognlLlon
% ConLlnue Lo fulflll lLs commlLmenL by parLlclpaLlng ln recycllng and reduclng emlsslons as parL of a
commlLmenL Lo susLalnablllLy
% 8oger's good corporaLe soclal pracLlces wlll also focus on human rlghLs packaglng procuremenL and
operaLlonal declslons
% 8oger's performance over Lhe lasL Lwo years conflrms LhaL sales have remalned sLagnanL and had a beLLer
8Cl ln 2006 Lhan lL does now
% 8ogers wlll seek ouL parLnershlps or collaboraLors such as Lhe 2010 vancouver Clymplcs and reach
consumers on a global level
% 8ogers wlll re sLrucLure lLs managemenL Leam Lo a more efflclenL coheslve Leam
% 8ebrand Lhelr LradlLlonal lmages Lo lnsplre new cllenL base Lo Lry Lhelr producLs
% 8esLrucLure reLall shops wlLh lower conLrlbuLlon marglns
% CreaLe reLall experlence around rlch LradlLlon and hlsLory producLlon and quallLy
% uellver unlque reLall experlence
% CeneraLe sales of aL leasL $17000000 by 2017
% lncrease brand awareness ln Canada by 30 and reLall locaLlons by 2017
% lncrease onllne sales Lo $11 mllllon by 2017
% keep exlsLlng and loyal cusLomers saLslfeld wlLh cusLomer rewards and promoLlons
% romoLe romoLe romoLe ChocolaLe of Lhe monLh clubs speclal occaslon glfLs (graduaLlon
laLher's/MoLher's uay Annlversarles 1eacher glfLs eLc)
MlSSlCn S1A1LMLn1 C8!LC1lvLS
8ogers ChocolaLes ls commlLLed Lo produclng and markeLlng flne producLs whlch reflecL and malnLaln our
repuLaLlon of quallLy and excellence esLabllshed for over a cenLury"
1A8CL1 MA8kL1 S18A1LC?
8ogers' LargeL markeL ls boLh end users and consumers who buy chocolaLes Lo lndulge Lhemselves or Lo glve as a
glfL 8ogers' LargeL buyers are new and exlsLlng chocolaLe buyers LhaL love quallLy chocolaLes
uemographlcs Lend Lo be malnly women ages 2333 years old wlLh mlddle Lo hlgh household lncome of $30000
upward 1hey generally have college educaLlon and are professlonals whlLe collar workers managers or owners
1he ma[orlLy wlll be frequenL Lravelers and lnLerneL users
A nlche dlfferenLlaLor sLraLegy wlll be employed Lo dlfferenLlaLe Lhe new 8ogers brand" lmage ln LasLern Canada
and uS 1o drlve lnLerneL sales 8ogers wlll promoLe Lhe webslLe beneflLs of convenlence and fasL dellvery More
aLLenLlon Lo 8ogers' reLall shops wlll be pursued ln order Lo geL LhaL excluslvlLy" feel Sam's uell wlll
1he key Lo Lhls sLraLegy and markeLlng plan wlll revolve around ralslng brand awareness arLnershlp and
collaboraLlons are a crlLlcal way Lo ralse awareness such as sponsorlng an Clymplc evenL/aLhleLe (lce skaLlng) as
Lhe Clymplcs are scheduled Lo be ln vancouver ln 2010
8ulLulnC AWA8LnLSS
1he mosL producLlve and efflclenL way Lo bulld awareness ls Lo lncrease onllne sales whlch wlll lncrease markeL
exposure ln addlLlon corporaLe sales and parLnershlp wlll generaLe much needed awareness ln Lhese secLors LhaL
wlll compllmenL Lhe onllne campalgn
8ogers wlll poslLlon lLself as a company LhaL values Lhelr cusLomers boLh onllne and ln Lhelr reLall shops A new
easy Lo use and lnLeracLlve webslLe wlll be lnLroduced Lo esLabllsh Lhe new and lmproved" 8ogers ChocolaLe llne
Samples wlll always be avallable ln Lhe reLall shops and sLores wlll feel llke your ln chocolaLe heaven
8uuCL1
A generous budgeL of approxlmaLely $2 mllllon wlll be provlded and supplemenLed by a prlce lncrease of abouL
3 Small wholesalers wlll be reduced and scaled back whlle Sales AgenLs wlll be reLralned Lo focus on Lhe blg
plcLure (corporaLe evenLs sponsorshlp)
30 of Lhe budgeL wlll be dlrecLed Loward 8rand Awareness
23 of Lhe budgeL wlll be dlrecLed Loward rebrandlng Lhe new face of 8oger's remlum ChocolaLes
13 of Lhe budgeL wlll be uLlllzed Lo updaLe Lhe webslLe
10 of Lhe budgeL wlll be spenL on promoLlons
SWC1
S18LnC1PS
% Well esLabllshed and repuLable 8rand
% Lxperlenced ManagemenL 1eam
% 8lch hlsLory and LradlLlon ln Canada
% Award wlnnlng recognlLlon
% 8evenues
% Loyal cusLomers
% uevoLed Lmployees and asslonaLe Lmployees
% CuallLy producLs hand wrapped
WLAknLSSLS
% roducLlon process noL efflclenL and no measurlng capablllLles
% uemand forecasLlng dlfflculL due Lo seasonallLy of sales
% ManagemenL's and Lmployee's reslsLance Lo change
% ManagemenL Leam confllcLs
% ackaglng
% Lack of brand lmage and cusLomer awareness
% CosL of seLLlng up and cleanlng equlpmenL
% lnvenLory ManagemenL CuL of SLock and Cver sLock producLlon plannlng lssues
% Wholesale
% Cnllne Sales only 4
CC81unl1lLS
% CrowLh ln Luropean and Aslan markeLs
% 8eLall and Cnllne expanslon
% lncreased producLlon capaclLy
% 1rends and shlfLs ln consumer confecLlonary markeL
% 2010 Clymplcs
% !olnL parLnershlps nPL ML8 n8A eLc
% klosks ln alrporLs
% Second shlfL posslblllLles
% Crganlc and/or lalr 1rade Llne
1P8LA1S
% Lconomy and demand flucLuaLlons
% CompeLlLors
% Consumer 1rafflc decrease ln Lourlsm
% LnvlronmenLal concerns and human rlghLs concerns expressed by some consumers
% CovernmenLal or luA rules redeflnlng" chocolaLe
C81L8'S llvL lC8CLS AnAL?SlS
8argalnlng ower of 8uyers
1he chocolaLe and cocoa lndusLry has several large volume reLallers llke WalMarL LhaL have slgnlflcanL bargalnlng
power 1hese large volume reLallers can bargaln for lower prlces and reduce Lhe lndusLry's proflLs
AnoLher condlLlon LhaL affecLs Lhe power of buyers ls producL dlfferenLlaLlon lf Lhe producL ls undlfferenLlaLed Lhe
buyer has Lhe power Lo play compeLlLors agalnsL each oLher and reduce Lhe cosL 1he chocolaLe and cocoa lndusLry
has a dlfferenLlaLed producL whlch reduces Lhe power of buyers 1he lndusLry has several large players LhaL have
brand ldenLlflcaLlon and cusLomer loyalLy whlch makes lL hard for buyers noL Lo use a parLlcular suppller
As far as reLall sales go chocolaLe ls an exLremely accesslble commodlLy LhaL has a mulLlLude of purposes for lLs
buyers and end users 1he buyer may noL always be Lhe end user and Lherefore chocolaLe may be and ofLen are
purchased as glfLs for famlly frlends and/or corporaLe occaslons
Cenerally Lhere ls sLrong compeLlLlon among Lhe premlum chocolaLe manufacLurers Lo galn buyers/end users of
flne chocolaLes especlally ln a down economy remlum chocolaLe manufacLurers such as 8ogers wlll be
compeLlng agalnsL lower quallLy chocolaLes ln some cases as consumers are more budgeL consclous 1herefore
consumers may have some leverage ln negoLlaLlng favorable Lerms of sale or purchaslng premlum chocolaLes aL a
dlscounL Lhan when markeL condlLlons are favorable Powever Lhe buyer musL be wllllng Lo accepL LasLe changes
ln Lhe producL whlch resLrlcLs Lhelr bargalnlng power
1hreaL of new LnLranLs 8arrlers
1he chocolaLe and cocoa lndusLrles do have a slgnlflcanL economy of scale enLry barrler because large companles
exlsL ln Lhls lndusLry 1hls ls slgnlflcanL because Lhe large esLabllshed companles would mosL llkely have hlgh
producLlon ouLpuL whlch reduces Lhe cosL Lo produce chocolaLe and cocoa lf a new compeLlLor wanLed Lo enLer
Lhe markeL Lhe company would have Lo enLer Lhe markeL produclng a large quanLlLy aL Lhe same low prlce as
compeLlLors or Lhe company would have Lo compeLe wlLh a cosL dlsadvanLage 8ecause economles of scale exlsL ln
Lhe lndusLry lL deLers smaller compeLlLors from enLerlng lnLo Lhe markeL and reduces Lhe LhreaL of enLranLs Also
caplLal requlremenLs may acL as a barrler
8argalnlng ower of Suppllers
1he suppllers of Lhe chocolaLe and cocoa lndusLry have slgnlflcanL bargalnlng power over Lhe lndusLry because of
Lhe llmlLed number of Lhese suppllers 8ecause Lhe cacao Lree ls grown ln areas LhaL have a Lroplcal cllmaLe many
players ln Lhe lndusLry are forced Lo lmporL Lhe producL
1he chocolaLe and cocoa lndusLry relles on suppllers Lo dellver hlgh quallLy producLs LhaL meeL food regulaLlons
and consumer LasLe LesLs lf Lhe suppllers' producL ls noL avallable or does noL meeL Lhe quallLy expecLed Lhe
lndusLry wlll suffer greaLly 1hls dependency on Lhe suppllers' producL lncreases Lhe suppllers' bargalnlng power
lL ls lmporLanL for Lhe suppllers' producL Lo be a cerLaln quallLy or grade however lf Lhe producL meeLs grade
guldellnes lL ls relaLlvely undlfferenLlaLed 1hls ls Lrue of all suppllers of Lhe lndusLry lncludlng cocoa bean mllk
and sugar suppllers
1hreaL of SubsLlLuLe roducLs and Servlces
1he chocolaLe and cocoa lndusLry musL compeLe wlLh numerous subsLlLuLe producLs LhaL can LhreaLen Lhe
lndusLry's proflLablllLy AlLernaLe cooklng flavors are a subsLlLuLe producL Lo chocolaLe and cocoa 1hese flavors
lnclude vanllla lemon buLLer or mlnL flavorlng 1hese flavors can be used by Lhe lndusLry's cusLomers LhaL use
chocolaLe and cocoa producLs for lndusLrlal and cooklng use
AnoLher slgnlflcanL caLegory of subsLlLuLes ls snacks Many nonchocolaLe snacks are avallable such as peanuL
buLLer frulLs poLaLo chlps lce cream eLc 1here ls no need Lo sLlck wlLh a speclflc snack oLher Lhan personal
preference lurLher many consumers conslder chocolaLe unhealLhy and are wllllng Lo subsLlLuLe lL readlly

8lvalry CompeLlLors
An lndusLry's compeLlLor rlvalry ls lncreased lf Lhere are numerous compeLlLors or lf Lhe compeLlLors are equally
balanced 1hls condlLlon can creaLe a sLraln on raw maLerlals and consumer groups 1he chocolaLe and cocoa
lndusLry has numerous lndusLry leaders LhaL are slmllar ln slze and producL offerlngs Many of Lhe leaders creaLe
new producL llnes and acLlvely parLlclpaLe ln adverLlslng wars 8ecause Lhere are numerous compeLlLors LhaL are
equally balanced compeLlLor rlvalry ls lncreased
AnoLher condlLlon LhaL lncreases Lhe lnLenslLy of rlvalry among compeLlLors ls lf Lhe lndusLry has hlgh flxed or
sLorage cosLs lf flxed cosLs are hlgh flrms ln an lndusLry are under pressure Lo lncrease capaclLy 1he chocolaLe
and cocoa lndusLry has boLh hlgh flxed cosLs and hlgh sLorage cosLs 1he lndusLry's flxed cosLs conslsL of large
amounLs of equlpmenL and huge faclllLles Lo house manufacLurlng operaLlons AlLhough Lhe lndusLry conslsLs of
perlshable foods and lngredlenLs whlch Lyplcally have a shorL shelfllfe Lhe sLorage cosLs are hlgh due Lo Lhe
preclse sLorage envlronmenL needed lor example boLh mllk and chocolaLe musL be kepL aL a proper LemperaLure
and humldlLy
ALk 4
CASL 9 8ogers ChocolaLes
SLraLeglc ManagemenL
ln18CuuC1lCn
8ogers ChocolaLes ls Lhe oldesL chocolaLe company ln Canada based ln vlcLorla 8rlLlsh Columbla 8ogers
ChocolaLes focuses on Lhe premlum chocolaLe markeL and dlfferenLlaLes lLself by dellverlng award wlnnlng quallLy
producLs aL a falr prlce Lhls comblnaLlon creaLes a good value for lLs cusLomers 1hey also have experLlse aL
creaLlng an ouLsLandlng cusLomer experlence wlLhln Lhelr vlcLorlan Lhemed reLall locaLlons LhaL have also won
awards 1he company ls prlvaLely held and currenLly focuses lLs buslness ln four markeL areas dlrecL reLall
onllne/mall order wholesale and sales from a resLauranL ln vlcLorla 1he company also produces and sells a llne
of premlum lce cream 1he company employes 130 people Lhe ma[orlLy of whlch are ln reLall Sales from Lhe
companys reLall esLabllshmenLs accounL for 30 of revenue roducLlon Lakes place on a oneshlfL operaLlon ln a
24000 square fooL faclllLy and ls labor lnLenslve 1here are currenLly no measuremenLs ln gauge producLlvlLy and
efflclency ln Lhe planL
1he pasL presldenL focused a growLh sLraLegy ln Lhe wholesale markeL and currenL order fulflllmenL sLraLegy ls Lo
glve prlorlLy Lo onllne and mallorder buslness followed by wholesale accounLs leavlng Lhe reLall locaLlons lasL Lo
be servlced lnLernally Sales have seasonal swells durlng Lhe holldays and demand forecasLlng has been an lssue
Lhey have lncreased lnvenLory Lo deal wlLh Lhese sales paLLerns buL sLlll encounLer ouL of sLock slLuaLlons 1he new
presldenL has been glven a goal by Lhe board of dlrecLors Lo double or Lrlple Lhe slze of Lhe company wlLhln 10
years
8C8LLM S1A1LMLn1
1he focus on Lhe wholesale markeL does noL lnllne wlLh Lhe sLrengLhs of Lhe company lurLhermore Lhe lssues ln
operaLlonal efflclency wlLh regard Lo producLlon capablllLles and demand forecasLlng are hlnderlng Lhe company
from lncreased growLh poLenLlal
AL1L8nA1lvLS
locus on sLrengLhenlng currenL reLall operaLlons
locus growlng Lhe reLall buslness lnLo new geographlc markeLs
ConLlnue Lo grow complemenLary buslness llnes (le lce Cream)
uevelop core compeLence ln operaLlons managemenL Lo drlve efflclencles and reduce lnvenLorles
upgrade Lechnology ln producLlon Lo lncrease capaclLy
CreaLe new producL llnes and packaglng Lo broaden Lhe cusLomer base
lranchlse Sams uell
lranchlse reLall chocolaLe sLores
AnAL?SlS
ln 2006 Lhe chocolaLe markeL slze for Canada was uS$167 mllllon wlLh Lhe premlum chocolaLe markeL growlng aL
a raLe of 20 annually CompeLlLlon wlLhln Lhe premlum markeL ls a broad mlx of small local nlche players Lo large
mulLlnaLlonal corporaLlons and ls growlng as larger LradlLlonal manufacLurers enLer Lhe markeL vla acqulslLlons or
new producL launches roducL dlfferenLlaLlon ls healLhy and Lhere are no lndlcaLlons of a prlce war sLarLlng
beLween rlvals roducL lnnovaLlon appears llmlLed mosLly focuslng on new flavor lnLroducLlons and varlaLlons ln
moldlng and colorlng Seasonal demands especlally Lhe elghL weeks prlor Lo ChrlsLmas can creaLe demand LhaL
can challenge small companles wlLh low producLlon capaclLy and/or lnadequaLe forecasLlng and lnvenLory
managemenL CompeLlLors vary ln Lhe level of verLlcal lnLegraLlon and companles wlLh largescale operaLlons and
dlsLrlbuLlon neLworks en[oy a compeLlLlve advanLage Lhrough economles of scale
8lvalry among compeLlng sellers ls acLlve and falrly sLrong due Lo Lhe followlng condlLlons
1here ls llLLle Lo no cosL for buyers Lo swlLch brand
1here ls a falr amounL of producL sLandardlzaLlon ln Lhe lndusLry
1he producLs ln Lhe chocolaLe markeL have large seasonal swells and are perlshable causlng some prlce
compeLlLlon Plgher flxed producLlon cosLs adds Lo Lhls pressure
1he addlLlon of new compeLlLlon by esLabllshed companles such as Persheys and Cadburys
CompeLlLlve pressure from poLenLlal new enLranLs ls medlum as mosL of Lhe ma[or players ln Lhe lndusLry are
already ln Lhe premlum chocolaLe markeL Lhe pro[ecLed growLh raLe ln Lhe markeL wlll sLrongly aLLracL new
upsLarLs buL Lhey wlll have challenges developlng dlsLrlbuLlon and reLall peneLraLlon wlLh llLLle Lo no brand
awareness llrms ln oLher lndusLrles wlll have llLLle lmpacL ln Lhls markeL as Lhere arenL any sLrong subsLlLuLlons Lo
premlum chocolaLe CompeLlLlve pressures sLemmlng from suppller bargalnlng ls mlxed largescale manufacLurers
wlll en[oy less pressure from suppllers due Lo economles of scale whlle smaller nlche companles wlll noL have as
much lnfluence especlally ln Lhe area of organlc and falr Lrade raw maLerlals ressure from Lhe buyer communlLy
ls falr demand ls hlgh buL so ls Lhe ablllLy Lo swlLch brands Crowlng demand for soclally responslble producLs
such as falrLrade and organlc wlll lncrease pressure from Lhe buyers
1he currenL drlvlng forces ln Lhe markeL are Lhe hlgh growLh raLe ln Lhe premlum markeL and Lhe enLrance of new
ma[or flrms consumers emerglng lnLeresL ln falrLrade and organlc producLs ls also a force Lo be consldered key
success facLors ln Lhls markeL lnclude a well known and respecLed brand and sLrong dlrecL sales and/or wholesale
dlsLrlbuLlon quallLy and efflclenL producLlon capablllLles are also key success facLors
AlLhough proflL marglns are down 8ogers ChocolaLes ls ln a sLrong flnanclal poslLlon 8eLall accounLs for 30 of
Lhe companys revenues alLhough Lhe Lwo new sLores ln Lhe companys porLfollo are noL performlng Lo
expecLaLlons lce cream sales alLhough small compared Lo reLall show a sLrong conLrlbuLlon Lo overall sales 1he
key flnanclal lndlcaLors are shown below one area of concern ls Lhe ma[or lncrease ln Lhe days of lnvenLory" and
Lhe accompanylng decrease ln lnvenLory Lurnaround" 1hls ls a concern due Lo Lhe perlshable naLure of Lhe
producL and Lhe negaLlve affecL on cusLomer quallLy percepLlon when producL ls sold pasL Lhe explraLlon daLe
whlch has occurred wlLh some sales vla wholesale accounLs
drawframe
A SWC1 analysls of Lhe company has Lurned up Lhe followlng polnLs
S18LnC1PS
a dlsLlncLlve compeLence ln reLall speclflcally Lhe cusLomer experlence"
a sLrong flnanclal base Lo grow Lhe buslness
a sLrong reglonal brand and company repuLaLlon Lo bulld upon
beLLer producL quallLy relaLlve Lo rlvals
good cusLomer servlce capablllLles ln reLall and onllne sales
WLAknLSSLS
weak wholesale neLwork
brand/company awareness ls poor ouLslde of Lhe reglon
weak supply chaln compeLences ln forecasLlng
problems wlLh operaLlonal efflclencles wlLh old Lechnology and hlgh cosL changeovers
CC81unl1lLS
expanslon lnLo new areas
enLerlng lnLo alllances or [olnL venLures Lo expand markeL coverage
conLlnued expanslon of complemenLary producLs (premlum lce cream)
explore new Lechnology wlLhln producLlon
1P8LA1S
lncreased compeLlLlon by new enLranLs ln Lhe markeL
slowdown ln markeL growLh
shlfL ln buyer needs and LasLes
8LCCMMLnuA1lCnS
l belleve LhaL 8ogers ChocolaLes should lmplemenL a comblnaLlon of Lhe followlng alLernaLlves
locus on sLrengLhenlng currenL reLall operaLlons
locus growlng Lhe reLall buslness lnLo new geographlc markeLs
ConLlnue Lo grow complemenLary buslness llnes (le lce Cream)
uevelop core compeLence ln operaLlons managemenL Lo drlve efflclencles and opLlmlze lnvenLorles
1he 8ogers ChocolaLes brand has been bullL based on a hlgh quallLy producL and Lhe reLall experlence of Lhelr
vlcLorlan Lhemed shops and packaglng 1hls ls Lhelr core compeLence and sLrengLh and lL should be Lhe focus of
Lhelr growLh 8y solldlfylng Lhe performance of Lhe currenL locaLlons and Lhen openlng addlLlonal sLores ln new
areas Lhe wlll expand Lhelr brand recognlLlon whlle preservlng Lhe quallLy of Lhelr producL 1here lce cream llne ls
complemenLary Lo Lhe buslness and should be furLher developed and sold ln Lhe sLores lnLernally and operaLlonal
sLraLegy Lo lmprove efflclencles ln producLlon and demand forecasLlng wlll reduce cosLs preserve producL quallLy
and opLlmlze producLlon and lnvenLory capablllLles



C A S L 7 App|e Inc |n 2008
ASSIGNMLN1 ULS1ICNS

1 now we|| has Steve Iobs done as App|e's CLC? nas he done a good [ob of perform|ng the
f|ve tasks of strateg|c management d|scussed |n Chapter 2? Why or why not? What grade
wou|d you g|ve h|m?
2 What are the ch|ef e|ements of App|e's strategy? now we|| do the p|eces f|t together? Is
the strategy evo|v|ng?
3 Does |t make good strateg|c sense for App|e to be a compet|tor |n the computer d|g|ta|
mus|c p|ayer and mob||e phone |ndustr|es? Are the va|ue cha|n act|v|t|es that App|e performs
|n computers d|g|ta| mus|c p|ayers and mob||e phones very s|m||ar and "compat|b|e" or are
there very |mportant d|fferences from product to product? Wh|ch of the three products ||nes
computers d|g|ta| mus|c p|ayers or mob||e phones
do you th|nk |s most |mportant to App|e's future growth and prof|tab|||ty? Why?
4 In wh|ch |ndustrycomputers or d|g|ta| mus|c p|ayers|s compet|t|on more |ntense?
repare a f| veforces ana|ys|s of each |ndustry to support your pos|t|on
S What does a compet|t|ve strength assessment revea| about App|e as compared to the
|eaders |n the persona| computer |ndustry? Use the methodo|ogy |n 1ab|e 44 to support your
answer Among these compet|tors who en[oys the strongest compet|t|ve pos|t|on? Who |s |n
the weakest overa|| compet|t|ve pos|t|on? nas App|e's strategy resu|ted |n a substant|a|
compet|t|ve advantage over |ts r|va|s |n the computer |ndustry?
What |s the bas|s for whatever compet|t|ve advantage |t has?
6 What does a compet|t|ve strength assessment revea| about App|e as compared to other
ma|n p|ayers |n the d|g|ta| mus|c |ndustry? Use the methodo|ogy |n 1ab|e 44 to support your
answer Among these d|g|ta| mus|c p|ayer compet|tors wh|ch company en[oys the strongest
compet|t|ve pos|t|on? Who |s |n the weakest overa|| compet|t|ve pos|t|on? nas App|e's
strategy resu|ted |n a substant|a| compet|t|ve advantage over |ts r|va|s |n the d|g|ta| mus|c
p|ayer |ndustry? What |s the bas|s for whatever compet|t|ve advantage App|e has?
7 What |s your assessment of App|e Computer's f|nanc|a| performance the past three years?
(Use the f|nanc|a| rat|os |n 1ab|e 41 of Chapter 4 as a gu|de |n do|ng your f|nanc|a| ana|ys|s)
8 What accounts for App|e's noteworthy success |n the markets for mob||e smart phones and
d|g|ta| mus|c p|ayers but |ts overa|| weak show|ng |n the computer |ndustry?
9 Is App|e's strategy |n |ts computer bus|ness strong enough to compete successfu||y aga|nst
De|| and n?
10 Does App|e's strategy for |ts |od bus|ness seem capab|e of a||ow|ng the company to
rema|n on top of the d|g|ta| mus|c p|ayer |ndustry over the next S years?
11 What steps shou|d App|e take to |mprove |ts corporate performance and to strengthen |ts
pos|t|on |n |ts most |mportant markets?


AL8 1
LxecuLlve Cvervlew
Apple has been esLabllshed for over 30 years slnce SLeve !obs and SLeve Woznlak founded Apple CompuLer ln
1976 uurlng SLeven !obs's Lenure as CLC Apple's mlsslon was Lo brlng an easyLouse compuLer Lo markeL
Powever Apple was noL performlng as good as !obs pro[ecLed so he reslgned ln 1983 ln Lhe followlng 12 years
Apple experlenced Lhree dlfferenL CLC's and sLlll could noL be broughL back Lo llfe under !ohn Sculley Apple
worked Lo drlve down cosLs by swlLchlng much of lLs manufacLurlng Lo subconLracLors 8uL Lhese efforLs were noL
enough Lo susLaln Apple's proflLablllLy uurlng Lhe Mlchael Splndler years lnLernaLlonal growLh became a key
ob[ecLlve for Apple ?eL desplLe Splndler's efforLs Apple losL momenLum Soon afLer CllberL Amello replaced
Splndler as CLC he proclalmed LhaL Apple would reLurn Lo lLs premlumprlce dlfferenLlaLlon sLraLegy uesplLe
some ausLerlLy moves Apple losL lLs compeLlLlveness and could noL regaln lLs share ln Lhe markeL ln 1997 SLeve
!obs came back agaln as Lhe CLC of Apple 1hls Llme he had a new game plan and Apple sLarLed Lo focus on Lhe
dlglLal llfesLyle for consumers lnLernally !obs worked Lo sLreamllne operaLlons and Lo relnvlgoraLe lnnovaLlon
1hls proved Lo be Apple's mosL successful buslness sLraLegy Lo daLe because a once lneffecLlve company now has
ruled Lhe compuLer world ln order Lo undersLand Lhls slLuaLlon Apples compeLlLlve advanLages and lndusLry
forces musL be analyzed
CompeLlLlve AdvanLages
Apple has been ln buslness slnce 1976 and has bullL qulLe a few compeLlLlve advanLages along Lhe way Cbvlously
lnnovaLlon has been aL Lhe forefronL of Apple's ablllLy Lo compeLe ln Lhe world markeL CLher Lhan LhaL advanLage
brand loyalLy producL dlfferenLlaLlon superlor quallLy and reLall sLraLegy are also lLs advanLages when compeLlng
wlLh oLher brands
lnnovaLlon
SLeve !obs and SLeve Woznlak sparked Lhe C revoluLlon maklng Lhe world of compuLers on Apple's head 1he
Apple ll launched ln 1978 drove Lhe C lndusLry Lo $1 bllllon ln annual sales ln less Lhan Lhree years Lven lf lnlLlally
regarded as a Loy by many oLher buslnesses Apple soon revealed lLself as a feaslble subsLlLuLe Lo Lhe LradlLlonal
malnframe lL conLlnued Lo demonsLraLe lLs lngenulLy lor example lL was Lhe flrsL Lo lnLroduce a compuLer wlLh
color a graphlcal lnLerface and many oLher flrsLs 1hese lnvenLlons deflned Apple and lLs buslness sLraLegles Cn
Lhe basls of lLs all bundled package of hardware and sofLware Apple became synonymous wlLh usablllLy
8rand LoyalLy
ln 1998 !obs recognlzed LhaL cusLomers really wanLed a MaclnLosh Apples brand commlLmenL ls sLrong Slnce
1970s Apple user communlLles have been founded Lo connecL LogeLher wlLh enLhuslasms Cne of Lhe maln
reasons Lo Lhls ls Apples ease of use Addlng exLra hardware and sofLware Lo a Mac ls almosL as easy as plugglng
speakers lnLo a sLereo sysLem uue Lo Lhls advanLage Apple forms a sLrong relaLlonshlp wlLh lLs consumers
especlally wlLhln Lhe educaLlon and deskLop publlshlng lndusLrles whlch accounLed for 60 and 80 of lLs markeL
poslLlon respecLlvely durlng Lhe Splndler years
roducL ulfferenLlaLlon
Apple's sysLem conLlnues Lo be one of Lhe advanLages because lLs closed operaLlng sysLem ls noL sub[ecL Lo Lhe
compuLer vlruses and hacklng LhaL ofLen desLroy Lhe MlcrosofL Wlndows operaLlng sysLem ln markeLlng lLs Mac
producLs Apple sLressed characLerlsLlcs LhaL dlfferenLlaLed Lhem form oLher Cs whlle also hlghllghLed Lhelr
lnLeroperablllLy wlLh oLher machlnes Apple LrumpeLed Lhe Mac as an LveryLhlngready" devlce LhaL worked well
wlLh oLher devlces 1he feaLure of Lhe closed sysLem whlle lncorporaLlng well wlLh oLher devlces makes Apple
more unlque Lhan oLher Cs
Superlor CuallLy
Apple's hlghquallLy bundled sofLware dlsLlngulshed Lhe MaclnLosh llne such as lLlfe sulLe and lWork ln 2001
Apple lnLroduced MAC CS x offerlng a sLeadler envlronmenL Lhan prevlous Mac plaLforms ln addlLlon Apple
always urged lLs users Lo upgrade CS x every 12 Lo 18 monLhs wlLh Lhe alm of always provldlng a sLable operaLlng
sysLem Lo lLs users
8eLall SLraLegy
AfLer !obs reLurned Lo Apple he revamped Apple's dlsLrlbuLlon sysLem removlng relaLlonshlps wlLh many smaller
ouLleLs and exLendlng lLs presence ln naLlonal chalns ln 1997 Apple also sLarLed a webslLe Lo sell lLs producLs
dlrecLly Lo cusLomers lLs reLall sLraLegy was regarded as a huge success More lmporLanLly people who vlslLed
Lhe sLores for lod producLs usually checked Lhe Mac Loo 1hls halo effecL" greaLly beneflLed Apple's Mac
buslness
orLer's llve lorces Analysls of Apple
CurrenL CompeLlLlon
Apple's currenL rlvalry ls very compeLlLlve and lnLense 1he C lndusLry has qulLe low swlLchlng cosLs so Lhe
currenL compeLlLlon ls preLLy hlgh Apple confronLs Lough compeLlLlon from l8M uell P and eLc
1hreaL of SubsLlLuLe roducLs
1he more dlfferenLlaLlon of Lhe producL Lhe less llkely Lhe change Lo a subsLlLuLe wlll happen Apple's operaLlng
sysLem dlfferenLlaLlon can always requlre hlgher prlclng Powever owlng Lo Lechnology lmprovemenL Lhe dlglLal
convergence" of C and CL (consumer elecLronlcs) producLs has become more subsLanLlal ln Lhe C markeL Many
dlfferenL alLernaLlve devlces have sLarLed Lo replace Cs 1herefore Lhls LhreaL ls becomlng hlgher Lo Apple
1hreaL of new LnLranLs
1hls LhreaL ls low slnce Lhe exlsLlng companles have esLabllshed powerful brand awareness 1he compuLer lndusLry
ls very saLuraLed and new enLranLs would be relucLanL Lo enLer Lhls lndusLry
8argalnlng ower of Suppllers
1here are Lwo Lypes of suppllers mlcroprocessors and operaLlng sysLems wlLh few sources as well as memory
chlps dlsk drlves and keyboards wlLh many sources 1he bargalnlng power of Lhe former one ls hlgh slnce Lhere
are malnly Lwo sources lnLel and MlcrosofL 1he bargalnlng power of Lhe laLLer one ls low slnce numerous
suppllers exlsL ln Lhls lndusLry
8argalnlng ower of CusLomers
As menLloned earller Lhe swlLchlng cosLs are low Such slLuaLlon places Lhe cusLomers ln a sLrong poslLlon LhaL
only companles wlLh hlgh producL dlfferenLlaLlon could lncrease Lhe swlLchlng cosLs Slnce producL dlfferenLlaLlon
ls one of Apple's advanLages Lo compeLe ln Lhls markeL Lhe bargalnlng power of buyers ls noL hlgh Lo Apple
Concluslon
Cenerally speaklng Lhe C lndusLry ls an lnLensely compeLlLlve segmenL WlLh Lechnology undergolng paradlgm
changes lL could make llfe hard for Apple Lo deal wlLh Lhese shlfLs 1hese dynamlcs does noL seem advanLageous
for Apple buL slmulLaneously Apple has been able Lo malnLaln lLs Lechnologlcal braln and deslgner approach Lo
walk away from Lhls dlfflculL poslLlon AcLually Apple could Lransform some of Lhese problemaLlc feaLures lnLo
opporLunlLles We all know LhaL a key facLor ln brlnglng people lnLo Lhe sLores ls Lhe popularlLy of Lhe lod MosL
of Lhe Llme Lhe purpose of eople comlng Lo Lhe sLores ls noL for Mac no maLLer whaL brlngs cusLomers Lo Apple
sLores Apple should Lake advanLage of Lhls chance 1hls halo effecL needs Lo be caplLallzed Lo Lhe maxlmum
exLenL ln addlLlon alLhough some people complaln Apple's closed operaLlng sysLem lL ls sLlll seen as a secure
safe and rellable sysLem Apple should Lry Lo make lLs sysLem less closed lncorporaLlng more oLher devlces 1hus
people can use Apple more easlly wlLhouL Loo much resLrlcLlon
AL8 2
CompeLlLlve SLraLegy AssessmenL 2
Case SLudy Apple lnc 2008

ln18CuuC1lCn

1hls 8uslness 8eporL prlmarlly addresses 3 quesLlons asked on Lhe Apple lnc case sLudy clrca mld 2008

WhaL effecLs have Lhe changes of sLrucLure and dynamlcs ln Lhe C lndusLry had on Apple lnc's compeLlLlve
poslLlon?

WhaL compeLlLlve advanLages dld Apple possess and whaL were Lhe sLraLegles employed by Apple?

WhaL ls your evaluaLlon of SLeve !ob as a leader? Pas he flnally solved Lhe long sLandlng problems wlLh respecL Lo
Lhe MaclnLosh buslness?

lnformaLlon ls prlmarlly obLalned from Lhe case sLudy and from publlcly avallable news reporLs and arLlcles

kL? CuLS1lCnS
1 WhaL effecLs have changlng of sLrucLure and dynamlcs ln Lhe C lndusLry on Apple lnc's compeLlLlve poslLlon 1)
ln Lhe mld1980s and 2) mld2008?
Mld1980s
1he orLer's flve forces" (orLer 2008) ls useful for analyzlng and expresslng Lhe effecL of changes ln Lhe C
lndusLry on Apple from Lhe mld1980s Lo 2008
l8M's enLry (new LnLranL) lnLo Lhe C markeL ln 1981 uslng Lhe MlcrosofL uCS operaLlng sysLem and Lhe
mlcroprocessor from lnLel (SubsLlLuLes) fundamenLally alLered Lhe C compeLlLlve landscape
1he C lndusLry became less verLlcally lnLegraLed (Machosky 2006) 1he relaLlvely open" sysLem resulLed ln a
prollferaLlon of compuLer appllcaLlons Lo be wrlLLen and heralded Lhe emergence of Lhe l8McompaLlble clones
(more new LnLranL) and Lhe rlse of conLracL manufacLurers and sLraLeglc ouLsourclng
8ecause of Lhelr quaslmonopolles MlcrosofL (CS) and lnLel (mlcroprocessors) were able Lo conLrol commodlLles
and Lo manlpulaLe prlclng and consequenLly Lo wleld Lremendous lnfluence (lncreaslng power of Suppller)
8uyers on Lhe oLher hand voLed wlLh Lhelr walleL ln droves (lncreaslng bargalnlng power of 8uyer) for l8M C
whlch worked more for less 1hus Apple losL lLs markeL leadershlp and could only garner around 8 of markeL
share ln 1986 (a far cry from lLs early years) and a neL lncome of uS$134 mllllon
1he lnLervenlng years
1he lnLervenlng years beLween Lhe mld1980s and 2008 saw Lremendous changes ln Lhe C lndusLry ln general and
parLlcularly Apple klndly refer Appendlx A for deLalls
Mld2008
Apple by 2008 had responded Lo changes ln Lhe C lndusLry by dlverslfylng lnLo consumer elecLronlcs years earller
lLs neL sales for 2007 was more Lhan 12 Llmes of 1986 (uS$24 bllllon) and lLs neL lncome was more Lhan 22 Llmes of
1986 (uS$33 bllllon)
Cn Lhe C fronL Mac now uses lnLel mlcroprocessors whlch are able Lo work on mulLlple CS allowlng lL Lo freely
run Wlndowbased appllcaLlons lL has also made sLraLeglc Lradeoffs (orLer 2001) ln lLs prlclng sLraLegy Lo reach
a wlder consumer base raLher Lhan sLlcklng Lo Lhe premlum segmenL

Whlle Apple has been able Lo reposlLlon lLs Mac offerlng Mac ceased Lo be Apple's lead offerlng 1he lconlc lod
became Lhe nexL sLandard bearer afLer Apple Look a sLraLeglc declslon Lo dlverslfy lnLo consumer elecLrlcs 1hough
Lhey were noL Lhe flrsL Lhe lod leapfrogged Lhe compeLlLlon (Makldes 1997) by dellverlng whaL Apple does besL
le a superlor user experlence and excepLlonal deslgn
1he successful lnLroducLlons of l1unes vldeo lod l1unes and laLer lhones furLher seal Lhe lconlc sLaLus of
Apple 8y now Apple had creaLed a new markeL space (klm 1999) by lnLroduclng a much soughLafLer muslc/vldeo
player LhaL download muslc and vldeo seamlessly and legally Maklng responslblllLy cool" agaln Lhls model
provlded record labels Lo moneLlze Lhelr muslc over Lhe lnLerneL
2 WhaL compeLlLlve advanLages do Apple possessed and sLraLegles employed by Apple Lo compeLe?
ln Lhe years followlng lLs lncepLlon ln 1976 Apple bullL a number of compeLlLlve advanLages 8lghL from Lhe sLarL
SLeve's manLra changlng Lhe world Lhrough Lechnology" clearly resonaLes wlLh Lhe brave new world as much as lL
drlves Lhe company forward
Apples emphasls on excepLlonal hardware deslgn and ease of use" LhaL focuses on Lhe cusLomer experlence
(raLher Lhan [usL purveyor C)and laLer on consumer elecLronlcs garnered a sLeady and falLhful followlng Apple
explolLed Lhls advanLage and loyalLy Lo pursue a value based buslness sLraLegy based on dlfferenLlaLed advanLage
raLher Lhan a cosL advanLage Lhus drlvlng a wedge beLween cosLs and amounL buyers are wllllng Lo pay
(8randenburger 1996) 1he ablllLy Lo capLure a hlgh value ls reflecLed ln Lhe hlgherLhanlndusLry marglns sLaLed ln
Lhe case (exhlblL 3)
Apple's alm Lo creaLe new markeL space raLher Lhan perslsLenLly golng headLohead wlLh lLs compeLlLlon saw lL
dlverslfylng lnLo consumer elecLronlcs SlgnlflcanLly when apple launched lLs lod lLs sLraLegles evolved from Lhe
earller closed proprleLary approach of MaclnLosh
Apple began worklng wlLh parLners Lo develop Lhe accessorles markeL and sLarLed a made for lod" llcenslng
program whlch generaLed a new revenue sLream Apple also worked wlLh record labels and lnLroduced l1unes
whlch made lL easy Lo buy and Lo download muslc and vldeos legally Lhus creaLlng a new plaLform (Llsenmann
2006) for Lwoslded neLworks
undoubLedly Apple demonsLraLed Lhe ablllLy Lo focus on Lhelr dlsLlncLlve compeLencles (orLer 2001) and Lo move
away from sLraLegles and pracLlces whlch have served Lhem well ln Lhe pasL buL no longer held Lrue due Lo Lhe
changlng forces ln Lhe markeL
ln my oplnlon whaL seLs Apple aparL ls lLs MarkeLlng sLraLegy 1helr ablllLy Lo snlff ouL whaL Lhe consumer wanLs
and dellver on LhaL ls [usL phenomenal Apple's campalgn adverLlslng producL launch and producL placemenL are
second Lo none 8ob Lnderle 1echnewsWorld wroLe Apple slmply seems Lo undersLand whaL wlll geL people
exclLed abouL lLs producLs and Lhen lL execuLes on LhaL vlslon ?ou donL see Lhe company malnly Lalklng abouL
feaLures or Lechnology buL abouL how Lhe compuLer wlll make your llfe beLLer"
3 WhaL ls your evaluaLlon of SLeve !ob as a leader? Pas he flnally solved Lhe long sLandlng problems wlLh respecL
Lo Lhe MaclnLosh buslness?
SLeve !ob as a leader

When one Lhlnks of Apple one cannoL help buL Lhlnk of SLeve !ob ln lLs early years SLeve galvanlzed Apple Lo be
Lhe C markeL leader Pe ls vlslonary and LransformaLlonal (uublnsky 1993) Whlle he ls clearly noL lnfalllble hls
deLermlnaLlon and drlve ls exemplary Pe ls also clearly Apple's chlef sLraLeglsL (MonLgomery 2008)
Cn hls reLurn ln 1997 SLeve began reesLabllshlng Apple's dlsLlncLlve sLraLeglc poslLlonlng (orLer 2001) Apple
began ouLsourclng manufacLurlng of lLs Mac producLs revamped lLs dlsLrlbuLlon sysLem and also sLarLed selllng lLs
producL Lhrough Lhe lnLerneL Pe led Apple lnLo consumer elecLronlcs and creaLed a new plaLform LhaL offers
unprecedenLed user experlence ln personal muslc and vldeo
uS news on uec 9 2006 descrlbed hlm as one who has been labeled a salnL a slnner and now a salnL agaln afLer
hls successful second sLlnL aL Apple
Cne quesLlon LhaL llngers ln Lhe mlnds of lnvesLors ls Wlll Apple Lhrlve wlLhouL SLeve !ob?
1he MaclnLosh buslness
1he earller lssues wlLh MaclnLosh belng a proprleLary plaLform and lLs lnferlor processors were addressed ln 2003
wlLh Lhe mlgraLlon Lo a new chlp archlLecLure LhaL adopLed Lhe lnLel rocessors whlch allows Mac users access Lo
a pleLhora of Wlndowbased appllcaLlons Lhus removlng a ma[or hurdle Lo wlder accepLance 1hls move coupled
wlLh Apple's own dlsLlncLlve value (orLer 2001) saw a sales lncrease by 27 ln 2003
Apple also made sLraLeglc Lradeoffs (orLer 2001) ln lLs prlclng sLraLegy of lLs Macs Lo reach a wlder consumer
base raLher Lhan sLlcklng Lo Lhe premlum segmenL lLs subsequenL successful producL exLenslon lnLo moblle
compuLlng segmenL ensured Lhe Apple buzz conLlnues
CCnCLuSlCnS
Some can polnL Lo Apple's falllngs Lo capLure a blgger plece of Lhe C cake as MlcrosofL dld and lL ls a valld polnL
8uL lL ls hard Lo begrudge a company LhaL has weaLhered Lhe sLorm adapLed Lo changlng markeL forces and
dynamlcs and changed lLs sLraLegles dellvered value Lo lLs shareholders and lasL buL noL leasL capLured Lhe
lmaglnaLlon of consumers worldwlde eagerly awalLlng Lhelr nexL blg hlL
ALnulx A
1he lnLervenlng years

1he lnLervenlng years beLween Lhe mld1980s and 2008 saw Lremendous changes ln Lhe C lndusLry ln general and
parLlcularly Apple
% A shlfL ln buyers' aLLlLude Lowards C as a commodlLy lncreased Lhe bargalnlng power of buyer
% 1he emergence of lnLel as a suppller of cuLLlng edge and cosL compeLlLlve processors and Apple's evenLual
adopLlon of Lhe lnLel mlcroprocessors ln 2003 furLher lncreased Lhe bargalnlng power of Suppller
% 1he accepLance of Lhe Wlndows CS as Lhe lndusLry sLandard meanL Apple's CS x was ln facL SubsLlLuLed"
% 1he new WlnLel plaLform reduced Lhe barrler Lo enLry and a slew of C manufacLurers (new enLranLs)
enLered Lhe markeL
% 1he Lwln rlse of Lhe WlnLel plaLform and oLher C manufacLures such as P uell eLc also alLered Lhe
naLure of Lhe compeLlLlve rlvalry ln Lhe lndusLry
% SLeve !ob goL Lhe sack ln 1983 afLer Lhe MaclnLosh falled Lo dellver
8LlL8LnCLS

8randenburger Adam M 1996 !ournal of economlcs and managemenL SLraLegy value based buslness
sLraLegy

?offle uavld 8 Sllnd Mlchael 2008 Parvard 8uslness School Case SLudy Apple lnc2008

Llsenmann 1homas CcL 2006 P88 SLraLegles for Lwo slded markeL

ChemawaL anka[ 2006 SLraLegy and Lhe buslness landscape CreaLlng compeLlLlve advanLage upper
Saddle 8lver

Machosky Mlchael lebruary 13 2006 verLlcal lnLegraLlon lLLsburgh 1rlbune 8evlew

MonLgomery CynLhla A !an 2003 P88 uLLlng Leadershlp back lnLo sLraLegy

orLer Mlchael L !an 2008 P88 llve CompeLlLlve lorces LhaL Shapes sLraLegy

orLer Mlchael L Mar 2001 P88 SLraLegy and Lhe lnLerneL

W Chan klm !an/leb 1999 P88 CreaLlng new MarkeL Space

W Chan klm 8enee Mauborgne 2003 8lue Ccean SLraLegy

Andrew 8urke Andre van SLel and 8oy 1hurlk May 2009 8lue Ccean versus CompeLlLlve SLraLegy
1heory and Lvldence Lrasmus 8esearch lnsLlLuLe of ManagemenL (L8lM) L8S2009030C8C

uublnsky A! ?ammarlno l! l! !olson MA 1993 ersonal CharacLerlsLlcs and dlmenslons of
LransformaLlonal leadershlp (CuoLed from Lhe book Leadershlp by uubrln ualgllsh and Mlller)

ALk 3

ALL lnc (AAL)

