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Course: Leadership and Business Strategy, EAA 305 a
First Semester 2014 - Final Exam 
Please write your name in all pages. 
This is an “open book” exam. 
You have 120 minutes to complete your answers.
You may answer in English or in Spanish. 
Question Nº 1.-
A recent article in Bloomberg News, reported the strategies of several airlines, in the following terms: 
Secrets of Successful Airlines
By Asit Sharma
The airline industry has a singular talent for draining the pockets of well-intentioned investors. Highly leveraged balance sheets and bankruptcies are the norm. Significant labor costs and unpredictable jet fuel prices wreak havoc on variable costs. Yet some airlines generate solid returns quarter after quarter. Alaska Air Group (NYSE: ALK ), Ryanair (NASDAQ: RYAAY ) and COPA Holdings (NYSE: CPA ) each manage to be consistently profitable. What strategies do they have fueling their returns? Let's examine a few themes they share in common, and zero in on their individual strategic ideas.
1. Go regional.-
None of the four airlines above tries to compete on a grand international scale, with presence in every metropolitan area that looks enticing on a map. Instead, each confines itself more or less to a geographical theme. Alaska Air, for example, primarily focuses on the West Coast of the U.S., along with Alaska (naturally) and Hawaii, with some coverage in the Midwest and on the East Coast. Ryanair operates as a European carrier, with comprehensive coverage across the continent.
2. Maintain a uniform fleet.-
Southwest pioneered the practice of buying a single type of aircraft from the same manufacturer - Boeing’s 737 - which cuts down on maintenance costs significantly, as less specialization of maintenance is required and a standard extra-parts inventory can be maintained at various airports. The three airlines – ALK, RYAAY and CPA- have followed the same guiding policy in structuring its fleet, just one plane model. Large carriers that choose to service a variety of hubs and both short- and long-haul flights can end up like US Airways, which stocks its fleet with multiple model series from at least three different airline manufacturers.
3. Invest in a fuel-efficient platform.-
The actual aircraft that makes up a uniform fleet is a significant decision. All four airlines have invested heavily in the fuel-efficient Boeing 737 platform. Variants of the 737 represent nearly all of these companies' active fleets. The 737 has been in continuous production since 1967, and it has been marked by continuous evolution in fuel efficiency and performance in the short-to-medium-range flight segment. So after choosing to implement a uniform fleet strategy, each of this group has voted the venerable 737 series with their checkbooks and long-term debt capacity.
Beyond these three key points, each airline has a strategic bet fueling its returns:
Alaska Airways
Alaska Air primarily focuses on the West Coast of the U.S., along with Alaska (naturally) and Hawaii, with some coverage in the Midwest and on the East Coast Alaska. The company focuses on return on invested capital, or ROIC, as a key performance metric. ROIC is an excellent metric for an airline to consider, as it counts all invested capital, including debt a company must repay, as the base on which financial returns are earned. ROIC forces a company to understand its returns in the context of its debt. In 2012, the airline achieved an ROIC of 13%.
Alaska Airways also invests in its people. In 2012, Alaska's net income as a percentage of revenues was 6.8%. It could have been 8.6%, but the company paid out $88 million of variable incentive pay to its workforce. By making such a significant discretionary payment, the company is proving the premise that giving its workforce an incentive to work around a "common set of goals" will enhance its earnings and reciprocally reward its people.
Ryanair
Ryanair is well known for its low-cost fares. It supplements these with incremental revenue opportunities, which are known in the industry as "ancillary revenues." But less heralded is Ryanair's rabid attention to cost control. The company enjoys the lowest cost per passenger among European airlines.
Significantly for the long term, the company is locking in a low fixed-cost structure. It has a modern, economical fleet with an estimated average carrier life of just 4.6 years, and that fleet has been financed in the current interest rate environment, so the company has an efficient debt service schedule for the next several years. Even better, a recent purchase of 175 Boeing 737NGs (a transition model to the new 737 "MAX") was transacted at an estimated 50% off the list price of $15.6 billion. The combination of lower fuel prices and lower interest expense will be a formidable competitive advantage in the coming years, especially against major European airlines with older, high-interest financed fleets that compete with Ryanair in the short-haul market.
COPA Holdings
Panama-based COPA Holdings, also known as COPA Airlines, has been in business for 66 years. Its overarching strategy is to be the best carrier choice for those traveling within Latin America. COPA serves 29 countries in the Americas, from its “hub” in Tocumen airport in Panama, which, according to CEO Pedro Heilbronn, is "the most complete and convenient network and option for intra-Latin America travel." By keeping a singular focus, the company can stay on point in optimizing its operations as it also has a modern fleet of 737 airplanes. COPA achieved a net profit margin of 14.4% in 2012, among the highest in the regional airline industry. 
See how simple it is? Let's start an airline together.
On second thought, let's both keep our day jobs. But if you were going to get into the air carrier business, you could do worse than follow the template developed by these four airlines. For now, consider investing in one or this entire group, which lies far outside the norm in a struggling industry
0. The article ends saying that the airline industry is “a struggling industry”. In short, what this sentence means is that the airline industry is not an attractive industry to invest. Why? Hint: What did you learn in class on how to evaluate whether an industry is attractive or not? (10 points)
0. In the first paragraph, the article says: “The airline industry has a singular talent for draining the pockets of well-intentioned investors. Highly leveraged balance sheets and bankruptcies are the norm. Significant labor costs and unpredictable jet fuel prices wreak havoc on variable costs”. Usually, the interest expense - due to high leverage (heavy debt relative to owner’s equity) - and administrative workers salaries are considered fixed costs. Is the journalist right or wrong? Are financial expenses (interest payments on debt), salaries and jet fuel, variable or fixed costs? Why? Hint: Consider the fact that airlines are committed to fly to the destinations they have announced, even if there are no passengers and the plane is empty. (5 points)
0. What difference does it make if these costs are variable or fixed? What is the strategic importance of this definition in this case? Hint: think about the “drivers” of competitive advantage (5 points)
0. Take COPA, one of the three air carriers depicted in the case, and describe its Value Proposition. (10 points).
0. In spite of the difficulties to earn above normal profits in this industry, there are some airlines that flourish. The journalist who wrote the article identified 3 “themes” that in her opinion explain the success of 3 specific air carriers: Alaska Air, Ryanair and COPA. What may be the explanation for these three airlines success, beyond the 3 themes? Is success attributable to their business models being similar? How? (10 points)
0. The case says: “Alaska Air focuses on return on invested capital, or ROIC, as a key performance metric. ROIC is an excellent metric for an airline to consider, as it counts all invested capital, including debt a companymust repay, as the base on which financial returns are earned. ROIC forces a company to understand its returns in the context of its debt. In 2012, the airline achieved an ROIC of 13%”.
 What is a performance metric? Where does this concept come from? How is it used? (10 points)
0. The case also says that: “Alaska Airways also invests in its people. In 2012, Alaska's net income as a percentage of revenues was 6.8%. It could have been 8.6%, but the company paid out $88 million of variable incentive pay to its workforce. By making such a significant discretionary payment, the company is proving the premise that giving its workforce an incentive to work around a "common set of goals" will enhance its earnings and reciprocally reward its people.” Please explain the theoretical underpinnings – the theory which supports the policy and which we discussed in class - of Alaska’s airlines compensation system. Is it right to sacrifice the return for the owners of the company (shareholders) – decreasing net income from 8.6 % to 6.8% of revenues to pay more to the airline’s workers? Why would the board of management approve such a decision in detriment to the shareholders interest? Is it an agency problem? (10 points)
0. Related to 1.7 and the ‘$88 million of variable incentive pay’, the journalist is using the word “discretionary payment” - pago discrecional- to describe the incentive scheme. Is there any advantage in having variable incentives which are discretionary in a compensation system? Are variable incentives important in an industry like the airline industry? Why? Hint: Think synonyms for “discretionary” are words such as: ‘optional, left to discretion, changeable, not obligatory, up to the individual and elected’. (5 points)
Course: Leadership and Business Strategy, EAA 305 a
First Semester 2014 - Final Exam 
Please write your name in all pages. 
