Spanish Intermediate

Recopilación de “Pruebas 1” años anteriores

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Course: Leadership and Business Strategy, EAA 305

First Quarter 2013 -  Mid Term Exam

Please write your name in all pages.

This is an “open book” exam.

You have 80 minutes to complete your answers.

You may answer in English or in Spanish.

Question Nº 1

        The October 8, 2012 issue of Fortune magazine included a section on “The Greatest Business Decisions of all Time”, in which Henry Ford’s decision to double his workers’ wages, was ranked as the best management decision ever. The story, as reported by Fortune, is as follows:

        Henry Ford had a problem. He was becoming too successful. The growing popularity of the Model T was causing him to rethink his ideas about mass production. In 1913, he had introduced the moving assembly line at his plant in Highland Park (Michigan) and it had worked far better than he could have imagined. The year before the assembly line was installed; he had doubled production of the Model T by doubling the size of his workforce. The following year he nearly doubled production again, but this time he did it with the same number of workers. The assembly line had made the plant so efficient that Highland Park payroll actually fell.

        The trouble was that employee turnover was accelerating at an alarming rate. The dispiriting, mind-numbing work on the line was causing workers to quit en masse. The men (and it was all men back then) reacted to their narrowly defined, repetitive, and physically demanding jobs by leaving them.

        Acting on the advice of his devoted lieutenant, James Couzens, Ford decided to take radical action. On Jan. 5, 1914, Ford and Couzens summoned newspaper reporters to the plant to publicize changes in employment policies at Highland Park that they hoped would improve employee retention. First, the company would reduce the work day from nine hours to eight. Second, it was moving to three shifts a day instead of two, opening up lots of new jobs. But the big news came in the third announcement: subject to certain conditions, Ford would more than double the basic rate of pay to $5 dollars a day. The 11 year old company was willing to spend an additional $10 million dollars annually to improve productivity and the lives of its workers.

        The news spread quickly beyond southeast Michigan. “A magnificent act of generosity” declared the New York Evening Post. But the Five Dollar Day turned out to be an excellent investment. Within a year, annual labor turnover fell from 370% to 16%; productivity was up 40% to 70%. Between 1910 and 1919, Henry Ford reduced the Model T’s price from around $800 to $350, solidified his position as the world’s greatest automaker, and made himself a billionaire. And by raising wages he expanded the overall market for the Model T.

 “We believe in making 20,000 men prosperous and contented rather than follow the plan of making a few slave drivers in our establishment, millionaires”, Ford said to reporters that January.

End of the story.

1. In the first class, the main objective of firms in capitalistic societies was discussed. You found this discussion, also, in a couple of papers included in the reading list for the course. Three views emerge from that discussion: the ‘primacy of shareholders’ vs. the ‘primacy of stakeholders’ vs. ‘shared value’.  There is no consensus among academics or practitioners about which view is correct. What do you think? What should be the purpose of business?  Why? Please limit your answer to one page. (10 points)
2. What does this story, about Henry Ford’s decision to double his workers wages,  tell about the issue of the purpose (or objective function) of firms? Does it confirm any of the three before mentioned theories? Please limit your answer to one page. (10 points)
3. The writer reports that after the salary increase: “productivity was up 40% to 70%”. What is the meaning of the word ‘productivity’?  What is the formula for measuring productivity that is being used in this case? (10 points)

Question Nº 2  

Professor Koljatic reviewed five different methodologies to do the “external analysis” in the initial stage of any strategic planning process - the “where are we?” stage – when firms think about their future goals and plans.

1. Please name these five methodologies (5 points)

1.  One of the methodologies for external analysis is the application of micro economic theory – in particular industrial organization theories - to evaluate the competitive environment. According to Koljatic, micro economics sheds light on two different issues. One is the intensity of competition – basically how imperfect is the competition in the industry. What is the second application?  (5 points)

1. It is common knowledge that a higher market share in an industry translates into a higher profitability. Please explain why.  (10 points)
2. An analyst   expressed his disagreement with this “common knowledge”, based on the observation of the global automobile industry. In fact, the most profitable brands are the German carmakers (Mercedes Benz and BMW), which have a negligible market share (less than 1%). How can you explain this paradox that small companies have the better results in terms of value creation and capture than companies that manufacture a lot more cars? (10 points).

Question 3.-

There is a very good text book about strategic management by two American professors, Barney and Hesterley, which you can find in the library. In this book, page 53, you will find the following text:

“The five forces model has three important implications for managers seeking to choose and implement strategies. First, this model describes the most common sources of external threats in industries. These are the threat of entry, the threat of rivalry, the threat of substitutes, the threat of suppliers, and the threat of buyers. Second, this model can be used to characterize the overall level of threat in an industry. Finally, since the overall level of threat in an industry is, according to Structure-Conduct-Performance logic, related to the average level of performance of a firm in an industry, the five forces model can also be used to anticipate the average level of performance of firms in an industry.