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Case studies
Introduction A summary of the case
analysis process C-2
Preparing an effective
case analysis – the full
story C-5
Case 1 Hearing with the aid of
implanted technology: The
case of Cochlear™, an
Australian high-technology
leader C-19
Case 2 The Australian retail wars:
Coles Myer and Woolworths
battle for brand value C-26
Case 3 eBay.com: Profitably
managing growth from
start-up to 2000 C-32
Case 4 Gillette and the men’s
wet-shaving market C-50
Case 5 Gunns and the greens:
Governance issues in
Tasmania C-70
Case 6 Growth at Hubbard’s
Foods? C-79
Case 7 Incat Tasmania’s race for
international success:
Blue-riband strategies C-89
Case 8 The Golden Arches in
India: A case of strategic
adaptation C-95
Case 9 Monsanto: Better
living through genetic
engineering? C-106
Case 10 Nucor Corporation and the
US steel industry C-121
Case 11 Philip Condit and the
Boeing 777: From design and
development to production
and sales C-152
Case 12 Resene Paints C-168
Case 13 Sony Corporation: The vision
of tomorrow C-184
C-2
Introduction
A summary of the case
analysis process
Dallas Hanson
University of Tasmania
Case analysis is an essential part of a strategic man-
agement course and is also perhaps the most enter-
taining part of such a course. The ‘full story’ that
follows this summary gives you considerable detail
about how to go about a case analysis, but for now
here is a brief account.
Before we start, a word about attitude: make it a
real exercise; you have a set of historical facts and use
a rigorous system to work out what strategies should
be followed. All the cases are about real companies,
and one of the entertaining bits of the analysis pro-
cess is to compare what you have said they should do
with what they really have done. So, it is best not to
check the Net to see current strategies until you have
completed your analysis.
What follows is one analytical system, a fairly
tight one that you may want to adapt according to
how much time you have and the style of the case.
External analysis
Step 1 What industry is it?
You must decide on this early. This is an important
step, because it changes the analysis for example,
your industry analysis will yield different conclusions
depending on what industry you determine.
Step 2 General environment analysis
Analyse the six generic elements economic, socio-
cultural, global, technological, political/legal and
demographic – and work out what the important
facts are. There may be many issues and facts in each
element, but you put down only the important ones.
It is also important to avoid the common error of over-
emphasis on the rm in question. So, assuming the
rm operates in the Australian ice-cream industry,
the demographic analysis may have this comment: A
large baby boomer generation is now becoming more
health-conscious. This presents opportunities in health
foods and healthy alternatives for conventional foods.
It also presents opportunities for low-fat ice creams.
Or, in analysing the demographics of the Cochlear
rm, you may conclude that there is a global market of
1.8 million profoundly deaf people and that this pro-
vides a huge undeveloped market for the implantable
hearing devices industry.
Step 3 The industry environment
Analyse the five forces (that is, supplier power, buyer
power, potential entrants, substitute products and
rivalry among competitors) and explain briefly what
is signicant for each. For example, what are the
issues involved in new entrants into the industry? For
Introduction • A summary of the case analysis process C-3
the implantable hearing devices industry, these may
include the need for understanding of intricate new
technology, possession of a reputation in the global
deaf community for safe and effective product devel-
opment, and links to research institutions. This makes
the industry hard to enter. Each force needs a brief dis-
cussion followed by a short conclusion.
One extra consideration before you pull the anal-
ysis together and work out if this is an attractive
industry (the main conclusion) is: Is there a key force
or forces in your industry? Porter argues that there is
a key force in any industry, one that exerts more influ-
ence than the other forces.
Now, is it an attractive industry? You need to
explain, briefly, why or why not. Bear in mind that
it is often not a clear decision because the forces are
mixed for example, there may be little concern about
new entrants, suppliers or substitutes, but buyers may
be fickle and rivalry high. In such cases, the key force
analysis is very important
Remember: it is the industry you analyse, not the
firm.
Step 4 Competitive environment
Is there a strategic group that you need to take account
of? What is the rivalry like in this group? What capa-
bilities do the relevant rms have? What strategies do
they follow? What threats do they represent?
Step 5 You now have material about
opportunities and threats
It is easy to pull this together from the four steps you
have now completed.
Internal analysis
Step 6 The firm’s resources, tangible and
intangible
List all relevant resources. It is useful to distinguish
between tangible and intangible resources. Remem-
ber: firms have many resources.
At this point, if you have the skills and time, you
can analyse the nancial information that almost all
cases provide. This provides material for a nancial
resources paragraph.
Step 7 Capabilities identification
Here you make a list of capabilities. Capabilities tell
you what the firm can do.
Remember: each rm may have a dozen or more
capabilities, so include some that are very unlikely to
be core competencies. This is a difcult step, because
you must explain the capabilities carefully to indicate
what the firm really does. For example, Cochlear has
a capability for research in cochlear-related technol-
ogy. It does not have a generic research capability.
Step 8 Core competency analysis
For each capability, indicate which of the four tests
for a core competency it meets. An easy way to do this
is through use of a table. For example:
Rare? Valuable?
Costly to
imitate?
Non-
substitutable
Logistics
management
in cochlear
technologies Yes Y
es No No
Research
knowledge and
skill in cochlear-
related areas Yes Yes Yes Yes
Etc.
This is an important step, because the core compe-
tencies are fundamental in the strategies you suggest
– firms use their core competencies.
Step 9 Weaknesses
What major weaknesses does the firm have – for
example, old technology, very limited finance and poor
cash flow, no succession planning?
Step 10 Pulling it together
You now have all the material for an excellent
SWOT (strengths/weaknesses, opportunities/threats)
analysis. Pull together the earlier identication of
opportunities and threats (step 5) with the internal
analysis you have done. This resources-based, theory-
oriented system gives you a powerful vocabulary
to describe what simpler systems call ‘strengths’,
and the other elements of the system allow you to
systematically identify other significant factors in
the mix.
C-4 Introduction • A summary of the case analysis process
Step 11 Current strategies
Work out the firm’s current strategies.
Step 12 Strategies
Here you take advantage of opportunities and handle
threats. You should be able to make use of core com-
petencies to do this.
You may need strategies at the business level, cor-
porate level and international level (but it depends on
the industry and on whether all are required). Also,
bear in mind that you may need to specify functional-
level strategies to fit the generic strategies at the
business level. For example, if your ice-cream compa-
ny adopts a differentiation strategy, you must specify
how it is differentiated (on what grounds low fat?)
and there must be associated innovation and market-
ing strategies (or, in the corporate-level strategy, a
supporting acquisition strategy may be used to handle
the innovation issue).
Make a list of alternative possibilities and use
the external and internal analyses that you have con-
ducted to assess them. Choose one set of alternatives.
How do these differ from current strategies?
Make sure the strategies chosen fit in with your
earlier analysis. Use all the conclusions in the earlier
analysis. For example (and bear in mind that this is
simplified to make the idea clearer), if you are in a
rivalrous industry which has good growth prospects
because of useful demographic change and you have
good nancial resources, you may argue for expan-
sion into the new segment using available resources.
If the nances were not there, this strategy would be
difficult to support.
Using the Cochlear™ case
as a training case
This case analysis process is easy to use once you have
learned it, and the best way to learn is to try it out. The
Cochlear™ case in this book is designed as a training
case to help you do this. Don’t be concerned if you get
a slightly different analysis to other people: one of the
glories of case analysis is that they are never ‘right’;
some are, however, more plausible than others.
C-5
Preparing an effective case
analysis – the full story
In most strategic management courses, cases are used
extensively as a teaching tool.1 A key reason is that
cases provide active learners with opportunities to
use the strategic management process to identify and
solve organisational problems. Thus, by analysing
situations that are described in cases and presenting
the results, active learners (that is, students) become
skilled at effectively using the tools, techniques and
concepts that combine to form the strategic manage-
ment process.
The cases that follow are concerned with actual
companies. Presented within the cases are problems
and situations that managers and those with whom
they work must analyse and resolve. As you will see,
a strategic management case can focus on an entire
industry, a single organisation, or a business unit of
a large, diversified rm. The strategic management
issues facing not-for-profit organisations also can be
examined using the case analysis method.
Basically, the case analysis method calls for a care-
ful diagnosis of an organisation’s current conditions
(as manifested by its external and internal environ-
ments) so that appropriate strategic actions can be
recommended in light of the rm’s strategic intent and
strategic mission. Strategic actions are taken to devel-
op and then use a rm’s core competencies to select
and implement different strategies, including business-
level, corporate-level, acquisition and restructuring,
international and cooperative strategies. Thus, appro-
priate strategic actions help the firm to survive in the
long run as it creates and uses competitive advantages
as the foundation for achieving strategic competitive-
ness and earning above-average returns. The case
method that we are recommending to you has a rich
heritage as a pedagogical approach to the study and
understanding of managerial effectiveness.2
As an active learner, your preparation is critical
to successful use of the case analysis method. With-
out careful study and analysis, active learners lack the
insights required to participate fully in the discussion
of a firm’s situation and the strategic actions that are
appropriate.
Instructors adopt different approaches in their
application of the case analysis method. Some require
active learners/students to use a specic analytical
procedure to examine an organisation; others pro-
vide less structure, expecting students to learn by
developing their own unique analytical method. Still
other instructors believe that a moderately structured
framework should be used to analyse a rm’s situa-
tion and make appropriate recommendations. Your
lecturer or tutor will determine the specific approach
you take. The approach we are presenting to you is a
moderately structured framework.
We divide our discussion of a moderately struc-
tured case analysis method framework into four
sections. First, we describe the importance of under-
standing the skills active learners can acquire through
effective use of the case analysis method. In the sec-
ond section, we provide you with a process-oriented
framework. This framework can be of value in your
efforts to analyse cases and then present the results of
your work. Using this framework in a classroom set-
ting yields valuable experiences that can, in turn, help
you to successfully complete assignments that you
will receive from your employer. The third section
C-6
is where we describe briefly what you can expect to
occur during in-class case discussions. As this descrip-
tion shows, the relationship and interactions between
instructors and active learners/students during case
discussions are different than they are during lectures.
In the nal section, we present a moderately struc-
tured framework that we believe can help you to pre-
pare effective oral and written presentations. Written
and oral communication skills also are valued highly
in many organisational settings; hence, their develop-
ment today can serve you well in the future.
Skills gained through use of
the case analysis method
The case analysis method is based on a philosophy
that combines knowledge acquisition with signicant
involvement from students as active learners. In the
words of Alfred North Whitehead, this philosophy
‘rejects the doctrine that students had rst learned
passively, and then, having learned should apply
knowledge’.3 In contrast to this philosophy, the case
analysis method is based on principles that were elab-
orated upon by John Dewey:
Only by wrestling with the conditions of this
problem at hand, seeking and nding his own way
out, does [the student] think ... If he cannot devise
his own solution (not, of course, in isolation, but
in correspondence with the teacher and other
pupils) and find his own way out he will not learn,
not even if he can recite some correct answer with
a hundred percent accuracy.4
The case analysis method brings reality into the
classroom. When developed and presented effectively,
with rich and interesting detail, cases keep conceptu-
al discussions grounded in reality. Experience shows
that simple ctional accounts of situations and collec-
tions of actual organisational data and articles from
public sources are not as effective for learning as fully
developed cases. A comprehensive case presents you
with a partial clinical study of a real-life situation that
faced managers as well as other stakeholders, includ-
ing employees. A case presented in narrative form
provides motivation for involvement with and analy-
sis of a specic situation. By framing alternative stra-
tegic actions and by confronting the complexity and
ambiguity of the practical world, case analysis pro-
vides extraordinary power for your involvement with
a personal learning experience. Some of the poten-
tial consequences of using the case method are sum-
marised in Exhibit 1.