AccounLlng and llnanclal roflle

plc

name

SachlLanand karnakoLe
Choong Chee Lal
Lel Clu
Alcldes SanLopleLro
uenlsa volcu

SepLember 2008

ConLenLs

lnLroducLlon 2
1he company and lLs acLlvlLles 2
lndusLry CompeLlLlon 2
8ecommendaLlon 3
AccounLlng cholces and CuallLy of Larnlngs 4
8aLlos analysls 6
LlquldlLy 6
Solvency 7
roflLablllLy 8
MarkeL 8
8elevanL ulsclosures 9
8lsks 9
Analysls of Apple lnc corporaLe sLraLegy 10

lnLroducLlon

Cur group declded Lo analyse Lhe company Apple lnc llsLed on nasdaq MarkeL as AAL 1he analysls
was malnly based on Lhe annual flnanclal reporL of Lhe company for Lhe flscal year ended on SepLember
29Lh 2007 Apple lnc ls Loday one of Lhe mosL lnnovaLlve creaLlve and admlred companles worldwlde
Cur cholce was based on a slmple moLLo LhaL one should know Lhe buslness of a company Lo have a
beLLer undersLandlng of lLs flnanclals lour of us ln Lhe group have worked ln Lhe l1 lndusLry and Lhe
oLher person has owned Apple sLock ln Lhe pasL All of us have used or are uslng producLs made by
Apple lnc

1he company and lLs acLlvlLles

Apple lnc and lLs subsldlarles deslgn manufacLure and markeL personal compuLers consumer
elecLronlcs and sofLware producLs 1he company's besLknown hardware producLs lnclude MaclnLosh
llne of Cs (43 of Lhe company's sales) lod llne of porLable medla players (346 of sales) and lhone
a mulLlmedla smarL phone Apple's sofLware producLs lnclude unlxbased Mac CS x operaLlng sysLem
l1unes lLlfe sulLe of mulLlmedla and creaLlvlLy sofLware and llnal CuL SLudlo As of !une 2008 Lhe
company operaLed 213 reLall sLores
1he company's earnlngs proflle has changed ln Lhe recenL years lod ls a producL LhaL may be reachlng
lLs maLurlLy so lmporLanL growLh raLes should noL be expecLed for Lhe fuLure MaclnLosh compuLers
(deskLop + porLables) are sLeadlly growlng and we can pro[ecL Lhe same pace ln Lhe near fuLure (markeL
shlfL Lo porLables ls noLed) 1herefore revenues comlng from Lhese lLems can be falrly consldered as
permanenL revenues

lndusLry CompeLlLlon

Apple's core buslness ls personal compuLers and on Lhls Lype of markeL many players are operaLlng
such as PewleLLackard and uell Apple's markeL share sLands aL 26 for 2007 (abouL 93 of Lhe
compuLers shlpped ln 2007 run on Wlndows plaLform) Some of company's advanLages ln Lhls segmenL
are Lhe shlfL Lo Lhe use of lnLel chlps Wlndows on Mac Mac CS x and aesLheLlcs/deslgn 1he LargeL
cusLomers for Lhe company ln Lhls segmenL are based on Lhe developed world where Lhe lndusLry
compeLlLlon from low cosL compuLer producers has a llmlLed lmpacL Powever for Lhe company Lo keep
lLs markeL share or even expand lL lL needs Lo conLlnue Lo lnnovaLe and aL Lhe same Llme reduce cosLs
Apple's share of Lhe porLable medla player segmenL ls esLlmaLed Lo be 727 ln 2007 maklng lL a close
monopoly lod's sleek deslgn comblned wlLh lLs ease of use and affordable prlclng makes lL a dlfflculL
producL Lo replace by Lhe compeLlLors l1unes supporL sysLem for lods cannoL be undersLaLed afLer all
l1unes makes Apple Lhe number one muslc shop ln Lhe world 1he company's challenges ln Lhls fleld
lnclude Lhe markeL saLuraLlon ln norLh Amerlca and Lhe facL LhaL Apple deals wlLh medla conLenL
owners and relaLed regulaLlons (u8M)
Apple ls a relaLlvely new player ln Lhe smarL phone segmenL Surprlslngly lL has enLered Lhls markeL wlLh
a revoluLlonary producL whlch malnLalned medla aLLenLlon for a long Llme lL faces lnLense compeLlLlon
from 8lM and nokla Lo menLlon a couple who have deep cash reserves an excellenL 8u body and blg
markeL shares ln Lhls segmenL 1he blggesL challenge Apple faces here ls Lo allure Lhe buslness
cusLomers lhone belng a mulLlfuncLlonal devlce wlLh a Louch lnLerface has many Lechnologlcal
advanLages for lL Lo be a success buL Lhe sLraLegy of Lhe company Lo work wlLh lndlvldual carrlers llmlLs
lLs growLh and Lhe recenL lssues wlLh mlssed calls and lawsulLs for producL underperformance has been
ma[or seLbacks

| |8evenues |Cross Margln |neL lncome |L8l1uA
|1oLal AsseLs |
|Culck 8aLlon (M8C) |298 |102 |183 |212 |102
|
|L1 uepL Lo LqulLy (M8C) |000 |1722 |2001 |1687
|11098 |

1able 1Apple PewleLL ackard llnAnClAL S18LnC1P source 8euLers

LlquldlLy

|1able 2 |Culck |CurrenL 8aLlo|AccounLs collecLlon perlod of accounLs |Average number of days
lnvenLory |
| |8aLlo | |recelvable(days) |on hand |
|2006 |176 |223 |237 |718 |

ln 2007 LoLal asseLs have lncreased slgnlflcanLly by 48 from 2006 CurrenL asseLs are 8662 of LoLal
asseLs ln 2007 up from 8433 ln 2006 lrom Lhe Lrend over Lhe lasL 3 years (20032007) Cash and Cash
LqulvalenLs (CCL) have grown sLrongly by 173 whlle LoLal currenL asseLs have grown slgnlflcanLly by
273 ln Lhe same perlod 1hls growLh ln currenL asseLs ls also reflecLed ln Apple's Culck 8aLlo and
CurrenL 8aLlo whlch have lmproved marglnally ln 2007 Lo 183 and 236 respecLlvely Apple`s raLlos are
favorable compared Lo lLs compeLlLors eg PewleLLackard posLed Culck 8aLlo of 070 and CurrenL
8aLlo of 121 ln Lhe same perlod CCL's lncreased Lremendously ln Lhe same perlod
|1able 3 |2007 |2006 |2003 |
|Cash and cash equlvalenLs (mllllons) |9332 |6392 |3491 |
|Change |46 |83 | |

lrom Lhe cash flow sLaLemenL we can see LhaL Lhe prlnclpal componenLs of Lhls neL lncrease were cash
generaLed by operaLlng acLlvlLles of $338 lL ls clear LhaL Apple has a sLrong ablllLy Lo generaLe cash
from lLs core buslnesses $8848 of CCL's are shorLLerm lnvesLmenLs such as securlLles maLurlng ln 3
monLhs or less We belleve LhaL parL of Lhls cash ls used as a hedge ln supply negoLlaLlons Lo ensure
favorable prlces and ln sufflclenL quanLlLles As sLaLed ln lLs 10k Apple has prepald $1238 for nAnu
flash memory ln 2006 ln 2007 lL has uLlllzed $208M of Lhls prepaymenL noLe LhaL Lhe prepaymenL has
been recorded as CLher AsseLs (CA's) and Lhls explalns Lhe large amounL for CA's 1he cash can also be
used Lo ensure adequaLe 8u fundlng
lrom 2006 Lo 2007 Lhe Average CollecLlon erlod (days) of 8ecelvables (AC8) has lncreased sllghLly
from 2366 days Lo 2490 days whlle Lhe Average number of uays of lnvenLory Cn Pand (AvglCP) also
lncreased from 718 Lo 797 1hls could be a resulL of sLrong growLh ln sales (24) A/8's (31) and
lnvenLorles (28) ln 2007 Powever Apple ls sLlll beLLer ln Lhese aspecLs Lhan lLs maln compeLlLors such
as PewleLLackard whlch recorded AC8 aL 3813 days and AvglCP of 4622 days ln Lhe same perlod
Cverall Apple's cash levels and llquldlLy are lmpresslve ln 2007 lLs llquldlLy has lmproved and has
ouLperformed mosL of lLs maln compeLlLors ln Lhls caLegory

Solvency

|1able 4 |uebL Lo AsseL |uebL Lo |uebL Lo AsseL/ uebL Lo|
| | |LqulLy |LqulLy |
|2006 |042 |072 |038 |
|2007 |043 |074 |038 |

1here ls a noLlceable lncrease ln raLlos debL Lo asseL" and debL Lo equlLy" ln Lable 4 Powever we
lnLerpreL lL Lo be lnslgnlflcanL because debL Lo asseL / debL Lo equlLy" raLlo doesn'L change whlch ls
deslrable
Long 1erm uebL Lo LqulLy and lnLeresL Coverage are zero for Lhe lasL 3 flnanclal years of Apple and Lhls
slLuaLlon deserves a speclal aLLenLlon ?ear 2002 ls Lhe lasL Llme Apple carrled any Long 1erm uebL
8ased on Lhe above resulLs and compared wlLh Lhe lndusLry we could say LhaL Lhe company ls a very low
rlsk company Powever only by analyzlng Lhe numbers from 8alance SheeL ls noL enough Lo help us Lo
undersLand and lnLerpreL correcLly Lhe rlsk of Lhe company Colng beyond Lhe numbers we have
ldenLlfled Lhe followlng
1he company menLlons LhaL lnLernal 8evenue Servlce (l8S) has compleLed lLs fleld audlL of Lhe
Companys federal lncome Lax reLurns for Lhe years 2002 Lhrough 2003 and proposed cerLaln
ad[usLmenLs"3 1he Company ls also sub[ecL Lo audlLs by sLaLe local and forelgn Lax auLhorlLles and
we've ldenLlfled LhaL lL has noL reporLed all Lhe ad[usLmenLs yeL and LhaL lL lnLends Lo conLesL some of
Lhem ManagemenL belleves LhaL adequaLe provlslons have been made for any ad[usLmenLs LhaL may
resulL from Lax examlnaLlons Powever Lhe ouLcome of Lax audlLs cannoL be predlcLed wlLh cerLalnLy
Should any lssues addressed ln Lhe Companys Lax audlLs be resolved ln a manner noL conslsLenL wlLh
managemenLs expecLaLlons Lhe Company could be requlred Lo ad[usL lLs provlslon for lncome Lax ln Lhe
perlod such resoluLlon occurs ln 2007 and 2006 Lhe Company recorded Lax beneflLs of $63M and
$20M respecLlvely due Lo Lhe seLLlemenL of prlor year Lax audlLs ln Lhe unlLed SLaLes
lL wlll deflnlLely help us Lo know whlch are Lhe proposed cerLaln ad[usLmenLs LhaL l8S recommended Lo
undersLand relaLed fuLure expenses

roflLablllLy

1he 8eLurn on LqulLy raLlo for 2007 ls 241 Cne posslble ad[usLmenL Lo Lhls raLlo can be Lhe
suppresslon of Lhe oLher lncomes" amounL as descrlbed prevlously 8y uslng $2897M as Lhe neL
lncome Lhe raLlo would be 199 lnsLead whlch ls sLlll a good raLlo buL lL would glve a less blased ldea
of Lhe acLual proflLablllLy of Lhe company
1he 8eLurn on AsseLs raLlo for 2007 ls 138 1hls raLlo lndlcaLes LhaL Lhe company ls managlng lLs
resources reasonably well generaLlng an healLhy reLurn on lLs asseLs
1he roflL Margln for 2007 ls 146 Apple generaLes very hlgh marglns for Lhe producLs and servlces lL
sells compared Lo lLs compeLlLors 1he fuLure revenue growLh from servlcebased (l1unes) and
recurrenLrevenues (lhone) lndlcaLes LhaL Lhe sales amounL may be undersLaLed whlch could lncrease
Lhe raLlo even more 1he Cross Margln for 2007 sLand aL 34 1hls raLlo ls also very poslLlve buL may be
lnfluenced by Lhe same facLors presenLed for Lhe proflL margln raLlo
|1able 3 |8eLurn on LqulLy |8eLurn on AsseLs |roflL Margln |Cross Margln |
| |raLlo | | | |
|Apple |241 |138 |146 |34 |
|PewleLLackard4 |19 |8 |7 |23 |

Apple possesses aLLracLlve proflLablllLy raLlos LhaL lndlcaLe a conLlnued growLh momenLum for Lhe
company Apple's raLlos are beLLer compared Lo Lhose of one of lLs compeLlLor PewleLLackard
Powever wlLh Lhe apparenL maLurlLy of Lhe lod buslness and Lhe lncreaslng operaLlng expenses we
may expecL Lhese lndlcaLors Lo be lower ln Lhe fuLure ln addlLlon Lhe revenues from Lhe sale of onllne
muslc Lhrough l1unes and oLher 3rd parLy onllnebased revenues are noL yeL slgnlflcanL Lo susLaln Lhe
growLh pace LhaL Lhe company presenLs Loday

MarkeL

8ased on Lhe sLock prlce (29Lh Sep 2007) and shareholders equlLy Apple's 8ook Lo MarkeL raLlo ls 011
(whlle for example PewleLLackard presenLs a raLlo of 027) Apple's markeL value was almosL 10
Llmes Lhe book value of Lhe company Several reasons can be asslgned Lo Lhls low raLlo
llrsL company's book value ls noL reflecLed 100 by Lhe equlLy lor lnsLance 8u ls one of Lhe mosL
lmporLanL buslness processes of Lhe company ln 2007
Apple spenL $782M ln 8u buL based on Lhe accounLlng Lheory 8u ls recorded as expense ln flnanclal
sLaLemenLs and Lherefore cannoL be ldenLlfled ln Lhe equlLy AnoLher facLor ls Lhe company's lnLanglble
asseLs such as Lhe brand and paLenLs ln addlLlon Lhe low raLlo may reflecL markeL's percepLlon of
Apple's growLh poLenLlal company's sLrong ablllLy Lo generaLe revenue and lLs compeLlLlve advanLage ln
lnnovaLlon
|1able 6 |2007 |2006 |2003 |
|8ook Lo MarkeL 8aLlo |011 |0133 |018 |
|Larnlngs per share |404 |236 |164 |

As earnlng per share lncreases markeLs percepLlon of Apple's growLh poLenLlal lncreases LasL buL noL
leasL Lhls low raLlo can also reflecL Lhe rlsk Lo lnvesL ln Apple because lL's less Lhan half of lLs maln
compeLlLor PewleLLackard's raLlo 1en Llmes Lhe book value makes Apple noL as valuable as lLs
compeLlLors and Lhe hlgh expecLaLlon from markeL can also be rlsky

8elevanL ulsclosures

ln 2006 Apple enLered lnLo an agreemenL wlLh lxar Lo sell cerLaln of lxar's shorL fllms on Apple's
sLores lxar ls a whollyowned subsldlary of ulsney buL Apple's CLC Mr SLeve !obs ls on Lhe 8oard of
ulrecLors 8oyalLy expense recognlzed by Apple for lxar ln 2006 was less Lhan $1 mllllon buL no expense
was recorded ln Lhe 2007 flnanclal sLaLemenL

8lsks

Apple faces challenges wlLh consLanL regulaLory changes parLlcularly ln Lhe muslc conLenL segmenL So
far Apple managed Lo work around Lhese regulaLlons lor lnsLance ln 2006 Lhe lrench governmenL
ouLlawed Apple's dlglLal rlghLs managemenL conLrols Lo blnd lods Lo lLs own l1unes onllne muslc
exchange ln lrance Lven Lhough LhaL had noL hlndered Apple's operaLlon ln lrance lL has hlghllghLed a
rlsk ln Lhls Lype of operaLlon
1he maln employees of Lhe company lncludlng lLs CLC have recenLly agreed Lo recelve paymenLs Lo
seLLle a sLock opLlons backdaLlng lawsulL now Lhe company faces a new lawsulL for vollaLlng sLock
opLlons pracLlces 1he company ls also faclng some lawsulLs for falllng Lo provlde producLs (lhone) wlLh
Lhe promlsed performance 1here ls a very good chance LhaL Lhe lawsulLs mlghL plle on Laklng Lhe
managemenL's focus away from Lhe core buslness lssues
1he company has maLerlal agreemenLs wlLh parLlcular vendors for cerLaln supplles Lherefore any lssues
wlLh Lhese suppllers wlll dlrecLly affecL Lhe company's buslness adversely
1he company has $68 ln shorL Lerm lnvesLmenLs ($198 wlLh 13 year maLurlLy oLhers presenL shorLer
maLurlLles) malnly hlghly llquld securlLles LhaL are hlghly lmpacLed by lnLeresL raLe flucLuaLlons 1he
currenL credlL markeL slLuaLlon warranLs cauLlon and due Lo all Lhese securlLles belng ln uSu
denomlnaLlon Lhey have an adverse affecL wlLh a decllnlng uSu 1he company ls also effecLed by
forelgn exchange flucLuaLlons
llnally Lhe company's heavy rellance on lLs CLC ls a cause of concern due Lo recenL reporLs of hls bad
healLh

Analysls of Apple lnc corporaLe sLraLegy

Apple lnc hlsLorlcally known for lLs compuLers has recenLly changed lLs name Lo allgn lL wlLh lLs fuLure
dlrecLlon 1he company wanLs Lo be a ploneer ln Lhe dlglLal consumer producLs markeL lL belleves ln Lhe
lnLegraLlon of personal compuLlng wlLh lLs producLs lods lhone and Apple 1v Lo form a new dlglLal
llfesLyle for lLs consumers and professlonals lL ls well known ln Lhe personal compuLlng world LhaL lLs
cusLomers are very loyal Lo Lhe brand (Apple has developed a sLrong brand lmage and lL promoLes lL
very well) commandlng hlgher prlces whlch conLrlbuLe Lo hlgh marglns Apple lnc has managed Lo
generaLe hlgh gross proflLs for lLs producLs overall Cne reason for LhaL ls lLs brand lmage anoLher one ls
Lhe facL LhaL lL's Lhe only company ln Lhe lndusLry LhaL conLrols Lhe deslgn and developmenL of Lhe
enLlre C lL also conLrols Lhe ma[orlLy aspecLs of Lhe producL cycle for lods and oLher producLs 1he
huge markeL share of Lhe dlglLal medla players markeL makes Apple Lhe blggesL consumer of flash
memory allowlng lL Lo geL Lhe besL deals from lLs vendors once agaln conLrlbuLlng Lo hlgh proflL
marglns
1he company ln recenL Llmes has been generaLlng a conslderable amouL of cash and lLs buslness ln
Lurope has lncreased slgnlflcanLly lL ls expandlng lLs capaclLy Lo reach cusLomers around Lhe world
whlch ls lncreaslng revenues from ouLslde of uSA markeL AL Lhe end of flscal year 2007 Apple had
abouL $ 13 bllllon ln cash cash equlvalenLs and shorL Lerm lnvesLmenLs and lL had plans Lo relnvesL
some of LhaL lnLo forelgn markeLs glvlng lL Lax beneflLs ln Lhe uSA and expandlng lLs buslness ouLslde of
uSA AL Lhe end of 2006 108 $ of company's money ls held by forelgn subsldlarles whlch could be an
lndlcaLor LhaL Apple has blg plans for lLs buslness ouLslde of uSA markeL As of !uly 2008 Apple has
adopLed a new buslness model for Lhe lhone LhaL allows Apple Lo collecL all of Lhe lnlLlal sale prlce
whlle Lhe carrlers keep 100 of Lhe recurrenL revenue from Lhe subscrlpLlons Apple ls counLlng on
hlgher volume sales Lo replace lhone revenue prevlously recelved on a recurrlng basls
llnally Lhe company ls conLlnulng Lo have huge lnvesLmenLs on 8u whlch wlll allow Lhe company Lo
develop new lnnovaLlve producLs and Lo conLlnue Lo lead Lhe lnnovaLlon wlLhln and Lo some exLend
ouLslde Lhe hlghLech lndusLry
plc

1 All amounLs sLaLed ln Lhls reporL are ln uSu
2 1he acLual flgures are $236 ln 2006 and $ 402 ln 2007
3 1he menLloned fragmenL ls expllclLly presenLed ln Appendlx 9
4 8ased on Lhe flnanclal sLaLemenLs for Lhe flscal year ended on CcLober 31Lh 2007


Source S 8eporL

ALk 4
SWC1 Analysls
SLrengLhs

r Apple CompuLer lnc ls one of Lhe oldesL hardware manufacLurers LhaL conLrol over Lhe producL by
manufacLurlng boLh compuLers and Lhelr operaLlon sysLem lL ls known LhaL Apple has a hlgh quallLy producL whlch
makes Apple dlfferenL Lhan lLs compeLlLors

r 1he deslgns are unlquely creaLed Lo capLure Lhe cusLomers' eyes
r roducLs are deslgned ergonomlcally and sLyllshly for example Lhe lpod nano lLs sllm deslgn flL easlly
Lhe consumers pockeLs and lL ls also llghL welghL enough Lo be carrled around
r Apple comes ouL wlLh many dlfferenL producLs Lo sulL Lo Lhe everyday demands of people for example Lhe
lLouch or lpone An lphone enables consumers Lo en[oy muslc waLch vldeos surf Lhe web and make phone calls
all Lhese can be done by [usL a devlce
r Aggresslve campalgns and commerclals are adverLlsed Lhrough medla wlLh lnLeresLlng and lnLrlgulng
vlsuals
r Apple had consLanLly been creaLlng new easyLouse producLs slnce decades ago
r 1he webslLe provldes Lhe cusLomers wlLh gulded Lours of every producL LhaL Lhey offer
r Apple knows how Lo dlverslfy from compuLers Lo lpods and sllmmer noLebooks 1hey never fall Lo caLch
up wlLh Lhe laLesL Lechnology and creaLlng dlfferenL lmages LhaL aLLracLs new consumers and keeps Lhelr exlsLlng
consumers comlng back for more
r lLs sLock prlce ls Lhe hlghesL ln Lhe personal compuLer lndusLry Apple ls flnanced mosLly by lLs equlLy ln
facL Apple does noL have any debL so lnvesLors would bear less rlsk by holdlng Apple's sLocks 1he company ls
loaded wlLh exLra cash LhaL ls ready Lo acqulre any flrm LhaL could help enhance Lhe value of Lhe company
r lrom a survey done by youLhs of ages 18 Lo 20 ln Slngapore 60 own a producL from Apple lnc mosL of
whlch ls lod
r Lven Lhose who don'L own any Apply producLs heard of Apple lnc before or have seen Lhem before
r Apple sold lLs 1 mllllonLh lhone 3Cs ln Lhe flrsL weekend [usL Lhree days afLer launch on 3 days afLer
lrlday !uly 11Lh
r Apple plans Lo compleLely ellmlnaLe Lhe use of polyvlnyl chlorlde (vC) and bromlnaLed flame reLardanLs
(8l8s) ln lLs producLs and arsenlc ln Lhe glass of flaLpanel dlsplays by Lhe end of 2008
r Apple has one of Lhe Lop brand names wlLhln Lhe Lechnology lndusLry all over Lhe world and 34 of Lhelr
proflLs are from forelgn markeLs
r 1here are a huge number of consumers who are loyal Lo Apple even Lhough Lhe prlces of Apple producLs
are hlgher comparlng Lo lLs compeLlLors
r lrom flg01 one can observe LhaL lLs sLock prlce ls Lhe hlghesL ln Lhe personal compuLer lndusLry and Lhe
company ls flnanced mosLly by lLs equlLy
r Apple does noL have any debL so lnvesLors would bear less rlsk by holdlng Apple's sLocks and even more
Lhe company ls loaded wlLh exLra cash LhaL ls ready Lo acqulre any flrm LhaL could help enhance Lhe value of Lhe
company

(flg 01)

Weaknesses
r Apple had dlfflculLles on some of lLs producLs quallLy conLrol Some consumers reporLed faulLy screens ln
Lhe lod nano 1he screens of Lhe lod cracks easlly even Lhough lL ls placed lnslde pockeLs and Lhe flxlng of Lhe
screen can cosL up Lo almosL Lhe prlce of geLLlng a new one
r Larly edlLlons of lods had cases of faulLy or shorLllved baLLerles Whereby Lhe company had Lo offer Lhe
cusLomers free baLLery cases
r 1he new Macbook lsn'L very userfrlendly consumers musL Lake some Llme Lo famlllarlze wlLh Lhe
meLhods before uslng lL
r lrom a survey done by youLhs of ages 18 Lo 20 ln Slngapore Apple producLs are noL Lhelr flrsL cholce
desplLe Lhelr appeallng appearance prlce plays a parL Loo
r Larly ln 2003 Apple announced LhaL lL was Lo end lLs longsLandlng relaLlonshlp wlLh l8M as a chlp
suppller and LhaL lL was abouL Lo swlLch Lo lnLel Some lndusLry speclallsLs commenLed LhaL Lhe swap could
confuse Apples consumers

CpporLunlLles
r Apple has Lhe opporLunlLy Lo develop lLs l1unes and muslc player Lechnology lnLo a moblle phone formaL
r A verslon of Apples l1unes muslc sLore has been developed for Lhe phone (8okr moblle phone devlce was
developed by MoLorola) so users can manage Lhe Lracks Lhey sLore on lL
r uownloads are avallable vla a uS8 cable ands sofLware on Lhe handseL pauses muslc lf a phone call
comes ln
r new Lechnologles and sLraLeglc alllances offer opporLunlLles for Apple
r odcasLs are downloadable radlo shows LhaL can be downloaded from Lhe lnLerneL and Lhen played back
on lods and oLher M3 devlces aL Lhe convenlence of Lhe llsLener
1hreaLs
r 1he blggesL LhreaL Lo l1 companles such as Apple ls Lhe very hlgh level of compeLlLlon ln Lhe markeL
because of Apple's success
r Many companles go headLohead wlLh Apple example Lhe wellknown CreaLlve because of Lhe
slmllarlLles ln Lhelr producLs
r lmlLaLlons can be found easlly ln Chlna for example
r 1here ls a hlgh producL subsLlLuLlon effecL ln Lhe l1 lndusLry Apple has Lo keep up wlLh Lechnologlcal
advances because lods and oLher brands of mp3s can conquer Loday buL Lomorrow's Lechnology mlghL be
compleLely dlfferenL lor example wlreless Lechnologles could replace Lhe need for physlcal muslc players
r Lven lf Lhe change don'L resulL ln Lhe collapse of Lhe company lL wlll deflnlLely changes how Apple wlll
approach Lhe LhreaLs ln fuLure and forced Lo come up wlLh new Lechnology Lo caLch up lf anoLher company
comes ouL wlLh a beLLer producL Apple would lose lLs markeL share Lo LhaL company




C A S E 14 Google`s Strategy in 2008
ASSIGNMENT QUESTIONS

1. Discuss competition in the search industry. Which of the five competitive
forces seem strongest? weakest?
What is your assessment of overall industry attractiveness?
2. How is the search industry changing? What forces seem most likely to bring
about major change to the industry within the next three to fi ve years?
3. What are the key factors that defi ne success in the industry? What are the
key competencies, capabilities, and resources of successful search engine
companies?
4. Describe Google`s business model. What are the company`s revenue-cost-
profi t relationships? What strategies has Google relied upon to build
competitive advantage in the industry?
5. Have Google`s business model and strategy proven to be successful? Should
investors be impressed with the company`s fi nancial performance? How does
the company`s fi nancial performance compare to that of Microsoft and
Yahoo? Please conduct a fi nancial analysis to support your position-you
may wish to use the fi nancial ratios presented in Table 1 of Chapter 4 as a
guide in doing your fi nancial analysis of the company.
6. What are the company`s key resource strengths and competitive
capabilities? What competitive liabilities and resource weaknesses does it
have? What opportunities exist? What threats to its continued success are
present?
7. What recommendations would you make to Google`s top-management team
to sustain its competitive advantage in the search industry? How should it best
capitalize on its strategic initiatives in mobile search, cloud computing, and its
auctioning system for traditional media ads?




PAPER 1
Competitive Strategy Assessment 2
Case Study Google Inc.
INTRODUCTION

This Business Report primarily addresses 4 questions asked on the Google Inc. case study.
InIormation is primarily obtained Irom the case study and Irom publicly available news reports and articles.

KEY QUESTIONS

1. What were the key Iactors behind Google`s early success?
A number oI key Iactors contributed to Google`s early success. Google had unassailable competitive advantage
in the Iorm oI PageRank algorithm that can eIIiciently index web pages and delivers highly relevant searches
to users. It avoided competing head to head with yahoo, etc by choosing not to diversiIy to portal positioning.
Instead, Google Iocuses on developing its strategic assets (Makides, 1997) and licensing its search
technologies to Yahoo and other 3rd party sites.
Operating under a duopoly market structure (Lewis, 1999) and under an expanding market, Google
encountered less competitive resistance. Staying true to its competitive advantage and Iocusing on its search
services, Google grew quickly.
Google was able to adopt a very competitive pricing strategy in paid listing and was oIIering a lower CPC and
higher revenue split than its competitions. And by ensuring a higher click through rate, Google became the
search engine oI choice Ior both the paid-listers and users alike and was able to capture cross-side networks
eIIect. (Eisenmann, 2006)
Google was able to translate its reach and pervasiveness oI its search engine to paid listings revenue. Google`s
reach also enables it to avoid the traditional overheads required Ior advertizing to make itselI and its services
known.
Google`s also seek out new market space (Kim, 1999) and the move to provide Iree unlimited e-mail web
storage also greatly built its base oI loyal customers and good-will.
Google`s corporate values, corporate culture and service oIIering was well 'Iitted Ior the industry. By
Iostering and encouraging a culture oI innovation, Google was able to reap the beneIits oI new monetizing new
ideas that came out.
2. Should Google pay AOL more than 100 oI the revenue generated Irom AOL searches? How did
MicrosoIt`s maximum aIIordable bid Ior AOL`s search traIIic compare with Google`s?
a. Given that Google is already sharing 85 to 90 oI the ad-revenue collected with AOL the question
oI paying more than 100 oI the revenue generated does not seemed like a signiIicant one especially in the
light oI Google paying way over the odds Ior 5 oI AOL shares.

While the one-oII decision by Google to pay a high premium Ior AOL`s share can be justiIied Irom the
perspective oI a deIensive play to ward oII a possible entry by MicrosoIt a very dangerous competitor with
deep pockets, entering a contract to pay over 100 oI the ad-revenue is not justiIiable even though there may
be justiIications with regards to cross-subsiding and the risk oI higher acquisition/conversion cost.
Paying more than 100 may not meant much in term dollars but the resultant loss oI bargaining leverage may
be too high a price to pay.
b. With hindsight, given that MicrosoIt bid Iailed it could be speculated that the bid is inIerior to
Google`s. II so, did MicrosoIt misread the potential oI the AOL deal to make serious in-roads into the search
market? Google on the hand saw the need to snuII out MicrosoIt`s Ioray into its lucrative market.
3. In addition to enhancing its core search business, should Google diversiIy into new arena? Which would you
recommend: 1) building a Iull pledged portal like yahoo`s 2) targeting MicrosoIt`s desktop hegemony 3)
becoming e-commerce intermediary like e-Bay?
It`s interesting that while Schmidt was deIlecting the question that Google might create its own web-based
operating system, he added that 'there was a great deal oI strategic leverage Ior Google in building an
ecosystem around content and advertizing and that it is an extension oI Google`s search mission..He went on
to say, 'Google is in the business oI making all the world`s inIormation accessible and useIul.
I would strongly recommend Google to pursue a solution that can challenge or substitute desktop computing
even iI MicrosoIt is toying with the idea.
Consider the amount oI inIormation that is just sitting in desk-tops, note books and servers around the world.
InIormation, that is useIul and can be made accessible. OI course, there must be means and protocols establish
Ior users to secure their private and proprietary inIormation but by and large most inIormation is shareable.
I imagine, one day, in the near Iuture when all oI one`s Iiles which have been designated as shareable, are
indexed and becomes searchable by people around the world. Shareable inIormation can be traded Ior a Iixed
or negotiated according to a Iee sharing plan with Google. Google then Iacilitates or mediates the payment
electronically.
This is just a small example oI what a web based desk-top replacement solution can do. People can store data
online and keep a copy in the local drive. We can do away with the expensive OS upgrades and extend the liIe-
span oI the hard-wares we have. SoItware support will also be kept to the minimum. It is not only a more
sustainable model but one that is more environmentally Iriendly as well. The list oI beneIits can only grow.
As web services becoming more prevalent, the move to replace desk-top will gain momentum and as in its
early days, Google can yet again take the lead and change the way we access and Iind inIormation Ior the
better.

4. Do you view Google`s distinctive governance structure, corporate culture and organizational processes as
strengths or potential limitations?

Google`s distinctive governance structure, corporate culture and organization processes reIlect the co-Iounders
emphasis on innovation. From the very beginning, both Sergey and Larry had intended Ior the company to
grow and do its business in manner that is consistent with its corporate values. In essence, Google is a
company that promotes innovation and pushes the envelope all the time.

Google`s governance structure however, can be a potential limitation. Google`s over reliance on the co-
Iounders and Schmidt may be a liability in the long run. In the event one or more oI these leaders cease to be
with the company, the probable impact can only be described as negative.
However, as the company grows certain adjustments are needed to ensure that its size does not stiIle creativity
and innovation. Google recognizes this as well and as Schmidt explains, 'Google has begun to hold regular
meetings at which employees are encouraged to present new ideas to me, Larry and Sergey. It has also begun
giving some projects more resources and independence than usual. Both moves are designed to ward oII
conservatism that can set in as companies mature. It has also put in place technological tools, such as Google
wave, to promote innovation and collaboration. This certainly bodes well Ior the company.
I believe this culture oI innovation itselI would position Google to innovate and adapt its own organizational
processes to keep itselI true to its corporate cultures. 'Making our own rules is proving more and more
relevant especially in times oI economic uncertainty.

REFERENCES
Llsenmann 1homas CcL 2006 P88 SLraLegles for Lwo slded markeL

W Chan klm !an/leb 1999 P88 CreaLlng new MarkeL Space

Lewls Ceoffrey 1999 AusLrallan and new Zealand SLraLeglc ManagemenL concepLs conLexL and cases

Makldes ConsLanLlnos C 1997 P88 Lo dlverslfy or noL Lo dlverslfy

hLLp//wwwlnLerneLworldsLaLscom/emarkeLlnghLm


ALk 2

SLraLeglc AudlL of Coogle

Coogle AbsLracL

Coogle was founded by Lwo SLanford hu sLudenLs Larry age and Sergey 8rln ln 1998 1he
Lwo recognlzed a need wlLhln Lhe lnLerneL servlces lndusLry for a search englne LhaL would provlde
accuraLe resulLs 1he Lwo opened Coogle lnc as an onllne company LhaL provlded a superlor search
englne a plaLform for exLremely LargeLed adverLlsemenLs and lnLraneL soluLlons Lo lnLerneL users
across Lhe world 1he company obLalned Lhe ma[orlLy of lLs revenues by selllng adverLlslng space wlLhln
Lhe search resulLs Coogle employed an lnnovaLlve sysLem for selllng Lhls space Lo companles
companles would only have Lo pay Coogle for Lhe adverLlslng space lf a cusLomer cllcked" on Lhelr
adverLlsemenL As Coogle became Lhe mosLused search englne ln Lhe world due Lo lLs greaLer accuracy
of produclng relevanL resulLs adverLlslng revenues lncreased aL a phenomenal raLe

Coogle faced compeLlLlon from oLhers ln Lhe lnLerneL search servlces lndusLry speclflcally ACL
MSn and ?ahoo Lach compeLlLor recognlzed Lhe lmporLance of a quallLy search englne Lo cusLomers
as well as Lhe opporLunlLy Lo galn adverLlslng revenues and was aLLempLlng Lo develop an lnnovaLlve
search englne LhaL would Lop Coogle's CompeLlLlon from MlcrosofL was also a posslblllLy MlcrosofL
lndlcaLed LhaL Lhey mlghL aLLempL Lo add a search englne Lo Lhelr new operaLlng sysLem LhaL was seL for
release ln 2006 Whlle MlcrosofL was noL an esLabllshed player ln Lhe lnLerneL search servlces lndusLry
Lhey had Lhe Lechnlcal experLlse and masslve resources Lo presenL a ma[or compeLlLlve LhreaL 1he
lmporLance of Lhe search englne Lo Coogle's compeLlLors as a sLandalone servlce was greaL buL Lhe
developmenL of a search englne rlvallng or beLLerlng Coogle's would also aLLracL cusLomers Lo Lhelr
oLher servlces Coogle's compeLlLors offered many oLher servlces ln addlLlon Lo Lhelr search servlces
such as emall onllne daLlng and fanLasy sporLs neLworks and were successful ln dolng so Coogle's
success as a company hlnged almosL compleLely on Lhe success of Lhelr search englne

Coogle lnc began Lo dlverslfy lnLo oLher segmenLs of Lhe lnLerneL servlces lndusLry ln order Lo
lessen Lhe rlsk of havlng only one Lruly successful producL and Lo bulld up boLh Lhelr cusLomer base and
cusLomer loyalLy Coogle began Lo offer lnLerneL users Lhe ablllLy Lo search wlLhln a dlrecLory of 423000
sLlll lmages 1helr collecLlon of lmages Lled wlLh ?ahoo's as lnLerneL users' flrsL cholce for lmage
searches Coogle also began offerlng a dlrecLory of 300 mllllon dlscusslon Loplcs LhaL daLed back Lo
1981 called Coogle Croups CusLomers ln addlLlon Lo belng able Lo examlne dlscusslon Loplcs wlLhln
Coogle Croups could add posLlngs Lo a new group Also ln 2004 Coogle began offerlng lLs users access
Lo a compllaLlon of 4300 news sources locaLed all over Lhe world Coogle Lhen developed a servlce LhaL
would allow cell phone and handheld devlce cusLomers Lo use Coogle's search and oLher servlces on
Lhelr wlreless devlces ln addlLlon Lo Lhese servlces and oLhers Coogle developed Coogle CaLalog a
servlce LhaL would allow users Lo search prlnL mall order caLalogs and offered emall accounLs Lo selecL
cllenLs

ln order Lo remaln ahead of Lhe compeLlLlon and an lndusLry leader ln provldlng lnLerneL
servlces Coogle had Lo now make some sLraLeglc declslons 1o assure Lhe fuLure of Lhe company
Coogle's managemenL Leam knew LhaL Lhey would have Lo dlfferenLlaLe Coogle's producLs from Lhose
offered by compeLlng companles such as ?ahoo MSn and ACL Coogle could elLher conLlnue Lo
expand Lhe amounLs of servlces lL offered (le lnclude LexL messaglng servlces large emall accounLs and
oLhers) lL could work Lo lmprove Lhe servlces lL offered across Lhe board or lL could focus on lmprovlng
lLs mosL successful creaLlon Lhe Coogle search englne Lach opLlon had lLs merlLs and Lhe company had
plenLy of resources Lo use ln pursulng any of Lhese Lhree (or oLher) sLraLegles 1he dlfflculL lssue was
chooslng Lhe mosL approprlaLe sLraLegy for Lhe company

l CurrenL SlLuaLlon

A erformance
. MosLused webslLe ln Lhe world
. ossesses global brand onehalf of lnLerneL users ouLslde Lhe unlLed SLaLes
. Plgh degree of user loyalLy and brand ldenLlLy
. Lmploys lnLerface for over 88 languages
. Cenerally consldered Lo possess Lhe mosL accuraLe lnLerneL search englne
. Coogle neLwork ls uLlllzed by 80 of lnLerneL users used by 163 mllllon people ln Lhe unlLed SLaLes
and unlLed klngdom per monLh
. Coogle's 2008 revenues were $21793330000 a 3134 lncrease slnce lasL year1
. Coogle's 2007 revenues were $16392986000 a 3647 lncrease over 2006's revenues2
. Coogle's cash lncreased 4234 from $6081393000 ln 2007 Lo $86366720003
. Coogle's debL Lo equlLy raLlo was 1044 ln 2007 and 111 ln 2008 ?ahoo's debL Lo equlLy raLlo
was 2203 ln 2007 and 1781 ln 2008 MlcrosofL's debL Lo equlLy raLlo 3013 ln 2007 and was
3077 ln 20084
. Coogle's currenL raLlo was 849 ln 2007 and 877 ln 2008 ?ahoo's currenL raLlo was 241 ln 2007
and 278 ln 2008 MlcrosofL's currenL raLlo was 144 ln 2007 and 169 ln 20083
. Coogle's lncome from operaLlons was 3064 of sales revenues ln 2007 and was 3043 of sales
revenues ln 2008 ?ahoo's operaLlng lncome was 998 of sales revenues ln 2007 and 018 of
revenues ln 2008 MlcrosofL's operaLlng lncome was 3623 of revenues ln 2007 and 3719 of sales
revenues ln 20086
. 8eLurn on AsseLs (8CA) 166 ln 2007 and 133 ln 2008 ?ahoo's 8CA 34 for 2007 and 31
ln 2008 MlcrosofL's 8CA 193 ln 2007 and 199 ln 20087
. 8eLurn Cn LqulLy (8CL) 183 ln 2007 and 130 ln 2008 ?ahoo's 8CL was 72 ln 2007 and
43 ln 2008 MlcrosofL's 8CL was 388 ln 2007 and 374 ln 20088

8 SLraLeglc osLure
. Mlsslon SLaLemenL 1o organlze Lhe worlds lnformaLlon and make lL unlversally accesslble and
useful"9
. Cb[ecLlves
. 8emaln Lhe lndusLryleadlng webslLe ln Lerms of lnLerneL Lrafflc markeL share
. 8emaln Lhe lndusLry leader ln provldlng Lhe mosL accuraLe search englnes
. CapLure markeL share ln Lhe onllne adverLlslng markeL and become Lhe lndusLry leader ln
provldlng dlrecLed onllne adverLlslng servlces
. 8educe rlsk by lncreaslng markeL share ln nonsearch lnLerneL servlces Coogle caLalog Coogle
8uslness SoluLlons Coogle news eLc
. 8egln llcenslng paLenLed wlreless Lechnology and lnLellecLual properLy Lo oLher companles
. lurLher dlverslfy company from compeLlLors

C CorporaLelevel sLraLegles
. ursue a sLraLegy of concenLrlc dlverslflcaLlon by enLerlng lnLo oLher areas of Lhe lnLerneL servlces
markeL

u 8uslnesslevel sLraLegles
. ulfferenLlaLe Coogle's producLs from Lhose offered by compeLlLors
. CompeLlLlve raLher Lhan cooperaLlve

L luncLlonallevel sLraLegles
. Coogle's 8u sLraLegy ls Lo be a Lechnologlcal leader
. Coogle's markeLlng sLraLegy ls Lo slmulLaneously pursue a markeL developmenL sLraLegy Lo galn
markeL share for lLs search englne and pursue a producL developmenL sLraLegy Lo lncrease Lhe dlverslLy
of lLs producL porLfollo ln boLh cases Coogle prlmarlly uses a pull sLraLegy Lo enLlce consumers Lo
uLlllze lLs producLs lor example Coogle uses Coogle 8uslness SoluLlons Lo adverLlse Lhe ways Coogle
can help varlous buslnesses Lhrough Lhe use of Lhelr producLs 1hls adverLlslng resulLs ln buslnesses
pulllng" Coogle's producLs Lhrough Lhe channels
. Coogle's flnanclal sLraLegy lncludes malnLalnlng a low debL Lo equlLy raLlo 1helr debL Lo equlLy
raLlo was only 11 ln 2008 whlch ls much lower Lhan LhaL of Lhe compeLlLlon
. Coogle's operaLlons sLraLegy lncludes lncreaslng and malnLalnlng global operaLlons 1hey have
offlces and Lhousands of servlces ln many dlfferenL counLrles on several conLlnenLs 1hls ls more fully
dlscussed ln a laLer secLlon
. Puman resources Coogle's P8 sLraLegy enLalls malnLalnlng and furLher developlng an exLremely
dlverse work force lLs sLraLegy ls also focused on aLLracLlng employees wlLh advanced Lechnlcal skllls
and paylng Lhem well boLh moneLarlly and wlLh many frlnge beneflLs 1hls ls more fully dlscussed ln a
laLer secLlon

B. Task Environment

1. Threat oI New Entrants
. Threat oI new entrants is medium
. Switching costs are virtually non-existent; customers can use search engines Ior Iree and can use them
apart Irom other services oIIered by the company Iurnishing the search engine. Customers will likely try
another search engine iI the results they require cannot be obtained quickly and easily Irom the engine they are
using. Google`s advertising customers are not required to sign a long-term contract; nor do they have to make a
sizable investment up-Iront in order to place an ad with Google. Advertisers pay Google Ior space on their
search engine results pages only when customers 'click on their ads and can thereIore switch to another
company without large sunk costs.
. Barriers to entry do exist, however, due to the amount oI computer equipment necessary to be
competitive with the likes oI Google and Yahoo. Also, the large competitors within this arena have servers
strategically placed all over the world. This may be diIIicult Ior a new company to this industry to replicate in
a Iashion that would make them competitive. Also, the large companies in this industry have vast amounts oI
inIormation about their customers and online advertisers that would be diIIicult Ior a new entrant to amass.|38|

2. Rivalry Among Competitors
. Rivalry among competitors is high
. Google`s competitors (at this time) are all larger companies with large amounts oI resources
. Google`s competitors oIIer other internet services as well as search services. The search engine
attracts customers to their other services (Ior example, dating services, email, and Iantasy sports league
platIorms); which raises the importance oI possessing a superior search engine past its importance oI a stand-
alone service Ior Google`s competition
. Competition with MicrosoIt is expected to increase. MicrosoIt is attempting to integrate a search
engine into its operating system and other products |39|
. Google considers MicrosoIt and Yahoo their greatest competition. These companies have greater cash
resources and ability to make acquisitions, a longer operating history, and more established customer and end
user relationships. They also operate internet portals and oIIer more products and services than Google does.
In the case oI MicrosoIt, they also have more employees |40|
. Google`s market share in the U.S. internet search market is 31; Yahoo`s market share is 26 and
MSN`s is 20. This is very close.
. The industry is attractive and margins are high. Google`s success has increased the intensity oI
competition since these other companies want to share in the Iinancial success
. MicrosoIt is working to develop a search engine to rival Google`s. This may be in lieu oI the MSN
search engine mentioned above|41|. This will deIinitely increase competition dramatically (in the short run at
least) as MicrosoIt throws its resources in promoting their new product and attempting to steal market share
Irom Google. MicrosoIt has a longer history oI marketing than Google does, which may increase rivalry.

3. Bargaining Power oI Suppliers
. Bargaining power among suppliers is low
. Google, as an internet-based service Iirm, requires Iew raw materials Irom outside sources. The
supplies required, with the exception oI electricity, are available Irom multiple sources
. Potential employees have some power over Google due to the short supply oI qualiIied applicants.
According to Google`s CEO, Google was having problems Iinding applicants that were either not technically
proIicient enough to complete the task at hand or oI 'insuIIicient quality.