This is an “open book” exam. 
You have 120 minutes to complete your answers.
You may answer in English or in Spanish. 
Question Nº 1.-
A recent article in Bloomberg News, reported the strategies of several airlines, in the following terms: 
Secrets of Successful Airlines
By Asit Sharma
The airline industry has a singular talent for draining the pockets of well-intentioned investors. Highly leveraged balance sheets and bankruptcies are the norm. Significant labor costs and unpredictable jet fuel prices wreak havoc on variable costs. Yet some airlines generate solid returns quarter after quarter. Alaska Air Group (NYSE: ALK ), Ryanair (NASDAQ: RYAAY ) and COPA Holdings (NYSE: CPA ) each manage to be consistently profitable. What strategies do they have fueling their returns? Let's examine a few themes they share in common, and zero in on their individual strategic ideas.
1. Go regional.-
None of the four airlines above tries to compete on a grand international scale, with presence in every metropolitan area that looks enticing on a map. Instead, each confines itself more or less to a geographical theme. Alaska Air, for example, primarily focuses on the West Coast of the U.S., along with Alaska (naturally) and Hawaii, with some coverage in the Midwest and on the East Coast. Ryanair operates as a European carrier, with comprehensive coverage across the continent.
2. Maintain a uniform fleet.-
Southwest pioneered the practice of buying a single type of aircraft from the same manufacturer - Boeing’s 737 - which cuts down on maintenance costs significantly, as less specialization of maintenance is required and a standard extra-parts inventory can be maintained at various airports. The three airlines – ALK, RYAAY and CPA- have followed the same guiding policy in structuring its fleet, just one plane model. Large carriers that choose to service a variety of hubs and both short- and long-haul flights can end up like US Airways, which stocks its fleet with multiple model series from at least three different airline manufacturers.
3. Invest in a fuel-efficient platform.-
The actual aircraft that makes up a uniform fleet is a significant decision. All four airlines have invested heavily in the fuel-efficient Boeing 737 platform. Variants of the 737 represent nearly all of these companies' active fleets. The 737 has been in continuous production since 1967, and it has been marked by continuous evolution in fuel efficiency and performance in the short-to-medium-range flight segment. So after choosing to implement a uniform fleet strategy, each of this group has voted the venerable 737 series with their checkbooks and long-term debt capacity.
Beyond these three key points, each airline has a strategic bet fueling its returns:
Alaska Airways
Alaska Air primarily focuses on the West Coast of the U.S., along with Alaska (naturally) and Hawaii, with some coverage in the Midwest and on the East Coast Alaska. The company focuses on return on invested capital, or ROIC, as a key performance metric. ROIC is an excellent metric for an airline to consider, as it counts all invested capital, including debt a company must repay, as the base on which financial returns are earned. ROIC forces a company to understand its returns in the context of its debt. In 2012, the airline achieved an ROIC of 13%.
Alaska Airways also invests in its people. In 2012, Alaska's net income as a percentage of revenues was 6.8%. It could have been 8.6%, but the company paid out $88 million of variable incentive pay to its workforce. By making such a significant discretionary payment, the company is proving the premise that giving its workforce an incentive to work around a "common set of goals" will enhance its earnings and reciprocally reward its people.
Ryanair
Ryanair is well known for its low-cost fares. It supplements these with incremental revenue opportunities, which are known in the industry as "ancillary revenues." But less heralded is Ryanair's rabid attention to cost control. The company enjoys the lowest cost per passenger among European airlines.
Significantly for the long term, the company is locking in a low fixed-cost structure. It has a modern, economical fleet with an estimated average carrier life of just 4.6 years, and that fleet has been financed in the current interest rate environment, so the company has an efficient debt service schedule for the next several years. Even better, a recent purchase of 175 Boeing 737NGs (a transition model to the new 737 "MAX") was transacted at an estimated 50% off the list price of $15.6 billion. The combination of lower fuel prices and lower interest expense will be a formidable competitive advantage in the coming years, especially against major European airlines with older, high-interest financed fleets that compete with Ryanair in the short-haul market.
COPA Holdings
Panama-based COPA Holdings, also known as COPA Airlines, has been in business for 66 years. Its overarching strategy is to be the best carrier choice for those traveling within Latin America. COPA serves 29 countries in the Americas, from its “hub” in Tocumen airport in Panama, which, according to CEO Pedro Heilbronn, is "the most complete and convenient network and option for intra-Latin America travel." By keeping a singular focus, the company can stay on point in optimizing its operations as it also has a modern fleet of 737 airplanes. COPA achieved a net profit margin of 14.4% in 2012, among the highest in the regional airline industry. 
See how simple it is? Let's start an airline together.
On second thought, let's both keep our day jobs. But if you were going to get into the air carrier business, you could do worse than follow the template developed by these four airlines. For now, consider investing in one or this entire group, which lies far outside the norm in a struggling industry
0. The article ends saying that the airline industry is “a struggling industry”. In short, what this sentence means is that the airline industry is not an attractive industry to invest. Why? Hint: What did you learn in class on how to evaluate whether an industry is attractiveor not? (10 points)
You have to do an EXTERNAL ANALYSIS assessing the Threats and Opportunities in the industry.
The simplest way is doing a SWET (FODA) evaluation for the initial diagnosis (where are we now?)
More sophisticated methods are :
1. A micro economic analysis of the industry – perfect competition? Imperfect competition? Oligopoly? Duopoly? Monopoly? Barriers to entry? Scale effects?
1. Lyfe cycle?
1. Porters 5 forces? Complementors?
1. Political economic social and technological evaluation?
All of the above methodologies may be applied. 
In class we saw an example with Porter’s five forces, as follows:
It tells that there are a lot of threats in this industry. Rivals, suppliers and the threat of entry are high. That is why it is a struggling industry.
0. In the first paragraph, the article says: “The airline industry has a singular talent for draining the pockets of well-intentioned investors. Highly leveraged balance sheets and bankruptcies are the norm. Significant labor costs and unpredictable jet fuel prices wreak havoc on variable costs”. Usually, the interest expense - due to high leverage (heavy debt relative to owner’s equity) - and administrative workers salaries are considered fixed costs. Is the journalist right or wrong? Are financial expenses (interest payments on debt), salaries and jet fuel, variable or fixed costs? Why? Hint: Consider the fact that airlines are committed to fly to the destinations they have announced, even if there are no passengers and the plane is empty. (5 points)
These expense and cost items are, in the case of airlines, FIXED COSTS!!!!
A variable cost, by definition is a cost that correlates positively with volume. That is, as sales volume grows, costs go up. Or, if sales volume decreases, the costs decrease. Fixed costs on the contrary, do not change with volume sold.
In the airlines business, the airline has to decide what flights they will offer (supply) for a relatively long time ahead….let’s say, 6 month to a year. The schedule is published and people buy tickets. As the hint says, it does not matter if the plane is full or empty, the airplane has to go (and come back) to its scheduled destination. So fuel becomes a fixed cost. It does not matter the volume of passengers who go on board. The same happens with salaries, interest payments, etc. and practically all of the costs and expenses in an airline
0. What difference does it make if these costs are variable or fixed? What is the strategic importance of this definition in this case? Hint: think about the “drivers” of competitive advantage (5 points)
Big difference!!!
If demand fluctuates, and sales go up and down – because the airline is carrying more or less passengers and cargo - fixed costs do not change. 
So, when sales are good, airlines make a profit do to the “scale effect”, a big driver of competitive advantage
But if sales go down, since costs are fixed, airlines make a big loss, as costs are inflexible to the downturn and the scale effect works the other way around. The firm has the costs, but it does not have the revenue.
And, since air travel depends so much on the economy, high income elasticity, airlines have a lot of trouble when things turn down, and in the past two decades many have gone into bankruptcy due to “black swan” events such as the Asiatic crisis (1997 -1998), the World Towers tragedy (2001) and later the big Recession of 2008 (subprime crisis).
