TEST BANK for Strategic Management Concepts Competitiveness and Globalization 12th Edition
Chapter 01 Strategic Management and Strategic Competitiveness TRUEFALSE 1. Strategic competitiveness is achieved when a firm successfully formulates and implements a value-creating strategy. (A) True (B) False Answer : (A)
2. Alligator Enterprises has earned above-average returns since its founding five years ago. No other firm has challenged Alligator in its particular market niche; therefore, the firm's owners can feel secure that Alligator has established a competitive advantage. (A) True (B) False Answer : (B)
3. The goal of strategy implementation is to develop a permanent competitive advantage. (A) True (B) False Answer : (B)
4. Risk in terms of financial returns reflects an investor's uncertainty about economic gains or losses that will result from a particular investment. (A) True (B) False Answer : (A)
5. Average returns are those in excess of what an investor expects to earn from other investments with a similar amount of risk. (A) True (B) False
Answer : (B)
6. Above average returns are those in excess of what an investor expects to earn from other investments with similar stock prices. (A) True (B) False Answer : (A)
7. Returns can only be measured in accounting terms such as return on assets, return on equity, or return on sales. (A) True (B) False Answer : (B)
8. To implement a firm's strategies, the firm takes actions to with the goal of achieving strategic competitiveness and above average returns. (A) True (B) False Answer : (A)
9. Economies of scale and huge advertising budgets are just as effective in the new competitive landscape as they were in the past. (A) True (B) False Answer : (B)
10. The two primary drivers of hypercompetition are the emergence of the global economy and technology. (A) True (B) False Answer : (A)
11. The rate of technology diffusion has been steadily increasing over the last two decades.
(A) True (B) False Answer : (A)
12. While patents may be an effective way of protecting proprietary technology, many firms competing in the electronics industry do not apply for patents to prevent competitors from utilizing the technological knowledge that would be included in the patent application. (A) True (B) False Answer : (A)
13. Examples of incremental innovations include iPods, PDAs, Wi-Fi, and web browser software. (A) True (B) False Answer : (B)
14. The rapid rate of technological diffusion has increased the competitive benefits of patents. (A) True (B) False Answer : (B)
15. Developed countries still have major advantages in their access to information technology when compared to emerging economies because of the significant cost of the infrastructure needed for computing power. (A) True (B) False Answer : (B)
16. The rate of growth of Internet-based applications could be affected by strategies of Internet service providers charging users for downloading those applications. (A) True (B) False
Answer : (A)
17. The new CEO of Opacity Enterprises is determined to make the long-established firm strategically flexible. The CEO feels that the employees of the company have the ability, training, and resources to engage in continuous learning. The CEO must encourage ambidextrous learning, absorbing new knowledge and building incremental knowledge. (A) True (B) False Answer : (A)
18. The I/O (industrial organization) model assumes that the uniqueness of a firm's resources and capabilities is the main source of above-average returns. (A) True (B) False Answer : (B)
19. The CEO of Twin Spires, Inc., is committed to using the expertise and resources currently in the firm to serve the needs of the natural gardening community by providing rare and native plants to individuals and nurseries around the United States. The perspective of the CEO of Twin Spires is consistent with the assumptions of the industrial organization (I/O) model. (A) True (B) False Answer : (B)
20. The five forces model suggests that firms should target the industry with the highest potential for above-average returns and then implement either a cost-leadership strategy or a differentiation strategy. (A) True (B) False Answer : (A)
21. The uniqueness of a firm's resources and capabilities is the basis for a firm's strategy and determines its ability to earn above-average returns under the I/O view. (A) True (B) False
Answer : (A)
22. Research shows that a greater percentage of a firm's profitability is explained by the I/O rather than the resource-based model. (A) True (B) False Answer : (B)
23. The resource-based model assumes that firms must have resources that are rare or costly to imitate to form a basis for competitive advantage. (A) True (B) False Answer : (B)
24. Resources are considered rare when they have no structural equivalent. (A) True (B) False Answer : (B)
25. The assumptions of the industrial organization model and the resource-based model are contradictory. Therefore, organizational strategists must choose one or the other model as the basis for developing a strategic plan. (A) True (B) False Answer : (B)
26. An effective vision statement must specify the industry in which a company will operate. (A) True (B) False Answer : (B)
27. An effective vision stretches and challenges people and can result in increased innovation. This is illustrated by Apple's CEO Steve Jobs, who was known to think bigger and differently than most
people ("putting a dent in the universe"). (A) True (B) False Answer : (A)
28. Organizational mission statements typically do not include statements about profitability and earning above-average returns. (A) True (B) False Answer : (A)
29. A firm's mission tends to be enduring while its vision can change in light of changing environmental conditions. (A) True (B) False Answer : (B)
30. Organizational stakeholders are the firm's internal resources, capabilities, and core competencies that are used to accomplish what may appear to be unattainable goals in the competitive environment. (A) True (B) False Answer : (B)
31. If a firm is dependent on a specific stakeholder group, that group has less influence on the firm's strategic decision making. (A) True (B) False Answer : (B)
32. Relative power is the most critical element for prioritizing the demands of stakeholders. (A) True
(B) False Answer : (A)
33. Hourly workers on the production line of a chicken-processing plant are considered organizational stakeholders. (A) True (B) False Answer : (A)
34. Customers, suppliers, unions, and local governments are examples of capital market stakeholders. (A) True (B) False Answer : (B)
35. When a firm earns lower-than-average returns, the highest priority is given to satisfying the needs of capital market stakeholders over the needs of product market and organizational shareholders. (A) True (B) False Answer : (B)
36. Six years ago, Colette Smith founded a successful catering company that specializes in providing a wide assortment of miniature cheesecakes for corporate and social events. Although Ms. Smith is no longer active in the actual production of the cheesecakes, she continues as president of the catering company. Ms. Smith could be considered a strategic leader of this firm. (A) True (B) False Answer : (A)
37. Although organizational cultures vary considerably, one cannot make an objective judgment that some organizational cultures are more or less functional than others in terms of ethical considerations. (A) True
(B) False Answer : (B)
38. Strategic leaders must have a strong strategic orientation while embracing change in the dynamic competitive landscape. (A) True (B) False Answer : (A)
39. Corporate-level strategy in a diversified organization requires a common business strategy for each component business. (A) True (B) False Answer : (B)
40. An organization's willingness to tolerate or encourage unethical behavior is a reflection of its core values. (A) True (B) False Answer : (A)
MULTICHOICE 41. A firm has achieved ______ when it successfully formulates and implements a value-creating strategy. (A) strategic competitiveness (B) a permanently sustainable competitive advantage (C) substantial returns (D) legal and ethical core values Answer : (A)
42. A competitive advantage:
(A) can be permanent if the firm has successfully implemented the strategic management process. (B) entails reducing investors' risk to near zero. (C) can be identified when competitors are unable to duplicate or find it too costly to try to imitate. (D) exists when competing firms are unable to find investors. Answer : (C)
43. Above-average returns are; (A) higher profits than the firm earned the previous year. (B) higher profits than the industry averaged over the last 10 years. (C) profits in excess of what an investor expects to earn from a historical pattern of performance of the firm. (D) returns in excess of what an investor expects to earn from other investments with a similar level of risk. Answer : (D)
44. The strategic management process is; (A) a set of activities that will assure a sustainable competitive advantage and above-average returns for the firm. (B) a decision-making activity concerned with a firm's internal resources, capabilities, and competencies, independent of the conditions in its external environment. (C) a process directed by top-management with input from other stakeholders that seeks to achieve above-average returns for investors through effective use of the organization's resources. (D) the formulation and implementation of a full set of commitments, decisions, and actions required for the firm to achieve above-average returns and strategic competitiveness. Answer : (D)
45. According to Hitt, the primary drivers of hypercompetition are: (A) rising global socio-economic instability and increased inflation. (B) the emergence of a global economy and rapid technological change. (C) increased global competition and decreased tariffs. (D) increased availability of capital and increased competition. Answer : (B)
46. All of the following are characteristics of the global economy EXCEPT: (A) the increasing importance of developing countries as sources of revenue growth. (B) the free movement of goods, services, people, skills, and ideas across geographic borders. (C) the increased use of tariffs to protect industries. (D) higher levels of opportunities and challenges in new geographic markets. Answer : (C)
47. Essentially, _______ has become one of the world's largest markets with 700 million potential consumers. (A) the European Union (B) the United States (C) China (D) Japan Answer : (A)
48. ______ has become the second-largest economy in the world. (A) The United States (B) The European Union (C) Japan (D) China Answer : (D)
49. The economic interdependence among countries which is reflected in the flow of goods, services, financial capital, and knowledge across country borders is defined as: (A) hypercompetition. (B) boundaryless retailing. (C) strategic intensity. (D) globalization. Answer : (D)
50. Globalization has led to:
(A) lower operational efficiency as firms must transport raw materials and finished goods farther. (B) increasing loyalty of customers for products made domestically. (C) declining returns from investment in research and development. (D) higher performance standards including quality and cost. Answer : (D)
51. The "liability of foreignness" is the: (A) inability of most U.S. managers to truly comprehend foreign cultures. (B) political disadvantage that U.S. firms have when doing business abroad. (C) overall risk of participating outside a firm's domestic country when entering global competition. (D) preference for "buying local," which always puts foreign firms at a disadvantage when competing in the U.S. market. Answer : (C)
52. Even for companies capable of succeeding in global markets, it is critical that they: (A) remain committed to and strategically competitive in their domestic market. (B) introduce many new products immediately after entering a new market. (C) acquire a local competitor in each significant foreign market. (D) develop good negotiating skills in order to take advantage of local suppliers in the international market. Answer : (A)
53. The rate of technological diffusion is increasing. Which of the following was fastest in penetrating 25 percent of homes in the U.S. market? (A) Mobile Phone (B) Television (C) Personal Computer (D) Internet Answer : (D)
54. New markets created by iPods, PDAs, and Wi-Fi are a result of:
(A) disruptive technologies. (B) global competition. (C) knowledge intensity. (D) hypercompetition. Answer : (A)
55. Henry Ford once said, "If I had asked people what they wanted, they would have said faster horses." The invention of the car is an early example of: (A) the march of globalization. (B) rapid technological diffusion. (C) disruptive technologies. (D) products that were not imitated by competitors. Answer : (C)
56. A company's ability to acquire knowledge is: (A) less important in the 21st century than in previous periods of business history. (B) an important source of competitive advantage in virtually all industries. (C) not considered an asset or resource for businesses. (D) only important in high technology industries. Answer : (B)
57. The CEO of Ridgeway, Inc., realizes that the company's survival depends on developing and acquiring knowledge. Which of the following actions by the CEO would be most consistent with this need? (A) Ensuring that all current unique knowledge of the firm is protected by patents (B) Planning extensive employee training and hiring educated and experienced employees (C) Investing in sophisticated databases in relevant knowledge areas (D) Establishing a system of organizational intelligence gathering Answer : (B)
58. Knowledge is composed of all the following EXCEPT:
(A) insight. (B) expertise. (C) information. (D) intelligence. Answer : (A)
59. Which of the following statements about organizational knowledge is correct? (A) Knowledge is an intangible resource. (B) The importance of knowledge is increasing. (C) The value of knowledge as a proportion of shareholder value is increasing. (D) All of these options are correct. Answer : (D)
60. In order to cope with hypercompetition, firms need to develop ______ through continuous learning. (A) competitive resilience (B) strategic flexibility (C) strategic power (D) competitive dominance Answer : (B)
61. All of the following are assumptions of the industrial organization (I/O) model EXCEPT: (A) organizational decision makers are rational and committed to acting in the firm's best interests. (B) resources to implement strategies are firm-specific and attached to firms over the long-term. (C) the external environment is assumed to impose pressures and constraints that determine the strategies that result in above-average returns. (D) every firm in an industry controls similar strategically relevant resources. Answer : (B)
62. The industrial organization (I/O) model argues that: (A) the key factor in success is choosing the correct industry in which to compete.
(B) the firm's internal resources and capabilities represent the foundation for development of a value-creating strategy. (C) the key to earning above-average returns is strategic flexibility. (D) the internal structure of the organization must match the industry in which it competes for it to earn above-average returns on investment. Answer : (A)
63. Which of the following statements is most consistent with the I/O view? Performance of a firm is most directly attributable to: (A) the power of the financial market stakeholders. (B) the resources the firm possesses. (C) the profitability of the industry in which the firm competes. (D) hypercompetition within the industry. Answer : (C)
64. Firms use the five forces model of competition to identify the ______ of the industry. It is measured by its _______. (A) size; number of competitors. (B) globalization; export percentages. (C) hypercompetition; technology diffusion. (D) attractiveness; profitability. Answer : (D)
65. Although Alibaba is competing in the internet services industry, it has improved its performance by focusing on innovation and service diversification. This improved performance is best explained by: (A) globalization. (B) the resource-based model. (C) the I/O model. (D) hypercompetition. Answer : (B)
66. An investor is considering in which of two start-up companies to invest. The investor has faith in the industrial organization model of above-average returns and is using that as a guideline to make a decision. Both start-up companies propose to manufacture health-focused foods with low salt, low sugar, high fiber, and no artificial additives. RexRich Foods has a business strategy of producing a differentiated product for which consumers will pay more. Green Pastures Foods is in the healthfoods industry because of its internal culture and commitment to healthy lifestyles, but it does not have any executives with experience in food production. Which firm will the investor feel is most consistent with the model of industrial organization? (A) Green Pastures Foods (B) RexRich Foods (C) Both firms are consistent with the I/O approach. (D) At the entrepreneurial stage, the model that companies follow is not important. Answer : (B)
67. Research shows that approximately ______ percent of a firm's profitability is explained by the industry in which it competes, whereas ______ percent is explained by the firm's characteristics and actions. (A) 90; 10 (B) 60; 40 (C) 36; 20 (D) 20; 36 Answer : (D)
68. All of the following are resources of an organization EXCEPT: (A) an hourly production employee's ability to catch subtle quality defects in products. (B) oil drilling rights in a promising region. (C) weak competitors in the industry. (D) a charity's board of directors of experienced executives. Answer : (C)
69. All of the following are assumptions of the resource-based model EXCEPT: (A) each firm is a unique collection of resources and capabilities. (B) the industry's structural characteristics have little impact on a firm's performance over time.
(C) capabilities are highly mobile across firms. (D) differences in resources and capabilities are the basis of competitive advantage. Answer : (C)
70. ______ is a capacity for a set of resources to perform a task or an activity in an integrative manner. (A) A capability (B) A core competence (C) Sustainable competitive advantage (D) Organizational intelligence Answer : (A)
71. When resources and capabilities serve as a source of competitive advantage for a firm, the firm has created a(n): (A) strategic mission. (B) inspiring vision. (C) core competence. (D) sustainable market niche. Answer : (C)
72. In the resource-based model, which of the following factors would be considered a key to organizational success? (A) Unique market niche (B) Weak competition (C) Economies of scale (D) Skilled employees Answer : (D)
73. To have the potential to become sources of competitive advantage, resources and capabilities must be non-substitutable, valuable, ______, and ______. (A) unique; easy to imitate.
(B) easy to imitate; difficult to implement. (C) rare; costly to imitate. (D) easy to implement; unique. Answer : (C)
74. The resource-based model argues that: (A) all resources have the potential to be the basis of sustainable competitive advantage. (B) resources alone can be a source of sustainable competitive advantage. (C) the key to competitive success is the structure of the industry in which the firm competes. (D) resources that are valuable, rare, costly to imitate, and non-substitutable form the basis of a firm's core competencies. Answer : (D)
75. The resource-based view of the firm: (A) emphasizes that it is difficult to develop and sustain a competitive advantage based on resources alone. (B) argues that the industry environment has a stronger influence on firms' ability to implement strategies successfully than does the competitive environment. (C) calls for firms to focus on their homogeneous capabilities to compete against their rivals. (D) suggests that vision and mission are marketing messages not tied to strategic plans. Answer : (A)
76. The goal of the organization's ______ is to point the firm in the direction of where it would like to be in the years to come. (A) vision (B) mission (C) culture (D) strategy Answer : (A)
77. The Princeton Alliance Church states in its website that "PAC exists to help you live life to the fullest by knowing God, developing community and bringing hope." This pronouncement is most
precisely a statement of organizational: (A) values. (B) structure. (C) vision. (D) culture. Answer : (C)
78. A firm's mission: (A) is a statement of a firm's business in which it intends to compete and the customers it intends to serve. (B) is an internally focused affirmation of the organization's financial, social, and ethical goals. (C) is mainly intended to emotionally inspire employees and other stakeholders. (D) is developed by a firm before the firm develops its vision. Answer : (A)
79. According to Hitt, the final responsibility for forming the organization's mission lies with the: (A) CEO. (B) top-management team. (C) employees. (D) organization's stakeholders. Answer : (A)
80. A key purpose of a mission statement is to inform _________what a firm is, what it seeks to accomplish and who it seeks to serve. (A) CEOs (B) stakeholders (C) regulators (D) former employees Answer : (B)
81. Organizational stakeholders include:
(A) unions. (B) host communities. (C) employees. (D) suppliers of capital. Answer : (C)
82. The interests of an organization's stakeholders often conflict, and the organization must prioritize its stakeholders if it cannot satisfy them all. The ______ is the most critical criterion in prioritizing stakeholders. (A) power of each stakeholder (B) urgency of satisfying each stakeholder (C) vulnerability of organizational stakeholders (D) social value of each stakeholder Answer : (A)
83. Capital market stakeholders include: (A) industry competitors. (B) shareholders. (C) employees. (D) government regulators. Answer : (B)
84. Dissatisfied capital market stakeholders may: (A) sell their stock. (B) tighten loan covenants. (C) seek to increase their power. (D) All of these options are correct. Answer : (D)
85. Greenleaf Property Management has been earning below-average returns for the last three years. Which one of the following statements is true?
(A) Greenleaf will be able to satisfy its multiple stakeholders easily as long as the stakeholders are committed to the strategic mission of the firm. (B) Greenleaf will be able to minimally satisfy the demands of each stakeholder. (C) Greenleaf will need to prioritize the demands of its stakeholders based on the political influence each wields. (D) Greenleaf will not be able to minimally satisfy all stakeholders. Answer : (D)
86. Product market stakeholders include the firm's customers, and the principal concern of this stakeholder group is: (A) maximizing the firm's return on investment. (B) receiving the highest-quality services in the industry at any price. (C) obtaining reliable products at the lowest possible price. (D) increasing the profitability of the firm. Answer : (C)
87. Generally speaking, product market stakeholders are satisfied when: (A) a firm achieves a balance between profit margins, costs paid to suppliers and prices set for customers. (B) a firm's profit margin yields an above-average return to its capital market stakeholders. (C) the interests of the firm's organizational stakeholders have been maximized. (D) the interests of all stakeholders have been at least minimally satisfied. Answer : (A)
88. Before liquidating during a bankruptcy, a company will take several actions to try to satisfy its ______ stakeholders. (A) capital market (B) product market (C) organizational (D) governmental Answer : (A)
89. The Chambers of Commerce of cities and towns often implore citizens to buy from local businesses. This is because the organization's role as a taxpayer is most important to ______ as stakeholders. (A) major suppliers of capital (B) shareholders (C) host communities (D) unions Answer : (C)
90. A retail outlet can attempt several remedies to improve profitability to meet the expectations of its _______ stakeholders, including closing stores, changing the top management team, and seeking potential buyers. (A) product market (B) capital market (C) organizational (D) governmental Answer : (B)
91. Organizational stakeholders are usually satisfied when (A) their return on investment has been maximized. (B) customers pay the highest sustainable price for the goods and services they receive. (C) companies provide a dynamic, stimulating, and rewarding work environment. (D) companies are paying the highest prices to suppliers. Answer : (C)
92. Product market stakeholders include (A) suppliers. (B) shareholders. (C) employees. (D) the firm's chief executive officer. Answer : (A)
93. Refuge Nursing Homes, Inc., (RNH) has been highly profitable in the past 10 years, providing its investors higher returns than those earned by its direct competitors' investors. RNH has a reputation for providing high-paying managerial and hourly-employee jobs. However, recent investigations have revealed that the nursing home residents have been provided substandard care, including non-nutritious and unappetizing meals, non-functional medical equipment, and inadequate patient-care staffing. Which statement best describes the situation? (A) RNH has been earning below-average returns, so it has had to prioritize the demands of its various stakeholders. (B) RNH has prioritized the demands of capital market stakeholders and organizational stakeholders, over the demands of product market stakeholders. (C) RNH has earned above-average returns and so has satisfied the needs of all relevant stakeholders. (D) RNH has been attempting to minimally satisfy the demands of all of its stakeholders. Answer : (B)
94. A prominent national website services company runs Super Bowl advertisements showing a small business owner working alone in the office on a project, during the big game. The message of the ad is that the company understands the sacrifices of its customers. This ad seeks to convey a sense of the organization's ____ to the product market stakeholders. (A) culture of recognition and reward (B) mission to radically shift the global economy toward small businesses (C) leadership as a technology company (D) personality as sports lovers Answer : (B)
95. The global economy, globalization, rapid technological change, and the increasing importance of knowledge are creating the need to: (A) delegate strategic responsibilities to employees "closer to the action." (B) split responsibilities between the CEO and the board of directors to minimize the possibility of corporate scandals triggered by unethical CEOs. (C) re-centralize the responsibility for strategy to the CEO. (D) expand the strategic responsibilities to all organizational stakeholders. Answer : (A)
96. The strategic leader's work is characterized by:
(A) ambiguous decision situations where the best course of action is not always easy to identify. (B) a willingness to unify stakeholders through skillful manipulation. (C) an ability to identify solutions to long-range problems. (D) concentration on the practical day-to-day aspects of the organization's operations. Answer : (A)
97. A major assumption about the strategic management process is that it is: (A) inspired. (B) team-based. (C) rational. (D) inclusive. Answer : (C)
98. :A business-level strategy describes (A) the businesses in which the company intends to compete. (B) all policies and procedures used in functional departments. (C) the business unit's actions to exploit its competitive advantage over rivals. (D) a firm's resources, intent, and mission. Answer : (C)
99. In a diversified firm, corporate-level strategy is concerned with: (A) operating each individual business under the corporate umbrella. (B) determining how each functional department of the firm will operate. (C) determining in which businesses to compete and how resources will be allocated between businesses. (D) coordinating the vision and mission of each subsidiary firm. Answer : (C)
100. PGG Mining is making a strategic decision whether to shut down a coal mine in Pennsylvania. It is important to consider that the decision: (A) should be based solely on the results of the CEO's approval of the mine's general manager.
(B) has ethical implications for organizational stakeholders. (C) need not be socially responsible if the firm is making below-average returns from the mine. (D) All of these choices are important to consider. Answer : (B)
101. A large corporation has earned a reputation for being a challenging work environment for employees, placing demands on employees' time and pushing them to accomplish tasks, sometimes with little recognition. A recent audit found that the company was denying employees overtime pay despite the extra work. This is a reflection of the company's: (A) core values of hard work to gain advancement. (B) unethical corporate culture. (C) lack of an organizational mission. (D) search for its core competencies. Answer : (B)
102. In smaller, new venture firms, returns are sometimes measured in terms of: (A) return on assets. (B) return on equity. (C) return on sales. (D) the amount and speed of growth. Answer : (D)
103. A ______ is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. (A) goal (B) strategy (C) tactic (D) mission Answer : (B)
104. ______ is an investor's uncertainty about the economic gains or losses that will result from a particular investment.
(A) Return (B) Reward (C) Risk (D) Revenue Answer : (C)
105. The culmination of the strategic management process is: (A) performance. (B) strategy implementation. (C) strategy formulation. (D) analysis. Answer : (A)
106. Managers must adopt a new mind-set that values ______ and the challenges that evolve from constantly changing conditions. (A) flexibility (B) innovation (C) speed (D) All of these options are correct. Answer : (D)
107. ______ innovation is a term used to describe how rapidly and consistently new, informationintensive technologies replace older ones. (A) Perpetual (B) Disruptive (C) Global (D) Diffusion Answer : (A)
108. ______ provides the firm with new and up-to-date skill sets, which allow it to adapt to its environment as it encounters changes.
(A) Strategic flexibility (B) Continuous learning (C) Knowledge (D) The Internet Answer : (B)
109. The I/O model is grounded in: (A) anthropology. (B) psychology. (C) economics. (D) accounting. Answer : (C)
110. Firms use both the ______ and ______ models. In fact, these models complement each other in that one focuses outside the firm while the other focuses inside the firm. (A) industry; capability (B) I/O; resource-based (C) competition; competency (D) industry; competency Answer : (B)
111. ______ should establish a firm's individuality and should be inspiring and relevant to all stakeholders. (A) A strategy (B) A vision (C) A mission (D) A goal Answer : (C)
112. William Ackman is a hedge fund manager who owned a large share of J.C. Penney stock. He was also a member of the J.C. Penney board. He tried to get the CEO fired, but the board and top
management said he breached his boardroom duties when he publicly disclosed information about the CEO search and financial condition of the company. He resigned from the board of directors. This is an example of a contentious relationship between: (A) the capital market stakeholders and the organizational stakeholders. (B) the organizational stakeholders and the product market stakeholders. (C) the capital market stakeholders and the product market stakeholders. (D) all the stakeholders. Answer : (A)
113. Strategic leaders are: (A) located only at the executive level. (B) located in different areas and levels. (C) the CEO, COO, and CFO only. (D) located at different levels, but only in the operating area of the organization. Answer : (B)
114. Successful strategic leaders are: (A) committed to helping the firm to create value for all stakeholder groups. (B) committed to nurturing those around them. (C) decisive. (D) All of these options are correct. Answer : (D)
115. Strategic delegation helps: (A) overload middle managers. (B) executives control strategy implementation. (C) avoid too much managerial hubris. (D) emphasize profit maximization. Answer : (C)
116. Organizational culture refers to:
(A) the social energy that drives, or fails to drive, the organization. (B) the complex set of ideologies, symbols, and core values that are shared throughout the firm. (C) what people do when no one else is looking. (D) All of these options are correct. Answer : (D)
117. Effective strategic leaders are chosen based on: (A) their capabilities and accumulation of human capital over time. (B) their single-minded focus on strategy formation. (C) their aptitude for strategy implementation. (D) their focus on innovation. Answer : (A)
118. Strategic leaders, ______, often work long hours, and their work is filled with ambiguous decision situations. (A) at the top of the organization (B) regardless of their location in the organization (C) in the finance area (D) in the operations area Answer : (B)
119. SWOT stands for (A) strategy, wealth, organization, and threats. (B) success, weakness, opportunities, and taxes. (C) strength, wealth, organization, and taxes. (D) strengths, weaknesses, opportunities, and threats. Answer : (D)
120. In the strategic management process ASP stands for (A) analyses, successes, and purposes.
(B) analyses, strategies, and performance. (C) ability, strategies, and purposes. (D) ability, successes, and performance. Answer : (B)
121. The firm's ______ provide the foundation for choosing one or more ______ and deciding how to implement them. (A) analyses; strengths (B) abilities; strengths (C) analyses; strategies (D) abilities; strategies Answer : (C)
122. It is important to emphasize that almost all strategic management process decisions have ______ because they are related to how a firm interacts with its stakeholders. (A) ethical dimensions. (B) local dimensions. (C) political dimensions. (D) global dimensions. Answer : (A)
123. A company competing in a single product market has (A) one corporate-level strategy. (B) one business-level strategy. (C) one business-level strategy for failure. It should seek to diversify. (D) one business-level strategy and one corporate-level strategy. Answer : (D)
ESSAY 124. Define strategic competitiveness and above-average returns. What is the relationship between
strategic competitiveness and returns on investment?
Graders Info : Strategic competitiveness is achieved when the firm successfully formulates and implements a value-creating strategy. Above-average returns are returns in excess of what investors expect to earn from other investments with similar risk levels. Firms will only be able to earn above-average returns if they develop a competitive advantage. Competitive advantage derives from a strategy that competitors cannot duplicate or find too costly to imitate. 125. Hypercompetition is a characteristic of the current competitive landscape. Define hypercompetition and identify its primary drivers. How can organizations survive in a hypercompetitive environment?
Graders Info : Hypercompetition is a condition of rapidly escalating competition based on price-quality positioning, competition to create new knowledge and establish first-mover advantage, and competition to protect or invade established product or geographic markets. In hypercompetition, firms aggressively challenge their competitors. Markets are assumed to be inherently unstable and changeable. The two primary drivers of hypercompetition are the global economy and rapid technological change. To survive in a hypercompetitive environment firms need strategic flexibility. This demands continuous learning which allows the firm to develop new skills so that they can adapt to the changing environment and to consistently engage in change. 126. Describe the industrial organization (I/O) model of above-average returns. What are its main assumptions? What is the key to success according to the I/O model?
Graders Info : The I/O model of above-average returns argues that the external environment is the primary determinant of firm success, rather than the firm's internal resources. The model has four underlying assumptions. First, the external environment is assumed to impose pressures and constraints that determine the strategies that would result in above-average returns. Second, most firms competing within a particular industry, or in a certain segment of the industry, are assumed to control similar strategically relevant resources and pursue similar strategies in light of those resources. Third, resources used to implement strategies are mobile across firms, which results in resource differences between firms being short-lived. Fourth, organizational decision makers are assumed to be rational and committed to acting in the firm's best interests as shown by their profitmaximizing behaviors. The key to success according to the I/O model is to find the most attractive industry (the one with the highest profit potential) in which to compete. 127. Describe and discuss the resource-based model of above-average returns.
Graders Info :
The resource-based model focuses on the firm's internal resources and capabilities. These resources and capabilities determine the firm's strategy and its ability to earn above-average returns. The firm's resources are inputs into its production process. Resources must be formed into capabilities, the capacity to perform a task or activity in an integrative manner. According to this model, capabilities evolve over time and must be managed dynamically to achieve above-average returns. Resources and capabilities that give a firm a competitive advantage are called core competencies. This model assumes that resources are not highly mobile across firms; consequently, all firms within a particular industry may not possess the same strategically relevant resources and capabilities. So, different firms will have different core competencies. The organization's strategy is based on finding the best environment in which to exploit its core competencies. 128. What are a firm's vision and mission? What is the value to the firm of having a specified vision and mission?
Graders Info : The firm's vision is a picture of what it wants to be and what it wants to ultimately achieve. The firm's mission is based on its vision. It specifies the business(es) in which the firm intends to compete and the customers it intends to serve. The value of having a vision and mission is that they inform stakeholders what the firm is, what it seeks to accomplish, and who it seeks to serve. A successful vision is inspirational. The mission is more concrete and guides employees' behavior as they achieve the firm's vision. Research shows that an effectively formed vision and mission positively impact firm performance in terms of growth in sales, profits, employment, and net worth. 129. Describe an organization's various stakeholders and their different interests. Under what condition can the firm most easily satisfy all stakeholders? If the firm cannot satisfy all stakeholders, which ones must it satisfy in order to survive?
Graders Info : Stakeholders are the individuals and groups who can affect and are affected by the strategic outcomes achieved and who have enforceable claims on a firm's performance. There are three principal types of stakeholders. First, there are the capital market stakeholders. These stakeholders include the shareholders and the major suppliers of capital to the firm. They are most interested in the return on capital in relation to the risk incurred. The second group of stakeholders is the product market stakeholders. This group includes customers, suppliers, host communities, and unions representing workers. The customers seek a reliable product at the lowest possible price. The suppliers seek loyal customers willing to pay the highest sustainable price. Host communities want companies willing to be long-term employers and providers of tax revenues. Union officials want secure jobs with good working conditions for the workers they represent. The final group of stakeholders is the organizational stakeholders. This group includes the employees (both managerial and non-managerial). These stakeholders expect a firm to provide a dynamic, stimulating, and rewarding work environment. The firm can most easily satisfy all stakeholders if it earns aboveaverage returns. If the firm does not earn above-average returns, it must prioritize its stakeholders by their power, urgency, and degree of importance to the firm. The firm must then make trade-offs among the stakeholders. 130. Who are the firm's strategic leaders? What things can a strategic leader focus on to be
effective?
Graders Info : The firm's strategic leaders include the CEO and top-level managers, but they also include organizational members who have been delegated strategic responsibilities. Strategic leaders use the strategic management process to help the firm reach its vision and mission. Effective leaders must embrace change in the dynamic competitive landscape. They should promote innovation in their organization. They can also leverage partnerships with external parties and organizations to advance the company. To increase incremental knowledge, strategic leaders can promote exploratory and exploitative learning within the team. An ambi-cultural approach, or global mind-set, can also help the company compete in a global economy. 131. Explain the relationship of the strategic management process to organizational ethics.
Graders Info : Almost all strategic management process decisions have ethical implications because they affect stakeholders, internally and externally. Strategic management processes influence competitive strategy which can be ethical or non-ethical as it relates to business espionage, pricing, marketing techniques, etc. The decisions of the strategic leaders also influence the organization's culture, which is based on the organization's core values. These values are also influenced by the strategic leaders. The organization's culture can be ethical or or unethical (e.g. salary and benefit structure, recognition/promotion, etc.). Consequently, the strategic leader's role has a large impact on whether the organization is a good citizen. 132. What are the primary aspects of the strategic management process? You may reference specific chapters from the text in formulating your response.
Graders Info : This is a roadmap question for the entire strategic management course. Students will likely have a far greater understanding of the big picture after having gone through the entire course. The strategic management process consists of three primary processes: analysis (chapters 2 & 3), strategy formulation (chapters 4-9) and implementation (chapters 10-13). Analysis. Analysis involves the development of an understanding of the external environment (Chapter 2) and internal organization (Chapter 3). These analyses are completed to identify opportunities and threats in the external environment and to decide how to use the resources, capabilities, and core competencies in the firm's internal organization to pursue opportunities and overcome threats. Formulation. With knowledge about its external environment and internal organization, the firm forms its vision and mission (Chapter 1) and makes decisions as to what strategies to utilize to provide returns to shareholders. These decisions involve the selection of business-level strategies (Chapter 4), which are the firm's actions designed to exploit its competitive advantage over rivals), and its corporate-level strategy (Chapter 6), which is the firm's scope, which ranges from a single
product market to unrelated, diversified firms competing in multiple product markets. The ability to utilize a strategy will be impacted by competing firms. This is described as the dynamics of competition (Chapter 5). Formulation involves the selection of mechanisms such as acquisition and restructuring the firm's portfolio of businesses (Chapter 7) and the use of cooperative strategies (Chapter 9) wherein firms form a partnership to share their resources and capabilities in order to develop a competitive advantage. The firm must also make decisions on the span, business level strategies, and mechanisms for international expansion (Chapter 8). Implementation. Implementation is putting the formulated plan into action. Implementation is facilitated by different mechanisms used to govern firms (Chapter 10), the use of appropriate organizational structure and mechanisms to control the firm's operations (Chapter 11), the patterns of strategic leadership appropriate for the firm's strategy and competitive environments (Chapter 12), and the use of strategic entrepreneurship (Chapter 13) as a path to continuous innovation. The objective of all of these activities is to manage the firm in a manner that produces aboveaverage rates of return.
133. Define globalization and describe some of its consequences.
Graders Info :
Globalization is the increasing economic interdependence among countries and their organizations as reflected in the flow of goods and services, financial capital, and knowledge across country borders. Globalization increases the range of opportunities for companies. Firms engaging in globalization of their operations must make culturally sensitive decisions. Globalization has led to higher performance standards in many competitive dimensions, including those of quality, cost, productivity, product introduction time, and operational efficiency. In addition to firms competing in the global economy, these standards affect firms competing on a domestic-only basis. Thus, managers have to learn how to operate effectively in a "multi-polar" world with many important countries having unique interests and environments. Firms must learn how to deal with the reality that in the competitive landscape of the 21st century, only companies capable of meeting, if not exceeding, global standards typically have the capability to earn above-average returns. The risks of participating outside of a firm's domestic markets in the global economy are labeled a "liability of foreignness."
Chapter 02 The External Environment Opportunities Threats Industry Competition and Competitor Analysis TRUEFALSE 1. The external environment facing business stays relatively constant over time. (A) True (B) False Answer : (B)
2. Demographic, economic, political/legal, sociocultural, technological, global, and physical are the seven elements comprising the industry environment. (A) True (B) False Answer : (A)
3. Firms can directly control the elements of the seven segments of the general environment. (A) True (B) False Answer : (B)
4. The bankruptcy filings by General Motors and Chrysler Corporation during the Great Recession illustrate that firms cannot directly control the general environment's segments. (A) True (B) False Answer : (A)
5. The industry environment directly influences a firm and its competitive actions and responses. (A) True (B) False Answer : (A)
6. Competitor analysis is focused on the factors and conditions influencing an industry's profitability
potential. (A) True (B) False Answer : (B)
7. When firms analyze the external environment, they typically have complete and unambiguous data. (A) True (B) False Answer : (B)
8. Monitoring involves the development of a forecast of what might happen at a future point in time. (A) True (B) False Answer : (B)
9. Scanning involves detecting meaning through early signals of environmental trends. (A) True (B) False Answer : (B)
10. When Google studies the internet user privacy policies of various nations, it is engaged in the forecasting component of the environmental analysis process. (A) True (B) False Answer : (B)
11. The objective of assessing the external environment is to determine the timing and importance of the effects of environmental changes and trends on the strategic management of the firm. (A) True (B) False
Answer : (A)
12. Age structure, geographic distribution, income distribution, interest rates, and process innovations are all elements of concern when studying the demographic segment of the general environment. (A) True (B) False Answer : (B)
13. In recent times, business leaders have become more confident in the ability of economists to provide valid and reliable predictions about the world's economic environment. (A) True (B) False Answer : (B)
14. The legislation introduced in the U.S. Congress during the early tenure of the Obama administration intended to reduce the amount of work U.S. companies outsource and is an example of a potential change in the sociocultural segment of the general environment. (A) True (B) False Answer : (B)
15. The European sovereign-debt crisis and political upheavals in Egypt, Tunisia, Libya, and Syria illustrate uncertainties in the political/legal segment of the general environment that could affect the performance of business firms. (A) True (B) False Answer : (A)
16. Developing a political strategy by the newly formed General Motors would likely be ineffective as firms are generally unable to influence the political/legal environment. (A) True (B) False Answer : (B)
17. Although health care reform legislation was passed in the early part of the Obama administration, it continues to be a contentious issue for employers, employees, and politicians because of its increased expenses. These attitudes about health care reform make up the sociocultural segment of the general environment. (A) True (B) False Answer : (A)
18. Early adopters of new technology often achieve higher market shares and higher returns than later adopters of the technology. (A) True (B) False Answer : (A)
19. Contrary to popular belief, the global segment of the external environment does not provide many opportunities for firms that recently experienced low growth and profits coming from emerging markets. (A) True (B) False Answer : (B)
20. Globalfocusing is often used by firms with high levels of international operations who further increase their internationalization by focusing on global niche markets. (A) True (B) False Answer : (B)
21. Global warming and energy consumption are aspects of the technological environment segment that firms should monitor. (A) True (B) False Answer : (B)
22. PepsiCo's strategy called "capital performance with a purpose" links green efforts in businesses
to the bottom line. This is an example of addressing concerns in the physical segment of the general environment. (A) True (B) False Answer : (A)
23. The five competitive forces model expands the arena of competitive analysis beyond direct competitors (i.e., rivals) to include buyers and suppliers who may also be a source of competition. (A) True (B) False Answer : (A)
24. Switching costs, access to distribution channels, economies of scale, large numbers of competing firms, and slow industry growth are some of the entry barriers that may affect the threat of new entrants to an industry. (A) True (B) False Answer : (B)
25. An example of a government policy barrier to entry would be a scenario in which the Antitrust Division of the Department of Justice disallows a merger because it creates a firm that is too dominant and would thus create unfair competition. (A) True (B) False Answer : (A)
26. Suppliers are powerful when the industry is dominated by a few large companies, no satisfactory substitutes are available, the selling industry is relatively more concentrated than the purchasing industry, or switching costs are high. (A) True (B) False Answer : (A)
27. Exit barriers are especially low in the airline industry because aircraft are not particularly
specialized and can easily be sold to other airlines, air cargo companies, the military, or even to wealthy individuals who want to own a private jet. (A) True (B) False Answer : (A)
28. Generally, industries with stronger competitive forces have higher profit potential. (A) True (B) False Answer : (B)
29. An attractive industry is one that is characterized by high entry barriers, suppliers and buyers with strong bargaining power, low threats from substitute products, or low rivalry among firms. (A) True (B) False Answer : (B)
30. Strategic groups are firms in different industries following the same or similar strategies. (A) True (B) False Answer : (B)
31. The strengths of the five competitive forces are similar across strategic groups within an industry. (A) True (B) False Answer : (B)
32. The more distant strategic groups are in terms of their strategies, the greater the likelihood of rivalry between the groups. (A) True (B) False
Answer : (B)
33. The competitor analysis is the final part of the external environment analysis and focuses on each company against which a firm directly competes (for example, Coca-Cola and PepsiCo, Home Depot and Lowe's, and Airbus and Boeing). (A) True (B) False Answer : (A)
34. The process of competitor analysis should examine the competitors' future objectives, current strategy, assumptions, and capabilities. (A) True (B) False Answer : (A)
35. When Delta Air Lines wants to study Continental Airlines, it must examine both Continental and its complementor, Star Alliance. (A) True (B) False Answer : (A)
36. Eavesdropping is an ethical way to obtain information about competitors' actions. (A) True (B) False Answer : (B)
37. Any competitor intelligence practice that is legal is also ethical. (A) True (B) False Answer : (B)
38. Eavesdropping by the NSA on average Americans is ethical because it is a governmental organization instead of a for-profit company.