4. Bargaining Power oI Buyers
. Bargaining power among buyers is medium
. Google has 31 oI the internet search traIIic market share, compared to 26 Ior Yahoo and 20 Ior
MSN. This strengthens Google`s position with buyers since Google is the industry leader and is thereIore
more attractive than competitors to advertisers who would like to place ads on search engine results pages
. No buyer oI Google`s services is responsible Ior larger than 3 oI Google`s revenues. Because
Google`s buyers are Iragmented and none are responsible Ior a large amount oI revenues, Google`s buyers do
not have much power over Google|42|

5. Threat oI Substitutes
. Threat oI substitutes is high
. Although there aren`t any true substitutes Ior a search engine, there are diIIerent ways to organize
inIormation. In this case, a diIIerent method oI searching might produce a substitute to the current method that
may produce better results
. Yahoo, MSN, AOL, and MicrosoIt are working to develop search engines that will either equal or
exceed the Iunctionality oI Google`s search engine and have the resources to allocate to a massive research and
development eIIort. Time will tell whether they are, in Iact, viewed as a substitute by search users.
. Google`s search-engine customers value accuracy oI search results. Google`s competitors already
oIIer search engines. Google`s competitors may be able to create a comparable search engine over time

6. Bargaining Power oI Other Stakeholders
. Bargaining power oI other stakeholders is medium
. Special interest groups, like the American Association oI Publishers and the Authors Guild, have sued
Google and won Ior copyright inIringement Ior content used by Google on their Google Print and Google
Books applications. These groups and other groups are constantly monitoring Google`s actions Ior incidents
oI actual or perceived copyright inIringement on their applications.|43|
. Google has been Iorced, as a result oI a lawsuit, to reveal the identity oI a blogger who wrote oIIensive
comments about a Canadian model. Google may be required to release the identity oI other users upon request
in the Iuture because oI this precedent which may reduce their customer base.|44|This example is meant to
illustrate that individuals, as well as organized groups, may have the power to inIluence Google`s business
operations
. Google`s employees have little power to exert when negotiating with Google. Labor within Google is
not organized|45|

Strategic Alternatives and Selected Strategy

A. Growth Strategies

1. Enter market providing legal music and video downloading services (S&O)
a. Pros:
. Google has the intellectual capital to successIully develop the soItware to provide this service. Google
has already proven that they can provide the search capabilities to link users with their desired songs or videos;
their search engine is the most accurate in the world and the popularity oI their product YouTube suggests they
possess the capabilities to develop a desirable music/video downloading service
. With a large cash balance and the capabilities to obtain Iinancing due to an extremely low debt to
equity ratio, Google deIinitely possesses the Iinancial resources to develop these services and bring them to
market
. By providing diIIerent but related services, Google will be reducing their 'diversiIiable risk, iI you
will, by increasing their product portIolio Irom one successIul revenue generating product to several
. There is a large market Ior these services already in place; this market is likely to grow as digital media
becomes more prevalent in society and obsolete technologies such as tapes, CDs, and records Iurther decline
. Google`s brand strength would be beneIicial in this market since the music and movie downloading
industry is related to Google`s area oI expertise (i.e. it is equivalent to an industry leader in the manuIacture oI
small power tools diversiIying into producing concrete mixers and pumps, rather than the power tool company
diversiIying into diapers and other baby products. A DeWalt brand logo on a pair oI diapers likely won`t
transmit the same message oI quality and expertise that it would on another type oI tool)

b. Cons
. Apple iTunes owns 82 oI legal music downloading market.|68| Competing with a company that
owns this much oI the market share and has more experience in this industry will be very diIIicult
. Increases the probability oI copyright inIringement lawsuits
. ShiIts emphasis away Irom Google`s core product the search engine. II the search engine is imitated
or surpassed by a better product beIore Google establishes a dominant position and greater proIits and
revenues Irom its new endeavor, Google may lose a large part oI its almost sole source oI revenues
. Regulation and trends concerning royalties paid to artists and music production companies may reduce
the proIitability oI this industry
. Illegal downloading may increase; thereby reducing the size oI the legal downloading market
. Requires maintaining existing advertising business model and creating and maintaining a new
switchboard model (connecting multiple buying downloaders with multiple selling digital music and video
suppliers

2. Develop new search engine designed Ior seniors markets 'Google Golden LiIe. New search engine
has an option Ior adjusting the size oI the Iont used on the search pages based on the capabilities oI the user`s
vision and allows seniors to type in a question instead oI just key words. In addition, it will contain a Iunction
that completes words Ior the typist iI he or she so chooses (like an internet browser address box does)
concentric diversiIication (S&O)
a. Pros
. First mover advantage could be gained by Iocusing on this market segment. Seniors have been ignored
- Ior the most part - in the development oI online products and services. No company currently caters to the
needs oI older internet users
. Seniors represent the largest growing demographic oI internet users and represent a large segment oI
all societies
. The baby boomers are aging and will want/demand products Iocused on their needs soon
. Google possesses the Iinancial resources to make this happen
. Google also possesses the brand strength and awareness to appeal to older users; older individuals tend
to like larger, stable, established, well-known companies as opposed to small, new, relatively unknown
startups
. Creating products geared toward older users may increase their interest in Google`s existing products
. Utilizes existing advertising business model to obtain revenues Irom pay-as-you-click advertisements

b. Cons
. Today`s older internet user`s wants and needs are poorly understood by the online industry; this makes
developing products/services Iocused at them a risky undertaking in the short-term. Younger baby boomers
are Iamiliar with current computer soItware but current seniors are less Iamiliar and use computers more
inIrequently and Ior less activities (i.e. they may email but not shop extensively online)
. Once Google enters this market and proves the market is attractive, competition will increase and
proIits will likely go down as the market matures
. The idea oI marketing online products and services geared toward older users is a newer one but an
imitable one; other companies may have a greater understanding oI the older consumer than Google since it
has Iocused on products/services Ior a primarily younger audience with diIIerent needs. This means that other
companies may prove to be more successIul with this market segment than Google because oI a greater
knowledge oI the older consumer
. Older users may only be interested in emailing and may have little interest in clicking on
advertisements; thereby lowering the desirability oI placing advertisements on Google`s new products
. May be hard to reach market segment to inIorm them oI new product

3. Develop Social Networking System 'Google Linkage Concentric diversiIication (S&O)
a. Pros
. Facebook and MySpace are both very popular. Today, internet users 12-34 are largest demographic to
engage in social networking. As this age group ages, they will likely continue to use social networking sites
and younger individuals entering this age group will likely also engage in social networking via the computer;
growth in the social networking industry is virtually assured. Why the growth in this industry is important Ior
Google: advertising revenues will likely increase as ads are placed on social networking pages
. Creates the potential Ior another proIitable advertising platIorm; reduces the reliance on advertising
revenues created Irom one product the search engine
. May increase interest in Google`s other products (i.e. a social networker uses Google Images to send a
picture oI a desert rose to another gardener via Google`s networking service)
. Could compliment Google`s existing mission oI organizing the world`s inIormation with a new
addition to the mission: 'Organizing the world`s inIormation and people to make it and them universally
accessible.
. Google`s strong brand and reputation will likely spark interest Irom social networkers in Google`s new
networking platIorm
. Google has the Iinancial resources to create and advertise a social networking site either alone or
through a joint venture
. Utilizes existing advertising business model to obtain revenues Irom advertisers through Google`s
AdWords and AdSense
. Likely inexpensive to maintain once it is 'rolled out

b. Cons
. Social networking market may be saturated. Customers may have all their needs met through
Facebook and Myspace. These companies already dominate the industry and have more knowledge and
experience in this market
. Google may not be able to provide any new innovations in social networking
. Doesn`t utilize their distinctive search competency
. May not prove proIitable aIter a cost/beneIit analysis is conducted since advertisements will be less
Iocused on selI-identiIied market segments. For example, iI one conducts an internet search Ior Echeveria
Subrigida seeds a succulent plant advertisements related to plants may be oI interest to the searcher.
However, an ad related to purchasing succulent plants online may not be oI much interest to the random
individual attempting to contact another individual whose interests and needs are also unknown
. Requires a diIIerent set oI competencies than Google already possesses. Email is the most basic social
networking method and Google did not perIorm well in creating a popular email system

4. Create open source network Ior the development oI applications Ior mobile devices Google
Architects concentric diversiIication (S & O)
a. Pros
. Market is supposed to almost triple in size in the next Iive years
. Google already has knowledge oI how to make internet applications compatible with mobile devices
i.e. connecting Google search engine to mobile devices
. It is Iorecasted that halI oI internet users will be mobile internet users
. Google has the Iinancial resources to undertake both the product development and advertising
. Google has experience and ability when it comes to developing internet apps.
. Could be set up to accommodate Google`s existing business model obtain advertising revenues
through oIIering Iree products
. Takes advantage oI innovative technical staII

b. Cons
. StiII competition Apple already has a large market share Ior mobile applications that are used on the
iPhone and others. MicrosoIt, as operating systems become more commoditized, will likely enter the mobile
internet applications market
. May not generate much revenue iI customers have a Iinite number oI minutes on their mobile plan.
Customers in this situation are not likely to engage in gratuitous searching Ior curiosity`s sake.
. While Google has proven adept at creating applications, their distinctive competency resides in search
engine excellence. Developing apps Ior mobile users requires a diIIerent skill set and core competency.
Google may not be able to gain competitive advantage in this market since generating applications may not be
one their distinctive competencies

5. Create a search service designed to locate music in a superior manner 'Google Music. The search
system would allow a user to enter in any part oI a song, a band name, a song name, or a CD name and the
search will provide results that include not only what the searcher is speciIically looking Ior, but also links to
the band`s website, links to listening to or downloading a particular song or multiple songs Irom the artist, and
links to other related sites (i.e. sites that oIIer guitar tablature Ior the artist or song mentioned in the search)
a. Pros
. Will attract more users to the Google search engine, which increases the desirability oI advertising on
Google`s web pages
. Google music will increase brand loyalty and strength as it meets more oI Google`s customers` needs
. Will strengthen the desirability oI the search engine Ior existing customers
. Will capitalize on Google`s distinctive competency oI creating a search engine that produces more
accurate results than other search engines oIIered by competitors
. Will address the needs oI the large segment oI internet users that use the internet Ior obtaining and
enjoying music
. May provide an additional source oI revenues Irom bands that would like to advertise their products on
Google Music`s results pages

b. Cons
. Users can already Iind all oI these items using the traditional Google search engine
. Will likely add little to Google`s revenue stream
. Doesn`t address the problem oI Google only possessing one proIitable product
. Doesn`t truly meet the needs oI internet music users since it doesn`t allow users to download music
directly Irom Google
. Most oI the results will likely be advertisements. Users may not want to search through advertisements


Strategic Planning Processes - Google

Step1. Evaluation oI the organization`s current mission and purpose

Mission: Organize the world's inIormation and make it universally accessible and useIul.

Purpose: Allow users to be able to Iind inIormation in many diIIerent languages; check stock quotes, maps,
and news headlines; lookup phonebook listings Ior every city in the United States; search billions oI images
and peruse the world's largest archive oI Usenet messages. In addition, support thousands oI advertisers to use
Google`s AdWords program to promote their products and services on the web with targeted advertising.

Vision:
[ Short-term objectives: are to expand the workIorce Ior anticipated growth, expand Iurther into
international markets, and continue developing new products.

[ Long-term objective: delivering new advertising technology. Expanding the workIorce will help
achieve the long-term goals. Google's organization structure is primarily Iunctional but also includes a Iew
geographical organizations.

Philosophy:
Google does not document a Vision or Values on the Google website. They do state a philosophy on the
Google website, some are listed below:

Focus on the user and all else will Iollow
It's best to do one thing really, really well.
Fast is better than slow
You don't need to be at your desk to need an answer.
No pop-ups

Step 2. Assessment oI the External Environment
This section identiIies the threats and opportunities the company Iaces.

Threats:
[ Remote (Remote concerns Ior Google are new laws and regulations, increasing intellectual property
claims, and access to more inIormation.) (Weak position in China- strict gov`t regulations and cultural
diIIerences)

[ Industry (Industry concerns Ior Google are competitive threats Irom Yahoo and MicrosoIt and new
unknown competitors that may be international. Agreements with advertisers could potentially become
competitive as well, as a result, reducing operating margin)

[ Operating (Operating issues are the current ad base, design oI the ads, and shrinking advertising
budgets oI customers. The quality oI service provided by the Google organization and retaining qualiIied help
is also an operating issue.)

Opportunities:
[ Unmapped countries expanding services (potential Ior unknown regions)
[ New advertisement Iormat and tracking mechanisms (new innovation oI technology)
[ Size oI current customer base and market share is small (potential growth and new advertising
agreements)

Step 3. Assessment oI the Internal Environment.
This section oI the strategic environment is a realistic analysis oI Google's internal resources.

Strengths:
[ Search engine diIIerentiation (Google`s strategic are innovation and concentric diversiIication)
[ Employee Iocus (Google has a unique culture and policies to promote innovation. The company
strives to employ the most qualiIied applicants and reward the greatest contributors, in order to promote good
perIormance and Iacilitate hiring and retention)
[ Strong brand name (well-known by all users as the best search engine)
[ The advertisers' return on investment Irom advertising campaigns on our web sites outweighs other
Iorms oI advertisements like radio, television or new papers.

Weaknesses:
[ Strategic controls can be largely aIIected by environmental Iactors (negative consequences oI a
signiIicant power outage). Google systems are vulnerable to any electrical service disruptions resulting in
service being impacted.

[ New technologies that do not compliment Google's current operating systems

[ Nearly all revenue is Irom advertising source

[ Finding new key employees and inIrastructure could be challenging

Step 4. Re-evaluation oI the organization`s mission and goals/objectives.

Based on the SWOT analysis oI internal and external Iactors, the next 10 years will deIine the longevity and
sustainability oI Google as a company. Quick and dramatic changes characterize the technological
environment. To keep up with the market Google plans to Iocus on

[ Enabling users to search a larger base oI inIormation
[ Developing tracking mechanisms and new advertising technology
[ Creating patents and intellectual property - will hold the keys to gaining competitive advantages in the
market
[ Retaining and recruiting the best human resources (a critical Iactor Ior Google in order to reach the
changing needs oI consumers and advertising clients.)

Step 5&6. Formulation, Development and Implementation oI strategic plans.

Strategic Planning

[ In order to compete with other media titans such as MicrosoIt and Yahoo!, Google has sought to
employ the power oI diIIerentiation to create a competitive advantage. (understands exactly what you mean
and gives you back exactly what you want)

[ Applying concentric diversiIication Iocus on the core product oI search services the company has also
been able to beneIit Irom a competitive advantage in "Iaster response times, greater scalability and lower
costs" Hence, not only does Google have a high advantage in the diIIerentiation arena, but a cost and speed
advantage as well.

[ Google oIIers generous stock options and provide relaxed working atmosphere to retain the best talent
and align employee interests with shareholder interests. (Google provides Iree lunches every day Ior
employees and encourages participation in the weekly roller hockey games. The company regularly sponsors
employee outings such as picnics and skiing trips)

[ Monitoring strategic projects must involve contingency planning in the event that Google's present
product oIIerings become obsolete with the invention oI new Internet devices and in case oI a competitive
threat. (This can be done by continuous monitoring oI competition and expanding current product oIIerings.
Gathering oI data detailing consumer needs and search preIerences will ensure that Google continues to be an
industry leader among search engines.)

18 C A S E Adidas in 2008: Has Corporate Restructuring Increased Shareholder Value?

ASSGNMENT QUESTONS

1. What is adidas` corporate strategy? Was there a common strategic approach utilized in managing the
company`s lineup oI sporting goods businesses prior to its 2005-2006 restructuring? Has the corporate strategy
changed with restructuring?
2. What is your evaluation oI adidas` line-up oI businesses in 2008? What does a 9-cell industry attractiveness/
business strength matrix displaying adidas` business units look like?
3. Does adidas` business line-up exhibit good strategic Ii t? What value-chain match-ups exists? What
opportunities Ior skills transIer, cost sharing, or brand sharing are evident? Prior to its divestiture, what kind oI
strategic Ii ts existed between adidas` core business and its Salomon business unit?
4. Has adidas` business line-up exhibited good resource Ii t between 1998 and 2007? What have been the
Ii nancial characteristics oI its major business segments during that time period? Which businesses might have
been considered cash hogs and cash cows?
5. Based on your analysis oI adidas businesses, did the restructuring undertaken in 2005 and 2006 make sense?
Does it appear the acquisition oI Reebok International will produce higher returns Ior shareholders? What
strategic actions should adidas` top management initiate to improve the company`s Ii nancial and market
perIormance now that restructuring is complete?

1) What |s ad|dass corporate strategy? Was there a common strateg|c approach used |n manag|ng the
companys ||neup of sport|ng goods bus|nesses pr|or to |ts 200S2006 restructur|ng? nas the corporate
strategy changed w|th restructur|ng?
8efore lL was resLrucLured Adldas Lrled Lo expand lnLo more areas Lhan lL could handle ln Lerms of
focus on producL speclallzaLlon lLs ma[or rlval nlke fared beLLer AfLer resLrucLurlng Adldas narrowed
down lLs markeLlng segmenLs and resolved Lo focus on lLs core compeLencles whlle conLlnulng Lo caLer
Lo mulLlple consumer needs Lhrough lLs unlque brand porLfollo
AparL from fooLball baskeLball and runnlng Lhe maln prlorlLles of lLs SporLs erformance dlvlslon
lnclude Lralnlng and ouLdoor (hLLp//wwwadldas
groupcom/en/lnvesLorrelaLlons/sLraLegy/adldas/defaulLaspx) AparL from SporLs erformance SporLs
SLyle was a dlvlslon LhaL was seen as an lmporLanL parL of lLs brand caLegorlzaLlon efforLs urlvlng lLs
lmposslble ls noLhlng" message Lhrough lLs premlumprlce sLraLegy and segmenLeddlsLrlbuLlon
approach Adldas now alms Lo become Lhe world's Lop sporLs brand
2) What |s your eva|uat|on of ad|das ||neup of bus|nesses |n 2008? What does a 9ce|| |ndustry
attract|veness]bus|ness strength matr|x d|sp|ay|ng ad|das bus|ness un|ts |ook ||ke?
8arrlng norLh Amerlca Adldas lmproved slgnlflcanLly on lLs sales flgures across Lhe world for Lhe year
2008 ln Lerms of overall revenues Laken on a basls of neuLral currency Adldas segmenL grew by as
much as 14 (hLLp//adldasgroupcorporaLepubllcaLlonscom/2008/gb/en/konzernlageberlchL/adldas
buslnessperfomancehLml) SporLs erformance dlvlslon accounLed for 80 of lLs sales whlle SporLs
sLyle dlvlslon accounLed for Lhe resL (hLLp//adldasgroupcorporaLe
publlcaLlonscom/2008/gb/en/sLrukLurundsLraLegle/ourbrandsanddlvlslonshLml)
1here were renewed efforLs Lo prepare lLs llneup of buslnesses Lo lmprove Lhelr efflclency ln seLLlng
clear responslblllLles brlnglng concepLs Lo markeL and maklng sure LhaL markeLplace resulLs are
opLlmal A 9cell maLrlx wlLh Lhe buslness unlLs of Adldas does noL seem Lo be a good flL uesplLe Lhe facL
LhaL Lhe buslness unlLs are LargeLlng a compeLlLlve advanLage derlved from producL dlfferenLlaLlon Lhe
facL sLlll remalns LhaL Lhere ls a sense of unrelaLedness and dlsslmllarlLy ln Lhe value chalns

3) Does ad|das bus|ness ||neup exh|b|t good strateg|c f|t? What va|uecha|n matchups ex|st? What
opportun|t|es for sk|||s transfer cost shar|ng or brand shar|ng are ev|dent? r|or to |ts d|vest|ture
what k|nd of strateg|c f|ts ex|sted between ad|das core bus|ness and |ts Sa|omon bus|ness un|t?
lL does noL seem LhaL adldas buslness llneup shows a good sLraLeglc flL glven Lhe very naLure of Lhe
buslnesses LhaL consLlLuLe lL 1ake Lhe alllance beLween Mavlc and Adldas for lnsLance uesplLe Lhe facL
LhaL Mavlc ls assoclaLed wlLh sporL dlfferenL areas of manufacLurlng markeLlng and dlsLrlbuLlon relaLed
Lo performance cycllng hardware vary slgnlflcanLly when compared Lo Lhose of aLhleLlc fooLwear
When lL comes Lo comblnlng Lhe markeLlng of sporLs performance shoes and performance blcycles
Lhough a valuechaln maLchup becomes evldenL When we conslder Lhe facL LhaL many esLabllshed
brands LhaL had assoclaLlons wlLh Adldas have conLlnued Lo remaln lnLacL wlLhouL belng Lagged wlLh Lhe
Adldas brand name lL becomes evldenL LhaL brand sharlng lsn'L really playlng a parL WlLh LhaL belng
sald Lhe example of Adldas Salomon AC comes Lo mlnd SklllLransfer lsn'L much of a facLor elLher when
we Lake lnLo accounL Lhe dlfferences LhaL can be seen ln Lhe Lypes of buslnesses and how Lhey funcLlon
CosL sharlng does come lnLo play ln Lerms of worklng Lowards a comblned Lheme assoclaLed wlLh
developlng and markeLlng selecLed producLs 8efore dlvesLlLure sLraLeglc flLs for Salomon and Lhe core
buslness of Adldas resulLed from boLh produclng sporLs goods operaLlng ln slmllar geographlc areas
and holdlng poLenLlal Lo lmplemenL comblned markeLlng efforLs
4) nas ad|das bus|ness ||neup exh|b|ted good resource f|t between 1998 and 2007? What have been
the f|nanc|a| character|st|cs of |ts ma[or bus|ness segments dur|ng that t|me per|od? Wh|ch bus|nesses
m|ght have been cons|dered cash hogs and cash cows?
no lL does noL seem LhaL Lhe buslness llneup of Adldas showed good resource flL durlng 19982007 A
ma[orlLy of Lhe overall sales resulLed from Adldas whlle Lhe remalnlng came from Salomon and
1aylorMade When compared Lo mulLlple areas of oLher buslness unlLs Salomon ranked slgnlflcanLly
lower
Salomon's caplLal expendlLures operaLlng proflLs and conLrlbuLlon Lo boLLom llne proflLs Loo were a
drawback durlng Lhls perlod Adldas was clearly Lhe cash cow ln Lhls perlod of Llme whlle Salomon was
Lhe cash hog Lurope and norLh Amerlca accounLed for a ma[orlLy of AdldasSalomon's sales whlle LaLln
Amerlca and Asla accounLed for Lhe resL Sales ln norLh Amerlca reduced every year however sales ln
Asla were on a conslsLenL rlse
S 8ased on your ana|ys|s of ad|das bus|nesses d|d the restructur|ng undertaken |n 200S and 2006
make sense? Does |t appear the acqu|s|t|on of keebok Internat|ona| w||| produce h|gher returns for
shareho|ders? What strateg|c act|ons shou|d ad|das top management |n|t|ate to |mprove the
companys f|nanc|a| and market performance now that restructur|ng |s comp|ete?
l Lhlnk Lhe resLrucLurlng process underLaken by Adldas durlng 20032006 made sense lL enabled Adldas
Lo dlscard Lhe buslness dlvlslons whlch lL couldn'L handle or Lake advanLage of lL would appear LhaL
8eebok acqulslLlon would provlde Adldas wlLh Lhe much needed boosL Lo compeLe wlLh nlke Lhe
world's leadlng sporLlnggoods maker
lL does seem LhaL Lhe 8eebok acqulslLlon wlll produce a good sLraLeglc flL and LranslaLe lnLo hlgher
sLakeholder reLurns because boLh are amongsL Lhe world's Lop brands ln aLhleLlc apparel and fooLwear
1he acqulslLlon also provldes Adldas wlLh a good opporLunlLy Lo enhance lLs core compeLencles 1op
managemenL should LargeL producL speclallzaLlon and dlfferenLlaLlon and sLlck Lo whaL Adldas can do
besL Adldas should refraln from explorlng Loo much ln unknown LerrlLorles Loo qulckly 8eebok should
be markeLed as lelsure shoes whlle Adldas conLlnues Lo compeLe ln Lhe aLhleLe's shoes caLegory

--Extended geographic reach and more balanced sales proIile. Reebok complements adidas's international
proIile and enhances adidas's strong position in North America. North America represents approximately 50
oI the global sporting goods market, and with Reebok, the adidas Group's North American sales will more than
double to EUR 3.1 billion (U.S. $3.9 billion). In Europe and Asia, adidas enjoys stronger brand recognition,
and has signiIicant marketing expertise and insights. adidas expects to use this expertise to Iurther develop
Reebok's global presence.
--World-class and talented employees. Both adidas-Salomon and Reebok bring an exceptional team oI talented
and experienced employees to the new group. As a result oI this transaction, Group employees will have even
more exciting job opportunities.
--Broader portIolio oI world-renowned brands. The combined entity will have a more complete portIolio oI
brands that caters to a global consumer base. The portIolio will be anchored by two brands with well-deIined
identities - adidas, a leader in sports perIormance with a European heritage, and Reebok, an American leader in
sports and liIestyle products. With its broad portIolio oI brands, including adidas, Reebok, TaylorMade,
Rockport, Greg Norman Collection, MAXFLI, CCM, JoIa and Koho, the adidas Group will be able to oIIer
Iootwear, apparel and hardware products based on cutting-edge technology, trend-setting street wear and
classic design.
--A more complete product oIIering in key sports categories. The new adidas Group will have a stronger
presence in American sports and a complete product oIIering that addresses key sports categories, including
soccer, basketball, running, American Iootball, hockey, tennis, training, outdoor and golI.
--Stronger presence across teams, athletes, events and leagues. adidas expects that the combined Group's
strong presence across teams, athletes, events and leagues will enable it to substantially increase the worldwide
visibility oI its brands. The Group's endorsement contracts will include many oI the world's elite teams, such as
Real Madrid, Milan AC, Bayern Munich and Liverpool FC, and athletes, such as David Beckham, Tracy
McGrady, Yao Ming and Allen Iverson, as well as high-proIile global events, such as the 2006 FIFA World
Cup(TM) and the Beijing 2008 Olympics. The Group will also have licensing relationships with the UEFA
Champions League(TM), more than twenty National Olympic Committees and Iive premier sporting leagues -
the NFL, NBA, NHL, MLB and MLS.
--Enhanced R&D capabilities and cutting-edge technology. adidas is an award winning technology leader in
the industry with the adidas innovation team having developed cutting-edge technologies, such as adidas1,
the Iirst "intelligent running shoe," ClimaCool(TM) and a3(R). Reebok also has a very talented group oI
experienced research and development proIessionals who have developed a distinguished portIolio oI
breakthrough product innovations, including the Pump 2.0 and DMX.
By harnessing both companies' R&D expertise, the new adidas Group expects to accelerate new product
introductions in Iootwear, apparel and hardware to help drive increased brand awareness and consumer
demand across all brands.

,,, Contents ,,,




Background 3
adidas in India 3
Industry Scenario 5
Scope oI Study 6
Consumers 7
Consumer Behaviour 8
Environmental Analysis 10
Retail 12
Competitors 13
Segmentation 15
Targeting & Positioning 16
Recommendations 19
Appendix 21



,,, Background ,,,
adidas AG is a German sports apparel manuIacturer, part oI the adidas Group. It registered as adidas AG on 18
August 1949 (with lower-case lettering: "adidas"). The company was named aIter its Iounder, AdolI (Adi)
Dassler, who started producing shoes in the 1920s in Herzogenaurach, near Nuremberg, with the help oI his
brother RudolI Dassler who later Iormed rival shoe company PUMA AG. The company's clothing and shoe
designs typically include three parallel stripes oI the same color, and the same motiI is incorporated into
adidas' oIIicial logos.

adidas plans to become the leader in the organised sports Iootwear and sportswear market.

,,, adidas in India ,,,
adidas Iirst entered India in 1989 through a licence agreement with Bata. adidas later re-entered India Ior the
second time in 1996 through a joint venture with Magnum International Trading Company Ltd with an initial
investment oI $2.5 million to Iorm adidas (India) Trading Pvt. Ltd. adidas holds a 100 percent stake in the
company.

The company launches every six months between 600 and 800 new designs in Iootwear and between 1,500 and
2,000 new designs in apparels. The apparel range is priced between Rs279 and Rs2700, while the Iootwear is
priced between Rs499 to over Rs12499. adidas' products in India are sold through 140 own outlets (excluding
multi-brand outlets).

The company, which is known Ior Iootball and running shoes, introduced its cricket gear in India in 2004.

The company adheres to strict quality and design speciIications and uses the manuIacturing unit oI Lakhani
Footwear to manuIacture the locally produced adidas range in India.

Around 30-40 percent oI the components are locally sourced.


,,, Industry Scenario ,,,
(as oI 2003-04)
Footwear brands drew up ambitious plans targeting a larger audience and higher market share.

MNC brands like Reebok and Adidas launched television commercials aIter a gap oI Iour years and brand
shops were Iilled with a Iresh and upgraded product line-up.

The new distribution strategy Iocused on extending the reach rather than exclusivity and at broad-basing
distribution through tie-ups with branded retailers and setting up shop in shopping malls.

For adidas, sales oI higher priced Iootwear recorded strong growth in 2003-2004 and the company expected to
close the year with a 30 percent growth.

Pre-1997, adidas had tied up with Bata and Woodland and Iirst began exploring multi-brand outlets and retail
malls.

Reebok was slated to grow by almost 30 percent against 22 percent in 2002-03 and Iocused on its global
PerIormance Range products. Bata started retailing other brands like Reebok, Nike and Lee Cooper.

As oI 2005-06, the current premium sports goods market in India was valued around Rs 500 crore. Within this
market, adidas enjoys considerable brand equity and is considered among the leading international brands in
the country.

,,, Scope oI Study ,,,
Our group has selected the Indian Footwear (Athletic) as Product Category.
The main multinational players in this industry are Nike, Puma, Fila, adidas & Reebok. Indian players include
Action Shoes Ltd., Liberty Footwear Co., and Bata India Ltd.
This report will mainly consider Nike & Rbk (Reebok) as competitors Ior adidas.
By way oI research, we have conducted a consumer survey, as well as spoken to a Iew retailers oI the 3 top
brands in the industry.


,,, Consumers ,,,
In 1999, when adidas entered the Indian market, it introduced the cheapest range oI shoes it had ever sold. The
new line took into account the importance oI aIIordability in the Indian market, and the company expected the
move to expand their customer base by 20.
But today, the customer has changed. Andreas Gellner, MD oI adidas India, tells us: 'Today`s Indian customer
is aware oI international Iashion and technology and he cares about them. He is also a big sports enthusiast.
We have also noted the need Ior constant changewhich implies Iaster turnaround Ior designs and thereIore
newer products.
On the other hand, the buying experience is becoming crucial. The retail scenario in sportswear is changing
accordinglymarketers are Iocusing on shop design and service and on brand consistency across outlets; they
are paying a premium on technology and innovation. This has also been impacted to a large extent by the mall
mania and the growth oI the high street.
From our meeting with adidas` marketing executives we gathered inIormation about how they deIined their
target demographic. They target the 15-35 age group, both males and Iemales, with a monthly income oI over
Rs15000.
The consumer is typically an image-conscious sports Ian, but not necessarily a sportsman.
,,, Consumer Behaviour ,,,
Our market research delves into the customer mindset, trying to assess the population and coming up with
demographic details as to who our target customer is. This is being done by a two-pronged strategy oI reaching
out to the young working class on the one hand (in and around NCR) and also by assessing the student strata
who are pursuing their post-graduation (IMT, DSE, FMS etc). This would leave us with roughly 120 separate
assessments on buyer behaviour on which we plan to base our studies.

Status so Iar:
Respondents: 118
Dates oI response: 27-08-2006 to 17-09-2006
Demography: Students (post-graduate 107, young working class 11)
Method oI survey: Online

Some oI our observations so Iar:
Only around 3 oI the total respondents cited Price as the number one Iactor inIluencing their purchase
decision, and another question showed that comIort, weight and styling oI the shoe were important elements oI
the shoe. This initially seems to indicate that the Indian customer no longer Iits the price-sensitive stereotype,
but a closer look at the results shows a diIIerent picture. The survey also showed that 62.93 budgeted less
than Rs. 2000 Ior their sports shoes. This shows that while Price is almost never the most important Iactor Ior
most respondents, it is certainly a very important consideration.
More respondents own a Reebok pair than adidas (second place) and Nike (third), but when asked which brand
they would like to own, Nike topped list, Iollowed by adidas and Reebok. This shows that Reebok`s Indian
pricing has managed to attract more market share than its rivals, but Nike still has the highest brand equity and
perceived value.
Nike being the world-wide leader does well on advertisements and viewer/customer attention-catching and
carries the best image oI the 3 top brands. It is the brand that people want to own.
The survey also revealed that customers Ielt that Sales StaII Service was the most important part oI the buying
experience. With 51.46, it beat the other 4 Iactors by a long way.


,,, Environmental Analysis ,,,
FIFA World Cup 2006 and other Football Tournaments
The World Cup's global TV and Web audience was bigger than the Olympics' or the Super Bowl's -- 38 billion
in-home viewers worldwide. Adidas was an oIIicial sponsor and paid Ior the rights to shut Nike out oI TV
advertising in the U.S. Ior all 64 games.
The retailers we spoke to acknowledged that the World Cup caused a sharp spike in sales, both oI the Iootball
(Teamgeist) and Iootwear & jerseys.
Globally, by end-June 2006, adidas had already sold $1.5 billion worth oI Iootball products this year owing to
the then ongoing World Cup. Football-related sales were expected to stabilise at slightly above 1.0 billion
euros in 2007 beIore rising again in 2008, when the Iootball European Championships take place. It had
already sold a record three million replica jerseys in the wake oI the Iootball event, including 1.5 million
jerseys oI the German national team.
At the previous World Cup in 2002, the company sold 1.5 million Iederation jerseys and 250,000 German
jerseys.
It has also sold more than 15 million oI its "Teamgeist" World Cup match balls, compared with 6.0 million oI
the replica ball Ior the 2002 tournament.
Adidas is an oIIicial sponsor, supplier and licensee oI the World Cup and is sponsoring six national teams in
the tournament, including host country Germany. Three teams sponsored by Adidas - Germany, France and
Argentina - reached the quarter-Iinals and France went through to the Iinals.
Adidas estimated its global share oI the soccer Iootwear market rose by 1-2 percentage points to 35-36 percent
at the end oI the Iirst quarter.
The company also announced that it has signed a long-term partnership to be the global sponsor Ior Euro 2008,
which will take place in Austria and Switzerland. It has also extended its partnership with the UEFA
Champions League to become the oIIicial ball supplier until 2009.
BPO Boom
This booming industry has emerged as a boon Ior the hundreds oI thousands oI job-hunting Indian youth and
aims to grow into Rs.100,000 crore industry generating over 1.1 million jobs by 2008.
As we shall explain later, the Call Centre Crowd is characterised by high disposable income, which is spent on
liIestyle products. ThereIore, this constitutes a segment oI increasing importance Ior adidas.

,,, Retail ,,,
We visited retailers oI leading Iootwear brands in Saket (South Delhi), and we gained an insight into the
workings oI the retail business. Periodical meetings are held, where the company shows samples oI its various
models and products to the retailers. It is up to the retailers to decide which products they will stock in their
shops, how and when they will put them on display and when they will be put up Ior sale. Thus, retail outlets
oI the same brand might well have diIIerent stocks oI diIIerent products at the same time.
Sales staII is another important Iactor. The Reebok retailer told us that Reebok does not allow retailers to hire
their own sales staII without company approval. All sales staII must pass the company`s test beIore getting the
job. The same does not apply to adidas though. Retailers Ior this company are allowed to hire salespersons
they Ieel will be eIIective. Training Ior salespeople, however, happens across the board. Reebok believes that
investing in salespeople is a cause Ior their higher sales, and will be a source oI sales growth in the Iuture.
Area Sales Managers (ASMs) are in constant touch with their retailers and actively take their Ieedback and
suggestions. adidas mentioned that they occasionally employ mystery shoppers to get a better Ieel oI the
customer`s perspective.
The decor and ambience oI the stores is under the control oI the retailer, but still guided by the company`s
direction. The number oI posters within the store, the type oI music, etc. generally conIorms to company
policy.
,,, Competitors ,,,
Nike
Nike, Inc. is a major American manuIacturer oI athletic shoes, apparel, and sports equipment. It is well known
Ior its strong sponsorship agreements with athletes, leagues and Iederations, as well as many oI the world's top
Iootball clubs and national teams, including Manchester United, Arsenal F.C, Brazil and even India.
Nike is the leading brand in sports Iootwear worldwide. In India, we have seen that although its brand image is
good, its sales are not. Nike products don`t compromise on quality, and are always Iull-price. They do not have
post-season discount sales on Iootwear unlike adidas and Rbk. While no brand can neglect the highly price-
sensitive consumer, Nike certainly does not target them. They use their higher perceived value to charge a
premium Ior their products.


Reebok
Also known by its contraction Rbk, Reebok International Limited is an Anglo-American Fortune 500
company, now subsidiary oI Adidas AG, and producer oI athletic Iootwear, apparel, and accessories.
Founded in 1895, the Iamily-owned business proudly made the running shoes worn in the 1924 Summer
Olympics by the athletes, Harold Abrahams and Eric Liddell celebrated in the Iilm Chariots oI Fire.
In August 2005, one oI the company's largest rivals, Adidas, announced that it would acquire Reebok Ior $3.8
billion. The acquisition would increase adidas' market share in North America and allow it to pose a serious
threat to the world's biggest maker oI sports apparel, Nike. The deal was completed in January oI 2006.
We gathered Irom the retailers that in India, adidas and Reebok are still very much in competition with each
other. Both are trying to get to the #1 position presumably to garner as much market share as they can, and in
the process take some Irom Nike as well.

,,, Segmentation ,,,
For adidas the market segments in consideration are based on demographics, psychographics and behaviour.
The demographic segmentation is based on age, gender, income and occupation.
The market is segmented into three main categories based on age. These segments are age groups 1-15 years,
15-35 years and above 35 years.
Based on monthly household income the market is segmented into below Rs.15000 pm, Rs.15000 to Rs.50000
pm and above Rs.50000 pm. The market is also segmented based on gender and occupation (which leads to
diIIerential disposable incomes).
Psychographic segmentation is oI great importance Ior the sport shoe industry. The higher income groups are
classiIied based on their tendencies into Iour major categories; the innovators, thinkers, achievers and
experiencers. As Ior the groups with lesser resources, they are categorized into believers, strivers, makers and
survivors.
Under behavioral segmentation an important user group is the sports and Iitness conscious population. This
segment is Iurther subdivided into gym regulars, proIessional and amateur athletes and even drawing-room
sports enthusiasts.

,,, Targeting & Positioning ,,,
Based on inIormation gathered Irom retailers and adidas executives, it is evident that the major demographic
segment targeted by adidas is the age group oI 15-35 years. Very Iew Iootwear products are aimed at the
Iemale market.
adidas targets households with monthly incomes greater than Rs. 15,000. Households with incomes between
15,000 and 30,000 rupees per month don`t buy a new pair as oIten as higher income brackets. This is primarily
because they use shoes as shoes and not as style/image products. It is important that when this group enters the
market with an intention to buy, they should buy Irom adidas. To ensure this, adidas should sell durable,
comIortable shoes at a reasonable price to this group.
A crucial segment adidas has identiIied is the Call Centre Crowd. This segment is substantial in the metros and
is expected to continue its rapid growth. It consists oI image-conscious youth who are earning but are not yet
independents. This means that their entire income is disposable. adidas seeks the highest share oI wallet Irom
these consumers.
Under psychographic segementation, adidas targets.
Experiencers: young, enthusiastic, impulsive people who seek variety and excitement.
Strivers: Trendy and Iun-loving people who are resource-constrained but Iavour stylish products that
emulate the purchase oI those with greater material wealth.
Image Drivers: The wealthy Iew who set the trends in their social circle. This is the segment
responsible Ior the selling out oI the Rs.12499 adidas One - adidas` most expensive shoe in India.
The company targets behavioural segments also: The sports and Iitness conscious population is Iurther
subdivided into gym regulars, proIessional and amateur athletes and even drawing-room sports enthusiasts.
adidas has speciIic products Ior each oI these sub-categories.
Cross-training shoes, running shoes, etc. are aimed at gym regulars and runners. Shoes are designed
speciIically Ior sports like cricket, Iootball, basketball and now even adventure sports like rock-climbing. We
can take a particular segment which we call Hardcore Iootball. It reIers to young Iootballers, passionate about
playing the sport, with the means to pay. A good example here would be adidas` 'Predator, which sets the
standard Ior Iootball studs.
adidas rightly sees themselves as the world leaders in Iootball shoes. This is the only sport market in which
they lead Nike. The brand has been synonymous with Iootball ever since Adi Dassler invented the Iirst
adjustable rubber screw-on studs. An interesting Iact: Every World Cup winning team beIore 2006 wore adidas
Iootball boots!
Sport-inspired designs are incorporated into adidas` liIestyle products Ior the sports enthusiast. For example,
there is a shoe that is designed like an F1 driver`s shoe. The heel is molded to Iit into the Iloorboard oI an F1
car and the sole is made oI Goodyear rubber the same rubber that F1 tyres are made oI! Despite the eIIort put
into design and manuIacturing oI the shoe, it is still meant to be a liIestyle product.

,,, Recommendations ,,,
AIter analysing the data, we Iind that although adidas has a greater market share than its arch-rival Nike, it still
lags behind in brand image. To tackle this problem, we will now show you what very Iew Indians have seen.
Globally, adidas sells products under 3 divisions.
www.adidas-group.com provides us with a clear deIinition oI these divisions.
Divisional Strategy
The divisional strategy has been developed to provide three distinct consumer segments with product and
marketing concepts that IulIill their unique needs and desires. The three divisions are:

Sport PerIormance Division
Innovate to perIorm.
This division is completely Iocused on the athlete who demands perIormance Iirst and style second. Every
sport is important, but the main categories oI running, Iootball, basketball, as well as the women`s segment, are
the primary Iocus in terms oI both Iootwear and apparel.

Sport Heritage Division
Celebrate Originality.
This division looks to our past Ior inspiration and direction Ior the authentic and contemporary products oI the
Iuture. These are Iootwear and apparel products that clearly have a Ioundation in sport but are meant Ior
liIestyle and street wear.

Sport Style Division
Modern Sportswear.
The newest division is directed at the style and Iashion conscious consumer who still desires the look and
attitude oI sport but in a new, more sophisticated interpretation. It is the Ioundation in sport that adidas and this
consumer share that makes this division so exciting and Iull oI potential Ior both Iootwear and apparel.

adidas can claim the prime position in the elite SEC, capturing share oI both mind and heart iI they introduce
adidas Originals (also known as Heritage) and adidas Style. These are extremely up-market products: High
proIile designers oI the likes oI Stella McCartney and Yohji Yamamoto combine cutting-edge technology with
unique styling and passion Ior sport.
This will enable adidas to target the Achievers psychographic segment, i.e. 'success, goal-oriented people who
Iocus on career and Iamily and Iavour premium products that demonstrate success to their peers.(Kotler &
Keller)
AIter acquiring a stagnating Reebok Ior 3.8 billion pounds, adidas must prove the deal was more than a market
share grab and integrate the companies smoothly. Considering that adidas themselves admitted that the Iemale
market is not catered to properly but still has great potential Ior growth, we think that Reebok should be used
to tackle the relatively untapped women`s sport shoe market. It could additionally tackle the price-sensitive
market.
Reebok has previously grown on the base oI an urban, street, hip-hop image. This image does not conIlict with
any oI adidas` target markets and should thus be exploited to the Iull.
adidas could beneIit Irom taking a leaI out oI Reebok`s retail book. Reebok does not allow retailers to hire
sales staII. All sales staII have to have passed a centralised test. This ensures that Reebok hires employees that
are equipped with the right knowledge and attitude towards service that is required to succeed in the Indian
market. We know that service at the point oI sales is a crucial element oI the buying experience because
51.46 oI the respondents oI our survey marked it as the single most important element.


IV. Introduction
This analysis is about the company adidas that belongs to the adidas Group. The adidas Group sells products
under the brands adidas, Reebok and TaylorMade-adidas GolI. Adidas is on the market over 80 years and sells
products Ior every kind oI sports. The adidas group was Iounded in the year 1949 by AdolI Dassler. A
company that started with selling soccer shoes contains today a wide product assortment with Iootwear,
apparel and accessories. The brand is Iurther divided into three subbrands called adidas perIormance, original
and sport style. TaylorMade-adidas also oIIers wide range oI golI equipment and matching golI apparel and
accessories.
On their homepage the adidas Group claims to be 'a global leader in the sporting goods industry (adidas
group, what we do). The company can be described as a global player because they have 170 subsidiaries in
diIIerent countries that are directed Irom their headquarter in Germany which is the home oI the adidas brand.
Headquarters oI Reebok and TaylorMade-adidas GolI are in the US in Massachusetts and CaliIornia. Besides
the international subsidiaries oI the company, products oI the group are available in every country through
their online store. Their strategy to success is 'continuously strengthen our brands and products to improve our
competitive position and Iinancial perIormance.
The Iollowing paper is going to analyze external and internal situation oI adidas. Further, their marketing and
growth strategies will be analysed. Major Iocus oI this paper will be on the customer analysis.

Growth Strategies
The evaluation oI the perIormance oI a company is oIten measured trough growth in sales. Growth strategies
determine how companies want to increase their market share or sales. They are crucial Ior the success oI a
company and should be selected careIully. There are diIIerent strategic options that companies have. Many
companies pursue diIIerent types oI growth strategies. Main decisions oI a company are iI they want to stay in
existing markets or enter into new markets and Iurther iI they have existing products or iI they develop new
products. A combination oI those Iour elements leads to the diIIerent types oI growth strategies: penetration
strategies, product-market expansion strategies, vertical integration strategies, diIIerentiation, and
diversiIication.

Penetration Strategies (existing products/existing markets)
Penetration Strategies means that companies sell their existing products on already existing markets.
Companies choosing this strategy have to gain competitive advantage through pricing, marketing, etc. They
want to gain market share and convince the customers oI their competitors to buy at their stores.

Adidas is deIinitely using penetration strategies. For over 80 years adidas is selling sports apparel and
accessories. Through a successIul established brand image adidas still sells their sports apparel all over the
world. Their marketing eIIorts as described in the part promotion strategies help them to remain competitive.

Product expansion strategies/Product Development (new products / existing markets)
You can speak oI product expansion or product development strategies iI a company develops new products
and try to sell them to existing markets.
Adidas made also use oI product expansion strategies through introducing adidas perIormance, originals and
style in October 2000. The company expanded their products through a new style line that Iocuses more on
Iashion than on sports clothes. You can speak oI product expansion because although the style is diIIerent it is
still in the apparel sector.
Further, adidas modiIies their products continuously. In February 2010 they just introduced their new
developed womens` Body Mapping Technology that 'deIin|es| Iemale-speciIic heat and sweat zones in order
to place Iabrics directly where they are needed the most, delivering optimised Iunction to provide maximum
comIort during workout. (Adidas, Press Room)
The new technology will be used in adidas` new CLIMA365 collection that will be introduced in
Spring/Summer 2010. Another expanding oI their products is heart rate sensing apparel so that consumers
don`t need a pacer while running. Through developing new technologies to improve their sports apparel
consumers Ieel that adidas is always up to date with new sports innovations.
On their website adidas also created an own section called 'mi. Customers have the possibility to personalize
products. For example you can personalize shoes. Besides color and design, it is possible Ior customers two
order the leIt and right shoe in diIIerent sizes and width. Customers have the possibility to identiIy with the
adidas products through creating their own personal adidas clothes.
Market expansion strategies/Market Development (existing products/ new markets)
In this strategy companies try to sell their products to new markets. Cooperation oI adidas with Stella
McCartney and Porsche Design Sports can be seen as a market expansion. The reason Ior evaluating it as
market expansion is that the new target market oI these products is Iashion. They target consumers that are
interested in high Iashion, who do not have to be interested in the sports sector. Fashion and liIestyle is in the
Iocus oI these apparel lines.