Airlines have pricing systems – generally known as revenue management systems – by which they change prices according to the demand. If demand is low, prices decrease, and you can fly to Europe for less than 2000 Euros, but if demand is strong, prices go up, and it costs almost 3000 Euros to fly from Santiago to Europe, as our exchange class mates probably know by now.
0. Take COPA, one of the three air carriers depicted in the case, and describe its Value Proposition. (10 points).
The Value proposition entails the WHO and WHAT of the business model, as described in the next paragraph: 
“Its overarching strategy is to be the best carrier choice for those traveling within Latin America. COPA serves 29 countries in the Americas, from its “hub” in Tocumen airport in Panama, which, according to CEO Pedro Heilbronn, is "the most complete and convenient network and option for intra-Latin America travel”
WHO? People in 29 countries in the Americas,
WHAT? From its “hub” in Tocumen airport in Panama, which is "the most complete and convenient network and option for intra-Latin America travel” 
0. In spite of the difficulties to earn above normal profits in this industry, there are some airlines that flourish. The journalist who wrote the article identified 3 “themes” that in her opinion explain the success of 3 specific air carriers: Alaska Air, Ryanair and COPA. What may be the explanation for these three airlines success, beyond the 3 themes? Is success attributable to their business models being similar? How? (10 points)
The three “themes” are: 
1. Go regional.-
2. Maintain a uniform fleet.-
3. Invest in a fuel-efficient platform.-
It is easy to see from the above that they share common elements in their business model: 
A common WHO and WHAT:
1. Go regional.- 
WHO? ALASKA; LATIN AMERICA AND EUROPE
WHAT? LOW COST FARES (PRICES)
A common HOW in two aspects: 
2. Maintain a uniform fleet.-
3. Invest in a fuel-efficient platform.-
But, the question is whether ‘beyond the three elements are there other aspects in their business model which are similar?”
The truth is that the similarities end in the three themes that dominate their business models. 
However, their success may be explained by other aspects ion their strategy on which they differenctiate themselves. What differentiates them are TACTICAL choices, the second stage in the formulation of a business strategy. 
These are residual decisions which the firm takes as described in the next two slides we saw in class:
By closely monitoring these tactical decisions – such as what specific airports they fly to and from – these airlines can implement a network of flights which are loaded with passengers (and or cargo), at profit making fares.
0. The case says: “Alaska Air focuses on return on invested capital, or ROIC, as a key performance metric. ROIC is an excellent metric for an airline to consider, as it counts all invested capital, including debt a company must repay, as the base on which financial returns are earned. ROIC forces a company to understand its returns in the context of its debt. In 2012, the airline achieved an ROIC of 13%”.
 What is a performance metric? Where does this concept come from? How is it used? (10 points).
A performance metric is an indicator – a numerical standard or yardstick - used to establish and evaluate performance by measuring and comparing goals – or objectives - and results. It originates in the Management by Objectives technique and was popularized with the Balance Scorecard.
The professor asked you to read the Balance Scorecard article by Norton and Kaplan, where the concept of KPI (Key Performance Indicator) is used, which is another way of calling a performance metric. 
0. The case also says that: “Alaska Airways also invests in its people. In 2012, Alaska's net income as a percentage of revenues was 6.8%. It could have been 8.6%, but the company paid out $88 million of variable incentive pay to its workforce. By making such a significant discretionary payment, the company is proving the premise that giving its workforce an incentive to work around a "common set of goals" will enhance its earnings and reciprocally reward its people.” Please explain the theoretical underpinnings – the theory which supports the policy and which we discussed in class - of Alaska’s airlines compensation system. Is it right to sacrifice the return for the owners of the company (shareholders) – decreasing net income from 8.6 % to 6.8% of revenues to pay more to the airline’s workers? Why would theboard of management approve such a decision in detriment to the shareholders interest? Is it an agency problem? (10 points)
The theory behind this compensation policy is Herzberg’s two factor theory which underpinning the common practices of compensation, whereby a significant portion of compensation are incentives :
Shareholders benefit from these type of compensation policies because workers and shareholders are aligned in their objectives, so although money is paid top workers, as they poursue profitability for the airline, the final result is a win win situation whereby both parties – workers and shareholders do in monetary terms , better. 
Although this is not part of the required answer, these incentives have to be complemented with other measures, so that hygienic factors are well covered. And then, although money is important, the company has to be a community in which the well being of workers in all aspects has to be considered at the moment of making decisions.
0. Related to 1.7 and the ‘$88 million of variable incentive pay’, the journalist is using the word “discretionary payment” - pago discrecional- to describe the incentive scheme. Is there any advantage in having variable incentives which are discretionary in a compensation system? Are variable incentives important in an industry like the airline industry? Why? Hint: Think synonyms for “discretionary” are words such as: ‘optional, left to discretion, changeable, not obligatory, up to the individual and elected’. (5 points)
As we saw in question 1.3, airlines run on fixed costs and are very much exposed to variations in demand, which may create “havoc”. It is important that incentives are discretionary – optional, changeable, etc.- because the airline can adjust to hard times by adjusting the discretionary part of compensation. If people take variable pay – incentives – as a fixed pay, in other words “guaranteed” or non discretionary – when demand slumps, costs would not go down.
So, for a variable compensation, payments to workers have to be variable, if the objective of giving flexibility to the cost structure is pursued. 
Course: Leadership and Business Strategy, EAA 305 a
First Quarter 2013 - Final Exam 
Please write your name in all pages. 
This is an “open book” exam. 
You have 120 minutes to complete your answers.
You may answer in English or in Spanish. 
Question Nº 1.-
The Financial Times, a British business newspaper, carries a section about business cases. In a recent edition, the newspaper told the story of Henkel, the German chemical company, under its new CEO. The report, written by Robert Simons, the Charles M. Williams professor of business administration at Harvard Business School, follows:
Henkel: New CEO’s broad range of measures.- 
 In 2008, Henkel, the German group with well-known brands ranging from Persil to Loctite, had reported comfortable growth and earnings. But its new chief executive, Kasper Rorsted, a Dane who had made his career in big IT companies, thought the 132-year-old, family controlled company needed to shake off some of its complacency if it was to safeguard its success.
The challenge
Henkel faced several serious issues. For instance, while reporting solid sales, it was less profitable than its industry peers – by a margin of up to 10 percentage points. But the majority of employees did not see any need for change. In fact, one analyst commented that it was characterized by “complacency and lack of competitive spirit”. Mr Rorsted determined to change the way the company was run and to create “a winning culture”.
The strategy
Mr Rorsted and his new, young team set about introducing changes that would include both tangible financial and performance targets, and an overhaul of company culture.
· Ambitious targets. In November 2008, Henkel announced challenging targets for 2012 that would improve performance but would also energize the organization by creating a sense of urgency.
	Targets included an increase in pre-tax profit margins to 14 per cent; in earnings per share; and in sales, to 	above 	the market average. In addition, the share of sales in emerging countries would be required to rise from 	33 per cent to 45 per cent by 2012.
· Efficiency and focus. With more than 1,000 brands, at least 200 production sites globally, and three separate business units, Henkel was ripe for proposed efficiency measures. These included cutting the number of brands in order to put more marketing resources behind its strongest labels; consolidating manufacturing sites; and shifting tasks to shared service centers.
· New vision and values. Henkel had a vision statement and a set of company values. But they were neither well-known nor relevant to either day-to-day decision making or evaluation of employee performance.
	In 2010, Henkel replaced the original list of 10 values with five new ones – such as: “We put our customers at 	the centre of what we do.” To make sure these were communicated to the 48,000 employees, more than 5,000 	workshops were held in which managers and teams discussed how the new values could apply to their work 	and how they could build a more positive company culture. 
· Performance management. Henkel introduced a process to evaluate consistently the performance and potential of all management- level employees. They would be ranked on relative performance, which significantly affected managers’ bonuses. Each individual is reviewed in “development roundtables”, interactive meetings where managers review and evaluate their direct reports across teams to create a broader perspective on their achievements, development needs and promotability. 
What happened?