(A) True (B) False Answer : (B)
MULTICHOICE 39. BP, in response to the Deepwater Horizon oil spill, expected increased scrutiny from which of the following segments of the general environment? (A) political/legal (B) global (C) technological (D) sociocultural Answer : (A)
40. Coca-Cola and PepsiCo have been accused of contributing to the obesity problem in the United States. This accusation comes from the ______segment of the general environment. (A) economic (B) political/legal (C) technological (D) sociocultural Answer : (D)
41. The recent joint ventures formed by BP with Russian and Indian partners show the importance of the ______ segment of the general environment in those countries that BP and other oil firms have to manage when contending with scarce resources. (A) technological (B) physical (C) demographic (D) global Answer : (D)
42. Acme Valves, Inc., has been a successful player in the oil field supply industry in the last 15
years. Acme maintained its strategy and product characteristics over this time period. However, the company has experienced declines in sales and profits over the last four quarters. The CEO of Acme should (A) continue with the proven strategy because its returns over the long run are important. (B) focus on improving efficiency of production and cost control. (C) conduct an analysis of the external environment. (D) immediately begin making incremental adjustments to the traditional business strategy in an effort to improve sales. Answer : (C)
43. The three parts of the external environment that affect a firm's strategic actions are: (A) economic, political, and legal. (B) general, industry, and competitor. (C) industry, business, and product. (D) local, national, and global. Answer : (B)
44. The ______ environment is composed of dimensions in the broader society that can influence an industry and the firms within it. (A) general (B) competitor (C) sociocultural (D) industry Answer : (A)
45. The environmental segments that make up the general environment typically will NOT include: (A) demographic factors. (B) sociocultural factors. (C) substitute products or services. (D) technological factors. Answer : (C)
46. Aardvark Corp. has three products. Two products together make up two-thirds of revenues and constitute 50 percent of company profits. Aardvark's third product makes up one-third of sales. With profitability far above the industry average, this product is responsible for one-half of Aardvark's profits. Which of the following statements regarding assessment of the general environment is accurate for Aardvark? (A) The company should monitor the general environment for changes that might affect the revenue of all products. (B) The company should monitor the general environment for changes that might affect the profitability of the most profitable products. (C) The company should monitor the general environment for changes that might affect the profitability of all products. (D) The company should monitor the general environment for changes that might affect the revenue and profitability of all products. Answer : (D)
47. Which of the following is NOT an activity used in the external environmental analysis process? (A) Scanning (B) Decrypting (C) Monitoring (D) Assessing Answer : (B)
48. Environmental scanning would be most important for which of the following organizations? (A) A provider of hospice services for the terminally ill (B) A web design company catering to small businesses (C) A neighborhood sewer and water utility (D) A manufacturer of household linens Answer : (B)
49. The use of the Internet by Netflix to collect data on customer preferences is an example of: (A) assessing. (B) monitoring. (C) forecasting.
(D) scanning. Answer : (D)
50. When analysts develop feasible projections of future events and how quickly they will occur based on observed changes and trends, they are: engaged in (A) scanning. (B) monitoring. (C) forecasting. (D) assessing. Answer : (C)
51. A general environmental analysis can be expected to produce all of the following EXCEPT: (A) objective answers. (B) recognition of environmental trends. (C) identification of organizational opportunities. (D) identification of organizational threats. Answer : (A)
52. In analyzing the demographic segment of the general environment, one typically examines all of the following factors EXCEPT: (A) age structure. (B) ethnic mix. (C) distribution of income. (D) cultural values. Answer : (D)
53. Which of the following, identified in an analysis of the general environment, is an opportunity for an entrepreneur who wishes to open a business providing "Fitness for Life" physical conditioning services (strength, balance, and flexibility training) in a city of 100,000 people? (A) The average age of the population in his community is high. (B) The level of unemployment in his community is high.
(C) A chiropractor and two independent physical therapists are located in his community. (D) The average education level of the population in his community is low. Answer : (A)
54. An analysis of income distribution would include all of the following EXCEPT: (A) the purchasing power of various age groups. (B) the discretionary income of various ethnic groups. (C) wage differentials between male and female employees working for a large manufacturer. (D) how income is distributed among regions of the United States. Answer : (C)
55. Demographic changes include variations in income distribution. Which of the following statements is true? (A) Firms are most interested in the consumers in the top 10 percent of household income. (B) In general, living standards have deteriorated over time. (C) The general loss in real income has been somewhat offset by the increase in dual-career couples. (D) Workforce diversity is making the concept of average income obsolete. Answer : (C)
56. The Obama administration sought to pursue policies that would: (A) remove the United States from NAFTA. (B) abolish antitrust laws. (C) increase the amount of work U.S. companies outsource to firms in other nations. (D) reduce the amount of work U.S. companies outsource to firms in other nations. Answer : (D)
57. An analysis of the economic segment of the external environment would include all of the following EXCEPT: (A) interest rates. (B) trade deficits or surpluses. (C) inflation rates.
(D) income distribution. Answer : (D)
58. Characteristics of the current economic segment include all of the following EXCEPT: (A) general uncertainty. (B) a clear understanding of future economic opportunities and threats. (C) the inability of economists to provide valid and reliable predictions. (D) an expanding economy in Vietnam. Answer : (B)
59. The economic environment refers to: (A) the nature and direction of the economy in which a firm competes or may compete. (B) the economic outlook of the world provided by the World Bank. (C) an analysis of how the environmental movement and world economy interact. (D) an analysis of how new environmental regulations will affect the U.S. economy. Answer : (A)
60. Which of the following would NOT be identified in an analysis of the economic portion of the general environment? (A) The willingness of Chrysler's buyers to purchase large vehicles in light of an increase in oil prices (B) The ability of Ford to issue new debt in light of its recent financial performance (C) The ability of BMW's buyers to finance car purchases in light of a change in interest rates (D) The willingness of GM buyers to purchase new vehicles in light of the threat of recession Answer : (B)
61. The political/legal segment of an environment represents: (A) the political preferences of different ethnic groups in the society. (B) the technological values of different political entities in society. (C) how organizations and governments mutually try to influence each other. (D) the system of regulations governments at all levels place on businesses.
Answer : (C)
62. All of the following are aspects of the political/legal segment of the general environment EXCEPT: (A) lobby groups. (B) attitudes and values. (C) taxation laws. (D) industries chosen for deregulation. Answer : (B)
63. An analysis of society's attitudes and values would be conducted when studying the ______ segment of the general environment. (A) sociocultural (B) global (C) demographic (D) economic Answer : (A)
64. In a suburban community outside a city in Alabama, a retail store opened that specialized in dancewear for children and adults. It was moderately successful for five years until the local newspaper published an exposé that scanty lingerie stocked in the back of the store's showroom was selling briskly to a certain clientele. Afterward, the store lost most of its customers and nearly closed. Which segment of the environment did the store owners fail to take into account when they began selling the lingerie? (A) the sociocultural segment (B) the economic segment (C) the demographic segment (D) the political/legal segment Answer : (A)
65. The technological segment of environmental analysis includes: (A) institutions and activities involved with creating new knowledge and translating that knowledge into new outputs.
(B) the determination of when machinery will need to be replaced in a given firm. (C) the need for new technology used by a firm to gain a competitive advantage. (D) places where a firm's technology will allow that firm to dominate a given market. Answer : (A)
66. Understanding how new knowledge can develop new products, processes, or materials is a result of analyzing the ______ segment of the general environment. (A) economic (B) political/legal (C) technological (D) global Answer : (C)
67. The next critical technological opportunity for organizations is predicted to be: (A) the Internet. (B) multiphasic interventions. (C) biological engineering. (D) wireless communications. Answer : (D)
68. Which of the following would be an example of the application of the next major technological opportunity for organizations? (A) Boeing's 747 (B) Toyota's hybrid vehicles (C) Budweiser's non-alcoholic beer (D) SpaceX's reusable space vehicle Answer : (D)
69. The observation that China reached automotive production overcapacity in 2015, and has a glut of extra cars, is an aspect of the ______ segment of the general environment. (A) demographic
(B) global (C) physical (D) technological Answer : (B)
70. Because of threats and risks in the global environment, some firms choose to take a more cautious approach by: (A) avoiding global markets altogether. (B) expanding only to developed countries. (C) focusing on global niche markets. (D) acquiring already established firms in foreign markets. Answer : (C)
71. The concepts of Guanxi, Wa, and Inhwa all convey the general idea of: (A) entrepreneurial risk-taking. (B) interpersonal relationships. (C) the value of hard work. (D) personal achievement. Answer : (B)
72. Global warming and energy consumption trends are aspects of the ______ segment of the general environment that firms should monitor. (A) technological (B) physical (C) sociocultural (D) economic Answer : (B)
73. Green design, sustainable packaging, waste management, and energy efficiency are aspects of the ______ segment of the general environment that companies have sought to address with environmental sustainability initiatives.
(A) technological (B) political/legal (C) global (D) physical Answer : (D)
74. All of the following are examples of efforts by firms to address the physical segment of the general: (A) development of sustainable packaging by McDonald's. (B) reduction in carbon dioxide emissions by Procter & Gamble. (C) reduction in water usage in plants by Unilever. (D) increase in hiring of women and minorities at Microsoft. Answer : (D)
75. One popular approach to taking care of the physical environment is: (A) producing and selling additional green products. (B) lobbying the government to reduce environmental regulations. (C) making donations to the Sierra Club and other environmental organizations. (D) increasing health benefits for employees. Answer : (A)
76. An industry is defined as: (A) a group of firms producing the same products or services. (B) firms producing items that sell through the same distribution channels. (C) firms that sell the same products or services to the same customer base. (D) a group of firms producing products that are close substitutes. Answer : (D)
77. The likelihood of entry of new competitors is affected by ______ and ______. (A) barriers to entry; expected retaliation of current industry organizations
(B) the power of existing suppliers; buyers (C) the profitability of the industry; the market share of its leading firm (D) the demand for the product; the profitability of the competitors Answer : (A)
78. Which of the following is NOT an entry barrier to an industry? (A) Expected competitor retaliation (B) Economies of scale (C) Customer product loyalty (D) Bargaining power of suppliers Answer : (D)
79. New entrants to an industry are more likely when: (A) it is difficult to gain access to distribution channels. (B) economies of scale in the industry are high. (C) product differentiation in the industry is low. (D) capital requirements in the industry are high. Answer : (C)
80. Economies of scale refers to the fact that as the: (A) quantity of product produced in a given time period increases, the cost of manufacturing each unit increases. (B) quantity of product produced in a given time period increases, the cost of manufacturing each unit remains constant. (C) quantity of product produced in a given time period increases, the cost of manufacturing each unit decreases. (D) quantity of product produced in a given time period decreases, the cost of manufacturing each unit decreases. Answer : (C)
81. The large amount of advertising by firms such as Procter & Gamble and Colgate-Palmolive is an example of what kind of barrier to entry?
(A) Access to distribution channels (B) Capital requirements (C) Economies of scale (D) Product differentiation Answer : (D)
82. Product differentiation refers to the: (A) ability of the buyer of a product to negotiate a lower price. (B) response of incumbent firms to new entrants. (C) belief by customers that a product is unique. (D) fact that as more of a product is produced the cheaper it becomes per unit. Answer : (C)
83. When consumers change mobile phone and data service providers, they may be required to maintain service with the provider for a specified time period. This is an example of a: (A) cost to a producer to exchange equipment in a facility when new technologies emerge. (B) cost of changing the firm's strategic group. (C) one-time cost suppliers incur when selling to a different customer. (D) one-time cost customers incur when buying from a different supplier. Answer : (D)
84. Customer loyalty programs such as airline frequent-flyer miles are an attempt to: (A) decrease competitors' access to distribution channels. (B) develop a cost advantage independent of scale. (C) increase customers' switching costs. (D) overcome the perishability of the hotel "product." Answer : (C)
85. As customers come to believe that a firm's product is unique, this allows the firm to: (A) decrease its advertising expenditures.
(B) customize its product. (C) force other companies out of the market by lowering prices. (D) obtain loyal customers. Answer : (D)
86. DWK Foods has developed a line of cookies and candies sweetened exclusively with organic honey. Although DWK is selling some of the products over the Internet, in order to gain economies of scale the products must be sold in retail outlets as well. The main barrier to entry DWK is likely to encounter here is: (A) government licensing and permits. (B) access to distribution channels. (C) consumers' switching costs. (D) cost disadvantages independent of scale. Answer : (B)
87. For a restaurant business dependent on drive-thru customers, the major cost disadvantage independent of scale would be if: (A) favorable locations are not available. (B) other competitors have proprietary product technology. (C) access to food and ingredients is difficult. (D) other competitors have government subsidies. Answer : (A)
88. A certain marble quarry provides a unique type of marble that is richly colored and strikingly veined. It has been used for churches and public buildings throughout the world. The architect of a new headquarters for a prestigious Fortune 500 firm has specified the use of this marble, and this marble only, for the project. Which of the following statements is most likely to be true? (A) The cost of the marble will be expensive because of the bargaining power of the supplier. (B) The cost of the marble will be moderate because of the bargaining power of the buyer. (C) The cost of the marble will be moderate because of economies of scale. (D) The cost of the marble will be expensive because of the high strategic stakes involved. Answer : (A)
89. Suppliers are powerful when: (A) satisfactory substitutes are available. (B) they sell a commodity product. (C) they offer a credible threat of forward integration. (D) they are in a highly fragmented industry. Answer : (C)
90. How is consolidation among fuel providers serving airport facilities viewed in the five forces model of competition? (A) As a reduction of the airlines' ability to benefit from economies of scale. (B) As an increase in switching costs because the airlines have no choice but to use jet fuel and other oil products. (C) As an increase in the bargaining power of suppliers of a critical input. (D) As an increase in the intensity of rivalry among airlines for scarce resources. Answer : (C)
91. Blood banks are highly dependent on donors. In the terminology of industry analysis, which statement about donors is accurate? (A) Blood donors are suppliers and are powerful because of the critical nature of what they provide to the blood bank. (B) Blood donors are suppliers and are powerful because of their concentration relative to the blood bank. (C) Blood donors are buyers and are not powerful because switching costs to change to alternative inputs are low. (D) Blood donors are buyers and are powerful because of the volume of blood needed. Answer : (A)
92. The aircraft industry has long been dominated by two large aircraft manufacturers, Boeing and Airbus. The demand for major aircraft is low, and Boeing and Airbus aggressively compete for orders from airlines. What effect will these conditions have on the domestic airline industry? (A) It will make the airline industry more attractive because of decreased supplier power. (B) It will make the airline industry less attractive because of decreased supplier power. (C) It will make the airline industry more attractive because of increased supplier power.
(D) It will make the airline industry more attractive because of a new entrant. Answer : (A)
93. Golden Lotus, an exercise club targeting healthy individuals over 50, is located in a fast-growing city in the Southwest. Which of the following factors that may have an effect on the success of Golden Lotus is the most directly controllable by the company? (A) The sociocultural environment (B) The demographics of the environment (C) The economy of the local area (D) The power of the customers/buyers Answer : (D)
94. Buyers are powerful when: (A) there is a threat of forward integration. (B) they purchase a small proportion of the supplier's output. (C) switching costs are low. (D) the buyers' industry is fragmented. Answer : (C)
95. The highest amount a firm can charge for its products is most directly affected by: (A) expected retaliation from competitors. (B) the cost of substitute products. (C) variable costs of production. (D) customers' high switching costs. Answer : (B)
96. The threat from substitutes is high when: (A) switching costs are high. (B) the substitute product's price is lower than the industry product's price. (C) the quality of the substitute product is lower than the quality of the industry's product. (D) the substitute product stimulates new process innovations within the industry.
Answer : (B)
97. Media content has moved from paper, tape, and film to a digital world based on Internet technology. From the perspective of the five forces model, which force is most relevant here? (A) Buyers (B) Substitutes (C) Entry barriers (D) Suppliers Answer : (B)
98. All of the following are forces that create high rivalry within an industry EXCEPT: (A) numerous or equally balanced competitors. (B) high fixed costs. (C) fast industry growth. (D) high storage costs. Answer : (C)
99. High-level maintenance on aircraft is performed by the manufacturer. This service after the sale means that in the aircraft industry: (A) customers are relatively weak because of the high switching costs created by frequent-flyer programs. (B) the industry is moving toward differentiation of services. (C) the competitive rivalry in the industry is severe. (D) the economic segment of the external environment has shifted, but airline strategies have not changed. Answer : (C)
100. A manufacturer of washing machines has expanded its plant and has created excess capacity, just as the general economy has taken a downturn. The company is likely to: (A) raise prices on washing machines to offset lost sales. (B) be vulnerable to new entrants to an attractive market. (C) suffer from intense rivalry from international manufacturers.
(D) offer rebates and incentives for customers who purchase washing machines. Answer : (D)
101. When rival firms compete aggressively by trying to attract competitors' customers, this might be an indication of: (A) an industry with low exit barriers. (B) increasing economies of scale. (C) slow industry growth. (D) high bargaining power among buyers. Answer : (C)
102. Mighty Green, a residential lawn chemical manufacturer, is committed to gaining market share in its industry. Mighty Green: (A) is likely to raise the level of competitive rivalry in the industry. (B) probably has top management who are affected by emotional barriers to exit. (C) has decided that long-run above-average returns are not important. (D) will probably embark on an acquisition strategy. Answer : (A)
103. Which of the following explains, in part, why rivalry among McDonald's, Wendy's, and Burger King is intense? (A) There is low geographic saturation of the market. (B) There is high differentiation among competing products. (C) The threat of supplier forward integration is low. (D) These companies are trying to find ways to differentiate their products. Answer : (D)
104. Circuit Inc. is a manufacturer of a broad range of consumer electronics products. These consumer products are all highly profitable. The firm also manufactures a low-cost component that is an essential differentiating feature for most of its consumer products. The costs to manufacture this component have risen sharply in recent months. Internal estimates now indicate the company is breaking even on the manufacture of this component. Which of the following is most likely? (A) Circuit will likely continue to manufacture the component, even at a loss, due to low supplier
power. (B) Circuit will likely continue to manufacture the component, even at a loss, due to high strategic stakes. (C) Circuit will likely discontinue manufacture of the component due to low strategic stakes. (D) Circuit will likely discontinue manufacture of the component due to high supplier stakes. Answer : (B)
105. Exit barriers to a firm include all of the following EXCEPT: (A) generic assets. (B) loyalty to employees. (C) governmental concern about job loss. (D) restrictive labor agreements. Answer : (A)
106. An owner of a stable of racehorses has been earning below-average returns for more than 15 years. To a colleague, he expressed his determination to stay in horse racing until he died because "racing is in my blood." This individual is probably still racing horses because of: (A) high barriers to exit. (B) high switching costs. (C) high fixed costs. (D) low levels of competitive rivalry. Answer : (A)
107. According to the five forces model, an attractive industry would have all of the following characteristics EXCEPT: (A) low barriers to entry. (B) suppliers and buyers with little bargaining power. (C) a moderate degree of rivalry among competitors. (D) few good product substitutes. Answer : (A)
108. According to the five forces model, an unattractive industry would include all of the following characteristics EXCEPT: (A) low economies of scale needed for new firms to enter. (B) low supplier power due to commodity inputs. (C) high threat of substitute products due to a large number of low-cost alternatives. (D) high bargaining power of buyers due to low switching costs. Answer : (B)
109. The competition within each strategic group is: (A) more intense than the competition between strategic groups. (B) less intense than the competition between strategic groups. (C) typically very low. (D) an unknown factor in the analysis of competitive practices within a firm's strategic group. Answer : (A)
110. Firms within strategic groups: (A) follow dissimilar strategies. (B) follow similar strategies across certain dimensions. (C) typically engage in greater intergroup rivalry than intragroup rivalry. (D) exist almost exclusively in the manufacturing sector. Answer : (B)
111. All of the following are implications of strategic groups EXCEPT: (A) the strength of the five forces differs across strategic groups. (B) the strength of the five forces is the same across strategic groups. (C) competitive rivalry within strategic groups is greater than between strategic groups. (D) the closer the strategic groups are in terms of strategies, the greater is the likelihood of rivalry. Answer : (B)
112. Competitor analysis focuses on:
(A) firms with which the company competes directly. (B) firms that produce products that are substitutes. (C) all firms in the industry. (D) companies that might enter the industry. Answer : (A)
113. Which of the following pairs of companies would be least likely to be examined together as part of competitive analysis? (A) Wendy's and Taco Bell (B) Samsung and Apple (C) Netflix and Microsoft (D) Coca-Cola and PepsiCo Answer : (C)
114. Competitor intelligence is: (A) legally or illegally gained data about competitors' internal strategic processes and competitive decisions. (B) strategic information gained from industrial espionage targeting international competitors. (C) the data that the firm gathers to understand competitors' objectives, strategies, assumptions, and capabilities. (D) illegal to gather under the Sarbanes-Oxley Act. Answer : (C)
115. Once a firm has determined its competitors' future objectives, current strategy, assumptions, and strengths and weaknesses, its next step is to develop: (A) an environmental assessment. (B) a marketing plan. (C) a response profile. (D) a task force to implement the plan. Answer : (C)
116. A competitor analysis includes all of the following about competitors EXCEPT: (A) future objectives. (B) current strategy. (C) assumptions. (D) traditions. Answer : (D)
117. Clarissa is a sales representative for a large pharmaceutical firm. While calling on one of her major clients, the purchasing director of a hospital, the client told her confidential information that a sales representative from a competing firm had passed on to him. The information completely contradicts Clarissa's firm's understanding of the competitor's business strategy and would allow Clarissa's employer to gain many of the competitor's clients. What ethical implications may result from this situation? (A) There is no ethical or legal concern here for Clarissa. (B) The ethical dilemma is not Clarissa's but her client's, since he passed on confidential information to her voluntarily. (C) The ethical dilemma here is the right of competitors not to reveal certain information. (D) This is an example of ethical competitor intelligence obtained as eavesdropping. Answer : (C)
118. All of the following are ethical sources of data for external analysis EXCEPT: (A) trade shows. (B) a competitor's annual reports. (C) a competitor's help-wanted advertisements. (D) a competitor's confidential memos. Answer : (D)
119. Competitor intelligence could ethically come from all of the following EXCEPT: (A) court records. (B) financial reports. (C) trade show discussions. (D) eavesdropping.
Answer : (D)
120. Which of the following represents a competitive intelligence practice that is both legal and ethical? (A) A firm hires a competitor's employees and asks them to share the names and addresses of business contacts from their previous company. (B) An executive attends a trade show solely to obtain a competitor's brochures, listen to sales pitches, and ask questions about the competitor's products. (C) A city council member shares information about the decision process for selecting a contractor to build a new city council building with his wife, an executive with a construction firm bidding on the contract. (D) A marketing manager sells confidential plans for a company's expansion into the Far East to a firm that is not a direct competitor. Answer : (B)
121. Which of the following intelligence-gathering techniques is most likely to be legal and ethical? (A) Hiring investigators to examine the competitor's trash (B) Entering a competitor's production plant without authorization (C) Redirecting a competitor's emails to one's own company (D) Attending trade show presentations given by a competitor's employees Answer : (D)
122. The U.S. Hispanic market is the third-largest "Latin American" economy behind Brazil and Mexico. This impacts the ______ aspect of demographic segment analysis. (A) age structure (B) geographic distribution (C) income distribution (D) ethnic mix Answer : (D)
123. New Jersey and New York have the highest state taxes in the United States. They also have high ratios of people moving out compared to people moving into the state. This impacts the ______ aspect of demographic analysis. (A) age structure
(B) geographic distribution (C) income distribution (D) ethnic mix Answer : (B)
124. The communications industry is broadly defined as encompassing all of the following EXCEPT: (A) media companies. (B) smartphone producers. (C) book retailers. (D) entertainment companies. Answer : (C)
125. The Department of Defense buys aircraft from U.S. companies for national security reasons. This is an example of a ______ barrier to entry. (A) cost disadvantage independent of scale (B) government policy (C) capital requirements (D) product differentiation Answer : (B)
126. After Amazon lowered the price on its tablets, Samsung eventually lowered the price on its tablets. Samsung needed to do this because: (A) it is in the same strategic group. (B) it is outside the strategic group. (C) of inter-strategic group competition. (D) of strategic distinctiveness. Answer : (A)
127. Applications developed for iPhones make the phone more valuable to iPhone users. App developers are ______ to Apple. (A) suppliers
(B) customers (C) competitors (D) complementors Answer : (D)
128. Counterfeiting goods and exporting them from China is: (A) ethical and legal. (B) unethical but legal. (C) ethical but illegal. (D) unethical and illegal. Answer : (D)
ESSAY 129. Explain why it is important for organizations to analyze and understand the external environment.
Graders Info : Organizations do not exist in isolation. The external environment of the organization presents threats and opportunities which the organization must address in its strategic actions. Some aspects of the organization's external environment are changing rapidly, such as technology, and the organization must constantly adjust to these changes. The information that the organization gathers about competitors, customers, and stakeholders is used to build the organization's capabilities or to build relationships with stakeholders in the external environment. The information that the organization gathers about the external environment must be matched with its knowledge of its internal environment to form its vision, to develop its mission, and to take actions that result in strategic competitiveness and above-average returns. 130. Identify and describe the three major parts of the external environment. What is the purpose for a firm to collect information about these aspects of its environment?
Graders Info : The external environment has three major parts. The first is the general environment, which is composed of dimensions in the broader society that affect industries and their firms. These environmental segments are: demographic, economic, political/legal, sociocultural, technological, and global. The second part of the external environment is the industry environment, which involves
five factors that influence a firm, its competitive actions and responses, and the industry's profit potential. These five factors are: the threat of new entrants, the power of suppliers, the power of buyers, the threat of product substitutes, and the intensity of rivalry among competitors. The competitor environment is the third part of the external environment. The firm must be able to predict competitors' actions, responses, and intentions. With the information collected about these aspects of its external environment, the firm can develop its vision, mission, and strategic actions. 131. Describe and discuss the four activities of the external environmental analysis process.
Graders Info : The external environmental analysis process includes four steps: scanning, monitoring, forecasting, and assessing. The scanning of the environment includes the study of all segments of the general environment in order to detect changes that may occur in the future or that already are occurring. This is critical in a volatile environment. Scanning often deals with ambiguous, incomplete, or unconnected data and information. When analysts monitor the environment, they observe environmental changes to see if an important trend is emerging from those spotted by scanning. It is critical for the firm to detect meanings in these events and trends so that it can be prepared to take advantage of opportunities these trends provide. Forecasting builds on scanning and monitoring to develop feasible projections of what might happen and how quickly it will occur. Forecasting is important in helping the firm adjust sales to meet demand. Finally, through assessing, the analyst determines the timing and the significance of the effects of environmental changes and trends on the strategic management of the firm. Assessment must specify the competitive relevance of the data. 132. Describe the seven segments of the general environment.
Graders Info : 1) The demographic segment encompasses factors such as population size, geographic distribution, age structure, ethnic mix, and income distribution. 2) The economic segment involves the nature and direction of the economy in which a firm competes or may compete, domestic as well as global. 3) The political/legal segment is the arena in which organizations compete for attention, resources, and a voice in laws and regulations guiding the interactions among nations. 4) The sociocultural segment is concerned with society's attitudes and cultural values. 5) The technological segment includes institutions and activities involved with creating new knowledge and transforming it into new outputs, products, processes, and materials. 6) The global segment includes new global markets, existing markets that are changing, international political events, and critical cultural and institutional characteristics of global markets. 7) The physical segment includes potential and actual changes in the physical environment (such as global warming) and business practices that are intended to positively deal with those changes (such as control of carbon emissions and other environmentally friendly actions). 133. Identify the five forces that underlie the five forces model of competition. Explain briefly how they affect industry profit potential.
Graders Info :
1) Threat of new entrants: New entrants threaten existing firms' market share. They increase production capacity in an industry which results in lower profits for all firms, unless demand is increasing. The new entrant may force the existing firms to be more effective and efficient in production, and to compete on new dimensions. 2) Power of suppliers: Suppliers with high power can increase prices and decrease the quality of their products sold to the firm. If firms are unable to pass along price increases to customers, their profits diminish. 3) Power of buyers: When buyers (customers) have high power they can force prices down, and require increases in quality and service levels, thus driving profits down. 4) Substitutes: Substitutes perform the same or similar functions of the firm's product. The price of the substitute places an upper limit on prices firms can charge for the original product, limiting industry profits. 5) Intensity of competitive rivalry affects the firm's ability to make a profit as competitors' actions challenge the firm or competitors try to improve their market position. Increasing rivalry reduces the ability of weaker firms to survive. 134. Describe the factors that raise the competitive nature of an industry's rivalry.
Graders Info : The competitive rivalry in an industry can be based on price, product quality, and product innovation in an attempt to differentiate the firm's product from its rivals' products. The factors that can increase competitive rivalry include: 1) numerous and equally balanced competitors; 2) slow or no industry growth; 3) high fixed costs, high storage costs of inventory, or perishable products; 3) lack of differentiated products or low cost of product switching by customers; 4) high strategic stakes for the competitors; and 5) high barriers for firms wishing to exit the industry, causing firms to remain in an industry where they cannot reasonably expect to make a profit. 135. What are high exit barriers and how do they affect the competition within an industry?
Graders Info : Exit barriers are economic, strategic, and emotional factors causing companies to remain in an industry, even though the profitability of doing so is in question. The following are common sources of exit barriers: 1) specialized assets which cannot be used in another business or location; 2) fixed costs of exit, such as labor agreements which penalize a firm for ceasing operation; 3) strategic interrelationships or mutual dependence of business units wherein one business of a corporation serves another corporate business; 4) emotional barriers that cause owners to be sentimentally attached to the business or to their own role in it; 5) governmental and social restrictions that prevent a firm from closing, often in order to prevent the loss of jobs in a country or community. 136. What is a firm's strategic group? What effect does the strategic group have on the firm?
Graders Info : The firm's strategic group is the set of firms that emphasize similar strategic dimensions and use a similar strategy. The firms in a strategic group occupy similar positions in the market, offer similar goods to similar customers, and may make similar decisions about production technology and organizational features. Competition among firms within a strategic group is more intense than the
competition among a firm and those firms outside its strategic group. Actions of members in the firm's strategic group affect its strategic decisions in many areas, including pricing, product quality, and distribution. 137. What do firms need to know about their competitors? What legal and ethical intelligencegathering techniques can be used to obtain this information?
Graders Info : Competitor analysis helps firms identify: 1) what drives the competitor by understanding the competitor's future objectives); 2) what the competitor is doing and is capable of doing by understanding the competitor's current strategy; 3) what the competitor believes about the industry by understanding the assumptions made by the competitor; and 4) what the competitor's capabilities are by understanding the competitor's strengths and weaknesses. Firms can legally and ethically gather public information, such as annual reports, SEC reports, UCC filings, court records, and advertisements. Firms can also attend trade fairs to obtain competitors' brochures, view exhibits, and discuss products. This data combines to form competitive intelligence. 138. What are barriers to entry and how do they affect competition in the industry?
Graders Info : Entry barriers discourage competitors from entering a market and facilitate a firm's ability to remain competitive in a market in which it currently competes. Barriers to entry include: 1) Economies of scale are derived from incremental efficiency improvements through experience as a firm grows larger. 2) Product differentiation occurs when over time, customers may come to believe that a firm's product is unique. This belief can result from the firm's service to the customer, effective advertising campaigns, or being the first to market a product or service. 3) Capital requirements Competing in a new industry requires a firm to have resources to invest. In addition to physical facilities, capital is needed for inventories, marketing activities, and other critical business functions. 4) Switching costs are the one-time costs customers incur when they buy from a different supplier. 5) Access to distribution channels - Over time, industry participants commonly learn how to effectively distribute their products. Once a relationship with its distributors has been built a firm will nurture it, thus creating switching costs for the distributors. 6) Cost disadvantages independent of scale - Sometimes, established competitors have cost advantages that new entrants cannot duplicate. Proprietary product technology, favorable access to raw materials, desirable locations, and government subsidies are examples. 7) Government policy - Through their decisions about issues such as the granting of licenses and permits, governments can also control entry into an industry.
Chapter 03 The Internal Organization Resources Capabilities Core Competencies and Competitive Advantages TRUEFALSE 1. Technology has made it more difficult for companies to find ways to develop competitive advantages. (A) True (B) False Answer : (A)
2. Firms should seek to continually develop new core competencies because all core competencies guarantee above-average profit. (A) True (B) False Answer : (B)
3. In today's global economy, some resources that were traditionally critical to firms' efforts to sell goods are now less likely to be a source of competitive advantage. (A) True (B) False Answer : (A)
4. Firms achieve strategic competitiveness and earn above-average returns by acquiring, bundling, and leveraging their resources for the purpose of taking advantage of opportunities in the external environment in ways that create value for customers. (A) True (B) False Answer : (A)
5. Analyzing the internal environment enables a firm to determine what it might do by identifying what opportunities and threats exist. (A) True (B) False
Answer : (B)
6. Analyzing the internal environment enables a firm to determine what it can do by identifying resources, capabilities, and core competencies in the internal organization. (A) True (B) False Answer : (A)
7. Understanding how to leverage the firm's unique bundle of resources and capabilities is a key outcome decision makers seek when analyzing the internal organization. (A) True (B) False Answer : (A)
8. Resources are the source of capabilities, some of which lead to the development of core competencies. In turn, some core competencies may lead to competitive advantage. (A) True (B) False Answer : (A)
9. Value is measured by the variable and fixed costs associated with the production and marketing of a particular product compared with the revenue and profits the product generates. (A) True (B) False Answer : (B)
10. Creating customer value is the source of the firm's potential to earn above-average returns. (A) True (B) False Answer : (A)
11. Walmart uses core competencies, such as information technology and distribution channels, to create value for its customers through its "everyday low prices."
(A) True (B) False Answer : (A)
12. The need to meet quarterly earnings results causes managers to accurately examine the firm's internal organization. (A) True (B) False Answer : (B)
13. The learning generated by making and correcting mistakes is generally unimportant to efforts to create new capabilities and core competencies. (A) True (B) False Answer : (B)
14. By themselves, resources can allow firms to create value for customers as the foundation for earning above-average returns. (A) True (B) False Answer : (B)
15. Resources must be combined to form capabilities, as illustrated by Chipotle, which linked fresh ingredients with several other resources, including the marketing and training of employees, as the foundation for customer service as a capability. (A) True (B) False Answer : (A)
16. The value of tangible assets, such as the firm's borrowing capacity and its physical plant, is high because these assets can be easily leveraged to derive additional value. (A) True (B) False
Answer : (B)
17. Although an organization's good reputation is a valuable resource that takes years of superior marketplace competence to achieve, it is not a good basis for building a competitive advantage because it can be destroyed almost instantly by bad publicity. (A) True (B) False Answer : (B)
18. Compared to tangible resources, intangible resources are an inferior source of core competencies. (A) True (B) False Answer : (B)
19. The foundation of many capabilities lies in the unique skills and knowledge of a firm's employees. (A) True (B) False Answer : (A)
20. Capabilities of an organization emerge spontaneously through the interaction of tangible and intangible resources. (A) True (B) False Answer : (B)
21. Older employees are less valuable resources to firms than younger employees, because older employees have lower levels of knowledge. Consequently, employee layoffs should begin with earlyretirement inducements. (A) True (B) False Answer : (B)
22. At IBM, human capital is critical to forming and using the firm's capabilities in customer relationships, scientific and research skills, and technical skills in hardware, software, and services. (A) True (B) False Answer : (A)
23. Capabilities are usually developed separately from specific functional areas such as manufacturing, R&D, and marketing. (A) True (B) False Answer : (B)
24. "Motivating, empowering, and retaining employees" is an example of a capability that resides within the human resources functional area. (A) True (B) False Answer : (A)
25. Core competencies are capabilities that serve as a source of competitive advantage for a firm over its rivals. (A) True (B) False Answer : (A)
26. Apple has combined some of its tangible resources (such as financial resources and research laboratories) and intangible resources (such as scientists, engineers, and organizational routines) to create a capability in R&D that creates a core competence in innovation. (A) True (B) False Answer : (A)
27. The firm with the most capabilities wins. (A) True
(B) False Answer : (B)
28. Valuable capabilities allow the firm to exploit strengths or neutralize weaknesses in the internal environment. (A) True (B) False Answer : (B)
29. Costly-to-imitate capabilities are those which other firms cannot easily develop as they have no strategic equivalent. (A) True (B) False Answer : (B)
30. Capabilities may be costly to imitate if firms have unique and valuable organizational cultures, are causally ambiguous, and socially complex. (A) True (B) False Answer : (A)
31. At Southwest Airlines, the complex interrelationship between its culture and human capital adds value for customers in ways that other airlines cannot, such as jokes on flights by flight attendants and cooperation between gate personnel and pilots. (A) True (B) False Answer : (A)
32. Interpersonal relationships, trust, friendships, and a firm's reputation are all examples of complex social phenomena that make capabilities easy to imitate. (A) True (B) False Answer : (B)
33. A company can earn above-average returns only when the value it creates is less than the costs incurred to create that value. (A) True (B) False Answer : (B)
34. Value chain activities in the value chain create value, whereas support functions generate costs. (A) True (B) False Answer : (B)
35. One criterion for a resource or capability to be a source of competitive advantage is that it must allow the firm to perform a value-creating activity that competitors cannot perform. (A) True (B) False Answer : (A)
36. A firm should outsource only activities where it cannot create value or where it is at a substantial disadvantage compared to competitors. (A) True (B) False Answer : (A)
37. Firms should never outsource a primary activity because of the danger of the activity being imitated by rivals. (A) True (B) False Answer : (B)
38. Two concerns about outsourcing are the potential loss of a firm's innovative ability and the loss of jobs within companies that decide to outsource some of their work. (A) True
(B) False Answer : (A)
39. Any core competency has the potential to lose its value-creating ability. (A) True (B) False Answer : (A)
MULTICHOICE 40. All competitive advantages have: (A) a limited life. (B) an expiration date. (C) the ability to earn above-average returns indefinitely. (D) the ability to lead to more competitive advantages. Answer : (A)
41. It is increasingly difficult for a firm to develop and sustain a competitive advantage because of the effects of globalization and: (A) the rapid development of the Internet's capabilities. (B) extensive use of outsourcing within the borders of the United States. (C) the declining number of inventions and patents developed by U.S. citizens. (D) the simultaneous erosion of the U.S. work ethic and the U.S. education system. Answer : (A)
42. Which of the following is NOT required for a firm to achieve strategic competitiveness and earn above-average returns from its core competencies? (A) Core competencies must be acquired. (B) Core competencies must be bundled. (C) Core competencies must be internationalized. (D) Core competencies must be leveraged.
Answer : (C)
43. Which of the following is NOT a factor affecting sustainability of a competitive advantage? (A) the availability of substitutes for a firm's core competence (B) the rate at which obsolescence of the core competence occurs because of environmental changes (C) the imitability of a core competence (D) the length of time the core competence has existed Answer : (D)
44. Internal analysis enables a firm to determine what the firm: (A) can do. (B) should do. (C) will do. (D) might do. Answer : (A)
45. The proper matching of what a firm can do with what it might do: (A) balances the internal characteristics of the firm with the characteristics of the external environment. (B) overcomes the rigidity and inertia resulting from a history of success. (C) yields insights the firm requires to select its strategy. (D) develops core competencies based on human knowledge. Answer : (C)
46. The key to achieving competitiveness, earning above-average returns, and remaining ahead of competitors in the long run is to manage current core competencies: (A) in a way that uniquely bundles and leverages the firm's existing resources. (B) while simultaneously developing new ones. (C) and imitate the core competencies of successful competitors. (D) in order to preserve and enhance them against the firm's competitors. Answer : (B)
47. Which of the following is NOT a component of internal analysis leading to competitive advantage? (A) Tangible and intangible resources (B) Analysis of supplier power (C) Capabilities (D) Core competencies Answer : (B)
48. Value consists of: (A) a product's proprietary characteristics and attributes for which customers are willing to pay. (B) a product's performance characteristics and attributes for which customers are willing to pay. (C) a product's proprietary characteristics and attributes for which customers consider paying. (D) a product's performance characteristics and attributes for which customers consider paying. Answer : (B)
49. ______ are the source of a firm's ______, which are the source of the firm's ______. (A) Resources; capabilities; core competencies (B) Capabilities; resources; core competencies (C) Capabilities; resources; above-average returns (D) Core competencies; resources; competitive advantage Answer : (A)
50. ______ is measured by a product's performance characteristics and its attributes for which customers are willing to pay. (A) Competitive advantage (B) Profit potential (C) Contribution (D) Value Answer : (D)
51. By emphasizing core competencies when formulating strategies, companies learn to compete
primarily on the basis of: (A) intangible resources. (B) their primary activities. (C) firm-specific differences. (D) efficiency of production. Answer : (C)
52. The challenge and difficulty of making effective decisions are implied by preliminary evidence that ______ of organizational decisions fail. (A) one-fourth (B) one-fifth (C) one-tenth (D) one-half Answer : (D)
53. A decision that results in failure: (A) is a career-ending event because it is so unusual. (B) often results from lack of accountability. (C) fosters organizational inertia. (D) allows for learning. Answer : (D)
54. The three conditions that characterize difficult managerial decisions concerning resources, capabilities, and core competencies are (A) complexity, rarity, and human intellectual capital. (B) uncertainty, complexity, and intraorganizational conflicts. (C) imitability, complexity, and interorganizational conflicts. (D) imitability, comparability, and human intellectual capital. Answer : (B)
55. A person who has made a successful decision when no obviously correct model or rule is
available or when relevant data are unreliable or incomplete has exercised: (A) foresight. (B) judgment. (C) effective strategic thinking. (D) decisiveness. Answer : (B)
56. One reason executive judgment can be a particularly important source of competitive advantage is that judgment: (A) allows a firm to build a strong reputation. (B) gains the loyalty of shareholders. (C) increases human intellectual capacity. (D) allows for superior bundling of resources. Answer : (A)
57. Judgment is the capacity for making a successful decision when: (A) there are multiple decision criteria. (B) no obviously correct model or rule is available. (C) cognitive biases create barriers to rationality. (D) there are contradictions between the firm's vision and its implemented strategy. Answer : (B)
58. The most numerous of the following organizational characteristics are: (A) resources. (B) capacities. (C) capabilities. (D) core competencies. Answer : (A)
59. Capabilities typically come from:
(A) individual resources. (B) one unique resource. (C) several outstanding resources used independently. (D) combining resources. Answer : (D)
60. All of the following are tangible resources EXCEPT: (A) production equipment. (B) distribution centers. (C) a firm's reputation. (D) formal reporting structures. Answer : (C)
61. Tangible resources include: (A) assets that are people-dependent, such as know-how. (B) assets that can be observed and quantified. (C) organizational culture. (D) a firm's reputation. Answer : (B)
62. Compared to intangible resources, tangible resources are ______ constrained because they are ______ to leverage. (A) less; easier (B) less; harder (C) more; harder (D) more; easier Answer : (C)
63. Compared to tangible resources, intangible resources are: (A) of less strategic value to the firm.
(B) less likely to be the focus of strategic analysis. (C) a superior source of capabilities. (D) more likely to be reflected on the firm's balance sheet. Answer : (C)
64. Compared to tangible resources, intangible resources are ______ and ______. (A) less visible; more difficult to copy. (B) less visible; less difficult to copy. (C) more visible; more difficult to copy. (D) more visible; less difficult to copy. Answer : (A)
65. The critical executive skill of the current business age is the ability to: (A) manage technological innovation. (B) manage human intellect. (C) initiate change and overcome inertia. (D) coordinate tangible and intangible resources. Answer : (B)
66. Which of the following is NOT a reputational resource? (A) Customers' opinions that the firm's products are high quality (B) Employees' opinions of the firm as a terrible place to work (C) Suppliers' opinions that the firm pays its bills in a timely manner (D) Customers' opinions that using the firm's products makes them attractive Answer : (B)
67. An investor is considering buying a restaurant that has been in operation for a number of years. The restaurant has a highly regarded chef and many long-term kitchen and wait staff who work together smoothly. It has a reputation for dishes of consistently high quality and an appealing dining atmosphere. What should the investor consider when making a decision? (A) The investor will find that the success of this restaurant is so heavily based on human resources
that the business will likely be subject to inertia in the future. (B) The investor will find that the restaurant's financial statements undervalue the true value of its resources. (C) The investor should be aware that intangible assets are difficult to leverage into additional businesses. (D) The investor should search for a firm that has competitive advantages based on tangible resources. Answer : (B)
68. Which of the following is a true statement about capabilities? (A) Capabilities are often developed in specific functional areas such as manufacturing, R&D, and marketing. (B) Valuable capabilities are based almost entirely on tangible resources. (C) Capabilities based on human capital are more vulnerable to obsolescence than other intangible capabilities because of the tendency for employee knowledge to become outdated. (D) The link between firm financial performance and capabilities is dependent on whether the capabilities are based on tangible or intangible resources. Answer : (A)
69. When firms lay off employees, they are: (A) treating employees as an intangible resource. (B) recognizing the reduced value of labor in the value chain. (C) eroding the organization's knowledge resources. (D) temporarily sacrificing a tangible asset that is easily replaced. Answer : (C)
70. Because firms combine tangible and intangible resources to create capabilities: (A) these capabilities are fragile and subject to sudden loss of value. (B) capabilities are often based on developing, carrying, and exchanging information and knowledge through the firm's human capital. (C) capabilities are easily transferred from one firm to another as employees change jobs. (D) these types of capabilities are considered primary activities in the value chain.