Vertical integration strategies (existing market/ diIIerent stage oI production)
A vertical integration strategy describes 'The degree to which a Iirm owns its upstream suppliers and its
downstream buyers (Blackwell ReIerence Online, Vertical Integration Strategy). In a value chain we have the
manuIacturer, wholesaler and retailer. II a retailer also owns a Iactory and manuIactures its products it would
be a backward integration. The purpose oI vertical integration is to increase the control oI the stages oI
development.
In the early beginnings adidas produced all their shoes and apparel on their own. Through the huge expansion
in the last decades adidas don`t produce all their apparel on their own. Today they own 9 own Iactories where
they produce some oI their products. Further, they have around 615 main suppliers Irom all over the world.
Production is in Europe (27), Asia (51) and America (22). (EVB, Adidas)

DiIIerentiation (uniqueness)
The diIIerentiation is a strategy with the main Iocus oI developing a product, service or image that is unique
and with attributes that are highly appreciated and valued by customers. Customers will value them higher as
products or services oI competitors. Through creating a unique image companies that make successIul use oI
this strategy can oIten sell their products Ior a higher price. So it is easier Ior companies to present their
products as unique because they get more money to cover their costs. Factors that describe companies that
make use oI diIIerentiation are
Access to leading scientiIic research.
Highly skilled and creative product development team.
Strong sales team with the ability to successIully communicate the perceived strengths oI the product.
Corporate reputation Ior quality and innovation.
(QuickMBA, Porter`s Generic Strategies)
A risk that companies have to Iace when using this strategy is that competitors will try to imitate the company
or change consumers mind/ taste.
The brand adidas as mentioned beIore exists over 80 years. They had a long time to create their unique brand
image. Adidas stands Ior quality and expertise in everything that is related to sports. Through supporting and
sponsoring diIIerent kind oI sports events such as the UEFA Champion League in 2008 adidas consumers`
view oI adidas is always connected with sports. Further, in their adidas perIormance collection they make use
oI innovation such as the mentioned Body Mapping Technology. Showing the consumers that they are using
new technologies and constantly improving their products diIIerentiates adidas Irom their competitors.
Customers Ieel that adidas uses all their possibilities to oIIer products that will help them doing a good
perIormance in their sports.
DiversiIication (new products/ new markets)
DiversiIication is also a growth strategy. 'The purpose oI diversiIication is to allow the company to enter lines
oI business that are diIIerent Irom current operations. (Thomas, Joe, DiversiIication Strategy) This means that
companies try to sell new products to new markets. This strategy is risky because the company is moving in
unknown markets where they do not have experience. (Tutor2u, AnsoII`s product/ market matrix)
Further, we can distinguish between concentric, horizontal and conglomerate diversiIication.
The Iirst Iorm, concentric diversiIication, is when a company 'adds related products or markets. Horizontal
diversiIication is when a company sells products that are unrelated to their existing but would appeal to their
customers. The third option is conglomerate diversiIication. It occurs when a company goes into a totally
diIIerent market with new products. There is no relation between the already existing products. This would be
Ior example iI a supermarket also sells travels.

A successIul company such as adidas also wants to enlarge their markets and is searching Ior new ways to
expand their business. Recently, in January 2010 adidas introduced the miCoach interactive training system
guide. The program miCoach is available over the adidas website. Customers can choose between diIIerent
training plans such as de-stress or learn how to run. It can be described as horizontal diversiIication because
they now oIIer a service 'personal training. The micoach pacers that they sell can be seen as concentric
diversiIication because pacers that measure your heart rate are related to sports and sports apparel.
Another Iorm oI concentric diversiIication can be seen in their deodorant and shower gel that they are selling
at drugstores and supermarkets. It is related to their main market because people who do sports need a good
deodorant and have to take a shower aIterwards.

AIter analyzing adidas growth strategies you can say that adidas knows what they are doing. They Iocus on
diIIerent growth strategies to gain market share and increase sales. Most oI the time they Iocus on product
extension to improve their product assortment. I think that because oI a well-established brand name adidas
should try more to make use oI diversiIication. They can also sell other products or services because people
trust this brand. A lot oI people all around the world are Iascinated by sports. Like the company jumba juice
they could Ior example sell healthy drinks and juice to support a healty sport-oriented liIe style.

Global strategy
A company that has a global strategy views the world as one market and tries to standardize their marketing
activities. Nevertheless, product adaptations are made where they are necessary. As mentioned beIore adidas is
a global company. Their products are available in nearly every country on earth and their target markets are
sports oriented customers all over the world. They sell their products successIully under the name adidas in
every country. A comparison oI the diIIerent country websites shows their standardization Ior diIIerent
countries. II you enter www.adidas.com or www.adidas.de or www.adidas.Ir it will only change the language
and some actual topics but the whole design and oIIer is the same. Adaptations are only made where they are
necessary. On the US homepage Ior example you can Iind Lacrosse under adidas PerIormance whereas on the
German homepage it cannot be Iound because the game is not played in Germany. Adidas knows their markets
and takes care oI cultural or country speciIic diIIerences. The company also says hat they know that they have
to adapt to certain cultural diIIerences. Further, they recognise the consumer buying behaviour and the unique
retail landscape when operating in diIIerent markets.

In 2009 the company reorganised their brand structure. They moved Irom a vertically integrated brand
structure to a Iunctional multi-brand structure. Now adidas has a Global Sales and Global Brands Iunction. The
Global Sales Function is responsible Ior the commercial activities where as the Global Brands Iunction takes
care oI the marketing activities oI the brands adidas sport perIormance, adidas sport style and also Reebok. For
their 2,200 retail stores they set global guidelines so that they can increase eIIiciency and to create consistent
conditions to ensure longterm proIitability.
These two new created Iunctions show that adidas is Iocused on a global strategy. Together with the new
structure oI the organisation the adidas Group also decided on new measures. First, they want to establish joint
operating models Ior adidas in most oI their global markets. Second, they want to eliminate regional
headquarters so that they have a more direct interaction between the global Iunctions and the Ioreign markets.
And third, they decided that they separated the responsibility Ior the Global Brands and Global sales. Now the
CEO oI the adidas Group Herbert Hainer is responsible Ior Global Sales and Erich Stamminger, a member oI
the executive board takes care oI Global Brands.
Main objective oI these new divisions is to ensure that all chances on their operating markets and categories
are taken through a development oI well-structured and coordinated 'Go-to-Market strategies. They have to
develop innovative products and communication strategies that can persuade consumers in the diIIerent
markets.
All in all, you can say that Adidas is a global player. They are selling their products around the world. It is
easier Ior them to develop a global strategy because they see the world as one huge 'sports market. They
target the customers that like to do sports and like the sports style Ior clothing. Nevertheless, they know the
diIIerent type oI sports consumers` preIer in diIIerent countries. The only aspect that could be improved by
adidas is to Iocus more on country speciIic sports. In the US Ior example Iootball is really popular. They could
create a special Iootball line to satisIy the needs oI the customers.

Sources:
Adidas Group, What we do, http://www.adidas-group.com/en/ourgroup/ourbusiness/deIault.aspx, accessed on
17 April 2010.

Adidas, Press Room, http://www.press.adidas.com/desktopdeIault.aspx/tabid-11/16read-10905/, accessed on
24 April 2010.

Adidas, The adidas story year by year, http://www.press.adidas.com/DesktopdeIault.aspx/tabid-28/41read-
1209/, accessed on 24 April 2010.

AnsoII Matrix, What is the AnsoII Matrix, http://www.ansoIImatrix.com/, accessed on 20 April 2010.

Blackwell ReIerence Online, Vertical Integration Strategy,
http://www.blackwellreIerence.com/public/tocnode?idg9780631233176chunkg978140511828629ss7-1,
accessed on 20 April 2010.

Cateora, P.R. and Graham, J.L., International Marketing, 13th edition, 2007, New York.

EVB, Adidas, http://www.evb.ch/p25010738.html, accessed on 25 April 2010.
http://www.gaebler.com/Growth-Strategies.htm

QuickMBA, Porter`s Generic Strategies, http://www.quickmba.com/strategy/generic.shtml, accessed on 20
April 2010.
Thomas, Joe, DiversiIication Strategy, http://www.enotes.com/management-encyclopedia/diversiIication-
strategy, accessed on 21April 2010.

Tutor2u, AnsoII`s product/market matrix, http://tutor2u.net/business/strategy/ansoIImatrix.htm, accessed on
20 April 2010.
www.adidas.com
www.adidas.de



CASE 23 Southwest Airlines in 2008: Culture, Values, and Operating
Practices
ASSIGNMENT QUESTIONS
1. Is there anything that you fi nd particularly impressive about Southwest
Airlines?
2. What grade would you give Southwest management for the job it has done
in crafting the company`s strategy?
What is it that you like or dislike about the strategy? Does Southwest have a
winning strategy?
3. What are the key policies, procedures, operating practices, and core values
underlying Southwest`s efforts
to implement and execute its low-cost/no frills strategy?
4. What are the key elements of Southwest`s culture? Is Southwest a strong
culture company? Why or why
not? What problems do you foresee that Gary Kelly has in sustaining the
culture now that Herb Kelleher, the
company`s spiritual leader, has departed?
5. What grade would you give Southwest management for the job it has done
in implementing and executing
the company`s strategy? Which of Southwest`s strategy execution approaches
and operating practices do
you believe have been most crucial in accounting for the success that
Southwest has enjoyed in executing its
strategy? Are the any policies, procedures, and operating approaches at
Southwest that you disapprove of or
that are not working well?
6. What weaknesses or problems do you see at Southwest Airlines?
7. What recommendations would you make to Gary Kelly?












SouLhwesL Alrllnes CulLure values And CperaLlng racLlces
Lssay reLrleved from hLLp//wwwanLlessayscom/freeessays/12682hLml
Case SLudy
SouLhwesL Alrllnes CulLure values and CperaLlng racLlces (ln 1hompson A A SLrlckland A ! and
Camble ! (2003) CrafLlng and LxecuLlng SLraLegy (lourLeenLh LdlLlon) McCrawPlll new ?ork pages C
636 C664)

1asks
1he case sLudy prepared by ArLhur A 1hompson unlverslLy of Alabama and !ohn L Camble unlverslLy
of SouLh Alabama focuses on Lhe rlse Lo buslness promlnence of SouLhwesL Alrllnes a reglonal alrllne
wlLh a lowcosL nofrllls approach

8ased on Lhe case sLudy and on onllne and offllne research lnLo SouLhwesL Alrllne's currenL sLaLe
compleLe Lhe followlng 1asks

1ask 1 20 Marks
rovlde an analysls of Lhe company's
% oLenLlal resource sLrengLhs and compeLlLlve capablllLles
% oLenLlal resource weaknesses and compeLlLlve deflclencles
% oLenLlal markeL opporLunlLles
% oLenLlal markeL LhreaLs
aL Lhe Llme Lhls asslgnmenL ls underLaken
SelecL sulLable analyLlcal Lools from Lhe LexLbook/course Lo help you sLrucLure your flndlngs

1ask 2 20 Marks
Cn Lhe basls of Lhe crlLlcal facLors ldenLlfled ln 1ask 1
a) uraw concluslons concernlng Lhe company's overall slLuaLlon
b) SuggesL acLlons for lmprovlng Lhe company's sLraLegy

1ask 3 30 Marks
Answer (ln essay form) Lhe followlng
lL has been sald LhaL LalenLed people ln possesslon of superlor lnLellecLual capaclLy are noL only a
resource LhaL enable proflclenL sLraLegy execuLlon buL also a prlme source of compeLlLlve advanLage"
ldenLlfy Lhe varlous Puman 8esource pracLlces of SouLhwesL Alrllnes LhaL collecLlvely show Lhe
company's focus on lLs employees
SLaLe wheLher or noL Lhese pracLlces have conLrlbuLed Lo proflclenL execuLlon of Lhe company's buslness
sLraLegy rlghL up Lo Lhe presenL day (noLe you wlll have Lo do some research Lo flnd ouL Lhe company's
laLesL sLaLe of affalrs)
uo you conslder Lhe sLaff and managemenL of SouLhwesL Alrllnes Lo be a prlme source of compeLlLlve
advanLage"? Clve your reasons for or agalnsL Lhls polnL of vlew

1ask 4 20 Marks
1he SouLhwesL Alrllne's buslness model has been copled by reglonal alrllnes ln oLher parLs of Lhe globe
ldenLlfy one oLher successful reglonal alrllne (ouLslde Lhe unlLed SLaLes of Amerlca) and examlne Lhe
way LhaL company operaLes lL can be a company ln your own reglon or elsewhere eg easy!eL ln Lhe uk
and Lurope

Answer (ln essay form) Lhe followlng
a) ln whaL ways ls LhaL company's markeL slmllar or dlsslmllar Lo SouLhwesL Alrllne's markeL?
b) WhaL aspecLs of Lhe reglonal alrllne's buslness model are slmllar or dlsslmllar Lo Lhe way SouLhwesL
Alrllnes operaLes?

1ask 3 10 Marks
Assemble your work lnLo one buslness reporLsLyle documenL wlLh
% 1able of ConLenLs
% 8eference LlsL
% Appendlces and
% 8lbllography
where relevanL

1ask 1
lnLroducLlon
LowcosL carrler ls socalled nofrllls alrllne or budgeL alrllne ls an alrllne LhaL adopLs Lhe low cosL
sLraLegles ln all respecLs of buslness such as Lhe openlng of alrllnes cholce of secondary alrporL ways of
selllng LlckeLs and onboard servlce lor lnsLance slngle Lype of alrplane slmple fare scheme dlrecL
sales of LlckeLs unreserved seaLlng wlLhouL many LradlLlonal passenger servlces use secondary alrporL
shorL fllghLs fasL Lurnaround Llmes slmpllfled rouLes wlLh polnLLopolnL LranslL low labor cosL wlLh
mulLlple roles and eLc Such a sLraLegy wlll cuL down Lhe prlce Lo a lower level and Lhen Lhe cosL Lhey
have saved wlll beneflL Lhe passenger and lL wlll help Lo achleve Lhe wlnwln aspecL LowcosL carrler
had changed Lhe LradlLlonal ldea of alr Lravel ls a hlgh level of consumpLlon lnLo a speedy and economlc
alr Lravel 1he concepL orlglnaLed ln Lhe unlLed SLaLes follow by Lurope and subsequenLly Lo Asla

noL every lowcosL carrler lmplemenLs all of Lhe above sLraLegy Some Lry Lo dlfferenLlaLe Lhemselves
wlLh allocaLed seaLlng whlle oLhers operaLe more Lhan one alrcrafL Lype sLlll oLhers wlll have relaLlvely
hlgh operaLlng cosLs buL lower fares noneLheless Lhese are general characLerlsLlcs mosL of whlch apply
Lo any glven lowcosL carrler

MosL successful lowcosL carrlers Lry Lo offer a modlcum of addlLlonal beneflLs such as beLLer onLlme
performance or more legroom Alr1ran Alrways has been very successful wlLh lLs lowfare 8uslness
Class whlle lronLler and !eL8lue offer llve lnfllghL Lelevlslon uS Alrways offers a flrsL class producL and
a very exLenslve rouLe neLwork lncludlng lnLernaLlonal desLlnaLlons

1he flrsL successful lowcosL carrler was aclflc SouLhwesL Alrllnes ln Lhe unlLed SLaLes whlch ploneered
Lhe concepL when Lhelr flrsL fllghL Look place on May 6 1949 Powever SouLhwesL Alrllnes LhaL began
servlce ln 1971 and has been proflLable every year slnce 1973 WlLh Lhe advenL of avlaLlon deregulaLlon
Lhe model spread Lo Lurope as well Lhe mosL noLable successes belng lrelands 8yanalr whlch began
lowfares operaLlons ln 1991 and easy!eL formed ln 1993 Low cosL carrlers developed ln Asla and
Cceanla from 2000 led by operaLors such as Malayslas AlrAsla and AusLrallas vlrgln 8lue 1he lowcosL
carrler model ls appllcable worldwlde alLhough deregulaLed markeLs are mosL sulLed for lLs rapld
spread ln 2006 new lowcosL carrlers were announced ln Saudl Arabla and Mexlco

LowcosL carrlers pose a serlous LhreaL Lo LradlLlonal full servlce alrllnes slnce Lhe hlgh cosL sLrucLure
of fullservlce carrlers prevenLs Lhem from compeLlng effecLlvely on prlce Lhe mosL lmporLanL facLor
among mosL consumers when selecLlng a carrler lrom 2001 Lo 2003 when Lhe avlaLlon lndusLry was
rocked by Lerrorlsm war and SA8S Lhe large ma[orlLy of LradlLlonal alrllnes suffered heavy losses whlle
lowcosL carrlers generally sLayed proflLable

Many carrlers opLed Lo launch Lhelr own nofrllls alrllnes such as kLMs 8uzz 8rlLlsh Alrways Co Alr
lndlas Alr lndlaLxpress and unlLeds 1ed buL have found lL dlfflculL Lo avold cannlballzlng Lhelr core
buslness LxcepLlons Lo Lhls have been bmls bmlbaby germanwlngs whlch ls conLrolled 49 by
LufLhansa and CanLass !eLsLar all of whlch successfully operaLe alongslde Lhelr fullservlce counLerparLs

lor hollday desLlnaLlons low cosL alrllnes also compeLe wlLh seaLonly charLer sales Powever Lhe
lnflexlblllLy of charLers (parLlcularly as regards lengLh of sLay) makes Lhem unpopular wlLh many
Lravelers

As Lhe number of lowcosL carrlers has grown Lhese alrllnes have begun Lo compeLe wlLh one anoLher ln
addlLlon Lo Lhe LradlLlonal carrlers ln Lhe uS alrllnes have responded by lnLroduclng varlaLlons Lo Lhe
model uS Alrways offers a flrsL class producL and alrporL lounges for example whlle lronLler Alrllnes
and !eL8lue Alrways adverLlses saLelllLe Lelevlslon ln Lurope Lhe emphasls has remalned on reduclng
cosLs and nofrllls servlce ln 2004 8yanalr announced proposals Lo ellmlnaLe recllnlng seaLs wlndow
bllnds seaL headresL covers and seaL pockeLs from lLs alrcrafL (Sydney Mornlng Perald 17 lebruary
2004)

A large number of new alrllnes aLLempLed Lo break lnLo Lhe alrllne lndusLry lmmedlaLely followlng
domesLlc deregulaLlon buL vlrLually all evenLually meL wlLh fallure or were acqulred WhaL followed was
a perlod domlnaLed by large neLwork carrlers domlnance LhaL appeared lmpeneLrable unLll SouLhwesL
Alrllnes alLered Lhe landscape of domesLlc alrllne Lravel uurlng Lhls perlod Lhe lndusLry experlenced
exLenslve consolldaLlon as carrlers merged or were acqulred ln Lhe process of creaLlng geographlcally
broad hubandspoke neLwork sysLems 1hls consolldaLlon was noL offseL slgnlflcanLly by new enLranL
acLlvlLy lndeed we saw vlrLually no new enLranLs for a perlod of several years Cne consequence of Lhls
was concern by some lndusLry observers LhaL a small number of neLwork alrllnes perhaps as few as
Lhree were so domlnanL LhaL domesLlc compeLlLlon was LhreaLened AlLhough for some Llme conLrary
evldence had exlsLed ln Lhe form of SouLhwesL Alrllnes Lhe facL LhaL for years Lhls carrler alone came
forward Lo successfully challenge Lhe large neLwork alrllnes was lLself a source of some concern

8y Lhe end of 1992 SouLhwesL was sLlll Lhe only low cosL carrler buL lL had expanded Lo Lhe polnL LhaL lLs
markeLs share reached 21 percenL of domesLlc passenger Lrafflc compared wlLh 137 percenL four years
earller SouLhwesL's very low operaLlng cosLs and success wherever lL operaLed lefL no doubL abouL lLs
ablllLy Lo conLlnue Lo be compeLlLlve

As lL Lurns ouL ln addlLlon Lo lLs own dlrecL compeLlLlve effecLs SouLhwesL had anoLher lmporLanL
lmpacL lL provlded a blueprlnL for successfully compeLlng wlLh large neLwork carrlers 1he llnchpln Lo
Lhls success ls low cosLs Whlle a number of new enLranL carrlers Loday have dlfferenL buslness concepLs
many of Lhe more successful have one Lhlng ln common LhaL allows Lhem Lo compeLe effecLlvely 1hls
common domlnaLor ls very low operaLlng cosLs Slnce early 1993 numerous oLher low cosL carrlers
began servlce 1hese carrlers are expandlng rapldly ln number and ln slze

8y 1994 SouLhwesL and several low cosL new enLranL carrlers compeLed ln markeLs LhaL accounLed for
313 percenL of domesLlc Lrafflc Cnly nlne monLhs laLer Lhe year ended SepLember 30 1993
passengers Lravellng ln markeLs wlLh low cosL servlce accounLed for 386 percenL of LoLal Lrafflc 1hls
acceleraLlng growLh raLe shows no slgns of slowlng down

1he dramaLlc relaLlve growLh of passengers Lravellng ln markeLs wlLh low cosL servlce does noL begln Lo
measure Lhe full lmpacL of low cosL servlce whlch lncludes boLh sLrong growLh ln Lhe absoluLe number
of passengers ln low cosL markeLs and a decllne ln Lhe absoluLe number of passengers Lravellng ln
markeLs where low cosL servlce ls noL avallable lndeed Lhe sLrong growLh of passengers ln low cosL
markeLs has resulLed ln an lncrease ln LoLal passengers desplLe a decllne ln Lhe number of passengers ln
oLher markeLs

1he decllne ln Lhe number of passengers LhaL Lravel ln markeLs wlLhouL low cosL servlce ls [usL one of
several lndlcaLors LhaL Lhe domesLlc lndusLry ls under lncreaslng compeLlLlve pressures from low cosL
alrllnes

SWC1 Analysls
oLenLlal resource sLrengLhs and compeLlLlve capablllLles oLenLlal resource weaknesses and
compeLlLlve deflclencles
1 CorporaLe CulLure Luv and lun 1 PlghesL employee compensaLlon levels ln Lhe lndusLry
2 Low CosL CperaLlon 2 Lean SLaff CperaLlon
3 LfflclenL uLlllzaLlon of AsseLs 3
4 Maxlmlze Puman 8esource 4 Plghly unloned Lmployee
3 Slngle AlrcrafL 1ype 8oelng 737s 3 8lsk of Slngle AlrcrafL Suppller
6 ulsLrlbuLlon Lfflclencles 6 1lckeLs Cversold
7 Slmple lare SLrucLure 7
8 knowhow or compeLencles 8
9 9
10 10
oLenLlal markeL opporLunlLles oLenLlal markeL LhreaLs
1 Alrllnes fuel hedges 1 luel cosLs
2 polnLLopolnL operaLlons 2 naLural dlsasLer such as Purrlcanes
3 drop ln compeLlLlve capaclLy 3 Legacy carrlers consolldaLlon (merger)
4 8apld capaclLy grow 4 AlLernaLlve 1ransporLaLlon
3 sLrong brand and loyal cusLomer 3 SLeallng Lrafflc from oLher LCC (!eL8lue Alr1ran)
6 6 1errorlsm
7 7 demand for 8oelng narrowbodles ln Asla and Lurope ls sLrong maklng lL dlfflculL Lo secure dellvery
poslLlons before 2010
8 8 securlLy and lnsurance cosLs
9 9 caLasLrophlc evenLs war
10 10 long securlLy screenlng llnes

oLenLlal resource sLrengLhs and compeLlLlve capablllLles

CorporaLe CulLure Love and lun
eople llke Lo work ln an en[oyable envlronmenL lf Lhe work envlronmenL ls very serlously and sLrlcLly
buslness Lhey mlghL burn ouL SouLhwesL promoLe love and fun aL work lor furLher promoLlng love and
fun corporaLe culLure SouLhwesL sLock llsLed on Lhe new ?ork SLock Lxchange as Luv (SouLhwesL
1997)

AL SouLhwesL Alrllnes CusLomers and Lmployees are Lhelr Lop prlorlLy Perb kelleher of SouLhwesL
Alrllnes says Cur paychecks say 'from our cusLomers because we wanL our people Lo remember LhaL
lLs noL some addlLlon ln an offlce LhaL produces Lhe check lLs our cusLomers (SouLhwesL 2006)

SouLhwesL splrlL Lo cusLomers was Lhe key as one SouLhwesL manager puL lL Cur fares can be
maLched our alrplanes and rouLes can be copled 8uL we prlde ourselves on our cusLomer servlce"
(Sunoo 1993)

SouLhwesL has lnlLlaLed 1he nuLs abouL SouLhwesL" blog wlLh Lhe goal Lo glve readers Lhe opporLunlLy
Lo look lnslde SouLhwesL Alrllnes and Lo lnLeracL wlLh SouLhwesL 1he bloggers from crosssecLlon of Lhe
company bulld a personal love and fun relaLlonshlp wlLh readers (hLLp//wwwblogsouLhwesLcom)

Low CosL CperaLlon
no exLra onboard servlce
ln order Lo archlve low cosL and fasL Lurnaround Llme onboard caLerlng enLerLalnmenL reserved seaL
more sLewards and alr hosLess and oLher compllmenLary servlces are ellmlnaLed and replaced by
opLlonal paldfor onboard food drlnk and enLerLalnmenL Moreover Lhey wlll sell duLyexempL goods
ln Lhe fllghL Lo lncrease lncome also
Slngle assenger Class
8ecause of low cosL sLraLegles SouLhwesL wlll noL seL buslness class buL slngle economy class Lo have
more Lravelers 8esldes Lhey narrow Lhe seaL space Lo conLaln more seaLlng use fully Lhe alrplane cabln

LfflclenL uLlllzaLlon of AsseLs
Culck 1urnaround Llme
ShorL fllghLs and fasL Lurnaround Llmes Lo allow maxlmum uLlllzaLlon of planes 1hls ls Lo make sure Lhe
alrcrafL uLlllzed consLanLly whlch ln Lurn maxlmlzes revenues
Secondary alrporLs
SouLhwesL Alrllnes ls uslng less congesLed secondary alrporLs or Lhe corners of ma[or alrporLs Lo avold
alr Lrafflc delays and Laklng advanLage of lower landlng and parklng fees assengers are senL Lo Lhelr
desLlnaLlons by shuLLle buses
unreserved seaLlng
1lme ls money SouLhwesL Alrllnes wlll noL offer servlce for Lravelers Lo reserve Lhe seaL because lL wlll
reduce Lhe boardlng Llme Lo check Lhe numbers and Lhe Llme LhaL ground crews have Lo deal wlLh Lhe
boardlng procedure 1here ls no seaL allocaLlon you [usL slL where you llke Moreover Lhey use plasLlc
and recyclable boardlng pass Lo save Lhe cosL All Lhe purpose ls Lo slmpllfy Lhe procedure Lo Lurnaround
fasL so Lhere rarely Lo see loLs of cusLomers walL ln llne ln fronL of Lhe counLers of SouLhwesL
lL ls also ln order Lo Lurn a plane as soon as posslble lL can save abouL 20 mlnuLes Lhan Lhe malnsLream
alrllnes because Lhe longer Lhe walLlng Llme aL a gaLe Lhe more lL cosLs an alrllne More dally operaLlons
aL a gaLe fewer gaLes are needed and lnfrasLrucLure cosLs are reduced 1he alrporL agencles wlll Lry Lo
cooperaLe wlLh Lhem Lo provlde good servlce

Maxlmlze Puman 8esource
1he employees are worklng ln mulLlple roles ln order Lo llmlL personnel cosLs Lvery scheduled fllghL only
has Lhree fllghL aLLendanLs afLer Lhe alrplane lands Lwo of Lhe fllghL aLLendanLs have Lo clean Lhe cabln
and one work as gaLe agenLs Lo check or collecL Lhe fllghL LlckeLs for Lhe passengers of nexL fllghL 1he
alrcrafL commanders have Lo clean Lhe cabln lf LhaL ls necessary 1hus Lhey don'L hlre cleaners and exLra
workers lllghL aLLendanLs also sell meals drlnks and duLyexempL goods afLer Lhe alrcrafL ls Laklng off
8esldes LhaL as Lhe SouLhwesL Alrllnes only Lhree persons Lo Lake care of Lhe fllghL LlckeLs buL Lhe
average of Lhe malnsLream alrllnes are 30 Lo 60 persons
Moreover SouLhwesL Alrllnes pays plloLs and fllghL aLLendanLs per Lrlp shlfLlng whaL could be a flxed
cosL Lo a varlable one he says !eL8lue has Laken Lhls a sLep furLher by employlng reservaLlons agenLs
who work from home 1hey are busy durlng peak Llmes and recelve exLra compensaLlon ln downLlme
perlods Lhey are off duLy and noL pald 1hls allows Lwo Lhlngs you are noL paylng people when Lhey
are noL needed and Lwo lL allows people flexlblllLy and cholce
SouLhwesL Alrllnes make pollcy cholces LhaL glve people lncenLlves Lo reduce cosL aL every opporLunlLy

Slngle AlrcrafL 1ype
1o keep cosLs of equlpmenL down SouLhwesL Alrllnes ls uslng a slngle Lype of alrplane 8oelng 737
lnsLead of dlfferenL Lypes of alrplanes Lhus employees spares equlpmenL could be replaced each oLher
Lo reduce sLaff Lralnlng cosLs Lremendously 1hls mlnlmlzes Lhe cosL of malnLalnlng dlfferenL alrcrafLs
and brlngs economles of scale when buylng parLs for alrplane repalr ln large number

1he reason of 8oelng 737 ls preferred due Lo lLs low operaLlng cosL and fuel consumpLlon SouLhwesL
can save Lhe cosL of consumlng energy of changlng fllghL and can Lake Lhe mass cusLomers Lo many
dlfferenL desLlnaLlons wlLhln 3 hours 1hese alrcrafLs are smaller Lhan usual Lhus lL can lands and Lakes
off ln Lhe secondary alrporLs does noL need Lo land and Lake off ln Lhe prlmary alrporLs because Lhe
alrporL landlng fees aL ma[or cenLers remaln very hlgh

SouLhwesL Alrllnes operaLes some 360 alrcrafL sald Wllllams lL handles lLs own llne malnLenance and
ouLsources lLs heavy malnLenance yeL lL sLlll has lower malnLenance cosLs Lhan any of Luropes alrllnes

ulsLrlbuLlon Lfflclencles
ln order Lo decrease dlsLrlbuLlon cosLs SouLhwesL Alrllnes has Lhelr ways Lo save Lhe cosLs avoldlng fees
and commlsslons pald Lo Lravel agenLs and corporaLe booklng sysLems or oLher mlddle men"
ulrecL channels
SouLhwesL Alrllnes emphaslze on dlrecL sales of LlckeLs Lo cusLomers bypasslng Lravel agenLs wlLhouL a
wholesaler or a LlckeL agenL especlally over Lhe lnLerneL 1hls saved SouLhwesL Alrllnes 3 Lo 10 of
each fare a savlngs no oLher alrllne en[oyed eople can purchase Lhe LlckeL by calllng or golng Lo Lhe
alrllne or golng on Lhe excluslve webslLe and paylng Lhe fare by credlL card
no ayable CompuLer 8eservaLlon SysLem
1here ls a usual way Lo book Lhe seaL by malnsLream alrllnes compuLer reservaLlon sysLems (C8S) buL lLs
cosL ls hlgh whlch pald a fee for each reservaLlon SouLhwesL Alrllnes ls keeplng off Lhe channel
Cwn 8ooklng 8equesL 8eservaLlon SysLem
SouLhwesL Alrllnes belng Lhe flrsL alrllne cusLomer of Lhe Sabre 8aslc 8ooklng 8equesL reservaLlon
sysLem whlch allowed Lravel agenLs Lo accommodaLe Lhe reservaLlon needs of our CusLomers dlrecLly
ulnC! ulscounLs ulrecLly 1o CusLomer ueskLop
Slnce Lhe 1990s SouLhwesL has been runnlng a Lelevlslon ad campalgn based on Lhe phrase Wanna geL
away? 1he commerclals presenL comlcal embarrasslng slLuaLlons ln whlch people flnd Lhemselves
wanLlng Lo geL away MosL ads are accompanled by Lhe sound cllp dlng ?ou are now free Lo move
abouL Lhe counLry 1he A dlng has become synonymous wlLh SouLhwesL Alrllnes and lnsplred Lhe
name of an onllne LlckeL offer program ulnC!" ulnC!" brlngs deeper dlscounLs dlrecLly Lo cusLomer
deskLop of Lhelr cholce and geL llve updaLes from Lhe clLles
1lckeLless
1ravelers wlll noL depend on Lhe C8S buL a conflrmable code from SouLhwesL Alrllnes SouLhwesL
Alrllnes own reservaLlon sysLem LhaL used no LlckeLs Ld SLewarL a SouLhwesL spokesperson compared
Lhe new sysLem Lo Lhose used by car renLal agencles ?ou show up aL Lhe LlckeL counLer and you have a
conflrmaLlon number and we glve you a boardlng pass and off you go he sald (1he new ?ork 1lmes
1994) 1he operaLlng way ls Lo beneflL boLh Lhe Lravelers and SouLhwesL Alrllnes because of Lhe less
paper work and Lhe fasL boardlng Llme

Slmple lare SLrucLure
SouLhwesL Alrllnes prefers Lo adopL slmple fare sLrucLure emphaslze polnLLopolnL LranslL and ad[usL
Lhe fare wlLh needs 1he prlce sLrucLure of SouLhwesL Alrllnes ls lower Lhan malnsLream alrllnes lL ls
enLlrely dlfferenL Lo Lhe malnsLream alrllnes wlLh offerlng Lhe flexlble and hlgh fare LlckeLs Cnly supply
anddemand prlnclple domlnaLes Lhe prlce and Lhls makes Lhe prlce aLLracLlve Lo frequenL flyers 8esldes
LhaL lL also can change Lhe prlce anyLlme Lo adapL Lo Lhe needs of offseason and hlgh season Cheaper
LlckeLs by booklng early where Lhere may only be a handful of seaLs avallable on each fllghL aL Lhe
adverLlsed bargaln fare Lhe earller you book Lhe larger Lhe savlng 1he besL prlce sLraLegy Lhere ls ln
Lerms of markeLlng and cash managemenL

knowPow or CompeLencles
1here wlll always be oLher alr carrlers LhaL Lry Lo repllcaLe SouLhwesL Alrllnes unlque buslness sLraLegy
8uL Lhe LruLh ls SouLhwesL Alrllnes lnvenLed" compeLlLlon ln Lhe alrllne lndusLry Lherefore we know
how Lo handle compeLlLlon from oLher carrlers unllke oLher carrlers Lhe Lmployees of SouLhwesL
Alrllnes know how Lo have lun whlle Lurnlng a proflL lL Lruly ls Lhe Lmployees of SouLhwesL Alrllnes
who seL us aparL from Lhe resL (SouLhwesL Medla 2006)

oLenLlal resource weaknesses and compeLlLlve deflclencles

lnconvenlence 8ooklng
1he promoLlonal fare musL be booked onllne because agenLs are hard Lo flnd noL all cusLomers know
how Lo access lnLerneL

no 8uslness Class
lor greaLer capaclLy SouLhwesL Alrllnes provldes only economy cabln seaL and narrow seaLlng

no Servlces for Speclal needs
no servlces are provlded for passengers who need connecLlng fllghLs or wheelchalrs

Slmpllfled Servlce
ln order Lo be low cosL and Lurnlng planes fasL no meals drlnks and snacks for free no seaL reservaLlon
and free seaLlng 1herefore only flles Lo desLlnaLlons wlLhln four hours

oor CuallLy ercepLlon
SouLhwesL Alrllnes use prlce as a markeL poslLlon CusLomers may arLlflclally relaLe low prlced LlckeLs
wlLh poor quallLy fllghL equlpmenL and search for more expenslve LlckeLs LhaL are assoclaLed wlLh beLLer
and safer alrllne equlpmenL

Small Legroom
1he smaller Lhe alrplane ls Lhe smaller legroom ls 8oelng 737 have smaller legroom even compare wlLh
oLher lowcosL carrler commonly use Alrbus A320 alrcrafL

Plgh labor cosL
1he labor cosL of SouLhwesL Alrllnes ls usually lower Lhan Lhe malnsLream alrllnes maybe only abouL
forLy percenL of Lhem (Anon 1997) uue Lo many reasons as Lhe sLaffs are younger Lhere are no
addlLlonal cosLs on senlor sLaff or Lhose reLlred sLaff

oLenLlal markeL opporLunlLles

As Lhe budgeL alrllnes puL LogeLher a sLrucLure of servlce on demand Lhey lmaglne and lnvenL Lhe beLLer
sLraLegy Movlng a conslgnmenL from A Lo 8 ls Lhe rock boLLom easlesL sLrucLure wlLhln moLor frelghL
Lrucklng
lnLernaLlonal gaLeways ls lacklng of affordable secondary alrporL and Lhe focus of Lhe new alrporLs on
Lhelr role 1he demand ls Lhere 1hus Lhe budgeL alrllnes choose Lhe shorL haul polnLLopolnL" servlce
beLween mldslze clLles and secondary alrporLs as lLs prlmary markeL focus Lo decrease Lhe cosLs 1he
polnL Lo polnL servlce means lf you are maklng a [ourney LhaL lnvolves a change of plane you wlll have
Lo check your luggage ln for each leg of [ourney ln addlLlon wlLh some alrllnes lf your flrs leg ls laLe you
wlll noL be Lransferred onLo anoLher plane lf you mlss Lhe second So lL ls wlse lf Lhe passengers would
check wlLh each alrllne Lhelr pollcy on mlssed connecLlons lL can lnsure agalnsL mlsslng low cosL
connecLlons wlLh alrllnes

luel Pedglng
SouLhwesL Alrllnes locked ln lower [eLfuel prlces wlLh lLs sLraLegy of buylng advance [eLfuel conLracLs
SouLhwesL ls 83 hedged aL prlces capped aL $26 per barrel of oll for 2003 63 aL $32 per barrel for
2006 more Lhan 43 aL $31 per barrel for 2007 and more Lhan 23 aL $33 per barrel for 2008 1o
hedge so exLenslvely an alrllne needs ready cash Lo lnvesL and SouLhwesLs blggesL compeLlLors are
hanglng onLo cash Lo rlde ouL Lhelr conLlnulng losses ConLlnenLal ls an exLreme example lL has no
hedges ln place aL all lLs very expenslve Lo hedge rlghL now says ClC !eff Mlsner l sure wlsh l had
some coverage ouL Lhere he adds buL glven Lhe cosL hedglng doesnL make economlc sense for
ConLlnenLal CLC Larry kellner noLes however LhaL Lhe company had no 2004 hedges aL Lhls Llme a year
ago and sLlll wound up wlLh a $70 mllllon hedglng galn for Lhe year

AvallablllLy of Secondary AlrporLs
1here are few secondary alrporLs ln ma[or cenLers

AlrporL LxLracL LowCosL Carrler
ln addlLlon Lo creaLlng lower cosL faclllLles speclflcally for lowcosL alrllnes alrporLs wlll begln Lo
unbundled Lhelr servlces and Lhe resulLlng charges so LhaL alrllnes can selecL and pay only for Lhose
servlces LhaL are requlred 1hls unbundled LreaLmenL of alrporL servlces can reduce cosLs Lo alrllnes
ldenLlfy unwanLed alrporL servlces LhaL can ellmlnaLed and reward alrllnes for more efflclenL use of
alrporL faclllLles

Low Alrllne lare
nonbuslness passengers lelsure Lrafflc prlceconsclous buslness passengers are ln conslderaLlon of low
alrllne fare 1he ralse of lowcosL carrler all offer low wages and pay less alrporL fees lor lnsLance Lhe
wages of lowcosL carrler fllghL aLLends are lower Lhen Lhe malnsLream alrllnes' abouL 60 lL could save
loLs of cosLs

AlLernaLlve lncome
AlLhough SouLhwesL Alrllnes do noL provlde meals drlnks and snacks lL ls acLually anoLher way Lo earn
money 1here are adverLlsemenLs of varlous producLs ln slde Lhe cabln and ouLslde Lhe fuselage whlch ls
ln order Lo geL Lhe adverLlsemenL expenses Lo lncrease Lhe lncome Lhe fllghL aLLends even can have
commlsslon for selllng food and drlnks on Lhe alrplanes 1hls proflL wlll encourage Lhe fllghL aLLends'
wllllng of selllng producLs

Low lare Servlce CompeLlLlveness
AfLer Lhe 911 Lerrorlsm Lhe cosLs of Lhe securlLy and lnsurance of Lhe malnsLream alrllnes are rlslng
sharply 1hls slLuaLlon provldes an opporLunlLy of developmenL for Lhe lowcosL carrler 1he laLesL
lnvesLlgaLlon showed LhaL Lhere are 60 Aslan Lravelers whlch lnclude workers sLudenLs Leachers and
many buslnessmen are wllllng Lo Lake Lhe lowcosL carrler alrllnes Lo Lhelr desLlnaLlons 1oday one of
every seven domesLlc passengers ls flylng because of Lhe lncreased compeLlLlveness resulLlng from low
fare servlce

oslLlve lmpacL
1he low fare sLlmulaLed demand has very poslLlve lmpllcaLlons for Lhe alrllne's lndusLry labor force and
promoLes subsLanLlal economlc growLh Lo Lhe beneflL of consumers local communlLles Lravel relaLed
lndusLrles and Lhe aerospace lndusLry

oLenLlal markeL LhreaLs

needs lor Plgher Servlces
SouLhwesL Alrllnes use prlce as a markeL poslLlon CusLomers may arLlflclally relaLe low prlced LlckeLs
wlLh poor quallLy fllghL equlpmenL 1hus ln order Lo have passengers' confldences SouLhwesL could be
forced Lo shed lLs mlnlmallsL cosL sLrucLure by provldlng hlgher servlces such as LlckeLs and baggage
Lransfer

Cn Lhe oLher hand prlce ls noL Lhe key Lo everyLhlng eople some noL focuslng on prlcesenslLlve
cllenLs sLlll have emoLlons whlch can be sLronger Lhan prlce moLlvaLlon because Lhe prlclng ls noL Lhe
key Lo medlum Lo longLerm success

ShorLage of Avallable Alrplanes
SouLhwesL may faclng an unexpecLed problem a shorLage of avallable alrplanes And Lhe shorLage ls
also pushlng up leaslng cosLs aL a Llme when alrllnes are already hurL by record hlgh fuel prlces Lease
raLes have lncreased beLween 10 and 13 slnce Lhe sLarL of Lhe 2004 CLher lowcosL carrler have
selecLed Alrbus Cver Lhe lasL slx monLhs Lhe slLuaLlon has gone from one of oversupply for Lhese 100 Lo
130 seaL alrcrafL Lo one where Lhere are very few avallable for lease CurrenL renLals for new A320
alrcrafL range beLween uS$230000 and uS$330000 a monLh dependlng on Lhe lengLh o Lhe lease
AeroSLraLegys SLewarL ls Lhe percelved rlsk of buylng everyLhlng from a slngle suppller 1hls arLlcle was
publlshed ln Lhe SepLember 2003 lssue of Cverhaul MalnLenance

luel CosL
1he fear of an oll hlke remalns SouLhwesL Alrllnes has been aggresslvely hedged agalnsL rlslng oll prlces
over Lhe pasL couple of years locklng ln fuel prlces well under $40 per barrel 1haL spared SouLhwesL
Alrllnes Lhe squeeze from hlgher energy prlces LhaL hlL oLher carrlers unforLunaLely Lhose hedges are
endlng so SouLhwesL faces hlgher energy cosLs even Lhough crude prlces have fallen (8oberL Walberg
SLreeL aLrol !an 2007)
SouLhwesL CreaL alrllne bad lnvesLmenL

1he alrllne wlLh by far Lhe besL flnanclals ln Lhe counLry has seen lLs sLock sLagnaLe even as shares of lLs
Lroubled rlvals rally Should lnvesLors show Luv more love?
8y 8oberL Walberg

unpredlcLable lacLors
WhaL lf Lhe unpredlcLable facLors llke 911 Lhe war ln lraq and Lhe SA8S sLrlke happen agaln? uurlng Lhe
senslLlve Llme Lhe Lravelers usually choose Lo sLay ln Lhelr own counLrles Lo lnsure Lhelr securlLy Can
SouLhwesL pass Lhe dlfflculLy wlLh low lncomes?