For fiscal 2012, Henkel’s global sales are forecast to exceed €16bn ($20bn), a rise of more than €2bn since 2008, and reach its profit margin target of 14 per cent. Emerging markets now represent 43 per cent of global sales, and more than 50 per cent of employees work in those territories. The number of brands is less than 400 and manufacturing sites have been consolidated by around 25 per cent.
a) What Key lessons can we learn from this short case? Read the case carefully. You will realize that practically all of Mr. Rorsted initiatives were discussed in our course on business leadership and strategy. Please explain how the four initiatives described in the case (ambitious targets, efficiency and focus, new vision and values, performance management) relate to the subjects we saw in class. In this answer you are being asked just to make the connection with the subject matter in the course. In some cases, each initiative may have a relationship with more than one subject matter. In that case, name all. Please do not explain each initiative, since you will have to do so in the next two questions. (10 points)
b) Are any of the Rorsted initiatives related to what we called “corporate strategy” in the course? If your answer is yes, explain in one paragraph why Rorsted may have decided to push for this initiative. (5 points)
c) Are any of the Rorsted initiatives related to what we called “management control” in the course? If your answer is yes, explain in one paragraph why you think these initiatives were pushed by Rorsted. (5 points) 
Question Nº 2 
A recent article in the New York Times, reads as follows:
Wal-Mart Yearly Meeting Follows a Narrow Script
 By STEPHANIE CLIFFORD
New York Times, June 8, 2013
FAYETTEVILLE, Ark. — There were two Wal-Marts on display at the company’s shareholder meeting on Friday: the one Wal-Mart presented, and the one some investors and activists were complaining about. 
Wal-Mart, in what appeared to be an attempt to counter employee and union complaints about thin staffing and low wages, centered the meeting on extolling the value of its employees. That message was interspersed with the usual parade of celebrity and spectacle: Hugh Jackman, Tom Cruise, Kelly Clarkson, Jennifer Hudson, dancers and a giant puppet of a white elephant. 
While Wal-Mart’s stock price remains close to an all-timehigh, its results in the most recent quarter missed analyst expectations. Sales at stores open at least a year, a key measure, declined in the United States for the first time since summer 2011, while costs in the international unit were higher than expected. Its stock price, however, got some help Friday from news that the company authorized a $15 billion stock buyback. Shares were up 1.2 percent. 
As is common for Wal-Mart at these meetings, executives barely made mention of recent controversies, including issues of employee staffing and the Bangladesh factory collapse that killed more than 1,100 workers where Wal-Mart was shown to be producing garments. In addition, there is still the continuing investigation into potential violations of the Foreign Corrupt Practices Act in Mexico and other countries, after The New York Times reported last year that company officials at Wal-Mart de Mexico bribed officials to ease expansion in that country and executives at headquarters were told of the bribery and declined to take action. 
But that did not mean those issues did not come up. 
During the brief portion of the meeting where shareholders could present proposals, criticisms were strong.[footnoteRef:1] One presenter asked why Wal-Mart had not joined European retailers in a pact to improve safety standards in Bangladesh. [1: The portion of the meeting where investors could speak amounted to about 15 minutes of an almost four-hour meeting.
] 
“The last six months have seen two of the worst disasters in the entire history of the garment industry,” said Kalpona Akter, a union activist in Bangladesh, referring to the Rana Plaza collapse and the Tazreen fire. “Both occurred in buildings where Wal-Mart goods were produced.” “Don’t you agree that the factories where Wal-Mart products are made should be safe for the workers?” she said. 
Wal-Mart says it did not have any production in the Rana Plaza factory at the time of the collapse. 
A shareholder and employee, Janet Sparks, who works at a Walmart in Baker, La., pushed the company on its pay and scheduling policies. “Times are tough for many Walmart associates, too. We are stretching our paychecks to pay our bills and support our families,” said Ms. Sparks, a member of the union-affiliated employee group Our Walmart. 
Referring to the chief executive Michael T. Duke’s $20.7 million in 2012 pay, she said that given the low wages store employees received, “with all due respect, I don’t think that’s right.” There were cheers and applause from the crowd, a response that could be considered significant because the employees selected to attend the annual meeting are generally big Wal-Mart supporters. 
Other investors raised concerns about the financial and reputational fallout from the Mexico inquiry, and whether Wal-Mart had a good handle on its supply chain given what occurred in Bangladesh. 
As expected, none of the shareholders’ proposals passed. The founding Walton family owns more than 50 percent of shares, making it impossible to pass any measures without their support. Likewise, despite opposition from some large pension funds and proxy-advisory firms, all 14 directors up for re-election were reinstated. 
The rest of it was devoted to Wal-Mart’s version of its story. 
The head of human resources was one of the first to speak, telling employees, “We’re here to celebrate each and every one of you.” Later, another human-resources executive took the stage, along with William S. Simon, the chief executive of Wal-Mart U.S., as they promoted two employees to assistant managers in front of the crowd of about 14,000. 
Mr. Simon reiterated earlier remarks telling employees that Wal-Mart was giving them more visibility into open shifts and into open supervisor roles. However, union members and activists have been complaining about unpredictable hours for employees, and Wal-Mart recently has “been hiring disproportionately” part-time workers who do not have fixed hours, Mr. Simon said in a separate meeting on Thursday. 
Even the celebrities were on-message. In one of the odder moments, Tom Cruise, looking dashing in a sharp suit and tie, took the stage not to entertain, but to reinforce Wal-Mart points about sustainability and promoting women. “Wal-Mart has served as a model for how business can address some of the biggest issues facing our world,” Mr. Cruise said. 
Executives briefly nodded at the Mexico bribery inquiry, telling the crowd that Wal-Mart remained committed to acting with integrity. And Mr. Duke, one of the executives who had been apprised of the bribery scheme after it occurred, according to reporting in The Times, had the crowd applaud a Chilean employee who had recently declined to take a bribe from a vendor. 
The company is using more than 300 legal and accounting professionals to work on new compliance programs and Foreign Corrupt Practices Act investigations, the corporate secretary Jeffrey J. Gearhart told investors on Friday, and they have spent more than 100,000 hours on the efforts so far.
a) The report says:
“….Its stock price, however, got some help Friday from news that the company authorized a $15 billion stock buyback. Shares were up 1.2 percent” 
Now, the question comes up whether buying back shares, by the company with its cash, is a good idea or not. 
What companies do is change the cash they have for their own shares in the hands of stock owners , and “presto”[footnoteRef:2] share prices go up. [2: Presto is an expression magicians use when a trick they do works out. ] 
Please explain, with a theoretical foundation to the answer, why it that share prices go up with these “buy back” initiatives. Hint: the material we discussed in the first class may help. (10 points)
b) Buying back their own shares is a rather common practice by companies in the USA – in fact, Apple just announced the largest such share buy back in history: the repurchase of us$100 billion dollars. Shares are purchased by the company at the price of the stock on the day the program is announced. 
In Chile, the Ley de Sociedades Anónimas does not allow these buybacks. Chilean legislation only allows dividends as a way to distribute money to shareholders, thus forcing shareholders to pay income tax on distribution of profits (the FUT scheme which is in the news these days). 
Now, the key question is different from tax considerations. Assuming that you are the CEO of the company, why would you consider doing a shares buy back? What does it reflect about the company’s strategy? (10 points).
c) It is obvious that this shareholder meeting was carefully orchestrated by the CEO and his management team.
In spite of the short time to present their points of view, institutional investors and union activists criticized Wal Mart policies. Their criticism may be summarized in three areas: lack of safety measures for workers of subcontractors – as in Bangladesh –, lack of control of medium level management on ethical issues – as shown by the investigation of bribing in Mexico – and low wages for “associates” vs. high compensation for managers. 
	It is obvious that Wal Mart has to strengthen:
· Its safety programs so as to make sure that their subcontractor workers do their work in the most strict safety conditions. 
· Their ethical standards, so that their management does not bribe people. It is not enough to congratulate a Chilean employee!
It is surprising, however, that the company was evasive in their response to the criticism. They should take a corrective stand, urgently, about these two issues and fix the problems! 