Answer : (B)
71. ______ can be viewed as the capacity to take action. (A) Strategic assets (B) Human capital (C) Core competencies (D) Functional capabilities Answer : (C)
72. ______ is an example of a capability that is based in the functional area of distribution. (A) Effective use of logistics management techniques (B) Effective control of inventories through point-of-purchase data collection (C) Effective organizational structure (D) Product and design quality Answer : (A)
73. Capabilities: (A) tend to be developed through firm-wide interactions and reside in the firm as a whole. (B) tend to be concentrated in the support activities of the value chain. (C) tend to be concentrated in the primary activities of the value chain. (D) are often developed in specific functional areas. Answer : (D)
74. Innovation, consumer understanding, brand-building, go-to-market, and scale are activities that P&G performs well and are examples of the company's: (A) tangible resources. (B) intangible resources. (C) core competencies. (D) capabilities. Answer : (C)
75. To provide a sustainable competitive advantage, a capability must satisfy all of the following criteria EXCEPT: (A) be technologically innovative. (B) be hard for competing firms to duplicate. (C) be without good substitutes. (D) be valuable to customers. Answer : (A)
76. From a customer's point of view, for an organization's capability to be a core competence it must be: (A) inimitable and unique. (B) valuable and unique. (C) inimitable and nonsubstitutable. (D) valuable and nonsubstitutable. Answer : (B)
77. Valuable capabilities: (A) allow the firm to exploit opportunities in its external environment. (B) allow the firm to neutralize threats in its internal environment. (C) allow the firm to exploit opportunities or neutralize threats in its external environment. (D) allow the firm to neutralize opportunities in its internal environment. Answer : (C)
78. Capabilities that other firms cannot develop easily are classified as: (A) costly to imitate. (B) rare. (C) valuable. (D) nonsubstitutable. Answer : (A)
79. A major department store chain has a strict policy of banning photographs or videos of its sales
floor or back-room operations. It also does not allow academics to conduct studies of it for publication in research journals. In fact, some of its own top managers refer to the management's policies on secrecy as "verging on paranoid." These policies indicate that the top management of the firm believes the organization's core competencies are: (A) causally ambiguous. (B) unobservable. (C) imitable. (D) common. Answer : (C)
80. Several months ago, a restaurant developed a new appetizer that is a hit with customers. Many customers go to the restaurant just for the appetizer, and it was at the center of a recent highly positive review by a food critic. Preparation involves common ingredients and average culinary skills but requires a very high oven temperature, which significantly increases utility costs. Several competing restaurants have since added their own version of the appetizer to their menu. Which criterion for assessing capabilities/core competencies is met? (A) The restaurant has the capability to develop something that is valuable. (B) The restaurant has the capability to develop something that is rare. (C) The restaurant has the capability to develop something that is costly to imitate. (D) All of these criteria are met. Answer : (A)
81. In the airline industry, frequent-flyer programs, ticket kiosks, and e-ticketing are all examples of capabilities that are ______ but no longer _____. (A) rare; valuable (B) valuable; rare (C) socially complex; rare (D) valuable; causally ambiguous Answer : (B)
82. The capabilities used to create the sustainability/green initiatives at Walmart and Target are ______ but less likely to be ______. (A) rare; valuable (B) valuable; rare
(C) socially complex; rare (D) valuable; causally ambiguous Answer : (B)
83. Costly-to-imitate capabilities can emerge for all of the following reasons EXCEPT: (A) lack of scientific transference. (B) social complexity. (C) unique historical conditions. (D) causal ambiguity. Answer : (A)
84. A financial management firm has existed for more than 70 years. Some of its original clients' grandchildren are now clients of the firm themselves. The partners and staff of the firm have spent most or all of their careers with the firm. Many have even married into each other's families. This firm has capabilities that would be costly to imitate because of its (A) access to large amounts of financial capital. (B) causally ambiguous core competencies. (C) social complexity. (D) unique historical conditions. Answer : (C)
85. Southwest Airlines has a complex interrelationship between its culture and staff that adds value in ways that other airlines cannot, such as jokes on flights or the cooperation between gate personnel and pilots. These examples illustrate which of the following criteria for sustainable competitive advantage? (A) Valuable (B) Rare (C) Costly to imitate (D) Nonsubstitutable Answer : (C)
86. McDonald's culture, with an emphasis on cleanliness, consistency, service, and the training that reinforces the value of these characteristics, illustrates which of the following criteria for
sustainable competitive advantage? (A) Valuable (B) Rare (C) Costly to imitate (D) Nonsubstitutable Answer : (C)
87. Organizational culture is: (A) amorphous and changeable. (B) not easily imitable. (C) so difficult to analyze that most firms should choose to ignore it. (D) typically fragile in the face of changes in the external environment. Answer : (B)
88. Gamma, Inc., has struggled for industry dominance with Ardent, Inc., its main competitor, for years. Gamma has gathered and analyzed large amounts of competitive intelligence about Ardent. It has observed as much of the firm's internal functioning and technology as it can legally, yet Gamma cannot understand why Ardent has a competitive advantage over it. The source of Ardent's success is (A) impregnable. (B) causally ambiguous. (C) rationally obscure. (D) elusive. Answer : (B)
89. If a firm offers a service that is valuable, rare, and costly to imitate, but a substitute exists for the service, the firm will: (A) achieve competitive parity. (B) have a competitive disadvantage. (C) have a temporary competitive advantage. (D) gain a sustainable competitive advantage.
Answer : (C)
90. ACME Corp. is a leading provider of radios to the commercial market. Its products all rely on printed circuit-board technology. ACME has protected its market leadership with continued advancements in this technology, which it patents. A competitor has developed a radio for this market with equal performance but uses a software-based technology instead of circuit boards. ACME's technology leadership fails which capability test? (A) The value test (B) The rareness test (C) The substitutability test (D) The costly-to-imitate test Answer : (C)
91. Firms that achieve competitive parity can expect to: (A) earn below-average returns. (B) earn average returns. (C) earn above-average returns. (D) initially earn above-average returns, declining to average returns. Answer : (B)
92. A veterinary practice has added a pet boarding and grooming facility. Most of the practice's competitors also provide these services. The veterinary practice is gaining competitive: (A) advantage. (B) parity. (C) disadvantage. (D) neutrality. Answer : (B)
93. A local restaurant, Farm Fresh Ingredients, has become highly successful through its menu, based solely on organically raised chicken and beef, and organic seasonal produce. It has opened new locations in other cities, and these new locations are becoming highly profitable. Farm Fresh can expect that, at best, its competitive advantage will be: (A) permanent.
(B) sustainable. (C) temporary. (D) defensible. Answer : (C)
94. Value chain activities are: (A) the activities most likely to be imitated by competitors. (B) activities or tasks the firm completes in order to produce products and then sell, distribute, and service those products in ways that create value for customers. (C) the core competencies of the organization. (D) the activities most crucial to implementing the firm's business strategy. Answer : (B)
95. Value chain activities include all of the following EXCEPT: (A) supply-chain management. (B) operations. (C) management information systems. (D) distribution. Answer : (C)
96. Examples of support activities include all of the following EXCEPT: (A) finance. (B) human resources. (C) follow-up service. (D) management information systems. Answer : (C)
97. Value chain analysis is a tool used to: (A) analyze a firm's external environment for value-creating opportunities. (B) analyze a firm's value chain activities and support functions in isolation from its competitors' value chain.
(C) understand the parts of the firm's operation that create value and those that do not. (D) identify the firm's core competencies in each of the primary activities of the firm. Answer : (C)
98. Firms that have strong positive relationships with suppliers and customers are said to have ______, an essential ingredient to creating value. (A) customer value (B) social capital (C) effective marketing (D) an attractive industry Answer : (B)
99. Knowledge transfer and access to resources within the value chain are enhanced by: (A) guidelines for sharing knowledge and resources. (B) social capital. (C) penalties for not sharing knowledge and resources. (D) training employees on how to cooperate. Answer : (B)
100. To build social capital whereby resources such as knowledge are transferred across organizations requires ______ between the parties. (A) a contract (B) determination (C) confidence (D) trust Answer : (D)
101. Outsourcing is the: (A) spinning off of a value-creating activity to create a new firm. (B) selling of a value-creating activity to other firms. (C) purchase of a value-creating activity from an external supplier.
(D) use of computers to obtain value-creating data from the Internet. Answer : (C)
102. A major reason outsourcing is effective is that: (A) it increases the innovative potential of the firm. (B) few firms possess superior capability in all primary and support activities. (C) it permits unlimited access to capital resources. (D) competitors do not have access to the same external sources. Answer : (B)
103. Which of the following is TRUE about outsourcing? (A) Outsourcing allows firms to be more flexible and requires minimal coordination. (B) Outsourcing allows firms to concentrate on those areas in which they can create value. (C) Outsourcing strengthens the creative and innovative functions within the firm. (D) Outsourcing is effective only when it includes all support activities. Answer : (B)
104. A major U.S. manufacturer of children's toys believes its main competitive advantage lies in its continuing development of innovative toys and games. The company is facing increasing competition on price, and it is strongly considering outsourcing to offshore firms as a means of reducing costs. The LAST function this firm should consider outsourcing is: (A) operations. (B) research and development. (C) supply-chain management. (D) distribution. Answer : (B)
105. The owner of a store that sells fine-quality fabrics for home seamstresses bemoans the fact that few young women know how to do fine tailoring, much less simple dressmaking. Many potential customers are unable to appreciate the premium quality of the fabrics and are deterred by the high prices, as well as the complexity of fine sewing. In the past, the store had a strong demand for fabrics, large classes for women learning the fine points of sewing, and a reputation for excellent service and technical advice. Now the store is earning lower-than-average returns. This case is an example of:
(A) the hazard of competitors being able to imitate a firm's core competency. (B) the need for firms to stick to their core competencies through temporary downturns in market demand. (C) the lack of intangible resources undermining the core competencies of the firm. (D) core competencies that have become core rigidities. Answer : (D)
106. Which of the following is NOT an external event that reveals the "dark side" of core capabilities? (A) A new competitor figures out a better way to serve the firm's customers. (B) New technologies emerge and replace those used by the firm. (C) A firm changes its focus to a new core competence. (D) Political or social events shift the foundation of current core capabilities. Answer : (C)
107. Acme Auto Repair has a thriving business based on its reputation for high-quality work, honesty, and skilled employees. For continued long-term success, Acme's owner should: (A) concentrate on maintaining Acme's current core competencies. (B) focus on developing Acme's future competitive advantages. (C) place more emphasis on tangible resources, which are less vulnerable to obsolescence than intangible resources. (D) recognize that core competencies derived from human resources are more subject to becoming core rigidities than are core competencies based on other types of resources. Answer : (B)
108. All of the following were traditional sources of competitive advantage EXCEPT: (A) labor costs. (B) access to financial resources. (C) protected markets. (D) a highly educated labor market. Answer : (D)
109. ______ is the ability to analyze, understand, and manage an internal organization in ways that are not dependent on the assumptions of a single country, culture, or context. (A) Strategic thinking (B) A global mind-set (C) Profit-pooling (D) Competency-discovering Answer : (B)
110. A product's value is created by each of the following EXCEPT: (A) high cost and highly differentiated features. (B) low cost. (C) highly differentiated features. (D) low cost and highly differentiated features. Answer : (A)
111. A firm's core competencies, integrated with an understanding of the results of studying the conditions in the external environment, should: (A) guarantee profits. (B) lead to a first-mover advantage. (C) drive the selection of strategies. (D) increase the firm's market share. Answer : (C)
112. All of the following are true about the strategic decisions managers make about their firm's internal organization EXCEPT that: (A) they are directly correlated to executive compensation. (B) they are non-routine. (C) they have ethical implications. (D) they significantly influence the firm's ability to earn above-average returns. Answer : (A)
113. One capability that can be learned from failure is when to: (A) repeat with a modification. (B) add more resources. (C) dig in. (D) quit. Answer : (D)
114. Subscriptions to the New York Times have been decreasing as more customers receive their news through other media. At the same time, advertisers have shifted portions of their spending to other media. The NYT's managers are making decisions under: (A) certainty. (B) uncertainty. (C) intraorganizational conflict. (D) interorganizational conflict. Answer : (B)
115. Amazon is building a new distribution facility in Robbinsville, New Jersey. It is immediately off the exit of a major road. This is an example of a(n) ______ resource. (A) financial (B) organizational (C) physical (D) technological Answer : (C)
116. The corporate research division of Siemens files, on average, 25 patents a day. The patents are a(n) ______ resource. (A) financial (B) organizational (C) physical (D) technological Answer : (D)
117. Government agencies are known for having so many layers and rules that decisions are made slowly and inefficiently. In this case the ______ resource is a detriment to taxpayers using and paying for the bureaucracy. (A) financial (B) organizational (C) physical (D) technological Answer : (B)
118. A food bank in Florida was struggling to serve its customers. It asked Walmart for help. Walmart sent a team of managers who reorganized storage and transportation. The food bank was able to increase the number of clients served by tenfold. Walmart shared its expertise in: (A) distribution. (B) human resources. (C) marketing. (D) manufacturing. Answer : (A)
119. Charmed by Claire is a successful retail boutique that sells women's accessories. Claire, the owner/manager, knows that women have many options when buying jewelry. When customers enter her store they are greeted by name and given prompt, friendly attention. Customers return to the store because the service is excellent. Claire says the most important decision she makes is hiring the best staff because customer service is vital to her business. Customer service is: (A) a human resource. (B) an organizational resource. (C) a rare resource. (D) a core competency. Answer : (D)
120. Many firms outsource the payroll function of paying employees to firms such as ADP. Payroll is a(n): (A) value-chain activity. (B) operation function.
(C) support function. (D) supply-chain function. Answer : (C)
121. The ______ are those with the potential to be formed into core competencies as the foundation for creating value. (A) "most" knowledge resources (B) "most" capabilities (C) "right" resources (D) "dark side" resources Answer : (C)
122. Tools such as ______ help the firm focus on its core competencies as the source of its competitive advantages. (A) marketing (B) manufacturing (C) outsourcing (D) imitation Answer : (C)
123. All core competencies have the potential to become core: (A) rigidities. (B) stagnations. (C) inefficiencies. (D) weaknesses. Answer : (A)
ESSAY 124. Describe the importance of internal analysis to the strategic success of the firm. Should not-fo-profit organizations perform internal analysis? Why or Why not?
Graders Info : By analyzing its internal environment, a firm determines what actions it can take based on its unique resources, capabilities, and core competencies. The firm's core competencies are the source of the firm's competitive advantage. Internal analysis allows the firm to compare what it is capable of doing (what it "can do") with what it "might do" (which is a function of opportunities and threats in the external environment). Matching what a firm can do with what it might do allows the firm to develop its vision, pursue its strategic mission, and select and implement its strategies. This allows the firm to leverage its unique bundle of resources and capabilities to gain competitive advantage. Not-fo-profit organizations absolutely need to conduct internal analysis. Competition for donations and grants is intense and a well-run, strategically focused organization is more likely to attract positive press and satisfy customer needs. Students should recognize that above-average return is not the only measure of success for organizations. When people gather to try and accomplish something, there will be managers, formal or informal. If those managers can think strategically, the group will have more success.
125. What are the differences between tangible and intangible resources? Which category of resources is more valuable to the firm?
Graders Info : Resources are either tangible or intangible. Tangible resources are those assets that can be observed and quantified. There are four types of tangible assets: financial resources (borrowing capacity, ability to generate internal funds); physical resources (plant and equipment, access to raw materials); technological resources (patents, trademarks, copyrights, and trade secrets); and organizational resources (formal reporting structure, planning, controlling and coordinating systems). Intangible resources are those assets in the firm that are less visible. There are three types of such resources: human resources (knowledge, trust, management capabilities, and organizational routines); resources for innovation (ideas, scientific capability, and capacity for innovation); and reputation (reputation with customers, i.e., the firm's brand name and perceptions of product quality, and relationships with suppliers). Intangible assets develop over time and are deeply rooted in the organization's history. Consequently, they are difficult for competitors to analyze and imitate. In addition, intangible resources can be leveraged to create new value to the firm. These properties give intangible resources a greater ability to create sustainable competitive advantage than do tangible resources. 126. Define capabilities and how they affect the firm's strategic success.
Graders Info : Capabilities exist when resources have been purposely integrated to achieve a specific task or tasks. Examples of tasks are human resource activities, product marketing, and research and development. Capabilities are based on developing, carrying, and exchanging information and knowledge through the firm's human capital. Many of the firm's capabilities are based on the unique skills and knowledge of its employees and their functional expertise. The knowledge possessed by human
capital is among the most significant of a firm's capabilities. Capabilities are often developed in specific functional areas (such as manufacturing or marketing) or in a part of a functional area (such as advertising). 127. Describe the four specific criteria that managers can use to decide which of their firm's capabilities have the potential to create a sustainable competitive advantage.
Graders Info : Managers must identify whether their firm has capabilities that are valuable and nonsubstitutable from the customer's point of view, and unique and inimitable from the firm's competitors' point of view. Only capabilities with these four characteristics are core competencies that can lead to sustainable competitive advantage. A valuable capability is one that helps the firm to exploit opportunities or to neutralize threats in the external environment. Rare means that few if any competitors possess the particular capability. Costly-to-imitate means a capability cannot be easily developed by other firms. Often, this kind of capability is rooted in the organization's culture or its unique history. Capabilities may also be costly to imitate if they are causally ambiguous or involve social complexity. Finally, nonsubstitutable capabilities do not have strategic equivalents that are rare and inimitable. 128. Describe a value chain analysis. How does a value chain analysis help a firm gain competitive advantage?
Graders Info : A value chain analysis allows a firm to understand the activities that create value for the firm and those that do not. A value chain analysis follows the product from its raw-material stage to the final customer. The purpose is to add as much value as possible as cheaply as possible and to capture that value. To conduct a value chain analysis, managers should study and identify all activities of the firm and evaluate their impact on the effort to create value for the customer. This analysis should be conducted with an attempt to assess the competitor's capabilities in these same areas. There are two central types of activities in a value chain - value chain activities and support functions. Value chain activities are activities or tasks the firm completes in order to produce products and then sell, distribute, and service those products in ways that create value for customers. The support functions are activities or tasks the firm completes in order to support the work being done by the value chain activities. If the firm can either perform the activity in a manner that is superior to how competitors perform it or perform a value-creating activity that competitors cannot complete, then the activity may be a source of competitive advantage. 129. Why is it important to prevent core competencies from becoming core rigidities?
Graders Info : All core competencies have the potential to become core rigidities and to generate failure. Each competence is a potential weakness if it is emphasized when it is no longer competitively relevant. The success that the competence generated in the past can generate organizational inertia and
complacency. A core competence can become obsolete if competitors figure out a better way to serve the firm's customers, if new technologies emerge, or if political or social events shift in the external environment. Managers studying the firm's internal organization are responsible for making certain that core competencies do not become core rigidities. 130. What is value? Why is it important?
Graders Info : Value is measured by a product's performance characteristics and by its attributes for which customers are willing to pay. Firms use their resources as the foundation for producing goods or services that will create value for customers. Value is important because firms with a competitive advantage create more value for customers than do competitors, and ultimately, creating value for customers is the source of above-average returns for a firm. 131. Define outsourcing. Why do organizations outsource?
Graders Info : Outsourcing is the purchase of a value-creating activity or a support function activity from an external supplier. Firms engaging in effective outsourcing increase their flexibility, mitigate risks, and reduce their capital investments. The trend toward outsourcing continues at a rapid pace. If outsourcing is to be used, firms must recognize that only activities that cannot create value or that create a substantial disadvantage compared to competitors should be outsourced. 132. Why is it important to identify internal strengths and weaknesses?
Graders Info : By analyzing the internal organization, firms are able to identify their strengths and weaknesses in resources, capabilities, and core competencies. In considering the results of examining the firm's internal organization, managers should understand that having a significant quantity of resources is not the same as having the "right" resources. The "right" resources are those with the potential to be formed into core competencies as the foundation for creating value. Tools such as outsourcing help the firm focus on its core competencies as the source of its competitive advantage. 133. Describe an organization with which you are familiar. Does it have a sustainable competitive advantage?
Graders Info : This question is similar to number 144, but it requires students to evaluate an organization on their own. They should have been doing this while studying the chapter and they will likely use an example from the chapter. Students must identify whether their organization has capabilities that are valuable and nonsubstitutable from the customer's point of view, and unique and inimitable from
the organization's competitors' point of view. Only capabilities with these four characteristics are core competencies that can lead to sustainable competitive advantage. A valuable capability is one that helps the firm to exploit opportunities or to neutralize threats in the external environment. Rare means that few if any competitors possess the particular capability. Costly-to-imitate means a capability cannot be easily developed by other organizations. Often, this kind of capability is rooted in the organization's culture or its unique history. Capabilities may also be costly to imitate if they are causally ambiguous or involve social complexity. Finally, nonsubstitutable capabilities do not have strategic equivalents that are rare and inimitable.
Chapter 04 Business Level Strategy TRUEFALSE 1. A business-level strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage in specific product markets. (A) True (B) False Answer : (A)
2. Every firm uses all levels of strategy: corporate, acquisition and restructuring, international and cooperative. (A) True (B) False Answer : (B)
3. When selecting a business-level strategy, the firm determines who will be served, what customer needs will be satisfied, and how those needs will be satisfied. (A) True (B) False Answer : (A)
4. Global competition has increased the options for consumers and has made it more imperative for firms to identify the needs of customers to earn above-average returns. (A) True (B) False Answer : (A)
5. Effective use of the generic business strategies allows a firm to favorably position itself relative to the five forces. (A) True (B) False Answer : (A)
6. Almost any identifiable human or organizational characteristic can be used to subdivide a market into segments that differ from one another on a given characteristic. (A) True (B) False Answer : (A)
7. The generalized forms of value that goods and services provide are either low cost with acceptable features or highly differentiated features with acceptable cost. (A) True (B) False Answer : (A)
8. Changing consumer needs are illustrated by Starbucks' enabling consumers to have an experience and design their own drinks rather than just a cup of coffee. (A) True (B) False Answer : (A)
9. Companies without core competencies in their value chain activities and support functions are still able to successfully implement either a cost leadership or a differentiation strategy, although they cannot implement an integrated cost leadership/differentiation strategy. (A) True (B) False Answer : (B)
10. To position itself differently from competitors, a firm must decide to either perform activities differently or to perform different activities. (A) True (B) False Answer : (A)
11. Southwest Airlines' tightly integrated activities make its cost leadership strategy more vulnerable to imitation than if its activities were loosely integrated.
(A) True (B) False Answer : (B)
12. The key to Southwest Airlines' success has been its ability to continuously reduce costs while providing customers with superior levels of differentiation, such as an engaging culture. (A) True (B) False Answer : (B)
13. Strategic fit among the many activities in the value chain is critical for competitive advantage because it is more difficult for a competitor to match a configuration of integrated activities than to imitate a particular activity, such as sales promotion or a process technology. (A) True (B) False Answer : (A)
14. The difference between the cost leadership and differentiation business-level strategies, and the focused cost leadership and focused differentiation strategies, are their basis for customer value. (A) True (B) False Answer : (B)
15. The integrated cost leadership/differentiation strategy is superior to the other business-level strategies. (A) True (B) False Answer : (B)
16. The best of the generic business strategies is the integrated cost leadership/differentiation strategy. (A) True (B) False
Answer : (B)
17. Low-cost leaders usually concentrate on the value chain activities of inbound logistics and outbound logistics as a means to reduce costs. (A) True (B) False Answer : (A)
18. Firms implementing cost leadership strategies often sell no-frills standardized goods or services (but with competitive levels of differentiation) to the industry's most typical customers. (A) True (B) False Answer : (A)
19. A low-cost position in the industry is not a valuable defense against rivals when competing on the basis of price. (A) True (B) False Answer : (B)
20. Walmart's change in strategy to attract more upscale customers will likely succeed because cost leaders are good at differentiating. (A) True (B) False Answer : (B)
21. Walmart's actions to become more upscale with the aim of taking sales away from Target provided an opening for competitors such as Amazon and Family Dollar to better compete on the basis of price and attract some of Walmart's customers. (A) True (B) False Answer : (A)
22. The value-creating activities associated with the cost leadership strategy and differentiation strategy are the same. (A) True (B) False Answer : (B)
23. Human resources and other support functions are not value-creating activities in the value chain; only value chain activities create value. (A) True (B) False Answer : (B)
24. In general, firms can be most effective if they develop business-level strategies that will serve the needs of the "typical customer" in the industry. (A) True (B) False Answer : (B)
25. The differentiation strategy is effective for products that are expensive, luxury consumer goods. It is not effective for common, inexpensive products such as donuts. (A) True (B) False Answer : (B)
26. A risk of the differentiation strategy is that the firm's means of differentiation may eventually not provide value for which customers are willing to pay. (A) True (B) False Answer : (A)
27. Unlike a cost leadership and a differentiation strategy, both focus strategies are less dependent on the completion of various value chain and support activities to compete in a superior manner. (A) True
(B) False Answer : (B)
28. The activities in the value chains of companies using focus strategies are quite different than the activities in the value chains of companies using industry-wide business strategies. (A) True (B) False Answer : (B)
29. A new generation of lunch trucks in cities such as New York, San Francisco, and Los Angeles serving high-end fare such as hamburgers made from grass-fed cattle, escargot, and crème brulee, at less expensive prices than sit-down restaurants. This illustrates a focus cost leadership strategy. (A) True (B) False Answer : (A)
30. A risk of a focus strategy is that the needs of the customer within a narrow competitive segment may become more similar to those needs of customers in the whole market. (A) True (B) False Answer : (A)
31. Although it is a cost leader, IKEA also offers differentiated features that appeal to its target customers, including its unique furniture designs, in-store playrooms for children, and extended hours. (A) True (B) False Answer : (A)
32. Flexible manufacturing systems, information networks, and total quality management are three techniques that make it possible for firms to implement the focused differentiation strategy. (A) True (B) False
Answer : (B)
33. A flexible manufacturing system is a computer-controlled process used to produce a variety of products in moderate, flexible quantities with minimal manual intervention. (A) True (B) False Answer : (A)
34. Because of its focus on innovation and quality manufacturing, Total Quality Management is not useful for firms that follow a cost leadership strategy. (A) True (B) False Answer : (B)
35. One of the benefits of the integrated cost leadership/differentiation strategy is that it is less risky than either the cost leadership or differentiation strategies. (A) True (B) False Answer : (B)
36. The hazard of getting "stuck in the middle" applies to firms using any business strategy. (A) True (B) False Answer : (B)
37. Research shows that firms using a hybrid strategy (i.e., integrated cost leadership/differentiation) often outperform firms using pure strategies ( i.e., cost leadership or differentiation). (A) True (B) False Answer : (B)
MULTICHOICE 38. Business-level strategies detail commitments and actions taken to provide value to customers and gain competitive advantage by exploiting core competencies in: (A) the selection of industries in which the firm will compete. (B) specific product markets. (C) primary value chain activities. (D) particular geographic locations. Answer : (B)
39. A firm's core strategy is its ____ strategy. (A) corporate (B) business (C) pricing (D) international Answer : (B)
40. When selecting a business level strategy, the firm must determine all of the following EXCEPT: (A) how will the customer's needs be satisfied? (B) who is the customer? (C) what are the customers' needs? (D) why should these customers' needs be satisfied? Answer : (D)
41. The three dimensions of a firm's relationships with customers include all the following EXCEPT: (A) exclusiveness. (B) affiliation. (C) richness. (D) reach. Answer : (A)
42. Which of the following is TRUE? (A) As customer loyalty increases, customers are more sensitive to price increases. (B) Customer loyalty has a positive relationship with firm profitability. (C) Customer loyalty is fragile and cannot reliably be considered a factor in firm success. (D) Customer loyalty is of importance only to firms using the differentiation strategy. Answer : (B)
43. The ________dimension of relationships with customers is particularly important for social networking sites such as Facebook and Twitter. (A) reach (B) richness (C) affiliation (D) social Answer : (A)
44. Amazon has built capabilities around Internet technology and e-commerce to facilitate information exchanges with its customers in a cost effective manner. This represents which of the three service dimension? (A) Reach (B) Richness (C) Affiliation (D) None of the these options are correct. Answer : (B)
45. Viewing the world through the customer's eyes and constantly seeking ways to create more value for the company enhances: (A) the reach of the company toward the customer. (B) the ability to identify the customer. (C) the richness of the relationship with the customer. (D) affiliation with the customer. Answer : (D)
46. Before the firm decides what products to offer and what benefits and features they will have, the firm must decide all the following questions EXCEPT: (A) who the firm should serve. (B) when the customer's needs should be satisfied. (C) what needs the firm should satisfy. (D) what core competencies are needed to satisfy customer needs. Answer : (B)
47. In the animal food products business, food-product needs of owners of companion animals pets (e.g., dogs and cats) differ from the needs for food and health-related products of those owning production animals (e.g., livestock). Which of the following aspects of managing customer relationships does this choice refer to? (A) Who: Determining the Customers to Serve (B) What: Determining Which Customer Needs to Satisfy (C) How: Determining Core Competencies Necessary to satisfy Customer Needs (D) When: Determining When to Satisfy Customer Needs Answer : (A)
48. Starbuck's determined that all of the following customer needs were important EXCEPT: (A) low price. (B) the experience associated with drinking coffee, not just the coffee. (C) the actual product of service (e.g., a cup of coffee), not the experience. (D) allowing customer to design their own drinks. Answer : (A)
49. Hyundai allows customers to return their cars if they lose their job within 12 months of purchase. Which of the following aspects of managing customer relationships is Hyundai engaged in? (A) Who: Determining the Customers to Serve (B) What: Determining Which Customer Needs to Satisfy (C) How: Determining Core Competencies Necessary to satisfy Customer Needs (D) When: Determining When to Satisfy Customer Needs
Answer : (B)
50. An interior decorator has moved his business from Los Angeles to St. Paul, Minnesota, because his spouse's company transferred her to St. Paul. The decorator is distressed because the customers in his target market have, in his words, "banal and bourgeois taste." What is the decorator's problem? (A) The decorator does not understand that customer needs are neither right nor wrong, good nor bad. (B) The decorator has no core competencies that will transfer to his new geographic market. (C) The decorator should choose a strategy of cost leadership in this environment. (D) The decorator is highly affiliated with the new target market and understands how he can create value for it. Answer : (A)
51. In order to meet and exceed customer's expectations, firms must: (A) constantly manipulate customers' perceptions of their needs. (B) answer the questions: who, what, when, where, how, and why as they apply to customers. (C) continuously improve, innovate, and upgrade their core competencies. (D) successfully defend their established core competencies from imitation by competitors. Answer : (C)
52. Business-level strategies are concerned specifically with: (A) creating differences between the firm's position and its competitors. (B) selecting the industries in which the firm will compete. (C) how functional areas will be organized within the firm. (D) how a business with multiple physical locations will operate one of those locations. Answer : (A)
53. An entrepreneur is investigating starting a company that provides tax advice to small companies. In order to position his company differently from the existing competitors, the entrepreneur must: (A) analyze the reach, richness, and affiliation the company must have with its customers. (B) provide tax advice either in a different manner or provide a different kind of tax service than
competitors. (C) offer tax advice at a price lower than the cheapest competitor. (D) offer tax advice at a higher quality than the best competitor. Answer : (B)
54. Which of the following are central to implementing value-creating strategies and thereby satisfying customers' needs? (A) Firm resources (B) Capabilities (C) Core competencies (D) None of the the above Answer : (C)
55. The analysis of the activity map of a successful company such as Southwest Airlines emphasizes how: (A) the organizational culture of Southwest Airlines is the key to the success of the organization. (B) understanding the profit ability in an industry indicates to companies where above-average returns can be earned. (C) it is hard for rivals to match a configuration of integrated activities than to imitate a single activity. (D) the primary and support activities of a successful company capture value all along the value chain. Answer : (C)
56. By examining the ____ of Southwest Airlines, one can identify the strategic themes around which it has developed its business strategy. These themes include limited passenger service, high aircraft utilization, and highly productive ground and gate crews. (A) activity map (B) profit sharing (C) value diagram (D) five forces model Answer : (A)
57. If Southwest Airlines employees lost their high enthusiasm and commitment to the company: (A) the airline could continue without problems because its cost leadership strategy is dependent on its efficient internal procedures. (B) replacement employees could be hired from rival airlines that are laying off employees and easily be merged into the Southwest culture. (C) there would be no impact on Southwest's profitability because Southwest's customers value the low fares rather than being "entertained" by the employees. (D) Southwest would have lost one of its competitive advantages, and its performance would be threatened. Answer : (D)
58. Strategic fit among many activities (in an activity map) is fundamental to: (A) the development of core competencies for a firm. (B) the breadth of competitive scope for a firm. (C) sustainability of a firm's competitive advantage. (D) the integrity of the firm's value chain. Answer : (C)
59. All of the following are considered generic business-level strategies EXCEPT: (A) product diversification. (B) cost leadership. (C) focused differentiation. (D) integrated cost leadership/differentiation. Answer : (A)
60. A company using a narrow target market in its business strategy is: (A) following a cost leadership business strategy. (B) focusing on a broad array of geographic markets. (C) limiting the group of customer segments served. (D) decreasing the number of activities on its value chain. Answer : (C)
61. As the television industry has changed in the last few decades from just three major networks to a multiplicity of networks, one of the major aspects of business strategy for the newer networks is ____ than the traditional networks. (A) broader target market (B) narrower target market (C) increased use of primary activities to capture value (D) increased use of support activities to capture value Answer : (B)
62. The effectiveness of any of the generic business-level strategies is contingent upon: (A) customer needs and competitors' strategies. (B) the match between the opportunities and threats in its external market and the strengths of its internal environment. (C) the trends in the general consumer base and the robustness of the global and industry economy. (D) the firm's competitive scope and its competitive advantage. Answer : (B)
63. A cost leadership strategy provides goods or services with features that are: (A) acceptable. (B) unique. (C) substandard. (D) mediocre. Answer : (A)
64. A cost leadership strategy targets the industry's ____ customers. (A) most typical (B) poorest (C) least educated (D) most frugal Answer : (A)
65. Durable Ceramics, Inc., provides inexpensive ceramic tile to builders of institutional buildings such as schools, prisons, and public administration buildings. It has always competed on a cost leadership basis. Most of its products are purchased by a few commercial construction firms, so it is fairly dependent on these construction firms for selling its product. Durable Ceramic's next mostefficient competitor, Cost-Less Ceramics, Inc., earns average returns, whereas Durable earns aboveaverage returns. The commercial construction firms are putting pressure on Durable to reduce its prices. If Durable reduces its prices below those of Cost-Less's prices, it is likely that: (A) both Durable and Cost-Less will devise additional ways to become more efficient in their production processes. (B) Durable will be unable to absorb the lower cost, and will go out of business. (C) both Cost-Less and Durable will go out of business, leaving the customers with fewer alternative sources of low-cost tile. (D) Cost-Less will go out of business, and Durable will gain higher power over its customers. Answer : (D)
66. Research suggests that having a competitive advantage in ____ creates more value in the cost leadership strategy than it does in the differentiation strategy. (A) marketing and sales (B) technology development (C) logistics (D) human resource management Answer : (C)
67. A river barge company can offer cheaper, although slower, per pound transportation of products to companies when compared with transportation by air, truck, or rail. The river barge company should first target customers whose companies use: (A) the integrated cost leadership/differentiation strategy. (B) either of the focus strategies. (C) the cost leadership strategy. (D) any of the strategies except the focused differentiation strategy. Answer : (C)
68. Walmart went against business-level strategy and made changes to attract upscale customers. These changes had which of the following results? (A) It strengthened Walmart's position against rivals such as Dollar Stores and Amazon.
(B) It made Walmart vulnerable to Dollar Store and Amazon. (C) It attracted significant numbers of new customers. (D) Family Dollar, Dollar Tree, and Dollar General all experienced losses in sales as many of their customers went to Walmart. Answer : (B)
69. Walmart's same store sales have been declining and those of rivals Family Dollar and Amazon have been increasing. What could explain this recent change? (A) Walmart was too aggressive with its low-cost position and lost customers who wanted more upscale products. (B) Walmart changed its strategy to focused differentiation. (C) Amazon and Family Dollar changed their strategies to attract more upscale customers. (D) Walmart changed its strategy to attract more upscale customers. Answer : (D)
70. A company pursuing the differentiation or focused differentiation strategy would tend to: (A) build economies of scale and efficient operations. (B) develop and maintain cost-effective MIS operations. (C) develop flexible systems that allow rapid response to customers' changing needs. (D) have relationships with suppliers to maintain efficient flow of supplies for operations. Answer : (C)
71. When the costs of supplies increase in an industry, the low-cost leader: (A) may continue competing with rivals on the basis of product features. (B) will lose customers as a result of price increases. (C) will be unable to absorb higher costs because cost-leaders operate on very narrow profit margins. (D) may be the only firm able to pay the higher prices and continue to earn average or aboveaverage returns. Answer : (D)
72. Ever-improving levels of efficiency enhance profit margins for a cost-leader. This effects which
of the five forces of industry structure most directly? (A) Potential entrants (B) Substitutes (C) Buyer power (D) Supplier power Answer : (A)
73. The typical risks of a cost leadership strategy include: (A) the inability to balance high differentiation and low price. (B) production and distribution processes becoming obsolete. (C) excessive differentiation to the point where the customer base is too small. (D) loss of customer loyalty. Answer : (B)
74. When a firm is able to produce nonstandardized (that is, distinctive) products for customers who value differentiated features more than they value low cost, the firm is successfully implementing: (A) a differentiation strategy. (B) a cost leadership strategy. (C) an integrated cost leadership/differentiation strategy. (D) a single-product strategy. Answer : (A)
75. A firm successfully implementing a differentiation strategy would expect: (A) customers to be sensitive to price increases. (B) to charge premium prices. (C) customers to perceive the product as standard. (D) to have high levels of power over suppliers. Answer : (B)
76. The products or services that are differentiated from others, have qualities that are:
(A) perceived by the customer to add value that they will pay a premium to purchase. (B) valued by the typical industry customer. (C) perceived as standardized by the customer. (D) seen as classic attributes rather than passing fads. Answer : (A)
77. Blind taste-tests have shown that the taste of premium-priced vodkas and inexpensive vodkas are indistinguishable even to regular drinkers of vodka. But the sales of premium vodkas are thriving. This is an example of: (A) the perception of perceived prestige and status as a means of differentiating a product. (B) the importance of high-quality raw materials when using the differentiation strategy. (C) the risk of product imitation by competitors. (D) the danger counterfeiting holds for firms pursuing the differentiation strategy. Answer : (A)
78. All of the following are examples of differentiated products EXCEPT: (A) Mont Blanc pens. (B) Caterpillar's heavy-duty earth-moving equipment. (C) Great Value brand at Walmart. (D) Prada fashion. Answer : (C)
79. The use of a differentiation strategy would be expected to be LEAST effective in which of the following markets? (A) Commodity goods (B) Mmotion pictures (C) Popular music (D) Writing instruments Answer : (A)
80. All of the following are ways that a good or service can be differentiated EXCEPT:
(A) responsive customer service. (B) perceived prestige and status. (C) economies of scale and efficient operations. (D) engineering design and performance. Answer : (C)
81. The differentiation strategy can be effective in controlling the power of rivalry with existing competitors in an industry because: (A) customers will seek out the lowest-cost product. (B) customers of nondifferentiated products are sensitive to price increases. (C) customers are loyal to brands that are differentiated in meaningful ways. (D) the differentiation strategy benefits from rivalry because it forces the firm to innovate. Answer : (C)
82. Wholesome Pet Food has successfully specialized for 20 years in high-quality pet food made from all-natural ingredients and organically raised lamb. This brand has a strong following and is recommended by veterinarians who practice in affluent neighborhoods. Wholesome's main supplier of lamb has announced that the price for lamb will be 15 percent higher next year. Which one of the following is true? (A) Wholesome will probably be able to pass the cost on to its customers because they are less sensitive to price increases than the average buyer. (B) Companies pursuing Wholesome's business strategy are especially vulnerable to this risk. (C) If Wholesome raises its pet food prices, customers will turn to less expensive brands such as Purina. (D) Wholesome probably operates on very thin margins, and a cost increase will threaten its ability to earn average returns. Answer : (A)
83. Which of the following is NOT a value-creating activity associated with the differentiation strategy? (A) Developing policies to ensure efficient hiring and retention to keep costs low and implement training to ensure high employee efficiency. (B) Providing accurate and timely delivery of goods to customers. (C) Ensuring receipt of high quality supplies (raw materials and other goods).