As Exhibit 1 suggests, the case analysis meth-
od can assist active learners in the development of
their analytical and judgement skills. Case analy-
sis also helps students to learn how to ask the right
questions. By this we mean questions that focus on
the core strategic issues that are included in a case.
Active learners/students with managerial aspirations
can improve their ability to identify underlying prob-
lems rather than focusing on superficial symptoms as
they develop skills at asking probing, yet appropriate,
questions.
The collection of cases your instructor chooses to
assign can expose you to a wide variety of organisa-
tions and decision situations. This approach vicari-
ously broadens your experience base and provides
insights into many types of managerial situations,
Exhibit 1
1 Case analysis requires students to practise important managerial skills – diagnosing, making decisions, observing, listening and
persuading – while preparing for a case discussion.
2 Cases require students to relate analysis and action, to develop realistic and concrete actions despite the complexity and
partial knowledge characterising the situation being studied.
3 Students must confront the intractability of reality – complete with absence of needed information, an imbalance between
needs and available resources, and conflicts among competing objectives.
4 Students develop a general managerial point of view – where responsibility is sensitive to action in a diverse environmental
context.
Source: C.C. Lundberg and C. Enz, 1993, ‘A framework for student case preparation’, Case Research Journal, 13 (summer), p. 134.
Introduction • Preparing an effective case analysis
C-7
tasks and responsibilities. Such indirect experience
can help you to make a more informed career deci-
sion about the industry and managerial situation
you believe will prove to be challenging and satisfy-
ing. Finally, experience in analysing cases definitely
enhances your problem-solving skills, and research
indicates that the case method for this subject is better
than the lecture method.5
Furthermore, when your instructor requires oral
and written presentations, your communication skills
will be honed through use of the case method. Of
course, these added skills depend on your prepara-
tion as well as your instructor’s facilitation of learn-
ing. However, the primary responsibility for learning
is yours. The quality of case discussion is generally
acknowledged to require, at a minimum, a thorough
mastery of case facts and some independent analysis
of them. The case method therefore rst requires that
you read and think carefully about each case. Addi-
tional comments about the preparation you should
complete to successfully discuss a case appear in the
next section.
Student preparation for
case discussion
If you are inexperienced with the case method,
you may need to alter your study habits. A lecture-
oriented course may not require you to do intensive
preparation for each class period. In such a course,
you have the latitude to work through assigned read-
ings and review lecture notes according to your own
schedule. However, an assigned case requires signi-
cant and conscientious preparation before class. With-
out it, you will be unable to contribute meaningfully
to in-class discussion. Therefore, careful reading and
thinking about case facts, as well as reasoned anal-
yses and the development of alternative solutions to
case problems, are essential. Recommended alterna-
tives should ow logically from core problems iden-
tied through study of the case. Exhibit 2 shows a
set of steps that can help you to familiarise yourself
with a case, identify problems and propose strategic
actions that increase the probability that a rm will
achieve strategic competitiveness and earn above-
average returns.
Exhibit 2
Step 1:
Gaining familiarity
a In general – determine who, what, how, where and when (the critical facts of the case).
b In detail – identify the places, persons, activities and contexts of the situation.
c Recognise the degree of certainty/uncertainty of acquired information.
Step 2:
Recognising symptoms
a List all indicators (including stated ‘problems’) that something is not as expected or as desired.
b Ensure that symptoms are not assumed to be the problem. (Symptoms should lead to
identification of the problem.)
Step 3:
Identifying goals
a Identify critical statements by major parties (e.g. people, groups, the work unit, etc.).
b List all goals of the major parties that exist or can be reasonably inferred.
Step 4:
Conducting the analysis
a Decide which ideas, models and theories seem useful.
b Apply these conceptual tools to the situation.
c As new information is revealed, cycle back to sub-steps (a) and (b).
Step 5:
Making the diagnosis
a Identify predicaments (goal inconsistencies).
b Identify problems (discrepancies between goals and performance).
c Prioritise predicaments/problems regarding timing, importance, etc.
Step 6:
Doing the action planning
a Specify and prioritise the criteria used to choose action alternatives.
b Discover or invent feasible action alternatives.
c Examine the probable consequences of action alternatives.
d Select a course of action.
e Design an implementation plan/schedule.
f Create a plan for assessing the action to be implemented.
Source: C. C. Lundberg and C. Enz, 1993, ‘A framework for student case preparation’, Case Research Journal, 13 (summer), p. 144.
Introduction • Preparing an effective case analysis
C-8
Gaining familiarity
The rst step of an effective case analysis process calls
for you to become familiar with the facts featured in
the case and the focal rm’s situation. Initially, you
should become familiar with the focal rm’s general
situation (for example, who, what, how, where and
when). Thorough familiarisation demands apprecia-
tion of the nuances, as well as the major issues, in
the case.
Gaining familiarity with a situation requires you to
study several situational levels, including interactions
between and among individuals within groups, busi-
ness units, the corporate office, the local communi-
ty and the society at large. Recognising relationships
within and among levels facilitates a more thorough
understanding of the specic case situation.
It is also important that you evaluate information
on a continuum of certainty. Information that is
veriable by several sources and judged along similar
dimensions can be classified as a fact. Information
representing someone’s perceptual judgement of a par-
ticular situation is referred to as an inference. Infor-
mation gleaned from a situation that is not veriable
is classied as speculation. Finally, information that is
independent of veriable sources and arises through
individual or group discussion is an assumption.
Obviously, case analysts and organisational decision
makers prefer having access to facts over inferences,
speculations and assumptions.
Personal feelings, judgements and opinions evolve
when you are analysing a case. It is important to be
aware of your own feelings about the case and to
evaluate the accuracy of perceived ‘facts’ to ensure
that the objectivity of your work is maximised.
Recognising symptoms
Recognition of symptoms is the second step of an
effective case analysis process. A symptom is an indi-
cation that something is not as you or someone else
thinks it should be. You may be tempted to correct the
symptoms instead of searching for true problems. True
problems are the conditions or situations requiring
solution before the performance of an organisation,
business unit or individual can improve. Identifying
and listing symptoms early in the case analysis process
tends to reduce the temptation to label symptoms as
problems. The focus of your analysis should be on the
actual causes of a problem, rather than on its symptoms.
Thus, it is important to remember that symptoms are
indicators of problems; subsequent work facilitates
discovery of critical causes of problems that your case
recommendations must address.
Identifying goals
The third step of effective case analysis calls for
you to identify the goals of the major organisations,
business units and/or individuals in a case. As appro-
priate, you should also identify each rm’s strategic
intent and strategic mission. Typically, these direc-
tion-setting statements (goals, strategic intents and
strategic missions) are derived from comments made
by central characters in the organisation, business
unit or top management team as described in the
case and/or from public documents (for example, an
annual report).
Completing this step successfully can sometimes be
difficult. Nonetheless, the outcomes you attain from
this step are essential to an effective case analysis
because identifying goals, intent and mission helps
you to clarify the main problems featured in a case
and to evaluate alternative solutions to those problems.
Direction-setting statements are not always stated
publicly or prepared in written format. When this
occurs, you must infer goals from other available fac-
tual data and information.
Conducting the analysis
The fourth step of effective case analysis is concerned
with acquiring a systematic understanding of a situ-
ation. Occasionally, cases are analysed in a less-than-
thorough manner. Such analyses may be a product of
a busy schedule or of the difculty and complexity of
the issues described in a particular case. Sometimes
you will face pressures on your limited amounts of
time and may believe that you can understand the sit-
uation described in a case without systematic analy-
sis of all the facts. However, experience shows that
familiarity with a case’s facts is a necessary, but insuf-
ficient, step in the development of effective solutions
solutions that can enhance a rm’s strategic com-
petitiveness. In fact, a less-than-thorough analysis
typically results in an emphasis on symptoms, rather
than on problems and their causes. To analyse a case
Introduction • Preparing an effective case analysis
C-9
effectively, you should be sceptical of quick or easy
approaches and answers.
A systematic analysis helps you to understand
a situation and determine what can work and prob-
ably what will not work. Key linkages and under-
lying causal networks based on the history of the rm
become apparent. In this way, you can separate causal
networks from symptoms.
Also, because the quality of a case analysis depends
on applying appropriate tools, it is important that you
use the ideas, models and theories that seem to be use-
ful for evaluating and solving individual and unique
situations. As you consider facts and symptoms, a
useful theory may become apparent. Of course, hav-
ing familiarity with conceptual models may be impor-
tant in the effective analysis of a situation. Successful
students and successful organisational strategists add
to their intellectual tool kits on a continual basis.
Making the diagnosis
The fth step of effective case analysis diagnosis is
the process of identifying and clarifying the roots of
the problems by comparing goals with facts. In this
step, it is useful to search for predicaments. Predica-
ments are situations in which goals do not t with
known facts. When you evaluate the actual perfor-
mance of an organisation, business unit or individual,
you may identify over- or under-achievement (relative
to established goals). Of course, single-problem situa-
tions are rare. Accordingly, you should recognise that
the case situations you study probably will be com-
plex in nature.
Effective diagnosis requires you to determine
the problems affecting longer-term performance and
those requiring immediate handling. Understanding
these issues will aid your efforts to prioritise prob-
lems and predicaments, given available resources and
existing constraints.
Doing the action planning
The nal step of an effective case analysis process is
called action planning. Action planning is the process
of identifying appropriate alternative actions. In the
action planning step, you select the criteria you will
use to evaluate the identified alternatives. You may
derive these criteria from the analyses; typically, they
are related to key strategic situations facing the focal
organisation. Furthermore, it is important that you
prioritise these criteria to ensure a rational and effec-
tive evaluation of alternative courses of action.
Typically, managers ‘satisfice when selecting
courses of action; that is, they find acceptable courses
of action that meet most of the chosen evaluation
criteria. A rule of thumb that has proved valuable to
strategic decision makers is to select an alternative
that leaves other plausible alternatives available if the
one selected fails.
Once you have selected the best alternative, you
must specify an implementation plan. Developing an
implementation plan serves as a reality check on the
feasibility of your alternatives. Thus, it is important
that you give thoughtful consideration to all issues
associated with the implementation of the selected
alternatives.
What to expect from
in-class case discussions
Classroom discussions of cases differ signicantly
from lectures. The case method calls for instructors to
guide the discussion, encourage student participation
and solicit alternative views. When alternative views
are not forthcoming, instructors typically adopt one
view so that students can be challenged to respond
to it thoughtfully. Often students’ work is evaluated
in terms of both the quantity and the quality of their
contributions to in-class case discussions. Students
benefit by having their views judged against those of
their peers and by responding to challenges by other
class members and/or the instructor.
During case discussions, instructors listen, ques-
tion and probe to extend the analysis of case issues.
In the course of these actions, peers or the instructor
may challenge an individual’s views and the validity
of alternative perspectives that have been expressed.
These challenges are offered in a constructive man-
ner; their intent is to help students develop their ana-
lytical and communication skills. Instructors should
encourage students to be innovative and original in
the development and presentation of their ideas. Over
the course of an individual discussion, students can
develop a more complex view of the case, benefiting
from the diverse inputs of their peers and instructor.
Introduction • Preparing an effective case analysis
C-10
Among other benefits, experience with multiple-case
discussions should help students to increase their
knowledge of the advantages and disadvantages of
group decision-making processes.