What is not as obvious is how to respond to Ms. Janet Sparks’s statement: ‘Referring to the chief executive Michael T. Duke’s $20.7 million in 2012 pay, she said that given the low wages store employees received, “with all due respect, I don’t think that’s right.”
What do you think? Is it right to pay the CEO US$ 20.7 million dollars for his work in one year? To put things in perspective, Wal Mart net income (profit after taxes) in 2012 were US$17 billion vs. 2011 with US$15.6 billion. Please remember that 1 billion – in English- is equivalent to one thousand million dollars. Share prices went from US$62 to $70 in past twelve months. 
Your answer will have two parts, supporting each part in one of the three ethical paradigms we discussed in class. In short, pick two of the ethical paradigms and answer the question whether paying twenty million dollars to Mr. Duke is right (or wrong). Each analysis is worth 5 points (15 points) 
Course: Leadership and Business Strategy, EAA 305 a
First Quarter 2013 - Final Exam 
Please write your name in all pages. 
This is an “open book” exam. 
You have 120 minutes to complete your answers.
You may answer in English or in Spanish. 
Question Nº 1.-
The Financial Times, a British business newspaper, carries a section about business cases. In a recent edition, the newspaper told the story of Henkel, the German chemical company, under its new CEO. The report, written by Robert Simons, the Charles M. Williams professor of business administration at Harvard Business School, follows:
Henkel: New CEO’s broad range of measures.- 
 In 2008, Henkel, the German group with well-known brands ranging from Persil to Loctite, had reported comfortable growth and earnings. But its new chief executive, Kasper Rorsted, a Dane who had made his career in big IT companies, thought the 132-year-old, family controlled company needed to shake off some of its complacency if it was to safeguard its success.
The challenge
Henkel faced several serious issues. For instance, while reporting solid sales, it was less profitable than its industry peers – by a margin of up to 10 percentage points. But the majority of employees did not see any need for change. In fact, one analyst commented that it was characterized by “complacency and lack of competitive spirit”. Mr Rorsted determined to change the way the company was run and to create “a winning culture”.
The strategy
Mr Rorsted and his new, young team set about introducing changes that would include both tangible financial and performance targets, and an overhaul of company culture.
· Ambitious targets. In November 2008, Henkel announced challenging targets for 2012 that would improve performance but would also energize the organization by creating a sense of urgency.
	Targets included an increase in pre-tax profit margins to 14 per cent; in earnings per share; and in sales, to 	above 	the market average. In addition, the share of sales in emerging countries would be required to rise from 	33 per cent to 45 per cent by 2012.
· Efficiency and focus. With more than 1,000 brands, at least 200 production sites globally, and three separate business units, Henkel was ripe for proposed efficiency measures. These included cutting the number of brands in order to put more marketing resources behind its strongest labels; consolidating manufacturing sites; and shifting tasks to shared service centers.
· New vision and values. Henkel had a vision statement and a set of company values. But they were neither well-known nor relevant to either day-to-day decision making or evaluation of employee performance.
	In 2010, Henkel replaced the original list of 10 values with five new ones – such as: “We put our customers at 	the centre of what we do.” To make sure these were communicated to the 48,000 employees, more than 5,000 	workshops were held in which managers and teams discussed how the new values could apply to their work 	and how they could build a more positive company culture. 
· Performance management. Henkel introduced a process to evaluate consistently the performance and potential of all management- level employees. They would be ranked on relative performance, which significantly affected managers’ bonuses. Each individual is reviewed in “development roundtables”, interactive meetings where managers review and evaluate their direct reports across teams to create a broader perspective on their achievements, development needs and promotability. 
What happened?
For fiscal 2012, Henkel’s global sales are forecast to exceed €16bn ($20bn), a rise of more than €2bn since 2008, and reach its profit margin target of 14 per cent. Emerging markets now represent 43 per cent of global sales, and more than 50 per cent of employees work in those territories. The number of brands is less than 400 and manufacturing sites have been consolidated by around 25 per cent.
d) What Key lessons can we learn from this short case? Read the case carefully. You will realize that practically all of Mr. Rorsted initiatives were discussed in our course on business leadership and strategy. Please explain how the four initiatives described in the case (ambitious targets, efficiency and focus, new vision and values, performance management) relate to the subjects we saw in class. In this answer you are being asked just to make the connection with the subject matter in the course. In some cases, each initiative may have a relationship with more than one subject matter. In that case, name all. Please do not explain each initiative, since you will have to do so in the next two questions. (10 points)
· Ambitious targets. In November 2008, Henkel announced challenging targets for 2012 that would improve performance but would also energize the organization by creating a sense of urgency.
	Targets included an increase in pre-tax profit margins to 14 per cent; in earnings per share; and in sales, to 	above 	the market average. In addition, the share of sales in emerging countries would be required to rise from 	33 per cent to 45 per cent by 2012. Setting ambitious targets is a fundamental part of any plan or 	strategy. Is the second question of the taxi drivers questions: where are we? (Diagnosis);where 	do we want to go ( Objectives/goals); how are we going to go? (plan) 
· Efficiency and focus. With more than 1,000 brands, at least 200 production sites globally, and three separate business units, Henkel was ripe for proposed efficiency measures. These included cutting the number of brands in order to put more marketing resources behind its strongest labels; consolidating manufacturing sites; and shifting tasks to shared service centers.
These initiatives are typical of corporate diversification. The initiative refers to the horizontal scope of the firm. 
· New vision and values. Henkel had a vision statement and a set of company values. But they were neither well-known nor relevant to either day-to-day decision making or evaluation of employee performance.
	In 2010, Henkel replaced the original list of 10 values with five new ones – such as: “We put our customers at 	the centre of what we do.” To make sure these were communicated to the 48,000 employees, more than 5,000 	workshops were held in which managers and teams discussed how the new values could apply to their work 	and how they could build a more positive company culture.
	This initiative has a direct relation with the values of the company. As values refere to the way 	the firm relates to stakeholders, it also has to do with the stakeholders. 
· Performance management. Henkel introduced a process to evaluate consistently the performance and potential of all management- level employees. They would be ranked on relative performance, which significantly affected managers’ bonuses. Each individual is reviewed in “development roundtables”, interactive meetings where managers review and evaluate their direct reports across teams to create a broader perspective on their achievements, development needs and promotability. 
Strategy execution – communication- control
e) Are any of the Rorsted initiatives related to what we called “corporate strategy” in the course? If your answer is yes, explain in one paragraph why Rorsted may have decided to push for this initiative. (5 points)
· Efficiency and focus. With more than 1,000 brands, at least 200 production sites globally, and three separate business units, Henkel was ripe for proposedefficiency measures. These included cutting the number of brands in order to put more marketing resources behind its strongest labels; consolidating manufacturing sites; and shifting tasks to shared service centers.
As said before this type of initiative is typical of corporate strategy. 
The following slide attests it in the paragraph about portfolio composition:
f) Are any of the Rorsted initiatives related to what we called “management control” in the course? If your answer is yes, explain in one paragraph why you think these initiatives were pushed by Rorsted. (5 points) 
· Performance management. Henkel introduced a process to evaluate consistently the performance and potential of all management- level employees. They would be ranked on relative performance, which significantly affected managers’ bonuses. Each individual is reviewed in “development roundtables”, interactive meetings where managers review and evaluate their direct reports across teams to create a broader perspective on their achievements, development needs and promotability. 
Tying compensation to results (achievement of objectives) is a way of making sure that strategies are properly executed and further, controlled. That is why in class we talked about executive compensation (like bonuses) and in particular about performance evaluations. 
Question Nº 2 
A recent article in the New York Times, reads as follows:
Wal-Mart Yearly Meeting Follows a Narrow Script
 By STEPHANIE CLIFFORD
New York Times, June 8, 2013
FAYETTEVILLE, Ark. — There were two Wal-Marts on display at the company’s shareholder meeting on Friday: the one Wal-Mart presented, and the one some investors and activists were complaining about. 
Wal-Mart, in what appeared to be an attempt to counter employee and union complaints about thin staffing and low wages, centered the meeting on extolling the value of its employees. That message was interspersed with the usual parade of celebrity and spectacle: Hugh Jackman, Tom Cruise, Kelly Clarkson, Jennifer Hudson, dancers and a giant puppet of a white elephant. 