(D) Developing flexible systems that allow rapid response to customers' changing needs. Answer : (A)
84. A differentiation strategy can be effective in controlling the power of substitutes in an industry because: (A) customers have low switching costs. (B) substitute products are lower quality. (C) a differentiating firm can always lower prices. (D) customers develop brand loyalty. Answer : (D)
85. Recently, the only type of car available for Anthony to rent on a business trip was a compact, fuel-efficient Japanese import. Anthony was surprised at the comfort and performance of the car. He is in the market for a new car and had previously considered only buying another luxury SUV. Now, he is thinking about the significant cost savings he would have if he bought the compact vehicle rather than a new SUV. This is an example of the competitive risk that: (A) a competitor's products can convey a product's differentiated features to a customer at a significantly reduced price. (B) a product imitation can cause customers to perceive that competitors offer essentially the same goods. (C) experience can narrow a customer's perceptions of the value of a product's differentiated features. (D) brand loyalty insulates a company from rivalry with competitors. Answer : (C)
86. A manufacturer of jewelry imitates the style of a popular and expensive brand using manufactured stones rather than real gemstones and lesser grade metals rather than silver and gold. The manufacturer packages the jewelry in boxes of the same color imprinted with an almost identical logo. About 85 percent of the company's sales are through Internet sales. This example illustrates the competitive risk of ____ that threatens companies that use the differentiation strategy. (A) customer sensitive to price differentials (B) threat by the cost leader (C) customer experience (D) counterfeiting Answer : (D)
87. The typical risks of a differentiation strategy do NOT include which of the following? (A) Customers may find the price differential between the low-cost product and the differentiated product too large. (B) Customers' experience with other products may narrow customers' perception of the value of a product's differentiated features. (C) Counterfeit goods are widely available and acceptable to customers. (D) Suppliers of raw materials erode the firm's profit margin with price increases. Answer : (D)
88. When implementing a focus strategy, the firm seeks to: (A) offer products that are both differentiated and low cost. (B) move into the global market. (C) target the typical customer in an industry. (D) serve the specialized needs of a market segment. Answer : (D)
89. The focused differentiation strategy differs from the differentiation strategy in that: (A) the focused differentiators have a broader competitive scope. (B) the value-creating activities of focused differentiators are more constrained. (C) focused differentiators target a narrower customer market. (D) there are fewer risks with the focused differentiation strategy. Answer : (C)
90. Chico's is a clothing retailer that targets middle-aged women who want stylish and appealing clothes that are suitable for the mature figure. Chico's has an extensive customer list, a frequentbuyer discount card, and frequent sales promotions to Chico's customers based on their spending levels. Chico's uses a ____ strategy. (A) focused differentiation based on a buyer group (B) focused differentiation based on a product line segment (C) generic differentiation (D) integrated cost leadership/differentiation
Answer : (A)
91. The new generation of lunch trucks serving high-end fare in cities such as New York, San Francisco, and Los Angeles share which of the following a business strategies? (A) Cost leadership (B) Focused differentiation (C) Integrated cost leadership/differentiation (D) Differentiation Answer : (B)
92. The Monteleone Company pays large fees to a highly recognizable, prestigious individual to be the spokesperson for the company's products, luxury private jets. Monteleone is probably following the: (A) focused cost leadership strategy. (B) focused differentiation strategy. (C) integrated cost leadership/differentiation strategy. (D) total quality strategy. Answer : (B)
93. The risks of a focus strategy include: (A) a competitor's ability to use its core competencies to outfocus the focuser by serving an even more narrowly defined segment. (B) a competitor's ability to use its core competencies to outfocus the focuser by serving an even more broadly defined segment. (C) decisions by industry-wide competitors to use their resources to serve a wider range of customers' needs than the focuser has been serving. (D) decisions by focused competitors to use their resources to serve a wider range of customers' needs. Answer : (A)
94. Focus strategies are: (A) sheltered from the risks associated with industry-wide strategies because of their niche focus. (B) able to avoid global risk by focusing on niches in national or regional markets.
(C) faced with additional types of risks than are industry-wide strategies. (D) more subject to failure than industry-wide strategies. Answer : (C)
95. New Balance Athletic Shoes target Baby Boomers' needs for well-fitting shoes. The company is unique in that it offers a very broad range of shoe widths. A realistic potential risk New Balance runs in this focused differentiation strategy includes the possibility that: (A) Baby Boomers may find that they do not need well-fitting shoes, because they will become increasingly sedentary as they age. (B) a competitor may be able to better use flexible manufacturing systems to make shoes with an individualized fit. (C) athletic shoes may go out of style. (D) New Balance shoes may begin to appeal to a wider market, thus losing New Balance's focus advantage. Answer : (B)
96. Suppose another firm found a way to offer IKEA's customers (young buyers interested in stylish furniture at low cost) additional sources of differentiation while charging the same price or to provide the same service with the same sources of differentiation at a lower price. What category of competitive risk to a focus strategy would this be? (A) An industry-wide competitor decides that the market segment served by IKEA is worth entering. (B) Focusing on a more narrowly defined segment and "outfocusing" the focuser. (C) The needs of the customers in this narrow segment have become more similar to those of industry-wide competitors. (D) Experience can narrow customer's perceptions of value of the firm's differentiated features. Answer : (B)
97. Zara has pioneered "cheap chic" in clothing apparel. Zara offers current and desirable fashion goods at relatively low prices. To implement the strategy, Zara uses sophisticated designers and effective means of managing costs. These are all characteristics of which business level strategy? (A) Cost leadership (B) Differentiation (C) Integrated cost leadership/differentiation (D) Stuck in the middle
Answer : (C)
98. Firms use the integrated cost leadership/differentiation strategy because: (A) other firms have established unassailable market dominance with the other four strategies. (B) global markets allow for much broader competitive scope. (C) most consumers want to pay a low price for products with somewhat highly differentiated features. (D) one strategy is not enough for most large firms. Answer : (C)
99. The integration of a cost leadership and a differentiation strategy: (A) is challenging because it increases the number of value-chain activities and support functions in which the firm must become competent. (B) forces a firm to adapt more slowly to changes in its environment. (C) allows the firm to avoid being "stuck in the middle." (D) requires such a large customer base that it is most practical for firms in the global marketplace. Answer : (A)
100. Target's brand promise "Expect More. Pay Less" and appeal to higher-income, fashionconscious discount shoppers illustrates the _____ strategy. (A) cost leadership (B) differentiation (C) focused differentiation (D) integrated cost leadership/differentiation Answer : (D)
101. J.C. Penney attempted the strategy ______ . But it couldn't out ______ Walmart, nor could it ______ Macy's and Target. (A) of integrated cost leadership; price; compete with (B) of focused differentiation; cost; differentiate between (C) of cost leadership; cost; differentiate between
(D) of focused cost leadership; price; differentiate between Answer : (A)
102. Three sources of flexibility in completing primary and support activities are particularly useful for firms using the integrated strategy. These are: (A) flexible manufacturing systems, reengineering, and Total Quality Management. (B) outsourcing, reengineering, and flexible manufacturing systems. (C) outsourcing, Total Quality Management, and information networks. (D) flexible manufacturing systems, Total Quality Management, and information networks. Answer : (D)
103. The benefit of a flexible manufacturing system is that: (A) the lot size needed to manufacture a firm's product efficiently is reduced. (B) the necessary skill levels of workers are reduced, allowing the firm to reduce costs. (C) it lends itself to empowerment of employees. (D) it captures the cost savings of economies of scale. Answer : (A)
104. A flexible manufacturing system is: (A) based on the use of temporary and part-time employees as well as outsourcing. (B) a computer-controlled process that is used to produce a variety of products in moderate, flexible quantities with minimal human intervention. (C) based on a 360-degree view of the company's relationships with customers. (D) a system that identifies "the one best way" to produce each product in the company's line. Answer : (B)
105. A nationwide chain of pet stores wishes to identify the tradeoffs that its customers are willing to make between low-cost products such as generic pet foods and differentiated features such as pick-up and delivery of pets for grooming. The best technique for this firm to learn this information would be to use: (A) information networks. (B) a flexible manufacturing system.
(C) differentiation development planning. (D) Enterprise Resource Planning. Answer : (A)
106. By linking companies with their suppliers, distributors, and customers, ____ provide a company with flexibility. (A) flexible manufacturing systems (B) information networks (C) Total Quality Management systems (D) capabilities Answer : (B)
107. TQM is most helpful to firms following the ____ business strategy. (A) cost leadership (B) integrated cost leadership/differentiation (C) focused cost leadership (D) focused differentiation Answer : (B)
108. The term "stuck in the middle": (A) means adhering to a middle of the road strategy in the face of negative outcomes. (B) indicates that the customers of the firm are willing to pay only a mid-range price for the product. (C) reflects the fact that the customers of the firm have only moderate expectations regarding product quality. (D) means that the firm's cost structure is not low enough to allow it to attractively price its products and that its products are not sufficiently differentiated to create value for its target customer. Answer : (D)
109. All of the following describe strategies EXCEPT: (A) they are purposeful. (B) they cannibalize the old strategy.
(C) they precede the taking of actions to which they apply. (D) they demonstrate a shared understanding of the firm's vision and mission. Answer : (B)
110. More choices and easily accessible information about the functionality of firms' products are creating increasingly ______ customers. (A) sophisticated and knowledgeable (B) loyal (C) dissatisfied (D) content Answer : (A)
111. The ______ dimension of relationships with customers is concerned with the firm's access and connection to customers. (A) loyalty (B) reach (C) richness (D) affiliation Answer : (B)
112. Reach is an especially critical dimension for which firm? (A) Google (B) J.C. Penney (C) Blockbuster (D) Colgate-Palmolive Answer : (A)
113. Customer ratings of products they bought online is an example of: (A) loyalty. (B) reach. (C) richness.
(D) affiliation. Answer : (C)
114. A company selling diapers knows the market is for people with young children. However, within that segment they can further divide the market by a demographic factor like: (A) culture. (B) lifestyle. (C) consumption pattern. (D) income. Answer : (D)
115. When firms use core competencies to implement value-creating strategies they are answering the "______" question. (A) who (B) what (C) why (D) how Answer : (D)
116. Stage in the family life cycle is a ______ factor. (A) demographic (B) socioeconomic (C) psychological (D) perceptual Answer : (B)
117. The book The Dyslexic Advantage appeals to a market of educators, people with dyslexia, their friends, family, and coworkers. This is customer segmentation by ______ factors. (A) demographic (B) socioeconomic (C) psychological
(D) consumption Answer : (C)
118. Religious beliefs are an example of customer segmentation by ______ factors. (A) demographic (B) socioeconomic (C) geographic (D) psychological Answer : (D)
119. Historically, women have paid more for dry cleaning than men. Signature Cleaners advertises "equal price" for all customers. Signature Cleaners appeals to women, which is market segmentation by ______ factors. (A) demographic (B) socioeconomic (C) geographic (D) consumption pattern Answer : (A)
120. Chelsea Milling Company makes Jiffy packaged baking mixes. It was established in 1930. It has never spent one cent on advertising, which is one reason it is able to pursue a(n) ______ strategy. (A) differentiation (B) focused differentiation (C) integrated cost leadership/differentiation (D) cost leadership Answer : (D)
121. Mercedes mass produces luxury vehicles at a premium price. It uses a(n) ______ strategy. (A) differentiation (B) focused differentiation (C) integrated cost leadership/differentiation
(D) focused cost leadership Answer : (A)
122. A firm using a(n) ______ strategy generally needs to operate "below the radar" of larger and more resource rich firms that serve the broader market. (A) cost leadership (B) differentiation (C) focused (D) integrated cost leadership/differentiation Answer : (C)
ESSAY 123. Define strategy and business-level strategy. What is the difference between these two concepts?
Graders Info : In general, a strategy consists of the choices an organization makes in an attempt to gain strategic competitiveness and earn above-average returns. The organization's strategic choices are influenced by threats and opportunities in the external environment and by the nation and quality of its internal resources, capabilities, and core competencies. The strategy reflects the firm's vision and mission. Business-level strategy is concerned with a particular product market. Business-level strategy is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage in a particular product market. It is the organization's core strategy. Every firm, no matter how small, will have at least one business-level strategy. A diversified firm will have several types of corporate-level strategies as well as a separate business-level strategy in each product market area in which the company competes. The essence of a firm's business level strategy is choosing to perform activities differently or to perform different activities than competitors. 124. When a firm chooses a business-level strategy, it must answer the questions "Who? What? and How?" What are these questions and why are they important?
Graders Info : The firm must decide (1) who are the customers who will be served, (2) what needs do the target customers have that must be satisfied, and (3) how will those needs be satisfied by the firm. The choice of target customer (who) usually involves segmenting the market to cluster people with similar needs into groups. The target customers' needs drive "what" benefits and features the firm's product will have. This involves a choice and balance between cost and differentiation of the
product. Finally, firms use their core competencies (how) to implement value-creating strategies and satisfy customers' needs. 125. Discuss how a cost leadership strategy can allow a firm to earn above-average returns in spite of strong competitive forces. Address each of the five competitive forces.
Graders Info : 1) Rivalry: Having the low cost position serves as a valuable defense against rivals. Because of the cost leader's advantageous position, especially in logistics, rivals cannot reduce their costs lower than the cost leaders', and so they cannot earn above-average returns. 2) Buyers: The cost leadership strategy also protects against the power of customers. Powerful customers can drive prices lower, but they are not likely to be driven below that of the next-most-efficient industry competitor. Prices below this would cause the next-most-efficient competitor to leave the market, leaving the costleader in a stronger position relative to the buyer. 3) Suppliers: The cost leadership strategy also allows a firm to better absorb any cost increases forced on it by powerful suppliers, because the cost leader has greater margins than its competitors. In fact, a cost leader may be able to force its suppliers to keep prices low for them. 4) Entrants: The cost leadership strategy also discourages new entrants because the new entrant must be willing to accept no better than average returns until they gain the experience and core competencies required to approach the efficiency of the cost leader. 5) Substitutes: For substitutes to be used, they must not only perform a similar function but also be cheaper than the cost leader's product. When faced with substitute products, the cost leader can reduce its price. 126. Describe the risks of a differentiation strategy.
Graders Info : The risks of a differentiation strategy include the fact that the price differential between the low-cost producer and the differentiated firm's product may be too high for the customer. The differentiated products may exceed the customers' needs. Additionally, differentiation may cease to provide value for which customers are willing to pay. This can occur if rivals imitate the firm's product and offer it at a lower price. A third risk is that customer learning can narrow the customer's perception of the value of the firm's differentiated product. If customers have positive experience with low-cost products, they may decide the additional cost for the differentiated product is too high. Finally, counterfeit products are a risk to a differentiation strategy if these products provide the same differentiated features to customers at significantly reduced prices. 127. How do focused differentiation and focused cost leadership strategies differ from their nonfocused counterparts?
Graders Info : Focus strategies target specific industry segments or niche rather than the entire market. The market can be segmented into 1) a particular buyer group, 2) a different part of a product line, or 3) different geographic areas. The firm using a focus strategy hopes to meet the needs of a particular
target market better than firms with a more broad-based approach. Or, they hope to meet needs of a market niche that has been overlooked or neglected by broad-based rivals. 128. Describe the additional risks undertaken by firms pursuing a focus strategy.
Graders Info : Focus firms face three additional risks beyond the general risks of industry-wide strategies. First, a competitor may be able to focus on a more narrowly defined competitive segment and "outfocus" the focuser. Second, a firm competing on an industry-wide basis may decide the targeted market segment is attractive and worthy of competitive pursuit. Finally, the needs of the firm's customer group may become more similar to the needs of industry-wide customers as a whole, thereby eliminating the advantages of a focus strategy. 129. Describe the advantages of integrating cost leadership and differentiation strategies.
Graders Info : Customers have increasingly high expectations for products, wanting products that are both lowpriced and differentiated. So a number of firms are trying to simultaneously follow both a costleadership and a differentiation strategy. This requires the firm to perform the primary and support activities required of both strategies, which is challenging. Successful integration of strategies allows firms to adapt quickly to environmental changes, and learn new technologies. The firm gains more skills which makes it more flexible. Evidence suggests that successful use of integrated strategies is related to above-average returns. A number of firms such as Target Stores and European-based Zara owe their success to the integrated cost leadership/differentiation strategy. 130. What are the risks of an integrated cost leadership/differentiation strategy?
Graders Info : Integrated strategies present risks that go beyond those that arise from the pursuit of any single strategy by itself. Principal among these risks is that a firm becomes "stuck in the middle." In such a situation a firm fails to implement either the differentiation or the cost leadership strategy effectively. The firm will not be able to earn above-average returns, and without favorable conditions, it will earn below-average returns. Recent research suggests that firms using either cost leadership or differentiation often outperform firms attempting to use a "hybrid" strategy (i.e., integrated cost leadership/differentiation). This research suggests the risks associated with the integrated strategy. 131. Describe how a differentiation strategy can help a firm earn above-average returns.
Graders Info :
The differentiation strategy is an integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them. Product innovation is critical to successful use of the differentiation strategy. If the firm has a thorough understanding of what its target customers value, the relative importance they attach to the satisfaction of different needs, and for what they are willing to pay a premium, the differentiation strategy can be effective in helping it earn above-average returns. 132. Describe a firm with which you are familiar. Which business-level strategy does it use and what are the risk to that particular firm?
Graders Info : Students will most likely choose a firm with a cost-leader or differentiation strategy because they are simpler to describe. The risks of each strategy can be found on pages 117, 121, 123, and 126.
Chapter 05 Competitive Rivalry and Competitive Dynamics TRUEFALSE 1. Firms operating in the same market, offering similar products and targeting similar customers are competitors. (A) True (B) False Answer : (A)
2. Competitive rivalry is the contest to be the first mover in an international market. (A) True (B) False Answer : (B)
3. Competitive rivalry is the set of competitive actions and responses that occur among firms as they maneuver for an advantageous market position. (A) True (B) False Answer : (A)
4. "Competitive dynamics" indicates that firms and their strategic actions are independent. (A) True (B) False Answer : (B)
5. A strategy's success is determined not only by the firm's initial competitive actions but also by how well it anticipates competitors' responses to them and by how well the firm anticipates and responds to its competitors initial actions. (A) True (B) False Answer : (A)
6. Firms with high market commonality and highly similar resources are direct and mutually acknowledged competitors. (A) True (B) False Answer : (A)
7. Market commonality is concerned with the number of markets with which the firm and a competitor are jointly involved and the degree of importance of the individual markets to each. (A) True (B) False Answer : (A)
8. Coca Cola and PepsiCo compete across a number of products (e.g., soft drinks, bottled water) and geographic markets (U.S. and foreign markets) indicating that both companies have market commonality. (A) True (B) False Answer : (A)
9. Research suggests that a firm with greater multimarket contact is less likely to initiate an attack, but more likely to respond aggressively when attacked. (A) True (B) False Answer : (A)
10. Extensive market commonality guarantees intense competition in an industry. (A) True (B) False Answer : (B)
11. Bayou Belle Water sells water drawn only from a single artesian well in Southern Louisiana. It has a loyal following in its region. Because Bayou Belle markets the water, just as Coca-Cola, Nestle, and PepsiCo do, Bayou Belle has high resource similarity with these international firms.
(A) True (B) False Answer : (B)
12. Two firms, such as Fed Ex and UPS that have similar resources and common markets would be direct and mutually acknowledged competitors. (A) True (B) False Answer : (A)
13. Two firms, such as a small local, family-owned Italian restaurant and Olive Garden share few markets and have little similarity in resources, but are nonetheless direct and mutually acknowledged competitors. (A) True (B) False Answer : (B)
14. Awareness tends to be greatest when firms have highly similar resources and compete in multiple markets. (A) True (B) False Answer : (A)
15. Under the framework of competitive action and response, "ability" refers to an attacking or responding firm's knowledge of the competitive market characteristics. (A) True (B) False Answer : (B)
16. Walmart has recently opened a store in Alsatia, Missouri. Several local small retailers have decided that choosing not to respond to Walmart's competitive actions is a viable long-term option, because although the companies have high market commonality they have little resource similarity. These small retailers are correct in their decision. (A) True
(B) False Answer : (B)
17. A tactical competitive action involves a significant commitment of specific and distinctive organizational resources. (A) True (B) False Answer : (B)
18. Boeing's decision to commit the resources required to build the super-efficient 787 midsized jetliner is an example of a tactical action. (A) True (B) False Answer : (B)
19. Walmart's aggressive pricing strategy is a strategic action that plays a major role in how it competes. (A) True (B) False Answer : (B)
20. First movers can gain a sustained competitive advantage when they reduce their costs through reverse engineering. (A) True (B) False Answer : (B)
21. To be a first mover, the firm must have readily available resources to invest in R&D as well as to rapidly and successfully produce and market a stream of innovative products. (A) True (B) False Answer : (A)
22. An organization with high profitability, such as Walmart, will be able to develop high organizational slack. (A) True (B) False Answer : (A)
23. Mighty Mike's, a manufacturer of power tools for the home hobbyist, has seen its main competitor, MyTools, introduce a line of power tools that are smaller sized, lighter weight, and suitable for women and older hobbyists who have weaker hands than the typical male workshop hobbyist. Mighty Mike is waiting to see whether MyTools' new line is a success. Mighty Mike could be classified as a second mover. (A) True (B) False Answer : (A)
24. Firms that are typically late movers usually have little organizational slack. (A) True (B) False Answer : (A)
25. Large firms with significant slack resources (i.e., are able to launch a greater number of competitive actions) but who remain flexible and act like small firms (i.e., are able to launch a variety of actions) will be more successful against rivals. (A) True (B) False Answer : (A)
26. The need for quality products and services is so high that quality alone can assure a firm that it will achieve strategic competitiveness and earn above-average returns. (A) True (B) False Answer : (B)
27. Quality begins in marketing an organization where employees must create a perceived value of
quality. (A) True (B) False Answer : (B)
28. A firm can predict that a competitor whose products suffer from poor quality is likely to be less aggressive in its competitive actions until those quality problems are corrected. (A) True (B) False Answer : (A)
29. In general, strategic actions elicit fewer competitive responses than do tactical actions. (A) True (B) False Answer : (A)
30. Even if the effects of a competitor's strategic action on the focal firm are significant (e.g., loss of market share), little response is likely from that firm. (A) True (B) False Answer : (B)
31. It is more likely that locally owned, one-location cafes in a small town will respond more rapidly to tactical actions by each other than they will to strategic actions by the Burger King franchise that has recently moved to their town. (A) True (B) False Answer : (A)
32. A firm with a reputation as a price predator (an actor that frequently reduces prices to gain or maintain market share) generates few responses to its pricing tactical actions. (A) True
(B) False Answer : (B)
33. Firms are likely to imitate the actions of a competitor that is noted for risky, complex, and unpredictable behavior because this is a way to imitate unobservable core competencies. (A) True (B) False Answer : (B)
34. The more dependent a firm is on its market, the more aggressively it will defend it from another competitor. (A) True (B) False Answer : (A)
35. Disney is an example of a firm in a slow-cycle market because its animated characters are shielded from imitation by copyrights and trademarks. (A) True (B) False Answer : (A)
36. Patent laws and regulatory requirements such as required FDA (Food and Drug Administration) approval to launch new products shield pharmaceutical companies' positions in this slow-cycle market. (A) True (B) False Answer : (A)
37. Carl has just graduated with a management degree. He has a good understanding of his personal strengths and weaknesses and knows he would fit best in a stable organizational environment. In his job search, Carl should target firms in slow-cycle markets. (A) True (B) False
Answer : (A)
38. Fast-cycle markets are characterized by "generational products," which start out with a substantial technological advance in the performance of a product category followed by incremental technological advances as new generations of products are introduced. (A) True (B) False Answer : (A)
39. The satellite dish at Faye's weekend home has malfunctioned. When she calls to have the dish repaired, the service representative tells her that the dish is obsolete and that parts for it are no longer made. Faye must replace the old dish with a new dish. This is an example of lack of firm loyalty to a product in a fast-cycle market. (A) True (B) False Answer : (A)
40. Unlike fast-cycle markets, the struggle for market share in standard-cycle markets is moderate. (A) True (B) False Answer : (B)
MULTICHOICE 41. Competitive rivalry has the most effect on a firm's ____ strategies than the firm's other strategies. (A) business-level (B) corporate-level (C) acquisition (D) international Answer : (A)
42. Multimarket competition occurs when firms:
(A) sell different products to the same customer. (B) have a high level of awareness of their competitors' strategic intent. (C) simultaneously enter into an attack strategy. (D) compete against each other in several geographic or product markets. Answer : (D)
43. Competitive dynamics refers to the: (A) circumstances in which competitors are aware of the degree of their mutual interdependence resulting from market commonality and resource similarity. (B) set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position. (C) total set of actions and responses taken by all firms competing within a market. (D) ongoing set of competitive actions and competitive responses between competitors as they maneuver for advantageous market position. Answer : (C)
44. Intensified rivalry within an industry results in: (A) increased hiring across the industry. (B) increased total revenues across the industry. (C) decreased average profitability across the industry. (D) increased entries into the industry. Answer : (C)
45. Hilliard Pharmaceuticals and Ahrens Vitamins, Inc., have high market commonality, both geographically and in the market segments in which they compete. Hilliard, the number two firm in the industry, has undertaken a major strategic attack upon Ahrens, the market leader. Which of the following statements is most likely to be TRUE? (A) Ahrens will not respond aggressively since this is a strategic move and not a tactical action. (B) As the market leader, Ahrens has little to fear from an attack by Hilliard and will not expend organizational slack on a major response. (C) Ahrens will respond aggressively because of the high multimarket contact between Hilliard and Ahrens. (D) Ahrens will respond after a long delay as the nutrition supplement industry is a slow-cycle
industry. Answer : (C)
46. In general, compared with firms which compete in only one market, among firms which face one another in multiple markets there is: (A) similar competitive rivalry. (B) less competitive rivalry. (C) more competitive rivalry. (D) no competitive rivalry. Answer : (B)
47. Research suggests that a firm with greater multimarket contact is _______ likely to initiate and attack, and _____ likely to respond aggressively when attacked. (A) more; more (B) less; more (C) less; less (D) more; less Answer : (B)
48. Which pair of firms has the LEAST resource similarity? (A) Small, family-owned Italian restaurant; Olive Garden (B) Target; Walmart (C) HP; Dell (D) FedEx; UPS Answer : (A)
49. Rapid-Built Homes specializes in low-cost prefabricated, modular homes that can be erected in a matter of days anywhere in the country. Rapid-Built focuses on entire subdivisions of homes developed by real estate speculators. ModernModular Homes (ModMod) specializes in modular homes designed by architects, which can be built anywhere in the country. The buyers usually build the home themselves from kits on their own lots. ModMod sells fewer than 100 house kits per year. ModMod is run by two professors of architecture as a sideline business. According to the "Framework of Competitive Analysis," we can say that Rapid-Built and ModMod
(A) are direct mutually acknowledged competitors. (B) have high resource similarity. (C) have high market commonality. (D) are probably not engaged in intense competitive rivalry. Answer : (D)
50. Firms with ______ market commonality and _____ resource similarity are direct and mutually acknowledged competitors. (A) low; high (B) low; low (C) high; high (D) high; low Answer : (C)
51. In general, firms are more aware of competitors who have similar resources and who: (A) have low market dependence. (B) are late movers. (C) have low market commonality. (D) compete against the firm in multiple markets. Answer : (D)
52. ____ and ____ describe the situation in which organizations are direct competitors and are fully aware of the competition. (A) High market commonality; high resource similarity (B) High market commonality; low resource similarity (C) Low market commonality; high resource similarity (D) Low market commonality; low resource similarity Answer : (A)
53. Firms with few competitive resources are more likely to: (A) not respond to competitive actions.
(B) respond quickly to competitive actions. (C) delay responding to competitive actions. (D) respond to strategic actions, but not to tactical actions. Answer : (C)
54. ____ relates to the gains or losses a firm will experience if it attacks a rival or responds to an attack by a rival. (A) Motivation (B) Awareness (C) Responsiveness (D) Ability Answer : (A)
55. Both ____ and ____ affect the awareness and motivation of a firm to undertake actions and responses. (A) first-mover advantages; corporate size (B) market commonality; resource similarity (C) management capabilities; competitive analysis (D) speed of management decisions; management actions Answer : (B)
56. The larger the resources of a firm taking a competitive action compared with the resources of the other firms in the industry, the ____ the response will be of these other firms. (A) more fragmented (B) slower (C) larger (D) more tactical Answer : (B)
57. Walmart initially used a focused cost-leadership strategy to compete only in small communities by using sophisticated logistics systems and efficient purchasing practices to gain a competitive advantage. The response of local competitors was _______ because they ______.
(A) rapid; were nimble and flexible (B) slow; lacked the ability to marshal resources (C) rapid; perceived gains from responding to Walmart's attack (D) rapid; had the resources and flexibility compete against Walmart Answer : (B)
58. A competitive action can be one of two types, either ____ or ____. (A) aggressive; defensive (B) quality-based; cost-based (C) strategic; tactical (D) market-based; resource-based Answer : (C)
59. Which of the following is an example of a strategic action? (A) A "two movies for the price of one" campaign by Redbox (B) Use of product coupons by a local grocer (C) Entry into the European market by Home Depot (D) Fare increases by Southwest Airlines Answer : (C)
60. Which of the following is an example of a tactical action? (A) Walmart's launch of Sam's Club stores (B) Continental Airlines exit from a hub airport in Denver (C) Netflix beginning to offer music in addition to movies (D) Dell's launch of a new line of high performance, custom-made PCs Answer : (C)
61. Which of the following is the most strategic action by Walmart? (A) Aggressive pricing to ensure they are a price leader (B) Aggressively pricing toys and electronics during the holiday season
(C) Aggressively pricing school-related items in the back-to-school season (D) Entering a new foreign market Answer : (D)
62. On the whole there are more competitive responses to: (A) strategic actions than to tactical actions. (B) tactical actions than to strategic actions. (C) buyer pressures than to supplier pressures. (D) the demands of the top management team than to industry structural pressures. Answer : (B)
63. First movers are: (A) entrepreneurs who lead in the establishment of new industries. (B) firms that are first to exit a declining industry. (C) firms that take an initial competitive action. (D) individuals who move frequently as employment opportunities change in a locale. Answer : (C)
64. The chief disadvantage of being a first mover is the: (A) high degree of risk. (B) high level of competition in the new marketplace. (C) inability to earn above-average returns unless the production process is very efficient. (D) difficulty of obtaining new customers. Answer : (A)
65. Which of the following statements is FALSE? (A) First movers tend to take higher risks than second and later movers. (B) First movers tend to have significantly higher revenues than second movers. (C) First movers have lower survival rates than second and late movers. (D) First movers tend to have more organizational slack than later movers.
Answer : (C)
66. A second mover: (A) is typically ineffective in its response to the first mover. (B) attempts to provide a product with greater customer value than the first mover's product. (C) usually incurs higher expenses than the first mover since it must engage in reverse engineering. (D) typically has a higher survival rate than first movers which typically take greater risks. Answer : (B)
67. Late movers are those firms that: (A) respond to a competitive action a significant amount of time after the first mover's action and the second mover's response. (B) respond to a first mover's competitive action often through imitation or a move designed to counter the effects of the action. (C) take an initial competitive action (either strategic or tactical). (D) typically achieve higher-than-average returns because they can imitate the most efficient actor. Answer : (A)
68. Bubble-Up, Inc., is a small manufacturer of educational toys for children under age 10. It has coexisted with three other competitors in the educational toy industry for over 20 years, each of them maintaining a stable market share. There is a wide-spread rumor that Mega-Toy, Inc., the market leader in the broad children's toy market, has decided to target educational toys. Which one of these statements is most likely TRUE? (A) The owners of Bubble-Up are unconcerned about Mega-Toy's entry to the market because of the resource dissimilarity between the firms. (B) Bubble-Up's greater organizational slack will allow it to aggressively attack Mega-Toy. (C) Bubble-Up's smaller size may make it more flexible in introducing innovations than Mega-Toy. (D) Competitive rivalry will not increase for Bubble-Up because Mega-Toy is not dependent on the educational toy market. Answer : (C)
69. A firm that is LEAST likely to launch competitive actions is one that has: (A) organizational slack.
(B) advanced research and development. (C) recently improved the quality of its products. (D) large size. Answer : (D)
70. All competitive advantages do not accrue to large-sized firms. A major advantage of smaller firms is that they: (A) are more likely to have organizational slack. (B) can launch competitive actions more quickly. (C) have more loyal and diverse workforces. (D) can wait for larger firms to make mistakes in introducing innovative products. Answer : (B)
71. Which of the following is TRUE of Walmart? (A) Walmart has an unusual amount of flexibility for a large firm. (B) Walmart's success is largely due to the fact it has little market commonality with other industry firms. (C) Decision-making responsibility is centered at its Arkansas headquarters, which allows the firm to respond quickly to competitive attacks. (D) Walmart's advantage lies in its ability to "think big." Answer : (A)
72. Which of the following is TRUE of Southwest Airlines? (A) Southwest has an unusually low amount of flexibility for a large firm. (B) Southwest's success is largely due to the fact it has little market commonality with other airlines. (C) Decision-making responsibility is centered at its Dallas headquarters, which allows the firm to respond quickly to competitive attacks. (D) Southwest's advantage lies in its ability to "think small." Answer : (D)
73. Without quality, the firm's products:
(A) can compete effectively on the basis of low price. (B) lack credibility among customers. (C) must be exported to developing countries, because they are not competitive in the United States or developed countries. (D) are associated with predatory competition. Answer : (B)
74. Quality is: (A) meeting or exceeding customer expectations in the goods and/or services offered. (B) only a major factor in the production of luxury goods, such as BMW cars. (C) an assured way to gain competitive advantage. (D) a viable trade-off with product cost in gaining a competitive advantage. Answer : (A)
75. Quality affects competitive rivalry because a competitor whose products suffer from poor quality likely will _____________ until ___________. (A) initiate more competitive actions; the firm returns to profitability (B) initiate fewer competitive actions; the quality problems are corrected (C) initiate more competitive actions; the quality problems are corrected (D) advertise more; customers believe the quality had improved Answer : (B)
76. Competitors are more likely to respond to competitive actions that are taken by: (A) differentiators. (B) larger companies. (C) first movers. (D) market leaders. Answer : (D)
77. A firm is likely to respond to an attack by a competitor in all of the following situations EXCEPT when:
(A) the attack is by a price predator. (B) the attack makes the firm's market position less defensible. (C) the attack damages the firm's ability to use its capabilities. (D) the attack improves the competitor's market position. Answer : (A)
78. Which company below committed significant resources to enter the information services market and, given its success, was imitated by other competitors? (A) Compaq (B) IBM (C) HP (D) Dell Answer : (B)
79. Akamai Technologies is a dominant player in the content delivery network (CDN) market. Akamai is not very diversified (i.e., is dependent on the CDN market). If rival CDN providers such as Limelight Networks and Level 3 Communications lower their basic CDN service prices, what would be Akamai's likely response? (A) Raise its prices (B) Do nothing since it is the market leader (C) Exit the industry (D) Lower its prices Answer : (D)
80. Lobelia's Nursery and Garden Resource Center has long provided high-quality, typical types of seasonal bedding plants to customers in the Mobile, Alabama, metropolitan area. It has traditionally competed with the other plant nurseries within a 50-mile radius of Mobile. Recently, Lobelia has opened a branch in Fairfax, Virginia. Lobelia's research shows that most Fairfax nurseries have only one location. Lobelia can expect the local Fairfax nurseries to (A) be unmotivated to respond because their market position is not threatened by a new competitor from out-of-town. (B) respond with fierce attacks because of resource dissimilarity. (C) respond aggressively because of high market dependence.
(D) take no competitive response because of the lack of mutual interdependence among the nurseries. Answer : (C)
81. Which organization has the highest market dependence? (A) a chain of rapid-service oil change shops (B) a manufacturer of chemicals for the international pharmaceutical industry (C) a regional department store having 26 locations in the Northwest (D) a company that specializes in making replacement tiles for the space shuttle Answer : (D)
82. Sustained competitive advantage is most achievable in a ____ market. (A) slow-cycle (B) medium-cycle (C) standard-cycle (D) fast-cycle Answer : (A)
83. Walt Disney's focus on ____ is typical of a slow-cycle market. (A) innovation (B) total quality (C) proprietary rights (D) economies of scale Answer : (C)
84. The CEO of the Wholesome Food retail grocery chain, which specializes in organic and natural produce and meat, has stated, "The key to success is to find your niche and focus on it, regardless of what anyone else does." The CEO: (A) realizes that he must understand competitors in order to predict their competitive actions and responses. (B) understands that he is the market leader in his niche and thus has a sustainable competitive advantage.
(C) believes he has placed his firm in a slow-cycle industry where concerns about protecting unique competencies dominate concerns about market share. (D) realizes his firm has such lower resources than other competitors that his chain is "competitively invisible" to them. Answer : (C)
85. The ability of Disney to maintain its competitive advantage through proprietary rights to its characters would be severely weakened if: (A) theme parks with alternative cartoon characters were built in large numbers. (B) numerous lawsuits against copyright thieves tainted the reputation of the company. (C) Disney attempted to move beyond its traditional industry. (D) Disney's cartoon characters became widely perceived as old-fashioned and unappealing. Answer : (D)
86. Lawsuits over patent and copyright infringements are more common and intense in: (A) fast-cycle markets because the market is innovation-driven. (B) standard-cycle markets because the firm's brand name is such an important competitive advantage. (C) slow-cycle markets, because of the ability to shelter the company from imitation of its competitive advantage. (D) standard-cycle markets because innovation is rare, and so gives the innovating firm a significant competitive advantage. Answer : (C)
87. Traditionally, the music industry signed multi-year contracts with artists and sold copyright protected music through established distribution channels. A shift to the digital format and the rise of Internet technology has resulted in the sharing of music over peer-to-peer networks, a practice the industry called "piracy." In recent years, the music industry has seen a rapid decline in the number of CDs sold. At the same time, the ownership of the distribution rights of musical content under copyright laws remains clear. Attempts at innovation by individual record labels to offer music as direct downloads to consumer are quickly copied by other labels. Based on these factors, the best assessment is that the music industry has shifted from a ____ to a ____ cycle market. (A) slow; fast (B) slow; standard (C) standard; slow
(D) standard; fast Answer : (D)
88. Which industry can be LEAST described as a slow-cycle market? (A) Freight railroads (B) Pharmaceuticals (C) Cell phone provider (D) Private ownership of highways and bridges Answer : (C)
89. Reverse engineering is characteristic of: (A) first movers. (B) fast-cycle markets. (C) market leaders. (D) price predators. Answer : (B)
90. Companies in fast-cycle markets need to profit quickly from an innovative product for all of the following reasons EXCEPT: (A) the technology used is not proprietary. (B) the prices of component parts tend to rise rapidly. (C) product prices fall quickly in fast-cycle markets. (D) counterattacks from rivals come quickly. Answer : (B)
91. A company in a ____ industry is LEAST likely to make heavy use of patents and copyrights. (A) slow-cycle (B) medium-cycle (C) standard-cycle (D) fast-cycle
Answer : (D)
92. ____ markets are often described as volatile and innovative. (A) Slow-cycle (B) Fast-cycle (C) Standard-cycle (D) Sheltered Answer : (B)
93. An organization's loyalty to its own product is a competitive disadvantage in a(n) ____ market. (A) slow-cycle (B) standard cycle (C) intermediate cycle (D) fast-cycle Answer : (D)
94. Because Coca-Cola, Nestle, and PepsiCo all sell a product (bottled water) that is essentially the same and all three giant companies are engaged in battles for market share using incremental changes in their products and seeking loyalty to brand names, it is most likely that the bottled water market is a(n): (A) slow-cycle market (B) standard-cycle market. (C) fast-cycle market. (D) intermediate-cycle market. Answer : (B)
95. Competition between candy makers (e.g., Hershey, Mars, Cadbury, Nestle, and Godiva) where firms package design (including package downsizing) and ease of availability is characteristic of a(n): (A) slow-cycle market (B) standard-cycle market. (C) fast-cycle market.
(D) intermediate-cycle market. Answer : (B)
96. Goods or services in standard-cycle markets reflect: (A) organizations that serve a mass market. (B) numerous first mover advantages. (C) an inability to sustain a competitive advantage except for brief periods of time. (D) competitive advantages that are shielded from imitation. Answer : (A)
97. The competitive actions and responses in __________ markets are designed to seek large market shares, to gain customer loyalty through brand names, and to carefully control the firm's operations in order to consistently provide the same positive experience for customers. (A) standard-cycle (B) fast-cycle (C) slow-cycle (D) intermediate-cycle Answer : (A)
98. The flat-panel television market where prices have come down and competition has become more stable is best characterized as: (A) standard-cycle. (B) fast-cycle. (C) slow-cycle. (D) competitive rivalry. Answer : (A)
99. Consumer goods producers are innovating in terms of healthy products. This type of incremental innovation is typical of: (A) fast-cycle markets. (B) standard-cycle markets.
(C) incremental-cycle markets. (D) slow-cycle markets. Answer : (B)
100. In order to compete effectively, standard-cycle firms need all of the following EXCEPT: (A) large market share. (B) customer loyalty through brand name. (C) careful control of operations to preserve consistency for customers. (D) rapid and continuous product introductions. Answer : (D)
ESSAY 101. Define competitors, competitive rivalry, competitive behavior, and competitive dynamics.