1ask 2
Cn Lhe basls of Lhe crlLlcal facLors ldenLlfled ln 1ask 1
a) uraw concluslons concernlng Lhe company's overall slLuaLlon
Company SlLuaLlon Analysls
SLraLegy Crld Model
SLraLegy CpLlons MeLhod
20022003 8evenue vs ASk/M
Croup Mapplng
b) SuggesL acLlons for lmprovlng Lhe company's sLraLegy
S1CM SCC
konsorLlum

1ask 3

lL has been sald LhaL LalenLed people ln possesslon of superlor lnLellecLual capaclLy are noL only a
resource LhaL enable proflclenL sLraLegy execuLlon buL also a prlme source of compeLlLlve advanLage"
a) ldenLlfy Lhe varlous Puman 8esource pracLlces of SouLhwesL Alrllnes LhaL collecLlvely show Lhe
company's focus on lLs employees
b) SLaLe wheLher or noL Lhese pracLlces have conLrlbuLed Lo proflclenL execuLlon of Lhe company's
buslness sLraLegy rlghL up Lo Lhe presenL day (noLe you wlll have Lo do some research Lo flnd ouL Lhe
company's laLesL sLaLe of affalrs)
c) uo you conslder Lhe sLaff and managemenL of SouLhwesL Alrllnes Lo be a prlme source of
compeLlLlve advanLage"? Clve your reasons for or agalnsL Lhls polnL of vlew

Puman 8esource pracLlces of SouLhwesL Alrllnes LhaL collecLlvely show Lhe company's focus on lLs
employees

Lmployees Come llrsL CusLomers Come Second
MosL company prlnclple always cusLomer come flrsL buL SouLhwesL operaLlve prlnclple was LhaL
employees come flrsL and cusLomers come second 1hls reflecLed managemenL's bellef LhaL dellverlng
superlor servlce requlred employees passlonaLe abouL Lhelr [ob and knew Lhe company concern Lhelr
wellbelng and commlLLed Lo provlde [ob securlLy SouLhwesL's Lhesls was keep employees happy Lhen
Lhey wlll keep cusLomers happy (1hompson eL al 2004) lmporLanL of employees has been reflecLed ln
SouLhwesL 2004 Annual 8eporL SouLhwesL has changed personnel deparLmenL's name Lo eople
ueparLmenL ln 1989 and Lhe deparLmenL head wlLh LlLle of vlce presldenL of people 1hls happens
slmllar wlLh SLarbucks SLarbucks recognlzes compeLlLors can repllcaLe producLs buL Lhey cannoL
repllcaLe people 1herefore SLarbucks seeks Lo connecL flrsL wlLh employees and second wlLh
cusLomers 1here ls no beLLer spokesperson for a company producL and brand Lhan someone who ls
happy wlLh Lhelr [ob and respecLed by Lhelr employer and peers A happy employee wlll ln Lurn make
cusLomers happy (Moore 2006)
Plre ALLlLude 1raln Sklll
Love and lun ls abouL aLLlLude buL dlfflculL Lo change someones aLLlLude so hlre for aLLlLude and Lraln
for sklll (lrelberg k and lrelberg ! 1996) Accordlng Lo Sunoo (1993) SouLhwesL Chalrman Perb kelleher
says Lhe company looks flrsL aL lndlvlduals' sense of humor ln assesslng Lhelr poLenLlal flL wlLh lLs
corporaLe culLure 1he alrllne's repuLaLlon as a fun workplace allows lL Lo recrulL and grow wlLhouL uslng
recrulLers or employmenL agencles 8eslde LhaL SouLhwesL looked for people LhaL readlng people's
emoLlons and respondlng ln a genulnely carlng empaLheLlc manner SouLhwesL ls lnLeresLed ln people
who Lruly en[oyed meeLlng wlLh people moLlvaLed Lo help oLher people and en[oyed Lhelr [ob
(1hompson eL al 2004)

unlverslLy for eople
1he currlculum lnvolved everyone lncluded new recrulLs employees and leadershlp regardless new or
experlenced 1he leadershlp courses focus on coachlng and encouraglng raLher Lhan supervlslon or
enforclng rules and regulaLlons All employees recelved cusLomer care Lralnlng lncludlng plloL
SouLhwesL emphaslzed on people developmenL by offerlng many courses lncludlng corporaLe culLure
Lmployees' orlenLaLlon programs called 1he SouLhwesL Shuffle" feaLured many of SouLhwesL
employees rapplng abouL Lhe fun Lhey had on Lhelr [obs and oLher exerclses LhaL corporaLe culLure has
lnformally communlcaLed (1hompson eL al 2004)

Career AdvancemenL
Lmployees are encouraged Lo apply for supervlsory poslLlons MosL of Lhe supervlsory poslLlons 80
90 were fllled by lnLernally (1hompson eL al 2004) lnLernal people wlll be appreclaLe and undersLand
Lhe needs under Lhem and en[oy Lhe respecL of Lhelr peers and hlgher managers 1argeLed SelecLlon
process wlll apply LhaL slmllar Lo screen new recrulLs ln order Lo lmprove Lhe chances of maLchlng Lhe
rlghL people Lo Lhe rlghL [obs 1hls provldes an opporLunlLy for Lhe employees grow LogeLher wlLh
SouLhwesL and career paLh Lo en[oy and feel greaL Lo be aL SouLhwesL All newly promoLed leaders have
an opporLunlLy Lo develop leadershlp and communlcaLlon skllls as well as operaLlon ln every deparLmenL
over a slxmonLh perlod Lo ensure LhaL Lhey could perform Lhelr [ob ueparLmenL heads peers and
subordlnaLes provlded 360degree feedbacks eople ueparLmenL analyzes Lhe feedback and decldes
speclflc asslgnmenL for each candldaLe (Sunoo 1993)

PlghesL Lmployee CompensaLlon Levels ln 1he lndusLry
SouLhwesL's pay scales were aL levels close Lo Lhe lndusLry average and lLs beneflL packages were good
relaLlve Lo oLher alrllnes Accordlng Lo a 199798 survey SouLhwesL's plloLs earned on average abouL
10 percenL above Lhe lndusLry average
SouLhwesL lnLroduced Lhe flrsL proflLsharlng plan ln Lhe alrllne lndusLry for senlor employees ln 1973
MosL SouLhwesL employees had Lhe plan ln 1999 8y 2001 SouLhwesL furLher develop Lhe plan lnLo 12
dlfferenL sLock opLlon programs for varlous employee groups a 401(k) employee savlngs plan LhaL
lncluded companymaLchlng conLrlbuLlons and a proflLsharlng plan LhaL covered vlrLually all employees
and conslsLed of a money purchase deflned conLrlbuLlon plan and an employee sLock purchase plan
AbouL elghL Lo Lwelve percenL of base pay represenLed ln recenL years WlLh payroll deducLlon
employees parLlclpaLlng ln sLock purchases aL prlces equal Lo 90 percenL of Lhe markeL value aL each
payroll perlod SouLhwesL employees owned abouL 10 percenL of SouLhwesL's ouLsLandlng shares
(1hompson eL al 2004)

Parmonlous wlLh unlon
SouLhwesL Alrllnes ls one of Lhe mosL hlghly unlonlzed alrllnes ln Lhe unlLed SLaLes unlons represenL
abouL 88 SouLhwesL workers Powever SouLhwesL Alrllnes has been more successful aL reachlng
agreemenL wlLh Lhelr labor unlons ln much less Llme SouLhwesL managemenL encouraged unlon
members and negoLlaLors Lo research Lhelr presslng lssues and conducL employee surveys before each
conLracL negoLlaLlon SouLhwesL's conLracLs wlLh Lhe unlons represenLlng lLs employees were relaLlvely
free of resLrlcLlve work rules and narrow [ob classlflcaLlons LhaL mlghL lmpede worker producLlvlLy All of
Lhe conLracLs allowed any quallfled employee Lo perform any funcLlonLhus plloLs LlckeL agenLs and
gaLe personnel could help load and unload baggage when needed and fllghL aLLendanLs could plck up
Lrash and make fllghL cablns more presenLable for passengers boardlng Lhe nexL fllghL (1hompson eL al
2004)

!ob SecurlLy
1oday hardly you could flnd a company glves you comforLable of feellng Work 1lll 8eLlremenL"
SouLhwesL's managemenL susLalns and nurLures Lhe corporaLe culLure wlLh nolayoff pollcy bullL up
conslderable goodwlll wlLh unlon over Lhe years by avoldlng layoffs (8rooker 2001)

When SouLhwesL flnally recelved permlsslon Lo operaLe ln 1971 lL had four 8oelngs and less Lhan 70
employees barely enough Lo operaLe When lL could noL meeL payroll Lhe company had Lo make a
cholce sell one of lLs planes or lay off people lL declded Lo do Lhe former and asked lLs employees Lo cuL
Lurnaround Llme aL Lhe gaLe from 33 Lo 13 mlnuLes 1he LradlLlon of SouLhwesL employees from plloLs
Lo ramp agenLs plLchlng ln Lo do whaL ls necessary ln order Lo help Lhe company was born (uonlon
1999)

ManagemenL by Walklng Around and Cpen uoor ollcy
SouLhwesL's manager spend aL leasL oneLhlrd of Lhelr Llme ouL of offlce walklng around Lhe faclllLles
under Lhelr supervlslon observlng flrsLhand whaL was golng on llsLenlng Lo employees and belng
responslve Lo Lhelr concerns 1hls Lechnlque commonly employed by effecLlve leaders Lo sLay lnformed
abouL how well Lhe SLraLegy execuLlon process ls progresslng by maklng regular vlslLs Lo Lhe fleld and
Lalklng wlLh many dlfferenL people aL many dlfferenL levels

Managers are responslble Lo be Lhere llsLenlng Lo people and avallable Lo people ln person noL vla a
suggesLlon box SouLhwesL sLrongly belleved LhaL musL be responslve Lo fllghL aLLendanLs or cusLomer
servlce agenLs when Lhey need Lo galn access Lo somebody who can glve Lhem resources and answers
(lrelberg k and lrelberg ! 1996)

Lmployees are encouraged Lo brlng up concerns oplnlons and suggesLlons for reduclng cosLs and
lmprovlng efflclency new proLocols for Lakeoffs and landlngs LhaL conserved fuel by plloL and no
company logos on Lrash bags are good example LhaL savlng an esLlmaLed $230000 annually Lmployees
suggesL LhaL buy Lhe parLs and assemble Lhe Cs Lhemselves for half Lhe prlce of a new C savlng Lhe
company $1 mllllon SouLhwesL clerks who came up wlLh Lhe ldea of dolng away wlLh paper LlckeLs and
shlfLlng Lo eLlckeLs (1hompson eL al 2004)

Colleen 8arreLL SouLhwesL's presldenL had arLlculaLed Lhe company's pollcy some years earller no
Lmployee wlll ever be punlshed for uslng good [udgmenL and good old common sense when Lrylng Lo
accommodaLe a CusLomer no maLLer whaL our rules are LeL's sLarL leanlng Lowards our CusLomers
agaln noL away from Lhem LeL's sLarL encouraglng our llne employees Lo be a llLLle more flexlble and Lo
Lake LhaL exLra mlnuLe Lo accommodaLe speclal needs LeL's sLarL encouraglng our Supervlsors Lo glve
our CusLomers Lhe beneflL of Lhe doubL"

Slmple four layers of managemenL beLween a fronLllne supervlsor and Lhe CLC enable bypass Lo geL
Lhlngs done lmmedlaLely and effecLlvely SouLhwesLs empowermenL leL employees comforLable ln
maklng Lhelr own declslons and underLaklng Lhelr own efforLs

1hese pracLlces have conLrlbuLed Lo proflclenL execuLlon of Lhe company's buslness sLraLegy rlghL up Lo
Lhe presenL day
A
A

1he sLaff and managemenL of SouLhwesL Alrllnes ls a compeLlLlve advanLage buL noL a prlme source of
compeLlLlve advanLage"
A
A

1ask 4
1he SouLhwesL Alrllne's buslness model has been copled by reglonal alrllnes ln oLher parLs of Lhe globe
ldenLlfy one oLher successful reglonal alrllne (ouLslde Lhe unlLed SLaLes of Amerlca) and examlne Lhe
way LhaL company operaLes lL can be a company ln your own reglon or elsewhere eg easy!eL ln Lhe uk
and Lurope

Answer (ln essay form) Lhe followlng
ln whaL ways ls LhaL company's markeL slmllar or dlsslmllar Lo SouLhwesL Alrllne's markeL?
WhaL aspecLs of Lhe reglonal alrllne's buslness model are slmllar or dlsslmllar Lo Lhe way SouLhwesL
Alrllnes operaLes?
SouLhwesL Alrllnes (SWA) and AlrAsla (AA)
MarkeL Slmllar MarkeL ulsslmllar
1 Lower lare rlce 8ange 1 8eglonal (SWA) and lnLernaLlonal (AA)
2 2 SWA Plgh lrequenL
3 3 SWA Cn 1lme
4 4 AlrAsla locus Cn Lelsure
3 3
6 6

8uslness Model Slmllar 8uslness Model ulsslmllar
1 vlslon 1 SouLhwesL only 2 AlrAsla Pub
2 A8S 2 8eglonal (SWA) and lnLernaLlonal (AA)
3 Code Share SouLhwesL wlLh A1A AlrAsla wlLh ??? 3 AlrAsla owned Lermlnal LCC1
4 SouLhwesL vacaLlon ackage and AlrAsla 8udgeL Pollday 4 AlrAsla more opLlons SMS
3 3 AlrAsla own Academy and MalnLenance Pub
6 6 AlrAsla pracLlce Lwo alrcrafL Lype 8oelng 737 Alrbus 320 lnsLead slngle alrcrafL Lype

MarkeL

lnLerconnecLlvlLy ln Asla
Alr Asla has an advanLage ln LhaL Lhe conLlnenL has almosL no lnLerreglonal hlghways and no hlghspeed
lnLernaLlonal rall 1here ls a loL of sea ln beLween Alr Lravel ls Lhe only way Lo develop lnLerconnecLlvlLy
ln Asla

8uslness Model

8ooklng
usually Lhe lowcosL carrler sell LlckeLs from Lhelr Web SlLes ln order Lo save Lhe cosLs and Lhe
promoLlonal fare musL be booked onllne Powever Alr Asla of Malaysla works wlLh Slngapore osL
Cfflce ln order Lo leL Lhe cusLomers buy Lhe LlckeLs ln Lhe posL offlce 1herefore Lhe cusLomers noL only
can book on llne buL also book Lhe LlckeLs Lhrough phones or send messages from cell phones 1hls
provldes one more good way Lo leL cusLomers Lo buy LlckeLs more convenlenL

1wo 1ype of AlrcrafL
Alr Asla have Lwo Lype of alrcrafL 8oelng 737 and Alrbus A320 A320 alrcrafL ls blg dlfferenL from oLhers
lL has a capaclLy for 162 passengers offer passengers flxed seaLlng and a flxed feaLure legroom of 32
lnches a full four lnches more Lhan whaL a Lyplcal lowcosL carrler offers

Low labor cosL
1he labor cosL of SouLhwesL Alrllnes ls usually lower Lhan Lhe malnsLream alrllnes maybe only abouL
forLy percenL of Lhem (Anon 1997) uue Lo many reasons as Lhe sLaffs are younger Lhere are no
addlLlonal cosLs on senlor sLaff or Lhose reLlred sLaff

1he flrsL 8udgeL Alrllne ln Asla AlrAsla ls based ln Malaysla Crlglnally founded by a governmenLowned
conglomeraLe u88Plcom Lhe heavlly lndebLed alrllne was purchased by former 1lme Warner execuLlve
1ony lernandess company 1une Alr Sdn 8hd for Lhe symbollc sum of one rlngglL on uecember 2nd
2001
lernandes proceeded Lo englneer a remarkable Lurnaround Lurnlng a proflL ln 2002 and launchlng new
rouLes from lLs hub ln kuala Lumpur lnLernaLlonal AlrporL aL breakneck speed undercuLLlng former
monopoly operaLor Malaysla Alrllnes wlLh promoLlonal fares as low as uS $230
ln 2003 AlrAsla opened a second hub aL Senal AlrporL ln !ohor 8ahru near Slngapore and launched lLs
flrsL lnLernaLlonal fllghLs Lo lndonesla As of uecember 2004 AlrAsla and lLs assoclaLed companles
operaLed LwenLyslx 8oelng 737300 fllghLs Lo Macau sLarLed ln !une 2004
ln uecember 2004 AlrAslas lndoneslan assoclaLed company AWAl8 was relaunched wlLh !akarLa as lLs
hub AlrAsla also ordered 40 Alrbus A320 Lo replace Lhelr agelng 8oelng 737300 fleeL and Lhe flrsL
Alrbus A320 ls expecLed Lo arrlve ln !anuary 2006
AlrAsla's alrllne desLlnaLlons are 8runel Alor SLar !ohor 8ahru kuala Lumpur koLa 8haru koLa
klnabalu kuala 1erengganu kuchlmg Labuan Langkawl Mlrl enang Sandakan Slbu 1awau 8angkok
PaLyal hukeL and Slngapore MosL desLlnaLlons are ln SouLheasL Asla
AlLhough AlrAsla only has belng operaLlng Lhe buslness for abouL four year Llll now (2003) 1 mllllon
passengers Lraveled per year AlrAsla also clalmed Lhelr operaLlng cosL ls lower Lhan oLher alrways ln
Asla for abouL a half of percenL Lherefore AlrAsla can offer Lhe affordable Lrlp for Lhe Malayslans or
oLher counLry's clLlzens ln SouLh Asla

8LlL8LnCLS
(lnclude only sources clLed ln LexL)
1ype your 8lbllography/8eferences ln a Lable uslng lnvlslble grldllnes 1hls enables you Lo sorL
alphabeLlcally uslng MlcrosofL Word 1able SorL use slnglellne spaclng wlLh one llne space beLween
lLems 1he examples below cover mosL Lypes of documenLs you wlll encounLer ay careful aLLenLlon Lo
spaclng (one space afLer all puncLuaLlon marks) and Lo Lhe use of LlLle case and senLence case ln LlLles of
books subLlLles of books [ournal arLlcles and [ournal LlLles uo noL [usLlfy Lhe rlghL margln ConsulL van
Aswegen (2006) as well as Parvard for uummles (for shorL cuLs)
1 1he Cuardlan 8yanalr cuLs recllnlng seaLs sulLcases nexL Lo go Sydney Mornlng Perald 17 lebruary
2004 vlewed 9 lebruary 2007
2 SWA ln a nuLshell SouLhwesL Alrllnes ress klLs 9 SepLember 2006 vlewed 28 !anuary 2007
3 1hompson A A SLrlckland A ! 2004 SLraLegy ManagemenL ConcepLs and Cases 13Lh edn McCraw
Plll lrwln
4 Moore ! 2006 1rlbal knowledge 8uslness Wlsdom 8rewed from Lhe Crounds of SLarbucks CorporaLe
CulLure kaplan 8uslness unlLed SLaLed of Amerlca
3 lrelberg k L and lrelberg ! A 1996 nuLs! SouLhwesL Alrllnes Crazy 8eclpe for 8uslness and ersonal
Success 8ard ress unlLed SLaLed of Amerlca
6 Cross 1 S 2004 oslLlvely CuLrageous Servlce Pow Lo uellghL and AsLound ?our CusLomers and Wln
1hem for Llfe 2nd edn kaplan 8uslness unlLed SLaLed of Amerlca
7 Sunoo 8 1993 Pow fun flles aL SouLhwesL Alrllnes ersonnel !ournal !une 1993 vol 74 no 6 pp
6273
8 8rooker k 1he Chalrman of Lhe 8oard Looks 8ack lorLune 28 May 2001 pp 6276
9 uonlon ! Alr Perbs SecreL Weapon Chlef LxecuLlve (uS) !ulyAugusL 1999 pp 3239
10 1he new ?ork 1lmes Al8LlnL 1C 1LS1 A 8LSL8vA1lCn S?S1LM Wl1PCu1 1lCkL1S 3 AugusL 1994
11 8enneLL 8andall u and !ames M Craun 1993 1he Alrllne ueregulaLlon LvoluLlon ConLlnues 1he
SouLhwesL LffecL Cfflce of AvlaLlon Analysls uS ueparLmenL of 1ransporLaLlon May 1993
12 CuperLlno Callfornla uSA
13 SouLhwesL Alrllnes lmplemenLs SAML wlLh Cbllx neLolnL
14 AugusL 13 2003
13 hLLp//xmlcoverpagesorg/CbllxSouLhwesLAlrllneshLml
16 SouLhwesL Alrllnes hlsLory of success ls bullL on glvlng our CusLomers a poslLlvely ouLrageous level
of servlce ConslsLenLly geLLlng Lhem Lo Lhelr desLlnaLlon onLlme ls a blg parL of LhaL sald 8rlan 8uege
manager of AppllcaLlon lrameworks SouLhwesL Alrllnes 8y deploylng Cbllx neLolnL lnLegraLed wlLh
SAML our mechanlcs can spend more Llme keeplng our fleeL alrborne and our fllghLs onLlme raLher
Lhan searchlng for losL passwords or relaLed lnformaLlon A SAMLlnLegraLed ldenLlLy and access
managemenL lnfrasLrucLure dellvers slgnlflcanL buslness beneflLs lncludlng reduced admlnlsLraLlve cosLs
and lncreased producLlvlLy
17 Cross 1 S 2004 oslLlvely CuLrageous Servlce Pow Lo uellghL and AsLound ?our CusLomers and Wln
1hem for Llfe 2nd edn kaplan 8uslness 1 SepLember 2004 unlLed SLaLed of Amerlca
18 8oberL Walberg 2007 SouLhwesL CreaL alrllne bad lnvesLmenL SLreeL aLrol 11 !an 2007

Appendlx A
hLLp//wwwsouLhwesLcom/abouL_swa/alrbornehLml
We WerenL !usL Alrborne ?esLerday
________________________________________
1lme flles when youre havlng fun!
More Lhan 33 years ago 8ollln klng and Perb kelleher goL LogeLher and declded Lo sLarL a dlfferenL klnd
of alrllne 1hey began wlLh one slmple noLlon lf you geL your passengers Lo Lhelr desLlnaLlons when Lhey
wanL Lo geL Lhere on Llme aL Lhe lowesL posslble fares and make darn sure Lhey have a good Llme
dolng lL people wlll fly your alrllne And you know whaL? 1hey were rlghL
WhaL began as a small 1exas alrllne has grown Lo become one of Lhe largesL alrllnes ln Amerlca 1oday
SouLhwesL Alrllnes flles more Lhan 80 mllllon passengers a year Lo 62 greaL clLles all across Lhe counLry
and we do lL more Lhan 3100 Llmes a day
We have 468 of Lhe newesL [eLs ln Lhe naLlon wlLh an average age of 9 years lncluded ln our fleeL are
Lhree flylng klller whales Shamu Cne 1wo and 1hree Lone SLar Cne palnLed llke Lhe 1exas flag Lo
celebraLe SouLhwesL Alrllnes 20Lh Annlversary ln a sLyle and manner second Lo none Arlzona Cne a
symbol of Lhe lmporLance of Lhe sLaLe of Arlzona Lo SouLhwesL Alrllnes Callfornla Cne a hlghflylng
LrlbuLe Lo Lhe sLaLe of Callfornla Sllver Cne our 23Lh Annlversary plane 1rlple Crown Cne dedlcaLed Lo
Lhe Lmployees of SouLhwesL Alrllnes for Lhelr marvelous achlevemenL of flve consecuLlve annual 1rlple
Crown awards nevada Cne a hlghflylng LrlbuLe Lo Lhe sLaLe of nevada new Mexlco Cne also known
as Zla palnLed ln Lhe brlghL yellow of Lhe new Mexlco flag Maryland Cne emblazoned wlLh an arLlsL's
renderlng of Lhe Maryland flag and Lhe newesL addlLlon Slam uunk Cne symbollzlng our speclal
parLnershlp wlLh Lhe n8A
ln May 1988 we were Lhe flrsL alrllne Lo wln Lhe coveLed 1rlple Crown for a monLh 8esL CnLlme
8ecord 8esL 8aggage Pandllng and lewesL CusLomer ComplalnLs Slnce Lhen weve won lL more Lhan
LhlrLy Llmes as well as flve annual 1rlple Crowns for 1992 1993 1994 1993 and 1996 and no oLher
alrllne has conLrlbuLed more Lo Lhe advancemenL of Lhe commerclal alrllne lndusLry Lhan SouLhwesL
Alrllnes We were Lhe flrsL alrllne wlLh a frequenL flyer program Lo glve credlL for Lhe number of Lrlps
Laken and noL Lhe number of mlles flown We also ploneered senlor dlscounLs lun lares lun acks a
sameday alr frelghL dellvery servlce LlckeLless Lravel and many oLher unlque programs
________________________________________
We Look a greaL ldea and made lL fly
8ead on Lo flnd ouL more abouL Lhls llLLle upsLarL Lhree[eL alrllne and how lL goL off Lhe ground Lo
become one of Amerlcas largesL and besLloved commerclal alrllnes ln hlsLory

1971
WlLh resldenL Lamar Muse aL Lhe helm SouLhwesL Alrllnes Lakes off on lLs malden voyage and beglns
servlce beLween uallas PousLon and San AnLonlo Amerlcas mosL unlque alrllne ls born
1972
All PousLon servlce ls Lransferred Lo PousLons Pobby AlrporL from PousLon lnLerconLlnenLal AfLer all
sald Perb kelleher cofounder of Lhe alrllne why should our CusLomers have Lo drlve 43 mlnuLes Lo
Lake a 40mlnuLe fllghL?
1973
WhaL a year lL was! SouLhwesL flles wlLh Lhe 1exas AeronauLlcs Commlsslon Lo exLend servlce Lo Lhe 8lo
Crande valley 8uSP Cargo servlce whlch provldes sameday alrporL cargo dellvery ls lnLroduced and
SouLhwesL has lLs flrsL proflLable year
1974
SouLhwesL carrles lLs one mllllonLh passenger and spends $400000 Lo remodel Lhelr Lermlnal aL
PousLons Pobby AlrporL by addlng Lwo new boardlng gaLes and deparLure lounges
1973
ermlsslon was flnally granLed for SouLhwesL Lo fly Lo Lhe 8lo Crande valley vla Lhe Parllngen AlrporL
wlLh four roundLrlps each buslness day 1he SouLhwesL was belng won once agaln
1976
SouLhwesL geLs clearance Lo begln spreadlng Luv Lo AusLln Corpus ChrlsLl Ll aso Lubbock and
Mldland/Cdessa And wlLhln flve shorL years SouLhwesL places lLs slxLh 8oelng 737 lnLo servlce whlle
flylng over one and a half mllllon saLlsfled CusLomers Lo Lhelr desLlnaLlons ulsco muslc mood rlngs and
black llghL posLers fade away buL SouLhwesL Alrllnes was here Lo sLay
1977
SouLhwesL carrles lLs flve mllllonLh passenger and SouLhwesL sLock ls llsLed on Lhe new ?ork SLock
Lxchange as Luv
1978
Lamar Muse sLeps down as resldenL and Perb kelleher fllls ln as lnLerlm resldenL CLC and Chalrman
of Lhe 8oard SouLhwesL alrcrafL n32 ls chrlsLened Lhe PerberL u kelleher Lo honor Lhe alrllnes co
founder LaLer ln Lhe year Poward uLnam ls unanlmously elecLed resldenL and Chlef LxecuLlve Cfflcer
Perb sLays on as permanenL Chalrman of Lhe 8oard
1979
SelfLlckeLlng machlnes are lnLroduced ln 10 clLles Lo make lL even fasLer and more convenlenL for
CusLomers Lo fly SouLhwesL and we begln servlce Lo new Crleans from uallas Lhe flrsL clLy ouLslde of
1exas Lo be served by SouLhwesL WlLh more planes more fllghLs and more responslve servlce
SouLhwesL becomes Amerlcas Company lane
1980
SouLhwesL added lLs 22nd 8oelng 737 Lo Lhe famlly and chrlsLened lL Lhe 8ollln W klng ln honor of Lhe
cofounder of Lhe alrllne lL was Lhe flrsL 737 Lo be compleLely owned by SouLhwesL Alrllnes
1981
SouLhwesL celebraLes a decade of Love SouLhwesL SLyle WlLh fun games and more savlngs for
everyone SouLhwesL launches lLs nexL decade of ouLsLandlng servlce
1982
PerberL u kelleher comes aboard as permanenL resldenL CLC and Chalrman of Lhe 8oard for
SouLhwesL Alrllnes and SouLhwesL spreads lLs wlngs Lo San lranclsco Los Angeles San ulego Las vegas
and hoenlx
1983
Ma[or schedule lncreases are adopLed Lhree addlLlonal 8oelng 737200s are purchased and SouLhwesL
flles over 9300000 saLlsfled CusLomers
1984
SouLhwesL ls ranked number one ln CusLomer saLlsfacLlon for Lhe fourLh consecuLlve year SouLhwesL
Alrllnes lnfllghL magazlne SplrlL celebraLes lLs 13Lh year of flylng hlgh and SouLhwesL unvells Lhe flrsL
300 serles alrcrafL ln lLs 8oelng 737 fleeL chrlsLened Lhe SplrlL of klLLy Pawk
1983
SouLhwesL Lakes off wlLh new servlce Lo SL Louls Mlssourl and Chlcagos convenlenL Mldway AlrporL
SouLhwesL names Lhe 8onald Mcuonald Pouse as lLs prlmary charlLy and launches Lhe !usL Say When
campalgn whlch esLabllshes SouLhwesL as Lhe mosL convenlenL polnLLopolnL carrler ln Lhe naLlon
1986
SouLhwesL celebraLes 13 years of low fares good Llmes and hlgh splrlLs! SouLhwesL fllers have even
more fun wlLh Lhe lnLroducLlon of lun lares and over 13 mllllon passengers Lhlnk of us as 1he
Company lane
1987
SouLhwesL celebraLes Lhe slxLh year ln a row as a reclplenL of Lhe 8esL Consumer SaLlsfacLlon record of
any conLlnenLal uS carrler Weekend lun acks whlch lnclude roundLrlp alr fare and hoLel are
lnLroduced and 14day advance purchase lun lares are reduced by as much as 23 Pow dld we do lL
fasLer cheaper and more fun Lhan any oLher alrllne ln Lhe sky? We dld lL smarLer
1988
SouLhwesL Alrllnes and Sea World of 1exas [oln flns Lo promoLe 1exas as a ma[or LourlsL aLLracLlon
1hrough Lhe new lrlends campalgn SouLhwesL becomes Sea World of 1exas offlclal alrllne and
creaLes Shamu Cne a 8oelng 737 palnLed llke Shamu Lhe klller whale LaLer ln Lhe year SouLhwesL
becomes Lhe offlclal alrllne of Sea World of Callfornla and SouLhwesL wlns Lhe flrsL 1rlple Crown8esL
Cn1lme 8ecord 8esL 8aggage Pandllng and lewesL CusLomer ComplalnLs
1989
A llLLle more Lhan a year and a half laLer SouLhwesL wlns lLs second 1rlple Crown Shamu 1wo ls born
and servlce beglns from Caklands lnLernaLlonal AlrporL
1990
SouLhwesL announces Lhe bllllon dollar revenue mark and becomes a Ma[or alrllne! SouLhwesL Alrllnes
and Lhe SouLhwesL Conference Leam up Lo make SouLhwesL Alrllnes Lhelr offlclal sponsor 1ermlnal 4 ln
hoenlx opens Shamu 1hree comes Lo Lhe surface Lo fly lLs colors And Lone SLar Cne Lakes Lo Lhe sky as
SouLhwesL Alrllnes 20Lh Annlversary flagshlp 8oelng 737
1991
SouLhwesL Alrllnes celebraLes 20 years of lovlng you!
1992
SouLhwesL wlns Lhe flrsL annual 1rlple Crown ln 1992 a feaL no oLher alrllne has been able Lo maLch ln a
slngle monLh!
1993
SouLhwesL expands Lo Lhe easL coasL and beglns servlce Lo 8alLlmore/WashlngLon lnLernaLlonal AlrporL
SouLhwesL Alrllnes wlns Lhe second annual 1rlple Crown ln 1993
1994
1he lndusLry leader does lL agaln! SouLhwesL lnLroduces 1lckeLless 1ravel ln four clLles Morrls Alr ls
merged wlLh SouLhwesL Arlzona Cne [olns Lhe fleeL Seven new clLles open lncludlng SeaLLle Spokane
orLland and 8olse ln Lhe aclflc norLhwesL SouLhwesL Alrllnes wlns Lhe Lhlrd consecuLlve 1rlple Crown
1993
1lckeLless 1ravel becomes avallable sysLemwlde ln !anuary Callfornla Cne debuLs ln SacramenLo
SouLhwesL adds servlce Lo Cmaha SouLhwesL Alrllnes wlns Lhe fourLh consecuLlve 1rlple Crown ln 1993
1996
llorlda servlce ls added 1ampa 8ay and lL Lauderdale ln !anuary and Crlando ln Aprll SouLhwesL
celebraLes 23 years of servlng you and puLs Lhe 23Lh Annlversary plane Sllver Cne lnLo servlce
1lckeLless 1ravel Cnllne debuLs on souLhwesLcom ln CcLober SouLhwesL lnauguraLes servlce from
rovldence 8hode lsland SouLhwesL wlns Lhe flfLh annual 1rlple Crown for 1996
1997
SouLhwesL sLarLs ouL Lhe year wlLh servlce Lo our 30Lh clLy !acksonvllle llorlda !ackson Mlsslsslppl
becomes Lhe 31sL clLy added ln AugusL 1rlple Crown Cne ls lnLroduced and [olns Lhe fleeL a LrlbuLe Lo
Lhe Lmployees of SouLhwesL Alrllnes ln uecember SouLhwesL accepLs Lhe dellvery of lLs flrsL 8oelng
737700 SouLhwesL ls Lhe launch cusLomer for 8oelng of Lhe nexL generaLlon 8oelng 737700
1998
SouLhwesL Alrllnes beglns new servlce Lo ManchesLer new Pampshlre on !une 7 1998
1999
SouLhwesL Alrllnes beglns new servlce Lo lsllp new ?ork on March 14 1999 and Lo 8alelghuurham
lnLernaLlonal AlrporL on !une 6 1999 nevada Cne a hlghflylng saluLe Lo Lhe sLaLe of nevada ls
lnLroduced Servlce Lo ParLford ConnecLlcuLs 8radley lnLernaLlonal AlrporL beglns on CcLober 31 1999
2000
Cn May 1 SouLhwesL Alrllnes lnLroduces SWA8lZ a Lool LhaL asslsLs company Lravel managers ln
booklng and Lracklng Lrlps made Lhrough souLhwesLcom SouLhwesL holds Lhe flrsL annual hoenlx Luv
Classlc Colf 1ournamenL and arLy on May 3 roceeds beneflL SouLhwesLs prlmary charlLy Lhe 8onald
Mcuonald Pouse new servlce Lo Albany lnLernaLlonal AlrporL beglns on May 8 and Lo 8uffalonlagara
lnLernaLlonal AlrporL on CcLober 8 SouLhwesLs LenLh speclalLy alrcrafL new Mexlco Cne ls unvelled
2001
SouLhwesL Alrllnes beglns new servlce Lo WesL alm 8each llorlda on !anuary 22 and Lo norfolk
vlrglnla on CcLober 8 Cn !une 18 SouLhwesL offlclally Lurns 30 years old and marks Lhe mllesLone wlLh
Lhe unvelllng of SplrlL Cne 1o celebraLe Lhe pasL and Lhe fuLure all 8oelng 737 dellverles wlll be ln Lhe
new Canyon 8lue exLerlor color scheme wlLh an all leaLher seaLlng conflguraLlon 1he exlsLlng fleeL wlll
be reLroflLLed over Llme lnLo Lhe new llvery
2002
SouLhwesL beglns Lhe gradual reLlremenL of reusable plasLlc boardlng cards and Leams wlLh l8M Lo offer
nearly 230 alrporL selfservlce checkln klosks 1he pro[ecL ls parL of a naLlonwlde efforL Lo reduce Lhe
amounL of Llme SouLhwesL CusLomers spend ln llne and Lo lmprove Lhe alrporL experlence followlng Lhe
SepL 11 2001 LerrorlsL aLLacks
2003
SouLhwesL Alrllnes announced LhaL lL would add performanceenhanclng 8lended WlngleLs Lo lLs currenL
and fuLure fleeL of 8oelng 737700's 1he vlsually dlsLlncLlve WlngleLs lmprove performance by
exLendlng Lhe alrplane's range savlng fuel lowerlng englne malnLenance cosLs and reduclng Lakeoff
nolse SouLhwesL Alrllnes also announced lLs parLnershlp wlLh Lhe AL 1elevlslon neLwork Lo fllm a real
llfe behlnd Lhe scenes look aL Lhe drama surroundlng commerclal alr Lravel Alr 1ransporL World
selecLed SouLhwesL Alrllnes Lhe Alrllne of Lhe ?ear for 2003 and SouLhwesL Alrllnes' 8apld 8ewards
rogram ls honored wlLh flrsL place awards for 8esL CusLomer Servlce 8esL 8onus romoLlon and 8esL
Award 8edempLlon aL lnsldellyer magazlne's 13Lh annual lreddle Awards
2004
SouLhwesL Alrllnes announces lLs 31sL consecuLlve year of proflLablllLy and beglns offerlng onllne
boardlng passes vla souLhwesLcom 1he onllne feaLure provldes addlLlonal convenlence Lo CusLomers
by allowlng Lhem Lo proceed Lo Lhelr deparLure gaLe wlLhouL sLopplng aL Lhe LlckeL counLer skycap or
selfservlce klosk Cn May 9 SouLhwesL Alrllnes launches servlce Lo hlladelphla lLs 60Lh alrporL WlLh
Lhe addlLlon of lLs hlladelphla servlce SouLhwesL now operaLes 2800 dally fllghLs Lo 60 alrporLs ln 39
clLles across Lhe unlLed SLaLes
2003
SouLhwesL Alrllnes launches lLs codeshare agreemenL wlLh A1A Alrllnes provldlng SouLhwesL CusLomers
access Lo more clLles wlLh more connecLlons and generaLlng almosL $30 mllllon ln annual revenue for
Lhe Company SouLhwesL announces lLs 32nd consecuLlve year of proflLablllLy an lndusLry record
SouLhwesL lnLroduces boLh ulnC! Lhe flrsLever dlrecL llnk Lo CusLomer's compuLer deskLops LhaL
dellvers llve updaLes on Lhe hoLLesL deals and Lhe souLhwesLglfLcard` SouLhwesL beglns flylng Lo Lhe
wonderful clLles of lLLsburgh (l1) and lL Myers (8SW) 1o supporL Lhe efforLs Lo repeal Lhe WrlghL
AmendmenL SouLhwesL launches wwwseLlovefreecom SouLhwesL surpasses 3000 dally fllghLs and
unvells Lwo speclalLy alrcrafL Maryland Cne and Slam uunk Cne (ln honor of lLs offlclal alrllne sLaLus
wlLh Lhe n8A) souLhwesLcom exLends Cnllne Checkln Lo 24 hours prlor Lo deparLure And flnally
Mlssourl ls llfLed from Lhe consLralnLs of Lhe WrlghL AmendmenL!
As you can see weve been busy Lhese pasL 33 years And we promlse LhaL Lhe nexL 33 wlll be [usL as
funfllled and exclLlng as Lhe lasL Weve accompllshed qulLe a blL and along Lhe way weve earned a LlLle
no oLher alrllne ln Lhe lndusLry can clalm 1he only shorLhaul lowfare hlghfrequency polnLLopolnL
carrler ln Amerlca We are proud of our accompllshmenLs and lL [usL goes Lo show LhaL Llme really does
fly when youre havlng fun!
updaLed CcLober 18 2006

8lbllography
1 AvlaLlon Week Space 1echnology hLLp//wwwavlaLlonweekcom/aw/

Company Cvervlew

1ask Cne

lnLroducLlon

nofrllls alrllnes usually focus on lowcosL sLraLegles ln every aspecL of Lhelr buslness 1he lowcosL
sLraLegles can be lmplemenLed by applylng varlous facLors such as uslng one Lype of alrplane uslng
secondary alrporLs wlLh shorL fllghLs polnLLopolnL LranslL wlLh slmpllfled rouLes speedy Lurnaround
Llmes and asslgnlng mulLlple roles Lo sLaff ln order Lo reduce Lhe labor cosL 1hese Lypes of sLraLegles leL
you play a wlnwln slLuaLlon because once Lhe cosL ls reduced lL beneflLs Lhe passengers as well as Lhe
company lLself 8uL ln real Llme lL ls noL necessary LhaL every lowcosL carrler alrllne wlll apply all Lhe
above menLloned sLraLegles sLlll Lhey can achleve beLLer resulLs due Lo efflclenL lmplemenLaLlon of such
sLraLegles

aclflc SouLhwesL Alrllnes orlglnaLed Lhe concepL of flrsL lowcosL carrler ln May 1949 Powever
SouLhwesL Alrllnes sLarLed ln 1971 and achlevlng a slgnlflcanL proflL every year slnce 1973 Such progress
of lowcarrler alrllnes causes problems for fullservlce alrllne because of compeLlLlon on prlce 1he prlce
ls Lhe maln facLor for cusLomers when selecLlng an alrllne 8eLween Lhe years 2001 and 2003 a large
number of fullservlce alrllnes faced heavy losses due Lo Lerrorlsm and wars ln Lhese days lowcosL
carrlers llke SouLhwesL remalned proflLable desplLe Lhe desLrucLlon ln avlaLlon lndusLry

As per Lhe requlremenL l selecLed a Lool called SWC1 AnAL?SlS" ln order Lo analyze Lhe company's
poLenLlal resource sLrengLhs and weaknesses opporLunlLles and LhreaLs lollowlng are Lhe flndlngs of
my analysls

SWC1 AnAL?SlS

oLenLlal 8esource SLrengLhs and CompeLlLlve CapablllLles

a) LowCosL CperaLlons LllmlnaLlon of onboard servlce
SouLhwesL has ellmlnaLed Lhe onboard servlces llke enLerLalnmenL caLerlng seaLs reservaLlons
alrhosLess and oLher complemenLary servlces 1he ob[ecLlve of Lhls ellmlnaLlon ls Lo
achleve Lhe lowcosL and beLLer Lurnaround Llme

b) LowCosL CperaLlons Lconomy Class
ln order Lo malnLaln Lhe lowcosL sLraLegy SouLhwesL ls focuslng on Lhe Lconomy Class
passengers Lo geL more Lravelers lurLhermore Lhe seaL space has also been narrowed down Lo
puL more seaLs ln Lhe plane cabln

c) Work LnvlronmenL Love Care and lun
SouLhwesL Alrllnes belleve ln Lhe facL LhaL Lhe organlzaLlon should have open en[oyable
envlronmenL Lmployee producLlvlLy depends on Lhelr peace of mlnd durlng worklng hours
SouLhwesL Alrllnes allow Lhelr employees Lo have fun and enLerLalnmenL durlng worklng hours
and Lhe employees are noL bound Lo any hard and fasL resLrlcLed rules And Lhls resulLs ln a good
producLlvlLy lurLhermore Lo promoLe Lhls corporaLe culLure of fun and love Lhe SouLhwesL ls
also llsLed on Lhe new ?ork SLock Lxchange as Luv" A blog LlLled 1he nuLs abouL SouLhwesL" ls
also launched Lo creaLe a personal love and fun relaLlonshlp beLween Lhe company bloggers and
Lhe readers (hLLp//wwwblogsouLhwesLcom)

d) lasL 1urnaround 1lme
SouLhwesL alrllnes have shorL fllghLs ln Lerms of Llmeperlod 1hls allows Lhem Lo use Lhelr
planes aL maxlmum 1he consLanL uLlllzaLlon of Lhelr alrcrafLs ensures Lhe maxlmum revenue whlch
lmproves Lhe Lurnaround Llme for SouLhwesL Alrllnes

e) Cne 1ype AlrcrafL
SouLhwesL Alrllnes uses only a slngle Lype of alrcrafLs named 8oelng 737" 1hls beneflLs Lhem ln
dlfferenL areas such as spares and equlpmenLs can be easlly replaced Lmployees Lralnlng
reduce slgnlflcanLly 1he malnLenance cosL for dlfferenL Lypes of alrcrafLs ls usually very hlgh 8y uslng
slngle Lype of alrcrafL SouLhwesL cuLs down Lhelr cosL by a large number when purchaslng or
repalrlng alrcrafLs 8oelng 737 has lowfuel consumpLlon and possesses low operaLlng cosL as
compare Lo oLher alrcrafLs

f) Secondary AlrporLs
8oelng 737 alrcrafL are smaller ln slze as compare Lo usual alrcrafLs Lherefore Lhey can land and
Lake off on secondary alrporLs 1hls characLerlsLlc also leads Lo less alrporL fees as compare Lo
prlmary alrporLs where Lhe fees ls relaLlvely very hlgh Secondary alrporLs also help Lo avold alr
Lrafflc delays LhaL ma[or alrllnes face on Lhe prlmary alrporLs SouLhwesL used shuLLle buses Lo
send Lhe passengers Lo Lhelr desLlnaLlons

g) Puman 8esource MaxlmlzaLlon Lmployees MulLlple 8oles
SouLhwesL manages Lhelr personnel cosLs by applylng mulLlple roles Lo one employee Lvery
fllghL has 3 or 4 aLLendanLs All Lhe aLLendanLs look afLer Lhe LlckeL checklng cabln cleanlng
selllng foods and drlnks

h) ulrecL ulsLrlbuLlon Channels
SouLhwesL easlly saves 3 Lo 10 of every fare by selllng Lhe LlckeLs dlrecLly Lo Lhe cusLomers
no wholesaler or LlckeL agenL ls lnvolved ln Lhe mlddle no one else en[oys Lhls savlng
CusLomers can easlly geL Lhe LlckeLs on call or on lnLerneL as well by paylng uslng CredlL Cards

l) CusLomer SaLlsfacLlon CuaranLeed
SouLhwesL has been very successful Lo provlde guaranLeed cusLomer saLlsfacLlon lollowlng ls
Lhe sLaLlsLlcs lssued by uS ueparLmenL of 1ransporLaLlon Alr 1ravels ln lebruary 2009 whlch shows
Lhe lowesL cusLomer complaln raLlo achleved by SouLhwesL

*lrom Lhe 2009 year uS ueparLmenL of 1ransporLaLlon Alr 1ravel Consumer 8eporL lssued lebruary
2010

[) CnLlme lllghL CperaLlons
SouLhwesL alrllnes have been very efflclenL ln Lhelr fllghLs Llmlngs lollowlng sLaLlsLlcs shows
LhaL SouLhwesL has secured flrsL place ln Lhe llsL of CnLlme erformance 8anklng

*lrom Lhe 2009 year uS ueparLmenL of 1ransporLaLlon Alr 1ravel Consumer 8eporL lssued lebruary
2010

k) SLrong llnanclal oslLlon
ConLlnuous proflLable years have also been a poLenLlal sLrengLh and a compeLlLlve capablllLy
over Lhe oLher alrllnes 1he followlng lncome sLaLemenL shows Lhe pasL Lhree year's Lrend of
SouLhwesL's roflLablllLy

SCu1PWLS1 Al8LlnLS
lnCCML S1A1LMLn1

All numbers ln uSu $ Lhousands

Source hLLp//flnanceyahoocom/q/ls?sLuv+lncome+SLaLemenLannual


oLenLlal 8esource Weaknesses and CompeLlLlve ueflclencles

a) Slngle roducer uependablllLy
Cne of Lhe weaknesses ls Lhelr dependablllLy on one producer of 8oelng 737 le 8oelng
Commerclal Alrplanes Slnce SouLhwesL only uses a slngle Lype of alrcrafL Lherefore Lhls ls one
of Lhe weakesL areas for SouLhwesL SouLhwesL wlll be dlrecLly affecLed lf anyLhlng goes wrong
wlLh 8oelng Commerclal Alrplanes

b) lnconvenlenL 8ooklng
lllghLs booklng become dlfflculL aL Llmes because lL ls hard Lo flnd agenLs and everyone does noL
know Lhe use of lnLerneL

c) 8uslness Class
SouLhwesL focuses only on Lconomy Class and Lhey narrowed down Lhelr seaLlng as well Lo
lncrease Lhe capaclLy of seaLs ln Lhe cabln 1hls sLraLegy losses a large markeL of buslness class
cusLomers who can pay beLLer raLes Large alrllnes geL beneflLs of Lhe 8uslness Class CusLomers
whereas SouLhwesL compleLely mlsses ouL Lhls secLor

d) MulLlCounLry Coverage
SouLhwesL only provlde Lravelllng faclllLy wlLhln Lhe unlLed SLaLes 1hey do noL Lravel
lnLernaLlonally 1herefore SouLhwesL Alrllnes ls mlsslng ouL a large markeL for lnLernaLlonal
Lravelllng

e) assengerCrlenLed 8evenue
SouLhwesL ls a lowcosL alrllne 1helr revenues are LoLally dependenL on Lhe number of
passengers fly ln a Lrlp lL means LhaL one empLy seaL ln any fllghL leads Lowards Lhe losses Plgher
Lhe number of passengers ln a fllghL hlgher wlll be Lhe revenue and lower Lhe number of passengers
ln a fllghL lower wlll be Lhe revenue

f) Low CuallLy MlndseL of CusLomers
SouLhwesL LargeLs Lhe cusLomers by charglng Lhem a low prlce 1hls can be Lhelr weakness for
such cusLomers who belleves poor quallLy ln low prlce 1here are cusLomers who are wllllng Lo
pay hlgh raLes keeplng ln mlnd LhaL expenslve alrllne ls much beLLer Lhan Lhe cheapesL one

1ask 1wo

a) SouLhwesL's Cverall SlLuaLlon based on Lhe crlLlcal facLors hlghllghLed ln 1ask 1

1he overall slLuaLlon of SouLhwesL Alrllnes ls preLLy shlny 1hey have achleved Lhelr goals ln a very
effecLlve manner 1helr sLrengLhs led Lhem Lowards consLanL success 1hey have been Lhe lndusLry
leader for pasL years ln lowcosL carrlers 1hey have proved Lhemselves as a CS (oslLlvely CuLrageous
Servlce) Lo Lhelr cusLomers SouLhwesL geLs Lhe credlL Lo dlscover a markeL segmenL who wanLs Lo have
a comforLable as well as affordable Lravelllng carrler wlLhln Lhe unlLed SLaLes SouLhwesL appeared ln
Lhe SLaLe aL Lhe Llme when Lhere was a need for domesLlc Lravellng buL due Lo hlgh raLes for Lhelr
compeLlLors lL was unable for cusLomers Lo fly uslng a carrler