Student peers as well as the instructor value com-
ments that contribute to the discussion. To offer
relevant contributions, you are encouraged to use
independent thought and, through discussions with
your peers outside of class, to refine your thinking. We
also encourage you to avoid using ‘I think’, ‘I believe’
and I feel’ to discuss your inputs to a case analysis
process. Instead, consider using a less emotion-laden
phrase, such as ‘My analysis shows’. This highlights
the logical nature of the approach you have taken to
complete the six steps of an effective case analysis
process.
When preparing for an in-class case discussion,
you should plan to use the case data to explain your
assessment of the situation. Assume that your peers
and instructor know the case facts. In addition, it is
good practice to prepare notes before class discus-
sions and use them as you explain your view. Effective
notes signal to classmates and the instructor that you
are prepared to engage in a thorough discussion of a
case. Moreover, thorough notes eliminate the need for
you to memorise the facts and gures needed to dis-
cuss a case successfully.
The case analysis process just described can help
you prepare to effectively discuss a case during class
meetings. Adherence to this process results in consid-
eration of the issues required to identify a focal firm’s
problems and to propose strategic actions through
which the rm can increase the probability that it will
achieve strategic competitiveness.
In some instances, your instructor may ask
you to prepare either an oral or a written analysis
of a particular case. Typically, such an assignment
demands even more thorough study and analysis of
the case contents. At your instructor’s discretion, oral
and written analyses may be completed by individuals
or by groups of two or more people. The informat-
ion and insights gained through completing the six
steps shown in Exhibit 2 are often of value in the
development of an oral or written analysis. However,
when preparing an oral or written presentation, you
must consider the overall framework in which your
information and inputs will be presented. Such a
framework is the focus of the next section.
Preparing an oral/written
case strategic plan
Experience shows that two types of thinking are nec-
essary in order to develop an effective oral or written
presentation (see Exhibit 3). The upper part of the
model in Exhibit 3 outlines the analysis stage of case
preparation.
In the analysis stage, you should rst analyse the
general external environmental issues affecting the
rm. Next, your environmental analysis should focus
on the particular industry (or industries, in the case
of a diversified company) in which a rm operates.
Finally, you should examine the competitive environ-
ment of the focal rm. Through study of the three
levels of the external environment, you will be able to
identify a firm’s opportunities and threats. Following
the external environmental analysis is the analysis of
the rm’s internal environment, which results in the
identication of the firm’s strengths and weaknesses.
As noted in Exhibit 3, you must then change the
focus from analysis to synthesis. Specifically, you
must synthesise information gained from your analy-
sis of the rm’s internal and external environments.
Synthesising information allows you to generate alter-
natives that can resolve the signicant problems or
challenges facing the focal rm. Once you identify a
best alternative, from an evaluation based on prede-
termined criteria and goals, you must explore imple-
mentation actions.
Exhibits 4 and 5 outline the sections that should
be included in either an oral or a written strategic
plan presentation: introduction (strategic intent and
mission), situation analysis, statements of strengths/
weaknesses and opportunities/threats, strategy for-
mulation and implementation plan. These sections,
which can be completed only through use of the two
types of thinking featured in Exhibit 3, are described
in the following discussion. Familiarity with the con-
tents of your textbook’s 13 chapters is helpful because
the general outline for an oral or a written strategic
plan shown in Exhibit 5 is based on an understand-
ing of the strategic management process detailed in
those chapters.
Introduction • Preparing an effective case analysis
C-11
External environment analysis
As shown in Exhibit 5, a general starting place for
completing a situation analysis is the external envi-
ronment. The external environment is composed of
outside conditions that affect a rm’s performance.
Your analysis of the environment should consider the
effects of the general environment on the focal rm.
Following that evaluation, you should analyse the
industry and competitor environmental trends.
These trends or conditions in the external environ-
ment shape the rm’s strategic intent and mission.
The external environment analysis essentially indi-
cates what a firm might choose to do. Often called an
environmental scan, an analysis of the external envi-
ronment allows a firm to identify key conditions that
are beyond its direct control. The purpose of studying
the external environment is to identify a rm’s oppor-
tunities and threats. Opportunities are conditions in
the external environment that appear to have the
potential to contribute to a firm’s success. In essence,
opportunities represent possibilities. Threats are
conditions in the external environment that appear
to have the potential to prevent a rm’s success. In
essence, threats represent potential constraints.
When studying the external environment, the
focus is on trying to predict the future (in terms of
local, regional, and international trends and issues)
and to predict the expected effects on a rm’s oper-
ations. The external environment features conditions
in the broader society and in the industry (area of
competition) that influence the rm’s possibilities
and constraints. Areas to be considered (to identify
opportunities and threats) when studying the general
environment are listed in Exhibit 6. Many of these
issues are explained more fully in Chapter 2.
Once you analyse the general environmental
trends, you should study their effect on the focal indus-
try. Often the same environmental trend may have a
signicantly different impact on separate industries,
or it may affect firms within the same industry differ-
ently. For instance, with deregulation of the airline
industry in the United States, older, established air-
lines had a significant decrease in profitability, while
many smaller airlines, such as Southwest Airlines,
Exhibit 3 Types of thinking in case preparation: Analysis and synthesis
ANALYSIS
External environment
General environment
Industry environment
Competitor environment
Internal environment
Statements of
strengths,
weaknesses,
opportunities
and threats
Alternatives
Evaluations of alternatives
Implementation
SYNTHESIS
Introduction • Preparing an effective case analysis
C-12
Exhibit 5 Strategic planning and its parts
Strategic planning is a process through which a firm determines what it seeks to accomplish and the actions required to
achieve desired outcomes
Strategic planning, then, is a process that we use to determine what (outcomes to be reached) and how (actions to be taken
to reach outcomes)
The effective strategic plan for a firm would include statements and details about the following:
Opportunities (possibilities) and threats (constraints)
Strengths (what we do especially well) and weaknesses (deficiencies)
Strategic intent (an indication of a firm’s ideal state)
Strategic mission (purpose and scope of a firm’s operations in product and market terms)
Key result areas (KRAs) (categories of activities where efforts must take place to reach the mission and intent)
Strategies (actions for each KRA to be completed within one to five years)
Objectives (specific statements detailing actions for each strategy that are to be completed in one year or less)
Cost linkages (relationships between actions and financial resources)
Exhibit 4 Strategic planning process
Strategic intent
Strategic mission
Strategies
1 to 5 years
Cost linkages
Objectives
1 year or less
Cost linkages
Key result areas
Required efforts
Cost linkages
External environment
Opportunities (possibilities)
Threats (constraints)
Internal environment
Strengths
Weaknesses
Introduction • Preparing an effective case analysis
C-13
with lower cost structures and greater flexibility, were
able to aggressively enter new markets.
Porter’s five forces model is a useful tool for ana-
lysing the specic industry (see Chapter 2). Careful
study of how the five competitive forces (that is, sup-
plier power, buyer power, potential entrants, substi-
tute products and rivalry among competitors) affect
a rm’s strategy is important. These forces may cre-
ate threats or opportunities relative to the specific
business-level strategies (that is, differentiation, cost
leadership, focus) being implemented. Often a stra-
tegic group’s analysis reveals how different environ-
mental trends are affecting industry competitors.
Strategic group analysis is useful for understanding
the industry’s competitive structures and rm con-
straints and possibilities within those structures.
Firms also need to analyse each of their primary
competitors. This analysis should identify their com-
petitors’ current strategies, strategic intent, strategic
mission, capabilities, core competencies and compet-
itive response profile. This information is useful to
the focal firm in formulating an appropriate strategic
intent and mission.
Internal environment analysis
The internal environment is composed of strengths
and weaknesses internal to a rm that influence its
strategic competitiveness. The purpose of completing
an analysis of a firm’s internal environment is to iden-
tify its strengths and weaknesses. The strengths and
weaknesses in a rm’s internal environment shape
the strategic intent and strategic mission. The inter-
nal environment essentially indicates what a rm
Exhibit 6 Sample general environmental categories
Technology Information technology continues to become cheaper and have more practical
applications
Database technology allows organisation of complex data and distribution of information
Telecommunications technology and networks increasingly provide fast transmission of all
sources of data, including voice, written communications and video information
Demographic trends Computerised design and manufacturing technologies continue to facilitate quality and
flexibility
Regional changes in population due to migration
Changing ethnic composition of the population
Ageing of the population
Ageing of the baby boomer generation
Economic trends Interest rates
Inflation rates
Savings rates
Trade deficits
Budget deficits
Exchange rates
Political/legal environment Antitrust enforcement
Tax policy changes
Environmental protection laws
Extent of regulation/deregulation
Developing countries privatising state monopolies
State-owned industries
Socio-cultural environment Increasing proportion of women in the workforce
Awareness of health and fitness issues
Concern for the environment
Concern for customers
Global environment Currency exchange rates
Free trade agreements
Trade deficits
New or developing markets
Introduction • Preparing an effective case analysis
C-14
can do. Capabilities or skills that allow a rm to do
something that others cannot do or that allow a firm
to do something better than others do it are called
strengths. Strengths can be categorised as something
that a firm does especially well. Strengths help a firm
to take advantage of external opportunities or over-
come external threats. Capabilities or skill deficien-
cies that prevent a rm from completing an important
activity as well as others do it are called weaknesses.
Weaknesses have the potential to prevent a firm from
taking advantage of external opportunities or suc-
ceeding in efforts to overcome external threats. Thus,
weaknesses can be thought of as something the rm
needs to improve.
Analysis of the primary and support activities of
the value chain provides opportunities to understand
how external environmental trends affect the spe-
cic activities of a rm. Such analysis helps to high-
light strengths and weaknesses. (See Chapter 3 for an
explanation of the value chain.) For the purposes of
preparing an oral or written presentation, it is impor-
tant to note that strengths are internal resources and
capabilities that have the potential to be core com-
petencies. Weaknesses, on the other hand, have the
potential to place a rm at a competitive disadvantage
in relation to its rivals.
When evaluating the internal characteristics of
the firm, your analysis of the functional activities
emphasised is critical. For example, if the strategy of
the rm is primarily technology-driven, it is important
to evaluate the rm’s R&D activities. If the strategy
is market-driven, marketing functional activities are
of paramount importance. If a rm has nancial dif-
culties, critical nancial ratios would require careful
evaluation. In fact, because of the importance of
nancial health, most cases require nancial analysis.
The appendix lists and operationally denes several
common nancial ratios. Included are exhibits des-
cribing profitability, liquidity, leverage, activity and
shareholders’ return ratios. Other rm characteristics
that should be examined to study the internal environ-
ment effectively include leadership, organisational
culture, structure and control systems.
Identification of strategic intent
and mission
Strategic intent is associated with a mind-set that
managers seek to imbue within the company. Essen-
tially, a mind-set captures how we view the world
and our intended role in it. Strategic intent reflects
or identifies a rm’s ideal state. Strategic intent flows
from a rm’s opportunities, threats, strengths and
weaknesses. However, the main influence on strate-
gic intent is a firm’s strengths. Strategic intent should
reect a firm’s intended character and a commitment
to ‘stretch’ available resources and strengths in order
to reach strategies and objectives. Examples of strate-
gic intent include:
The relentless pursuit of perfection (Lexus).
To be the top performer in everything that we do
(Phillips Petroleum).
We are dedicated to being the world’s best at
bringing people together (AT&T).
The strategic mission flows from a rm’s strate-
gic intent; it is a statement used to describe a rm’s
unique intent and the scope of its operations in prod-
uct and market terms. In its most basic form, the stra-
tegic mission indicates to stakeholders what a rm
seeks to accomplish. An effective strategic mission
reflects a rm’s individuality and reveals its leader-
ship’s predisposition(s). The useful strategic mission
shows how a rm differs from others and defines
boundaries within which the firm intends to operate.