Graders Info : Competitors are firms competing in the same market, offering similar products, and targeting similar customers. Competitive rivalry is the ongoing set of competitive actions and competitive responses occurring between competitors as they compete against each other for an advantageous market position. For the individual firm, the set of competitive actions and responses it takes while engaged in competitive rivalry is called competitive behavior. Competitive dynamics is the set of actions and responses taken by all firms that are competitors within a particular market. 102. What is market commonality? What is resource similarity? How are these concepts combined to identify the level of competition between two firms?
Graders Info : Market commonality is concerned with the number of markets with which the firm and a competitor are jointly involved and the degree of importance of the individual markets to each. When firms produce similar products and compete for the same customers, the competitive rivalry is likely to be high. Firms competing against one another in several or many markets engage in multimarket competition. Research suggests that a firm with greater multimarket contact is less likely to initiate an attack, but more likely to respond when attacked. In general, multimarket competition reduces competitive rivalry but some firms will still compete when the potential rewards (e.g., potential market share gain) are high. Resource similarity is the extent to which the firm's tangible and intangible resources are comparable to a competitor's in terms of both type and amount. Firms with resource similarity are
likely to have similar strengths and weaknesses and to use similar strategies. The combination of high or low market commonality and high or low resource similarity identifies whether firms are competitors. Firms having both high market commonality and high resource similarity are direct and mutually acknowledged competitors. If firms share few markets and have little similarity in resources they are not direct and mutually acknowledged competitors.
103. Define awareness, motivation, and ability in reference to competitive behavior.
Graders Info : Awareness, motivation, and ability are the drivers of competitive behavior. They influence the firm's actions toward and responses to competitors. Awareness is the extent to which competitors recognize the degree of their mutual interdependence that results from market commonality and resource similarity. Awareness affects the extent to which the firm understands the consequences of its competitive actions and responses. Awareness is greatest when firms have highly similar resources. Motivation concerns the firm's incentive to take action against a competitor or to respond to a competitor's attack. If the firm does not believe that attacking its competitors will improve its position, it will not act. If the firm does not believe a competitor's action will result in losses for it, it will not have motivation to respond. High market commonality gives firms more motivation to attack and to respond to competitors' actions than when market commonality is low. Ability relates to each firm's resources and the flexibility these resources provide. When a firm faces a competitor with similar resources, careful study of a possible attack is essential because a competitor with similar resources is likely to respond to competitive attack. When the resources between two competitors are very dissimilar, the weaker firm will delay in responding to an attack by the stronger firm. 104. Define competitive actions and responses and explain the two types of competitive actions and responses.
Graders Info : A competitive action is a strategic or tactical action the firm takes to build or defend its competitive advantages and improve its market position. A competitive response is a strategic or tactical action the firm takes to counter the effects of a competitor's competitive action. A strategic action or strategic response is a market-based move that involves a significant commitment of organizational resources and is difficult to implement or reverse. A tactical action or tactical response is a marketbased move that is taken to fine-tune a strategy. It involves fewer resources and is relatively easy to implement and reverse. Strategic actions tend to receive strategic responses. Tactical actions tend to receive tactical responses because they are easy to put into place. Strategic actions elicit fewer total competitive responses than do tactical actions. Responses to strategic actions will be slower than will responses to tactical actions because competitors need time to observe whether the strategic action will be successful. But, if a competitor's action threatens a large number of a firm's customers, the firm will react strongly regardless of whether the competitor's action is strategic or tactical. 105. What are the advantages and disadvantages of being a first mover, second mover, and late mover?
Graders Info : First movers can gain market share, customer loyalty, and high revenues by being the first in the market. But, first movers also take more risk because it is difficult to judge the returns the firm will earn from product innovations. Moreover, if the first mover is successful, other firms will enter its arena. First movers tend to have a significant amount of organizational slack to fund research and development. Second movers imitate the first movers, after they have studied the first mover's successes and mistakes. Consequently, second movers can develop more efficient processes and technologies than first movers, which results in lower costs. Late movers react to the first and second movers' actions after a long delay. A late mover may be able to earn average returns if it has learned how to create at least as much value for customers as the value created by the first and second movers. In general, late movers are relatively ineffective. 106. What factors contribute to the likelihood of a response to a competitive action?
Graders Info : In general, a firm is more likely to respond to a competitive action if: (1) the action leads to better use of the competitor's capabilities to gain or produce stronger competitive advantage or to improve its market position, (2) the action damages the firm's ability to use its capabilities to create or maintain an advantage, or (3) the firm's market position becomes less defensible. In addition, a firm is more likely to respond to a competitor's tactical action, rather than to a competitor's strategic action. Strategic actions involve a significant commitment of resources and are difficult to implement and reverse, as well as requiring time to put into place. In contrast, tactical actions can be implemented quickly and are quickly reversed, and are relatively less costly than strategic actions. A firm is also more likely to respond to a competitor's action when the competitor is the market leader-a firm that has the reputation for above-average returns. Successful actions by competitors are likely to be quickly imitated, even if not initiated by a market leader. Actions by price predators are usually not responded to, nor are actions by firms with reputations for risky, complex, and unpredictable behavior. Finally, competitors with high market dependence are likely to respond strongly to attacks threatening their market position. 107. Define slow-cycle, fast-cycle, and standard cycle markets.
Graders Info : In slow-cycle markets, the firm's competitive advantage is shielded from imitation for long periods of time and imitation is costly. Competitive advantages are sustainable in slow-cycle markets. Successful firms in slow-cycle markets have difficult-to-understand and costly-to-imitate advantages resulting from unique historical conditions, causal ambiguity, and/or social complexity. These conditions can include copyrights, patents, and ownership of an information resource. Firms in slowcycle markets focus on protecting their competitive advantages and exploiting them as long as possible. In fast-cycle markets, imitation happens quickly. Competitive advantages are not sustainable. Reverse engineering and quick technology diffusion facilitate rapid imitation. In fastcycle markets, innovation is critical and firms avoid "loyalty" to any product. Firms must focus on rapidly and continuously developing new competitive advantages, because prices fall quickly and
firms need to profit rapidly from innovations, and move on to the next product. Fast-cycle markets are volatile and the pace of innovation is frenzied. In standard-cycle markets, the firm's competitive advantages are moderately shielded from imitation and imitation is moderately costly. Competitive advantages are partially sustainable if the firm can continuously upgrade the quality of its capabilities making its competitive advantage dynamic. Typically, these markets have large firms seeking high market share, striving for customer brand loyalty, and controlling their operations to give customers consistent experiences. Economies of scale are necessary for survival. Competition for market share is intense and is often based on incremental innovation in a product rather than radical innovation.
Chapter 06 Corporate Level Strategy TRUEFALSE 1. In the Chapter 6 Opening Case, Disney achieved growth and diversification through mergers and acquisitions. (A) True (B) False Answer : (B)
2. Disney (discussed in the Chapter 6 Opening Case) is an example of a company that was successful because its corporate strategy added value across its set of businesses above what the individual businesses could create individually. (A) True (B) False Answer : (A)
3. Corporate-level strategies are strategies a firm uses to diversify its operations from a single business competing in a single market into several product markets and, most commonly, into several businesses. (A) True (B) False Answer : (B)
4. If the businesses in the corporate portfolio are not worth more under the management of the corporation than they would be under any other ownership, then the corporate-level strategy has failed. (A) True (B) False Answer : (A)
5. An effective corporate strategy creates aggregate returns across all businesses that exceed what those returns would be without the strategy and contributes to the firm's strategic competitiveness and ability to earn above-average returns. (A) True
(B) False Answer : (A)
6. A major advantage of diversification is that overall monitoring costs are reduced because each separate business comes under the control of corporate headquarters. (A) True (B) False Answer : (B)
7. Successful product diversification is expected to increase the variability in the firm's profitability because the earnings are generated from several different business units. (A) True (B) False Answer : (B)
8. All of Krispy Kreme's revenues come from its one main product, doughnuts. It can be considered a classic example of a firm following a related constrained strategy. (A) True (B) False Answer : (B)
9. Revenues for United Parcel Service (UPS) are derived from the following business segments: 60 percent from U.S. package delivery operations, 22 percent from international package delivery, and 18 percent from non-packaging operations. The best description of the corporate level strategy of UPS is unrelated diversification. (A) True (B) False Answer : (B)
10. Related linked firms share more resources and assets between their businesses than do related constrained firms. (A) True (B) False
Answer : (B)
11. Compared with related constrained firms, related linked firms share fewer resources and assets between their businesses, concentrating instead on transferring knowledge and core competencies between the businesses. (A) True (B) False Answer : (A)
12. United Technologies, Textron, Samsung, and Hutchison Whampoa Limited are examples of diversified firms that have no relationships between their businesses. These firms all use the strategy of unrelated diversification. (A) True (B) False Answer : (A)
13. A firm uses a corporate-level diversification strategy for a variety of reasons, all of which have to do with ways to create value. (A) True (B) False Answer : (B)
14. Decisions to expand a firm's portfolio of businesses to reduce managerial risk can have a positive effect on the firm's value. (A) True (B) False Answer : (B)
15. Antitrust regulation, tax laws, and low performance are all value-neutral reasons why firms engage in diversification. (A) True (B) False Answer : (A)
16. Procter & Gamble (P&G) has a paper towel and baby diaper business that both use paper products. This is an example of value created through the sharing of activities. (A) True (B) False Answer : (A)
17. Economies of scope are cost savings resulting from a firm successfully leveraging, either through sharing or transferring, some of its capabilities and competencies developed in one business to another business. (A) True (B) False Answer : (A)
18. In a money-making effort, a small private university has decided to institute consulting services using its business faculty as consultants whose services would be sold to clients. This university is attempting to use its faculty to gain economies of scope. (A) True (B) False Answer : (A)
19. When firms share activities across units, they are often able to achieve increased value. (A) True (B) False Answer : (A)
20. Firms using the related constrained strategy share activities in order to create value. (A) True (B) False Answer : (A)
21. Firms that sold off related units in which resource sharing was a possible source of economies of scope have been found to produce lower returns than those that sold off businesses unrelated to the firm's core businesses.
(A) True (B) False Answer : (A)
22. Firms seeking to create value through corporate relatedness use the related constrained strategy. (A) True (B) False Answer : (B)
23. Equator, a U.S. manufacturer of pharmaceuticals, has acquired a firm in the same industry in Ireland. It plans to move one of its key managers from its plant in St. Louis to Ireland. This can be considered a method of transferring corporate-level core competencies. (A) True (B) False Answer : (A)
24. Market power exists when a firm is able to sell its products above the existing competitive level or decrease the costs of its primary and support activities below the competitive level, or both. (A) True (B) False Answer : (A)
25. Firms using a related diversification strategy may gain market power when successfully using their related constrained or related linked strategy. (A) True (B) False Answer : (A)
26. Vertical integration allows the firm to gain market power as the firm develops the ability to save on its operations, avoid market costs, improve product quality, and possibly protect its technology from rivals. (A) True
(B) False Answer : (A)
27. Vertical integration exists when a company produces its own inputs (forward integration) or owns its source of output distribution (backward integration). (A) True (B) False Answer : (A)
28. Google's diversification could lead the firm toward a related linked strategy and give the firm advantages in multipoint competition with competitors such as Facebook and Microsoft. (A) True (B) False Answer : (A)
29. Many manufacturing firms are reducing vertical integration and moving to independent supplier networks. (A) True (B) False Answer : (A)
30. Contract manufacturers who manage their customers' entire product line, and offer services ranging from inventory management to delivery and after-sales services are prime examples of vertical integration. (A) True (B) False Answer : (B)
31. A company that tries to balance both operational and corporate relatedness and fails, risks incurring diseconomies of scope. (A) True (B) False Answer : (A)
32. Firms with both operational and corporate relatedness are favorites of investment analysts because the transparency and clarity of their financial statements clearly show the value-creation resulting from the combination of multiple businesses. (A) True (B) False Answer : (B)
33. It can be difficult for investors to actually observe the value created by a firm as it shares activities and transfers core competencies. (A) True (B) False Answer : (A)
34. Financial economies are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm. (A) True (B) False Answer : (A)
35. An unrelated diversification strategy can create value through two types of financial economies: (1) efficient internal capital allocations, and (2) purchasing other firms, restructuring their assets, and selling them. (A) True (B) False Answer : (A)
36. A significant benefit of an internal capital market is that corporate headquarters has access to detailed and accurate information regarding the performance of the company's portfolio and can thus make better capital allocation decisions. (A) True (B) False Answer : (A)
37. A significant benefit of an internal capital market is limiting competitors' access to information
about the performance of the individual businesses within the corporation. (A) True (B) False Answer : (A)
38. In a diversified firm, capital allocation can be adjusted according to more specific criteria than is possible with external market allocation of capital. (A) True (B) False Answer : (A)
39. GE is an example of a firm that has used internal capital market allocation as a means of creating value even though it competes using a related linked strategy rather than an unrelated diversification strategy. (A) True (B) False Answer : (A)
40. The "conglomerate discount" occurs in large, highly diversified businesses and results from analysts not knowing how to value the vast array of large businesses with complex financial reports. (A) True (B) False Answer : (A)
41. In spite of the challenges associated with it, a number of firms continue to use the unrelated diversification strategy, especially in Europe and in emerging markets. (A) True (B) False Answer : (A)
42. One advantage of an unrelated diversification strategy in a developed economy is that competitors cannot easily imitate the financial economies, whereas they can easily replicate the value gained through the use of a related diversification strategy.
(A) True (B) False Answer : (B)
43. Companies in emerging markets frequently use the unrelated diversification strategy because of the absence of a "soft infrastructure" in those markets. (A) True (B) False Answer : (A)
44. When implementing a restructuring strategy, a company would do best by focusing on mature, low-technology businesses rather than high-technology or service businesses. (A) True (B) False Answer : (A)
45. Companies creating financial economies through restructuring typically focus on hightechnology businesses primarily because these firms are dependent on human-resources. (A) True (B) False Answer : (B)
46. Diversification strategies can be used with both value-creating and value-neutral objectives. (A) True (B) False Answer : (A)
47. Different incentives to diversify sometimes exist, and the quality of a firm's resources may permit only diversification that is value neutral rather than value creating. (A) True (B) False Answer : (A)
48. Since the 1950s, U.S. government policy regarding antitrust concerns has remained constant. (A) True (B) False Answer : (B)
49. Corporate tax laws, rather than tax laws affecting individuals, have had the most impact on the firm's use of free cash flows for investment in acquisitions. (A) True (B) False Answer : (B)
50. Low firm performance is associated with increased diversification. (A) True (B) False Answer : (A)
51. Performance continues to increase as diversification increases from single business to unrelated diversification. (A) True (B) False Answer : (B)
52. Synergy exists when the value created by business units working together exceeds the value that those same units create working independently. (A) True (B) False Answer : (A)
53. Compared to diversification that is grounded in intangible resources, diversification based on financial resources only is more visible to competitors and thus more imitable and less likely to create value on a long-term basis. (A) True
(B) False Answer : (A)
54. Research shows that increased firm size and greater levels of diversification are correlated with increased executive compensation. (A) True (B) False Answer : (A)
55. If managers diversify a firm in a way that does not produce value, the firm risks capital market intervention. (A) True (B) False Answer : (A)
56. Golden parachutes protect managers from the negative consequences of over-diversifying a firm. (A) True (B) False Answer : (A)
57. Without strict governance mechanisms, the majority of executives will act in their own selfinterest rather than acting as positive stewards of firm resources. (A) True (B) False Answer : (B)
58. The use of poison pills increases the chance that a poorly performing firm will be taken over. (A) True (B) False Answer : (B)
59. Knowing that their firms could be acquired if they are not managed successfully encourages
executives to use value-creating diversification strategies. (A) True (B) False Answer : (A)
MULTICHOICE 60. Corporate-level strategy is concerned with ____ and how to manage these businesses. (A) whether the firm should invest in global or domestic businesses (B) what product markets and businesses the firm should be in (C) whether the portfolio of businesses should generate immediate above-average returns or should be troubled businesses which will create above-average returns only after restructuring (D) whether to integrate backward or forward. Answer : (B)
61. The ultimate test of the value of a corporate-level strategy is whether the: (A) corporation earns a great deal of money. (B) top management team is satisfied with the corporation's performance. (C) businesses in the portfolio are worth more under the management of the company in question than they would be under any other ownership. (D) businesses in the portfolio increase the firm's financial returns. Answer : (C)
62. The more "constrained" the relatedness of diversification: (A) the fewer the linkages between the businesses within the portfolio owned by the firm. (B) the wider the variation in the portfolio of businesses owned by the firm. (C) the more links there are among the businesses owned by an organization. (D) the lower the proportion of total organizational revenue derived from the dominant business. Answer : (C)
63. Wm. Wrigley Jr. Company once made only chewing gum. When Wrigley bought Life Savers (a
line of candy mints) and Altoids (a line of breath mints) from Kraft, chewing gum then constituted less than 95 percent of revenues. Thus, Wrigley: (A) was moving away from its traditional single-business strategy toward a dominant strategy. (B) was moving away from its traditional dominant strategy toward a related linked strategy. (C) became a conglomerate since Life Savers and Altoids are unrelated businesses. (D) probably planned to restructure these companies and sell them off. Answer : (A)
64. Usually a company is classified as a single business firm when revenues generated by the dominant business are greater than ____ percent. (A) 99 (B) 95 (C) 90 (D) 70 Answer : (B)
65. The more sharing of resources and activities among businesses, the more ____ is the relatedness of the diversification. (A) linked (B) constrained (C) integrated (D) intense Answer : (B)
66. A firm that earns less than 70 percent of revenue from its dominant business and has direct connections between its businesses is engaging in ____ diversification. (A) unrelated (B) related constrained (C) related linked (D) dominant business Answer : (B)
67. Revenues for United Parcel Service (UPS) come from the following business segments: 60 percent from U.S. package delivery operations, 22 percent from international package delivery, and 18 percent from non-packaging operations. Which best describes the corporate level strategy of UPS? (A) single business (B) dominant business (C) related constrained (D) related linked Answer : (B)
68. Which acquisition would be considered the LEAST related? (A) A candy manufacturer purchases a chemical laboratory specializing in food flavorings. (B) A chain of garden centers acquires a landscape architecture firm. (C) A hospital acquires a long-term care nursing home. (D) An upscale "white-tablecloth" restaurant chain acquires a travel agency. Answer : (D)
69. The lowest level of diversification is the ____ level. (A) single-business (B) dominant business (C) related constrained (D) unrelated Answer : (A)
70. The main difference between the related constrained level of diversification and the related linked level of diversification is: (A) the percentage of total organizational profitability that comes from the dominant business. (B) the level of resources and activities shared among the businesses. (C) whether the diversification is vertical or horizontal. (D) whether the diversification is value-creating or value-neutral. Answer : (B)
71. The Publicis Groupe has three major groups of business (advertising, media, and digital) that share resources and capabilities. Publicis Groupe is using a _____________ diversification strategy. (A) related linked (B) related constrained (C) unrelated (D) dominant Answer : (B)
72. The Publicis Groupe uses the digital technology from its digital business to enhance the advertising products in its advertising group. This sharing of activities is characteristic of the _____________ diversification strategy. (A) related constrained (B) related linked (C) unrelated (D) dominant Answer : (A)
73. The term "conglomerates" refers to firms using the ____ diversification strategy. (A) unrelated (B) related constrained (C) related linked (D) global Answer : (A)
74. Hutchison Whampoa Limited (HWL) has businesses in ports and related services, telecommunications, property and hotels, retail and manufacturing, and energy and infrastructure. HWL makes no efforts to share activities or transfer core competencies among the businesses. HWL is following a strategy of__________diversification. (A) dominant business (B) related constrained (C) related linked (D) unrelated
Answer : (D)
75. Firms use corporate-level diversification strategies for all the following reasons EXCEPT: (A) value-creating. (B) value-neutral. (C) value-reducing. (D) value-diversifying. Answer : (D)
76. Which of the following reasons for diversification is most likely to increase the firm's value? (A) Increasing managerial compensation (B) Reducing costs through business restructuring (C) Taking advantage of changes in tax laws (D) Conforming to antitrust regulation Answer : (B)
77. Which of the following is a value-reducing reason for diversification? (A) Enhancing the strategic competitiveness of the entire company (B) Expanding the business portfolio in order to diversify managerial employment risk (C) Gaining market power relative to competitors (D) Conforming to antitrust regulation Answer : (B)
78. An office management firm has developed a system for efficiently organizing small medical and dental practices both through proprietary software and through unique training programs for staff. It has recently acquired a firm specializing in providing management services for veterinary practices. The office management firm is hoping to: (A) achieve economies of scope. (B) implement vertical integration. (C) achieve financial economies through an unrelated acquisition. (D) acquire specialized talent from the veterinary management company.
Answer : (A)
79. Firms that have selected a related diversification corporate-level strategy seek to exploit: (A) control shared among business-unit managers. (B) economies of scope between business units. (C) the favorable demand of buyers. (D) market power. Answer : (B)
80. Firms seek to create value from economies of scope through all of the following EXCEPT: (A) activity sharing. (B) skill transfers. (C) transfers of corporate core competencies. (D) de-integration. Answer : (D)
81. The basic types of operational economies through which firms seek value from economies of scope are: (A) synergies between internal and external capital markets. (B) the leveraging of individual tangible resources. (C) the sharing of value chain activities and support functions. (D) joint ventures and outsourcing. Answer : (C)
82. Operational relatedness is created by ___________ of ___________. (A) sharing; core competencies (B) sharing; activities (C) transferring; core competencies (D) transferring; activities Answer : (B)
83. Procter & Gamble (P&G) has a paper towel and baby diaper business, both of which use paper products. The firm's paper production plant produces inputs for both businesses. P&G most likely uses the _____________ diversification strategy to create ___________. (A) related constrained; operational relatedness (B) related linked; corporate relatedness (C) related constrained; corporate relatedness (D) related linked; operational relatedness Answer : (A)
84. Which of the following is TRUE? (A) Conglomerates no longer exist in the U.S. business scene, but are common in emerging markets. (B) Unrelated diversified firms seek to create value through economies of scope. (C) The sharing of intangible resources, such as know-how, between firms is a type of operational sharing in related diversifications. (D) Related constrained firms share more tangible resources and activities between businesses than do related linked firms. Answer : (D)
85. Research has shown that horizontal acquisitions (A) tend to have disappointing financial results in the long run. (B) are being replaced by virtual acquisitions. (C) result in lower levels of performance than unrelated acquisitions. (D) are able to use activity sharing to successfully create economies of scope. Answer : (D)
86. A noted professional art academy has founded an "artists and friends" travel company specializing in tours for artists to scenic locales, using its faculty as traveling teachers. In addition, the art academy has purchased a framing company to make frames for academy art works, and to sell museum-quality framing services to the public. The art academy is engaging in diversification based on ____ relatedness. (A) operational (B) corporate (C) intellectual
(D) constrained Answer : (A)
87. Dragonfly, publishers of children's books, has purchased White Rabbit, another publisher of children's books. Both companies' books are sold to the same retail stores and schools. Their content is different because Dragonfly produces children's literature, whereas White Rabbit focuses on childlevel nonfiction scientific and nature topics. Which of the following statements is probably TRUE about this acquisition? (A) This is a horizontal acquisition. (B) This is an example of virtual integration. (C) Dragonfly is beginning to build a conglomerate. (D) Economies of scope are unlikely to result from this acquisition. Answer : (A)
88. The purchasing of firms in the same industry is called: (A) unrelated diversification. (B) vertical integration. (C) networking the organization. (D) horizontal acquisition. Answer : (D)
89. The _________________diversification strategy creates value in two ways. First, because the core competency has already been developed in one business, the firm does not have to allocate resources to develop it. Second, because the resource is intangible, competitors cannot easily imitate it. (A) related constrained (B) unrelated (C) related linked (D) dominant business Answer : (C)
90. The drawbacks to transferring competencies by moving key people into new management positions include all of these EXCEPT:
(A) the people involved may not want to move. (B) managerial competencies are not easily transferable to different organizational cultures. (C) managers with these skills are expensive. (D) top-level managers may resist having these key people transferred. Answer : (B)
91. Multipoint competition occurs when: (A) firms have multiple retail outlets. (B) firms have multiple products in their primary industry. (C) diversified firms compete against each other in several markets. (D) firms have diversified portfolios of companies. Answer : (C)
92. One method of facilitating the transfer of competencies between firms is to: (A) virtually integrate the two firms. (B) transfer key people into new management positions. (C) share support activities, such as purchasing practices. (D) restructure the weaker firm to mirror the structure of the more successful firm. Answer : (B)
93. Equator, a U.S. manufacturer of pharmaceuticals, has acquired a firm in the same industry in Ireland. It plans to transfer one of its key managers from its plant in St. Louis to Ireland. What is the major threat to Equator's plan to transfer competencies from itself to the Irish firm? (A) The St. Louis manager may quit Equator in order to remain in St. Louis. (B) American pharmaceutical manufacturing techniques may not transfer to Ireland. (C) Irish managers will refuse to take direction from a foreign executive. (D) The cost of transferring U.S. managers overseas is usually not cost-effective. Answer : (A)
94. Acquisitions to increase market power require that the firm have a(n) ____ diversification strategy.
(A) unrelated (B) related (C) dominant-business (D) single-business Answer : (B)
95. When diversification results in two companies, such as UPS and FedEx, simultaneously competing in the same product areas or geographic markets, this is called ____ competition. (A) multiple (B) multiportal (C) multipoint (D) multiplicit Answer : (C)
96. Virgin Group successfully transfers its marketing core competence across airlines, cosmetics, music, drinks, mobile phones, health clubs, and a number of other businesses. Virgin follows a(n) ____ diversification corporate strategy. (A) dominant-business (B) related constrained (C) related linked (D) unrelated Answer : (C)
97. The Mars acquisition of the Wrigley assets was part of its related constrained diversification and added market share to the Mars/Wrigley integrated firm. It allowed Mars to gain _______because it could sell its products above the market level or reduce its costs below the market level. (A) multipoint competition (B) virtual integration (C) market power (D) vertical integration Answer : (C)
98. Backward integration occurs when a company: (A) produces its own inputs. (B) owns its own source of distribution of outputs. (C) is concentrated in a single industry. (D) is divesting unrelated businesses. Answer : (A)
99. PorkPride Foods produces hams and other meat products. It owns hog raising operations. This is an example of a business that is: (A) reducing vertical integration. (B) vertically integrated. (C) totally integrated. (D) horizontally integrated. Answer : (B)
100. A company pursuing vertical integration can gain market power over its competitors through all of the following EXCEPT: (A) improved adjustment to technological changes. (B) savings on operations costs. (C) improved product quality. (D) avoidance of market costs. Answer : (A)
101. Which of the following is NOT a limitation directly relating to vertical integration? (A) Bureaucratic costs (B) The loss of flexibility through investment in specific technologies (C) Capacity balance and coordination problems from changes in demand (D) Imitation of core technology by potential competitors Answer : (D)
102. Specialty Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve
the high temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare and only two brick plants in the United States make this type of brick. Specialty Steel has decided to buy one of these brick plants. This is an example of: (A) backward integration. (B) forward integration. (C) horizontal integration. (D) virtual integration. Answer : (A)
103. Specialty Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve the high temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare and only two brick plants in the United States make this type of brick. Specialty Steel owns one of these brick plants and buys all of its production. The other brick manufacturer has recently developed an inexpensive new technology whereby ordinary clay can be used to make this fire brick. This significantly reduces the production cost of this type of brick. (A) Specialty Steel has less flexibility now than if it were not vertically integrated. (B) This is an example of a capacity balance problem. (C) This is a result of conflicts of interest between the managers of the brick plant and the executives of Specialty Steel. (D) The market power of Specialty Steel has been reducing vertical integration. Answer : (A)
104. The Walt Disney Company has successfully used related diversification to create value by: (A) sharing activities. (B) sharing activities and transferring core competencies. (C) transferring core competencies. (D) efficient internal capital allocation and restructuring. Answer : (B)
105. The value of the assets of a firm using a diversification strategy to create both operational and corporate relatedness tend to be: (A) discounted by investors. (B) inflated by investors.
(C) completely ignored by investors. (D) highly valued by investors. Answer : (A)
106. When a firm simultaneously practices operational relatedness and corporate relatedness: (A) it is difficult for investors to observe the value created by the firm. (B) the firm is likely to be overvalued by investors. (C) the firm will suffer from diseconomies of scope that outweigh cost savings generated. (D) the firm is seeking to create value through financial economies. Answer : (A)
107. Which type of diversification is most likely to create value through financial economies? (A) Related constrained (B) Operational and corporate relatedness (C) Unrelated (D) Related linked Answer : (C)
108. An ability to efficiently allocate capital through an internal market may help the firm protect the competitive advantages it develops: (A) through reduced disclosure to outside parties. (B) by the ability to not report losses to investors. (C) by the ability to increase pay to managers without shareholders being aware. (D) through the ability to reinvest cash in dividends to shareholders. Answer : (A)
109. A firm practicing unrelated diversification can make better capital allocations to its subsidiary businesses than the external capital market can for all the following reasons EXCEPT: (A) corporate headquarters can allocate capital according to more specific criteria than is possible with external market allocations. (B) corporate headquarters has more complete information about the subsidiary businesses than the
external capital market. (C) the firm can acquire other firms with innovative products instead of allocating capital to research and development. (D) corporate headquarters can more effectively discipline underperforming management teams through resource allocation than can the external market. Answer : (C)
110. Large diversified businesses often face what is known as the "conglomerate discount." This discount means that investors: (A) understand that the financial efficiencies of this strategy automatically make these stocks worth more than their current market valuation. (B) believe that the value of conglomerates is less than the value of the sum of their parts. (C) increase the expected future earnings of conglomerates. (D) have found that over time, conglomerates earn more than the component companies would have earned independently. Answer : (B)
111. Large diversified businesses often face a _______________, which results from analysts not knowing how to value a vast array of large businesses with complex financial reports. (A) threat of regulation by the Securities and Exchange Commission (B) high CEO turnover (C) threat of takeover (D) conglomerate discount Answer : (D)
112. Successful unrelated diversification through restructuring is typically accomplished by: (A) focusing on mature, low-technology businesses. (B) a "random walk" of good luck in picking firms to buy. (C) seeking out high technology firms in high-growth industries. (D) a top management team that is not constrained by pre-established ideas of how the firm's portfolio should be developed. Answer : (A)
113. The risk for firms that follow the unrelated diversification strategy in developed economies is that: (A) external investors tend to dump the stocks of conglomerates during economic downturns. (B) conglomerates are typically owned by one powerful entrepreneur and do not survive his/her retirement or death. (C) government regulations, especially in Europe, have periodically forced the dissolution of conglomerates. (D) competitors can imitate financial economies more easily than they imitate economies of scope. Answer : (D)
114. What is the similarity between high-technology firms and service-based firms that makes them risky as restructuring candidates? (A) They are dependent on human resources. (B) They have few tangible assets. (C) Both types of firm rely on financial economies. (D) The demand for their products is highly sensitive to economic downturns. Answer : (A)
115. Which of the following firms would be the most likely to be a successful candidate for acquisition and restructuring? (A) A medical practice (B) A management consulting firm that has a tradition of long term client-consultant relationships (C) A tire manufacturer established in 1910 (D) A start-up communications technology firm Answer : (C)
116. Among the value-neutral incentives to diversify, some come from the firm's external environment while others are internal to the firm. External incentives to diversify include: (A) the fact that other firms in an industry are diversifying. (B) pressure from stockholders who are demanding that the firm diversify. (C) changes in antitrust regulations and tax laws. (D) a firm's low performance.
Answer : (C)
117. Of the value-neutral incentives to diversify, all of the following are internal firm incentives EXCEPT: (A) overall firm risk reduction. (B) uncertain future cash flows. (C) stricter interpretation of antitrust laws. (D) low performance. Answer : (C)
118. Because of the tax laws of the 1960s and 1970s, when dividends were taxed more heavily than capital gains, shareholders preferred that corporations: (A) pay dividends annually. (B) keep free cash flows for investment in acquisitions. (C) distribute capital gains regularly. (D) increase managerial salaries. Answer : (B)
119. Free cash flows are: (A) liquid financial assets for which investments in current businesses are no longer economically viable. (B) liquid financial assets that for tax purposes must be reinvested in the firm if not distributed as dividends to shareholders. (C) the profits resulting after a restructured firm has been sold. (D) dividends that have been distributed to shareholders that are taxed as capital gains. Answer : (A)
120. Certain regulatory changes (such as antitrust regulation and tax laws) create incentives or disincentives for diversification that: (A) create value. (B) reduce value. (C) are value-neutral.
(D) are managerial motives to diversify. Answer : (C)
121. The curvilinear relationship of corporate performance and diversification indicates that: (A) dominant-business corporate strategies tend to be higher performing than related constrained or unrelated business strategies. (B) the highest performing business strategy is related constrained diversification. (C) the less related the businesses acquired, the higher performing the organization. (D) none of the strategies consistently outperforms the others. Answer : (B)
122. As the threat of corporate failure increases due to relatedness between a firm's business units, firms may decide to: (A) increase the firm's level of retained resources. (B) diversify into less risky environments. (C) reduce the level of diversity in its investments. (D) pursue unproven product lines. Answer : (B)
123. Synergy exists when: (A) cost savings are realized through improved allocations of financial resources based on investments inside or outside the firm. (B) two units create value by utilizing market power in their respective industries. (C) firms utilize constrained related diversification to build an attractive portfolio of businesses. (D) the value created by business units working together exceeds the value the units create when working independently. Answer : (D)
124. The downside of synergy in a diversified firm is: (A) increasing independence of businesses. (B) the reduction of activity sharing.
(C) excessive focus on risky innovation. (D) the loss of flexibility. Answer : (D)
125. The Cherrywood Fine Furniture Company finds itself with excess capacity in its plant and equipment for furniture manufacturing. This excess capacity will be useful in: (A) unrelated diversification. (B) related diversification projects. (C) corporate restructuring. (D) multipoint competition Answer : (B)
126. Which of the following resources are more likely to create value in the diversification process? (A) Plant and equipment (B) Tacit knowledge (C) Excess capacity (D) Financial resources Answer : (B)
127. Compared with diversification based on intangible resources, diversification based on financial resources is: (A) less imitable and less likely to create value on a long-term basis. (B) more imitable and less likely to create value on a long-term basis. (C) less imitable and more likely to create value on a long-term basis. (D) more imitable and more likely to create value on a long-term basis. Answer : (B)
128. Managerial motives to seek diversification include a desire to: (A) improve their marketability to other firms. (B) effectively use corporate resources. (C) provide higher returns to corporate stakeholders.
(D) increase their compensation. Answer : (D)
129. Isidore Crocker, CEO of Gotham Engines, is strongly in favor of acquiring Carolina Textiles, a firm in an unrelated industry. Some members of the Board of Directors are questioning Crocker's motives for the acquisition. They argue that it is not uncommon for CEOs to push for acquisitions because: (A) a successful acquisition will increase the CEO's power over the Board of Directors. (B) making an acquisition is an easier route to increased firm value than is improving the firm's core competencies. (C) higher CEO pay is related to larger organization size. (D) CEOs nearing retirement seek to create empires to continue their legacy. Answer : (C)
130. During the 1990s top executives of Titanic, Inc., followed a pattern of aggressive acquisitions and diversification. Now, Titanic is performing poorly and earning below average returns. Lusitania, a large conglomerate firm, is in the final stages of purchasing Titanic. Lusitania has announced that it will fire Titanic's current top executives. The Titanic executives may not be worried about their impending job loss if they: (A) plan to take poison pills. (B) have golden parachutes. (C) have silver handcuffs. (D) have ironclad contracts. Answer : (B)
131. Which of the following is NOT a governance mechanism that may limit managerial tendencies to over-diversify? (A) The market for corporate control (B) The Board of Directors (C) Surveillance technologies (D) Executive compensation practices Answer : (C)
132. In making a decision to diversify, managers should use value-creating reasons or face the risk
that their firms will be acquired and they could lose their jobs. Which of the following is a valuecreating reason to diversify? (A) Economies of scope (B) Desire for increased compensation (C) Reduced managerial risk (D) Low performance Answer : (A)
133. Research suggests that _______________has decreased while ___________has increased possibly due to the restructuring that took place in the 1990s and early twenty-first century. (A) forward vertical integration; backward vertical integration (B) backward vertical integration; forward vertical integration (C) related diversification; unrelated diversification (D) unrelated diversification; related diversification Answer : (D)
ESSAY 134. Differentiate between corporate-level and business-level strategies and give examples of each.
Graders Info : A business-level strategy determines how a firm will compete in a single industry or product market. When a firm diversifies beyond a single industry it uses a corporate-level strategy. A diversified company has two levels of strategy: business-level and corporate-level. Each business unit has a business level strategy. The corporate strategy is concerned with: 1) what businesses the firm should be in and 2) how the corporate office should manage the group of businesses. The top management of diversified companies views the firm's businesses as a portfolio of core competencies that will generate above-average returns by creating value. An example of a business-level strategy would be whether the firm targets the mass market and competes on price, or whether it competes on the basis of uniqueness. An example of a corporate-level strategy would be whether the firm should sell off a poorly performing subsidiary. 135. What are the five categories of businesses based on level of diversification?
Graders Info :
The five categories of businesses determined by level of diversification are as follows: (1) Single business (more than 95 percent of revenues from a single business), (2) Dominant business (between 70 percent and 95 percent of revenue from a single business), (3) Related constrained (a diversified organization earning less than 70 percent of revenue from the dominant business, and all the component businesses share product, technological, and distribution linkages), (4) Related linked (a diversified organization earning less than 70 percent of revenues from the dominant business with only limited links among the component businesses), and (5) Unrelated (diversified organizations earning less than 70 percent of revenues from the dominant business with no common links among the businesses). 136. Describe the primary reasons a firm pursues increased diversification.
Graders Info : Firms typically diversify to increase the firm's value by improving its overall performance. Valuecreating diversification occurs through related or unrelated diversification when the strategy allows the company's business units to increase revenues or reduce costs while implementing business level strategies. Alternatively, a firm may diversify to gain market power over competitors. Valueneutral diversification may occur in response to governmental policies, firm performance problems, or uncertainties about future cash flows. Finally, managers may have selfish motives to diversify, such as increased compensation or personal reduced employment risk. These selfish motivations may actually erode the firm's competitiveness, and can be value-reducing diversifications. 137. Describe how diversified firms can use activity sharing and transfer of core competencies to create value.
Graders Info : In related diversification, a firm seeks to exploit economies of scope between its business units. Economies of scope are cost savings created by transferring some of its capabilities and competencies developed in another business to a new business. Firms create value through economies of scope two ways: the sharing of activities (operational relatedness) and the transferring of core competencies (corporate relatedness). Both primary and support activities may be shared, including marketing and production. This activity sharing can result in cost reductions and improve financial returns. The sharing of core competencies allows the firm to create value two ways: 1) it eliminates the need for the second unit to allocate resources to develop the competence, and 2) transferring intangible resources internally makes it hard for competitors to understand and to imitate the resource. 138. What are the two ways that an unrelated diversification strategy can create value?
Graders Info : Unrelated diversification can create value through two types of financial economies (cost savings). 1) Unrelated diversified firms can more efficiently allocate capital among the component businesses than can the external financial market. This is possible because the corporate-level management has
more complete information about the performance of the component businesses and it can also discipline under-performing management teams. 2) Unrelated diversified firms can also create value by purchasing other businesses at low prices, restructuring them, and reselling them at a higher price. This practice is most successful with mature, low-technology businesses, rather than hightechnology or service businesses, which are more dependent on employees who may leave. 139. What is the effect of a firm's low performance on the pursuit of diversification?
Graders Info : High corporate performance eliminates the need for diversification. Some research shows that low returns are related to greater levels of diversification. Firms plagued by poor performance often diversify in an effort to become more profitable. But, continued poor performance following diversification may slow the pace of diversification and may lead to divestitures and a focus on the core business. In addition, firms that are more broadly diversified compared to their competitors may have lower overall performance. Figure 6.3 shows that the related constrained diversification strategy is the highest performing strategy. So poor performing firms that intend to diversify should look at purchasing businesses that would be suitable for this strategy rather than moving into unrelated diversification or retaining a dominant business strategy. 140. What are the managerial motives to diversify?
Graders Info : A top-level manager may be motivated to pursue diversification because diversification leads to greater job security for executives. In general, greater amounts of diversification reduce managerial risk because if a particular business fails, the top executive remains employed by the corporation. In addition, diversification increases firm size, and firm size has a direct effect on executive compensation. Moreover, managing a highly diversified firm is more difficult; thus, managerial compensation is generally higher in such a firm. Consequently, executives may have selfish motives to diversify the company in ways which may actually reduce corporate competitiveness.