WlLh Lhe help of effecLlve lowcosL sLraLegles SouLhwesL has been very successful ln achlevlng proflL for
lasL consecuLlve years Speclally ln recesslon ln Lhe economy SouLhwesL produced a proflLable year As
menLloned above ln Lhe lncome SLaLemenL SouLhwesL keeps on generaLlng lncome for lasL years 1helr
performance has been ouLsLandlng ln Lhe alr Lravel lndusLry 1he cusLomers of SouLhwesL are almosL
100 saLlsfled wlLh Lhelr producL quallLy and servlce 1hey have been Lop raLed ln performance ranklng
and Lhey also achleved lowesL raLlo of cusLomer's complalnLs 1he envlronmenL provlded by Lhe
SouLhwesL Alrllnes Lo Lhelr Lmployees ls very lovlng and en[oyable 1helr employees are hlghly
moLlvaLed and Lhe love Lo serve Lhe cusLomers wlLh Lhelr personal care AparL from Lhe successful sLory
Lhere are some negaLlve aspecLs of SouLhwesL Alrllnes whlch affecL Lhelr buslness A very lmporLanL and
may be harmful for SouLhwesL ls Lhe dependablllLy on slngle producer of Lhelr 8oelng 737 AlrcrafL 1hls
bounds Lhem Lo sLlck wlLh one plece of source Lo run Lhe buslness lurLhermore Lhe lowprlce sLraLegy
someLlmes becomes dlsadvanLage for Lhem when lL comes Lo be selecLed by Lhe cusLomers who are
wllllng Lo pay hlgh raLes and bellevlng low quallLy ln low raLes Slmllarly Lhe processlng wlLhln Lhe
unlLed SLaLes also bounds Lhem Lo capLure Lhe markeL exlsLs beyond Lhe naLlonal boundarles 1here ls a
good opporLunlLy Lo enLer lnLo a new markeL where Lhe number of cusLomers wlll lncrease dramaLlcally
uesplLe Lhe low prlces SouLhwesL has been achleved consLanL lncomes buL Lhey are always LhreaLened
by fuel prlces and oLher economlc condlLlons ln a nuL shell SouLhwesL ls Lhe champ of varlous flelds ln
Lhe lndusLry buL aL Lhe same Llme Lhey are lacklng wlLh some requlred sLraLeglc acLlon LhaL needs Lo be
Laken as soon as posslble so LhaL Lhey can malnLaln Lhe same performance laLer on

b) AcLlons / Culdellnes / SuggesLlons for lmprovlng Company's SLraLegy

AfLer evaluaLlng all Lhe crlLlcal facLors ln 1ask 1 l have reached ouL Lo Lhe followlng suggesLlons or
guldellnes LhaL need Lo be applled ln SouLhwesL Alrllnes Lo lmprove Lhelr currenL sLraLegy

1 lnLerneL MarkeLlng CpporLunlLles should be pursued acLlvely
2 keep on Pedglng luel rlces
3 ln order Lo avold dlsrupLlve conLracL negoLlaLlons lmprove employee managemenL relaLlonshlps
4 SLarL capLurlng ouLslde Lhe unlLed SLaLes ln order Lo lncrease Lhe MarkeL Share
3 CurrenL and old employees can be reLalned by provldlng Lhem sLrucLured learnlng programs
6 no need Lo purchase new crafLs aL Lhls polnL ln Llme Lherefore lL can be deferred
7 keep on lmprovlng 1urnaround 1lmes
8 Cffer promoLlonal campalgns Lo Lhe cusLomers such as 8uy Cne CeL Cne lree" LlckeL offer Lo
lmprove offpeak fllghLs
9 ConLlnue Lo keep prlces as low as posslble so LhaL Lhe compeLlLors go ouL from Lhe buslness
10 SouLhwesL should adopL new Lechnologles llke LlckeLless Lravel and C 8eservaLlons


lmplemenLaLlon

ShorL1erm Coals
MosL Lhe buslness sLraLegles need Lo be lmplemenLed lmmedlaLely and should have sLarLed from
deparLmenL Lo deparLmenL

Mld1erm Coals
SLraLegles for lmprovlng buslness operaLlons and employees relaLlonshlps can be lmplemenLed ln a span
of one year maxlmum noL more Lhan one year

Long1erm Coals
1he hlgher level of managemenL should declde Lhe sLraLeglc changes such as expanslon merger or
purchase of 8oelng should be planned for nexL 3 Lo 10 years

1ask 1hree

a) Puman 8esource racLlces of SouLhwesL Alrllnes

lollowlng are Lhe pracLlces Laken ln place by SouLhwesL Alrllnes

a) Lmployees CrlenLed Company
usually companles belleve LhaL Lhelr cusLomers are more lmporLanL Lhan anyLhlng else and cusLomers
are always LreaLed on hlgh prlorlLy 8uL lf you look aL SouLhwesL Alrllnes Lhey have an opposlLe mlndseL
1hey always provlde flrsL prlorlLy Lo Lhelr Lmployees and Lhen Lhey focus on Lhe CusLomers SouLhwesL
knows LhaL Lo provlde superlor servlces Lo Lhe cusLomers employees have Lo be honesL and passlonaLe
wlLh Lhelr [obs 1o geL Lhe beLLer from Lhe employees SouLhwesL always focuses on wellbelng wlLh lLs
employees and provldes Lhem a [ob securlLy as well SouLhwesL applles Lhe concepL LhaL keep
employees happy Lhen Lhey wlll cusLomers happy (1hompson eL al 2004)" ln vlew of belng more
personal wlLh Lhe employees SouLhwesL changed Lhelr ersonnel ueparLmenL name Lo eople
ueparLmenL lurLhermore Lhe head of deparLmenL glven a deslgnaLlon of vlce resldenL of eople"
1he same has been done SLarbucks SLarbucks approach ls LhaL your comparaLor can copy your producL
buL lL ls noL posslble Lo copy your people 1he besL spokesperson of a company and lLs producL ls Lhe
one who ls happy wlLh hls [ob employer and colleagues lf employees are happy cusLomers wlll be
more Lhan happy as a resulL

b) 8eLLer CompensaLlon for Lmployees
SouLhwesL's employees are pald on an average of lndusLry pay scale 1he beneflLs and allowances
offered by SouLhwesL Lo Lhelr employees are beLLer Lhan oLher alrllnes Accordlng Lo survey SouLhwesL
pays Lhelr plloLs normally 10 above Lhe lndusLry average roflL sharlng plan ls lnLroduced by
SouLhwesL ln Lhe alr llnes lndusLry durlng 1973 ulfferenL savlng plans and sLock opLlon programs are
managed by SouLhwesL for dlfferenL group of employees AbouL 10 of SouLhwesL's ouLsLandlng shares
owned by Lhe employees of Lhe company

c) Labor unlon 8elaLlonshlp
More Lhan 80 of SouLhwesL's workforce ls represenLed by Lhe unlons 1herefore SouLhwesL Alrllnes ls
one of Lhe hlghly unlonlzed alrllnes ln Lhe unlLed SLaLes SouLhwesL has been very effecLlve and
successful ln deallng wlLh labor unlons SouLhwesL lLself appreclaLe and encourage unlon members Lo
ldenLlfy lssues or problems faced by Lhe employees 1he agreemenL wlLh Lhe unlons represenL open
envlronmenL for labor force Lo work ln wlLhouL any resLrlcLlons and Lhls acL helps ln lmprovlng
producLlvlLy

d) !ob SecurlLy
!ob SecurlLy ls one of Lhe ma[or problems for any employee ln any organlzaLlon no one can guaranLee
you LhaL you can work ln our company Llll you reLlremenL ln SouLhwesL CorporaLe CulLure Lhere ls no
pollcy Lo layoff Lhe employees A good relaLlonshlp has been bullL beLween among SouLhwesL unlons
and employees durlng llfeLlme of Lhe company by compleLely avoldlng Lhe layoffs

1here was a Llme ln SouLhwesL ln early days when Lhey had four 8oelngs and less Lhan 70 employees
uue Lo hard Llmes Lhey were unable Lo meeL Lhe payroll and Lhey had Lwo cholces elLher sell one of lLs
planes or lay off people SouLhwesL sold lLs boelng and asked Lhelr employees Lo cuL Lhe Lurnaround
Llme Lo down Lo 13 mlnuLes from 33 mlnuLes Lverybody ln Lhe company from lloLs Lo ramp agenLs was
plLchlng whaL ls necessary Lo help Lhe company"

e) ManagemenL Cpen uoor ollcy
ln large organlzaLlons lL ls very dlfflculL for employees Lo communlcaLe wlLh anyone ln hlgher
managemenL Lmployees can only communlcaLe Lo Lhelr llne managers regardlng Lhelr problems or
lssues unllkely ln SouLhwesL Lhe managers and senlors from managemenL are dlrecLed Lo spend one
Lhlrd of Lhelr Llme ouL of Lhelr offlce observlng Lhe operaLlons golng on ln Lhe flelds communlcaLlng
wlLh employees and llsLenlng Lo Lhelr concerns 1hls ls normally done by Lhe leaders who dlrecLly wanL
Lo know abouL Lhe execuLlon of Lhelr pollcles 1hey regularly vlslL Lhe dlfferenL flelds and deparLmenLs
and spend some Llme wlLh dlfferenL people aL every level

Managers are dlrecLed Lo be Lhere personally Lo llsLen Lhe people noL vla suggesLlon box SouLhwesL
always suggesLs Lo responslve on fllghL Lo Lhe cusLomers when Lhey need or lf Lhey have any query

SouLhwesL always encourages Lhelr employees Lo show up Lhelr concerns Lmployees feel free Lo share
Lhe ldeas or suggesLlons wlLh Lhe managers and Lhls reduces Lhe cosL and lmproves efflclency
Lmployees suggesLed SouLhwesL Lo buy Lhe parLs and assemble Cs Lhemselves for half of Lhe prlce of a
new C 1hls as a resulL helped SouLhwesL Lo save a mllllon dollar SouLhwesL's clerks broughL an ldea of
uslng L1lckeLs raLher Lhan paper LlckeLs

Some years earller lL was wrlLLen ln company pollcy LhaL no Lmployee wlll ever be punlshed for uslng
good [udgmenL and good old common sense when Lrylng Lo accommodaLe a CusLomer no maLLer whaL
our rules are LeL's sLarL leanlng Lowards our CusLomers agaln noL away from Lhem LeL's sLarL
encouraglng our llne employees Lo be a llLLle more flexlble and Lo Lake LhaL exLra mlnuLe Lo
accommodaLe speclal needs LeL's sLarL encouraglng our supervlsors Lo glve our CusLomers Lhe beneflL
of doubL"

A slmple hlerarchy of four layers of managemenL beLween a fronLllne manager and CLC leLs Lhlngs done
lmmedlaLely and efflclenLly wlLhouL any delays SouLhwesL belleves LhaL employees should feel
comforLable ln Laklng Lhelr own declslons and underLake Lhelr own efforLs

8eferences

* SouLhwesL Alrllnes CulLure values and CperaLlng racLlces (ln 1hompson A A SLrlckland A ! and
Camble ! (2003) CrafLlng and LxecuLlng SLraLegy (lourLeenLh LdlLlon) McCrawPlll new?ork

* SouLhwesL Alrllnes A case sLudy llnklng employee needs saLlsfacLlon and organlzaLlonal capablllLles
Lo compeLlLlve advanLage Pallowel 8

* Puselld M (1993) 1he lmpacL of human resource managemenL pracLlces on Lurnover producLlvlLy
and corporaLe flnanclal performance Academy of ManagemenL !ournal

* Mlddaugh u! (2007) Are you nuLs? Lessons from SouLhwesL Alrllnes (p 193) nurslng
ManagemenL MedSurg nurslng

* Clbson ! W 8lackwell C W (1999) llylng Plgh wlLh Perb kelleher A roflle ln CharlsmaLlc
Leadershlp (p 120) !ournal of Leadershlp SLudles

* SplneLLa L (2006) luel hedglng lessons from Lhe alrllnes (p 30) Alr lorce !ournal of LoglsLlcs vol
30 lss 3

* uaraban l 8 (2007) Low cosL carrler enLry lncumbenL responses and spaLlal compeLlLlon ln Lhe
unlLed SLaLes alrllne lndusLry 1he llorlda SLaLe unlverslLy

* lorLune Magazlne Aprll 2000

* hLLp//wwwsouLhwesLcom

* hLLp//wwwflnanceyahoocom

* hLLp//flnanceyahoocom/q/ls?sLuv+lncome+SLaLemenLannual

* hLLp//wwwalraslacom















Background:
Southwest Airlines is the largest airline measured by number oI passengers carried each year
within the United States. It is also known as a discount airline` compared with its large rivals in
the industry. Rollin King and Herb Kelleher Iounded Southwest Airlines on June 18, 1971. Its
Iirst Ilights were Irom Love Field in Dallas to Houston and San Antonio, short hops with no-
Irills service and a simple Iare structure. The airline began with one simple strategy: 'II you get
your passengers to their destinations when they want to get there, on time, at the lowest possible
Iares, and make darn sure they have a good time doing it, people will Ily your airline. This
approach has been the key to Southwest`s success. Currently, Southwest serves about 60 cities
(in 31 states) with 71 million total passengers carried (in 2004) and with a total operating
revenue oI $6.5 billion. Southwest is traded publicly under the symbol 'LUV on NYSE.
Facts:
* The Iirst major airline to Ily a single type oI aircraIt (Boeing 737s)
* The Iirst major airline to oIIer ticketless travel system wide including a Irequent Ilier program
based on number oI trips and not number oI miles Ilown.
* The Iirst airline to oIIer a proIit-sharing program to its Employees (instituted in 1973).
* The Iirst major airline to develop a Web site and oIIer online booking. In 2001, about 40
percent ($2.1 billion) oI its passenger revenue was generated through online bookings at
|http://www.southwest.com|. Southwest's cost per booking via the Internet is about $1, compared
to a cost per booking through travel agents oI $6 to $8.
Key competitive advantages:
* Low Operational costs / High Operational EIIiciency
* Award winning customer service
* Human Resource practices / Work culture
Operations Analysis Competitive Dimensions:
Southwest clearly has a distinct advantage compared to other airlines in the industry by
executing an eIIective and eIIicient operations strategy that Iorms an important pillar oI its
overall corporate strategy. Given below are some competitive dimensions that will be studied in
this paper.
1. Operational Costs and EIIiciency
2. Customer Service
3. Employee/Labor Relations
4. Technology
1. Operational Costs and EIIiciency
AIter all, the airline industry overall is in shambles. But, how does Southwest Airlines stay
proIitable? Southwest Airlines has the lowest costs and strongest balance sheet in its industry,
according to its chairman Kelleher. The two biggest operating costs Ior any airline are labor
costs (approx 40) Iollowed by Iuel costs (approx 18). Some other ways that Southwest is
able to keep their operational costs low is - Ilying point-to-point routes, choosing secondary
(smaller) airports, carrying consistent aircraIts, maintaining high aircraIt utilization, encouraging
e-ticketing etc.
Labor Costs
The labor costs Ior Southwest typically accounts Ior about 37 oI its operating costs. Perhaps
the most critical element oI the successIul low-Iare airline business model is achieving
signiIicantly higher labor productivity. According to a recent HBS Case Study, southwest
airlines is the 'most heavily unionized US airline (about 81 oI its employees belong to an
union) and its salary rates are considered to be at or above average compared to the US airline
industry. The low-Iare carrier labor advantage is in much more Ilexible work rules that allow
cross-utilization oI virtually all employees (except where disallowed by licensing and saIety
standards). Such cross-utilization and a long-standing culture oI cooperation among labor groups
translate into lower unit labor costs. At Southwest in 4th quarter 2000, total labor expense per
available seat mile (ASM) was more than 25 below that oI United and American, and 58 less
than US Airways.
Carriers like Southwest have a tremendous cost advantage over network airlines simply because
their workIorce generates more output per employee. In a study in 2001, the productivity oI
Southwest employees was over 45 higher than at American and United, despite the
substantially longer Ilight lengths and larger average aircraIt size oI these network carriers.
ThereIore by its relentless pursuit Ior lowest labor costs, Southwest is able to positively impact
its bottom line revenues.
Fuel Costs
Fuel costs is the second-largest expense Ior airlines aIter labor and accounts Ior about 18 percent
oI the carrier's operating costs. Airlines that want to prevent huge swings in operating expenses
and bottom line proIitability choose to hedge Iuel prices. II airlines can control the cost oI Iuel,
they can more accurately estimate budgets and Iorecast earnings. With growing competition and
air travel becoming a commodity business, being competitive on price was key to any airline`s
survival and success. It became hard to pass higher Iuel costs on to passengers by raising ticket
prices due to the highly competitive nature oI the industry.
Southwest has been able to successIully implement its Iuel hedging strategy to save on Iuel
expenses in a big way and has the largest hedging position among other carriers. In the second
quarter oI 2005, Southwest`s unit costs Iell by 3.5 despite a 25 increase in jet Iuel costs.
During Fiscal year 2003, Southwest had much lower Iuel expense (0.012 per ASM) compared to
the other airlines with the exception oI JetBlue as illustrated in exhibit 1 below. In 2005, 85 per
cent oI the airline`s Iuel needs has been hedged at $26 per barrel. World oil prices in August
2005 reached $68 per barrel. In the second quarter oI 2005 alone, Southwest achieved Iuel
savings oI $196 million. The state oI the industry also suggests that airlines that are hedged have
a competitive advantage over the non-hedging airlines. Southwest announced in 2003 that it
would add perIormance-enhancing Blended Winglets to its current and Iuture Ileet oI Boeing
737-700`s. The visually distinctive Winglets will improve perIormance by extending the
airplane`s range, saving Iuel, lowering engine maintenance costs, and reducing takeoII noise.
Point-to-Point Service
Southwest operates its Ilight point-to-point service to maximize its operational eIIiciency and
stay cost-eIIective. Most oI its Ilights are short hauls averaging about 590 miles. It uses the
strategy to keep its Ilights in the air more oIten and thereIore achieve better capacity utilization.
Secondary Airports
Southwest Ilies to secondary/smaller airports in an eIIort to reduce travel delays and thereIore
provide excellent service to its customers. It has led the industry in on-time perIormance.
Southwest has also been able to trim down its airport operations costs relatively better than its
rival airlines.
Consistent aircraIts
At the heart oI Southwest's success is its single aircraIt strategy: Its Ileet consists exclusively oI
Boeing 737 jets. Having common Ileet signiIicantly simpliIies scheduling, operations and Ilight
maintenance. The training costs Ior pilots, ground crew and mechanics are lower, because there's
only a single aircraIt to learn. Purchasing, provisioning, and other operations are also vastly
simpliIied, thereby lowering costs. Consistent aircraIts also enables Southwest to utilize its pilot
crew more eIIiciently.
E-Ticketing
The idea oI ticketless travel was a major advantage to Southwest because it could lower its
distribution costs. Southwest became electronic or ticketless back in the mid-1990s, and today
they are about 90-95 ticketless. Customers who use credit cards are eligible Ior online
transactions, and today Southwest.com bookings account Ior about 65 oI total revenue. The
CEO Gary Kelly thinks that this idea would grow Iurther and that he wouldn't be surprised iI e-
ticketing accounted Ior 75 oI Southwest`s revenues by end oI 2005. In the past, when there was
a 10 travel agency commission paid, it used to cost about $8 a booking. But currently,
Southwest is paying between 50 cents and $1 per booking Ior electronic transactions that
translate to huge cost savings.
2. Employee and Labor Relations
Southwest has been highly regarded Ior its innovative management style. It maintains a relentless
Iocus on high-perIormance relationships and its people-management practices have been the key
to its unparalleled success in the airline industry.
Mission Statement
To Our Employees
'We are committed to provide our Employees a stable work environment with equal opportunity
Ior learning and personal growth. Creativity and innovation are encouraged Ior improving the
eIIectiveness oI Southwest Airlines. Above all, Employees will be provided the same concern,
respect, and caring attitude within the organization that they are expected to share externally with
every Southwest Customer.
The Southwest mission statement shows that the company has a strong commitment to its
employees. The company aIIords the same respect to its employees that is provided to its
customers. The Southwest mission statement is unique in that it recognizes the importance oI its
employees within the broader business strategy, which emphasizes superb customer service and
operational eIIiciency. The employees reciprocate the respect, loyalty and trust that Southwest
demonstrates. Southwest employees are known Ior their loyalty, dedication, attitude and
innovation. The employees are the distinguishing Iactor between Southwest and the rest oI the
airline industry.
Hiring
Southwest hiring policy is unique not only within the airline industry, but also more broadly, and
revolves around Iinding people with the right attitude that will thrive in the Southwest culture.
Extensive procedures are employed to hire Ior positive attitude and dedication. Those who do not
posses those qualities are weeded out. Colleen Barrett, a non-operational oIIicer at Southwest,
states that
'Hiring is critical, because you cannot institutionalize behavior. Instead, you must identiIy those
people who already practice the behaviors you are looking Ior. Then you can allow Employees to
be themselves and make decisions about Customer service based on common sense and their
natural inclinations. 1
Recruiting and interviewing at Southwest is a two-step process. The Iirst step is a group
interview, conducted by employees, where communication skills oI potential candidates are
evaluated. The next steps in this process are one on one interview, where the candidates' attitudes
and orientation toward serving others are evaluated. These hiring criteria apply to all job
Iunctions since all Employees at Southwest play a customer service role. A critical part oI
Southwest operational strategy is that every job at Southwest is a customer service position,
whether it directly applies to the customer or whether it is internal.
The table below shows that even though Southwest is the most heavily unionized airline, at
approximately 80, that contract negotiations between the unions and Southwest are much
shorter in duration than oI the other major carriers. This shows the quality oI relationship that
Southwest has with its employees and with the unions that represent them.
Culture
Southwest was created as a diIIerent kind oI company and Irom its beginnings a unique culture
was nurtured. In 1990 Colleen Barrett Iormed the Southwest Culture Committee. This is unique
within the industry and among all large companies. The committee also has a mission statement:
'This group's goal is to help create the Southwest spirit and culture where needed; to enrich it
and make it better where it already exists; and to liven it up in places where it might be
"Iloundering". In short, this group's goal is to do "whatever it takes" to create, enhance, and
enrich the special Southwest spirit and culture that has made this such a wonderIul
Company/Family.
It is this unique approach to company values that has created a culture that diIIerentiates itselI
Irom others. Southwest`s culture is the reason why it is successIul.
3. Customer Service
The Mission oI Southwest Airlines
The mission oI Southwest Airlines is dedication to the highest quality oI Customer Service
delivered with a sense oI warmth, Iriendliness, individual pride, and Company Spirit.
Approach
Herb Kelleher, Iounder oI Southwest, has been quoted as saying that "We're in the Customer
service business; we just happen to provide airline transportation".2 Award winning customer
service is a distinguishing characteristic oI Southwest and it is reIerred to internally as
'Positively Outrageous Service. It means that Irom the top to bottom everyone does whatever
he or she can to satisIy the customer. This includes Herb Kelleher, who has been known Ior
helping out baggage handlers on Thanksgiving. It is through emphasizing the customer and
employee that Southwest is able to diIIerentiate itselI Irom others in the airline industry. On a
more technical level, each employee or group within Southwest has his or her own customer.
This means that every employee serves` in one way or another despite not being directly
involved with the passenger. The mechanic`s customer is the pilot and the caterer`s is the Ilight
attendant.
Results
It can be said that the "Positively Outrageous Service" that is unique to Southwest 'is not the
result oI a department, or a program, or a mandate Irom management. It is not secondary to the
product; it is the product. This approach creates the conditions where Employees are more
likely to treat customers in ways that distinguish the company Irom others. There are numerous
accounts oI passengers who have received exceptional treatment Irom Southwest employees.
The question that needs to be answered is how Southwest`s customer service is diIIerent and
why? Is it common Ior customers oI other airlines to rave about their special service? The answer
is that it is not. While Southwest does not have a monopoly on people who are kind and who are
willing to go above and beyond to satisIy a customer, such behavior is nurtured at Southwest to a
much greater extent.
It can then be concluded that the customer service that is inherent to Southwest is a part oI its
culture. This culture is supported through employee encouragement to do the extra to satisIy the
customer. This approach inspires people who would ordinarily only on occasion go out oI their
way to help someone, to become consistent perIormers that oIIer exceptional service all the time.
Southwest employees are what diIIerentiate its customer service Irom the other airlines.
4. Technology
Southwest utilizes technology in many ways to IulIill its business objectives and maintain its
eIIicient operations. According to its CEO, technology equals productivity. Launched in 1996,
ticketless travel was Iirst introduced by Southwest. On May 1st 2000, Southwest Airlines
introduces "SWABIZ," a portal that assists company travel managers in booking and tracking
trips made through its web site |http://www.southwest.com|. There are many new technology
initiatives being undertaken currently and some are in the pipeline.
Bar codes in Boarding Passes
Southwest Airlines has invested $12 million during the past three years to standardize corporate
and terminal operations on about 10,000 Dell OptiPlex desktop and Latitude notebook computers
according to its company executives. Southwest wanted to replace its well known, brightly
colored plastic boarding passes with an electronic system with bar-code paper boarding passes.
So it installed about 350 touch screen ticket readers powered by Dell OptiPlex desktops. The bar
code gives Southwest more inIormation to automatically reconcile the number oI boarding
passes with the number oI passengers that actually board the plane.
Although the technology will help Southwest Airlines remain eIIicient by consolidating
passenger inIormation Ior the company's 3,000 daily Ilights, there were concerns it could
lengthen the time to get travelers on board. However it was Iound that scanning each bar code on
the boarding passes didn't increase or shorten boarding schedules, but it did take minutes Irom
administrative processes, such as looking up customer records. The new paper bar code system is
giving Southwest ticket agents the ability to match a customer record within having to scroll
through and log into multiple soItware screens. The process is much more automated. Once the
bar code on the boarding pass is scanned at the terminal gate it checks oII the person Irom the
passenger list in real time.
The old process was manual that involved Iinding the inIormation, scrolling through several
soItware screens Irom reservations to check-in to boarding. The bar code hardware to scan the
boarding passes has been deployed. The company is in the process oI replacing customer service
back-oIIice equipment at airports including at its headquarters in Dallas.
SoItware Upgrades
SoItware applications, such as those used by clerks to check in passengers, are being replaced.
Southwest Airlines' internally written "Airport Application Suite" is expected to rollout next year
as the company transitions Irom green screens to Window-based user interIace. Similar to Wal-
Mart Stores Inc., Southwest Airlines believes in developing in-house the soItware that runs its
operations. The company uses very little oII-the-shelI soItware. There are between 75 and 100
projects in the works each year supported by approximately 900 IT employees.
RFID
Radio Irequency identiIication technology, a Iavorable alternative to bar-coding Ior luggage
identiIication, is also on Southwest's radar. It plans to test RFID technology sometime in 2006.
Even though, Southwest is playing a little catch-up with other airlines such as Air Tran, Alaska
and Champion Airlines, in many cases they are able leapIrog to more sophisticated applications
easily having waited longer.
Challenges:
Southwest has emerged very successIul, despite the most troubled times in the airline market.
However, it Iaces new challenges in the Iace oI increasing competition Irom other low Iare
airlines such as JetBlue, ATA airlines, America West.
Reserved Seating
Due to increasing security guidelines since September 2001, Southwest would need to prepare
Ior assigned (reserved) seating to track its in-Ilight passengers. This change will involve large
technology investments and may impact its gate operations negatively since the current way oI
unassigned seating has helped in quick gate turnarounds.
Passenger Demand
The keep-it-simple philosophy has served Southwest well. But as its own business grows and
grows more complex, with plans to purchase dozens oI new aircraIt and an expected upsurge in
passenger traIIic to about 80 million boarding`s a year, the simplicity strategy that has been
reIlected in the airline's IT philosophy is evolving. The CIO Tom Nealon says that "It's time to
adapt our business processes Ior eIIiciency. As our airline scales Ior us to provide the same kind
oI high-touch customer service, we have to automate a lot oI things we've been able to do
without technology previously. The challenge is doing that without conceding the customer
touch." Southwest is also aggressively pursuing customer relationship management (CRM)
techniques and has applications to get insight into customer`s wants and dislikes. According to
an interview with its CEO Gary Keller, Southwest has its Iocus on improving in two areas -
customer`s airport experience and in-Ilight experience.
In-Flight Entertainment
In an overall eIIort to improve customer`s in-Ilight experience, in-Ilight entertainment is
something that Southwest is currently evaluating and which JetBlue has been very successIul at
already because oI its introduction in its long-haul Ilights. In comparison, Southwest has 415
airplanes to consider and that represents an investment decision at a whole new dimension.
Additionally, Southwest has to consider how things may Iit into their environment. At this point,
60 oI its service is still very short haul. Southwest needs to be mindIul oI the Iact that a certain
approach that has been successIul Ior its competitor may not be necessarily work to its
advantage.
Summary:
Southwest has long been regarded as a benchmark in its industry Ior operational excellence.
Southwest Airlines is a Iine example oI a company that is committed to its core competencies -
eIIicient operations to drive its low cost structure, outstanding delivery oI customer service and
innovative HR management practices. We hope this paper provided a good insight into
Southwest operations, as part oI its overall strategy, to achieve success and gain competitive
advantage.
ReIerences:
1. |http://www.southwest.com| (Southwest airlines oIIicial web site)
2. 'Southwest keeps it simple - Air Transport World, April 2005, Pg 36
3. 'Around the World on $48 (or So): How High Can Discount Airlines Fly?' Strategy
Management - Knowledge Wharton Newsletter Oct 5, 2005
4. TechWeb - |http://www.techweb.com/wire/ebiz/173601227|
5. 'Southwest's Strategy Ior Success: Consolidate! - Oracle Magazine (Sept/Oct 2004 edition)
http://www.oracle.com/technology/oramag/oracle/04-sep/o54swest.html
6. 'Southwest Airlines: High Tech, Low Costs - Eweek.com, April 2005
7. 'Jet Fuel Hedging Strategies: Options Available Ior Airlines and a Survey oI Industry
Practices Kellogg School oI Management Research Paper, Spring 2004
8. Winning Behavior: What the Smartest, Most SuccessIul Companies Do DiIIerently, Terry R.
Bacon and David G. Pugh, 2003
9. Time Magazine, Oct 28th 2002 issue, Vol. 160 Issue 18, p. 45
10. 'Wings OI Change,InIormation Week, March 28, 2005,
11. Labor Contract Negotiations in the Airline Industry, Monthly Labor Review, July 2003, page
24
Article Source: http://EzineArticles.com/?expertMukundSrinivasan


C A S E 24 Shangri-La Hotels
ASSIGNMENT QUESTIONS
1. What are the key elements of Shangri-La Hotel`s strategy? Which of the fi
ve generic competitive strategies described in Chapter 5 is the company
employing? What is Shangri-La`s strategy for competing internationally?
2. What policies, practices, support systems, and management approaches
underlie Shangri-La`s efforts to execute its strategy?
3. How important are the company`s training and Shangri-La Care program
to its success? What is your assessment of Shangri-La`s compensation policies
and career growth effort? What pluses and minuses do you see?
4. What are the key features of the culture at Shangri-La Hotels? How
important is the culture in the company`s success? Explain. What impact do
the company`s mission statement and the Shangri-La Care program have on
the company`s culture?
5. What core/distinctive competencies has management at Shangri-La tried to
build and nurture? What challenges does the company face as it attempts to
transfer its core and distinctive competencies to other cultures? How has the
company attempted to resolve these challenges? Has it been successful in
doing so?
6. What does the company`s fi nancial and operational performance reveal
about how successful its strategy and strategy implementation efforts have
been? Should shareholders be pleased with the company`s fi nancial
performance? Why or why not? What fi nancial and operating performance
pluses and minuses do you see?
7. What challenges does Shangri-La face in expanding into Eastern China? Do
you believe the company`s current policies and operating procedures will be
suffi cient in addressing these challenges? If so, why? If not, what else may
need to be done?
8. How do the challenges associated with Shangri-La`s expansion into Europe,
Australia, and North America compare with the company`s expansion in
China? Do you believe the company`s current policies and operating
procedures will be suffi cient in addressing these challenges? If so, why? If
not, what else may need to be done?









Introduction: Prominence, Adversity, the Plan
Shangri-La Hotels and Resorts, as one oI the most distinguished brands in the hotel industry worldwide, has
earned its reputation with its dedication to high quality service. In spite oI enjoying some appreciable proIits
and rapid development oI the scale oI the company in the early 1990s, there was no common core value among
all the hotels. It was this concern that led to the introduction oI the "Shangri-La 2000" strategic plan. In this
essay, the changes in the company brought about by the plan will Iirst be discussed, then the existence and
cause oI subcultures as well as the ideal way to manage these subcultures will be analyzed. The essay will end
with suggestions on how the Kowloon Shangri-La hotel could succeed in becoming the dominant Iorce in
Hong Kong.

A BrieI Picture oI Shangri-La
Well known Ior its eccentric name and guaranteed quality whenever you pay Ior its service, Shangri-La Hotels
and Resorts (SLA) is a deluxe hotel chain setting its sites in Asia Iounded by the Malaysian-Chinese tycoon
Robert Kuok in 1971. It took 28 years Ior the company to expand Irom being started with just one hotel in
Singapore to having 37 branches located in major cities and popular tourist destinations in Asia. During this
period, the company saw the recognition oI its excellence ever climbing and reaching its peak in 1997 when
Island Shangri-La, located in Hong Kong, became the Iirst hotel in Asia PaciIic to obtain ISO14001
certiIication to go along with the numerous rewards the company received then and the year aIter.

The Environment in Asia: From Prosperity to the Asian Economic Crisis
When the Iirst Shangri-La hotel was Iounded in 1971, the whole Asia was in a period oI rapid economic
growth and the tourism industries in the countries beneIited hugely Irom it. The expansion oI SLA was greatly
Iacilitated by the blooming economies in the area to reach such a large scale, and the proIit oI the company
increased proportionately. Nevertheless, the tale reached a dramatic climax in the 1990s, a decade that saw the
economies in Asia undergoing a roller-coaster development. While the wealth oI the countries had Ilourished
to an arguably unprecedented level within the Iirst six years, the Asian economic crisis in 1997 put a traumatic
end to all the optimism oI the people and SLA was invariably aIIected by this. The devaluation oI currencies,
the lack oI demand and the translation oI revenues at unIavorable exchange rates led to a substantial reduction
in the proIitability oI the hotel industry in Asia and the proIit oI SLA attributable to shareholders dropped
sharply Irom HK$1,090,357,000 in 1996 to HK$743,132,000 in 1997. The impact oI this depression has not
ceased since then.

The Changes brought about by the Plan
II many people liken business to a game, then one rule a competitor must bear in mind in order to win is that
no strategy can ensure Iorever victory. The Managing Directors oI Shangri-La Hotels and Resorts (SLA)
understood this and boldly took radical actions to resolve the problems he saw in the company. This invariably
brought huge changes in the company, and they will be pointed out and their eIIectiveness weighed in the
Iollowing.

Despite the signiIicant decline in the proIit oI the company during the economic recession aIter 1997, Shangri-
La Hotels and Resorts was chieIly a highly successIul company as recognized worldwide. However,
complacency would only hinder the long-term development oI a business. In 1993, a Managing Director,
having newly joined SLA, observed a major problem in the management oI the hotels. His concern was that
while each hotel was able to maintain a high-level quality in its service, the inter-hotel relationship was weak.
The hotels were under diIIerent styles oI management as iI each was independent and thus they all had their
own cultures, management processes and standards Ior their service. They did not have a common marketing
strategy or a centralized budgeting process that all hotels would Iollow. The Managing Director Ielt that this
should only occur in a small company with a Iew hotels but not in one with the scale oI SLA. It was this
concern oI his that initiated the "Shangri-La 2000" strategic plan to be launched. Under the plan, the
organization was changed in three ways: the clariIication oI values oI the organization, decentralization and an
increased emphasis on measuring the perIormance oI the company in diIIerent areas.

ClariIication oI Core Values and Principles
This was the most important change in the organization brought about by the plan. First, the vision oI the
company was clearly stated, that is, to be the dominant hotel company in Asia by the year 2000. This showed
the ambition oI the company to the employees and made them more motivated in actively contributing to the
company. Moreover, to avoid seeing diIIerent interpretation oI the core values in diIIerent hotels, the plan
introduced Iive words to summarize them, namely Respect, Humility, Courtesy, Sincerity and HelpIulness,
which were under the philosophy oI the Asian hospitality Irom caring people. In addition, eight guiding
principles were introduced to the employees explaining the direction oI their job, and the principles were
largely about how to satisIy the customers. The main purpose oI these was to enhance unity and consistency in
the organization besides educating the employees about the essential concepts behind their job.

Decentralization and De-bureaucratization
This means the distribution oI more power to the junior employees. Contrary to the old way where employees
had to strictly Iollow the operating guidelines when perIorming their duties or reIer to their supervisors Ior
resolution, the Irontline employees were given the power to make decisions on their own at the customer
contact point when the amount oI money involved was below a certain limit. This increased the eIIiciency oI
the service-rendering process by reducing the rigidity oI the job oI such employees, while the loss arising Irom
inappropriate decisions made by such employees was also limited. The aim oI all these was simply to make
customers Ieel more comIortable since their requests could be promptly dealt with and thus they would be
more loyal to the hotels oI the company in the long run.

Increased Emphasis on Measuring PerIormance in DiIIerent Areas
Partly to assess the eIIectiveness oI the plan and partly to assess the eIIiciency oI the company in reaching its
goal, a series oI evaluation schemes were established to measure the perIormance oI the company in diIIerent
areas. Since the company had its largest concern on the loyalty oI their customers, most oI the schemes were
about this and measurements like Return Guest Ratio, PerIormance Monitor and Guest DissatisIaction
Reduction were introduced. Other areas to be assessed included employee loyalty, market share oI the
company, recognition oI the excellence oI their hotels and business results. These measurements provided
reIerence to the company on how it could improve as well as to alert the employees on the quality oI the
IulIillment oI their job.


The Score sheet: A Hat trick, a Debacle, or a So-so?
The "Shangri-La 2000" strategic plan involved considerable changes in both the culture and working processes
oI the company and this inevitably entailed many problems. The Iirst one was the scepticism and resistance
Irom the employees. They had all kinds oI questions in mind like whether the top management had
commitment to the plan, why the company had to undergo such dramatic changes when it was actually highly
proIitable the time the plan was introduced. The long-serving employees also wondered why they suddenly
had to change their ways oI working when they had done it Ior so long. The decentralization process Iaced
even more diIIiculties since the employees were accustomed to Iollowing strict guidelines in their work and
reIerring to their supervisors when they were uncertain about what actions to take. As a result, the employees
were immensely uncomIortable and in lack oI conIidence when they were asked to make decisions themselves.
In addition, some department heads, who were responsible Ior educating their subordinates about the plan, had
limited ability and experience in conveying the messages in the plan to the latter, while others simply Iound
this kind oI education too much to add on top oI their normal workload.
Although these problems were Iaced by the company in implementing the plan, the intended results were
gradually achieved aIter some adaptation period. The employees began to understand and agree with the
positive eIIect oI the carrying out oI this plan to the company. Their acceptance towards the plan was Iurther
reinIorced when Island Shangri-La won the coveted HKMA Quality Reward, which was widely regarded as a
great recognition oI the quality oIIered by a company. As an indication oI this, the staII turnover rate oI the
company was continuously lower than that oI the industry by 9.2-17.1 aIter the plan was launched and the
development oI a more positive attitude towards their job was shown in the alignment survey in 1996 and
1998. All these reIlected an increase in the satisIaction oI the employees. For the customer satisIaction level,
which is a major concern oI the company, some encouraging results were seen as the Return Guest Ratio saw
an increase oI 15.7 in 1997 and a Iurther 3.1 in 1998.

To summarize, the "Shangri-La 2000" strategic plan was an ambitious one aimed at increasing the long-term
competitiveness oI the company and the positive results as seen aIter some years oI adaptation justiIied the
eIIectiveness oI the plan. Whether Shangri-La Hotels and Resorts could be a dominant Iorce in the hotel
industry in Asia is yet to be proved, but the quality oI the service oIIered by its hotels is certainly what
customers would appreciate, and that wins the game.

Subcultures at the Kowloon Shangri-La
Existence oI subculture at the Kowloon Shangri-La
Subculture exists at the Kowloon Shangri-La as it does in other Shangri-La Hotels and Resorts. Since
Managing Director dislikes Shangri-La Hotels to be "cookie-cutters", he advocated establishing individual
culture in diIIerent hotels while establishing consistency and commonality among all Shangri-La Hotels
worldwide.

Evidence oI subculture
Firstly, though bearing the same company name, Shangri-La Hotel, there is a huge diIIerence between the
Western Hotels and the Eastern ones. Compared to the Western Hotels, the Eastern ones are less democratic as
employees simply do not have rights to express their ideas. ThereIore, managers want to introduce some
Western management styles such as employee empowerment and perIormance related compensation structure
to change the mindset oI the staIIs in Kowloon Shangri-La.

Secondly, the longer years working Ior Kowloon Shangri-La, the Iewer employees can be rewarded.
According to the chart called By Years oI Service, it shows that the most beneIicial workers are those who
work less than one year. To the senior, the level oI satisIaction decreases because oI several possible causes.
For example, they may Ieel insecure as more and more new staIIs are hired once Shangri-La2000 is
introduced. Due to incompetence and competition, they may probably lose their jobs. In addition, it is hard to
change the mindset oI people especially Ior the senior ones. It is almost impossible to change their working
style or structure as most oI them are reluctant to change.

Then, the advantages given by Shangri-La 2000 to various departments seem not to be equally distributed.
Based on the chart named By Division, the most beneIicial departments are Executive OIIice or Human
Resources, Security, and Rooms respectively. On the contrary, the least Iavorable one is Finance. The
dissimilar degree oI satisIaction among seven divisions implies that employees have diIIerent attitudes towards
this strategic plan.

Lastly, employees simply cannot Ioresee a need to change. In 2000, Shangri-La Hotels are enjoying enormous
proIits earned during peak seasons. From 1994 to 1998, the staII turnover rate oI Kowloon Shangri-La is Iar
much lower than that oI other counterparts in the same industry. Given a stable workIorce with low turnover
rate, the labors do not understand why Shangri-La 2000 should be proposed to change the whole structure oI
the hotel.

Causes oI Sub-culture in the Kowloon Shangri-La Hotel
The Iirst reason Ior the development oI sub-culture in the Kowloon Shangri-La is that the Shangri-La Hotel
chain was initially developed and maintained as individual hotels rather than a hotel chain. Even aIter 1983,
the year when the Shangri-La International Hotel Management Limited (SLIM) was Iormed to better manage
the hotels, the company had no intention to change this behavior. The Shangri-La Hotels were still managed as
iI they were separated. The only thing SLIM has done was to lay down guidelines and standards to each hotel
to ensure their consistency in service quality. Hotels are Iree to develop their own culture as long as they do
not run contrary to the guiding principles. In other words, SLIM only gives the Shangri-La Hotels a goal to
head Ior but without a speciIic path to achieve it. In this way, it is not surprising that each Shangri-La Hotel
will develop its own unique culture and the Kowloon Shangri-La is surely no exception.

Management intention has surely played an inIluential part in giving rise to sub-culture in the Kowloon
Shangri-La. As put by Kwan (2000), management had clearly no intention in making Shangri-La a cookie-cut
hotel chain'. While stressing the importance oI commonality and consistency within the hotel chain,
individuality oI each hotel is equally emphasized. For instance, in realizing Shangri-La's serving philosophy
"Asian hospitality Irom caring people", each hotel was encouraged to show their hospitality in a way that is
appropriate in its local culture. In other words, Shangri-La Hotels are encouraged to absorb local culture. This
is why the Kowloon Shangri-La is diIIerent Irom the other Shangri-La Hotels. ThereIore, the Kowloon
Shangri-La was more metropolitan in style when compared to Ior instance, the Taipei Shangri-La, which is
more traditional and Buddhist in nature.

The high ratio oI local staII working in the hotel Iurther strengthens the locality oI the Shangri-La Hotels.
According to Kwan (2000), among the 25000 employees Shangri-La had at the Iirst quarter oI 1999, 50-80
oI Shangri-La division heads as almost 100 oI Irontline staIIs were hired locally. Only key posts were held in
the hands oI Ioreigners'. In largely incorporating local staIIs, each hotel will inevitably absorb their respective
local culture arising Irom notable cultural diIIerentiations among Shangri-La staIIs in diIIerent places. Thus
local way oI getting things done have been brought into the Kowloon Shangri-La.

DiIIerence in targeted customers also promotes sub-culture in Shangri-La Hotels. In Iact, diIIerent Shangri-La
Hotels aims at diIIerent customers. For example, Traders Hotel, which oIIers only Iour-star accommodations,
was introduced to cater Ior the need oI budget-conscious travelers. Such seemingly slight diIIerence in targeted
customers is Iavorable Ior the development oI sub-culture in Shangri-La. Kowloon Shangri-La, which targets
tourists and prestigious business travelers, oI course aims at catering the needs Ior these customers. In
achieving this, it will unavoidably develop cultures that are diIIerent Irom Shangri-La Hotels targeting at other
types oI customers, such as the aIorementioned trader hotels or resorts that targets mainly holiday Ilyers.


In short, the development oI sub-culture in Kowloon Shangri-La can be attributed to 4 main reasons - (1) the
initial style oI managing the Shangri-La Hotels; (2) management intention oI making each Shangri-La unique;
(3) the largely local composition oI each Shangri-La, and (4) the quest oI each Shangri-La to cater Ior the
diIIerent needs oI targeted customers. It was under the work oI these Iorces that shaped the sub-culture in
Kowloon Shangri-La.

Managing the subcultures
II subcultures exist, how should they be managed during the implementation oI Shangri-La 2000 so that the
eIIectiveness oI the strategic plan is not compromised?

Although the aim oI the strategic plan is to promote a sense oI belonging among the individual hotels,
individuality oI each hotel is respected and valued. In other words, subcultures are treasured during the
implementation oI the plan oI centralization. However, subcultures are handled careIully to ensure that their
existence will not reduce the eIIectiveness oI the strategic plan.

One oI the means is to hire an expertise who is experienced in changing company's culture. For instance, in
1995, Shangri-La employed a new Group Director oI Human resource who is known to be Iamiliar with
changing company's culture to take lead in the strategic plan. As a result, subcultures can be better managed to
ensure that their existence can co-exist with the unity oI the company's uniIorm culture.

Besides leadership, subcultures are made to Iuse with the company's common values and mission. For
instance, while advocating the common service philosophy oI the company- respect, humility, courtesy,
sincerity and helpIulness- diIIerent hotels are asked to perIorm them in the way accepted in their local culture.

In addition, communication between managers and employees are enhanced in both Iormal and inIormal ways
in order to make sure that all employees understand the plan. For example, "cascading process" is done by the
managers to teach their Iollowers about the content oI the plan.

Also, to ensure that all employees are able to adapt to the new plan, training is given to all employees.
Employees oI diIIerent levels have diIIerent training.

Moreover, enlisting the support oI employees is essential to the success oI the plan. Hence, a number oI
methods are carried out. First, in the Iormulating stage, group meetings are held to brainstorm ideas Irom the
employees and to reach consensus among them. Next, during the implementation stage, extra reward scheme
may be carried out to motivate the employees.