For example:
Cochlear’s mission is to have ‘clinical teams and
recipients embrace Cochlear as their partner in
hearing for life’.
Coca-Cola Amatil’s mission is to have market
leadership in every territory.
Hints for presenting an
effective strategic plan
There may be a temptation to spend most of your
oral or written case analysis on the results from the
analysis. It is important, however, that the analysis
of a case should not be over-emphasised relative to
Introduction • Preparing an effective case analysis
C-15
the synthesis of results gained from your analytical
efforts – what does the analysis mean for the organi-
sation (see Exhibit 3)?
Strategy formulation: Choosing key
result areas
Once you have identified strengths and weaknesses,
determined the firm’s core competencies (if any), and
formulated a strategic intent and mission, you have a
picture of what the rm is and what challenges and
threats it faces.
You can now determine alternative key result
areas (KRAs). Each of these is a category of activi-
ties that helps to accomplish the strategic intent of the
rm. For example, KRAs for Cochlear may include
to remain a leader in hearing implant technology and
to build links with hearing clinicians in Southeast
Asia. Each alternative should be feasible (that is, it
should match the rm’s strengths, capabilities and,
especially, core competencies), and feasibility should
be demonstrated. In addition, you should show how
each alternative takes advantage of the environmental
opportunity or avoids/buffers against environmental
threats. Developing carefully thought-out alternatives
requires synthesis of your analyses and creates greater
credibility in oral and written case presentations.
Once you develop a strong set of alternative
KRAs, you must evaluate the set to choose the best
ones. Your choice should be defensible and provide
benefits over the other alternatives. Thus, it is impor-
tant that both the alternative development and evalu-
ation of alternatives be thorough. The choice of the
best alternative should be explained and defended.
For the two Cochlear KRAs presented earlier, the
strategies are clear and in both cases they take advan-
tage of competencies within the company and oppor-
tunities in the external environment.
Key result area implementation
After selecting the most appropriate KRAs (that is,
those with the highest probability of enhancing a
rm’s strategic competitiveness), you must consider
effective implementation. Effective synthesis is impor-
tant to ensure that you have considered and evaluated
all critical implementation issues. Issues you might
consider include the structural changes necessary to
implement the new strategies and objectives associ-
ated with each KRA. In addition, leadership changes
and new controls or incentives may be necessary to
implement these strategic actions. The implementa-
tion actions you recommend should be explicit and
thoroughly explained. Occasionally, careful evalua-
tion of implementation actions may show the strat-
egy to be less favourable than you originally thought.
(You may find that the capabilities required to imple-
ment the strategy are absent and unobtainable.) A
strategy is only as good as the firm’s ability to imple-
ment it effectively. Therefore, expending the effort to
determine effective implementation is important.
Process issues
You should ensure that your presentation (either oral
or written) has logical consistency throughout. For
example, if your presentation identies one purpose,
but your analysis focuses on issues that differ from
the stated purpose, the logical inconsistency will be
apparent. Likewise, your alternatives should flow
from the conguration of strengths, weaknesses,
opportunities and threats you identied through the
internal and external analyses.
Thoroughness and clarity also are critical to an
effective presentation. Thoroughness is represented
by the comprehensiveness of the analysis and alterna-
tive generation. Furthermore, clarity in the results of
the analyses, selection of the best alternative KRAs
and strategies, and design of implementation actions
are important. For example, your statement of the
strengths and weaknesses should flow clearly and
logically from the internal analyses presented, and
these should be reflected in KRAs and strategies.
Presentations (oral or written) that show logi-
cal consistency, thoroughness and clarity of purpose,
effective analyses, and feasible recommendations are
more effective and will receive more positive evalua-
tions. Being able to withstand tough questions from
peers after your presentation will build credibility for
your strategic plan presentation. Furthermore, devel-
oping the skills necessary to make such presentations
will enhance your future job performance and career
success.
Introduction • Preparing an effective case analysis
C-16
Appendix: Financial analysis in case studies
Exhibit A-1 Profitability ratios
Ratio Formula What it shows
1 Return on total assets Profits after taxes
Total assets
The net return on total investment
of the firm
or or
Profits after taxes + interest
Total assets
The return on both creditors’ and
shareholders’ investments
2 Return on shareholders’ equity
(or return on net worth)
Profits after taxes
Total shareholders’ equity
How effectively the company is
utilising shareholders’ funds
3 Return on ordinary equity Profit after taxes – preference share dividends
Total shareholders’ equity – par value of
preference shares
The net return to ordinary
shareholders
4 Operating profit margin
(or return on sales)
Profits before taxes and before interest
Sales
The firm’s profitability from
regular operations
5 Net profit margin
(or net return on sales)
Profits after taxes
Sales
The firm’s net profit as a
percentage of total sales
Exhibit A-2 Liquidity ratios
Ratio Formula What it shows
1 Current ratio Current assets
Current liabilities
The firm’s ability to meet its current financial
liabilities
2 Quick ratio (or acid-test ratio) Current assets – inventory
Current liabilities
The firm’s ability to pay off short-term
obligations without relying on sales of
inventory
3 Inventory to net working capital Inventory
Current assets – current liabilities
The extent to which the firm’s working capital
is tied up in inventory
Introduction • Preparing an effective case analysis
C-17
Exhibit A-3 Leverage ratios
Ratio Formula What it shows
1 Debt-to-assets Total debt
Total assets
Total borrowed funds as a percentage of total
assets
2 Debt-to-equity Total debt
Total shareholders’ equity
Borrowed funds versus the funds provided by
shareholders
3 Long-term debt-to-equity Long-term debt
Total shareholders’ equity
Leverage used by the firm
4 Times-interest-earned
(or coverage ratio)
Profits before interest and taxes
Total interest charges
The firm’s ability to meet all interest payments
5 Fixed charge coverage Profits before taxes and interest
+ lease obligations
Total interest charges
+ lease obligations
The firm’s ability to meet all fixed-charge
obligations, including lease payments
Exhibit A-4 Activity ratios
Ratio Formula What it shows
1 Inventory turnover Sales
Inventory of finished goods
The effectiveness of the firm in employing
inventory
2 Fixed assets turnover Sales
Fixed assets
The effectiveness of the firm in utilising plant
and equipment
3 Total assets turnover Sales
Total assets
The effectiveness of the firm in utilising total
assets
4 Accounts receivable turnover Annual credit sales
Accounts receivable
How many times the total receivables have
been collected during the accounting period
5 Average collection period Accounts receivable
Average daily sales
The average length of time the firm waits to
collect payments after sales
Introduction • Preparing an effective case analysis
C-18
Exhibit A-5 Shareholders’ return ratios
Ratio Formula What it shows
1 Dividend yield on ordinary
shares
Annual dividends per share
Current market price per share
A measure of return to ordinary shareholders
in the form of dividends
2 Price–earnings ratio Current market price per share
After-tax earnings per share
An indication of market perception of the firm.
Usually, the faster-growing or less risky firms
tend to have higher PE ratios than the slower-
growing or more risky firms
3 Dividend payout ratio Annual dividends per share
After-tax earnings per share
An indication of dividends paid out as a
percentage of profits
4 Cash flow per share After-tax profits + depreciation
Number of ordinary shares outstanding
A measure of total cash per share available for
use by the firm
Notes
1 M. A. Lundberg, B. B. Levin and H. I. Harrington, 2000, Who
Learns What from Cases and How? The Research Base for Teaching
and Learning with Cases (Englewood Cliffs, NJ: Lawrence Erlbaum
Associates).
2 L. B. Barnes, A. J. Nelson and C. R. Christensen, 1994, Teaching
and the Case Method: Text, Cases and Readings (Boston: Harvard
Business School Press); C. C. Lundberg, 1993, ‘Introduction to
the case method’, in C. M. Vance (ed.), Mastering Management
Education (Newbury Park, Calif.: Sage); C. Christensen, 1989,
Teaching and the Case Method (Boston: Harvard Business School
Publishing Division).
3 C. C. Lundberg and E. Enz, 1993, A framework for student
case preparation’, Case Research Journal, 13 (summer), p. 133.
4 J. Solitis, 1971, John Dewey’, in L. E. Deighton (ed.), Encyclopedia
of Education (New York: Macmillan and The Free Press).
5 F. Bocker, 1987, Is case teaching more effective than lecture
teaching in business administration? An exploratory analysis’,
Interfaces, 17(5), pp. 64–71.
Introduction • Preparing an effective case analysis
C-19
Case 1
Hearing with the aid of
implanted technology:
The case of Cochlear, an Australian
high-technology leader
Dallas Hanson Mark Wickham
University of Tasmania University of Tasmania
The Cochlear company of
Australia: The situation
Cochlear™ is a leading Australian company specialis-
ing in cochlear devices that is, implantable hearing
devices. It is the world leader in this market and a pro-
minent innovator in the high-technology niche within
which it operates. Cochlear originated in Australia
but now sells globally in an increasingly competitive
market.
There are several problems currently facing the
company. Within the global deaf community there is
a serious debate about the use of technology to aid
hearing in the profoundly deaf, and this obviously
threatens the market. Second, and more significantly,
in 2002 there was a major issue when the US Food
and Drug Administration (FDA) issued a notification
that it had received news of possible associations
between cochlear implants and meningitis. In late
2003 a new CEO, Chris Roberts, took over. What are
his options?
The Cochlear implant technology
A cochlear implant is a small electronic device that
helps a profoundly (completely) deaf person to have
a sense of sound. It is different from a hearing aid
because it helps to compensate for damaged or non-
functional parts of the ear, while a hearing aid ampli-
fies sound. The implant has four parts:
a tiny but sensitive microphone that picks up
sound
a speech processor that selects and arranges
useful sounds
a transmitter and receiver that turns these
sounds into electrical impulses
a series of electrodes that are surgically
implanted in the inner ear, which pick up the
receiver’s impulses and transmit them to the
brain. (This process is analogous to how hearing
people hear sounds.)
The cochlear implant technology is getting more
sophisticated all the time. It is a fast-moving technol-
ogy, and changes are further enhancing the capacity
C-20 Case 1 • Hearing with the aid of implanted technology: Cochlear
of the devices as well as making them smaller and
therefore more socially acceptable.
Implanting the devices is a surgical procedure that
has some risks. It is also expensive because it requires
an experienced surgeon. Exhibit 1 is a diagrammatic
representation of the device.
A recent Cochlear company annual report out-
lines the details of this technology and indicates its
intricacy:
Introduction to the Nucleus® 3 system
The unique features of the Nucleus® 3 system
include:
Longest battery life on the market: The ESPrit™
3G speech processor is the only processor on the
market with a battery life that lasts up to three
days. Few interruptions and clear sound means
better hearing.
Unique Whisper setting provides more sound:
The ESPrit 3G is the only speech processor on the
market that features a special Whisper setting
designed to make soft sounds more audible
like rain falling or a person calling from another
room.
Wireless FM and in-built telecoil: An in-built
telecoil allows you to use the telephone with no
additional attachments. The wireless FM provides
access to sound in a variety of settings including
cinemas, museums, meetings, classrooms, and
wherever an FM system is in place for hearing-
impaired participants. No additional cables are
necessary.
The only pre-curved (contoured) electrode
array on the market: The Nucleus® 24 Contour™
implant is the rst implant choice for surgeons.
It features a pre-curved electrode array, which
has two important benefits: 1) The curve of the
array puts the electrodes as close as possible to
the hearing fibers in the cochlea to allow for the
distinct sound. 2) The pre-curved shape of the
array matches the shape of the cochlea, which
helps to protect its delicate structure.