Chapter 07 Merger and Acquisition Strategies TRUEFALSE 1. Restructuring strategies are commonly used to correct or deal with the results of ineffective mergers and acquisitions. (A) True (B) False Answer : (A)
2. The recent financial crisis made it difficult for firms to complete "megadeals" and the slowdown in merger and acquisition has continued in 2011. (A) True (B) False Answer : (A)
3. The relatively strong U.S. dollar has increased the interest of firms from other nations to acquire U.S. companies. (A) True (B) False Answer : (B)
4. Evidence suggests that acquisitions usually lead to favorable financial outcomes, especially for the acquiring firm. (A) True (B) False Answer : (B)
5. Typical returns on acquisitions for acquiring firms are close to zero. (A) True (B) False Answer : (A)
6. A merger is defined as a strategy in which one firm purchases controlling interest in another firm. (A) True (B) False Answer : (B)
7. A merger is a strategy through which two firms agree to integrate their operations on a relatively coequal basis. (A) True (B) False Answer : (A)
8. In the final analysis, firms use merger and acquisition strategies to improve their ability to create value for all stakeholders, including stockholders. (A) True (B) False Answer : (A)
9. An acquisition occurs when one firm buys a controlling or 100 percent interest in another firm and the acquired firm becomes a subsidiary business. (A) True (B) False Answer : (A)
10. Most acquisitions that are designed to achieve greater market power entail buying a competitor, a supplier, a distributor, or a business in a highly related industry. (A) True (B) False Answer : (A)
11. Moon-in-June, a designer and manufacturer of wedding dresses, has decided to purchase a retail chain specializing in bridal wear. This purchase will be useful in gaining more market power for Moon-in-June. (A) True
(B) False Answer : (A)
12. Research suggests that horizontal acquisitions of firms with dissimilar characteristics result in higher performance levels. (A) True (B) False Answer : (B)
13. Research suggests that horizontal acquisitions result in higher performance when the firms have similar strategies, assets, and capabilities. (A) True (B) False Answer : (A)
14. A horizontal acquisition involves two firms in the same industry. (A) True (B) False Answer : (A)
15. A related acquisition involves two firms in the same industry. (A) True (B) False Answer : (B)
16. An advantage of using horizontal, vertical, or related acquisitions is that they are not subject to regulatory review. (A) True (B) False Answer : (B)
17. Firms are more likely to enter a market through acquisition when high product loyalty is present
in the industry. (A) True (B) False Answer : (A)
18. The lower the barriers to entry, the more likely firms will use acquisition as a means to enter a market. (A) True (B) False Answer : (B)
19. In the current global landscape, firms from North America and Europe use the acquisition strategy more frequently than firms from other nations. (A) True (B) False Answer : (B)
20. The current Chinese cross-border strategy is to focus on buying global brands, sales networks, and goodwill in branded products. (A) True (B) False Answer : (B)
21. Research suggests that emerging economy firms pay a higher premium than other firms when making cross-border acquisitions. (A) True (B) False Answer : (A)
22. Research suggests that government ownership of emerging economy firms leads to overpayment in cross-border acquisitions and that overpayment reduces value for minority shareholders (nongovernment shareholders). (A) True
(B) False Answer : (A)
23. A major problem with buying other companies in order to gain access to their product lines is that the acquiring firm may lose its own ability to innovate. (A) True (B) False Answer : (A)
24. Firms can increase their speed to market for new products by pursuing an internal product development strategy rather than an acquisition strategy. (A) True (B) False Answer : (B)
25. United Technologies Corp. (UTC) uses acquisitions of firms such as Otis Elevator Company (elevators, escalators, and moving walkways) and Carrier Corporation (heating and air conditioning systems) as the foundation for implementing its related diversification strategy. (A) True (B) False Answer : (B)
26. Research has shown that the more different the acquired firm is in terms of competencies and resources than the acquiring firm, the more likely the acquisition is to be successful. (A) True (B) False Answer : (B)
27. Horizontal acquisitions and related acquisitions tend to contribute less to a firm's competitiveness than do unrelated acquisitions. (A) True (B) False Answer : (B)
28. The quickest and easiest way for a firm to diversify its portfolio of businesses is to make acquisitions. (A) True (B) False Answer : (A)
29. It is relatively common for a firm to develop new products internally to diversify its product lines. (A) True (B) False Answer : (B)
30. The post-acquisition integration phase is less important for acquisition success than characteristics of the deal itself. (A) True (B) False Answer : (B)
31. Research shows that in times of high or increasing stock prices, due diligence is relaxed and firms often overpay for acquisitions and the long-run performance of the newly formed form suffers. (A) True (B) False Answer : (A)
32. The reasons why a firm would overpay for a company that it acquires include inadequate due diligence. (A) True (B) False Answer : (A)
33. Large or extraordinary debt is defined as overpaying for an acquired firm. (A) True
(B) False Answer : (B)
34. Junk bonds are now used more frequently to finance acquisitions primarily because of the belief that debt disciplines managers. (A) True (B) False Answer : (B)
35. Junk bonds are a financing option through which risky acquisitions are financed with debt that provides a large potential return to bondholders. (A) True (B) False Answer : (A)
36. Synergy is created by the efficiencies derived from economies of scale and economies of scope and by sharing resources across the businesses in the merged firm. (A) True (B) False Answer : (A)
37. Private synergies are unique to the acquired and acquiring firms and could not be developed by combining either firm's assets with another company. (A) True (B) False Answer : (A)
38. Transaction costs resulting from an acquisition refer to the direct and indirect costs resulting from the use of acquisition strategies to create synergies. (A) True (B) False Answer : (A)
39. Unrelated diversified firms become overdiversified with a smaller number of business units than do firms using a related diversification strategy. (A) True (B) False Answer : (B)
40. When a firm becomes highly diversified through acquisitions, managers often focus on financial controls rather than strategic controls. (A) True (B) False Answer : (A)
41. Top managers typically become overly focused on acquisitions because only they can perform most of the tasks involved, such as performing due diligence on the target firm. (A) True (B) False Answer : (B)
42. Top manager participation in and overseeing the activities required for making acquisitions can divert managerial attention from other matters that are necessary for long-term competitive success. (A) True (B) False Answer : (A)
43. Acquisitions can become a substitute for innovation in some firms and trigger future rounds of acquisitions. (A) True (B) False Answer : (A)
44. One of the potential problems associated with acquisitions is that the additional costs required to manage the larger firm will exceed the benefits of economies of scale and additional market power.
(A) True (B) False Answer : (A)
45. One of the most effective ways to test the feasibility of a future merger or acquisition is for the firms to first engage in a strategic alliance. (A) True (B) False Answer : (A)
46. Hostile acquisitions provide greater financial returns to the acquiring company as it is easier for managers to integrate the firms. (A) True (B) False Answer : (B)
47. Research has shown that maintaining a low or moderate level of firm debt is critical to the success of an acquisition, even when substantial leverage was used to finance the acquisition itself. (A) True (B) False Answer : (A)
48. Wilberforce Press is a small book publishing firm in Iowa that has been owned by the same family since 1895. It is being purchased by Ozarka Publishing, another family-run business in Nebraska, which has been a specialty publisher for 77 years. Each company is known for its unique culture passed down from its founders. Executives and employees in both firms have "grown up" with their companies. Because both these companies have a long, stable history in highly related industries, this acquisition has a high probability of success. (A) True (B) False Answer : (B)
49. When the actual results of an acquisition strategy fall short of the projected results, firms consider using restructuring strategies.
(A) True (B) False Answer : (A)
50. Restructuring refers to changes in the composition of a firm's set of businesses or its financial structure. (A) True (B) False Answer : (A)
51. Downscoping represents a reduction in the number of a firm's employees and sometimes in the number of its operating units, but it may or may not represent a change in the composition of businesses in the corporation's portfolio. (A) True (B) False Answer : (B)
52. Downscoping makes management of the firm more effective because it allows the top management team to better understand the remaining businesses. (A) True (B) False Answer : (A)
53. Traditionally, leveraged buyouts were used as a restructuring strategy to correct managerial mistakes or because the firm's managers were making decisions that primarily served their own interests rather than those of the shareholders. (A) True (B) False Answer : (A)
54. Downsizing may be necessary because acquisitions often create a situation in which the newly formed firm has duplicate organizational functions such as sales, manufacturing, distribution, human resources, and management. (A) True
(B) False Answer : (A)
55. The outcome of downsizing, downscoping, and leveraged buyouts is higher performance. (A) True (B) False Answer : (B)
56. The intent of the owners in a whole-firm leveraged buyout may be to increase the efficiency of the bought-out firm and resell it in 5-8 years. This tends to make the managers of the bought-out firm high-risk takers, since they will probably not survive the resale and thus have little to lose. (A) True (B) False Answer : (B)
MULTICHOICE 57. During the recent financial crisis, M&A activity ______, whereas in 2011, M&A activity ______. (A) declined; increased (B) declined; declined (C) increased; increased (D) increased; declined Answer : (A)
58. Researchers have found that shareholders of acquired firms often: (A) earn above-average returns. (B) earn below-average returns. (C) earn close to zero as a result of the acquisition. (D) are not affected by the acquisition. Answer : (A)
59. All of the following statements are correct EXCEPT: (A) immediately after the announcement of a planned acquisition, the stock price of the majority of acquiring firms declines. (B) shareholders of acquired firms often earn above-average returns from an acquisition. (C) the majority of acquisitions increase long-term value for the acquiring firm. (D) shareholders of acquiring firms typically earn returns from the transaction that are close to zero. Answer : (C)
60. Claude holds a large number of shares of Bayou Beauty, a regional brewing company that is considered a likely takeover target by a major international brewer. It would probably be in Claude's financial interest if Bayou Beauty's owners: (A) resisted selling at any price. (B) sold the company to the larger brewer. (C) designed a poison pill to discourage a takeover. (D) looked for smaller brewers to acquire instead of selling to the larger brewer. Answer : (B)
61. In a merger: (A) one firm buys controlling interest in another firm. (B) two firms agree to integrate their operations on a relatively coequal basis. (C) two firms combine to create a third separate entity. (D) one firm breaks into two firms. Answer : (B)
62. There are few true mergers because: (A) few firms have complementary resources. (B) integration problems are more severe than in outright acquisitions. (C) one firm usually dominates in terms of market share, size, or value of assets. (D) of managerial resistance. True mergers result in significant managerial-level layoffs. Answer : (C)
63. A(n) ____ occurs when one firm buys a controlling, or 100 percent interest, in another firm. (A) merger (B) acquisition (C) spin-off (D) restructuring Answer : (B)
64. When the target firm does not solicit the acquiring firm's bid, it is referred to as a(n): (A) stealth raid. (B) adversarial acquisition. (C) takeover or unfriendly acquisition. (D) leveraged buyout. Answer : (C)
65. Currently, the rationale for making an acquisition includes each of the following EXCEPT: (A) to increase market power. (B) to decrease taxes paid by shareholders. (C) to overcome entry barriers. (D) to increase diversification. Answer : (B)
66. Market power is derived primarily from the: (A) core competencies of the firm. (B) size of a firm and its resources and capabilities. (C) quality of a firm's top management team. (D) depth of a firm's strategy. Answer : (B)
67. The announcement that P&G was acquiring premium dog and cat food manufacturer Iams was a _________ acquisition and is intended to ________.
(A) vertical; increase diversification (B) horizontal; increase market power (C) vertical; overcome entry barriers (D) related; increase speed to market Answer : (D)
68. A primary reason for a firm to pursue an acquisition is to: (A) avoid increased government regulation. (B) achieve greater market power. (C) exit a hyper-competitive market. (D) achieve greater financial returns in the short run. Answer : (B)
69. When a firm acquires its supplier, it is engaging in a(n): (A) merger. (B) unrelated acquisition. (C) hostile takeover. (D) vertical acquisition. Answer : (D)
70. The acquisition of Sun Microsystems (a computer hardware producer) by Oracle Corporation (a software firm) is an example of a(n): (A) vertical acquisition. (B) unrelated acquisition. (C) horizontal acquisition. (D) merger of equals. Answer : (A)
71. Horizontal, vertical, and related acquisitions to build market power: (A) are likely to undergo regulatory review and analysis by financial markets.
(B) are rarely permitted to occur across international borders. (C) typically involve a firm purchasing one of its suppliers or distributors. (D) concentrate on capturing value at more than one stage in the value chain. Answer : (A)
72. Baby Doe's, a designer and manufacturer of children's clothing, has decided to purchase a retail chain specializing in children's clothing. This purchase is a(n): (A) merger. (B) unrelated acquisition. (C) horizontal acquisition. (D) vertical acquisition. Answer : (D)
73. Manny Inc. recently completed the purchase of its primary supplier. Manny intends to begin expanding the market to which the suppliers' products are sold. This purchase is a(n): (A) merger. (B) unrelated acquisition. (C) horizontal acquisition. (D) vertical acquisition. Answer : (D)
74. Cross-border acquisitions are primarily made to: (A) reshape the firm's competitive scope. (B) reduce the cost of new product development. (C) take advantage of higher education levels of labor in developed countries. (D) overcome barriers to entry in another country. Answer : (D)
75. The presence of barriers to entry in a particular market will generally make acquisitions ____ as an entry strategy. (A) less likely
(B) more likely (C) prohibitive (D) illegal Answer : (B)
76. SpeakEasy, a U.S. software company that specializes in voice-recognition software, wishes to rapidly enter the growing technical translation software market. This market is dominated by firms making highly differentiated products. To enter this market, SpeakEasy would be best served if it considers a(an): (A) vertical acquisition of a firm that uses technical translation products. (B) acquisition of a highly related firm in the technical translation market. (C) cross-border merger, preferably with an Indian or Chinese company. (D) strategy of internally developing the technical translation products needed to compete in this market. Answer : (B)
77. Cross-border acquisitions are critical to U.S. firms competing internationally: (A) if they are to develop differentiated products for markets served. (B) when market share growth is the focus. (C) where consolidated operations are beneficial. (D) if they wish to overcome entry barriers to international markets. Answer : (D)
78. Managers perceive internal product development as a high-risk activity and tend to choose acquisitions because approximately _______ percent of innovations are imitated within 4 years after patents are obtained. (A) 5 (B) 10 (C) 60 (D) 20 Answer : (C)
79. Internal product development is often viewed as: (A) carrying a high risk of failure. (B) the only reliable method of generating new products for the firm. (C) a quicker method of product launch than acquisition of another firm. (D) critical to the success of biotech and pharmaceutical firms. Answer : (A)
80. A manager in your company is proposing the acquisition of Taylor Company, which has developed a new, innovative product instead of a strategy of developing new products in-house. All of the following arguments are correct EXCEPT: (A) the acquisition of Taylor should be primarily for defensive rather than strategic reasons. (B) research suggests that acquisition strategies are a common means of avoiding risky internal ventures. (C) the outcomes of acquisitions can be estimated more easily and accurately than the outcomes for an internal product development process. (D) acquisitions could become a substitute for innovation within your firm. Answer : (A)
81. Entering new markets through acquisitions of companies with new products is not risk-free, especially if acquisition becomes a substitute for: (A) market discipline. (B) innovation. (C) risk analysis. (D) international diversification. Answer : (B)
82. Compared to internal product development, acquisitions allow: (A) immediate access to innovations in mature product markets. (B) more accurate prediction of return on investment. (C) slower market entry. (D) more effective use of company core competencies.
Answer : (B)
83. Research has shown that the more ____, the greater is the probability that an acquisition will be successful. (A) related the acquired and acquiring firms are (B) diverse the resulting portfolio of competencies (C) disparate the corporate cultures (D) involved investment banking firms are in the due diligence process Answer : (A)
84. When a firm is overly dependent on one or more products or markets, and the intensity of rivalry in that market is intense, the firm may wish to ____ by making an acquisition. (A) increase new product speed to market (B) broaden its competitive scope (C) increase its economies of scale (D) overcome entry barriers Answer : (B)
85. The fastest and easiest way for a firm to diversity its portfolio of businesses is through acquisition because: (A) of barriers to entry in many industries. (B) it is difficult and time intensive for companies to develop products that differ from their current product line. (C) innovation in both the acquired and the acquiring firm is enhanced by the exchange of competencies resulting from acquisition. (D) unrelated acquisitions are usually uncomplicated because the acquired firm is allowed to continue to function independently as it did before acquisition. Answer : (B)
86. Sales of watches among teenagers and twenty-somethings are declining rapidly as this age group uses cellphones, iPods, and other devices to tell time. A company that specializes in selling inexpensive watches to this age group may wish to consider ____ in order to develop new products other than watches. (A) unrelated diversification
(B) backward integration (C) forward integration (D) horizontal acquisitions Answer : (A)
87. Each of the following is a rationale for acquisitions EXCEPT: (A) achieving greater market power. (B) overcoming significant barriers to entry. (C) increasing speed of market entry. (D) positioning the firm for a tactical competitive move. Answer : (D)
88. Research shows that about ____ percent of mergers and acquisitions are successful. (A) 20 (B) 40 (C) 60 (D) 80 Answer : (A)
89. Problems associated with acquisitions include all of the following EXCEPT: (A) managers overly focused on acquisitions. (B) integration difficulties. (C) large or extraordinary debt. (D) excessive time spent on the due diligence process. Answer : (D)
90. The factors that lead to poor long-term performance by acquisitions include all of the following EXCEPT firms: (A) with insufficient diversification. (B) having too much debt.
(C) being unable to achieve synergy. (D) growing too large. Answer : (A)
91. The ____ phase is probably the single most important determinant of shareholder value creation in mergers and acquisitions. (A) pre-acquisition negotiations (B) pre-acquisition due diligence (C) post-acquisition integration (D) post-acquisition restructuring Answer : (C)
92. Without effective due diligence the: (A) acquiring firm is likely to overpay for an acquisition. (B) firm may miss its opportunity to buy a well-matched company. (C) acquisition may deteriorate into a hostile takeover, reducing the value creating potential of the action. (D) firm may be unable to act quickly and decisively in purchasing the target firm. Answer : (A)
93. Due diligence includes all of the following activities EXCEPT assessing: (A) differences in firm cultures. (B) tax consequences of the acquisition. (C) the level of private synergy between the two firms. (D) financing for intended transaction. Answer : (C)
94. Pappelbon Enterprises recently acquired a chain of convenience stores offering both fuel and food. Pappelbon is now surprised and dismayed to find that the gas pumps have been poorly maintained and will need to be replaced at considerable expense. Each of the following statements accurately reflect this EXCEPT: (A) Pappelbon did not fully evaluate the target.
(B) Pappelbon overpaid. (C) Pappelbon's due diligence was not fully effective. (D) Pappelbon's management was overly focused on acquisitions. Answer : (D)
95. The use of high levels of debt in acquisitions has contributed to: (A) the increase in above-average returns earned by acquiring firms. (B) an increased risk of bankruptcy for acquiring firms. (C) the confidence of the stock market in firms issuing junk bonds. (D) an increase in investments that have long-term payoffs. Answer : (B)
96. ____ are unsecured obligations that are not tied to specific assets for collateral. (A) Bearer bonds (B) No-load stocks (C) Penny stocks (D) Junk bonds Answer : (D)
97. Caterpillar's payment of a 32 percent premium for the acquisition of Bucyrus in 2011 and subsequent need to issue more stock illustrates the acquisition problem of: (A) integration difficulties. (B) inability to achieve synergy. (C) large or extraordinary debt. (D) managers overly focused on acquisitions. Answer : (C)
98. Which of the following statements is FALSE? (A) Synergy resulting from an acquisition generates gains in shareholder wealth beyond what they could achieve through diversification of their own portfolios. (B) Private synergy results when the combination of two firms yields competencies and capabilities
that could not be achieved by combining with any other firm. (C) Private synergy is easy for competitors to understand and imitate. (D) Private synergy is more likely when the two firms in an acquisition have complementary assets. Answer : (C)
99. Private synergy: (A) occurs in most related acquisitions and allows firms to see increased returns. (B) is frequently achieved in conglomerates. (C) is not easy for competitors to understand and imitate. (D) is assessed by managers during the due diligence process. Answer : (C)
100. The expenses incurred by firms trying to create synergy through acquisition are called ____ costs. (A) differentiation (B) diversification (C) transaction (D) interaction Answer : (C)
101. Which of the following is NOT a result of over-diversification? (A) Executives do not have a rich understanding of all of the firm's business units. (B) Managers emphasize strategic controls rather than financial controls. (C) Firms use acquisition as a substitute for innovation. (D) Managers become short-term in their orientation. Answer : (B)
102. Acquisitions can become a time sink for top level managers for all the following reasons EXCEPT: (A) the integration process after acquisition requires managerial attention. (B) they must prepare for acquisition negotiations.
(C) managers are involved in the search for viable acquisition candidates. (D) only top managers can perform the required due diligence. Answer : (D)
103. One problem with becoming too large is that large firms: (A) tend to have less market power. (B) have less potential for economies of scale. (C) become attractive takeover targets. (D) usually increase bureaucratic controls. Answer : (D)
104. Thomas is an upper-middle level manager for a firm that has been actively involved in acquisitions over the last 10 years. The firm has grown much larger as a result. Thomas has been dismayed to find that recently the managerial culture of the firm has been turning more and more to ____ controls. (A) bureaucratic (B) strategic (C) tactical (D) organic Answer : (A)
105. A friendly acquisition: (A) raises the price that has to be paid for a firm. (B) enhances the complementarity of the two firms' assets. (C) facilitates the integration of the acquired and acquiring firms. (D) allows joint ventures to be developed. Answer : (C)
106. ____ typically result(s) in the acquiring firm being able to prevent valuable human resources in the acquired firm from leaving. (A) Financial slack
(B) Private synergy (C) Friendly acquisitions (D) High compensation Answer : (C)
107. Which of the following is NOT an attribute of a successful acquisition? (A) The acquiring firm has a large amount of financial slack. (B) The acquired and acquiring firms have complementary assets and/or resources. (C) Innovation and R&D investments continue as part of the firm's strategy. (D) Investments in advertising and image building are made quickly. Answer : (D)
108. Typically, in a failed acquisition, the organization will: (A) restructure. (B) go into bankruptcy. (C) focus on building private synergy. (D) increase integration. Answer : (A)
109. Ambrose is a scientist working for a pharmaceutical company. His company was acquired by a rival pharmaceutical company, and now it is involved in downsizing and downscoping. Ambrose is concerned about his job security, since he is actively involved in amateur sports in his community and does not wish to disrupt his current lifestyle. Ambrose's job will be most likely to be secure if: (A) Ambrose's research is in a non-core activity. (B) the acquisition has been financed by junk bonds. (C) Ambrose is in a position to take a poison pill. (D) Ambrose is a key employee in the firm's primary business. Answer : (D)
110. Magma, Inc., acquired Vulcan, Inc., 3 years ago. Effective integration of the two companies' culture was never achieved, and the two firms' assets were not complementary. It is very likely that Magma will:
(A) go public through an IPO. (B) review the due diligence information collected before the acquisition. (C) restructure. (D) review its tactical-level strategies. Answer : (C)
111. Which of the following is NOT one of the three main restructuring strategies? (A) Realigning (B) Downsizing (C) Downscoping (D) Leveraged buyouts Answer : (A)
112. ___________ is often used when the acquiring firm paid too high a premium to acquire the target firm. (A) Management buyout (B) Leveraged buyout (C) Downscoping (D) Downsizing Answer : (D)
113. ___________ may be necessary because acquisitions create a situation in which the newly formed form has duplicate organizational functions such as sales, manufacturing, distribution, and human resource management. (A) Management buyout (B) Leveraged buyout (C) Downsizing (D) Downscoping Answer : (C)
114. _________ refers to a divestiture, spin-off, or some other means of eliminating businesses that
are unrelated to a firm's core business. (A) Downsizing (B) Hostile takeovers (C) Shakeouts (D) Downscoping Answer : (D)
115. Failing to ____________ appropriately will result in too many employees doing the same work and prevent the new firm from realizing the cost synergies it anticipated. (A) downsize (B) spin-off (C) downscope (D) buyout Answer : (A)
116. An investor is analyzing two firms in the same industry. She is looking for long-term performance from her investment. Both firms are basically identical except one firm is involved in substantial downsizing and the other firm is undertaking aggressive downscoping. The investor should invest in the: (A) downscoping firm because the higher debt load will discipline managers to act in shareholders' best interests. (B) downscoping firm because of reduced debt costs and the emphasis on strategic controls derived from focusing on the firm's core businesses. (C) downsizing firm because it will be making decisions based on tactical strategies. (D) downsizing firm because it is eliminating employees who are essentially "dead weight" and are dragging down the firm's profitability. Answer : (B)
117. Compared with downsizing, ____ has (have) a more positive effect on firm performance. (A) reconfiguring (B) downscoping (C) leveraged buyouts
(D) acquisitions Answer : (B)
118. A leveraged buyout refers to: (A) a firm restructuring itself by selling off unrelated units of the company's portfolio. (B) a firm pursuing its core competencies by seeking to build a top management team that comes from a similar background. (C) a restructuring action whereby a party buys all of the assets of a business, financed largely with debt, and takes the firm private. (D) an action where the management of the firm and/or an external party buys all of the assets of a business financed largely with equity. Answer : (C)
119. The term "leverage" in leveraged buyouts refers to the: (A) firm's increased concentration on the firm's core competencies. (B) amount of new debt incurred in buying the firm. (C) fact that the employees are purchasing the firm for which they work. (D) process of removing the firm's stock from public trading. Answer : (B)
120. Whole-firm LBOs tend to result in all the following negative outcomes EXCEPT: (A) large debt and increased financial risk. (B) failure to invest in R&D. (C) risk-averse management. (D) inefficient operations. Answer : (D)
121. After a leveraged buyout, ____ typically occur(s). (A) selling of assets (B) further rounds of acquisitions (C) due diligence
(D) private synergy Answer : (A)
ESSAY 122. How have changing conditions in the external environment influenced the type of M & A activity firms pursue?
Graders Info : During the recent financial crisis, tightening credit markets made it more difficult for firms to complete megadeals (those costing $10 billion or more). As a result, many acquirers focused on smaller targets with a niche focus that complemented their existing businesses. In addition, the relatively weak U.S. dollar increased the interest of firms from other nations to acquire U.S. companies. 123. How difficult is it for merger and acquisition strategies to create value and which firms benefit the most from M & A activity?
Graders Info : Evidence suggests that using merger and acquisition strategies to create value is challenging. This is particularly true for acquiring firms in that some research results indicate that shareholders of acquired firms often earn above-average returns from acquisitions while shareholders of acquiring firms typically earn returns that are close to zero. In addition, in approximately two-thirds of all acquisitions, the acquiring firm's stock price falls immediately after the intended transaction is announced. This negative response reflects investor's skepticism about the likelihood that the acquirer will be able to achieve the synergies required to justify the premium. 124. Identify and explain the seven reasons firms engage in an acquisition strategy.
Graders Info : (1) Increased market power. Market power allows a firm to sell its goods or services above competitive levels or when the costs of its primary or support activities are below those of its competitors. Market power is derived from the size of the firm and the firm's resources and capabilities to compete in the marketplace. Firms use horizontal, vertical, and related acquisitions to increase their size and market power. (2) Overcoming entry barriers. Firms can gain immediate access to a market by purchasing a firm with an established product that has consumer loyalty. Acquiring firms can also overcome economies of scale entry barriers through buying a firm that has already successfully achieved economies of scale. In addition, acquisitions can often overcome barriers to entry into international markets. (3) Reducing the cost of new product development and increasing speed to market. Developing new products and ventures internally can be very costly and
time consuming without any guarantee of success. Acquiring firms with products new to the acquiring firm avoids the risk and cost of internal innovation. In addition, acquisitions provide more predictable returns on investments than internal new product development. Acquisitions are a much quicker path than internal development to enter a new market, and they are a means of gaining new capabilities for the acquiring firm. (4) Lower risk compared to developing new products internally. Acquisitions are a means to avoid internal ventures (and R&D investments), which many managers perceive to be highly risky. However, substituting acquisitions for innovation may leave the acquiring firm without the skills to innovate internally. (5) Increased diversification. Firms can diversify their portfolio of business through acquiring other firms. It is easier and quicker to buy firms with different product lines than to develop new product lines independently. (6) Reshaping the firm's competitive scope. Firms can move more easily into new markets as a way to decrease their dependence on a market or product line that has high levels of competition. (7) Learning and developing new capabilities. By gaining access to new knowledge, acquisitions can help companies gain capabilities and technologies they do not possess. Acquisitions can reduce inertia and help a firm remain agile. 125. Describe the seven problems in achieving a successful acquisition.
Graders Info : Acquisition strategies present many potential problems. (1) Integration difficulties. It may be difficult to effectively integrate the acquiring and acquired firms due to differences in corporate culture, financial and control systems, management styles, and status of executives in the combined firms. Turnover of key personnel from the acquired firm is particularly negative. (2) Inadequate evaluation of target. Due diligence assesses where, when, and how management can drive real performance gains through an acquisition. Acquirers that fail to perform effective due diligence are likely to pay too much for the target firm. (3) Large or extraordinary debt. Acquiring firms frequently incur high debt to finance the acquisition. High debt may prevent the investment in activities such as research and development, training of employees, and marketing that are required for long-term success. High debt also increases the risk of bankruptcy and can lead to downgrading of the firm's credit rating. (4) Inability to achieve synergy. Private synergy occurs when the acquiring and target firms' assets are complementary in unique ways, making this synergy difficult for rivals to understand and imitate. Private synergy is difficult to create. Transaction costs are incurred when firms seek private synergy through acquisitions. Direct transaction costs include legal fees and investment banker charges. Indirect transaction costs include managerial time to evaluate target firms, time to complete negotiations, and the loss of key managers and employees following an acquisition. Firms often underestimate the indirect transaction costs of an acquisition. (5) Too much diversification. A high level of diversification can have a negative effect on the firm's long-term performance. For example, the scope created by diversification often causes managers to rely on financial controls rather than strategic controls because the managers cannot completely understand the business units' objectives and strategies. The focus on financial controls creates a short-term outlook among managers and they forego long-term investments. Additionally, acquisitions can become a substitute for innovation, which can be negative in the long run. (6) Managers overly focused on acquisitions. Firms that become heavily involved in acquisition activity often create an internal environment in which managers devote increasing amounts of their time and energy to analyzing and completing additional acquisitions. This detracts from other important activities, such as identifying and taking advantage of other opportunities and interacting with importance external stakeholders. Moreover, during an acquisition, the managers of the target firm are hesitant to make decisions with long-term consequences until the negotiations are completed.
(7) Growing too large. Acquisitions may lead to a combined firm that is too large, requiring extensive use of bureaucratic controls. This leads to rigidity and lack of innovation, and can negatively affect performance. Very large size may exceed the efficiencies gained from economies of scale and the benefits of the additional market power that comes with size. 126. Describe how an acquisition program can result in managerial time and energy absorption.
Graders Info : Typically, a substantial amount of managerial time and energy is required for acquisition strategies if they are to contribute to a firm's strategic competitiveness. Activities with which managers become involved include those of searching for viable acquisition candidates, completing effective due diligence processes, preparing for negotiations and managing the integration process after the acquisition is completed. Company experience shows that participating in and overseeing the acquisition activities can divert managerial attention from other matters that are linked with longterm competitive success (e.g., identifying and acting on other opportunities, interacting effectively with external stakeholders). 127. What are the attributes of a successful acquisition program?
Graders Info : Acquisitions can contribute to a firm's competitiveness if they have the following attributes: (1) The acquired firm has assets or resources that are complementary to the acquiring firm's core business. (2) The acquisition is friendly. (3) The acquiring firm conducts effective due diligence to select target firms and evaluates the target firm's health (financial, cultural, and human resources). (4) The acquiring firm has financial slack. (5) The merged firm maintains low to moderate debt. (6) The acquiring firm has sustained and consistent emphasis on R&D and innovation. (7) The acquiring firm manages change well and is flexible and adaptable. 128. What is restructuring and what are its common forms?
Graders Info : Restructuring refers to changes in a firm's portfolio of businesses and/or financial structure. There are three general forms of restructuring: (1) Downsizing involves reducing the number of employees, which may include decreasing the number of operating units. (2) Downscoping entails divesting, spinning-off, or eliminating businesses that are not related to the core business. It allows the firm to focus on its core business. (3) A leveraged buyout occurs when a party (managers, employees, or an external party) buys all the assets of a (publicly traded) business, takes it private, and finances the buyout with debt. Once the transaction is complete, the company's stock is no longer publicly traded. 129. What are the differences between downscoping and downsizing and why are each used?
Graders Info : Downsizing is a reduction in the number of employees. It may or may not change the composition of businesses in the company's portfolio. In contrast, the goal of downscoping is to reduce the firm's level of diversification. Downsizing is often used when the acquiring form paid too high a premium to acquire the target firm or where the acquisition created a situation in which the newly formed form had duplicate organizational functions such as sales or manufacturing. Downscoping is accomplished by divesting unrelated businesses. Downscoping is used to make the firm less diversified and allow its top-level managers to focus on a few core businesses. A firm that downscopes often also downsizes at the same time. 130. What is an LBO and what have been the results of such activities?
Graders Info : Leveraged buyouts (LBOs) are a restructuring strategy. Through a leveraged buyout, a (publicly traded) firm is purchased so that it can be taken private. In this manner, the company's stock is no longer publicly traded. LBOs usually are financed largely through debt, and the new owners usually sell off a number of assets. There are three types of LBOs: management buyouts (MBOs), employee buyouts (EBOs), and whole-firm buyouts. Because they provide managerial incentives, MBOs have been the most successful of the three leveraged buyout types. MBOs tend to result in downscoping, an increased strategic focus, and improved performance. 131. What are the results of the three forms of restructuring?
Graders Info : Downsizing usually does not lead to higher firm performance. The stock markets tend to evaluate downsizing negatively, as investors assume downsizing is a result of problems within the firm. In addition, the laid-off employees represent a significant loss of knowledge to the firm, making it less competitive. The main positive outcome of downsizing is accidental, since many laid-off employees become entrepreneurs, starting up new businesses. In contrast, downscoping generally improves firm performance through reducing debt costs and concentrating on the firm's core businesses. LBOs have mixed outcomes. The resulting large debt increases the financial risk and may end in bankruptcy. The managers of the bought-out firm often have a short-term and risk-averse focus because the acquiring firm intends to sell it within 5 to 8 years. This prevents investment in R&D and other actions that would improve the firm's core competence. But, if the firms have an entrepreneurial mindset, buyouts can lead to greater innovation if the debt load is not too large.
Chapter 08 International Strategy TRUEFALSE 1. In place of relatively stable and predictable domestic markets, firms across the globe find that they are competing in relatively unstable and unpredictable global markets. (A) True (B) False Answer : (A)
2. After a firm decides to compete internationally, it must select its strategy and choose a mode of entry into international markets. (A) True (B) False Answer : (A)
3. Because there are still several industrial and consumer markets in which only domestic firms compete, many firms do not have to be able to compete internationally. (A) True (B) False Answer : (B)
4. One reason why firms pursue international opportunities is to extend the product's life cycle. (A) True (B) False Answer : (A)
5. A reason that firms use international strategies is to secure needed resources, especially minerals and energy. (A) True (B) False Answer : (A)
6. In some industries, technology drives globalization because the economies of scale necessary to reduce costs cannot be met by competing in domestic markets alone. (A) True (B) False Answer : (A)
7. A major incentive for the use of international strategy by French-based Carrefour Group is the potential for large demand for goods and services from emerging markets such as China and India. (A) True (B) False Answer : (A)
8. The three basic benefits of international strategies are 1) increased market size; 2) increased economies of scale and learning; and 3) development of competitive advantages through location. (A) True (B) False Answer : (A)
9. Rivals Airbus and Boeing have multiple manufacturing facilities and outsource activities partly for the purpose of developing economies of scale as a source of being able to create value for customers. (A) True (B) False Answer : (A)
10. As an indication of the importance of economies of scale, Ford Motor Company runs a single global business developing cars and trucks that can be built and sold through the world. (A) True (B) False Answer : (A)
11. Coca Cola and PepsiCo are examples of firms that have found it unnecessary to aggressively pursue international strategies because of extensive growth opportunities available in the U.S. market.
(A) True (B) False Answer : (B)
12. Multinational firms have many opportunities to learn from their experiences in international markets, but they must have a strong R&D system to absorb the knowledge. (A) True (B) False Answer : (A)
13. Cultural differences affect location advantages in that business transactions are less difficult for a firm to complete when there is a strong match among the cultures with which the firm is involved. (A) True (B) False Answer : (A)
14. Location advantages are influenced by costs of production, access to natural resources and critical supplies, as well as the needs of customers, but not culture. (A) True (B) False Answer : (B)
15. The three corporate-level international strategies are cost leadership, differentiation, and focus. (A) True (B) False Answer : (B)
16. When a firm initially pursues an international business-level strategy, the resources and capabilities established in the home country frequently allow the firm to pursue the strategy into markets located in other countries. (A) True (B) False
Answer : (A)
17. Michael Porter's Determinants of National Advantage describe factors associated with the firm's domestic environment that contribute to its dominance in a particular global industry. (A) True (B) False Answer : (A)
18. Both the size and the nature of a country's domestic demand for a particular industry's good or service are important in Porter's determinants of national advantage. (A) True (B) False Answer : (A)
19. Having substantial supplies of critical basic natural resources is a necessary condition for a country to support businesses that can successfully compete in international markets. (A) True (B) False Answer : (B)
20. South Korea's success in international markets is primarily a result of its abundant natural resources. (A) True (B) False Answer : (B)
21. Italy has become the leader in the shoe industry because of related and supporting industries such as a well-established leather-processing industry that provides the leather needed to construct shoes and related products. (A) True (B) False Answer : (A)
22. A firm based in a country with a national competitive advantage is not guaranteed success as it implements its chosen international business-level strategy. Instead, the actual strategic choices managers make may be the most compelling reasons for success or failure. (A) True (B) False Answer : (A)
23. A multi-domestic strategy is an international strategy in which a firm's home office determines the strategies business units are to use in each region. (A) True (B) False Answer : (B)
24. A major advantage of multi-domestic strategies is the ability to customize products and services for the specific market, although this sacrifices economies of scale. (A) True (B) False Answer : (A)
25. The firm using a global strategy seeks to develop economies of scale as it produces the same or virtually the same products for distribution to customers throughout the world who are assumed to have similar needs. (A) True (B) False Answer : (A)
26. The global strategy offers greater opportunities to take innovations developed at the corporate level or in one market and apply them to other markets. (A) True (B) False Answer : (A)
27. Research suggests that the performance of the global strategy is enhanced if it deploys in areas where regional integration across countries is occurring.
(A) True (B) False Answer : (A)
28. A transnational strategy is an international strategy in which the firm seeks to achieve both global efficiency and local responsiveness. (A) True (B) False Answer : (A)
29. A transnational strategy is difficult to use because of its conflicting goals. (A) True (B) False Answer : (A)
30. Even if effectively implemented, the transnational strategy often produces lower performance than does the implementation of either the multi-domestic or global strategies. (A) True (B) False Answer : (B)
31. The growing number of global competitors heightens the requirements to keep costs down and there is the desire for more specialized products to meet customer needs. These two pressures make transnational strategies increasingly necessary. (A) True (B) False Answer : (A)
32. A company that chooses a truly global corporate-level strategy assumes that the liability of foreignness will be minimal. (A) True (B) False
Answer : (A)
33. Four types of distances are associated with the liability of foreignness: cultural, administrative, geographic, and economic. (A) True (B) False Answer : (A)
34. The "regionalization" environmental trend means that firms can focus on a region (customization) but also have some standardization or sharing within the region. (A) True (B) False Answer : (A)
35. By choosing a region where markets are more similar, the firm may be able to better understand those markets and cater to their needs, but also achieve economies through sharing of resources. (A) True (B) False Answer : (A)
36. International associations such as the European Union, the Organization of American States, and the North American Free Trade Association encourage regionalization of competition rather than globalization. (A) True (B) False Answer : (A)
37. Exporting and licensing are the most appropriate ways for smaller firms to first enter international markets. (A) True (B) False Answer : (A)
38. The high cost of transportation, expense of tariffs, and loss of control are three disadvantages of exporting. (A) True (B) False Answer : (A)
39. Evidence suggests that, in general, using an international cost leadership strategy when exporting to developed countries has the most positive effect on firm performance while using an international differentiation strategy with larger scale when exporting to emerging economies leads to the greatest amounts of success. (A) True (B) False Answer : (A)
40. Because of the lack of protection of intellectual property in some foreign countries, licensing arrangements are one of the best ways for a firm to protect its technology from being appropriated by potential competitors. (A) True (B) False Answer : (B)
41. Although licensing is the least costly method to enter a foreign market, its disadvantages include high costs of transportation and low control over the marketing and distribution of goods. (A) True (B) False Answer : (B)
42. Strategic alliances tend to increase the risk associated with international expansion for the U.S. partner because of the greater dependence on the foreign firm. (A) True (B) False Answer : (B)
43. Establishing a wholly-owned subsidiary provides the quickest access to a new market.
(A) True (B) False Answer : (B)
44. Research suggests that wholly owned subsidiaries and expatriate staff are inappropriate for service industries because those industries require close contact with customers, high levels of professional skills, specialized know-how, and customization. (A) True (B) False Answer : (B)
45. The greenfield venture option is useful when control of proprietary technology is important in an international expansion. (A) True (B) False Answer : (A)
46. When the country risk is high, firms prefer to enter with a greenfield investment rather than a joint venture. (A) True (B) False Answer : (B)
47. While there are multiple means of entering new international markets, firms should use one method consistently with all of its various products and across its different markets in order to reduce administrative complexity. (A) True (B) False Answer : (B)
48. Export, licensing, and the strategic alliance entry modes are all appropriate for early market development. (A) True
(B) False Answer : (A)
49. Acquisitions, greenfield ventures, and sometimes joint ventures are appropriate when firms want to establish a strong presence in an international market. (A) True (B) False Answer : (A)
50. International diversification can help to reduce a firm's overall risk through the stabilization of returns. (A) True (B) False Answer : (A)
51. Research has shown that, as international diversification increases, firms' returns decrease initially but then increase quickly as firms learn to manage international expansion. (A) True (B) False Answer : (A)
52. International diversification is a strategy through which a firm expands the sale of its goods and services across borders of global regions and countries into a potentially large number of geographic locations of markets. Instead of entering one or a few markets, international diversification means that the firm enters multiple markets. (A) True (B) False Answer : (A)
53. The chief risks in the international environment are political and cultural. (A) True (B) False Answer : (B)
54. Fluctuation in the value of different currencies is a major economic risk associated with international diversification. (A) True (B) False Answer : (A)
55. A U.S. manufacturer of pigments for household paint that exports about 40 percent of its production to European markets will find its sales will be harmed by a weak dollar. (A) True (B) False Answer : (B)
56. An increase in the value of the U.S. dollar is an example of an economic risk in that it can reduce the value of U.S. multinational firms' international assets and earnings in other countries. (A) True (B) False Answer : (A)
57. Some of the costs incurred by firms pursuing international diversification may derive from higher coordination expenses, trade barriers, and lack of familiarity with local cultures. (A) True (B) False Answer : (A)
58. Although leaders in Russia have tried to reassure potential investors about their property rights, political risks in the form of weak laws and commonplace government corruption make firms leery of investing in Russia. (A) True (B) False Answer : (A)
59. The amount of diversification in a firm's international operations that can be managed varies from company to company and is affected by managers' abilities to deal with ambiguity and complexity.