Finally yet importantly, managers should actively participate in the implementation oI the plan to show the
determination oI the company to achieve the success oI the plan. Thus, resistance Irom the employees is
minimized.

Maintaining the momentum oI the program and achieving the vision
The implementation oI "Shangri-La 2000" proves to be IruitIul. For example, it won the 1997 Quality Award
presented by HKMA. However, the employees needed to be continuously reminded oI the spirit oI "Shangri-
La 2000"; otherwise, they would easily Iorget them and the eIIorts devoted previous would be in vain when the
transIormation comes to a contingency interrupt. To go Iurther, as the momentum maintains, the hotel will
gain more competitive advantages so as to solve enduring problems within the hotel in quest oI its vision
oI"becoming the dominant hotel in Hong Kong' deluxe hotel market". ThereIore, Kowloon Shangri-La should
maintain this momentum to achieve its vision.

OI particular importance is the integrity and consistency through the implementation oI the "Shangri-La 2000"
iI the KSL wants to achieve its vision. To ensure the Iruit oI the "Shangri-La 2000", the core spirit established
in the "Shangri-La 2000" should be Irequently emphasized and disseminated in the routine working. The Iive
core values should be reinIorced repeatedly and distributed to the employees in the Iorm oI pamphlets.
Measures that can be taken are as Iollows:

Leadership improvement
To achieve the ultimate goal, the leadership oI the managers plays an important role. Firstly, the managers
should set themselves as examples to other employees by personal participation. They should exhibit great
conIidence and enthusiasm in the implementation oI the "Shangri-La 2000". As mentioned in the case, some
department heads were not very eIIective in delivering the "Shangri-La 2000" concepts because they were
heavily engaged in operations and did not participate the strategic planning oIten. In solving this problem, the
managers oI strategic level should emphasize the signiIicance oI the plan to the department heads and urge
them to devote more.

Secondly, more eIIort should be devoted to reinIorce the organizational commitment to its employees so that
the staIIs within the KSL can perceive organizational support. As some staIIs are skeptical about the
commitment oI "create an environment where our people might achieve their personal and career goals", the
managers should erase their suspicion by conveying to employees the conception that the KSL value their
contribution and concern about their well-being. The experience oI the veteran will be treasured whereas new
blood is inIused. These two sides do not contradict each other. This will deIinitely increased job satisIaction
and lower turnover.

Thirdly, managers should continue to empower more competent employees to involve in decision making.
With this employee empowerment, Iront-line employees are Iully authorized to deal with urgent situations to
seek autonomy and eIIiciency. With respect to Kowloon Shangri-La Hotel's limited amount oI Iund, this
measure was helpIul in giving the employees conIidence to make decisions while at the same time limiting
losses should inappropriate decisions be made. Apart Irom that, the manager can concentrate on more pressing
issues to cope with increasing workload.

Maintaining the existing level oI services

Input Processes Output

Training Supervising Reward and Punishment

Maintaining the existing level oI services is crucial Ior Kowloon Shangri-La to achieve its vision. Although
KSL has Iewer employees, it still has to be consistent in delivery oI high-quality services, and to demonstrate
the Iive core values "respect, humility, courtesy, sincerity and helpIulness" in all relationships. Measures have
to be taken in the input, processes and output oI the work activities.

In the input, John McGrogor can keep conducting the training program. According to the one-ten-hundred
theory, working on prevention oI the problems may be an economical way Ior the organization. John
McGrogor has to anticipate problems and Iind out ways to avoid them. One problem is that there are Iewer
employees leIt, but KSL still wants to do more Ior the customers. Enhancing the existing employees' skills and
qualities may be the solution. This can be accomplished by scientiIic training. Due to the budget constraints,
the training also has to be as eIIective and eIIicient as possible. Since the employees have already been trained
once, the new training can eliminate the introduction oI theory to save money and time and increase more
exercises, Ior example, the " Home Visit Exercise", a role-playing tool in the Shangri-La Care I workshops
which proves to be useIul. By simulating the work activities, the employees can recall the standardized
processes and core values in a saIe environment instead oI making mistakes in real business.

During the processes, managers should do the supervising and endeavor to correct problems as they happen.
However, it is Iound to be diIIicult Ior the department heads to take care oI the operations and conduct
"Shangri-La 2000" at the same time. ThereIore, to reduce the heavy workload, managers can inspect the
service quality randomly instead oI daily. By doing this, they still can know the problems exposed and point it
out to their employees.

Based on the quality oI output, managers can adopt the reward and punishment policy. The criteria should
include the eight guiding principles and the Iive core values in the "Shangri-La 2000" program. The quality
can be assessed through peer evaluation and customers' Ieedback. Employees who have perIormed well can
receive bonus, while employees who do not work hard have to be Iined or at least given a verbal warning. This
policy can be view as a method oI controlling. It gives employees incentive to work towards the direction oI
the program, thus maintaining its momentum. The reward also can help John McGrogor hold those excellent
employees.

Through training, supervising, reward and punishment, John McGrogor can well control the quality oI the
services, so that the services will accord with the "Shangri-La 2000" and maintain the momentum. To go
Iurther, by oIIering Iirst-class services, the organization will be closer to the service leadership.

Building up customer loyalty
To compete in service industry and achieve leadership, John McGrogor Iirstly has to know the needs oI his
customers. According to "Shangri-La 2000", customer Ieedback and research tools process needs improvement
in all hotels. Paying attention to the complaints is necessary but it should not be the only measure, Ior most
unsatisIied customers will just leave the hotel instead oI making complaints. John McGrogor can use some
inIormation systems such as customer relationship management system to study the records and do the data
mining to Iind out customers' consumption patterns. Adjustments can be done to take advantage oI the
patterns. Kowloon Shangri-La can also conduct customer survey as MTR does.

AIter the customer Ieedback and research tools business process has been improved, Kowloon Shangri-La can
continue to improve other main processes: check-in /check-out, meeting and de-bureaucratization according to
customers' preIerences discovered. The hotel can require its employees to provide customized services to
delight and build ideal relationship with their customers. ThereIore, the customer loyalty can gradually be built
up.

Another signiIicant tool John McGrogor should make good use oI is advertisement. A good advertisement can
even make the employees Ieel proud oI their routine jobs and their Iive-star hotel. However, it is a double-
edged sword in building customer loyalty. It can promote a positive image oI Kowloon Shangri-La.
Nonetheless, too high expectation Irom the customers may result in disappointment in the end. Management
had better make sure that they invest their money in advertisement sensibly because their budget is limited.

Incorporating the plan into the hotel culture
As mentioned in the case, there exist some opposed Ieelings among the employees. Even worse, some oI the
employees cannot adapt to the western management philosophy. Incorporating the plan into the hotel culture is
oI signiIicant importance, because as behavioral psychologist has maintained, culture is most inIluential in
determining one's behavior. A set oI common values must be set up so that the employees will realize that they
all belong to one organization, which will greatly increase their loyalty towards the company.

To incorporate the plan into the hotel culture, Iirstly, top managers should Iilter the culture implication oI the
plan down through the hotel. Secondly, the hotel should select the candidates who will melt in and socialize
novices to adapt to the organization culture. For example, while the Shangri-La Plan can serve to IulIill the
transcending and socializing Iunction, department oI human resources must seek new staIIs that suit or even
contribute to the culture. New comers must go through all the "cascading process" Irom the beginning stage to
ensure that all oI them understood the "Shangri-La 2000" is part oI the KSL's existing culture and contribute to
it ultimately. Thirdly, since proper delivery oI the western management philosophy to the employees is
essential, managers may combine the western philosophy with existing traditional eastern culture to strike a
balance and show its Iunction in appropriate occasion to convince the employees that to incorporate
advancement management concept is also part oI existing culture.

In short, in quest Ior its vision oI"becoming the dominant hotel in Hong Kong's deluxe hotel market", the hotel
should Iocus on addressing the pressing problems and ameliorate some oI the measures to maintain the
momentum oI "Shangri-La 2000". The skillIul leadership can be achieved by manager's active participation,
stronger organizational commitment and eIIective employee empowerment. Furthermore, the training program
in the Iorm oI "Home Visit Exercise" should be maintained while eIIicient control oI perIormance can be
achieved by establishing rewarding mechanism and proper supervising to motivate all the employees. Despite
all these, the customer-oriented conception is what underlies the operation oI iI the hotel hopes to retain its
lead in deluxe hotel market. At last, oI great signiIicance is the consolidation oI the existing organization
culture and incorporation oI the spirit oI the "Shangri-La 2000".

Conclusion
To conclude, notwithstanding a variety oI subcultures exist in the Kowloon Shangri-La, a group oI
proIessional managers could handle them eIIiciently with active participation and eIIective support. The
contemporized and all-rounded "Shangri-La 2000" strategic plan leaves customers as well as employees a
Iresh and highly recognized impression that brings about a positive impact in the long run. In the Iuture, the
manager, John McGregor should exert his utmost to maintain the momentum oI this strategy and lead
Kowloon Shangri-La to the Ioremost hotel in Hong Kong deluxe hotel market.

ReIerences
Stephen P. Robbins & Mary Coulter, Management (8th edition)
Centre Ior Asian Business Cases, Shangri-La Hotels and Resorts Achieving Service Leadership


Table oI contents
Title Page
Overview 1
Board oI Director 2
Shangri-La Culture 3
o Philosophy 3
o Vision 3
o Mission 4
o Guiding principle 4
Product and Services 5
Company Analysis 6
o SWOT analysis 6
o Location analysis 6
o Forecasting 7
Competitor 9
Current issue 10
Recommendation 12
Conclusion 12
ReIerences 13




Overview
Shangri-La Hotels and Resorts is the world`s largest Asia-based luxury hotel group, welcomes business and
leisure travelers with award winning Asian hospitality. Shangri-La Hotel and Resorts began in year 1971 with
the Iirst deluxe hotel in Singapore. The group now has 52 deluxe hotels and resorts located in Asia and Middle
East cities. There are new properties under development in Europe and North America.

Shangri-La Hotels and Resorts group has several brands name,
Shangri-La City Hotels
Shangri-La Resorts
Traders Hotels
Chi, The Spa at Shangri-La
Besides this, the group also provides services at two oI the Asia`s most well known clubs, the Aberdeen
Marina Club in Hong Kong and the Xili GolI and Country Club in Shenzhen, China.

Shangri-La Traders Hotel, Penang is one oI Traders Hotel oI the group in Malaysia. Shangri-La Traders Hotel,
Penang is located in the heart oI the Georgetown. Shangri-La Trader Hotel supported by superb meeting
Iacilities, a modern business center and a Iully equipped Iitness center. The rooms and suites oIIer a complete
range oI amenities that one would expect Irom a 5 star hotel.

Shangri-La Traders Hotel, Penang is one oI the topnotch award winning trader`s hotels.

Board oI Director
Recognizing that a passion Ior excellence cascades Irom the upper levels oI an organization, Shangri-La Hotels
and Resorts has careIully selected the members oI it executive team |2|. This shows that high level manager
need to have a very good conceptual skill, and able to Iorecast things will go to happen in the Iuture. This will
lead the company to a better Iuture.

The members oI executive team are
Mr. Angelini, Giovanni - chieI Executive OIIicer and Managing Director
Mr. Rao, Madhu ChieI Financial OIIicer
Mr. Ng, Alan S.F. Senior Group Director oI Projects
Mr. Waechter, Martin F ChieI Marketing OIIicer
Mr. Bridle, Symon ChieI Operating OIIicer
Mr. Jin, Jian Ping Executive Vice President
Mr. Sekerciogle, Cetin Vice President
Ms. DeMotte, Elizabeth A. Vice President, Public Relations
Mr. Tan, Eng Leong Group Director oI Human Resources
Mr. OIIe, Jean Michel Group Director oI Food and Beverage
Mr. Rao, Anand ChieI InIormation OIIicer
Mr. Wikinson, Jim Vice President, Procurement
Ms. Cheah, Caroline Group Director oI Rooms
Mr. Fankhanel, Max Group Director oI Engineering
Mr. Ram, S. S. Mohan Vice President, Finance
Mr. Kuok, Khoon Tsen Group Director oI Projects
Mr. Hediger, Marc Senior Vice President Development
Mr. Inns, Brendan Quality Assurance
Ms. Angeles, Peggy Vice President Marketing
Ms. Chen, Sarah Vice President Marketing, Projects
Mr. Paw, Sunny Vice President Sales & Marketing
Mr. Frost, Austin Vice President, International Sales


Shangri-La Culture
Philosophy
'Shangri-La hospitality Irom caring people |1|

From the philosophy oI the Shangri-La Hotel, it shows that they want provide warm services to their
customers. Mostly, people will stay in hotel is due to they are away Irom their home Irom other state, or Irom
overseas. Having this philosophy, so that the services provided will let the customer Ieel like being home but
the Ieeling oI a stranger in a strange land.

Vision
'The Iirst choice Ior customers, employees, shareholders and business partners |1|

Vision is the ability to Ioresee what a company wants to do and what they want to be. For the Shangri-La
Hotel`s vision that stated above, shows that they want to be the Iirst choice Ior their customers. As we know,
every business is depending on customers. None oI the business will survive without customers. When they
able to attract more customers, it makes them to earn more in their business. Besides this, the reputation oI the
company will be increase as well, due to it able to provide excellent services to customers.

Employees mostly will stay in one company is due to the company has a good management, a lot beneIit to
them, provide them space Ior innovation, a good environment Ior them to achieve their career goal. This kind
oI environment will able to attract more talented, proIessional workers to work with them. Having good
colleagues is a great advantage Ior a company. It`s able to make the company business grow.

When come to the shareholders, they play a big role in a company capital. A company issue shares, is due to
they want to increase the company capital, so that they able to expand their business. To have business
partners, it makes the company business grow as well.


Mission
'Delighting customers each and every time |1|

Mission is deIined as a speciIic task that a company decided to do and also tell that why the company exists.
By accomplish the mission will lead the company to achieve the company`s vision. As can see the mission oI
Shangri-La is to delight customers each and every time. Once they able to achieve this mission automatically
will attract more customers. All those that discuss in the previous title, vision, will be achieved, once able to
attract more customers.

Guiding principles |1|
Ensure leadership drives Ior results
Make customer loyalty a key driver oI business
Enable decision making at the customer contact point
Be committed to the Iinancial success oI own unit and oI company
Create an environment where colleagues may achieve their personal and career goals.
Demonstrate honesty, care and integrity in all relationships
Ensure policies and processes are customer and employee Iriendly
Be environmentally conscientious and provide saIety and security Ior customers and colleagues

Those guiding principles that show above are guideline Ior the whole company to Iollow. This will lead them
to achieve the company`s mission and vision.

Product and Services
Shangri-La Hotels and Resorts group is in service business. They provide diIIerent kind oI services to meet the
customer`s requirement. As mention beIore, the group has Iour kinds oI hotel and resort. They are as below,

Shangri-La Hotels
Shangri-La Hotels is mainly target to those busy travelers. It is a Iive star luxury hotel in premier city
addresses across Asia and the Middle East.

Shangri-La Resorts
It is a place that allows travelers and Iamilies to relax, renew. It located in some oI the world`s most exotic
destinations. It also allows their customer to choose Irom a range oI vibrant cultural experiences, recreation
activities and dining option.

Traders Hotels
It is to target those value conscious travelers. It provides high quality accommodations with value Ior money.
Traders Hotels is located in major business centers in Asia and the Middle East.

Chi, The Spa at Shangri-La
Chi, The Spa is where the traveler allows relaxing and restoring balance and harmony to mind and body. The
private spa suite tat includes a changing area, spa shower, bath and steam.

Those brand name hotels that mentioned above provide more choices Ior the customers. Customer able to base
on their needs, expectation, and value to choose which type oI hotels or resorts they want to stay in.


Company Analysis
SWOT analysis
The strengths that make Shangri-La Hotels and Resorts be one oI the top oI the list oI hotel are due to the
leadership and management skills. Besides this, Shangri-La has won more than 120 awards till year 2006.
These awards build up the Shangri-La reputation in hotel Iield. And this good reputation becomes one oI the
strengths that able to compete with their competitor. Besides this, Shangri-La strategically located their hotels
and resorts in the world Iamous city, tourism destination, and world`s most exotic destinations. This gives
them great advantage to attract more customers. Best MICE Facilities and Service Hotel, Travel Weekly, this
is one oI the awards won by Shangri-La. This proved that they provide excellent services to their customer.

Strengths are not the only thing that Shangri-La has, they also good in holding opportunities. They start their
business in those growing market like in Beijing. The hotel that expanding in North America, that at the heart
oI the city and near to downtown oIIices, shopping mall, restaurants, theatres, convention centre, and world
Iamous Stanly Park. Spa is one oI the culture that getting Iamous in Malaysia. So that, they come out the
Shangri-La`s Rasa Sayang Resort and Spa in Penang, Malaysia, to let the customer to enjoy the spa.

Compare with other hotel which at the same level, others may have a cheaper price compare with Shangri-La.
But this will not become the threats to Shangri-La. This is due to their reputation and awards winning that
promise customers will have the best services and the best Iacilities provided.

Location analysis
As mention beIore, location oI a company is very important. For hotel industry, it is a very important criterion
that a hotel must consider. By using Shangri-La Hotel Penang as an example,

In West Coast oI Malaysia, Penang is Iamed Ior its mix oI exotic cultures. Penang is known as the Pearl oI the
Orient, Penang boasts grand colonial architecture alongside Chinese, Indian and Malay styles, and with its
unique blend oI backgrounds, enchants tourists and business travelers. Penang also has a thriving commercial
district together with palm-Iringed beaches and mountain.

Shangri-La Hotel Penang is located in the heart oI city, Georgetown, Penang. It located ideally right in the
historical city where it turns out to be a heaven Ior busy executives and travelers.
The award-winning city hotel allows visitors easy access to the historical inner city as well as the business and
commercial districts. The hotel is strategically located in the commercial hub oI the city and it`s convenient to
access to Iamous tourism destination such as the Penang Museum and Art Gallery, St. George's Church, Fort
Cornwallis and other Iamous destination. Other than that, customers do not have problem in access to public
transportation, due to the bus and taxi terminal are situated behind the hotel. This proves to be a competitive
advantage Ior the hotel as customers can easily get access to everywhere they wanted by using public
transportation.

Shangri-La Hotel also has direct access to one oI the biggest shopping malls in Penang. The Komtar shopping
complex which is one oI the main attractions in Penang is located right beside the hotel. Prangin Mall
shopping complex and Parkson shopping centre is also a walk away Irom the hotel. There is suIIicient labor
Iorce as the hotel is located in the densely populated Georgetown. ThereIore, shortcoming on labor Iorce won`t
be a problem as the availability oI labor is high.

Forecasting
Forecasting is a statement about Iuture value oI a variable oI interest. It helps the managers oI Shangri-la Hotel
enable their planning, which includes strategic planning, tactical planning and operational planning. By using
Iorecast it also able to help managers take advantage oI Iuture opportunities and reduce potential risk. BeIore a
manager starts Iorecasting, he or she must take note oI a Iew important elements in Iorecasting. These elements
includes timely Iorecast, accurate, reliable, had meaningIul units, a written Iorecast, understandable, useIul and
a good Iorecast must also be cost eIIective.

Shangri-La Hotel`s Iorecasting includes Iorecasting the growth in tourism in Penang, Iorecasting the growth in
transportation, Iorecasting the climate, and Iorecasting the growth in the country`s economy. These Iorecasting
leads to one important Iorecast, which the demand oI the hotel rooms is. The management oI Shangri-La Hotel
uses several methods to Iorecast the demand oI hotel rooms. These include Iorecasts based on judgment and
opinion, Iorecasting using the naive method, moving average Iorecast, exponential smoothing Iorecast, and
Iorecasting using seasonal variations.

The Iorecast based on judgment and opinion relies on analysis oI subjective inputs obtained Irom various
sources such as managers and executives and through consumer surveys. The naive method is a Iorecast that
using a single previous value oI a time series as the basis oI a Iorecast. Moving average Iorecast uses the
number oI the most recent actual data values to do Iorecast. The characteristics oI a moving average Iorecast
includes a number oI observations in making a Iorecast, inexpensive and easy to understand, and it gives equal
weight to all observations. Exponential smoothing is a sophisticated weighted averaging method that is also
relatively easy to use and easy to understand. II the diIIerent techniques produced approximately the same
result, it would deIinitely increase the manager`s conIidence.


Competitor
In Malaysia alone, there are about 281 hotels in this country, such as Cititel Hotel, Bayview Hotel
Georgetown, Evergreen Laurel Hotel, Bayview Beach Resort, Lone Pine Hotel, Hydro Majestic Hotel, Holiday
Inn Hotel, Golden Sands Resort, Sunway Hotel, Mutiara Beach Resort and much more. All these hotels
compete to each other to gain more customers and be the leader in the hotel industry.

Shangri-La Hotels and Resorts will compete against its competitor as well. In order to be the Iirst choice oI the
customer, it needs to have excellent service and more variety choices Ior customer. Because oI this, Shangri-La
having the mission is to delight customer each and every time, so that the worker will bear in mind that they
need to provide the best services to the customer. Shangri-La also comes out Iour brand names oI hotel and
resort to target diIIerent level oI people in this society. Those Iour brand names oI hotel and resort is shown
and discussed in previous title.


Current Issue
Shangri-La Hotels and Resorts seem like does not Iacing any major problem in it business. However Shangri-
La Hotels and Resorts is now expanding it business in North America. Below is the article that gets Irom the
South PaciIic Tourism Organization weekly newsletter.

'Shangri-La Hotels and Resorts Expand into North America
Asia PaciIic`s leading luxury hotel group, Shangri-La Hotels and Resorts, reinIorces its expansion outside Asia
PaciIic with a management agreement Ior a Iive-star deluxe hotel in Vancouver, Canada in early 2008. The
hotel is being jointly developed by Vancouver based Peterson Investment Group and Westbank Projects. The
deluxe Shangri-La Hotel, Vancouver will be strategically located one block Irom the city`s premier business
address at Burrard and West Georgia Streets. Set in the heart oI the city, the hotel is an easy walk to all
downtown oIIices, shopping, restaurants, theatres, the convention centre, the world-Iamous Stanley Park, and a
halI a block Irom the popular shopping district on Robson Street. The hotel will occupy IiIteen Iloors oI a new
60-story landmark building, the tallest in Vancouver with cutting edge architectural design. The entire multi
purpose complex will showcase innovative residential living, a sculpture galleria curated by the Vancouver
Art Gallery, high end retail shopping, innovative live/work condominiums, unique restaurants and the Shangri-
La Hotel, all in all the best oI cosmopolitan West Coast liIe`. Commenting on the new hotel, Shangri-La`s
ChieI Executive OIIicer and Managing Director, Giovanni Angelini said, 'It is a wonderIul opportunity Ior
Shangri-La to enter the North American market with this landmark hotel and our dedicated partners. It is an
important step in the group`s expansion plans outside Asia PaciIic to develop Shangri-La hotels in
international gateway cities around the world, targeting the prime North American market plus the Iast-
growing outbound traIIic Irom China and the rest oI Asia. Ian Gillespie, President oI Westbank Projects
added, 'We selected Shangri-La to manage the hotel due to the strength oI their award-winning brand and its
reputation Ior service excellence and Asian hospitality. The group will introduce our hotel to its loyal guests
including its rapidly growing Golden Circle membership and via its network oI hotels and worldwide sales
oIIices. The appointment oI Shangri-La reIlects our Iocus on becoming a major Iorce in the hospitality
industry. Peterson Investment Group and Westbank Projects have developed over $2 billion in projects
consisting oI over 3.8 million square Ieet oI retail, mixed use, residential and oIIice developments. The group
is one oI the most active integrated development companies on the westcoast oI North America. The product
mix includes luxury condominiums, urban inIill housing, class A oIIice space, neighbourhoold grocery
anchored shopping centres, rental apartments and hotels. |4|

From the article above, it shows that Shangri-La Hotels and Resorts business is still growing. It also shows that
Shangri-La does not simply start their business in an unknown land. They choose the location properly so they
able to reach their customer easily. The hotel they set up in North America is set in the heart oI the city; the
hotel is just a walk away Irom downtown oIIices, shopping mall, restaurants, theatres, convention centre, and
world Iamous Stanly Park. It makes this hotel become the Iirst choice oI traveler to North America.
Business partners, as mentioned beIore, it is very important in a company. Once have business partner, a
company business can be easily expand and gain more proIit. In this case, the business partner Ior Shangri-La
is Westbank Projects. Ian Gillespie, the president oI Westbank Projects said that the reason they choose
Shangri-La to manage the hotel is due to their strength oI award winning brand and its reputation Ior
excellence service and Asian hospitality. This shows that award winning is very important in one company; it
will build up the company reputation rapidly.

Economy oI one country also is a reason Ior global companies or multinational companies expand their
business in that country. Once a country economy is increasing, automatically the population will be increase
as well. Besides this, the daily expend oI the people will be increase simultaneously. No doubt, the businesses
that start here will be gaining more proIit.


Recommendation
Since recently Shangri-La Hotels and Resorts does not Iacing any problem, it proved that the management oI
Shangri-La is well planned. Shangri-La should stick with their current management, and have change while it
necessary. By having partnership with other companies to rise up some event will help to attract more
customers.

Conclusion
Shangri-La Hotels and Resorts is one the large and well known hotel in the world. It consists oI a big
organization that plays many Iunctions. A well planned operation management is needed to enable the
organization to run eIIectively and eIIiciently. A well planned operation management approach includes
getting accurate and reliable Iorecasting results develop a well-designed service systems, eIIective capacity
planning, Iacility layout planning, location planning and quality control. Shangri-La Hotel uses these
approaches to operate their hotel. This will allow them to have smoothly operated work system and help them
in gaining competitive advantages as a well manage organization will gain employee`s involvement and
satisIaction. In the mean time, it will also gain customers trust, loyalty and satisIaction. Besides that, a well
systematize operation will help the organization in reducing cost and improving productivity. All these Iactors
will determine how well the organization will turn out to be and plays an important part in ensuring
organization success.


ReIerences
1. http://www.shangri-la.com/en/corporate/aboutus/mission (Shangri-La Culture)
2. http://www.shangri-la.com/en/corporate/aboutus/management (Shangri-La Management)
3. http://www.tamu-commerce.edu/mktmgt/Iaculty/odom/mgt307/Iorecast.htm (Texas A&M University
Commerce)
4. http://www.spto.org/spto/export/sites/spto/news/press/newsletter2604.shtml (South PaciIic Tourism
Organization weekly newsletter)



C A S E 8 Panera Bread Company
ASSIGNMENT QUESTIONS
1. What is Panera Bread`s strategy? Which of the fi ve generic competitive
strategies discussed in Chapter 5 most closely fi t the competitive approach
that Panera Bread is taking? What type of competitive advantage is Panera
Bread trying to achieve?
2. What does a SWOT analysis of Panera Bread reveal about the overall
attractiveness of its situation? Does the company have any core competencies
or distinctive competencies?
3. What is your appraisal of Panera Bread`s`s fi nancial performance based
on the data in case Exhibits 1, 2 and
8? How well is the company doing fi nancially? Use the fi nancial ratios in
Table 4.1 of Chapter 4 as a guide in doing the calculations needed to arrive at
an analysis-based answer to your assessment of Panera`s recent fi nancial
performance.
4. Based on the information in case Exhibit 9, which rival restaurant chains
appear to be Panera`s closest rivals?
5. What strategic issues and problems does Panera Bread management need
to address?
6. What does Panera Bread need to do to strengthen its competitive position
and business prospects vis--vis
other restaurant chain rivals?



In 1993, AU Bon Pain Company purchased the Saint Louis Bread Company. In 1995, top management at Au
Bon Pain instituted a comprehensive overhaul oI the newly-acquired Saint Louis Bread locations. The overhaul
included altering the menu and the dining atmosphere. The vision was to create a specialty caIe anchored by an
authentic, Iresh-dough artisan bakery and upscale quick-service menu selections. This acquisition proved
successIul Ior Au Bon Pain. Between 1993 and 1997, average unit volumes at the revamped locations
increased by 75 and over 100 additional locations were opened. In 1997, the bakery-caIes were renamed
Panera bread in markets outside oI St Louis. The Panera business plan had worked well and management
concluded it had broad market appeal and could be rolled out nationwide. The management team quickly
realized the potential oI Panera Bread to Ilourish into one oI the leading Iast-casual restaurant chains in the
nation. With this realization came the need Ior a more Iocused management team and greater Iinancial
resources. It was not in their best interest to continue with both Au Bon Pain and Panera Bread. In 1998, they
went exclusively with Panera Bread and sold their Au Bon Pain bakery-caIe division. AIter the sales
transaction to ABP Corporation was complete, the new Panera Bread Company was restructured and had 180
St Louis Bread and Panera Bread bakery-caIes and a debt-Iree balance sheet.

Over the next 8 years a combination oI company owned and Iranchised bakery-caIes opened, Ior a
total oI 850 additional locations. Exhibit 1 shows their success between 2002 and 2006. Their Iinancial stats
remained strong, with a continuous increase in revenue and net income. Panera's strategic intent was to make
great bread broadly available to consumers across the United States. They have plans to open 170-180 caIe
locations in 2007 and to have nearly 2,000 Panera Bread bakery-caIes open by the end oI 2010. Management
was conIident that their attractive menu and the dining ambience provided signiIicant growth opportunity,
despite the Iiercely competitive nature oI the restaurant industry.

1. What is Panera Bread's Strategy and what type oI competitive advantage are they trying to achieve?

Panera Bread's distinctive menu, signature caIe design, inviting ambience, operating systems, and unit
location strategy has allowed it to compete successIully in Iive submarkets in the Iood-away-Irom home
industry. Those submarkets are breakIast, lunch, daytime "chill out," light evening Iare Ior eat-in or take-out
and take-home bread. Panera's competitive advantage comes in part Irom their well balanced approach. They
count on their Product, Environment, and Great Service (PEGS) to deliver their success. This synergy has
worked well Ior them. The have taken a broad approach to their customer's experience. They don't Iocus on
just the quality oI the Iood, or just the warm and inviting atmosphere oI the caIe or just the Iriendly customer
service. They are truly committed to constantly providing all three in harmony, taking the Iull experience into
account. In regards to increasing their evening sales, they tried to succeed by "being better than the guys across
the street" and making the experience oI dining at Panera so attractive that customers would be willing to pass
up their typical Iast-casual restaurant and go to a nearby by Panera Bread bakery-caIe instead.

Panera used a three pronged business approach. Franchising had been a key component oI the
company's eIIorts to broaden its market penetration, but not its only approach. Panera Bread had organized its
business around company-owned bakery-caIe operations, the Iranchise operations, and Iresh dough operations.

Another competitive advantage Panera Bread has is it's ingredients. Their signature product, artisan
bread, is made Irom Iour ingredients - water, natural yeast, Ilour and salt. Preservatives and chemicals are not
added to the mixture. They use the highest quality ingredients and the bread is baked Iresh everyday. At the
Iresh dough Iacilities, no Ireezing oI the dough and no partial baking is done, each bakery-caIe does all the
baking itselI. Panera knows what it's good at and has used that as their Ioundation. Their menu was designed to
provide target customers with products built on the company's bakery expertise. They specialized in Iresh
baked goods, made-to-order sandwiches on Ireshly baked bread, soups, salads, custom roasted coIIees, and
other caIe beverages. They oIIer over 20 varieties oI bread.

Unlike some iI its competitors, Panera is in tune with its customer's changing preIerences. They are
responsive to the various seasons oI the year, oIIering seasonal menu rotations, reIerred to as "Celebrations."
OIIering something new and Iresh is a great way to sustain your regular customers and to bring in new
customers. Panera is wise in their introduction oI new menu items. Prior to system wide rollouts, new items are
developed in test kitchens and then introduced to a limited number oI bakery-caIe locations to determine
customer response and veriIy that preparation and operating procedures resulted in product consistency and
high quality standards.

In addition to seasonal items, Panera has answered its health conscious consumers' needs. They have
introduced whole grain breads and switched to the use oI natural, antibiotic-Iree chicken in all oI its chicken-
related sandwiches and salads. They also added light entrees to jump-start dinner appeal and egg souIIles to
expand their breakIast oIIerings and help boost morning-hour sales.

Panera saw a customer need Ior more catering options and expanded into this market. Now customers
could experience the high quality Panera products at the convience oI their own location, whether it be in the
workplace, schools, parties or gatherings held in the home. This opportunity would help increase breakIast,
lunch and dinner sales, as well as grow customer awareness.

Early on Panera's marketing strategy was more oI a passive approach. They relied heavily on customer
loyalty and word oI mouth to develop their brand awareness. In 2006, Panera stepped up its marketing
strategy. One element aimed at raising the quality oI awareness about Panera by hammering the theme "Iood
you crave, Iood you can trust." With this theme they looked to market Panera as a neighborhood gathering
place . Also, instead oI the hard-sell, in-your-Iace approach, Panera aimed at a soIter touch, allowing its new
customers to "discover" Panera. Panera also looked to increase its evening sales by capturing its existing lunch
customers.

Panera Bread's Iranchising strategy was to enter into Iranchise agreements that required the Iranchise
developer to open a number oI units, typically 15 bakery-caIes in six years. To protect the company and ensure
success, applicants had to meet eight stringent criteria to gain consideration Ior a Panera Bread Iranchise. A
Iranchise Iee oI $35,000 per location and continuing royalties oI 4-5 on sales was typically included in the
Iranchise agreement. Dough products had to be purchased Irom approved sources by Panera Bread. The
Iranchise segment oI the company proved to be beneIicial Ior both company as a whole and the Iranchise
developer. Panera's surveys oI its Iranchises indicated high satisIaction with the Panera Bread concept, the
overall support received Irom Panera Bread, and the company's leadership. The biggest Iranchise issue was the
desire Ior more territory. As oI mid-2006, Panera did not yet have any international Iranchise development
agreements. However they were considering entering into Iranchise agreements in Canada, speciIically
Toronto and Vancouver.

In terms oI site selection, Panera did its due diligence beIore selecting or approving Iuture site
locations. They studied the surrounding trade area, demographic inIormation within that area, and inIormation
on competitors. They developed projections oI sales and ROI Ior candidate sites. In terms oI caIe environment,
Panera has a winning approach to making their locations warm, inviting and comIortable. They strive to be
community gathering places. They provide a distinctive and engaging environment by using Iixtures and
materials complementary to the neighborhood location. Recently they have introduced a new G2 caIe design
which incorporates higher-quality Iurniture, cozier seating areas and groupings, a brighter more open display
case, and in some locations a Iireplace. Based on the climate and geographical location some bakery-caIes also
oIIer outdoor seating. Panera's Iree Wi-Fi is a competitive advantage. I personally choose to go to Panera
because oI this. Their competitors oIIer wireless internet but at a cost. Free Wi-Fi meets the needs oI a
sophisticated and diverse customer base. I think the extra perks like this help Panera develop such a strong
customer loyalty. I also appreciate the real china and stainless silverware over paper plates and plastic utensils.

Panera is committed to their community. Operation Dough-Nation is a program that allows Panera the
opportunity to give back to the community. At the end oI each business day, any unsold loaves oI bread are
either delivered to or picked up by a local homeless shelter or Iood bank. This is a great gesture and shows
Panera's commitment to being a positive inIluence in their local communities.

bakery caIe chain supply - pricing threat - value oI item line -

The restaurant business was labor-intensive, extremely competitive, and risky. Industry members
pursued diIIerentiation strategies oI one variety or another to set themselves apart Irom rivals. Many
restaurants had Iairly short lives; there were multiples causes Ior a restaurant's Iailure. They range Irom the
Iollowing: a lack oI enthusiasm Ior the menu or dining experience, inconsistent Iood quality, poor service, a
bad location, meal prices that patrons deemed too high, and superior completion by rivals with comparable
menu oIIerings. Fortunately, Panera has processes in place to help Iight against each oI these deal breakers.

2. What does a SWOT analysis oI Panera Bread reveal about the overall attractiveness oI its business
situation?

Strengths:

Very successIul acquisition oI the Saint Louis Bread Company in 1993

Panera was widely recognized as the nationwide leader in specialty bread

In 2003, they scored the highest level oI customer loyalty among quick-casual restaurants

In 2004, customers ranked Panera highest among quick-service restaurants in all categories -
environment, meal, service, and cost

Strong Iinancial statements show continuous increase in revenue and net income Irom 2002
through 2006

Their management team is conIident that their business plan will provide signiIicant growth
opportunity

Panera Bread has a diversiIied Board oI Directors

Their made to order menu items give the customer the option to have exactly what they want
and how they want it

Global opportunities - expanding to Canadian locations

Young proIessionals don't want to cook, don't want to pay a high price and want an inviting
atmosphere, they are drawn to Panera because it can oIIer them these things

Well suited Ior groups to gather - business lunch meetings, bible study groups, etc.

Weaknesses:

There are operational restrictions on Iranchise operations

It is very costly Ior Iranchisees because oI the Iranchise Iee and royalties, on top oI the cost oI
equipment, inventory, and business space

StaIIing and Iunding required to open new locations - growing pains

Supplier contracts - less bargaining power Ior Panera

Opportunities:

Health conscious consumers are steering away Irom McDonalds and looking Ior healthy
alternative "Iast-Iood"

Young proIessionals don't want to cook, don't want to pay a high price and want an inviting
atmosphere, they are drawn to Panera because it can oIIer them these things elder
generation...

Global opportunities - expanding outside oI North America - European market

Introduce more organic items and items with a higher protein content - nuts and lean meat

Threats:

Climate - iI wheat crops, lettuce, tomatoes, etc. are damaged by severe weather their prices will
increase - this increase will result in Panera increasing customer prices or taking a loss to
their net income

InIlation rates - an increase causes the general price level oI products (and services) to rise
which decreases the purchasing power oI the dollar

Changes in unemployment levels and wage rates can negatively impact the industry

Restaurant industry is extremely competitive

Potential oI over saturating the market

Panera Bread's strengths out number it's weaknesses and there is a balance between opportunities and threats. I
would say overall, this is a Iairly attractive business situation. I would recommend that the careIully consider
increasing their caIe-bakery locations at the rate they are proposing. I would suggest stepping back a little and
allowing more oI a demand to build.

3. What is your appraisal oI Panera Bread's Iinancial perIormance based on the data in Case Exhibits 1, 2, and
8?

Exhibits 1 and 2 -

Exhibit 8 - in 2005 you can start to see the eIIect oI increased ingredient prices on the Iresh dough operations.
In 2006, this increase is more evident and a greater impact is shown.

4. What are the strategic issues and problems that Panera Bread's management needs to address?

I think Panera Bread needs to do more media advertisement. This will help gain consumers' awareness Ior their
products, which in return will allow them to gain additional market share. I think they are relying too heavily
on word oI mouth.

5. What does Panera Bread need to do to strengthen its competitive position and business prospects vis-a-vis
other restaurant chain rivals?

I think their current position is setting them up Ior success and that they just need to be aware oI their growth
rate. They don't want to get ahead oI themselves and stretch themselves too thin. They currently have a strong
competitive position. Their business model has proved successIul Ior them and they don't need to stray Iar
Irom what has been working Ior them in the past. I would suggest staying on top oI their suppliers and
revisiting any single source supplier contracts. That is one oI the Iew areas where there is some potential Ior
improvement.



PAPER 2

Panera Bread is a company oI small beginnings, starting out as a chain oI small scale bakery-caIes along the
east coast to having over 1,200 locations in over 40 states. Panera is a company that strives to project an
inviting atmosphere in all oI its establishments. Panera`s stores are mostly located in suburban areas with heir
target customers being urban workers and suburban dwellers.

'A loaI oI bread in every arm is the mission statement oI Panera Bread. Panera Bread bakes more bread
each day than any bakery-caIe in the country. Panera`s menu spans Irom muIIins and bagels to soups and
salads to a variety oI sandwiches. Panera Bread prides itselI on providing the highest quality oI Iood that
customer enjoy.

Panera`s competitors include restaurants in the Iast-casual restaurant market such as Applebee`s, Baja Fresh
and Fuddruckers. Panera Bread also has to compete with common Iast Iood restaurants such as McDonald`s
and Wendy`s. Although, competition is Iierce in these markets, Panera has been able to diIIerentiate itselI
Irom other competitors.

One oI the main problems that Panera Bread is Iacing is their pricing strategy. With the state oI the
economy today, it deIinitely aIIects the consumer`s ability to eat at places like Panera Bread, especially when
there are less expensive options available. These competitors, most oI which are in the Iast Iood industry, oIIer
less expensive Iood items, although they may be oI a lesser quality, they still pose a major threat.

Fast Iood restaurants such as McDonalds may operate diIIerently, however they have a strong presence in
suburban areas, which is where Panera is primarily located. There is approximately one Panera location Ior
every ten McDonald`s. Also, Iull service restaurants such as Applebees, are beginning to oIIer lower priced
menu options. For example, Applebee`s recently began oIIering 2 Ior $20 deals where customers can get an
appetizer and two entrees Ior $20. Deals like these may start to lure Panera`s customers to other
establishments.

Customers at Panera are expected to stand in line, place their order, wait Ior the Iood and take it to their
table. They are also expected to clean their table when they are done, all Ior the price oI a sit down dinner. On
average a customer at Panera can expect to pay around $10 Ior a sandwich and a beverage. For the same price
or just a Iew dollars more, consumers can get a Iull service experience at a restaurant like Applebee`s.
Although, the Iood may be great, will customers continue to pay these types oI prices Ior limited services?

Described in Newsweek as 'the Applebee`s oI Iast Iood, Panera Bread has not altered there pricing to stay
competitive in this industry. Instead, Panera uses market segmentation and Iocuses on the customers who can
aIIord their prices. As the CEO, Ron Shaich, stated when asked about the 8.1 unemployment rate, 'We
preIer to Iocus on the 92 oI the country who still have jobs. Even though the majority oI their target market
segment may be still employed, people are scaling back due to the Iear oI possibly losing their job in the near
Iuture. This can pose a major threat to their Iuture success.

One oI the main causes oI Paneras higher menu prices is the cost oI the quality ingredients that they use in
their Iood. The quality oI Panera`s Iood is part oI their marketing strategy. The company attempts to grow
sales through providing an enjoyable dining experience rather than attracting customers on price. Their
marketing objective is to grow their customer base with menu development strategies.

As indicated in the case, Panera manuIactures its own Iresh dough, which is produced and delivered daily in
Iacilities all over the country. Although this is a very costly process, management at Panera sees this as a
competitive advantage. Also, Panera obtains ingredients Ior their dough and other products Irom multiple
suppliers. Due to the rising cost oI ingredients, it is likely that Panera`s menu prices will increase.

To eIIectively analyze cost in relation to price, more inIormation is needed on the cost oI producing all
items on Panera`s menu. How much oI the price is aIIected by cost is a major Iactor. Management needs to
look at ways oI oIIering lower priced Ioods without having an major Iinancial impact on the companys proIit
margin.

One option that Panera can implement is lower priced menu options. This can be done in various ways to
ensure the quality is not compromised. Panera could oIIer lower priced, smaller portions Ior the lunch menu.
For example, in addition to oIIering a whole sandwich, Panera can oIIer halI sandwich at a lesser price. This
would also tie in with marketing to health conscious people because they would be getting healthier sized
portions oI Iood. Panera would also become more competitive with Iast Iood restaurants such as McDonald`s
that have everyday low-priced value option on their menu.

Although, this may be a good way to bring in a new customer base, there is also a downside. Introducing
lower priced menu items may jeopardize Panera`s current competitive advantage. Panera has grown over the
years by staying committed to what they believe in, which is providing a great dining experience. However,
by oIIering a value menu, this may be seen to some customers as a step down, which could result in decreased
sales.

Another option is Ior Panera to transIorm into a Iull service dining establishment. Essentially they would
operate more like Applebee`s where customers are waited on and served. This would also allow them the
opportunity expand their menu, especially Ior dinner since this is a slow period Ior them. They would even be
able to introduce some higher priced menu items which would be more aligned with other Iull service
restaurants. The current layout oI the restaurant is setup very similar to a Iull service restaurant, so there would
be minimal structural changes necessary.

There are some negative aspects to this option that have to be explored. The main issue that would have to
be examined is the increased cost. Going Iull service entails hiring additional staII to serve customers. Also,
although minimal, there would have to be some structural changes made at each locations to enable Panera to
become more conducive to a Iull service establishment

Another issue that has to be considered with going Iull service is the additional competition. There are lists
oI Iull service restaurants that Panera would have to compete with, which may have a negative impact on sales.
Their existing customer base may also not be very accepting oI a Iull service option and this may ultimately
result in Panera losing revenue.

I think the best option Ior Panera Bread is to oIIer lower priced options as a part oI their menu. This is the
most cost eIIective way Ior them to address the issues that consumers have with their prices. This would also
allow them to perhaps gain new customers with these lower priced items. Also, oIIering lower price menu
options would have the least Iinancial impact. This can be done by oIIering coupons or having specials on
certain days oI the week.

Panera can also oIIer a customer rewards card which is a very popular trend. Customers would gain points
Ior Irequenting the restaurant and aIter gaining so many points, they would be entitled to a Iree entree. This
would be a great opportunity to increase customer loyalty.

Panera Bread is a successIul company that has stood behind their commitment oI providing 'crave-able
Iood that people trust. Although, with the current state oI the economy change is necessary, Panera Bread can
make changes to their strategy without jeopardizing quality.

ReIerences

Donnelly, J. H., Jr., & Peter, J. P. Marketing management: Knowledge and skills. (9th ed.) (2009). Boston,
NY: McGraw-Hill Irwin.

Panera Bread Company InIormation Retrieved October 10,2009 Irom Panera Bread oIIicial website
http://www.panerabread.com/about/company/

Julie Jargon (2009) Slicing the Bread But Not the Prices Retrieved October 10, 2009 Irom The Wall Street
Journal http://online.wsj.com/article/SB125055615200338805.html?ruMKTW&modMKTW

Michael Arndt (2009) Panera Bread`s Apple Strategy Retrieved October 10, 2009 Irom BusinessWeek
http://www.businessweek.com/thethread/brandnewday/archives/2009/03/panera breadis.html

Market Scan (2007) Panera Bread in The Oven Retrieved October 10, 2009 Irom Forbes.com
http://www.Iorbes.com/2007/10/24/panera-bread-update-markets- equity-
cxml1024markets36.html

PAPER 3

Running head: PANERA BREAD CASE
Title: Panera Bread Strategy
Ron Johnson
March 1, 2009
Southwestern College ProIessional Studies

Abstract
This case study is about Panera Bread Company and its strategy it wishes to employ to become the best brand
name oI Iresh bread in the United States. Panera Bread`s use oI a broad diIIerentiation strategy has helped their
proIitability and growth and rivals have Iound it hard to compete with the competitiveness oI Panera Bread. A
SWOT analysis will reveal the competitive advantage Panera Bread has and why this company is in an
attractive situation and what Panera Bread must do to strengthen its competitive advantage against rival chains.