Titanium implant casing for best reliability:
Nucleus® implants are durable and reliable and
are made from Titanium. The Nucleus 24 Contour
has never fractured on impact. Nucleus is built for
a lifetime of use.
Removable magnet for safe MRI: Nucleus is the
rst implant to feature the removable magnet for
MRI. This allows recipients to have a full-strength
MRI if they require one.1
Exhibit 1 How the Nucleus® 3 system works
1 A directional microphone picks up sound.
2 Sound is sent from the microphone to the speech processor.
3 The speech processor analyses and digitises the sound into coded
signals.
4 Coded signals are sent to the transmitter via radio frequency.
5 The transmitter sends the code across the skin to the internal
implant.
6 The internal implant converts the code to electrical signals.
7 The signals are sent to the electrodes to stimulate the remaining
nerve fibres.
8 The signals are recognised as sounds by the brain, producing a
hearing sensation.
Case 1 • Hearing with the aid of implanted technology: Cochlear C-21
Cochlear, the company
The history of Cochlear’s Nucleus® device goes back to
1967, when Graeme Clark started research on multi-
channel cochlear implants. In 1978, Professor Clark
implanted Rodney Saunders with a multi-channel
cochlear device, and by 1982 a 22-channel device
was implanted in Graham Carrick. (The more chan-
nels, basically, the better the hearing.) In 1985 the
22-channel Nucleus device was approved by the FDA
for use in adults, and in 1990 for use in children. By
1998, 10 000 children had been implanted, and by
2001 more than 36 000 adults and children had been
implanted.2
Cochlear’s technology has kept improving, and
each component improvement improves the overall
system. In 2003 the company announced a further
signicant improvement to its basic product: the
Nucleus® 24 Contour Advance™ was designed to
minimise trauma to the delicate cochlear structures
during implant surgery. It also developed a new Micro-
Link Adaptor for use with the speech processor and
receiver. (This was a product of the alliance Cochlear
has with European technology rm Phonok AG.) In
recent years the company has continually enhanced
the capacity, and further minimised the size, of its
Nucleus devices. Cochlear has won many awards for
innovation for example, the Medical Design Excel-
lence Award in 2001 (an internationally prestigious
achievement).
The 2002/03 nancial year also included a record
result nancially. Profit after tax increased by 45 per
cent to A$58.2 million and earnings per share were
up 44 per cent. There were also record unit sales, up
Exhibit 2 Statement of financial performance
Cochlear Limited and its controlled entities for the year ended 30 June 2003
Consolidated Company
2003
$000
2002
$000
2003
$000
2002
$000
Revenue from ordinary activities 290 045 256 201 205 044 187 752
Expenses 209 239 204 021 131 110 136 448
Borrowing costs 796 1 150 153 195
Profit from ordinary activities before related income tax expense 80 010 51 030 73 781 51 109
Income tax expense relating to ordinary activities 21 797 10 920 19 892 11 952
Net profit attributable to members of the parent entity 58 213 40 110 53 889 39 157
Non-owner transaction changes in equity
T
ranslation adjustment in general reserve (8) 3
Net (decrease)/increase in retained profits on the initial adoption of:
Revised AASB 1028, ‘Employee Benefits’ (116) (90)
AASB 1044, ‘Provisions, Contingent Liabilities and Contingent Assets’ 311 2 411
Net exchange difference relating to self-sustaining foreign operations (4 737) 2 507
Total changes in equity from non-owner related transactions
attributable to the members of the parent entity 53 663 42 620 56 210 39 157
Basic earnings per share (cents)
Ordinary shares 110.0 76.6
Diluted earnings per share (cents)
Ordinary shares 110.0 76.6
C-22 Case 1 • Hearing with the aid of implanted technology: Cochlear
19 per cent on the previous year. Sales in the United
States were strong; in Europe they were steady; and
in Asia there was strong growth before the SARS out-
break of 2002 affected the market. Some 9328 devices
were sold during the nancial year, and at A$50 000
for lifetime care this indicated a very good year. It
took Cochlear 20 years to sell 30 000 systems, but in
the last couple of years it has sold another 20 000.3
Exhibit 2 shows the statement of nancial perfor-
mance for the 2002/03 financial year.
Cochlear’s manufacturing facilities are world class
and have had repeated upgrades in order to maintain
this status.
The rm is very focused on R&D and devotes
15 per cent of total revenue to research. As well as
220 research staff, it has major long-term research
links with the CRC (Co-operative Research Centre)
for Cochlear Implant and Hearing Aid Innovation in
Melbourne, as well as with the University of Melb-
ourne itself. In addition, Cochlear has collaborative
research arrangements with 90 other partners in 35
countries.4
The organisation is very determined to maintain
excellent links with implant recipients and the sur-
geons and audiologists that work with them. In 2002,
70 surgeons attended the Sydney facility through
Cochlear’s ongoing visiting surgeon program.
Cochlear has 630 staff in 70 countries. It has an
excellent training system for new staff. For exam-
ple, in 2002, 43 new staff attended the Sydney head-
quarters for intensive training in the technology of
implants and all aspects of the implantation process,
including surgery. Cochlear is proud of the ethnic
diversity of its staff the Sydney ofce includes staff
from 60 nations.
The board is made up of eight independent non-
executive directors, the CEO, and one other execu-
tive director. Cochlear has a great committee system
and all meetings are well documented. In September
2002, Cochlear was named in the top three Australian
companies for best corporate governance by Investor
Relations Magazine.
The external world for the
industry
Hearing impairment
Hearing impairment ranges from mild to profound,
and some people can hear some frequencies but not
others. Mild hearing loss means that people can hear
in quiet, one-to-one, situations but have problems in
noisy environments such as cafés and bars. At the
moderate level of loss, people nd difculty in hear-
ing normal speech at any distance over a metre and
are unlikely to hear well in crowded social situations.
Profound hearing loss means that a person cannot
hear a normal speaking voice or normal sounds. They
may be helped by hearing aids, but tend to rely heav-
ily on speech reading or sign language. Those with
high-frequency loss (often caused by exposure to loud
noises) can hear the person speaking but have dif-
culty hearing all the sounds. For example, the higher-
pitched consonants such as P, S, F and CH may be
confused, so ‘sun’ may be heard as ‘fun’ or ‘patheard
as ‘sat.5
The market for cochlear devices is the pro-
foundly deaf. The number of such people is diffi-
cult to determine. The UK National Deaf Children’s
Society (NDCS) suggests that one in 1000 children
are born with severe/profound hearing problems.6
The (Australian) Bionic Ear Institute estimates the
potential market in the West plus Japan as 3 million
devices. In China, there are possibly 35 000 people
born each year who would benefit from the device.7
Even when discounted for unwillingness to risk the
operation or lack of money, the numbers are huge.
The companies competing in the industry concen-
trate on the United States and European markets and
have barely penetrated the wider global market.
The political/legal environment
The cochlear industry is part of the general medical
technology industry. Regulation is therefore signi-
cant and the US Food and Drug Administration is
Case 1 • Hearing with the aid of implanted technology: Cochlear C-23
the most significant regulator because its findings
have weight worldwide. The FDA must approve new
devices before they can be sold in the United States.
The FDA was also the initiator of the 2002 meningitis
scare, which affected the whole industry.
The global aspect
The cochlear market has gradually expanded beyond
Australia, the United States and Europe. Cochlear
itself established its European ofces in 1987 and
an office in Japan and Hong Kong in the 1990s,
while China was a major target in 2001. Cochlear
devices are now sold in more than 60 nations. Given
that profound deafness is a problem globally, it can
be expected that the global market will continue to
expand.
Economics and cochlear devices
Cochlear devices cost around A$50 000 for a life-
time service.8 Demand worldwide therefore comes
from relatively affluent individuals, medical insur-
ance companies and government organisations. It is
possibly limited in poorer nations. However, within
the OECD the middle to upper income groups are
increasingly prosperous and these people are a poten-
tial market without government help. On the other
hand, medical and insurance systems are gradually
coming under increasing pressure as government tax
incomes struggle to cope with competing demands for
health, education and welfare services.9
In 2003 the global economy was expected to take
an upturn, while Australia continued a phase of con-
tinued prosperity and Europe and the United States
were basically stable in economic terms.
The meningitis crisis in the
Cochlear implant industry
On 24 July 2002 the FDA issued a notication that it
had reports of a link between cochlear implants and
bacterial meningitis (a potentially fatal infection of
the lining of the surface of the brain). There were 43
such cases and 11 people died. There were reports that
implants had been withdrawn from sale in Germany,
France and Spain. On 25 July the FDA updated its
warning and said it had now learned of 118 cases.10
Cochlear responded to the crisis quickly. Graeme
Clark claimed that the infection was related to a
design change by their competitor, Advanced Bionics,
that created ‘dead space’ within the ear, thus provid-
ing a home for bacteria. Professor Clark commented
that, It is a very great problem of engineers per se
designing something without due recourse to biolo-
gists and medical people.11 Advanced Bionics tempo-
rarily withdrew its product from sale.
The neuro-technology industry (the generic
industry for implantable devices) bulletin commented
on this scare: ‘One side benefit of the relative lack
of media exposure that the neural prosthesis industry
receives is that this crisis has not gained the inten-
sive public scrutiny that has greeted other industries
when confronted with unattering data or allega-
tions.12 The scare nevertheless received significant
media attention and Cochlear’s share price dropped
sharply. Advanced Bionics advanced a reputation for
crisis management with its suspension from sales and
detailed explanations of problems to its stakeholders.
The meningitis scare has had a long-term ripple
effect on the industry, and doubt remains despite a
climb in share prices to those similar to levels prior
to the scare. The deaf community and the medical
profession have an ongoing debate about cochlear
implants. For example, Blake Papsin, the director of
the Cochlear implant program in Toronto, Canada,
in early 2003, said:
In coming to terms with the relation between
cochlear implants and meningitis, we should not
lose sight of the benefit of this technology. For
many children, the cochlear implant is a marvel
that has allowed them to attain or regain hearing
and speech. The growing number of candidates
for cochlear implants, at least in Canada centres,
reflects a conservative application of this technology
based on the responsible evaluation of outcomes.13
This debate simmers in deaf culture. It is made
more complex by advances in other areas of neuro-
technology that are leading to useful devices such
C-24 Case 1 • Hearing with the aid of implanted technology: Cochlear
as articial sight. In addition, the increasing accep-
tance of altered body technology may impact on the
cochlear industry: many now feel it is normal to alter
body parts by surgery for example, with pectoral
enhancement or breast enlargement and this could
affect the ‘normality of a cochlear implant in the
wider (as distinct from deaf) culture.
Debate about the idea of
Cochlear implants in the
deaf community
The background to a vigorous debate about the
active benefits of a cochlear implant is encapsulated
in a 2002 letter from Robert Adam, President of the
Australian Association of the Deaf:
The truth is obvious: a cochlear implant is not a
cure for deafness. Let me expand on this a little.
The Royal Institute for the deaf in the UK has a
fact sheet which mirrors the Australian Association
of the Deaf’s view succinctly: A child with an
implant will still be profoundly deaf when not
wearing the implant. When wearing the implant,
the child will be considered hard of hearing, or
severely deaf, in the sense that a person with a
hearing aid is described as hard of hearing.