(A) True (B) False Answer : (A)
MULTICHOICE 60. International strategy refers to a(n): (A) action plan pursued by American companies to compete against foreign companies operating in the United States. (B) strategy through which the firm sells products in markets outside the firm's domestic market. (C) political and economic action plan developed by businesses and governments to cope with global competition. (D) strategy American firms use to dominate international markets. Answer : (B)
61. Raymond Vernon states that the classic rationale for international diversification is to: (A) pre-emptively dominate world markets before foreign companies can establish dominance. (B) avoid domestic governmental regulation. (C) extend the product's life cycle. (D) avoid international governmental regulation. Answer : (C)
62. Which of the following is NOT an incentive for firms to become multinational? (A) To gain access to consumers in emerging markets (B) To gain easier access to raw materials (C) To avoid high domestic taxation on corporate income (D) Opportunities to integrate operations on a global scale Answer : (C)
63. The increased pressures for global integration of operations have been driven mostly by: (A) new low-cost entrants.
(B) increasing demand for similar products. (C) increased levels of joint ventures. (D) the rise of governmental regulation. Answer : (B)
64. The benefits of expanding into international markets include each of the following opportunities EXCEPT: (A) increasing the size of the firm's potential markets. (B) economies of scale and learning. (C) location advantages. (D) favorable tax concessions and economic incentives by home-country governments. Answer : (D)
65. U.S. companies moving into the international market need to be sensitive to the need for local country or regional responsiveness because of: (A) increasing rejection of American culture across much of the world. (B) the sophistication of the international consumer because of the Internet. (C) consumer needs, political and legal structures, and social norms vary by country. (D) the increasing loss of economies of scale. Answer : (C)
66. Which of the following is NOT a factor pressuring companies for local responsiveness? (A) Differences in employment laws (B) Customization due to cultural differences (C) Government pressure for firms to use local sources for procurement (D) Availability of low labor costs Answer : (D)
67. U.S. cola companies entered the global market because of: (A) limited growth opportunities in their domestic market. (B) lower labor costs in the emerging markets.
(C) economies of scale that offset research and development costs. (D) an increase in the return on investment from their U.S. bottling plants. Answer : (A)
68. Moving into international markets is a particularly attractive strategy to firms whose domestic markets: (A) demand a differentiation strategy for success. (B) are limited in opportunities for growth. (C) have developed unfriendly business attitudes toward the industry. (D) have too much regulation. Answer : (B)
69. Working in multiple international markets can provide firms with __________ perhaps even in terms of __________. (A) location advantages; larger markets (B) research and development activities; larger markets (C) new learning opportunities; research and development activities (D) economies of scale and learning; larger markets Answer : (C)
70. Firms able to standardize the processes used to produce, sell, distribute, and service their products across country borders enhance their ability to: (A) learn how to continuously reduce costs while increase the value of their products. (B) increase investment in research and development. (C) access to a low-cost labor force in the host market. (D) mitigate cultural differences. Answer : (A)
71. Firms with core competencies that can be exploited across international markets are able to: (A) achieve synergies and produce high-quality goods at lower costs. (B) enter new markets more quickly.
(C) enhance their market image and brand loyalty among local consumers. (D) meet local government requirements more quickly than their international competitors. Answer : (A)
72. The location advantages associated with locating facilities in other countries can include all of the following EXCEPT: (A) low-cost labor. (B) access to critical supplies. (C) access to customers. (D) evasion of host country governmental regulations. Answer : (D)
73. Factors of production in Porter's model of international competitive advantage include all of the following EXCEPT: (A) labor. (B) capital. (C) infrastructure. (D) technology. Answer : (D)
74. In Porter's model, if a country has both ________ and __________ production factors, it is likely to serve an industry well by spawning strong home-country competitors that can also be successful global competitors. (A) basic; advanced (B) advanced; generalized (C) basic; generalized (D) advanced; specialized Answer : (D)
75. Japan, due to a lack of undeveloped land, would be an unusual choice of location for a U.S. cattle company to set up local grazing operations. This limiting factor would be identified in what part of Porter's determinants of national advantage?
(A) Factors of production (B) Demand conditions (C) Related and supporting industries (D) Firm strategy, structure, and rivalry Answer : (A)
76. A fundamental reason for a country's development of advanced and specialized factors of production is often its: (A) lack of basic resources. (B) monetary wealth. (C) small workforce. (D) protective tariffs. Answer : (A)
77. The four aspects of Porter's model of international competitive advantage include all of the following EXCEPT: (A) factors of production. (B) demand conditions. (C) political and economic institutions. (D) related and supporting industries. Answer : (C)
78. Which pair of industries would NOT be considered as "related and supporting" under Porter's diamond model? (A) Japanese cameras and copiers (B) Italian leather-processing and shoes (C) U.S. computers and software (D) highway systems and the supply of debt capital Answer : (D)
79. In France, fine dressmaking and tailoring have been a tradition predating Queen Marie
Antoinette. Cloth manufacturers, design schools, craft apprenticeship programs, modeling agencies, and so forth, all exist to supply the clothing industry. This is an example of the ____ in Porter's model. (A) strategy, structure, and rivalry among firms (B) related and supporting industries (C) demand conditions (D) factors of production Answer : (B)
80. A large domestic market can provide the country's industries a chance at dominating the world market because: (A) they have been able to develop economies of scale at home. (B) they have access to abundant and inexpensive factors of production. (C) the related and supporting industries will have been developed. (D) the nation's culture and educational system will be adapted to producing the labor force needed for the industry. Answer : (A)
81. In addition to the four basic dimensions of Porter's "diamond" model, ____ may also contribute to the success or failure of firms. (A) national work ethic (B) educational requirements (C) government policy (D) national pride Answer : (C)
82. All of the following are correct about what managers should know about firms based in a country with a national competitive advantage EXCEPT: (A) success is not guaranteed as the firm implements its chosen international business-level strategy. (B) the actual strategic choices made are most compelling reasons for success or failure. (C) success is guaranteed as the firm implements its chosen international business-level strategy.
(D) the determinants of national competitive advantage provide a foundation for a firm's competitive advantages. Answer : (C)
83. All of the following are international corporate-level strategies EXCEPT the ____ strategy. (A) multi-domestic (B) universal (C) global (D) transnational Answer : (B)
84. International corporate-level strategy focuses on: (A) the scope of operations through both product and geographic diversification. (B) competition within each country. (C) economies of scale. (D) sophistication of monitoring and controlling systems. Answer : (A)
85. Effectively implementing the ________ international corporate-level strategy often produces higher performance than does implementing either the _______ or _________ strategies. (A) multi-domestic; global; transnational (B) global; multi-domestic; transnational (C) cost leadership; differentation; focus (D) transnational; multi-domestic; global Answer : (D)
86. A multi-domestic corporate-level strategy is one in which: (A) a corporation chooses not to compete internationally but where there are a number of international competitors in the firm's local marketplace. (B) the firm produces a standardized product, but markets it differently in each country in which it competes.
(C) the firm customizes the product for each country in which it competes. (D) the firm competes in a number of countries, but it is centrally coordinated by the home office. Answer : (C)
87. A multi-domestic corporate-level strategy has ____ need for global integration and ____ need for local market responsiveness. (A) low; low (B) low; high (C) high; low (D) high; high Answer : (B)
88. A global corporate-level strategy differs from a multi-domestic corporate-level strategy in that in a global strategy: (A) competitive strategy is dictated by the home office. (B) competitive strategy is decentralized and controlled by individual strategic business units. (C) products are customized to meet the individual needs of each country. (D) the firm sells in multiple countries. Answer : (A)
89. A global corporate-level strategy emphasizes: (A) differentiated products. (B) economies of scale. (C) sensitivity to local product preferences. (D) decentralizing control and limited monitoring. Answer : (B)
90. A global strategy: (A) is easy to manage because of common operating decisions across borders. (B) achieves efficient operations without sharing resources across country boundaries. (C) increases risk because decision making is centralized at the home office.
(D) lacks responsiveness to local markets. Answer : (D)
91. A global corporate-level strategy assumes: (A) efficiency and customization can be achieved simultaneously. (B) a rise in income levels across the world. (C) increasing levels of cultural differences among nations. (D) more standardization of products across country markets. Answer : (D)
92. The transnational strategy is becoming increasingly necessary to compete in international markets for all the following reasons EXCEPT: (A) the growing number of competitors heightens the requirements to keep costs down. (B) the desire for specialized products to meet consumers' needs. (C) differences in culture and institutional environments also require firms to adapt their products and approaches to local environments. (D) it is easy to use. Answer : (D)
93. In China, Starbucks is standardizing its operations while simultaneously decentralizing some decision-making responsibility to local levels to meet customers' tastes. Starbucks is following the __________ international corporate-level strategy. (A) transnational (B) global (C) differentiation (D) multi-domestic Answer : (A)
94. Increasingly, customers worldwide are demanding emphasis on local requirements and companies require efficiency as global competition increases. This has triggered an increase in the number of firms using the ____ strategy. (A) multi-domestic
(B) transnational (C) universal (D) global Answer : (B)
95. The two important environmental trends that influence a firm's choice and use of international corporate-level strategies are _________ and __________. (A) culture; geographic scope (B) cost; quality (C) regionalization; globalization (D) liability of foreignness; regionalization Answer : (D)
96. Disney suffered lawsuits in France at Disneyland Paris as a result of the lack of fit between its transferred personnel policies and the French employees charged to enact them. This is an example of: (A) the effects of regionalization. (B) the risks of a multi-domestic strategy. (C) the liability of foreignness. (D) the effect of demand conditions. Answer : (C)
97. _________ is the set of costs associated with unfamiliar operating environments; economic, administrative and cultural differences; and the challenges of coordination over distances. (A) Transnational risk (B) Regionalization (C) Liability of foreignness (D) International risk Answer : (C)
98. Associations such as the European Union, Organization of American States, and the North American Free Trade Association, encourage:
(A) global strategies. (B) domestication. (C) regional strategies. (D) nationalization. Answer : (C)
99. A firm may narrow its focus to a specific region of the world: (A) because that market is most different from its domestic market and so represents an unexploited "greenfield opportunity" for its products. (B) in order to obtain greater economies of scale. (C) so that it can better understand the cultures, legal and social norms, and other factors that are important for effective competition in those markets. (D) to take advantage of limited protections of intellectual property so that it can manufacture innovative products without restrictions. Answer : (C)
100. Skaredykat Inc. is considering initial expansion beyond its home market. The firm has decided not to enter markets that differ greatly from its home market, instead expanding within the twelvenation region that includes its home country. Which one of these is true? (A) The firm is not engaging in international trade. (B) The firm is using a regional approach to international expansion. (C) The firm will not be able understand the cultures, legal, and social norms of this market. (D) Skaredykat is too afraid to implement an international strategy. Answer : (B)
101. Most firms enter international markets sequentially, introducing their ____ first. (A) most innovative products (B) largest and strongest lines of business (C) most generic products, which will be more likely to generate universal product demand, (D) products customized to the region Answer : (B)
102. A U.S. manufacturer of adaptive devices for persons with disabilities is considering expanding internationally. It is a fairly small company, but it is looking for growth opportunities. This company should primarily consider the option of: (A) licensing. (B) exporting. (C) a strategic alliance. (D) a greenfield venture. Answer : (B)
103. The choices that a firm has for entering the international market include all of the following EXCEPT: (A) exporting. (B) licensing. (C) leasing. (D) acquisition. Answer : (C)
104. The problems associated with exporting include: (A) merging corporate cultures. (B) a partner's incompatibility. (C) difficulty in negotiating relationships. (D) high transportation costs and the expense of tariffs. Answer : (D)
105. Which of the following is NOT a disadvantage associated with exporting? (A) Potential loss of proprietary technologies (B) High transportation costs (C) Loss of control over distribution activities (D) Tariffs imposed by local governments Answer : (A)
106. A licensing agreement: (A) results in two firms agreeing to share the risks and the resources of a new venture. (B) is best way to protect proprietary technology from future competitors. (C) allows a foreign firm to purchase the rights to manufacture and sell a firm's products within a host country. (D) can be greatly impacted by currency exchange rate fluctuations. Answer : (C)
107. Which of the following is NOT a typical disadvantage of licensing? (A) Little control over the marketing of the products (B) Licensees may develop a competitive product after the license expires (C) Lower potential returns than the use of exporting or strategic alliances (D) Incompatibility of the licensing partners Answer : (D)
108. All of the following are reasons why firms use international strategic alliances EXCEPT: (A) sharing of risks and resources. (B) alliances facilitate the development of new capabilities. (C) learning new competencies particularly those related to technology. (D) strategic alliances are easy to manage. Answer : (D)
109. One of the primary reasons for failure of cross-border strategic alliances is: (A) the incompatibility of the partners. (B) conflict between legal and business systems. (C) security concerns and terrorism. (D) high debt financing. Answer : (A)
110. If conflict in a strategic alliance or joint venture is not manageable, a(n) _______may be a better option.
(A) licensing strategy (B) exporting strategy (C) acquisition (D) new wholly owned subsidiary Answer : (C)
111. Which of the following is NOT a disadvantage of international acquisitions? (A) They are very expensive and often require debt financing. (B) The acquiring firm has to deal with the regulatory requirements of a host country. (C) Merging the acquired and acquiring firm is difficult. (D) It is the slowest way to enter a new market. Answer : (D)
112. The means of entry into international markets that offers the greatest control is: (A) licensing. (B) acquisitions. (C) joint ventures. (D) greenfield ventures. Answer : (D)
113. Which of the following is an advantage associated with greenfield ventures? (A) Governmental support and subsidies in the host country (B) The lower cost of this type of venture (C) The level of control over the firm's operations (D) The lower level of risks involved Answer : (C)
114. If intellectual property rights in an emerging economy are not well-protected, the number of firms in the industry is rapidly growing, and the need for global integration is high, ____ is the preferred entry mode. (A) exporting
(B) strategic alliance (C) a joint venture or wholly owned subsidiary (D) licensing Answer : (C)
115. The decision of what entry mode to use is primarily based on all of the following factors EXCEPT: (A) the industry's competitive conditions. (B) the country's situation and government policies. (C) the worldwide economic situation. (D) the firm's unique set of resources, capabilities, and core competencies. Answer : (C)
116. When a firm INITIALLY becomes internationally diversified, its returns: (A) remain stable. (B) decrease. (C) become more variable. (D) increase. Answer : (B)
117. An international diversification strategy is one in which a firm: (A) expands into nearby markets. (B) expands into a potentially large number of geographic locations and markets. (C) expands into one or a few markets. (D) acquires a firm in a foreign country. Answer : (B)
118. Internationally diversified firms: (A) earn greater returns on their innovations through larger or more numerous markets. (B) are more likely to produce below-average returns for investors in the long run.
(C) may need to decrease international activities when domestic profits are poor. (D) are generally unable to achieve high levels of synergy because of differences in cultures. Answer : (A)
119. Bunyan Heavy Equipment, a U.S. firm, is investigating expanding into Russia using a greenfield venture. The committee researching this project has delivered a negative report. The MAIN concern of the committee is probably: (A) loss of intellectual property due to Russian piracy. (B) the fluctuation in the value of the ruble. (C) the numerous and conflicting legal authorities in Russia. (D) Russia's recent actions to gain state control of private firms' assets. Answer : (D)
120. Terrorism creates an economic risk for firms, which: (A) reduces the amount of investment foreign companies will make in a country perceived to be terror-prone. (B) is created by governmental bans on doing business with terrorist regimes. (C) is offset by the above-average returns for firms that have learned how to operate in such an environment. (D) is absorbed by firms that are highly geographically diversified and that operate in both secure and insecure locations. Answer : (A)
121. Arkadelphia Polymers, Inc., earns 60 percent of its revenue from exports to Europe and Asia. The CEO of the company would be: (A) concerned if the value of the dollar strengthened. (B) pleased if the value of the dollar strengthened. (C) unconcerned about the fluctuation in the value of the dollar because the company is widely diversified geographically. (D) likely to consider moving to international strategic alliances or acquisitions if the value of the dollar fell and remained low. Answer : (A)
122. The positive results associated with increasing international diversification have been shown to: (A) continue as the level of international diversification increases. (B) level off and become negative as diversification increases past some point. (C) become negative quickly. (D) be centered in only one or two industries. Answer : (B)
123. All of the following complicate the implementation of an international diversification strategy EXCEPT: (A) widespread multilingualism. (B) increased costs of coordination between business units. (C) cultural diversity. (D) logistical costs. Answer : (A)
ESSAY 124. What are the incentives for firms to use international strategies? What are the three basic benefits firms can derive by moving into international markets?
Graders Info : One reason is to extend the life cycle of the firm's products. Gaining access to needed and potentially scarce resources is another reason. There is also pressure for global integration of operations, driven by growing universal product demand. Companies also want to take advantage of opportunities to better use rapidly developing technologies such as the Internet and mobile applications, which permit greater integration of trade, capital, and culture. Finally, the potential of large demand for goods and services for people in emerging markets is an important incentive. When firms successfully move into international markets, they can experience: increased market size, economies of scale and learning, and location advantages.
125. What are the three basic benefits of international strategies?
Graders Info :
Firms derive three basic benefits by successfully using international strategies: (1) increased market size, (2) economies of scale and learning, and (3) advantages of location. Increased market size is achieved by expansion beyond the firm's home country. International expansion increases the number of potential customers a firm may serve. Starbucks is a firm that has increased its market size through international expansion (Opening Case). Other firms such as Coca Cola and PepsiCo have moved into international markets primarily because of limited growth opportunities in their domestic markets. Economies of scale and learning is a second benefit. Leveraging a technology beyond the home country allows for more units to be sold and initial investments recovered more quickly. Rivals Airbus and Boeing have multiple manufacturing facilities and outsource some activities in order to gain scale advantages. Lastly, advantages of location can be realized through internationalization. These advantages include access to low-cost labor, critical resources, or customers. 126. Discuss the three international corporate-level strategies. On what factors are these strategies based?
Graders Info : International corporate strategy focuses on the scope of a firm's operations through both product and geographic diversification. The three basic international corporate-level strategies vary on the need for local responsiveness to the market and the need for global integration. The multi-domestic strategy focuses on competition within each country in which the firm operates. Firms employing a multi-domestic strategy decentralize strategic and operating decisions to the strategic business units operating in each country so business units can customize their goods and services to the local market. The use of global integration in this strategy is low. The global strategy assumes more standardization of product demand across country boundaries. Therefore, competitive strategy is centralized and controlled by the home office, placing high emphasis on global integration of operations. The strategic business units in each country are interdependent and the home office integrates these businesses. The firm offers standardized products across country markets. It emphasizes economies of scale and the opportunity to use innovations developed in one nation to other markets. The transnational strategy seeks to achieve both global efficiency (through global integration) and local responsiveness. This strategy is difficult to implement. One goal requires global coordination while the other requires local flexibility. Flexible coordination builds a shared vision and individual commitment through an integrated network. The effective implementation of the transnational strategy often produces higher performance than either of the other corporatelevel strategies. 127. Identify and describe the modes of entering international markets. What are their advantages and disadvantages?
Graders Info : Firms may enter international markets in any of five ways: exporting, licensing, forming strategic alliances, making acquisitions, and establishing new, wholly owned subsidiaries (greenfield ventures). Most firms, particularly small ones, begin with exporting (marketing and distributing their products abroad). This involves high transportation costs and possibly tariffs. An exporter has less control over the marketing and distribution of the product than in other methods of entering the international market. In addition, the exporter must pay the distributor or allow the distributor to
add to the product price in order to offset its costs and earn a profit. In addition, the strength of the dollar against foreign currencies is a constant uncertainty. But, the advantages are that the company does not have the expense of establishing operations in the host countries. The Internet makes exporting easier than in previous times. Licensing (selling the manufacturing and distribution rights to a foreign firm) is also popular with smaller firms. The licenser is paid a royalty on each unit sold by the licensee. The licensee takes the risks and makes the financial investments in manufacturing and distributing the product. It is the least costly way of entering international markets. It allows a firm to expand returns based on a previous innovation. But there are disadvantages. Licensing provides the lowest returns, because they must be shared between the licensee and the licensor. Licensing gives the licenser less control over the manufacturing and marketing process. There is the risk that the licensee will learn the technology and become a competitor when the original license expires. If the licenser later wishes to use a different ownership arrangement, the licensing arrangement make create some inflexibility. Strategic alliances involve sharing risks and resources with another firm in the host country. The host country partner knows the local conditions; the expanding firm has the technology or other capabilities. Both partners typically enter an alliance in order to learn new capabilities. The partnership allows the entering firm to gain access to a new market and avoid paying tariffs. The host-country firm gains access to new technology and innovative products. Equity-based alliances are more likely to produce positive gains. Alliances work best in the face of high uncertainty and where cooperation is needed between partners and strategic flexibility is important. But, many alliances fail due to incompatibility and conflict between the partners. Cross-border acquisitions provide quick access to a new market, but they are expensive and involve complex negotiations. Cross-border acquisitions have all the problems of domestic acquisitions with the complication of a different culture, legal system and regulatory requirements. Acquisitions are expensive and usually involve debt-financing. The most expensive and risky means of entering a new international market is through the establishment of a new, wholly owned subsidiary or greenfield venture. Alternatively, it provides the advantages of maximum control for the firm and, if successful, potentially the greatest returns as well. This alternative is suitable for firms with strong intangible capabilities and/or proprietary technology. The risks are high because of the challenges of operating in an unfamiliar environment. The company must build new manufacturing facilities, establish distribution networks, and learn and implement new marketing strategies. 128. Discuss the effect of international diversification on a firm's returns.
Graders Info : Research shows that returns vary as the level of diversification increases. At first, returns decrease, then as the firm learns to manage the diversification, returns increase. But, as diversification increases past some point, returns level off and become negative. Firms that are broadly diversified in international markets usually receive the most positive stock returns, especially when they diversify geographically into core business areas. International diversification can lead to economies of scale and experience, location advantages, increased market size, and the potential to stabilize returns (which reduces the firm's overall risk). International diversification improves a firm's ability to increase returns from innovation before competitors can overcome the initial competitive advantage. In addition, as firms move into international markets, they are exposed to new products and processes that stimulate further innovation. The amount of international diversification that can be managed varies from firm to firm and according to the abilities of the firm's managers. The problems of central coordination and integration are mitigated if the firm diversifies into more friendly countries that are geographically and culturally close.
129. Identify and describe the major risks of international diversification.
Graders Info : International diversification carries multiple risks. The major risks are political and economic. Political risks are related to governmental instability and to war. Instability in a government creates economic risks and uncertainty created by government regulation. Governmental instability can result in the existence of many potentially conflicting legal authorities, corruption, and the risk of nationalization of company assets. Economic risks are related to political risks. Economic risks include the increased trend of counterfeit products and the lack of global policing of these products. Another economic risk is the perceived security risk of a foreign firm acquiring firms that have key natural resources or firms that may be considered strategic in regard to intellectual property. In addition, differences in and fluctuations of the value of different currencies is another economic risk. The security risk created by terrorism prevents U.S. firms from investing in some regions. The relative strength or weakness of the dollar affects international firms' competitiveness in certain markets and their returns.
Chapter 09 Cooperative Strategy TRUEFALSE 1. A cooperative strategy is a means by which firms work together to achieve a shared objective. (A) True (B) False Answer : (A)
2. According to the Chapter 9 Mini Case, in addition to their corporate-level alliance, Renault and Nissan have each formed vertical complementary strategic alliances with other companies. (A) True (B) False Answer : (B)
3. Strategic alliances are cooperative strategies between firms that combine their resources and capabilities to create a competitive advantage. (A) True (B) False Answer : (A)
4. Although growing in popularity with small and medium-sized firms because they can gain economies of scale, large companies tend to avoid strategic alliances. (A) True (B) False Answer : (B)
5. Strategic alliances have become the cornerstone of many firms' competitive strategy, particularly large global competitors. (A) True (B) False Answer : (A)
6. If a large Asian cosmetics firm was to engage in a 50-50 partnership with a large American chemical company to form a new company focused on creating advanced skin care products, this would be considered a joint venture. (A) True (B) False Answer : (A)
7. One area in which joint ventures are effective is the transfer of tacit knowledge as illustrated in the Chevron/China National Petroleum joint venture. (A) True (B) False Answer : (A)
8. Nonequity strategic alliances exist when two or more firms join together to create an independent firm. (A) True (B) False Answer : (B)
9. Nonequity strategic alliances are formed when one partner owns a much larger (or inequitable) share of the joint venture than do the remaining partner(s). (A) True (B) False Answer : (B)
10. Cooperation in slow-cycle markets is extremely rare because these industries are declining. (A) True (B) False Answer : (B)
11. Firms in slow-cycle markets can use alliances to enter restricted markets or to establish franchises in new markets. (A) True
(B) False Answer : (A)
12. Acquisitions are the most common cooperative strategy used in standard-cycle markets. (A) True (B) False Answer : (B)
13. Firms in standard-cycle markets seek to gain economies of scale through cooperative alliances. (A) True (B) False Answer : (A)
14. In a vertical complementary alliance, firms share some of their resources and capabilities from the same stage of the value chain to create a competitive advantage. (A) True (B) False Answer : (B)
15. Horizontal complementary strategic alliances are designed so that each partner realizes equal benefits from equal investments in the alliance. (A) True (B) False Answer : (B)
16. A cooperative agreement between a hotel chain and a casino operator would be viewed as a horizontal complementary strategic alliance because as separate entities, the two firms would compete for the same customer. (A) True (B) False Answer : (B)
17. Using business-level strategic alliances to hedge against risk and uncertainty is most common in the slow-cycle markets. (A) True (B) False Answer : (B)
18. Collusion is a form of cooperative strategy. (A) True (B) False Answer : (A)
19. Tacit collusion is not explicitly illegal in the United States even though it results in higher prices for consumers. (A) True (B) False Answer : (A)
20. Tacit collusion tends to be least used as a business-level, competition-reducing strategy in highly concentrated industries such as airlines and breakfast cereals even though it results in higher prices for consumers. (A) True (B) False Answer : (B)
21. Research in the airline industry suggests that tacit collusion reduces service quality and on-time performance. (A) True (B) False Answer : (A)
22. Mutual forbearance is a form of explicit collusion between firms in which competitors avoid attacking rivals they meet in multiple markets. (A) True
(B) False Answer : (B)
23. Horizontal business-level strategic alliances have greater probability of creating sustainable competitive advantage than do vertical business-level strategic alliances. (A) True (B) False Answer : (B)
24. Of the four business-level cooperative strategies, the competition-reducing strategy has the lowest probability of creating a sustainable advantage. (A) True (B) False Answer : (A)
25. The advantages of alliances designed to respond to competition and to reduce uncertainty are more temporary than those developed through complementary alliances, such as vertical and horizontal strategic alliances. (A) True (B) False Answer : (A)
26. An alliance can be used to test whether the partners would benefit from a future merger. (A) True (B) False Answer : (A)
27. Because of U.S. legal restrictions concerning large foreign acquisitions, American firms can only enter into diversifying alliances with other U.S. firms. (A) True (B) False Answer : (B)
28. Franchising is most attractive in concentrated industries. (A) True (B) False Answer : (B)
29. Franchising is an alternative to pursuing growth through mergers and acquisitions. (A) True (B) False Answer : (A)
30. The primary responsibility of the franchiser is to transfer capital to the franchisee. (A) True (B) False Answer : (B)
31. The probability of alliance success is increased when partnering firms internalize successful alliance experiences. (A) True (B) False Answer : (A)
32. A firm creates a competitive advantage when it develops and manages corporate-level cooperative strategies in a way that is valuable, rare, imperfectly imitable, and nonsubstitutable. (A) True (B) False Answer : (A)
33. Firms consider entering international alliances because multinational firms outperform firms operating only in their home markets. (A) True (B) False
Answer : (A)
34. International strategic alliances are less risky than domestic strategic alliances because of diversification across countries. (A) True (B) False Answer : (B)
35. When a firm is in the early stages of geographic diversification, cross-border alliances may be a good learning step before other forms of international expansion. (A) True (B) False Answer : (A)
36. A network strategy involves a series of horizontal acquisitions by firms that are committed to dominating a particular industry. (A) True (B) False Answer : (B)
37. Network cooperative strategies among Silicon Valley firms have been successful, in part, because they are geographically close together. (A) True (B) False Answer : (A)
38. A stable alliance network is used in industries characterized by frequent product innovations and short product life cycles. (A) True (B) False Answer : (B)
39. A major risk of a network cooperative strategy is that firms gain access to their partner's
partners thus exposing their proprietary processes to loss or theft. (A) True (B) False Answer : (B)
40. Some cooperative strategies fail when it is discovered that a firm has misrepresented the competencies it can bring to the partnership. (A) True (B) False Answer : (A)
41. Only about 50 percent of cooperative strategies succeed. (A) True (B) False Answer : (A)
42. The cost minimization approach of managing alliances is more expensive to put into place and to use than is the opportunity maximization management approach. (A) True (B) False Answer : (A)
43. In the cost minimization approach to managing competitive strategies, the relationship between the firms is based on trust of the other partner. (A) True (B) False Answer : (B)
44. The alliance between BP Plc and OAO Rosneft to extract oil from Russia's Arctic Ocean was managed using contracts, i.e., the cost minimization approach. (A) True (B) False
Answer : (A)
45. The Renault Nissan approach to managing its collaboration involves less reliance on contracts and more reliance on trust, respect, and transparency (i.e., the opportunity-maximization approach to managing cooperative strategies). (A) True (B) False Answer : (A)
46. Close monitoring, formal contracts, and constant vigilance against opportunism increase the probability of alliance success. (A) True (B) False Answer : (B)
47. High levels of trust allow less formal contracts to govern the relationship between alliance partners and increases the likelihood of alliance success. (A) True (B) False Answer : (A)
MULTICHOICE 48. The Renault Nissan alliance (Chapter 9 Mini Case) is an example of a _______ created to gain economies of scope by sharing resources and capabilities. (A) diversifying strategic alliance (B) vertical complementary alliance (C) synergistic strategic alliance (D) nonequity-based horizontal complementary alliance Answer : (C)
49. Within the Renault Nissan alliance (Chapter 9 Mini Case), both Renault and Nissan have each formed ____________ strategic alliances at the business-unit level with other companies.
(A) vertical complementary (B) horizontal complementary (C) synergistic (D) diversifying Answer : (B)
50. A cooperative strategy: (A) is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. (B) is a strategy in which firms work together to achieve a shared objective. (C) is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. (D) specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets. Answer : (B)
51. A strategy in which firms work together to achieve a shared objective is a: (A) functional-level strategy. (B) business-level strategy. (C) corporate-level strategy. (D) cooperative strategy. Answer : (D)
52. When using cooperative strategies, firms most frequently develop strategic alliances that: (A) enhance the firm's reputation in the marketplace. (B) are long-lived. (C) will reduce the firm's political risk. (D) create a competitive advantage. Answer : (D)
53. The use of strategic alliances:
(A) is unlikely to yield success if partnering firms are headquartered in the same country. (B) may be too restrictive to facilitate entry into new markets. (C) usually increases the investment necessary to introduce new products. (D) is more frequent than other types of cooperative strategies. Answer : (D)
54. In a(n) ____, two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage. (A) equality-based strategic alliance (B) non-equity strategic alliance (C) joint venture (D) equity strategic alliance Answer : (C)
55. A competitive advantage that is developed through a cooperative strategy is called a collaborative or a(n) ____ advantage. (A) economic (B) collusive (C) alliance (D) relational Answer : (D)
56. Which type of strategic alliance is best at passing tacit knowledge between firms? (A) primary cooperative strategic alliances (B) Joint ventures (C) Equity strategic alliances (D) Nonequity strategic alliances Answer : (B)
57. Moon Flower cosmetics company executives are aware that their Asian customer base is interested in advanced skin care treatments beyond Moon Flower's traditional herbal and organic
compounds. Moon Flower and a large American chemical company are in discussions to create a 5050 partnership in a new firm, which would create skin care treatments based on innovative chemical formulations that would be marketed both in Asia and in the United States. Beyond being a crossborder alliance, this partnership can be called a(n): (A) nonequity strategic alliance. (B) joint venture. (C) horizontal complementary alliance. (D) equity strategic alliance. Answer : (B)
58. Fujitsu Siemens Computers is a legally independent company of which Fujitsu and Siemens each own 50 percent. This collaboration is an example of a ________, which is effective at transferring ________. (A) nonequity strategic alliance; explicit knowledge (B) joint venture; tacit knowledge (C) joint venture; explicit knowledge (D) equity strategic alliance; tacit knowledge Answer : (B)
59. BPM Corp. is a manufacturer of radar systems for regional-sized jet aircraft. The company has announced plans to enter into a joint venture with J3 Composites, a producer of advanced composite materials. The announced venture will produce a new, combined product consisting of the radar unit and protective composite cover. Which of the following ownership arrangements would be most typical for a joint venture? (A) BPM will own more than 50 percent of the venture and a new company will be formed. (B) J3 will own more than 50 percent of the venture and a new company will be formed. (C) BPM and J3 will both own 50 percent of the venture and a new company will be formed. (D) BPM and J3 will both own 50 percent of the venture but no new company will be formed. Answer : (C)
60. A strategic alliance in which the partners own different percentages of the new company they have formed is called a(n): (A) equity strategic alliance. (B) joint venture.
(C) nonequity strategic alliance. (D) cooperative arrangement. Answer : (A)
61. Meredith Inc. is a manufacturer of art supplies. The company has announced plans to enter into an equity strategic alliance with JaZz Paper to develop a line of specialty papers for use with a line of specialty paints Meredith manufactures. Which of the following would be the accurate interpretation of this announcement? (A) Meredith will own a majority equity stake in the new venture. (B) JaZz will own a majority equity stake in the new venture. (C) Meredith or JaZz will own an equal equity stake in the new venture. (D) Either Meredith or JaZz will own a majority equity stake, but we do not know which one based on the announcement. Answer : (D)
62. Japanese telecom NTT DoCoMo Inc. and Chinese Internet search operator Baidu Inc. established an alliance to distribute games and other mobile-phone content. Baidu will own 80 percent of this collaboration with DoCoMo holding the remaining 20 percent. This collaborative arrangement is an example of a(n): (A) joint venture. (B) network strategy. (C) equity strategic alliance. (D) nonequity strategic alliance. Answer : (C)
63. A nonequity strategic alliance exists when: (A) two firms join together to create a new company. (B) two or more firms have a contractual relationship to share resources and capabilities. (C) two partners in an alliance own unequal shares in the combined entity. (D) the partners agree to sell bonds instead of stock in order to finance a new venture. Answer : (B)
64. Burgess Corp. manufactures a line of heavy construction equipment. The company has
announced a contractual relationship with FS Electronics whereby FS will supply Burgess with advanced GPS navigation and guidance systems. These systems will be an option on all bulldozers, dump trucks, and road graders Burgess produces. What type of alliance is this? (A) Joint venture (B) Equity strategic alliance (C) Nonequity strategic alliance (D) Competition reduction alliance Answer : (C)
65. Firms participate in strategic alliances for all the following reasons EXCEPT to: (A) create value that they could not develop by acting independently. (B) enter competitive markets more quickly. (C) gain access to resources. (D) retain tight control over intangible core competencies. Answer : (D)
66. U.S. Steel and Nucor (the two remaining major players in the U.S. steel industry) have been forming alliances as a means to enter markets in Europe and Asia. The steel industry is an example of a ________ market in which firms typically use alliances to gain market access. (A) fast-cycle (B) standard-cycle (C) slow-cycle (D) intermediate-cycle Answer : (C)
67. A relatively young firm has developed a method of transferring photographic images of surface textures onto any type of hard surface. This potentially has a huge market in the home-decorating field as well as any hard surface that is typically painted, such as car bodies. The type of alliance partner this firm would be searching for would be one with: (A) low-cost labor production facilities in another country. (B) similar products who could help the firm establish economies of scale. (C) access to franchises in new markets.
(D) excess resources for investing. Answer : (D)
68. A state-wide alliance of independent hospitals has formed in order to do group purchasing of medical supplies. Group purchasing allows the hospital alliance to negotiate lower prices with suppliers because of the large quantity of materials ordered. This is an example of the advantage of ____ resulting from an alliance. (A) explicit collusion (B) economies of scale (C) opportunistic behavior (D) distribution opportunities Answer : (B)
69. Firms in a standard-cycle market may form alliances in order to: (A) take advantage of opportunities in emerging market countries. (B) more quickly distribute new products. (C) capture economies of scale. (D) share risky R&D investments. Answer : (C)
70. The two types of complementary strategic alliances are: (A) vertical and horizontal. (B) macro and micro. (C) outsourcing and insourcing. (D) network and complementary. Answer : (A)
71. All of the following are business-level cooperative strategic alliances EXCEPT: (A) synergistic strategic alliances. (B) uncertainty reduction strategic alliances. (C) complementary strategic alliances.
(D) competition response strategic alliances. Answer : (A)
72. A manufacturer of specialty jams and jellies has decided to ally itself with an orchard and vineyard growing rare strains of fruit. This is a(n) ____ strategy. (A) vertical complementary (B) horizontal complementary (C) uncertainty reduction (D) network Answer : (A)
73. ____ are LEAST likely to involve potential or current competitors. (A) Mutual forbearance strategies (B) Tacit collusion strategies (C) Horizontal complementary strategic alliances (D) Vertical complementary strategic alliances Answer : (D)
74. Reduction of competition can be accomplished through all of the following EXCEPT: (A) predatory alliances. (B) explicit collusion. (C) tacit collusion. (D) mutual forbearance. Answer : (A)
75. The three main luxury hotels in a major tourist destination keep very close track of their competitors' room pricing, restaurant offerings, tour packages, and special services, such as airport transportation and spa privileges. When one hotel makes adjustments in prices or offerings, the other hotels follow suit. It is possible that these hotels are: (A) engaging in tacit collusion. (B) following uncertainty reducing strategies.
(C) monitoring business competitors for opportunistic behaviors. (D) following a competitive response strategy. Answer : (A)
76. Mutual forbearance is: (A) illegal in the United States. (B) a type of competition-reducing strategy. (C) a variety of risk-sharing by firms in highly fragmented industries. (D) exercised when alliance partners refrain from opportunistic behaviors. Answer : (B)
77. The fact that the prices consumers pay for branded breakfast cereals are above the prices that would exist if there were true competition suggests that the cereal manufacturers are engaging in: (A) excessive cooperation. (B) joint ventures. (C) tacit collusion. (D) horizontal strategic alliances. Answer : (C)
78. In the United States, cooperative strategies to reduce competition may result in ____ if they are explicit. (A) increased tax liabilities (B) litigation (C) government takeover of the firms (D) dissolution of the firm Answer : (B)
79. In free-market economies, ____ must decide how rivals can collaborate with their competitors without violating established regulations. (A) the invisible hand (B) the government
(C) consumers (D) the business community Answer : (B)
80. The risks of being accused of collusion are MOST likely under what type of alliance? (A) Equity-based vertical complementary alliance (B) Equity-based horizontal complementary alliance (C) Nonequity-based vertical complementary alliance (D) Nonequity-based horizontal complementary alliance Answer : (D)
81. Why are alliances in the airline industry unstable? (A) Unstable industries make for unstable alliances. (B) The potential for firms to take opportunistic actions is too widespread. (C) The industry is declining and profits are not sufficient to divide among alliance partners. (D) The alliances require cooperation among firms that must also compete with one another. Answer : (D)
82. A ____ cooperative strategy helps the firm diversify in terms of products offered, markets served, or both. (A) corporate-level (B) business-level (C) national-level (D) industry-level Answer : (A)
83. Of the various business-level strategic alliances, ____ alliances have the most probability of creating sustainable competitive advantage, and ____ have the lowest. (A) horizontal complementary; vertical complementary (B) vertical complementary; competition reducing (C) competition reducing; horizontal complementary
(D) uncertainty reducing; competition reducing Answer : (B)
84. ____ strategic alliances have stronger focus on value creation than do ____ alliances. (A) competition reducing; complementary (B) complementary; competition reducing (C) uncertainty reducing; complementary (D) collusive; uncertainty reducing Answer : (B)
85. For the purpose of diversification, a corporate-level cooperative strategy may be preferable to a merger or acquisition for all the following reasons EXCEPT: (A) a host nation may forbid a merger or acquisition. (B) opportunistic behaviors are less likely. (C) cooperative strategies require fewer resources. (D) cooperative strategies allow greater flexibility in diversifying the firm's portfolio. Answer : (B)
86. In the Chapter 9 Mini Case, the cooperation between Fiat and Chrysler to produce a Fiatdesigned car in Chrysler's Illinois factory is a(n) _________ alliance because it allows the firms to share resources and capabilities across multiple functions. (A) synergistic (B) opportunistic (C) horizontal (D) diversifying Answer : (A)
87. Firms entering into synergistic strategic alliances expect to attain: (A) technological complexity. (B) economies of scope. (C) monopolistic market power.
(D) learning curve efficiencies. Answer : (B)
88. The Renault Nissan alliance discussed in the Mini Case is an example of a ________ in that the firms seek to create economies of scope by sharing their resources and capabilities to develop manufacturing platforms that can be used to produce cars that will be either a Renault or a Nissan. (A) joint venture (B) synergistic alliance (C) horizontal complementary alliance (D) dynamic alliance network Answer : (B)
89. A ____________ is a strategy in which firms share some of their resources and capabilities to create economies of scope and is similar to the business-level horizontal complementary alliance. (A) joint venture (B) synergistic strategic alliance (C) diversifying strategic alliance (D) dynamic alliance network Answer : (B)
90. The primary responsibility of the franchisor, such as McDonald's or Hilton International is to: (A) learn about the brand and technology from the franchisee. (B) test the franchisee for potential future acquisition. (C) transfer to the franchisee knowledge and skills needed to compete at the local level. (D) provide feedback to the franchisee regarding how the franchisor could become more effective and efficient. Answer : (C)
91. Which of the following statements is FALSE? (A) Franchising is most appropriate in fragmented industries. (B) Franchising provides corporate growth with less risk than do mergers and acquisitions.