While Wal-Mart’s stock price remains close to an all-time high, its results in the most recent quarter missed analyst expectations. Sales at stores open at least a year, a key measure, declined in the United States for the first time since summer 2011, while costs in the international unit were higher than expected. Its stock price, however, got some help Friday from news that the company authorized a $15 billion stock buyback. Shares were up 1.2 percent. 
As is common for Wal-Mart at these meetings, executives barely made mention of recent controversies, including issues of employee staffing and the Bangladesh factory collapse that killed more than 1,100 workers where Wal-Mart was shown to be producing garments. In addition, there is still the continuing investigation into potential violations of the Foreign Corrupt Practices Act in Mexico and other countries, after The New York Times reported last year that company officials at Wal-Mart de Mexico bribed officials to ease expansion in that country and executives at headquarters were told of the bribery and declined to take action. 
But that did not mean those issues did not come up. 
During the brief portion of the meeting where shareholders could present proposals, criticisms were strong.[footnoteRef:3] One presenter asked why Wal-Mart had not joined European retailers in a pact to improve safety standards in Bangladesh. [3: The portion of the meeting where investors could speak amounted to about 15 minutes of an almost four-hour meeting.
] 
“The last six months have seen two of the worst disasters in the entire history of the garment industry,” said Kalpona Akter, a union activist in Bangladesh, referring to the Rana Plaza collapse and the Tazreen fire. “Both occurred in buildings where Wal-Mart goods were produced.” “Don’t you agree that the factories where Wal-Mart products are made should be safe for the workers?” she said. 
Wal-Mart says it did not have any production in the Rana Plaza factory at the time of the collapse. 
A shareholder and employee, Janet Sparks, who works at a Walmart in Baker, La., pushed the company on its pay and scheduling policies. “Times are tough for many Walmart associates, too. We are stretching our paychecks to pay our bills and support our families,” said Ms. Sparks, a member of the union-affiliated employee group Our Walmart. 
Referring to the chief executive Michael T. Duke’s $20.7 million in 2012 pay, she said that given the low wages store employees received, “with all due respect, I don’t think that’s right.” There were cheers and applause from the crowd, a response that could be considered significant because the employees selected to attend the annual meeting are generally big Wal-Mart supporters. 
Other investors raised concerns about the financial and reputational fallout from the Mexico inquiry, and whether Wal-Mart had a good handle on its supply chain given what occurred in Bangladesh. 
As expected, none of the shareholders’ proposals passed. The founding Walton family owns more than 50 percent of shares, making it impossible to pass any measures without their support. Likewise, despite opposition from some large pension funds and proxy-advisory firms, all 14 directors up for re-election were reinstated. 
The rest of it was devoted to Wal-Mart’s version of its story. 
The head of human resources was one of the first to speak, telling employees, “We’re here to celebrate each and every one of you.” Later, another human-resources executive took the stage, along with William S. Simon, the chief executive of Wal-Mart U.S., as they promoted two employees to assistant managers in front of the crowd of about 14,000. 
Mr. Simon reiterated earlier remarks telling employees that Wal-Mart was giving them more visibility into open shifts and into open supervisor roles. However, union members and activists have been complaining about unpredictable hours for employees, and Wal-Mart recently has “been hiring disproportionately” part-time workers who do not have fixed hours, Mr. Simon said in a separate meeting on Thursday. 
Even the celebrities were on-message. In one of the odder moments, Tom Cruise, looking dashing in a sharp suit and tie, took the stage not to entertain, but to reinforce Wal-Mart points about sustainability and promoting women. “Wal-Mart has served as a model for how business can address some of the biggest issues facing our world,” Mr. Cruise said. 
Executives briefly nodded at the Mexico bribery inquiry, telling the crowd that Wal-Mart remained committed to acting with integrity. And Mr. Duke, one of the executives who had been apprised of the bribery scheme after it occurred, according to reporting in The Times, had the crowd applaud a Chilean employee who had recently declined to take a bribe from a vendor. 
The company is using more than 300 legal and accounting professionals to work on new compliance programs and Foreign Corrupt Practices Act investigations, the corporate secretary Jeffrey J. Gearhart told investors on Friday, and they have spent more than 100,000 hours on the efforts so far.
d) The report says:
“….Its stock price, however, got some help Friday from news that the company authorized a $15 billion stock buyback. Shares were up 1.2 percent” 
Now, the question comes up whether buying back shares, by the company with its cash, is a good idea or not. 
What companies do is change the cash they have for their own shares in the hands of stock owners, and “presto”[footnoteRef:4] share prices go up. [4: Presto is an expression magicians use when a trick they do works out. ] 
Please explain, with a theoretical foundation to the answer, why it is that share prices go up with these “buy back” initiatives. Hint: the material we discussed in the first class may help. (10 points)
The effect of a buy back is that the number of shares in the hands of the shareholders diminishes because the company is buying shares with its cash.Thus, earnings per share go up. As earnings per share go up, the price of the shares should go up, since the future dividends should be higher PER SHARE. Thus, following Gordon’s formula, the price of stock will go up. 
e) Buying back their own shares is a rather common practice by companies in the USA – in fact, Apple just announced the largest such share buy back in history: the repurchase of us$100 billion dollars. Shares are purchased by the company at the price of the stock on the day the program is announced. 
In Chile, the Ley de Sociedades Anónimas does not allow these buybacks. Chilean legislation only allows dividends as a way to distribute money to shareholders, thus forcing shareholders to pay income tax on distribution of profits (the FUT scheme which is in the news these days). 
Now, the key question is different from tax considerations. Assuming that you are the CEO of the company, why would you consider doing a shares buy back? What does it reflect about the company’s strategy? (10 points).
If the company does not have growth projects which are attractive – which provide a return on investment higher than the WACC – then a buy back makes sense. Why? Because the company does not have a use for that money (a value creating investment) so it returns the money to the shareholders who originally invested in the company, who may decide to invest the money in other companies that do have profitable projects or simply consume the money. 
So in the capital markets, when companies do this buybacks it is understood as a tactic to boost the price of the stock; but, it is also understood as a lack of investment opportunities in the company which could create value. 
f) It is obvious that this shareholder meeting was carefully orchestrated by the CEO and his management team.
In spite of the short time to present their points of view, institutional investors and union activists criticized Wal Mart policies. Their criticism may be summarized in three areas: lack of safety measures for workers of subcontractors – as in Bangladesh –, lack of control of medium level management on ethical issues – as shown by the investigation of bribing in Mexico – and low wages for “associates” vs. high compensation for managers. 
	It is obvious that Wal Mart has to strengthen:
· Its safety programs so as to make sure that their subcontractor workers do their work in the most strict safety conditions. 
· Their ethical standards, so that their management does not bribe people. It is not enough to congratulate a Chilean employee!
It is surprising, however, that the company was evasive in their response to the criticism. They should take a corrective stand, urgently, about these two issues and fix the problems! 
What is not as obvious is how to respond to Ms. Janet Sparks’s statement: ‘Referring to the chief executive Michael T. Duke’s $20.7 million in 2012 pay, she said that given the low wages store employees received, “with all due respect, I don’t think that’s right.”
What do you think? Is it right to pay the CEO US$ 20.7 million dollars for his work in one year? To put things in perspective, Wal Mart net income (profit after taxes) in 2012 were US$ 17 billion vs. 2011 with US$15.6 billion. Please remember that 1 billion – in English- is equivalent to one thousand million dollars. Share prices went from US$62 to $70 in past twelve months. 