The deaf culture is not just about a language
– it is also about community, history and art. Like
many minority cultures, there is a strong tradition
of stories and folklore that is passed on from one
generation to the next. There have been many
captivating and moving stories about the way deaf
people lived in the past and about how deaf culture
has endured despite attempts to ‘cure’ deafness.14
In 2000 in the United States the debate was high-
lighted by a film documentary called Sound and Fury,
which portrayed the Artinian family. The father,
Pete, is deaf and has three deaf children. His family
includes brother Chris and his wife Mari. They had a
deaf baby and decided to have an implant. Pete and his
wife Nita, leading anti-implant campaigners, object-
ed but were then astonished when their own daughter
requested an implant. Pete and Nita were afraid that
their daughter would lose contact with deaf culture if
she had an implant, so they decided to move to a more
deaf-culture-oriented community. This complex fam-
ily drama appealed to the US media, and the idea of a
deaf culture contrasted with the benefits of cochlear
implants became a subject of general debate.
In 2003 the tenor of the debate in the United States
changed with the entry of Miss USA 1995, Heather
Whitestone McCallum. She became profoundly deaf
in infancy and had an implant in 2002. She then
sprang into action, lobbying federal politicians for the
industry, appearing on top-rating television shows,
such as Good Morning America, and appearing in
print media such as the bestselling USA Today. She
has been credited with helping to change the US gov-
ernments mind on cochlear support: the government
had been talking in 2002 of reducing funding for the
implant procedure but ended up increasing it.15
Competitors in the
industry
Advanced Bionics is a private US company founded
in 1993, which is dedicated to the development of
neuron-stimulation products – implantable devices
that direct electrical impulses to nerves and muscles.
The chairman, Alfred Mann, says the company aims
to ‘enable the deaf to hear, the blind to see, and the
lame to walk. The company originated when Dr
Robert Schindler from the University of California’s
San Francisco cochlear program approached Mann
for funding. Mann was already highly successful in
implantable devices, the founder of a major heart
pacemaker company (Pacemaker Systems) and high-
tech wearable insulin-delivering pumps (MiniMed).
In 2003 the Alfred Mann Foundation (Mann’s phil-
anthropic research organisation) was working with
Robert Greenberg, the CEO of Mann’s company
Second Sight, a company devoted to the development
of implants to enable vision. The implants would
enable people with retinal disintegration to see.
Greenberg claimed in 2003 that three people have
been implanted and that the results were ‘pleasing’.16
Advanced Bioniocs has developed and sold the Clar-
ion cochlear implant. This had, in 2002, about 15 per
cent of the US market.
Case 1 • Hearing with the aid of implanted technology: Cochlear C-25
AllHear Inc. Designs
This company manufactures and sells cochlear
implants. The founder, Dr William House, produced
a cochlear device in 1984 in conjunction with the 3M
Corporation, one of the world’s leading innovation-
driven corporations. The AllHear cochlear implant
is unique because it uses a single short electrode that
apparently does not destroy residue of hearing.17 In
2003, AllHear’s cochlear implants were not approved
by the FDA for general sale in the United States.
Med-El
Med-El produces the COMBI-40+ cochlear implant
system. It has collaborative arrangements with a
range of universities. Med-El has eight subsidiaries
and nine service centres throughout the world. It is a
fierce competitor.
Back to Cochlear, the
company
The previous CEO, Jack Mahoney, was a successful
leader after succeeding the well-known Catherine Liv-
ingstone in 2001. He delivered on ambitious growth
and profit targets in 2002/03. He received a pack-
age in 2002 worth $1.8 million, including a $416 845
performance-based bonus and had $100 000 in stock
options, which remained unaffected by the new plan.
In late 2003 he announced his resignation and
a new CEO, Chris Roberts, took over in February
2004. Roberts faced the classic challenges of the new
CEO of a reasonably successful company how to
continue a record of advancing sales, profits and inno-
vation. In addition, he must cope with the competi-
tion and the social and medical issues that threaten
the industry. Roberts had been CEO of ResMed, an
Australian company that makes and innovates in sleep
apnoea products. (Sleep apnoea is a condition where
a person’s airways become blocked, often as a result
of being overweight, causing them to wake up, some-
times many times a night. It is a good area for busi-
ness, as cases of apnoea are on the increase. ResMed
is number one in Europe for these products.
Soon after Roberts took over at Cochlear, the
share price dropped by 30 per cent. The European
markets were worse than expected, and the American
market was tight because the federal health budget
was tighter, and the major competitor in the United
States, Advanced Bionics, had been rejuvenated.
Cochlear is still the market leader, but its competitors
are coming on strong.18
What strategies do you suggest CEO Chris Roberts
use to achieve his aims?
Notes
1 www.cochlear.com.
2 Ibid.
3 N. Gluyas, ‘Cochlear’, The Australian, 1 December 2003.
4 www.cochlear.com.
5 Australian Association of the Deaf, 2003.
6 NDCS, 2003.
7 Gluyas, ‘Cochlear’.
8 Ibid.
9 OECD, 2002.
10 www.lieffcabrasser.com/cochlear.htm.
11 Quoted in ibid.
12 Neurotech Business Report, August 2003.
13 MAT, accessed on www.cmaj.ca.
14 Herald-Sun, 26 March 2002.
15 Australian Financial Review, 20 August 2003.
16 www.healthyhearing.com.
17 Ibid.; www.allhear.com.
18 B. Foley, 2004, ‘Cochlear needs a good doctor’, Australian
Financial Review, 4 February, p. 21.
C-26
Case 2
The Australian retail wars:
Coles Myer and Woolworths battle for
brand value
Mark Wickham Dallas Hanson
University of Tasmania University of Tasmania
Introduction
Throughout the 1990s, the chronic poor performance
of Australia’s largest food and ‘general merchan-
dise’ retail rms, Coles Myer and Woolworths, led
analysts and investors alike to abandon their shares
in droves. Both chains were dogged by underperform-
ing divisions, global economic uncertainty, and a
lack of strategic vision perceived as endemic to the
sector. Since 2000, however, both companies have
managed to implement significant strategic changes
to their business operations, and by 2003 had once
again found favour with the investment community.
The strategic changes have included diversication
into new retailing sectors such as petrol and credit
cards, the restructuring of their supply chain logis-
tics, and the advancement of their information tech-
nology capabilities. Each move has been greeted with
increased earnings and the associated investor opti-
mism, although the question remains as to how Coles
Myer and Woolworths can continue to deliver the
outstanding results of 2003 in an uncertain economic
future.
The Australian ‘food’ and
‘general merchandise’
retail sectors, 1996–2002
Despite the global economic decline experienced since
the Asian financial crisis of 1997/98, and the economic
and social shocks of the World Trade Center attacks in
2001, the Australian retailing sector has experienced
robust year-on-year growth since 1995/96. Exhibit 1
indicates the robust nature of Australian retail spend-
ing during this period. The strength of Australia’s
retail spending has been attributed to relatively high
consumer and business confidence, relatively low offi-
cial interest rates and stable employment levels.1 The
food and general merchandise retail sectors have con-
tributed significantly to Australia’s retailing success
story, and closely reflect the success, and dominance,
of Coles Myer’s and Woolworths’ branding strategies
since 2000. Coles Myer’s and Woolworths’ domina-
tion of the food and general merchandise sectors is
reflected by their combined revenues, which in the
nancial year ended 2003 accounted for close to 80
per cent of the sector’s total.2
Case 2 The Australian retail wars: Coles Myer and Woolworths C-27
Exhibit 1 Australian retail sales figures, 1995/96–2001/02
Food
retailing
General
merchandise
Clothing
and soft
goods
retailing
Household
goods
retailing
Recreational
goods
retailing
Other
retailing
Hospitality
and services Total
$mn $mn $mn $mn $mn $mn $mn $mn
1995/96 57 996 12 315 8 882 12 591 7 623 12 307 25 002 135 885
1996/97 58 406 12 241 8 758 13 795 7 251 12 742 23 603 136 411
1997/98 60 453 12 593 8 989 14 314 7 391 13 835 23 965 141 220
1998 /99 61 482 12 994 10 068 14 717 7 492 14 639 26 007 147 081
1999/00 62 218 13 768 10 781 17 344 7 612 15 863 27 363 154 884
2000 /01 62 004 13 140 10 213 17 972 7 310 17 020 27 563 155 222
2001/02 63 340 13 714 11 005 20 554 7 393 18 785 25 584 163 374
Source: Commsec.
The best of times: A tale of
two retailers
The Australian food retailing industry consists of
a virtual duopoly between Coles Myer and Wool-
worths. The combined sales of the two retail giants
exceed A$55 billion, and provide employment for
some 300 000 workers.3 The Coles Myer empire was
established in 1985 with Coles’ acquisition of Grace
Brothers, and by 2003 consisted of 14 distinct busi-
ness units spanning both the food and general mer-
chandise retailing sectors. In its food division are the
Coles Supermarket chain of stores, its Bi-Lo discount
supermarkets, and the Internet-based Coles Online
and Shopfast Online. In its general merchandise divi-
sion are the Myer’s Grace Brothers department store,
the Megamart chain of electrical and furniture retail-
ers, the Target department stores, Kmart’s cut-price
department store, the OfceWorks chain and Harris
Technology. Recently, the company also launched its
Coles Express stores, which merchandise a limited
range of grocery items from selected petrol stations
in Victoria.4
In 2003, the Woolworths retailing empire con-
sisted of three food and four general merchandise
businesses. Woolworths’ food businesses included
their Woolworths and Safeway supermarkets, and the
BWS (Beer, Wines and Spirits) chain of liquor outlets.
Its general merchandise businesses include the Big W
chain of discount department stores, the Dick Smith
chain of electronic equipment stores, the Tandy chain
of electrical merchandise stores, and the Plus Petrol
service stations.5
Despite the fact that Coles Myer remains the coun-
trys largest food retailer, its growth year on year lags
behind that of Woolworths, which has delivered 22
per cent increases in its earnings for the period 2000
to 2002. Coles Myer, on the other hand, has achieved
growth rates that are commensurate with CPI increas-
es, and has tended to play ‘catch-up retailing’ on
everything from supply chain management to fuel dis-
counts. One strategy that Coles Myer uses that acts as
a real point of difference in the supermarket game is
its concentration on the development of house brands
(that is, its Coles, Reliance and Farmland brands).