Panera Bread Strategy
Neighborhoods and cities all around the country are enjoying a tradition oI Ireshly baked artisan breads Irom
Panera Bread bakery-caIes. A driving Iorce behind Panera Bread was to create 'a premium specialty bakery
and caIe experience to urban workers and suburban dwellers (Thompson, Strickland, & Gamble, 2008, pC-
87). Heading into 2007, Panera Bread Company`s market presence was expanding rather swiItly. 'Between
January 1999 and December 2006, close to 850 additional Panera Bread backery-caIes were opened, some
company owned and some Iranchised. Panera Bread reported sales oI $829 million and a net income oI $58.8
million in 2006. Sales at Iranchised-operated Panera Bread bakery caIes totaled $1.2 billion in 2006
(Thompson, Strickland, & Gamble, 2008, pC-87). Panera Bread`s strategy was and still is to make great bread
and to make it broadly available. Part oI that strategy is to make there caIes a home away Irom home, where
people are comIortable and relaxed. What competitive strategy did Panera Bread use to grow its business?
There are a number oI ways that companies employ competitive strategies and that can depend on a
number oI things. Panera Bread`s competitive strategy approach is geared more to a broad diIIerentiation
strategy, where the products and services they oIIer are somewhat diIIerent than their rivals and it appeals to a
large spectrum oI buyers. In this case Panera Bread has set itselI apart Irom its rivals by oIIering specialty type
Ioods that are outside the norm. The bakery menu oIIers pastries and sweets, granola parIait, baked egg
souIIles, breakIast sandwiches and oI course, Ireshly baked breads to include bagels. They also have a caIe
menu that oIIers hand tossed salads, sandwiches, drinks, and soups. To top things oII, they even oIIer a kids
menu, so Panera Bread caters to the entire Iamily. Panera Bread Company went as Iar as starting a catering
program to extend its market reach (Thompson, Strickland, & Gamble, 2008, pC-92). 'Everyone enjoys
choices, especially when they're Iresh, Iun and spontaneous. Right now at Panera Bread, there are plenty oI
tempting selections to captivate, tantalize and energize your bread-lover's soul as we celebrate the delicious
rewards oI the baker's craIt (Panera Bread, 2009). What competitive edge does Panera Bread have iI any?
Panera is attempting to achieve a longer lasting, more proIitable competitive advantage by their
capability to oIIer unique or specialty type items. Also, their commitment to put there all into everything they
oIIer their customers. For example, Panera oIIers 4 diIIerent Ilavors oI coIIee, dark and light roast, hazelnut,
and decaI. What is important is the work they put into making the coIIee. 'We believe that coIIee is sacred.
And that making it requires the utmost attention Irom the bean to the cup. So we roast our coIIee beans in
small batches allowing us to make adjustments along the way to bring out the best in every bean. And when
we brew it, we keep it at just the right temperature so it`s not too weak or bitter (Panera Bread). Panera`s
ability to oIIer a more unique product and experience will help them be able to sustain their competitive
advantage. What are the strengths, weaknesses, opportunities, and threats (SWOT) analysis involved with
Panera Bread?
A company`s proIitability and competitive well-being are aIIected by both internal and external
origins. Threats that can harm Panera Bread Company are their competitive rivals who attempt to copy and
employ some oI the same standards and who may one day oIIer the same products and services. Panera Bread
is in a very attractive situation. The company reached an all time high according to published reports Irom the
company`s press release department on February 8, 2007, where the company`s revenue was just over $282
million in 2002 and nearly $829 million in 2006 (Thompson, Strickland, & Gamble, 2008, pC-86). Does
Panera Bread Company have any core or distinctive competencies?
Panera provides its customers with unique Iood and a unique experience. It oIIers a bakery and caIe
menu and let`s not leave out the kids menu. They oIIer Iour types oI coIIee that they give special attention to
when and how they make it Ior their customers. Panera Bread even goes the extra mile by having wiIi
connectivity in 1200 oI its business locations Ior business men and women and college students` just to help
give the extra Ieel oI being home. Panera Bread`s distinctive menu, signature caIe design, inviting ambience,
operating systems, and unit location strategy allowed it to compete successIully in Iive submarkets oI the Iood-
away-Irom-home industry: breakIast, lunch, daytime chill out (the time between breakIast and lunch and
between lunch and dinner when customers visited its bakery-caIes to take a break Irom their daily activities),
light evening Iare Ior eat-in or take-out, and take-home bread (Thompson, Strickland, & Gamble, 2008, pC-
87 and C-88). What can Panera Bread Company do to strengthen its competitive position and business
prospects?
One way Panera Bread can strengthen its competitive advantage is to continue to make it
selI available around the country- even more than it has. One way is to have more Iranchised-operated bakery-
caIes. It was reIerenced earlier with the Iinancial data reports that Iranchised-operated bakery-caIes totaled
$1.2 billion in sales in 2006 (Thompson, Strickland, & Gamble, 2008, p-C-86). Panera Bread counts on its
product environment and great service to deliver its success. II it continues to oIIer great customer service,
unique products and an overall escape Ior people oI all ages, Panera Bread can keep its competitive advantage.
Conclusion
Panera Bread provides a specialty bakery and caIe experience to people all across the United States.
Panera`s marketing strategy was to compete heavily; not on the basis oI price, but on providing a unique
dining experience that none oI its rivals can match. That is one reason Panera Bread has been able to grow and
prosper, the company and its Iranchises. By using a broad diIIerentiation strategy, Panera Bread has been
successIul at maintaining a broad customer base. II there are any threats to this company, they are Irom
external Iorces because they have adapted to the market and continue to win over their consumers. Panera
Bread Company should not have a problem with maintaining there competitive advantage.


ReIerences
Thompson, A. A., Strickland, A. I., & Gamble, J. E. (2008). CraIting & executing strategy: The
quest Ior competitive advantage: concepts and cases (16th ed.). Boston, Massachusetts:
McGraw-Hill/Irwin.
Panera Bread Company. (1999-2009). Our menu oIIers. Retrieved February 27, 2009 Irom:
http://www.panerabread.com/menu/bakery/


PAPER 4
Panera Bread Company

0. INTRODUCTION

The Panera Bread legacy began in 1981 as Au Bon Pain Co., Inc. Founded by Louis Kane and Ron Shaich, the
company prospered along the east coast oI the United States and internationally throughout the 1980s and
1990s and became the dominant operator within the bakery-caIe category. In 1993, Au Bon Pain Co., Inc.
purchased Saint Louis Bread Company, a chain oI 20 bakery-caIes located in the St. Louis area. The company
then managed a comprehensive re-staging oI Saint Louis Bread Co. Between 1993 and 1997 average unit
volumes increased by 75. Ultimately the concept's name was changed to Panera Bread.
Panera Bread has been recognized as one oI Business Week's "100 Hot Growth Companies."As reported by the
Wall St. Journal's Shareholder Scorecard in 2006, Panera Bread was recognized as the top perIormer in
restaurant category Ior one-, Iive- and ten-year returns to shareholders. Today, there are more than 1160 Panera
Bread bakery-caIes in 40 states delivering Iresh, authentic artisan bread on a national scale.

1. STRATEGIC CHALLENGE

Panera Bread`s major problem is its development in North America and the disparity oI its implementation in
general. The company has many caIes all around the United States, in major cities such as St Louis, Los
Angeles, Philadelphia, Dallas. but big cities such as New York city, Phoenix, San Antonio, New Orleans,.
do not have any Panera Bread CaIes.

The strategic challenge Ior Panera Bread is to develop the implementation oI the company all around North
America beIore going to the international market. With its own characteristics and a good development, Panera
Bread will be a major actor on the bakery-caIe market and will compete with big companies such as Starbucks
or Subway.

2.COMPETITION ANALYSIS

Core Competence

-The company`s Iresh-dough-making capability Ior Iresh baked and quality goods served in a comIortable
environment.

SWOT

Strengths:

-Panera Bread is well-known Ior the quality oI its products, it provides warm and baked Iood that people trust.
-The comIortable environment oI the caIes is also a major strength Ior the company, customers really like to
hang out in Panera Bread caIe and spend their breakIast or lunch time in a peaceIul and smooth environment.
-Customer satisIaction and their tendency to share their positive experiences with Iriends and neighbours.
-Company`s Iresh-dough-making capability provide a competitive advantage by ensuring a daily quality and
dough-making eIIiciency.
-Panera Bread growth strategy: opening both owned-company and Iranchise locations.


Concerns:

-Lack oI Panera Bread`s locations in many states in the U.S and in North America in general.
-Panera Bread`s weak marketing, a lot oI people do not know their innovative products.

Opportunities:

-Higher quality quick dinning experience than the traditional Iast Iood restaurant
-Fast casual restaurant market is a growing market
-Panera Bread is in the trend, its Iood correspond to the actual trend oI heart-healthy, organic, low calorie Iood.
-The catering market to increase lunch and dinner sales.

Challenges:

-Important competition and major competitors such as Subway or Starbucks on the market which have
restaurants in North America and all around the world.
-Business itselI is really hard, labor intensive, extremely competitive and risky.
- People only come in the restaurant once a day (Ior breakIast or lunch but not Ior both) Panera Bread will have
to Iind new ways to attract them.
-The company will always have to be really innovative to always Iollow the trend oI the market and stay Iocus
on the customers needs.
-The company must have to continue to develop itselI all around the U.S and in North America.

PEST

Political and Legal:

-Political and legal Iactors were not addressed in the Panera Bread Company case study but Panera Bread
company like the other Iast Iood companies and restaurants takes into account the political and legal
environment and depend on employment laws and tax policy Ior their products and employees.

Economical:

-Fast casual restaurant sector is growing up and the market is at the moment Iavourable Ior Panera Bread
development and implementation
-Increase oI the demand Ior Iast casual restaurants in the United States

Social and Cultural:

-Health consciousness oI the customers
-Need oI a new oIIer adapted to consumer`s taste (vegetarian, low-calorie) and to their expectations ( happy-
hours, children`s menus, innovative or trendy dishes,.)
-ComIortable environment where customers like to stay and not Iast Iood environment where consumers eat in
20 minutes and then leave

Technological:

-Panera Bread`s Iresh-dough manuIactures which provides Iresh dough everyday to its caIes and so ensure the
quality and the Iresher oI its products.

Porter`s Five Competitive Forces

Potential new entrants:

-Even tough the competition is pretty tough and the threat oI potential new entrants is high in the market,
Panera Bread is doing very well because it oIIers a quality product which is in the trend.
-Restaurant market is easy to penetrate with an innovative product.

Threat oI substitute products:

-In general, the threat is high in the Iast casual restaurant industry with similar products proposed by diIIerent
companies.
- Panera Bread is oIIering an innovative product which diIIerentiate the company to its close competitors.
-The quality oI its products (thanks to its Iresh-dough) also diIIerentiate Panera Bread to its competitors.

Bargaining power oI buyers :

-Franchisee power is low, they are dependant oI Panera Bread supply Ior the Iresh-dough Ior example and they
can also be bought by the company aIter Iive years.
-Customer`s power is high, they decide and impulse the trend, they share their good experience with other
customers.

Bargaining power oI suppliers:

-Suppliers power is also low, Panera Bread Company only depend on them Ior the supply oI their 'raw
material.
-You can Iind a lot oI alternative suppliers

Rivalry among competitors:

-The competitors are numerous and diverse.
-The competition on the market is hard, rivals compete aggressively.
-Panera`s marketing is a bit weak but the level oI advertising expense is important Ior every big company in
that sector.

PAPER 5

Panera Bread: A Case Study Misti Walker

Panera Bread: A Case Study 1

Strategy
Panera Bread`s strategy is 'to provide a premium specialty bakery and caIe experience to urban workers and
suburban dwellers. This strategy is most closely aligned with a broad diIIerentiation strategy, or being unique
in ways that a broad range oI consumers Iind appealing. Prior to taking the Panera concept nationwide, the
owners perIormed cross-country market research and concluded that consumers could get excited about a
quick, high quality dining experience. The concept is a mix between Iast Iood and casual dining, or Iast casual.
By choosing this strategy, Panera is attempting to achieve competitive advantage in the unique oIIerings it
provides, oIIerings that rivals don`t have and can`t aIIord to match. In this case, delicious handcraIted bread
arriving Iresh daily, served in an inviting atmosphere is the company`s competitive advantage and core
competency.

SWOT Analysis
Strengths - Repeat customers, learning curve, word-oI-mouth, Iresh, quality Iood, rapid market penetration,
economies oI scale, customer service, good atmosphere Weaknesses - leased land, oII-site dough preparation
and delivery, many untapped markets, no sustainable competitive advantage, unclear strategic direction,
unIavorable Iinancial trends Opportunities catering, national Iocus on health, dinner crowd, global sales
Threats bad economy, high gas prices, highly competitive industry

Financials
Net proIit margin Return on stockholder`s equity Debt to Equity Ratio Current Ratio 2006 .071 14.8 .365
1.16 2005 .081 16.5 .381 1.18 2004 .081 15.9 .345 1.05 2003 .084 15.8 .239 1.58 2002 .076 14 .215
1.83

Return on Sales (by business segment) 2006 Company stores 18.5 2005 19.6 2004 19.8 2003 20.7 2

Franchises Dough Combined

88.0 9.9 23.3

87.7 9.0 24.5

88.0 6.7 24.6

88.7 7.0 25.8

The Iranchise business segment is showing above average returns on sales. This is due to the Iact that the start-
up costs tied to the Iranchise segment are not reIlected in the company`s 10-K reports.

Competitors
Panera Bread`s closest rivals include: Atlanta Bread Company, Au Bon Pain, Chipotle, and Starbucks. These
restaurants are also in the Iast-casual dining segment oI the industry. Like Starbucks, Panera Bread hopes to
convey a casual, Iriendly atmosphere Ior people to 'chill out and enjoy the Wi-Fi and good times with
Iriends. While these are the closest rivals, Panera must also compete with casual dining restaurants, IastIood
places and any number oI other locally-owned establishments.

Recommended Action
In order to compete eIIectively in this highly-competitive industry, management needs to deIine a clear-cut
strategy that addresses the company`s distinctive competence it`s wholesome, delicious artisan craIted bread
products. The name oI the company is Panera Bread, the bread is its distinctive competence, and the company
should promote it as such. Given the industry`s competitiveness and the Iickleness oI its consumers,
management can strengthen its competitive position by providing a superior product at the best value to
consumers. Already Panera is competitively priced but many external events might curb the company`s
proIitability. By implementing a best cost provider strategy, the company would be somewhat shielded Irom
downturns in the economy. Further, the company`s proIitability is trending downward. To address this issue
and attain best cost provider status, management should consider eliminating the Iresh dough segment oI the
company, and instead bring the bread making into each store. This will reduce the risk oI higher gas prices
eating into the proIit margin. It will also aid in the goal oI creating an inviting environment Ior its guests. Who
doesn`t love the smell oI Iresh bread? And kids would love to watch the bread artisans practice their trade.
Finally, research has shown that once a person has visited a Panera bakery-caIe, they are more likely to return
and tell their Iriends about their visit. Panera is a relatively young company that has experienced high growth
in the past Iew years. Management needs to raise awareness oI the brand and the rest will take care oI itselI. To
achieve this goal with limited cost, the company should increase its marketing budget and share the associated
cost with its Iranchises. The marketing campaign should Iocus on the competitive advantage oI the company,
value, nutrition, and warmth.

PAPER 6\

Overview

Panera Bread is ready Ior an epochal change in American eating habits. The company is a leader in the quick-
casual restaurant business with more than 1,027 bakery-caIes in 36 states. Its locations, which operate under
the Panera and Saint Louis Bread Company banners, oIIer made-to-order sandwiches built using a variety oI
artisan breads, including Asiago cheese bread, Iocaccia, and its classic sourdough bread. Its menu also
Ieatures soups, salads, and gourmet coIIees. In addition, Panera sells its bread, bagels, and pastries to go.
Almost 400 oI its locations are company-operated, while the rest are run by Iranchisees. Panera Bread's is
trying to provide premium specialty bakery and caIe experience to urban workers and suburban dwellers.
They want to make the experience oI dining at Panera so attractive that customers would be willing to pass by
the outlets oI other Iast-casual restaurants competitors to dine at a near-by Panera Bread. They have strong
competition through-out the whole Iast-Iood/restaurant business. Two main competitors that they have are
Starbucks and Einstein Bagels. They are a proven company that is always looking Ior ways to move Iorward,
and advance their business.
1. What is Panera Bread's strategy? What type oI competitive advantage is Panera Bread trying to achieve?
Panera Bread's strategy is to provide premium specialty bakery and caIe experience to urban workers and
suburban dwellers. Panera is trying to be "better than the guys across the street." They are trying to make the
experience oI dining at Panera so attractive that customers would be willing to pass by the outlets oI other Iast-
casual restaurants competitors to dine at a near-by Panera Bread.

2. What does a SWOT analysis oI Panera Bread reveal about the overall attractiveness oI its situation? Does
the company have any core competencies or distinctive competencies?
Panera's Resource Strengths and Competitive Assets:
Leading bakery-caIe nationwide
Award winning sourdough bread
High quality Iood
Strong Financial Condition
Loyal customer base
PowerIul Strategy
Known brand name

Panera's Resource Weaknesses and Competitive Liabilities :
Low brand awareness in new markets
Limited product line

Panera's Market Opportunities:
Increasing health conscientious among consumers
Few direct competitors
Ample room to expand into new markets
Expanding the product line

External Threats to Panera's Future Well-Being and ProIitability:
Due to high proIit margins, potential Ior competitors to enter the market
A shiIt in buyer needs and tastes
Slowdowns in market growth

Conclusions concerning the attractiveness oI Panera Bread's overall situation:

The above SWOT listings Ior Panera Bread reveal that they have an attractive set oI strengths. They also have
attractive opportunities that are well suited to its strengths. The one weakness I think Panera should worry
about would be limited product line. Panera does oIIer diIIerent product but when compared to the whole Iast-
Iood industry they don't have an extensive menu. I don't think any oI the threats are too alarming. They
company should be able to deal with them iI they were to come along. Panera should use their known brand
name to help expand into new markets. They could also expand their product line in connection to the
increasing health conscientious among consumers. They could oIIer consumers healthier and more options or
Iood and beverages.

3. What is your appraisal oI Panera Bread's Iinancial perIormance based on the data contained in case Exhibits
1, 2, and 8? How well is the company doing Iinancially?

Panera's total revenues have grown Irom $282,225 million in 2002 to nearly $828,971 million in 2006, equal to
a strong compound average growth rate (CAGR) oI 30.91.
Franchise royalties and Iees are up Irom $27892 million in 2002 to $61,531 million in 2006, a CAGR oI
21.78. Fresh dough sales to Iranchisees have grown Irom $41,688 million (.15 oI total revenues) in 2002
to $101,299 million (.12 oI total revenues) in 2006, a CAGR oI 24.85. Net income is up Irom $21,300
million in 2002 to $58,849 million in 2006, a CAGR oI 28.9. EPS is up Irom $.71 per diluted share to $1.84
per diluted share, a CAGR oI 27.6. Net cash provided by operating activities rose Irom $46.3 million in 2002
to $104,895 in 2006, a CAGR oI 22.67.

I believe that Panera has grown rapidly over the last Iour years. They have increased there revenue by 34
4. Which rival restaurant chains appear to be Panera's closest rivals?

Einstein Bagels and Starbucks seem to be Panera's closest rivals. This is because they all sell a similar
combination oI products. Einstein and Panera's Menu's are quite similar. Both menus Ior breakIast include;
bagels, scones, cinnamon twists, coIIee cake, cookies, and muIIins. Lunch menus include; soups, salads, and
sandwiches. They also both oIIer hot and cold beverages. Starbucks is more oI a rival due to their
atmosphere, though they do show similarities in their menus. Both Panera and Starbucks are places where you
can pair your coIIee with a Iresh pastry and enjoy Iree WiFi access to boot. Both successIully execute the
concept oI a "third place" i.e., a location other than home and work where you can relax, work, meet and chat.

5. What strategic issues and problems does Panera Bread management need to address?

One strategic issue Panera Bread management needs to address is expansion. II Panera does expand too
quickly or too close together, it would mean problems. II these expansion problems, or any other problems Ior
that matter, did come up, Panera could handle some oI it with the strong balance sheet. I believe management
is smart and knows what locations/areas where Panera would do well. But this will be something to keep an
eye on. They also need to address whether to expand their product line. OIIering more products will attract
customers and help them to compete with their rivals.
Another issue management should address could be competition. Competition Irom other eateries and caIes
will be something that could hurt Panera. Again, I believe management is smart and knows what tactics work
in this area, but competition is still a Iactor that could hurt Panera and something to Iollow. They also need to
address whether to correct the company's deIiciencies by acquiring a rival company with the missing strengths.
The Iinal issue would be location. 40 oI Panera's bakery-caIes are located in the Midwest. II a signiIicant
amount oI these locations suIIered serious damage Ior whatever reason, it'd hurt the company. Again, the
strong balance sheet means the company can handle some diIIiculties. But iI anything major kept the caIes
shut or the customers away, Panera wouldn't have much support Irom the stock market. They could also
address whether to expand into Ioreign markets. This would help Panera's continual growth.

6. What does Panera Bread need to do to strengthen its competitive position and business prospects vis-a-vis
other restaurant chain rivals?

The key Ior Panera's expansion is their bakery-caIes, obviously. Panera will deIinitely be a company who's
helped by a rising organics crowd, which is currently growing at 15-20 and still makes up only 2 oI the
whole U.S. Iood market. Panera has a niche Ior sure, and that niche will greatly beneIit Irom a larger natural,
organic, healthy crowd, which I believe will continue to keep growing. Now, Panera doesn't quite have the
ability oI Starbucks to have a caIe on every other block, but they can do some close expansion, more so than
other restaurants. I think Panera could have one oI their caIes every 15-20 miles Irom another one, because
people go out oI their way to get to Panera, just as they do to get to Starbucks. Panera has a great reputation,
so as long as they have that, expansion will come relatively easily. I believe Panera could easily operate 4000-
5000 bakery-caIes. Remember that they are opening a bakery-caIe every other day right now and that they are
still in only 38 states. With the balance sheet in great shape and the business strongly producing, I certainly
see Panera being able to take advantage oI opportunities when they come along.

Bibliography

Panera Bread: Rising To The Challenge. David Kretzmann http://seekingalpha.com/article/24944-panera-
bread-rising-to-the-challenge


CASE 4 Competition in the Golf Equipment Industry in 2008
ASSIGNMENT QUESTIONS
1. What are the defi ning characteristics of the golf equipment industry? What is the industry like?
2. What is competition like in the golf equipment industry? What competitive forces seem to have the
greatest effect on industry attractiveness? What are the competitive weapons that rivals are using to try
to outmaneuver one another in the marketplace? Is the pace of rivalry quickening and becoming more
intense? Why or why not?
3. How is the golf equipment industry changing? What are the underlying drivers of change and how
might those driving forces change the industry?
4. What does your strategic group map of the golf equipment industry look like? Which strategic groups
do you think are in the best positions? Which are in the worst positions?
5. What key factors determine the success of companies competing in the golf equipment industry?
Which companies seem to perform these factors the best? What is the overall competitive strength of the
major golf equipment manufacturers?
6. How do the fi nancial results of the major golf equipment manufacturers compare? Which rivals seem
to be coping best with the competitive forces prevailing in the industry? How do the growth rates of
golf`s major equipment manufacturers compare? Have Callaway Golf Company and TaylorMade-
adidas Golf found growth easier to achieve in some product categories than others?
7. What recommendations would you make to Callaway Golf to improve the company`s competitive
position in the industry and its fi nancial and market performance? To Fortune Brands? To
TaylorMade-adidas Golf?

An Analysis oI 'Competition in the GolI Industry
It is unknown when the game oI golI originated, but it is believed that people began playing in Europe during
the middle ages. In the United States, golI was a sport primarily played by the wealthy individuals until
tournaments began being televised. Since then, golI has grown to be a very lucrative industry with over 27
million golIers nationwide by the end oI the 1990`s. 'Competition in the GolI Equipment Industry, a case
study written by John E. Gamble oI the University oI South Alabama, is an overview oI the problems currently
Iacing major companies in the golI equipment industry: technological limitations (due to golI`s governing
organizations), a decline in the number oI golIers, and the economic recession, and the threat oI counterIeit
products. These limitations are causing leading competitors in the golI industry, namely Calloway GolI, to
rethink their strategies in 2010.
PLAC Analysis Ior Calloway GolI
Ely Reeves Calloway Jr., Calloway`s original owner, CEO and President, bought a manuIacturing company oI
hickory shaIt wedges and putters in 1983. Calloway, originally restricted to reproducing antique golI clubs, has
extended its product breadth across the golI equipment industry. Calloway GolI now encompasses drivers
(with the introduction oI Big Bertha), putters (with the acquisition oI Odyssey), irons (designed to compete
against Titleist), golI balls (with the acquisition oI Top-Flite), Iootwear and clothes branding, and GPS units
(with the acquisition oI UPlay). See Timeline in Appendix 1.Calloway has diIIerentiated itselI Irom its
competitors by its innovation, beginning with the success oI their driver, Big Bertha, which initiated the
technology race among Iirms. Calloway and its` competitors introduce more innovative products every 12-18
months to remain competitive. Furthermore, Calloway has acquired several Iirms since its origination in 1983
in order to expand its product breadth. Although in 2009, Calloway GolI Company was the 'second largest
seller oI drivers and Iairway woods, revenues have declined by 17 in 2009 compared to the Iirst six months
oI 2008. Challenges Iacing this Iirm will be assessed in the SWOT analysis.
SWOT Analysis Ior the golI industry, Calloway GolI & Recommendations
See Appendix 2 Ior Matrix
Strengths:
Calloway`s technological innovation in making a driver that pushed the limits oI USGA standards shows
motivation to become the best. Marketing to recreational golIers in an attempt to help them enjoy the game
more by oIIering an opportunity to drive 6-10 yards Iurther was a benchmark and pushed Calloway`s product
to the best golI product oI the century by a two-to-one margin. Calloway`s recognizable name also gives them
a competitive edge.
Weaknesses:
Although these technological advances may have boosted sales, there is still little evidence that these advances
help golIers lower their scores. Another weakness oI the industry is sustainability. With the development oI
new products every 12-18 months, it is crucial that companies market their products and have strong sales
shortly aIter introduction. Also, a weakness with Calloway`s golI balls was their brand image with the
acquisition oI Top-Flite golI balls, which quickly coined the game 'Rock-Flight.
Opportunities:
Although sales have declined 5.7 during 2008, continued marketing eIIorts and remaining a household name
could prove beneIicial to all Iirms aIter the recession has subsided. Due to the recession, discretionary
spending has declined and savings has risen, but this could quickly change aIter a turn in the economy.
Furthermore, Calloway has recently cut their endorsements oI PGA proIessionals to only encompass 10 men`s
PGA proIessionals and 5 women. II they expanded these numbers, it would give them more brand exposure
and possibly higher revenues since many recreational golIers base their decisions on the type oI equipment
successIul, proIessional golIers are using.
Threats:
There are a number oI threats aIIecting the golI industry as a whole: eIIects oI technological limitations by
USGA, a decline in the number oI golIers due to the economy and lack oI leisure time, and the rise oI
counterIeiting. The state oI the current economy paired with the decline in the number oI golIers, has caused
companies to Iocus more on price and volume. CounterIeiting is largely attributable to the decisions by
executives to outsource Ior cheaper labor to manuIacturers in China; who can produce a golI club Ior less than
$3 per club.
Recommendations
Companies currently operating within the golI industry, speciIically Calloway GolI, must change their current
marketing approaches and strategies to withstand the recession and threats Iacing the industry. Although
Calloway has a strong R&D department that tends to remain competitive with products and technology, there
have been little results in reIerence to scores. It is imperative that iI companies are going to market a product
that will help golIers drive Iurther and straighter that the results depict this so that not to damage the brand
name oI a product. Secondly, due to the decline in equipment sales and the number oI golIers, prices are
dropping and companies are outsourcing to maintain the volume needed to remain competitive. Companies
must be cautious and aware so that counterIeiting may be reduced. This reduction would also allow companies
to reduce their pricing and have more sales without the competition oI these cheaply priced knock-oIIs. In the
instance oI Calloway, an increase in marketing and endorsements would boost their sales due to brand
recognition. Calloway has recently Iallen to second place in the amount oI sales oI drivers. In aiding in
cutting down on counterIeiting, lowering prices, and increasing marketing and endorsements, Calloway may
have the opportunity to reposition themselves as number one in the marketplace.

Appendix 1
Calloway Timeline
1983- Ely Reeves Calloway, Jr. purchased a 50 interest in a Temecula, CaliIornia manuIacturer and marketer
oI hickory shaIted wedges and putters Ior $400,000.
1985-Ely Reeves Calloway, Jr., hired aerospace and metallurgical engineers to design the most technologically
advanced golI clubs.
1991- Introduction oI Big Bertha
1996- Acquisition oI Odyssey (leading brand oI putters)


Dominant Economic Characteristic
Market size
SRI estimates that the overall golI economy was approximately $62.2 billion in the year 2000. This estimate is
comprised oI $38.8 billion in core industries, and an additional $23.4 billion in enabled industries. It is
interesting to note that in a study oI similar scope analyzing the game in 1987,3 the golI industry was projected
to grow to between $25.2 billion (no growth scenario) and $57.8 billion (most optimistic growth scenario) by
the year 2000. The growth in the golI economy since 1987 can be attributed to a number oI Iactors. These
include growth in the number and diversity oI players, the increasing importance oI golI real estate, expansion
oI the golI tourism industry, and one oI the longest economic expansions in our nation's history (1992-2000).
GolI course Iacilities - where golIers play the game, take lessons, play in tournaments, and relax with a
sandwich and reIreshment aIterwards - represent the largest and most central component oI the golI economy.
GolI Iacilities in the United States produced $20.5 billion oI goods and services Ior golIers and the general
public in 2000 (see table below). Moreover, revenue at golI Iacilities grew by close to 10 percent per annum
between 1997 and 2000.

Scope oI rivalry
There are Iive main competitors in the premium segment: Callaway, Ping, Taylor Made and Titleist, Nike. II
we look at the evolutions oI both Callaway and Ping Irom 1994 to 2001, we see that both price and perceived
quality have improved. Callaway is one oI the main drivers oI competition, accelerating Irom $16 million
R&D spending in 1996 to $34.5 million on R&D in 2000. However, competition on perIormance/price has
become so commonplace, rivalry has spread to other arenas: new technologies, strongholds, and is now
entering the Deep Pockets' arena.
For instance, Callaway spent $175 million on marketing in 2001, 23 oI net sales, Taylor Made was sold to
Adidas to access deep pockets, and Titleist merged Cobra Ior economy oI scale both on R&D and marketing
activities. Nike is suited to a Deep Pockets' competition, with a $35 million advertising budget, including a
$100 million Iive-year endorsement deal with Tiger Woods.

Vertical integration

There are some vertical integration in the golI industry Ior most oI the competitors in this industry. Callaway
GolI company has its own R&D department where company innovate new products. Also many companies
have their own retail stores where all the products are getting sold. Most oI the golI companies buy material,
such as club heads, overseas in Taiwan and Chine. Outsourcing supplies Irom the Asia is very popular in many
industries including golI industry. In addition, many companies sell golI equipments through online stores.

Consumer Characteristic
According to the statistic, the level oI participation depends on the level oI income. For golIer with annual
income lower than $ 100,000 Caucasian are twice likely to play golI, compare with other races. 15 oI
Caucasian and 12.4 oI Asian, 8.4 oI AIrican American and 8 oI Hispanic with household lower than $
100,000 plays golI. About 28 oI adults with household income over $ 100,000 are playing, regardless oI the
race. I Iound it is very interesting that Hispanic Americans had a highest participation rate (about 32) with
household income more than $150,000. According to the GolI 20/20 the average golIer player is 40-64 years oI
age, with income about $75,000, living in the large metropolitan areas and no longer have small children.

1. The deIining characteristics oI the golI equipment industry are innovative technology and name brand
recognition. This industry is very competitive due to the regulations placed upon it and the diminishing growth
in the number oI players. The technology and research that these companies have done is so advanced that the
USGA Ieels the need to place regulations upon the proIessional players so that the game is Iair all around.
2. The competition in this industry is Iierce since the growth is slowing. Now these companies are
Iighting to snatch up the new players Irom that very narrow window oI opportunity. It seems that the new
players usually start oII with the least expensive brands. It seems that is the greatest competitive Iorce Ior
newcomers; however, Ior others there are many Iactors to be considered. The pros look at things such as
surIace area and angle oI the club head at the striking point, a higher COR in the shaIt (to produce a spring-like
eIIect) and the diIIerences in grips. Putting all oI these Iactors together along with the slowing oI growth in the
industry certainly intensiIies the rivalries between these companies.
3. The golI equipment industry has been changing drastically in the past decade due to new technological
advances and regulations placed upon the PGA and other pro golI tournaments. The proIessional industry will
not change quickly but when it does it will change Ior the better. That being said, the recreational industry will
change quickly as long as there are not too many out there who Iollow the USGA rules and regulations Ior golI
tournaments.
4. This question will be sent in another E-mail.
5. The key Iactors that determine the success in the golI equipment industry are the new research and
innovations that these companies come out with, their loyal consumers, their image in the public and
proIessionals eyes, the quality oI their equipment, and their prices.
6. It seems that the two companies that are the strongest seem to be Callaway and Taylormade. These
two have been Iighting Ior the top place in market share Ior the past Iew years and it seems as though
Talyormade is gaining ground while Callaway is beginning to Iall behind, possibly due to its prices. The two
have a Iairly equal product line but it seems that players have taken a liking to Titleist golI balls over most oI
the companies out there including Callaway even though proIessionals have Iound at least one oI Callaways
models to be equally as impressive in perIormance as the Titleist models that are popular. I`m not 100 sure
what you mean by using table 4.5 (I don`t see it unless it`s exhibit 5).
7. My suggestions to Callaway would be to lower its prices a little bit and market their woods more since
those used to be their top sellers.
8. As Iar as Iortune brands, I would tell them to widen their product line and try to vertically integrate so
they can improve their bottom line. Also, take a closer look at the way Callaway is advertising and researching
Ior their products.
9. Taylormade-Adidas GolI I would tell them to stay the course because they are already in one oI the
top positions in the market and they seem to be stealing a lot oI market share Irom Callaway which has been
the industry leader Ior years. The only thing I would think they need improvement on is their product line.
Thompson-strictland-Gamble, . The battle in Radio Broadcasting: XM vs Sirius vs. Local Radio vs. Internet
Radio. 16th. 1. McGraw-Hill, 2009. Print.



22 C A S E WaI-Mart Stores Inc 2008
Management`s Initiatives to Transform the Company and Curtail Wal-Mart
Bashing
ASSIGNMENT QUESTIONS
1. What impresses you about this company? What accounts for Wal-Mart`s success over the past 25+
years? Is it a great strategy, superb strategy implementation and execution, or great leadership? What
aspects of Wal-Mart do you fi nd unimpressive?
2. Which of the fi ve generic strategies is Wal-Mart employing? What are the chief elements of its
strategy?
3. Is Wal-Mart`s strategy working well? What does the information in case Exhibit 1 reveal about the
company`s strategic and fi nancial performance during 2000-2008? Please use the financial ratios
presented in Table 4.1
of Chapter 4 to guide your calculations and reach conclusions about the caliber of Wal-Mart`s financial
performance.
4. What policies, practices, support systems, and management approaches underlie Wal-Mart`s efforts
to execute the company`s strategy?
5. What are its chief elements and characteristics of Wal-Mart`s culture? Why does the culture seem to
be so much stronger in Bentonville than out in the stores?
6. What is your assessment of Lee Scott`s transformation initiatives? Are the initiatives ~sincere or just
calculated to garner better PR for Wal-Mart? Are more transformational initiatives needed? Why or
why not?
7. What issues do Lee Scott and Wal-Mart management need to address?
8. What recommendations would you make to Lee Scott?

Strategy Management
A case study of Wal-Mart
Introduction
Porter (2002) states that root of the problem lies in the lack of distinguishing between operation
effectiveness and strategy. The expedition for productivity, quality and speed has resulted in
management tools and techniques, total quality management benchmarking, time based competition,
outsourcing, partnering, reengineering, change management. In any organization, strategy
management is the key to its success. There are many theories based on this assumption that without
a proper strategy and planning, it is difficult for any industry to survive irrespective of its size. It is
necessary to understand here that all the major corporate organizations have established themselves,
thanks to superior strategic planning and implementation. The retail industry is making news
everywhere with not only the traditional industries increasing their outlets but some major corporate
industries also intruding into this industry like Fresh @ Reliance of Reliance Industries, More of Aditya
Birla Group in India. Wal-Mart, a US based retail industry, which is known as the giant in the retail
industry has survived and is still the huge enterprise in the world which deals with almost all the F&B
products, apparels, etc. It is not only the largest company in world but also the largest company in the
history of world.(Fishman, 2006) The present paper is divided into four sections to understand and
answer as what makes Wal-Mart the best in the industry, 1) retailing industry at the time of Wal-
Mart's innings, 2) Wal-Mart's Competitive advantage and key components, 3) Wal-Mart's Strategy and
4) Sustainable growth of Wal-Mart.


I. Retail Industry - Wal-Mart says Hello!
Strategic decisions are ones that are aimed at differentiating an organization from its competitors in a
way that is sustainable in the future. (Porter, 2002) Porter strongly advocates that decisions in
business can be classified as strategic if they involve some innovation and difference that results in
sustainable advantage. According to Patrick Hayden et al (2002) the retailing industry adopted the
style of discounting on its merchandise after the Second World War. It is learnt that discount retailing
was not the strategy at the time Kmart, Target and Wal-Mart first started operating their
business. Frank (2006) states that when Sam Walton was franchising for Ben Franklin's variety store,
invented an idea of passing on the savings to his customers and earning his profits through
volume. Prior to Wal-Mart's entry into the market, Sidney and Hebert from Harrison founded Two
Guys discount store in the year 1946 which dealt in hardware, automotive parts and later on
groceries. Two Guys was the forerunner as compared to today's retailers like Super Target, Wal-Mart
which succumbed to the economic recession. Another discount store set up by Eugene as E.J.
Korvette, which is often cited as first discount store which did not raise from 5 & 10 cents roots and
eventually declared bankruptcy due to inability to compete with the new entrants.
Porter (2002) states that combination of operational effectiveness and strategy is essential for
superior performance which is the primary goal of any organization. He also says that a company can
perform its rivals only if it can operate in different ways which are not in practice. Much emphasis had
been laid on strategic positioning like variety based positioning, needs - based positioning and access
based positioning.
Along with Wal-Mart, other stores that started operating were Target, Woolworth (Woolco) and K-
Mart. However, Target has been functioning successfully, courtesy Wal-Mart, but other two failed in
their operations and filed bankruptcy.( Michael Bergdahl, 2004) Porters five forces model explains
what strategic decisions should be made and on what basis. The model explains the basic strategies
to be considered while starting a business like bargaining power of suppliers. While franchising of
Franklin he always looked for cheaper deals and thought of passing his savings to the customers and
earning through the margin on volume of bulk purchases. Through the way of discount stores,
shoppers were given the cheapest price as compared to any other store. In regard to threats of new
entrants, Wal-Mart has been constantly in the news for acquisition of other small retail shops in view
of its expansion. But nevertheless it has stiff competition from likes of Super Target, Tesco, etc. it is
the world's biggest retail industry.
II. Key Components of Wal-Mart Business Model
Wal-Mart is the leader in retailing industry with fiscal revenue of $244.52 billion in 2003 making it the
world's largest corporation. Mike reports that Wal-Mart as of 2002 had 1,283,000 employees growing
at 11.2%. The above data explains that strategy of Wal-Mart is extraordinary which manages and
operates over 4150 retail facilities globally.The key components of Wal-Mart (The Value Chain), which
offers cheap prices than its competitors includes firm infrastructure like frugal culture, no regional
offices and pleasant environment to work. Managements take lots of visits and it is learnt there are no
rehearsals before any meeting which is usually scheduled on every Saturday. In any organization,
human resource is the key to development and Wal-Mart efficiently manages its sources. Wal-Mart
terms its employees as associates. Manager compensation is linked to the profit of store operated by
him, within promotions, compensation offered to associates depending on company's profits and also
offered some incentives on their performances. The workforce at Wal-Mart is not unionized as the
company takes all the measures of their benefits and provides them training on related issues.
Technology plays a vital role in development of the organization and Wal-Mart is well equipped with
technological innovations like POS, store performance tracking, real time market research, satellite
system and UPC. Wal-Mart procurement measures like hard-nosed negotiations, partnerships with
some vendors, centralized buying, planning packets, etc. helps at large the cause of providing the
goods and services on cheap prices. The other factors that increase the margin of profit for Wal-Mart
are inbound logistics with frequent replenishment, automated DCs cross docking, pick to flight, EDI,
hub and spoke system. Wal-Mart strategy of operation is innovative with big stores in small towns
with monopoly in the market at low rental costs, local prices, concentric expansion, merchandising in
brand name, private labels, little space for inventory, store within store, etc. In relation to marketing
and sales, merchandising is tailored from locals, spent less on advertising and the prices are fixed low
and it depends on the store manager to fix the latitude of pricing. All the above factors combined
together form the key components of Wal-Mart which not only increase the margin of profits through
bulk sales but also boost the confidence of the customers with services like point of sale information
system and everyday low prices.
III. Wal-Mart Strategy
Wal-Mart dominates the American retailing industry due to number of factors like its business model
which is still a mystery and its effectiveness in not letting the rivals let know about the weaknesses.
Wal-Mart made strategic attempts in the its formulation to dominate the retail market where it has its
presence, growth by expansion in the US and Internationally, create widespread name recognition and
customer satisfaction in relation to brand name Wal-Mart and branching into new sectors of retailing.
It is learnt that Wal-Mart strives on three generic strategies consisting of Focus Strategy, the
Differentiation Strategy and overall cost leadership. Managers strive hard to make their organizations
unique, distinctive and identify key success factors that will drive the customers to buy their
products.Thus, firm specific resources and capabilities are crucial in explaining the firm's performance.
The Resource Based View (RBV) explains competitive heterogeneity based on the premise that close
competitors differ in their resources and capabilities in important and durable ways. The company's
capability can be found through its functionality, reliable performance, like Wal-Mart superior logistics.
(Helfat, 2002) Wal-Mart has firm infrastructure, well equipped in human resource with management
professionals and technologically too.
Any organizations thrive hard to be successful for which it needs to have better resources and superior
capabilities. Wal-Mart has strong RBV with economically and financially very strong enough to stand
still in the time of crisis. Pereira states that dominating the retail market is its key strategy. Wal-Mart
operates on low price strategy which is operated as every day low prices (EDLP) which builds trust
among the customers.(Brunn, 2006)The strategy lies in purchasing the goods at lower prices and
selling the goods to customer at much lower prices, cutting the price as far as possible and increasing
the profit by increasing the number of sales. This ferociously increases the competition in the market
and Wal-Mart competes with all its competitors till it is dominant it the market.
Wal-Mart is expanding seriously and rapidly which is also its strategic goal. Wal-Mart employs over 1.3
associates, owns over 4000 stores out of which 3000 are in US and serves around 100 million
customers weekly. Wal-Mart has acquired many international stores and merged with some super
stores like ASDA in UK. Wal-Mart far flung network of retail outlets has ensured that Wal-Mart
interacts with and has impact on virtually every locality within US. (Helfat, 2002) The expanded
strategy has led the hunger of Wal-Mart to many European Countries. It is learnt that three countries
with no Wal-Mart stores became part of corporation's international presence wherein the domestic
retail chains were taken over by Wal-Mart including 122 Woolco stores in Canada, 21 Wertkauf stores
in Germany and 229 ASDA units in United Kingdom. The takeover strategy by Wal-Mart keeps the
company at forefront when entering into the new market and the number of competitors is also
minimized. The strategies have helped the Wal-Mart to rein in number one position in international
countries making it the largest retailer in the world.
It is seen that Wal-Mart has significantly the Porters five force model wherein through proper strategic
planning and strategic implementation has led to removal of barrier entry, rivalry from competitors
and pricing norms. In regard to substitutes, Wal-Mart in order to achieve its aim of customer
satisfaction has selling goods under its own legal brand. Wal-Mart's big box phenomenon has changed
the retailing industry in the United States which is often considered as discount stores and makes
profit through high volume of purchases and low markup on profits.(Parnell, 2008)Wal-Mart with its
low cost and ever expanding strategy has made a dramatic impact since 1962 when Sam Walton first
started his business. With this strategy, Wal-Mart has now over 4000 stores and outlets in US and
other countries through acquisition and mergers.
IV. Sustainability in Discount Retailing - Wal-Mart
According to Porter, (2002) operational effectiveness and efficiency are the key elements of success in
any organization. A company can outperform its rivals or competitors in the market only with superior
management and efficient control creating a difference from the others which eventually attracts
customers. Porter defines operational effectiveness as performance of similar activities as its rivals but
better than them. In a study, it is stated the Wal-Mart is expert in manipulating perceptions. It is
termed that low price is not the strategy of Wal-Mart but the advertisement manipulates the consumer
perceptions by making them think that its prices are lower than its competitors' price using `price
spin'. Wal-Mart makes the consumer addicted coming to its stores by convincing them the prices are
lower than in the other stores by selling itself cheaper by advertising that `we have lower prices than
anyone else' and placing a `opening price point'. The `opening price point' is the lowest price in the
store which is kept at high visibility which makes consumer believes that the products in this store are
really cheaper. (Race Cowgill, 2005)
The SWOT analysis of Wal-Mart reveals that it is most powerful retail brand, reputation for money,
value, commitment, and provides wide range of products. It is growing at a brisk pace with expanding
its horizon to other parts of world through acquisition and merger. Wal-Mart has good opportunities in
markets of Europe and China and focuses on acquiring the market through acquisition of smaller
stores and merger with leaders in the specific markets. Wal-Mart is always under threat to sustain its
top position in market nationally and internationally. Global leader in the industry leaves the
organization vulnerable to many socioeconomic and political problems of the country.
Sustainability at the top place is the most important job that makes its managers strives hard to
frame the policies and strategy to compete with its rivals in the market. Slack, Imitation, Substitution
and Hold-up are some of the threats to any organization in retail industry. However, Wal-Mart with its
visionary goal of attaining zero waste status and reaching 100% renewable energy has planned to
launch number of sustainability initiatives. (GreenBiz, 2008) Imitation increase profits by increasing
the supply. But imitation puts reputation, relationship at stake. James Hall reports that Wal-Mart is
planning to open convenience stores as Tesco has started and operating in US called Fresh & Easy
Neighborhood Markets. (James, 2008) Such tactics will create mixed response among the consumers
while degrading the reputation of the leader in market. Substitution reduces the demand for what a
firm uniquely provides by shifting the demand elsewhere due to changes in technology. The threats of
substitution can be subtle and unexpected like minimizing expenses through videoconferencing
instead of air flights to long distance meetings with its managers of other stores, etc. Therefore,
substation is an especially effective way of attacking dominant rivals in the market. Substitution offers
mixed responses after identifying and understanding the threats. The organization should fight the
threat and merging with them, switching to different options of substitution to be in the market. Hold-
up diverts the value to customers, suppliers or complementors who have some bargaining leverage
which results in tough negotiations, contractual agreements and vertical integration.
Wal-Mart is having great network with almost over 7800 stores and Sam's Club locations in 16
markets worldwide. It employs more than 2 million associates and serves more than 100 million
customers every year. According to Fishman (2006) Americans spend $26 million every hour at Wal-
Mart which makes it believable that Wal-Mart is financially very strong and is capable of combating
any threat from its rivals in the market. Wal-Mart is ever expanding its boundaries by way of
acquisition and mergers. Thus Wal-Mart with such a vast network of stores and alliances in the forms
of ASDA, Target and many other stores is well protected enough to sustain its top position in the retail
industry.


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