Your answer will have two parts, supporting each part in one of the three ethical paradigms we discussed in class. In short, pick two of the ethical paradigms and answer the question whether paying twenty million dollars to Mr. Duke is right (or wrong). Each analysis is worth 5 points (15 points) 
The three ethical paradigms are summarized in the next slide:
Let’s see what we can say from these three perspectives:
1) Stakeholders: it is difficult to justify the 20.7 million dollars from this perspective. Although the Walton family is free to pay Mr. Duke whatever they decide - they own more than 50% of the shares of the company and it is their money- from what Ms. Sparks says, workers are paid low salaries. The differences in pay are enormous and it is not surprising that workers are not happy- they feel they are not being treated as they should. To put things in perspective, if you are going to do a judgment, a more profound analysis is needed. For instance, how do salaries and benefits of workers compare with the industry. If Wal Mart is a good payer- lets say pays 20% better than the average in the industry- then the argument looses strength. In that case workers are well treated. 
2) Principles: again, it is difficult to justify the salary Duke gets based on principles, particularly it is questionable from the justice of the decision. Again, a comparison of wages and benefits is necessary to put matters in perspective, though.
3) Choice: this is the only ethical paradigm that when applied, justifies the salary for Duke. Basically in this paradigm the consequences of the decision become the justification. In this case, it is possible to say that good executives are difficult to find and retain, that Duke has proved to be an excellent manager and CEO, which is proved by the earnings increases and the increase in the price of the stock. Thus, given his results, the salary he is getting is in fact a very small portion of the value he created. 
The board of directors of Wal Mart has to consider all of these arguments when considering how much to pay to its CEO. 
Course: Leadership and Business Strategy , EAA 305a, section 2.-
First semester 2012 Final Exam
Please write your name in all pages. You may answer in English or in Spanish. 
This is an “open book” exam. Time: 120 minutes
Question 1.- 
In an interview published by Harvard Business Review in October 2011, Adi Ignatius, the editor in chief of the Review talks with Muhtar Kent, Coca Cola’s CEO, about the company’s vision, its sustainability initiatives and why an executive should never have dinner alone. The following paragraphs are excerpts from this interview.
Since Muhtar Kent took the helm of Coca-Cola, in July 2008, he has set a course for ambitious, long-term growth—even in a supposedly mature U.S. market—with the goal of doubling revenue by 2020. Kent has tried to rejuvenate an inward-looking, “arrogant” corporate culture and has reinvested cost-cutting dividends in brand development. 
When you became CEO, in 2008, what was your top priority?
There were two: establishing a long-term vision and restoring growth in North America. I felt that we needed a vision, a shared picture of success—both for us and for our bottling partners. We call it 2020 Vision, and it calls for us to double the business in 10 years. It’s not for the fainthearted, but it’s clearly doable.
What were some of the problems you saw?
We had become ingrown. Most of the meetings we were holding were just with ourselves. We weren’t going out to see how the world was changing.
How did you try to turn things around?
We brought in people from all over the world—the top 400 people in the company—to talk about how we had got into this position and how we were going to get out. We started working more closely with our bottling partners. We put a stop to all those internal meetings. We put new people in place. And we stabilized the company.
How are you doing so far?
We’ve still got eight years to go in 2020 Vision. So far we’re on track. We have not wasted this crisis. We’ve saved more than half a billion dollars in unnecessary expenses and reallocated some of that to help fuel our brands. Our metrics are good, and we’ve been able to restore growth in our biggest market, which is the United States. When you start creating proof points like that, it’s great for your credibility. When our brands are strong, our bottling partners want to invest in the business, too.
Why is the U.S. such a challenging market?
When we first talked about achieving growth in the U.S., people thought we were trying to go to the moon in a glider.They thought it was an oxymoron[footnoteRef:5]: “growth in the U.S.” But we believe the U.S. is a great growth market, and we’re investing roughly $3 billion a year in it. Here’s why: It’s the only Western nation with a young demography that is growing. By 2040 only a quarter of the U.S. population will be over the age of 60, compared with 30% in Europe and 40% in Japan. It’s a diverse, enterprising, entrepreneurial population. [5: NT: ‘oxímoron’= ‘contra-sentido’ en español] 
You have described Coca-Cola as “an idea, a vision, a feeling.” What does that mean? 
Coca-Cola is much more than just the product. It’s about universal refreshment, about moments of happiness. Last year I was in Hohhot, in Inner Mongolia, inaugurating a plant. It was like a carnival: Coca-Cola was coming, and it was part of a belief in a better tomorrow for everyone. It’s not that Coca- Cola represents the American flag. It’s a unique representation of optimism.
What is your approach to sustainability? Is it in the Vision 2020?
Yes it is. We have a simple belief inside Coca-Cola that if we can’t help create sustainable communities where we operate, we won’t have a sustainable business. It needs to be embedded in your business as opposed to inserted in your corporate social responsibility report. 
What does that mean in concrete terms? 
We were the first to declare water neutrality as a goal. Water neutrality means that you give back a liter for every one you use. How can you do that? By reducing the amount of water you use in your factories, by recycling water that you don’t need and giving it back to local cities, and by creating harvesting projects around the world. You let someone else measure that for you; in our case, it’s the World Wildlife Fund. And when you reduce water use, your costs go down.
Beyond all that, we’re committed to empowering women outside the company. We have a scholars program to send kids to universities. And we try to help our communities wherever they are, by bringing in water, or hospitals, or education. After the earthquake in China’s Sichuan province, we built more than 50 schools.
You’ve said that criticizing soft-drink makers for the obesity epidemic is unfair, because they’re responsible for only a small percentage of the calories people consume. But why make sugary drinks at all, since they do contribute to the problem? 
We, as a business, cannot solve a big, complex issue like obesity. We’ve reduced the calories in our beverages significantly over the past 20 years. Yet U.S. obesity rates have risen sharply. We provide choice: products with no calories, products with some calories, products with more calories. And we communicate with the consumer through our labeling about calories. We are working diligently to be part of the solution, but we reject the notion that we created the problem. We all have a responsibility to raise awareness about the benefit of active lifestyle programs.
Would Coke ever make alcoholic beverages?
No, and here’s why. It gets back to our 2020 Vision. In the next 10 years some 800 million to 1 billion people around the world will move into the middle class— the biggest urbanization the world has known. That translates into on-the-go lifestyles, which means significant demand for nonalcoholic, ready-to-drink beverages. This is such a beautiful business. Why would I want to lose focus?
Let’s talk about leadership. What kind of CEO are you?
I love to get down into the details, the engine room, but also to operate at a high level in terms of setting the strategy, vision, and direction for the company. At the end of the day, when you’re the chief executive of a company that employs 140,000 people in 206 markets around the world, you can only influence.
How do you influence effectively?
I prefer to be low-key, to carry my own bag, to try to be inclusive. I use “I” as little as possible and treasure the team in the largest sense—not just of employees but of partners, customers and stakeholders. I love to visit supermarkets, to be with customers. When consumers are inviting your products into their lives 1.7 billion times a day, you need to see that happening.
OK, but is it really a good use of a CEO’s time to go to stores that sell Coke?
Yes, because you learn. And it’s important to be seen, because we are a people business. We’re one of the largest private employers in the world, and it’s important that all our people who touch customers be motivated and feel good about what they’re doing. It’s about being proud of what you’re doing.
What was the big break that guided your career?
Early on, after spending a couple of years with Coca- Cola in the United States, I was given an opportunity to go to Rome, to head advertising and sales promotion. But two and a half years after I got there, the office shut down in a re-organization, and I found myself with no job. I was about to pack it up and return to the States when someone inside the company whom I’d met just once—I guess I made an impression on him—phoned me and set up a meeting. He gave me a break and a job based in Amsterdam. The lesson is: Always create and nurture. Never eat alone.
a) Muhtar Kent talks in the interview about his 2020 Vision. How does this Vision match what Collins and Porras call a vision for a company in their article ‘Building Your Company’s Vision? In other words, in what is Kent’s 2020 Vision similar (or different) from Collins and Porras definition of a vision? (10 points).
b) In the course we discussed the theory of Resources and Capabilities (for short, R&C) of the firm as a source of competitive advantages. What are the resources and capabilities on which Kent is building the strategy for Coca Cola? Please refer only to R&C’s mentioned in the answers Kent gives in the interview. In other words, what is being requested is that you identify in Kent’s answers those R & C’s which constitute the platform upon which Coca Cola is building its competitive advantages. Please be brief and mention not more than three Resources and Capabilities mentioned by Kent. (10 points)
c) Kent says that the only thing he can do is ‘influence’. Now, in class, we discussed leadership in similar terms, saying that managers have the responsibility, but exercise their roles through ‘influence’. Please explain how Kent’s answers, about how he works, match with the ideas we saw in class about what impacts influence. In other words, how do Kent´s answers about how he ‘influences’ correspond with what we saw in class. (10 points)
Question 2
In Bloomberg Business Week magazine, Sheridan Prasso recently interviewed Hamdy Ulukaya, the CEO of Chobani Yogurt. The company, which operates in a small upstate New York factory, went from nowhere to every where in the blink of an eye. The following paragraphs reproduce the most relevant points in this interview. 