Currently, house brands account for approximately
8 per cent of Coles Myer’s store-keeping units (SKUs),
with the company planning to increase these to 15
per cent over the next three years. Woolworths, on
the other hand, is concentrating on the promotion of
everyday low price (EDLP) points for well-established
national brands, a strategy that it borrowed heavi-
ly from the success of the Wal-Mart chain of stores
in the United States.6 By taking on the demonstra-
bly successful aspects of Wal-Marts EDLP strategy,
Woolworths has turned around its loss-making gen-
eral merchandise operations and has streaked ahead
of its major competitors.7 In particular, Woolworths’
EDLP has worked well in its Big W chain, where it has
C-28 Case 2 • The Australian retail wars: Coles Myer and Woolworths
proven to be a competitive advantage against Coles’
Kmart and Target divisions, which maintained a
‘high–low’ pricing strategy.8
A question of leadership
and strategy
Despite the multi-point competition that exists
between the two companies, their leadership could
not be any more divergent. In September 2001, and
without any prior experience in the industry, John
Fletcher was appointed as the chief executive ofcer
of Australia’s largest retailer, Coles Myer Ltd. Before
his appointment at Coles Myer, Fletcher spent almost
his entire professional career at Brambles Industries,
a resource sector rm that supplied on- and off-site
logistics for mining companies operating in Austra-
lia.9 Early in his career, Fletcher was charged with
accounting responsibilities at Brambles, but his man-
agerial skills were soon recognised and developed by
the company, who promoted him to CEO in 1993. By
comparison, Roger Corbett, the CEO of Woolworths
Ltd, has been involved in the Australian retail indus-
try for more than 30 years, initially working as a ser-
vice assistant for Grace Brothers in the 1960s, which,
ironically, became part of the Coles Myer empire in
1985. Corbett has also been heavily involved with the
management of the Wal-Mart chain of supermarket
and general merchandise stores in the United States,
where he has attended annual general meetings and
other pivotal strategy meetings. It was from this inter-
action that Corbett adopted the Australian version of
the EDLP strategy that has to date been highly valu-
able for the Woolworths business.10
Fletcher assumed the CEO position at Coles Myer
during a very interesting time for the company. Aside
from its supermarket division, which had experi-
enced strong growth since Dennis Eck took control
in the mid-1990s, the remainder of the group was
dogged by well-documented, and seemingly chronic,
underperformance. In addition, Fletcher’s arrival was
met with a series of boardroom upheavals and the
culmination of years of shareholder discontent.11 The
eight years’ experience at the helm of one of Australia’s
largest resource companies between 1993 and 2001,
however, did little to prepare him for the tumultuous
period that he would endure at Coles Myer during
2002, a year that he was to describe as ‘as tough as
any year that I have had in my professional life’. At the
same time, Roger Corbett was enjoying a third consec-
utive year-on-year profit growth of approximately 10
per cent, and had plans to acquire the Franklins’ chain
of supermarkets to further its growth ambitions. The
source of Woolworths’ much-heralded performance
has been attributed to Corbett’s implementation of
a strategy named Project Refresh’ in 1999. Project
Refresh sought to restructure the company’s supply
chain, and to introduce new technology and the new
EDLP structure to its supermarkets. Added to this
was its successful foray into the petrol-retailing sector
in 1997 (a strategy that drew no competitive response
from Coles Myer at the time), which resulted in Wool-
worths capturing valuable market share points from
Coles Supermarkets between 1999 and 2002. By the
end of 2002, the Australian food and general mer-
chandise retail sectors were valued at approximately
$75 billion, and Woolworths had managed to cap-
ture 40 per cent compared with Coles’ 36 per cent, a
fact reflected in Woolworths’ share price which had
grown from $4.20 in 1999 to $13 in 2002. Coles’
share price during the same period had fallen from
$9 to $6.
2003: The Coles Myer
empire strikes back
After indications that the Coles Myer empire might be
broken into its constituent ‘parts’ due to the chronic
underperformance of a number of its divisions,12 John
Fletcher instead announced a bold plan to confront
Woolworths head-on in the war for corporate brand
value in early 2003. The corporate brand ‘battles’ had
been comprehensively won by Woolworths between
1997 and 2002, with the company achieving 400 per
cent sales growth on their multi-point direct compe-
tition items during this time. Woolworths had also
managed to position itself as The Fresh Food People
during this period, a marketing triumph not matched
by the Coles Myer food retailers. In response to Coles
Myer’s relatively poor performance and its ‘second
mover status in the food and general merchandise
sectors, Fletcher promised his shareholders that by
Case 2 The Australian retail wars: Coles Myer and Woolworths C-29
2007, Coles Myer would become the leaders of retail-
market innovation and value, and double the com-
panys profit levels achieved in 2003. The first broad-
side in this ‘battle of the brands’ was to occur early
in 2003 in the liquor segment of the food-retailing
sector.
In April 2003, Coles Myer announced that it had
acquired the Theo’s chain of ‘premium’ liquor out-
lets located in Sydney and Melbourne. Woolworths
had already been in control of the Cheaper Liquor
Company in various states, but had not been involved
with this premium end of the market. Almost imme-
diately, Woolworths undertook a similar acquisition
of the Dan Murphy’s franchise (for a reported $260
million), also located in Sydney and Melbourne.13 The
move almost immediately resulted in the reduction
of prices charged by both outlets. Coles Myer had
acquired Theo’s as a real point of difference between
the two companies’ offerings; however, Woolworths’
implementation of its EDLP strategy forced Coles
Myer to similarly cut its prices as a competitive neces-
sity. Woolworths’ ability to minimise its supply chain
costs (a benefit of the four-year-old Project Refresh
strategy) enabled the company to maintain greater
margins in this price war than Coles Myer could man-
age, a fact reflected in the two companies’ 2002/03
nancial reports (see Exhibit 2 later in this case).
In May 2003, some six years after Woolworths’
initial foray into the retail petrol sector had seen it
capture 11 per cent of the market, Coles Myer agreed
to pay $94 million to Shell Petroleum for the right to
operate its own petrol discount chain in 584 of Shell’s
service stations. The alliance between the two compa-
nies was negotiated on the understanding that the
relationship would last for 20 years. Up until this
point, Coles Myer had undertaken a token competi-
tive response to Woolworths’ 1997 Plus Petrol scheme
by offering its customers discount vouchers to the
Mobil chain of petrol retailers. The problem with this
initial response was that, unlike Woolworths’ Plus
Petrol stations, which were located in close proximity
to its stores, the ColesMobil discount offer did not
allow the customer to ‘cash in’ on the value-adding
offer at the point of purchase. Of the company’s even-
tual strategic move into retail petrol, Fletcher stated:
‘Coles [does] not want a price war, but will react to
Woolworths’ pricing in this market.14 In response to
this competitive action, Woolworths reversed its long-
running ‘house-brand’ fuel strategy by unveiling an
equity joint venture with the Caltex franchise of petrol
retailers in August 2003 a move that closely
mimicked Coles Myers alliance with Shell. The equi-
ty joint venture was the company’s response to the
ColesShell alliance, a move that the company had
widely criticised at its launch in July 2003.15 In line
with the announcement was a commitment by the
company to wind down its home brand Plus Petrol
service stations in favour of re-branding them as
Caltex service stations.16 The deal with Caltex was to
add an additional 180 retail petrol outlets to Wool-
worths’ existing 287 Plus Petrol outlets. Essentially,
this move ensured that Woolworths would have 450
outlets in head-to-head competition with Coles Myers
580 outlets nation-wide.17 Roger Corbett claimed that
the joint venture with Caltex had nothing to do with
Coles Myer’s alliance with Shell, instead stating that
the strategy overcame the difficulties the company
was having in nding new retail outlet sites for its
growing Plus Petrol division.18
The new financial year 2003/04 began with two
important announcements from Fletcher. The rst
concerned a Coles Myer alliance with the Nation-
al Australia Bank to revamp the company’s long-
running Fly Buys reward program. The second was
the introduction of a major cost-cutting strategy that
mirrored Woolworths’ Project Refresh launched some
four years earlier. In July 2003, Coles Myer and the
National Australia Bank announced that they had
signed an agreement to revamp the Fly Buys loyalty
program to include a credit card facility. Jon Wood,
a senior Coles Myer executive, said that the enhance-
ment of the Fly Buys card was an important part of
Coles Myer’s strategy to provide a comprehensive and
valuable offer for all of its customers, especially given
the announcement that the company’s famous share-
holder discount card was to be discontinued. Of the
Fly Buys strategy, Wood stated: ‘Fly Buys is Austra-
lias largest loyalty program and we are moving to
put more value into the program for our customers.
Together with our partners at the National [Australia
Bank], we will be revamping the program to offer
more points, better rewards and other benefits.19
The replacement card was to be known as the Source
card, and included a credit facility that represented
C-30 Case 2 • The Australian retail wars: Coles Myer and Woolworths
Exhibit 2 Financial results for Woolworths Limited and Coles Myer Limited, 2001/02 and 2002/03
Woolworths financials
28 Coles Myer financials29
(A$ million) 2001/02 2002/03 2001/02 2002/03
Sales 25 239.4 26 321.4 25 688.7 27 016.6
Pre-tax profit 782.2 (3%) 906.0 (3.4%) 491.0 (1.9%) 617.2 (2.3%)
Net profit 564.4 (2.2%) 650.6 (2.5%) 353.8 (1.4%) 429.5 (1.6%)
EPS 50.2 58.1 26.1 32.2
Dividend 15.0 18.0 25.5 26.0
Sources: Commsec Securities Home Page, www.commsec.com.au.
Coles Myer’s initial foray into Australia’s $100 bil-
lion Capital Card Market (that is, credit cards). Coles
Myer already operates a loyalty card program that con-
sists of 1.7 million Coles Myer Card holders (a chain-
specic line of credit) but did not have the universal
usage capability. The company’s new Source credit
card meant that Coles Myer could differentiate itself
from Woolworths by offering a full credit card capa-
bility alongside a long-standing and valued rewards
program and a private label store credit card.
Fletchers second announcement was his inten-
tion to emulate the success of Woolworths’ Project
Refresh, a plan that would entail major cost-cutting
strategies within the company.20 Fletcher planned to
save up to $1 billion by making its 65 000 suppliers
shoulder more of its supply chain costs in a program
designed to close the performance gap with Wool-
worths. Fletcher intended to change the way Coles
Myer buys its $18 billion of merchandise by cutting
its stock on hand and by forcing its suppliers to move
to a just-in-time approach to delivery. The company
flagged to its employees that it intends to cut the num-
ber of its distribution centres from 41 to 24, and will
use improved technology to reduce costs and stream-
line deliveries to stores.21 Also part of this strategy
are plans to pressure its suppliers to adopt the same
IT systems that it uses in its warehouses and stores so
that it can build a more efcient e-trading platform.
Fletcher said that the company would invest between
$800 million and $900 million over the next ve years
as part of this cost-cutting strategy that is expected to
deliver benefits of $425 million a year from 2007/08
onwards.22
By August 2003, there was already some evidence
that Coles Myer’s strategies were bearing fruit for
Fletchers shareholders. Sales in the group lifted by
a substantial 6.1 per cent at $27 billion, marginally
ahead of Woolworths’ $26.3 billion. The stock mar-
ket also responded well to Fletchers performance,
with Coles Myer shares rising 29 per cent during the
year, while Woolworths’ shares remained steady.23
Still a concern for the company was the food and
liquor sales, which grew by only 1.5 per cent, as
opposed to Woolworths’ 5.4 per cent.24 The statistics
served to underline the competitive advantage that
Woolworths had over the Coles Myer empire. Exhibit
2 presents the economic results for both rms dur-
ing the 2002/03 nancial year. Despite the appar-
ent success of Coles Myer’s strategies in address-
ing its performance gap with Woolworths, Corbett
was confident that Woolworths would continue to
achieve its recent double-digit profit growth. Indeed,
despite Coles Myer’s seemingly effective strategis-
ing, the financial year ended 2003 witnessed Wool-
worths notching up its best annual result in five
years. The company’s 16.5 per cent increase in profit
to $610 million was powered by higher margins in
its supermarket, liquor, petrol and general merchan-
dise operations.25 Corbett also revealed that its cost
savings program, Project Refresh, had delivered the
promised savings to the company of some $1.7 billion
over the previous four years.26 Corbett announced
that the company would maintain its profit growth
forecasts of between 10 and 15 per cent for the
2003/04 financial year, despite the uncertain outlook
for the food and liquor divisions, and the increased
competition from Coles and the German outfit,
Aldi.27 Corbett stated that Woolworths’ strategy to
remain differentiated from Coles Myer while adding
greater value to their customers’ shopping experience
Case 2 The Australian retail wars: Coles Myer and Woolworths C-31
was of utmost importance in Australia’s retailing
industry, and agged a possible diversication into
the pharmaceutical market. In November 2003,
Corbett solidied this by announcing that Wool-
worths planned to open a number of fully stocked
pharmacies and ‘health and beauty stores’ in its super-
market chain.30
The challenge for both Fletcher and Corbett in
2004 centres on their ability to continue to add value
to their customers’ shopping experience while simul-
taneously maintaining shareholder returns. The ques-
tion, therefore, is how the two men might best strat-
egise for this result given the increasing market power
of the two dominant firms, and the multi-point com-
petitiveness inherent to their operations.