The Unlikely King of Yogurt
Growing up in eastern Turkey, I was not really involved with the family business - sheep and cow farming, yogurt and cheese making. But I think I learned from my father the unspoken business language or instincts that go back thousands of years. We call it Anatolian business practice - your reputation is your asset.
I came to the U.S. in 1994 to learn English and go to business school. I took the business courses at the State University of New York at Albany and finished my undergraduate degree there. My father had come to visit. He said, “They don´t have very good cheese here. You should make cheese.” I said, “What? I didn´t come all the way here to make cheese!” But I did. I started a feta cheese company, Euphrates, in upstate New York in 2002. It was two years of the most challenging days of my life.
By 2005, I thought maybe I would relax and have a family. But one day I opened a piece of mail. It said, “Fully equipped yogurt factory for sale”. I threw it away. But then I thought about it later and went back and got it out of the garbage. I called. It was nearby, in South Edmeston, N.Y, near Utica. Kraft was closing it andgetting out of the yogurt business. There were a million reasons not to buy it. My friends said, “Don´t do it.” But I did. I was listening to my instincts that there´s something in this. I hired five people from the 55 that Kraft had let go. When I first met with them, they said, “What are we going to do?” I said, “Let´s start by painting the walls.” Then I hired a yogurt master. It took a year and a half to make a perfect cup of yogurt. Then we put our sales strategy together. We didn´t want to do high end. We went to the big chains and said we wanted to put it in the regular yogurt section. We launched the products in 2007.
When the first 200 cases were sold, in three small stores in Long Island, we were getting repeat orders – meaning that customers were coming back the next week to buy the product again- that were a big relief. Then we got BJ´s (a wholesale club) in late 2009 and Costco, the big supermarket chain, after that. We were overwhelmed and humbled, but not surprised. Deep down we knew we had something really good. We took a plant that was being closed by a big company thinking there was no good use for it, and we came in with a different perspective. We bought some used equipment, as simple as we could (buy).
When we saw that it was working, we started investing more in the plant. It´s the same plant, same community, and now we are the biggest yogurt plant in the Northeast. We use 3 million pounds of milk a day. If we had said to local farmers three years ago that we were going to need that much milk, they would have said, “You´re crazy”. But we wanted to make sure that the milk was made proudly by local people, and they have supported us with supply. With our planned $200 million plant expansion, we will ultimately have more than 1,200 employees in New York, plus another 400 at our new plant in Idaho by the middle of next year.
Everyone asks me why someone Turkish is making Greek yogurt. In Greece it is not called “Greek yogurt.” Everywhere in the world it is called “strained yogurt.” But because it was introduced in this country by a Greek company, they called it “Greek yogurt.” As long as it´s a good yogurt, it doesn´t matter whether it´s Greek yogurt or Turkish yogurt.
The most exciting aisle in the supermarket now is yogurt. The market is really growing big, and what’s really growing is Greek yogurt. In January we launched our kids´ line in smaller portions, and this January we are planning to launch three new Chobani flavors –apple cinnamon, blood orange, and passion fruit. I chose pomegranate as one of our original flavors because I grew up with it. It’s unusual, but it´s one of the best success we have. 
The yogurt story in this country is just getting started. We feel that as long as we stay true to who we are –quality, good-tasting products that are priced fairly and honestly positioned –our growth is limitless. So that’s what we´re doing and we won´t compromise. All this growth has happened at the worst time this country has faced economically. But I trusted my instinct, and I designed the company to support it and support the growth. Maybe now I can relax and have a family! 
a) What kind of strategy did the CEO of Chobani yogurt follow? Please describe briefly Chobani’s strategy, identifying the competitive advantage the brand has developed. (10 points)
b) How sustainable is the competitive advantage of Chobani yogurt? Please identify the main threats to Chobani’s Competitive advantage. Hint: please remember that threats are “external” to the firm; thus, you have toi do a short external analysis. (10 points)
Question 3
In class we discussed the case ‘GE: Jack Welch’s two decades transformational leadership’ at length. However, due to time constraints we were not able to review the globalization strategy of the company. The following paragraphs shortly depict what the case says about how Jack Welch handled this strategic thrust.
	
					Going Global
	During the early- and mid-1980s, internationalization had remained a back-burner issue at GE, but strong advocates of globalization such as Paolo Fresco, the Italian-born president of GE - Europe, understood why Welch had to concentrate his early efforts on the rationalization of the U.S. operations. “It’s very difficult to jump into the world arena if you don’t have a solid base at home,” said Fresco, “but once the solid base was created, we really took the jump.”
	The first rumblings of the emerging globalization priority came in Welch’s challenges to his Corporate Executive Council meetings during 1986. Reflecting his own early experience in GE Plastics, he did not try to impose a corporate globalization strategy, preferring to let each business take responsibility for implementing a plan appropriate to its particular needs: When I was 29 years old I bought land in Holland and built the plants there. That was “my land” for “my business.” I was never interested in the global GE, just the global Plastics business. The idea of a company being global is nonsense. Businesses are global, not companies. As if to underline his seriousness, a few months later he announced a major deal with Thomson S.A., in which GE agreed to exchange its struggling consumer electronics business for the large French electronics company’s medical imaging business, a business in which GE had a leading global position.
	To provide continuing momentum to the internationalization effort, in 1989 Welch appointed
Paolo Fresco as head of International Operations and in 1992 made him a vice-chairman and member of his four-man corporate executive office. Fresco, a key negotiator on the Thomson swap, continued to broker numerous international deals: a joint venture with German-based Robert Bosch, a partnership with Toshiba, and the acquisition of Sovac, the French consumer credit company. As Eastern Europe opened, he initiated a major thrust into the former Communist bloc, spearheaded by the purchase of a majority share in the Hungarian lighting company, Tungsram. Fresco became the locator and champion of new opportunities. “I fill vacuums,” he said. “All these assignments are temporary—once they are complete, I get out of the way.”
	Like subsequent strategic initiatives, globalization was not a one-time effort, but an ongoing theme that Welch doggedly pursued over the years. Taking advantage of Europe’s economic downturn, GE invested $17.5 billion in the region between 1989 and 1995, half on new plants and facilities and half to finance 50 or so acquisitions. Then, in 1995, after the Mexican peso collapsed, the company again saw the economic uncertainty as a great buying opportunity. Within six months GE had acquired 16 companies, positioning it to participate in the country’s surprisingly rapid recovery. And as Asia slipped into crisis in 1997-1998, Welch urged his managers to view it as a buying opportunity rather than a problem. In Japan alone the company spent $15 billion on acquisitions in six months.
By 1998, international revenues were $42.8 billion, almost double the level just five years earlier.
The company expected to do almost half its business outside the United States by 2000, compared with only 20% in 1985, the year before the first international push. More important, global revenues were growing at almost three times the rate of domestic sales. 
In pursuing his globalization strategy for GE, Jack Welch established an organizational structure and followed an opportunistic acquisitions strategy – buying ‘cheap’ companies in distressed economies. Please refer to the first issue, the organizational structure he put together – what can we learn from the way Welch handled this issue? In other words, what concepts we discussed in class as effective organizational methods are confirmed in Welch’s way of handling this problem? (10 points)
Pontificia Universidad Católica de Chile
Escuela de Administración
Course: Leadership and Business Strategy , EAA 305a, section 2.-
First semester 2012 Final Exam
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