Notes
1 L. Schmidt and S. Lloyd, 2003, Monsters of retail’, Business
Review Weekly, 13–19 November, p. 38.
2 Ibid.
3 P. Switzer, 2003, ‘Call for codes to curb growth of retail giants’,
The Australian, 2 September, p. 29.
4 ‘Our brands’, 2003, Coles Myer Home Page, 10 November,
www.coles.com.au.
5 ‘Our brands’, 2003, Woolworths Home Page, 10 November,
www.woolworths.com.au.
6 Woolies and Coles both forging ahead’, Australian Financial
Review, 15 August, p. 76.
7 S. Mitchell, 2003, Roger Corbett’s other BIG W’, BOSS
Magazine, October.
8 N. Shoebridge, 2003, ‘Woolies stands by its low-price strategy’,
Australian Financial Review, 18 August, p. 45.
9 S. Evans, 2003, Coles targets $1 billion squeeze on suppliers’,
Australian Financial Review, September, p. 1.
10 Mitchell, ’Roger Corbett’s other Big W’.
11 S. Long, 2002, Mayhem in the Coles-Myer boardroom’, ABC
PM, 10 September.
12 R. Gluyas, 2002, Coles Myer break-up looms’, The Australian,
7 June, p. 19.
13 M. Westeld, 2003, Woolies squeezes rivals, suppliers’, The
Australian, 25 March, p. 19.
14 K. Jiminez, 2003, Coles in discount fuel link’, The Australian,
28 May, p. 21.
15 G. Elliott, 2003, Woolies ties up Caltex deal’, The Australian,
22 August, p. 17.
16 T. Hardcourt, 2003, Woolies changes tack and to Caltex’,
Australian Financial Review, 22 August, p. 56.
17 Elliott, ‘Woolies ties up Caltex deal’.
18 I. Howar th and S. Mitchell, 2003, Corbett defends petrol
strategy’, Australian Financial Review, 25 August, p. 14.
19 Coles Myer and National increase Fly Buys commitment’,
2003, National Australia Bank Home Page, 1 July, 11 November,
www.national.com.au.
20 Woolies and Coles both forging ahead’, p. 76.
21 CNN News Service, 2003, Australia’s biggest retailer Coles
Myer says a transformation of its supply chain will help its
prot goal of Aust. $ 800 million ($536 million) by 2006’,
25 September.
22 Ibid.
23 S. Mitchell, 2003, ‘Woolies vows to beat Coles threat’,
Australian Financial Review, 26 August, p. 1.
24 S. Evans, 2003, ‘Sales rise lifts Coles prot’, Australian Financial
Review, 15 August, p. 55.
25 Mitchell, ‘Woolies vows to beat Coles threat, p. 1.
26 Ibid.
27 Ibid.
28 Woolworths Home Page, www.woolworths.com.au.
29 ‘Corporate Report 2002–03’, 2003, Coles Myer Home Page,
10 November, http://corporate.colesmyer.com.au.
30 Schmidt and Lloyd, ‘Monsters of retail’, p. 38.
C-32
Case 3
eBay.com*:
Profitably managing growth from
start-up to 2000
Dale Pudney Marius van der Merwe Gary J. Stockport
University of Cape Town University of Cape Town University of Western Australia
* This case study was written by Dale Pudney and Marius van der Merwe, MBA students at the University of Cape Town, under the supervision of
Professor Gary J. Stockport, Graduate School of Management, University of Western Australia. It is intended to be used as the basis for class discussion
rather than to illustrate either effective or ineffective handling of a management situation.
This case was compiled from published sources.
© 2001 G. J. Stockport, University of Western Australia, Perth, Australia.
Introduction
It was 21 November 2000, and Meg Whitman was
considering the events of the last few days. As the
chief executive ofcer (CEO), she had led eBay.com
to its position as the world’s largest person-to-person
(P2P) trading community, but the share price had just
fallen 20 per cent to US$34.75 when eBay’s share was
downgraded from a ‘buy’ to a ‘neutral’ by Lehman
Brothers, a global investment bank, because of con-
cerns over eBay’s aggressive sales forecasts. The pre-
vious day, eBay had announced the launch of a new
product, application programming interface software
that would enable other web companies to display
eBay auctions on their sites.
The company had experienced explosive growth
from start-up when the founder and current chair-
man, Pierre Omidyar, launched eBay in September
1995. While most e-commerce companies were mak-
ing significant losses by spending aggressively to build
their customer and revenue bases, eBay had remained
profitable since the beginning. In the three-month
period to September 2000, US$1.4 billion worth of
goods were transacted on eBay, with items listed in
more than 4320 categories. The company had 18.9
million registered users at the end of the period and
had captured over 80 per cent of the on-line auction
market with its closest competitors being Yahoo! and
Amazon.com.
Background to eBay
Pierre Omidyar
Pierre Omidyar was born in Paris, France in 1967 and
moved to Washington, DC in the United States with
his parents at the age of six. From an early age he was
interested in computers and he wrote a program to
print catalogue cards for the school library at the age
of 14. In 1988, he graduated with a Bachelor’s degree
in Computer Science from Tufts University. He ini-
tially worked as a developer of consumer application
Case 3 • eBay.com C-33
software such as MacDraw, for Claris, a software
subsidiary of Apple Computer. In 1991, he was one of
the founders of Ink Development, which later became
eShop, an early e-commerce site that was bought by
Microsoft in 1996.
Person-to-person (P2P) trading
prior to 1995
In traditional P2P trading forums, it is sometimes dif-
ficult for buyers to find pricing benchmarks to ensure
that the prices that they pay correspond to the proper
value of the item. It was estimated that in 1995,
US$100 billion was traded annually in the following
forums:
Newspaper classifieds: Users listed items that
were for sale or wanted, normally in locally
distributed newspapers. The classifieds
typically generated more than 50 per cent of
local newspapers’ revenues from listing fees.
The buyers usually inspected the items before
purchasing and may have collected and paid
for the items in person. As a consequence of the
proximity of buyers and sellers, the items could
have been larger items that were difficult to
transport over long distances.
Flea markets and garage sales: Sellers stocked
items for sale either at their homes or at
organised markets. Buyers were typically
looking for bargains or interesting artefacts. The
buyers were able to inspect the items and needed
to pay for them before they could collect.
Auction houses: Sellers took items that were
for sale to auction houses where buyers could
inspect them before the auction. Buyers needed
to pay a registration fee in order to bid and were
required to be at the auction or have a proxy
bidder. The highest bidder won the auction and
normally paid the auction house. The auction
house typically deducted a percentage of the sale
price and paid the balance to the seller.
The opportunity
In the early 1990s, Silicon Valley was quickly turning
its attention away from electronics manufacturers
towards new Internet-based start-ups that married
existing technology to new business models. Internet
usage growth and the provision of the infrastructure
required to ensure acceptable data transmission speeds
were, however, uncertain. Analysts were also unsure
whether people would purchase goods of value from
distant strangers without seeing them beforehand.
Omidyar was writing code for communications-
software maker General Magic in 1995 when he
started to think about the possibility of on-line
auctions. He said the following about his idea:
I had been thinking about how to create an
efcient marketplace – a level playing field, where
everyone had access to the same information and
could compete on the same terms as everyone else.
Not just a site where big corporations sold stuff
to consumers and bombarded them with ads, but
rather one where people tradedwith each other
I thought, if you could bring enough people
together and let them pay whatever they thought
something was worth real values could be
realised and it could ultimately be a fairer system
– a win-win for buyers and sellers.1
Start-up in 1995
eBay (then AuctionWeb) was launched on Labour
Day, 1 September 1995, using a website that was
hosted by Omidyars US$30 per month Internet ser-
vice provider (ISP). The site was located at www.ebay.
com. The company operated from Omidyars apart-
ment with only the website, a ling cabinet, an old
school desk and a laptop computer. The site was not
much more than a simple marketplace where sellers
listed items and buyers bid for them. Omidyar made
no guarantees about the goods being sold, took no
responsibility and settled no disputes. There were no
fees, no registration, no search engine and, for the
rst month, no customers.
Omidyar’s only attempt at marketing was to list
eBay on the National Center for Supercomputing
Applications’ What’s Cool site. Despite this, so many
people visited the site that by February 1996 Omidyar
had to institute a fee of 10 cents per listing to recoup
the ISP costs which by then had risen to US$250 per
month. By the end of March 1996, eBay showed a
profit. Omidyar had kept his day job at General
Magic, but the traffic to the site became so intense
that he had to concentrate on eBay full-time and the
C-34 Case 3 • eBay.com
ISP asked him to take the site elsewhere. He there-
fore bought his own web server and installed it in his
apartment.
Omidyar developed software that was capable
of supporting a robust scalable website and transac-
tion processing system to provide real-time reporting
on the current auctions. The system was scalable to
reduce the initial investment but enabled expansions
when an increasing number of auctions demanded it.
By July 1996, Omidyar needed to move the
operation to a one-room ofce and hire a part-time
employee. The risks that the business faced at that
stage were substantial and with barriers to entry
being low there was nothing to stop the large Internet
players such as America Online (AOL) (ISP and Inter-
net portal), Amazon.com (on-line book retailer) and
Yahoo! (search engine and Internet portal) from
stealing the opportunity. As the business was based
on collectors’ items, changes in the current fads could
have affected the revenues signicantly. At one stage,
trading of Beanie Babies generated 7 per cent of eBay’s
revenues.
The business concept
Omidyar asked one of his friends, Jeff Skoll, to join the
company as its first president in August 1996 and his
role was to turn the concept into a business. He had
a Master’s in Business Administration (MBA) degree
Exhibit 1 Quarterly financial results and statistics
1998 1999 2000
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Financial data
Revenue
(’000) 13 998 19 480 21 731 30 930 42 801 49 479 58 525 73 919 85 753 97 399 113 377
Gross profit
(’000) 16 194 17 364 24 980 34 824 38 534 41 444 52 334 62 481 73 756 89 465
Gross margin
(%) 83.1 79.9 80.8 81.4 77.9 70.8 72.9 75.7 78.9
Operating
expenses (’000) 11 996 15 504 21 365 27 063 43 166 46 478 51 883 62 029 65 026 75 149
Net income
(’000) 2 279 461 2 639 3 765 816 1 186 4 895 6 288 11 590 15 211
Net profitability
(’000) 14.0 2.1 8.5 8.8 1.6 2.0 6.6 7.3 11.9 13.4
Registered users
(mn) 0.85 1.3 2.2 3.8 5.6 7.7 10.0 12.6 15.8 18.9
No. of auctions
(mn) 6.6 9.2 13.6 22.9 29.3 36.2 41.0 53.6 62.5 68.5
Growth (%)
Revenue (per
quarter) 39 12 42 38 16 18 26 16 14 16
Net income –83 472 43 –78 45 313 28 84 31
Registered users 53 69 73 47 38 30 26 25 20
No. of auctions 39 48 68 28 24 13 31 17 10
Auctions/
registered user 7.1 6.2 6.0 5.2 4.7 4.1 4.3 4.0 3.6
Revenue/auction 2.95 2.36 2.27 1.87 1.69 1.62 1.80 1.60 1.56 1.66
Notes: All figures in US dollars. Source: eBay financial statements.
The registered users figures include everyone who had ever registered on the site and does not reflect currently active users.
Growth figures are growth per quarter.
Revenue figures exclude refunds to sellers due to site outages.