(C) Successful franchising allows transfer of knowledge and skills from the franchisor to the franchisee. (D) Franchising agreements require more trust between firms than do other cooperative strategies. Answer : (D)
92. In the franchising strategy, the most important competitive advantage for the franchisee is the franchisor's: (A) brand name. (B) capital resources. (C) access to a consolidated market. (D) geographic locations. Answer : (A)
93. A businessperson in Atlanta who wishes to develop a luxury pet kennel approaches the owner of the highly successful Pet Resort and Day Spa in Houston to see if the owner is interesting in franchising the Pet Resort brand. The Atlanta businessperson's goal is to: (A) get venture capital from Pet Resort. (B) gain access to Pet Resort's tacit knowledge. (C) collude with Pet Resort to diminish competition in the kennel industry in Atlanta. (D) join in a vertical complementary alliance with Pet Resort. Answer : (B)
94. McDonald's, Hilton International, and Subway all heavily rely on the ____ strategy. (A) transnational (B) network cooperative (C) cross-border alliances (D) franchising cooperative Answer : (D)
95. FrameCo, a maker of commercial greenhouses, has just extricated itself from a failing cooperative alliance with another firm. The expected synergies never were achieved, and FrameCo lost most of its investment. The top management of FrameCo should:
(A) avoid future cooperative alliances because they lack the skills needed to manage them successfully. (B) enter into future cooperative alliances only if the alliance is closely monitored by a third party to prevent opportunistic behavior by the alliance partner. (C) realize that most cooperative alliances fail and that it should ally itself only with an experienced alliance partner in the future. (D) internalize the knowledge about the successes and failures of this alliance so FrameCo can learn from the experience. Answer : (D)
96. The collaboration between Volvo Aero (a subsidiary of Sweden's AB Volvo) and U.S.-based Pratt & Whitney to produce a new jet engine would be characterized as a(n): (A) collusive tactic. (B) merger. (C) cross-border strategic alliance. (D) international acquisition. Answer : (C)
97. Legitimately, a firm may pursue an international strategic alliance for all of the following reasons EXCEPT: (A) to enhance the compensation packages of top managers. (B) to leverage core competencies in new markets. (C) to operate within government restrictions in the local country. (D) to escape limited domestic growth opportunities. Answer : (A)
98. In some countries, the only legal way for foreign firms to invest in the country is through: (A) acquisitions. (B) mergers. (C) greenfield ventures. (D) strategic alliance with a local firm. Answer : (D)
99. In a cross-border alliance, the local partner is often a useful source of information about: (A) sources of capital. (B) the strengths of the foreign firm's technology. (C) market synergies. (D) long-term planning. Answer : (A)
100. In general, cross-border alliances are more ____ and ____ than domestic alliances, especially in emerging markets. (A) uncertainty reducing; diversifying (B) complex; risky (C) highly leveraged; tightly monitored (D) flexible; trust-based Answer : (B)
101. Stable alliance networks will most often: (A) be used to enhance a firm's internal operations. (B) appear in mature industries where demand is relatively constant and predictable. (C) emerge in industries with short product life cycles. (D) emerge in declining industries as a way to increase process innovations. Answer : (B)
102. Dynamic alliance networks work best in industries: (A) characterized by frequent product innovations and short product life cycles. (B) that are mature and stable in nature. (C) where the coordination of product and global diversity is critical. (D) that are characterized by predictable market cycles and demand. Answer : (A)
103. Which of the following statements is TRUE?
(A) Most cooperative strategies are successful if the basic agreements are well written and include appropriate monitoring strategies. (B) As many as 50 percent of cooperative strategies fail. (C) Opportunistic behaviors are usually focused on gaining the use of the partner's manufacturing and financial resources. (D) Problems with international cooperative strategies usually concern financial-system differences between the partners. Answer : (B)
104. Which of the following is NOT a risk for firms engaged in cooperative strategies? (A) Misrepresentation of a partner's competencies (B) Partner acts opportunistically (C) Insufficient variation in firms' core competencies (D) Failure of partners to make complementary resources available to the partnership Answer : (C)
105. Greentech, Inc., is a bioengineering firm specializing in food crops. It is considering a cooperative alliance with an Asian agribusiness firm, AsiaFoods, to jointly produce improved crops for the Asian market. The risks that Greentech should consider before entering this alliance include all of the following EXCEPT: (A) Has AsiaFoods accurately represented its competencies? (B) Will AsiaFoods make alliance-specific investments? (C) Can Greentech expect opportunistic behavior from AsiaFoods? (D) Will Greentech be able to use a cost-minimization management strategy in the AsiaFoods alliance? Answer : (D)
106. Amylin Pharmaceuticals has an alliance with Eli Lilly & Co. to produce diabetes drugs. Lilly, however, recently signed an alliance agreement with another company to also produce diabetes drugs. As a result, Amylin sued Lilly for breach of the alliance agreement. Which of the following risks of cooperative strategies discussed in the chapter is most likely occurring here? (A) Having a true perception of the partner's trustworthiness (B) Failing to make available to its partners the resources and capabilities that it committed to the cooperative strategy
(C) The partner misrepresenting competencies it can bring to the partnership (D) Opportunistic behavior Answer : (D)
107. DDD Partners, a U.S. business consulting firm is considering a cooperative alliance with an Indian business consulting firm that has a wide practice in the Middle East and Asia. DDD has some European clients, but it sees the Middle East and Asia as growth opportunities. It hopes to learn how to navigate the different cultures and business practices in this part of the world from its alliance with the Indian firm. DDD's greatest risk here is that the Indian firm will: (A) insist on excessively close monitoring of DDD's actions. (B) gain access to DDD's core competencies and use them to become a future competitor. (C) not fully share its intangible resources. (D) not make equivalent investments to the alliance as does DDD. Answer : (C)
108. In practice, the cost minimization strategy can be more expensive than the opportunity maximization strategy. Which of the following is a way in which the cost minimization strategy is less expensive than the opportunity minimization strategy? (A) The loss of unexpected opportunities (B) The cost of extensive monitoring mechanisms (C) The costs of writing detailed contracts (D) The prevention of opportunistic behavior by the partner(s) Answer : (D)
109. The two basic approaches to successfully manage cooperative strategic alliances involve ____ and ____. (A) cost minimization; opportunity maximization (B) monitoring systems; multiple management approaches (C) contractual systems; financial systems (D) equity approaches; nonequity approaches Answer : (A)
110. Offshore Oil Exploration Partners (OOEP) has entered into a cooperative strategy with Malay
Petroleum. The resulting documents are long, formal, and detailed. They specify detailed responsibilities of each partner and include methods of monitoring accounting and technical procedures. OOEP and Malay Petroleum are using the ____ management approach. (A) cost minimization (B) trust but verify (C) opportunity maximization (D) pragmatic realism Answer : (A)
111. The Microsoft/Nokia alliance that had hundreds of pages to specify each partner's responsibilities would be closest to the _______ approach to managing cooperative ventures. In contrast, the Renault/Nissan alliance (Chapter 9 Mini Case) was based on trust, respect, and transparency and is an example of the ________ approach to managing cooperative ventures. (A) cost minimization; opportunity maximization (B) opportunity maximization; cost minimization (C) cost maximization; opportunity minimization (D) bureaucratic; organic Answer : (A)
112. One disadvantage of developing effective monitoring systems to manage a strategic alliance is that: (A) firms will have to accept greater risks. (B) trust will be eroded. (C) spontaneous opportunities are minimized. (D) power coalitions will still develop. Answer : (C)
113. In managing cooperative strategies, research indicates that ____ can be a capability that is valuable, rare, imperfectly imitable, and often nonsubstitutable giving these firms a competitive advantage. (A) extensive capitalization (B) stability (C) trustworthiness
(D) Internet competency Answer : (C)
114. To increase the likelihood of success between partners assuming that trust exists, ____ approach(es) should be used to manage cooperative strategies. (A) the cost minimization (B) the opportunity maximization (C) both the cost minimization and opportunity maximization (D) None of the these options are correct. Answer : (B)
115. The opportunity maximization approach is more difficult to establish in international relationships than in domestic relationships because of differences in all EXCEPT: (A) laws. (B) culture. (C) trade policies. (D) technology. Answer : (D)
ESSAY 116. Identify and define the different types of strategic alliances.
Graders Info : Strategic alliances are cooperative strategies between firms whereby resources and capabilities are combined to create a competitive advantage. All strategic alliances require firms to exchange and share resources and capabilities to co-develop or distribute goods or services. The three basic types of strategic alliances are: (1) joint ventures, where a legally independent company is created by at least two other firms, with each firm usually owning an equal percentage of the new company; 2) equity strategic alliances, whereby partners own different percentages of equity in the new company they have formed; and (3) nonequity strategic alliances, which are contractual relationships between firms to share some of their resources and capabilities. The firms do not establish a separate organization, nor do they take an equity position. Because of this, nonequity strategic alliances are less formal and demand fewer partner commitments than joint ventures and equity strategic alliances. Typical forms are licensing agreements, distribution agreements, and supply contracts.
117. Explain the rationales for a cooperative strategy under each of the three types of basic market situations (i.e., slow, standard, and fast cycles).
Graders Info : In slow-cycle markets (markets that are near-monopolies), firms cooperate with others to gain entry into restricted markets or to establish franchises in new markets. Slow-cycle markets are rare and diminishing. Cooperative strategies can help firms in (presently) slow-cycle markets make the transition from this relatively sheltered existence to a more competitive environment. In standardcycle markets (which are often large and oriented toward economies of scale), firms try to gain access to partners with complementary resources and capabilities. Through the alliance, the firms try to increase economies of scale and market power. In fast-cycle markets (characterized by instability, unpredictability, and complexity), sustained competitive advantages are rare, so firms must constantly seek new sources of competitive advantage. In fast-cycle markets, alliances between firms with excess resources and capabilities and firms with promising capabilities who lack resources help both firms to rapidly enter new markets. 118. Identify the four types of business-level cooperative strategies and the advantages and disadvantages of each.
Graders Info : Through vertical and horizontal complementary alliances, companies combine their resources and capabilities in ways that create value. Vertical complementary strategic alliances result when firms creating value in different parts of the value chain combine their assets to create a competitive advantage. Vertical complementary strategies have the greatest probability of being successful compared with other types of cooperative strategies. But firms using this type of alliance need to be wise in how much technology they share with their partners. Vertical complementary alliances rely heavily on trust between partners to succeed. Horizontal complementary strategic alliances are developed when firms in the same stage of the value chain combine their assets to create additional value. Usually they are formed to improve long-term product development and distribution opportunities. Horizontal complementary strategies can be unstable because they often join highly rivalrous competitors. In addition, even though partners may make similar investments, they rarely benefit equally from the alliance. The competition response strategy involves alliances formed to react to competitors' actions. Usually they respond to strategic, rather than tactical, actions because the alliances are difficult to reverse and expensive to operate. The uncertainty-reducing strategy is used to hedge against risk and uncertainty, such as when entering new product markets or in emerging economies. Both of these strategies are less effective in the long-run than the complementary alliances that are focused on creating value. Competition reducing (collusive) strategies are often illegal. There are two types of collusive competition reducing strategies: explicit collusion and tacit collusion. Explicit collusion exists when firms directly negotiate production output and pricing agreements to reduce competition. These are illegal in the United States and in most developed economies. Tacit collusion exists when several firms in an industry indirectly coordinate their production and pricing decisions by observing each other's competitive actions and responses. Both types of collusion result in lower production levels and higher prices for consumers.
119. Identify the three types of corporate-level cooperative strategies.
Graders Info : A diversifying strategic alliance allows firms to share some of their resources and capabilities to diversify into new product or market areas. A synergistic strategic alliance allows firms to share some of their resources and capabilities to create economies of scope. These alliances create synergy across multiple functions or multiple businesses between partner firms. Franchising is a strategy in which the franchisor uses a contractual relationship to describe and control the sharing of its resources and capabilities with franchisees. A franchise is a contract between two independent organizations whereby the franchisor grants the right to the franchisee to sell the franchisor's product or do business under its trademarks in a given location for a specified period of time. 120. Why are cooperative strategies often used when firms pursue international strategies? What are the advantages and disadvantages of international cooperative strategies?
Graders Info : A cross-border strategic alliance is an international cooperative strategy in which firms headquartered in different nations combine some of their resources and capabilities to create a competitive advantage. The typical reasons follow: 1) In general, multinational firms outperform firms operating only on a domestic basis. Firms may be able to leverage core competencies developed domestically in other countries. 2) Limited domestic growth opportunities push firms into international expansion. 3) Some governments require local ownership in order for foreign firms to invest in businesses in their countries, which requires foreign firms to ally with local firms. 4) Local partners often have significantly more information about factors contributing to competitive success such as local markets, sources of capital, legal procedures, and politics, which makes an alliance useful for a foreign firm. 5) Cross-border alliances can help firms transform themselves or better use their competitive advantages surfacing in the global economy. On the negative side, cross-border alliances are more complex and risky than domestic strategic alliances. 121. Identify and define the two different types of network strategies.
Graders Info : A network cooperative strategy is a cooperative strategy wherein several firms form multiple partnerships to achieve shared objectives. Stable alliance networks (primarily found in mature industries) usually involve exploitation of economies of scale or scope. In this type of network, the firms try to extend their competitive advantages to other settings while continuing to profit from operations in their core industries. Dynamic alliance networks (witnessed mainly in rapidly changing industries) are used to help a firm keep up when technologies shift rapidly by stimulating product innovation and successful market entries. Dynamic alliance networks explore new ideas and typically generate frequent product innovations with short product life cycles. 122. Identify the competitive risks associated with cooperative strategies.
Graders Info : Cooperative strategies are not risk-free strategy choices; as many as 70 percent fail. If a contract is not developed appropriately and fails to avert opportunistic behavior, or if a potential partner firm misrepresents its competencies or fails to make available promised complementary resources, failure is likely. Furthermore, a firm may make investments that are specific to the alliance while the partner does not. This puts the investing firm at a disadvantage in terms of return on investment. The core of many failures is the lack of trustworthiness of the partner(s) who act opportunistically. 123. Describe the two strategic management approaches to managing alliances.
Graders Info : The ability to effectively manage competitive strategies can be one of a firm's core competencies. There are two basic approaches to managing competitive alliances. Cost minimization leads firms to develop protective formal contracts and effective monitoring systems to manage alliances. Its focus is to prevent opportunistic behavior by the partner(s). Opportunity maximization is intended to maximize value creation opportunities. It is less formal and places fewer constraints on partner behaviors. But, identifying trustworthy partners is the key to this second approach. If (well-founded) trust is present, monitoring costs are lowered and opportunities will be maximized. Trust is more difficult to establish between international partners. Ironically, the cost minimization approach is more expensive to implement and to use than the opportunity maximization approach.
Chapter 10 Corporate Governance TRUEFALSE 1. Corporate governance is the set of mechanisms used to manage the relationship among stakeholders and to determine and control the strategic direction and performance of an organization. (A) True (B) False Answer : (A)
2. Corporate governance involves oversight in areas where owners, managers, and members of Boards of Directors may have conflicts of interest. (A) True (B) False Answer : (A)
3. Corporate governance is a means to establish harmony between parties (the firm's owners and its top-level managers) whose interests may conflict. (A) True (B) False Answer : (A)
4. In modern corporations-especially those in the United States and United Kingdom-a primary objective of corporate governance is to ensure that the interests of top-level managers are aligned with the interests of shareholders. (A) True (B) False Answer : (A)
5. Recent emphasis on corporate governance stems mainly from the failure of corporate governance mechanisms to adequately monitor and control top-level managers' decisions. (A) True (B) False
Answer : (A)
6. The three internal corporate governance mechanisms are ownership concentration, Board of Directors, and the market for corporate control. (A) True (B) False Answer : (B)
7. Executive compensation is considered an external corporate governance mechanism because it determined in part by market forces. (A) True (B) False Answer : (B)
8. In the United States, the primary goal of a firm is to maximize profits to provide a financial gain to shareholders. (A) True (B) False Answer : (A)
9. In the United States, the members of the Board of Directors are a firm's key stakeholders and a company's legal owners. (A) True (B) False Answer : (B)
10. In the modern U.S. corporation, the ownership and managerial control of the firm are separated. (A) True (B) False Answer : (A)
11. In a large number of family owned firms, ownership and managerial control are not separated.
(A) True (B) False Answer : (A)
12. Amelia Smith is the sole owner of the successful restaurant chain, Amelia's Café. Ms. Smith has taken a no-interest loan from the company in order to build a luxurious seaside house for herself in Carmel, California. This constitutes a classic agency problem. (A) True (B) False Answer : (B)
13. An agency relationship exists when one or more persons (the principal or principals) hire another person or persons (the agent or agents) as decision-making specialists to perform a service. (A) True (B) False Answer : (A)
14. The separation of ownership and control is the most effective means used by firms to prevent managerial opportunism. (A) True (B) False Answer : (B)
15. A top-level manager's reputation is a dependable predictor of his/her future behavior. (A) True (B) False Answer : (B)
16. As a rule, shareholders prefer more product diversification than do managers because shareholders wish to reduce risk and maximize wealth. (A) True (B) False
Answer : (B)
17. Both top executives and owners of the firm wish to diversify the firm to reduce risk. (A) True (B) False Answer : (B)
18. Agency costs include incentives for executives, monitoring, enforcement costs, and any individual financial losses incurred by principals. (A) True (B) False Answer : (A)
19. In general, when governance mechanisms are strong, managers have free rein in their decisions. (A) True (B) False Answer : (B)
20. Failures of corporate internal controls and inadequate internal control systems allowed unethical executives at such companies as Enron and WorldCom to act in their own self-interest. (A) True (B) False Answer : (A)
21. The Dodd-Frank Wall Street Reform and Consumer Protection Act is the most sweeping set of financial and regulatory reforms in the United States since the Great Depression. (A) True (B) False Answer : (A)
22. The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions related to consumer protection, systemic risk oversight, capital requirements for banks, but not for executive compensation.
(A) True (B) False Answer : (B)
23. While the implementation of the Sarbanes-Oxley Act in 2002 has been controversial to some, most believe that it has had positive results in terms of protecting stakeholders and certain stockholder interests. (A) True (B) False Answer : (A)
24. More intense application of governance mechanisms such as mandated by Sarbanes Oxley and Dodd-Frank may cause firms to take on fewer risky projects and thus increase potential shareholder wealth. (A) True (B) False Answer : (B)
25. Ownership of many modern corporations is now concentrated in the hands of institutional investors rather than individual stockholders. (A) True (B) False Answer : (A)
26. Large-block shareholders typically own at least 5 percent of a corporation's issued shares. (A) True (B) False Answer : (A)
27. Research evidence suggests that ownership concentration is associated with lower levels of firm diversification, which conforms to the interests of stockholders. (A) True (B) False
Answer : (B)
28. In recent years, the number of individuals who are large-block shareholders have declined and been replaced by institutional owners such as mutual funds and pension funds. (A) True (B) False Answer : (A)
29. Institutional owners, despite their size, are usually unable to discipline ineffective top managers and cannot influence a firm's choice of strategies and overall strategic direction. (A) True (B) False Answer : (B)
30. Research suggests that institutional activism may not have a strong direct effect on firm performance but may indirectly influence the targeted firm's strategic decisions, including those concerned with international diversification and innovation. (A) True (B) False Answer : (A)
31. The primary role of the Board of Directors is to monitor and control top-level executives to protect owners' interests. (A) True (B) False Answer : (A)
32. Individual shareholders with small ownership percentages are less dependent on the Board of Directors to represent their interests than are large block shareholders. (A) True (B) False Answer : (B)
33. Because of recent ineffective performance, Boards of Directors are experiencing increasing pressure from shareholders, lawmakers, and regulators to be more effective in preventing managers from acting in their own interest. (A) True (B) False Answer : (A)
34. Generally, the Board of Directors can be classified as insiders, unrelated insiders, outsiders, and unrelated outsiders. (A) True (B) False Answer : (B)
35. Boards with many members from the firm's top management team tend to have weak monitoring and control systems for managerial decisions. (A) True (B) False Answer : (A)
36. DDD MetalWorks plans to go public in the next 2 years. In order to be listed on the New York Stock Exchange, the firm will need to restructure its present Board of Directors, which is made up of a majority outside independent directors to a Board of Directors that is dominated by insiders and related outsiders. (A) True (B) False Answer : (B)
37. Critics advocate reforms to ensure that independent outside directors represent a significant majority of the total membership of the Board. But outsider-dominated Boards may emphasize the use of financial as opposed to strategic controls. The risk of reliance on financial controls is that they may encourage managers to make decisions to maximize their interests and reduce their employment risk. (A) True (B) False Answer : (A)
38. A powerful CEO would oppose the appointment of a lead director on the Board of Directors. (A) True (B) False Answer : (A)
39. The separation of the positions of CEO and chairperson of the Board of Directors reduces the power of the CEO over firm governance practices. (A) True (B) False Answer : (A)
40. A Board composed primarily of outside directors will have better insights as to the firms intended strategic initiatives, the reasons for the initiatives, and the outcomes expected from them than will inside directors. (A) True (B) False Answer : (B)
41. The performance of individual Board members and entire Boards are being evaluated more formally and with greater intensity than in years past. (A) True (B) False Answer : (A)
42. Because top management decisions are usually complex and nonroutine, determining the quality of executive performance is beyond the power of Boards of Directors. (A) True (B) False Answer : (B)
43. One of the changes to enhance the effectiveness of the Board of Directors is the creation of a "lead director" role that has strong powers with regard to the Board agenda and oversight of nonmanagement Board member activities.
(A) True (B) False Answer : (A)
44. Executive compensation is a governance mechanism that seeks to align the interests of managers and owners through salaries, bonuses, and long-term incentive compensation such as stock awards and options. (A) True (B) False Answer : (A)
45. Long-term incentives facilitate a Board of Directors' pay-related decisions designed to avoid potential agency problems by linking managerial compensation to the wealth of common shareholders. (A) True (B) False Answer : (A)
46. The use of executive compensation as a governance mechanism is more challenging to firms implementing international strategies than those strictly operating domestically. (A) True (B) False Answer : (A)
47. When the option strike prices in an executive stock option-based compensation plan have been lowered it is usually a defense to a hostile takeover. (A) True (B) False Answer : (B)
48. Well-designed stock option-based compensation plans should have the option strike prices substantially lower than the current stock prices. (A) True
(B) False Answer : (B)
49. Stock option repricing where the strike price value of the option has been lowered from its original position sometimes happens when firm performance is poor. (A) True (B) False Answer : (A)
50. The market for corporate control is composed of individuals and firms that buy ownership positions or take over potentially undervalued corporations and make changes to those corporations, including the replacement of the top managers. (A) True (B) False Answer : (A)
51. For top-level managers, Board acceptance of the acquiring firm's offer usually leads to job loss because the acquiring firm wants new leadership. If the offer is refused, however, the job loss risk is minimal. (A) True (B) False Answer : (B)
52. Managers in firms that have been subjects of hostile takeovers usually find that their value to the new firm has been enhanced because of their in-depth insider knowledge. (A) True (B) False Answer : (B)
53. The top management of RavenCrest, Inc. have significant stock options in RavenCrest. They are therefore more likely to gain in making an agreement to be acquired, especially if they have golden parachutes. (A) True (B) False
Answer : (A)
54. The market for corporate control may not be as efficient as a governance device as theory suggests because takeover targets are not always low performers with weak governance. (A) True (B) False Answer : (A)
55. Hedge funds, as part of the market for corporate control, identifies a firm that is underperforming and then invests in it with the goal of improving that firm's performance. (A) True (B) False Answer : (A)
56. The increased use of the market for corporate control has decreased the sophistication and variety of managerial defense tactics that are used in takeovers. (A) True (B) False Answer : (B)
57. The most effective defense against a hostile takeover is the poison pill strategy. (A) True (B) False Answer : (A)
58. An advantage of severance packages is that they may encourage top-level managers to accept takeover bids that are attractive to shareholders. (A) True (B) False Answer : (A)
59. Awareness by top managers of the existence of external investors in the form of individuals (e.g., Carl Icahn) and groups (e.g., hedge funds) often positively influences them to align their interests
with shareholders. (A) True (B) False Answer : (A)
60. As globalization grows, adequate corporate governance is becoming an important requirement for doing business with a foreign firms and in foreign countries. (A) True (B) False Answer : (A)
61. Foreign investors are playing a relatively minor role in the governance of firms in many countries. (A) True (B) False Answer : (B)
62. Large German firms must include employees, union members, and shareholders in the formal governance structure. (A) True (B) False Answer : (A)
63. Attitudes toward corporate governance in Japan are affected by the concepts of obligation, family, and consensus. (A) True (B) False Answer : (A)
64. The way that U.S. corporate Boards of Directors are presently structured, they have little influence on the unethical behavior of top management. (A) True
(B) False Answer : (B)
65. If a stakeholder is dissatisfied with a firm, it will withdraw its support and give it to another firm. (A) True (B) False Answer : (A)
66. Corporate governance mechanisms are designed to ensure that top managers make strategic decisions that best serve the interests of the entire group of stakeholders. (A) True (B) False Answer : (A)
67. Ethically responsible companies design and use governance mechanisms that will at least minimally satisfy stakeholders' interests. (A) True (B) False Answer : (A)
68. Scandals at Enron, WorldCom, and HealthSouth illustrate the negative effects of poor ethical behavior on a firm's efforts to satisfy stakeholders. (A) True (B) False Answer : (A)
MULTICHOICE 69. Corporate governance is all of the following EXCEPT: (A) mechanisms used to determine and control the strategic direction and performance of organizations. (B) a means to establish and maintain harmony between owners and top managers whose interests may conflict.
(C) ensuring that top managers' interests are aligned with the interests of stockholders. (D) resolve conflicts among corporate employees. Answer : (D)
70. In the United States, the fundamental goal of business is to: (A) ensure customer satisfaction. (B) maximize shareholder wealth. (C) provide job security. (D) generate profits. Answer : (B)
71. In the United States, a firm's key stakeholder(s) is(are) the: (A) government. (B) executives. (C) shareholders. (D) customers. Answer : (C)
72. Which of the following is NOT an internal governance mechanism? (A) The board of directors (B) Ownership concentration (C) Executive compensation (D) The market for corporate control Answer : (D)
73. Corporate governance revolves around the relationship between which two parties? (A) Shareholders and the Board of Directors (B) Shareholders and managers (C) The Board of Directors and managers (D) None of the the above
Answer : (B)
74. Corporate governance is important to nations because: (A) shareholders want large stock returns. (B) firms seek to invest in nations with national governance standards that are acceptable to them. (C) company Boards have lobbied for strong governance. (D) the United States requires that other nations adopt its governance practices. Answer : (B)
75. Amos Ball, Inc., is a printing company in Iowa that has been family owned and managed for three generations. Which of the following statements is most likely to be TRUE? (A) Agency costs at Amos Ball are high. (B) If research findings are valid, Amos Ball, Inc., will perform better if a family member is CEO than if an outsider is CEO. (C) At Amos Ball, the opportunity for managerial opportunism is high. (D) The functions of risk-bearing and decision making are separate at Amos Ball. Answer : (B)
76. Complete the following: In small firms, managers often own a ____ percentage of the firm, which means there is ____ separation between ownership and managerial control. (A) small; small (B) small; large (C) large; small (D) large; large Answer : (C)
77. The separation between firm ownership and management creates a(n) ____ relationship. (A) governance (B) control (C) agency (D) dependent
Answer : (C)
78. An agency relationship exists when one party delegates: (A) decision-making responsibility to a second party. (B) financial responsibility to employees. (C) strategy implementation actions to functional managers. (D) ownership of a company to a second party. Answer : (A)
79. Managerial employment risk is the: (A) risk that managers will behave opportunistically. (B) risk undertaken by managers to earn stock options. (C) managers' risk of job loss, loss of compensation, and/or loss of reputation. (D) risk managers will not find a new top management position if they should be dismissed. Answer : (C)
80. Managers may decide to invest ____ in products that are not associated with the firm's current lines of business to increase the firm's level of diversification and decrease their employment risk. (A) unsubstantial profits (B) free cash flows (C) marginal profits (D) frozen assets Answer : (B)
81. Product diversification provides two benefits to managers that do not accrue to shareholders: ____ and ____. (A) greater experience in a wider range of industries; lessening of managerial employment risk (B) the manager frequently invests in the acquired firm, which allows him or her extensive profits; the manager can frequently buy excess assets divested by the acquired firm (C) the manager's supervisory needs are lowered; the manager is allowed greater time to oversee a wider range of activities
(D) the opportunity for higher compensation through firm growth; a reduction in managerial employment risk Answer : (D)
82. The top management team at Sierra Infusion is concerned about the declining performance of firms in their industry. The team members are becoming concerned about the security of their jobs at Sierra Infusion. At a meeting over dinner, the top management team agrees to go to the Board of Directors with a proposal for: (A) increased diversification of Sierra Infusion. (B) the addition of outside directors to the Board. (C) increased shareholder participation in decision making. (D) greater concentration on Sierra's core industry. Answer : (A)
83. In contrast to managers' desires, shareholders usually prefer that free cash flows be: (A) used to diversify the firm. (B) returned to them as dividends. (C) used to reduce corporate debt. (D) re-invested in additional corporate assets. Answer : (B)
84. A major conflict of interest between top executives and owners, is that top executives wish to diversify the firm in order to ____, whereas owners wish to diversify the firm to ____. (A) generate free cash flows; reduce the risk of total firm failure (B) increase the price of the firm's stock; increase the dividends paid out from free cash flows (C) reduce the risk of total firm failure; reduce their total portfolio risk (D) reduce their employment risk; increase the company's value Answer : (D)
85. Compared to managers, shareholders prefer: (A) safer strategies with greater diversification for the firm. (B) riskier strategies with more focused diversification for the firm.
(C) safer strategies with more focused diversification for the firm. (D) riskier strategies with greater diversification for the firm. Answer : (B)
86. Agency costs reflect all of the following EXCEPT ____ costs. (A) monitoring (B) enforcement (C) opportunity (D) incentive Answer : (C)
87. All of the following are consequences of the Sarbanes-Oxley Act EXCEPT: (A) a decrease in foreign firms listing on U.S. stock exchanges. (B) internal auditing scrutiny has improved and there is greater trust in financial reporting. (C) an increased number of IPOs (initial public offerings) are expected. (D) Section 404 creates excessive costs for firms. Answer : (C)
88. All of the following are areas covered by the Dodd-Frank Wall Street Reform and Consumer Protection Act EXCEPT: (A) consumer protection. (B) CEO compensation. (C) regulation of derivatives. (D) retirement accounts. Answer : (D)
89. Broadly, the Dodd-Frank Wall Street Reform and Consumer Protection Act seeks to: (A) align financial institutions' actions with society's interests. (B) increase the number of foreign firms listing on U.S. stock exchanges. (C) require CEOs to attest to the accuracy of their companies' financial reports.
(D) increase consumer protection in pharmaceutical products. Answer : (A)
90. Usually, large-block shareholders are considered to be those shareholders with at least ____ percent of the firm's stock. (A) 5 (B) 25 (C) 50 (D) 75 Answer : (A)
91. Ownership concentration is determined by both: (A) the number of stockholders and the parties they represent. (B) the number of stockholders and total percentage of shares they own. (C) the number of outside directors and the parties they represent. (D) the number of outside directors and total percentage of shares they own. Answer : (B)
92. As ownership of the corporation is diffused, shareholders' ability to monitor managerial decisions: (A) increases. (B) decreases. (C) remains constant. (D) is eliminated. Answer : (B)
93. Institutional owners are: (A) shareholders in the large institutional firms listed on the New York Stock Exchange. (B) banks and other lending institutions that have provided major financing to the firm. (C) financial institutions such as mutual funds and pension funds that control large-block shareholder positions.
(D) prevented by the Sarbanes-Oxley Act from owning more than 50 percent of the stock of any one firm. Answer : (C)
94. The ownership of major blocks of stock by institutional investors have resulted in all of the following EXCEPT: (A) making CEOs more accountable for their performance. (B) challenges to the decisions of Boards. (C) focusing attention on ineffective Boards of Directors. (D) a direct effect on firm performance. Answer : (D)
95. Research suggests that the activism of institutional investors such as TIAA-CREF and CalPERS: (A) increases shareholder value significantly. (B) may not have a direct effect on firm performance. (C) is so aggressive that Boards of Directors have become overly cautious. (D) has weakened the effect of other governance mechanisms. Answer : (B)
96. Monitoring by shareholders is usually accomplished through: (A) management consultants. (B) government auditors. (C) the firm's top managers. (D) the Board of Directors. Answer : (D)
97. Which of the following is a FALSE statement about corporate governance? (A) Governance is used to establish order between parties whose interests may be in conflict. (B) Corporate governance mechanisms sometimes fail to monitor and control top managers' decisions. (C) Corporate governance mechanisms can be in conflict with one another.
(D) Corporate governance is best achieved with a Board of Directors with strong ties to management. Answer : (D)
98. Generally, a Board member who is a source of information about a firm's day-to-day activities is classified as a(n) ____ director. (A) lead independent (B) inside (C) related (D) encumbered Answer : (B)
99. The New York Stock Exchange requires that the audit committee be: (A) available to comment to external analysts. (B) headed by outside directors. (C) liable for any illegal actions by the top management team. (D) made up of CPAs with auditing experience. Answer : (B)
100. A virtually exclusive reliance on financial controls may occur when outsider-dominated Boards exist. This may lead to all of the following EXCEPT: (A) high executive turnover. (B) increased diversification of the firm. (C) excessive management compensation. (D) reduction in R&D expenditure. Answer : (A)
101. Simon Leagreet, the Chairperson and CEO of L-EVA Industries, Inc., has long been the major power at L-EVA. A majority of the directors are concerned that while Mr. Leagreet has been responsible for the firm's earning above-average returns, he has been displaying a tendency toward personal extravagance at the firm's expense. In order to limit Mr. Leagreet's power, the Board of Directors plans to: (A) elect an insider as the lead director.
(B) appoint another individual as chairperson of the Board of Directors. (C) require Mr. Leagreet to personally certify the firm's financial reports. (D) reduce the size of the stock option package provided to Mr. Leagreet. Answer : (B)
102. Several members of the Board of Directors of American Textile Products (ATP) have proposed creating the position of lead director. What circumstances would most likely have initiated this proposal? (A) ATP has been the initiator of several hostile takeovers in the last 2 years. (B) The Board has been successful in reducing the percentage of CEO pay that is composed of stock options. (C) The CEO/chairperson of the Board has been suspected of opportunistic behavior. (D) The firm is traded on the New York Stock Exchange and must change its corporate governance to comply with the NYSE's new rules. Answer : (C)
103. Given the demands for greater accountability and improved performance, which of the following is NOT a voluntary change many Boards of Directors have initiated? (A) Moving toward having directors from different backgrounds (B) Strengthening the internal management and accounting control systems (C) Compensating directors with stock options rather than with fixed remuneration (D) Establishing and using formal processes to evaluate the Board's performance Answer : (C)
104. Boards of Directors are now becoming more involved in: (A) the strategic decision-making process. (B) selecting new CEOs. (C) the firm's tax issues. (D) governmental relations. Answer : (A)
105. Research suggests that Boards of Directors perform better if:
(A) the CEO is also the chairperson of the Board of Directors. (B) the Bard includes employees as voting members. (C) the Board is homogenous in composition. (D) outside directors own significant equity in the organization. Answer : (D)
106. One means that is considered to improve the effectiveness of outside directors is: (A) mandating that all outside directors be drawn from government or academia rather than industry. (B) requiring that outside directors be former executives of the firm. (C) requiring outside directors to own significant equity stakes in the firm. (D) requiring that outside directors act objectively and have no ownership interest in the firm. Answer : (C)
107. The CEO and Chairman of the Board of Directors Alta Corp. is dismayed by a lack of effort and insights his directors provide during Board meetings. The directors are all outsiders, experienced, and run their own successful firms. The CEO/chair genuinely seeks their greater involvement. What would you recommend? (A) Requiring that the directors own stock in the company. (B) Establishing a formal process to evaluate the Board's performance. (C) Electing a lead director. (D) All of these options are correct. Answer : (D)
108. Executive compensation is a governance mechanism that seeks to align managers' and owners' interests through all of the following EXCEPT: (A) bonuses. (B) long-term incentives such as stock options. (C) salary. (D) penalties for inadequate firm performance. Answer : (D)
109. The interests of multinational corporations' shareholders may be best served when there is: (A) a uniform compensation plan for all corporate executives, United States and foreign alike. (B) executive compensation that is primarily based on long-term performance. (C) elevation of foreign executive compensation to U.S. levels. (D) a variety of compensation plans for executives of foreign subsidiaries. Answer : (D)
110. Managers in the United States receive ____ compensation than managers in the rest of the world. (A) equivalent (B) higher (C) lower (D) more variable Answer : (B)
111. The longer the focus of managerial incentive compensation, the greater the ____ top-level managers. (A) earnings potential for (B) risks borne by (C) incentives for (D) potential tax burden for Answer : (B)
112. Which of the following reasons would NOT explain the difficulty of determining appropriate executive compensation? (A) The decisions made by top-level managers are typically complex and non-routine. (B) An executive's decisions often affect firm performance only over the long run. (C) A number of factors intervene between top-level management decisions and firm performance (e.g., unpredictable economic, social, or legal changes). (D) The compensation committee may not have comprehensive firm performance data. Answer : (D)
113. The Board of Directors of CamCell, Inc., wishes to design a CEO compensation plan that will align the personal interests of the CEO with the interests of the shareholders in long-term firm performance. The Board wishes the CEO to take more short-term risks in order to achieve potentially higher long-term returns. Consequently, the Board has decided on an incentive plan that involves payout based on the firm's performance five years in the future. CamCell is presently searching for a new CEO. Which of the following statements is true? (A) This plan will be very attractive in luring candidates for the CEO position. (B) CamCell may have to over-compensate its CEO in order to offset the personal risk a CEO would undertake under this plan. (C) Institutional investors disapprove of long-term executive incentive plans and they may sell their blocks of stock in CamCell. (D) This type of plan is likely to cause the CEO to underinvest in R&D in order to boost CamCell's long-term profitability. Answer : (B)
114. The Board of Directors of CyberScope, Inc., is designing a stock option plan for its CEO that will motivate the CEO to increase the market value of the firm. Consequently, the Board is: (A) setting the option strike price substantially higher than the current stock price. (B) insuring that the strike price value of the options can be lowered if the organizational environment becomes more risky. (C) having the stock option plan designed by insiders on the Board of Directors who are familiar with day-to-day operations of the firm. (D) consulting accounting advisors to make sure that the plan transfers wealth to the CEO without immediately appearing on the balance sheet of CyberScope. Answer : (A)
115. The market for corporate control serves as a means of governance when: (A) the firm is overpriced in the market. (B) internal controls have failed. (C) the corporation has greatly exceeded performance expectations. (D) the top management team's interests and the owners' interests are aligned. Answer : (B)
116. Agricultural Chemicals, Inc., was the target of a hostile takeover 6 months ago. The CEO and the top executives successfully fended off the takeover and are concentrating on strategies to improve the performance of the firm. Which of the following is most likely to be TRUE?
(A) Hostile takeover attempts are so common that they do not reflect negatively on the firm's performance. They are more a function of general market conditions. (B) The fact that a hostile takeover has occurred is proof that the firm was under-performing. (C) Research shows that once a hostile takeover has been defeated, the firm is safe from other hostile takeover attempts for many years. (D) The CEO and top executives should not consider their jobs secure. Answer : (D)
117. The market for corporate control may not be as efficient as previously thought as recent findings suggest that those firms targeted for takeover by active corporate raiders are: (A) usually on the verge of bankruptcy. (B) typically under-performing their industry. (C) often performing above their industry averages. (D) always outperforming their industry. Answer : (C)
118. If the market for corporate control were efficient as a governance device, then only ____ would be targets for takeovers. (A) firms with unethical top executives (B) firms earning above-average returns (C) poorly performing firms (D) over-valued firms Answer : (C)
119. All of the following statements are TRUE about the use of defense tactics by the target firm during a hostile takeover EXCEPT: (A) defense tactics are usually beneficial for the executives of the target firm. (B) defense tactics are opposed by institutional investors. (C) defense tactics vary in their effectiveness as a defense to takeovers. (D) defense tactics make the costs of a takeover lower. Answer : (D)
120. Ambrose Bierce, the CEO of DictionAry, has been paid a lump sum amounting to 3 years' salary because DictionAry has been bought in a hostile takeover by its main competitor. Ambrose received: (A) a golden parachute. (B) a poison pill. (C) greenmail. (D) a silver handshake. Answer : (A)
121. The repurchase at a premium of the target firm's shares that were acquired by the aggressor firm in a hostile takeover in exchange for an agreement that the aggressor will no longer target the company for takeover is called: (A) greenmail. (B) a standstill agreement. (C) crossing the palm with silver. (D) a poison pill. Answer : (A)
122. A hostile takeover defense wherein the target firm makes its stock less attractive to a potential acquirer is called: (A) greenmail. (B) a standstill agreement. (C) crossing the palm with silver. (D) a poison pill. Answer : (D)
123. Historically, ____ have been at the center of German corporate governance structure. (A) banks (B) institutional shareholders (C) public pension funds (D) government agencies Answer : (A)
124. James Abercrombie has a thriving consulting firm specializing in training Boards of Directors in decision-making skills. Mr. Abercrombie has had striking success in reducing conflict and hostility among directors and allowing Boards to develop more cohesiveness. Mr. Abercrombie is considering expanding his consulting practice overseas. Which of the following statements is most likely to be TRUE? (A) Mr. Abercrombie will have a large market in Japan because the culture highly values consensus decision making. (B) Japanese firms will have little interest in Mr. Abercrombie's specialty because these skills are already practiced at a high level. (C) German firms will not be interested in Mr. Abercrombie's services because the German system of decision making is based on authority and few conflicts emerge. (D) Mr. Abercrombie should find significant need for his services in companies in transitional economies. Answer : (B)
125. German executives are not dedicated to the maximization of shareholder value to the degree that is the case for executives in the UK and United States largely because: (A) the roles of CEO and chairperson of the Board of Directors are usually combined. (B) large institutional investors control large blocks of stock. (C) private shareholders and large institutional investors rarely have large ownership positions in firms. (D) of the focus on stewardship-management in German firms rather than the financial performance focus of U.S. firms. Answer : (C)
126. Which of the following statements is about corporate governance in Germany is FALSE? (A) The Vorstand (management Board) of a German corporation makes decisions about strategy and management. (B) The Vorstand is elected by the firm's employees. (C) Employees, union members, and shareholders appoint members to the Aufsichsrat (the supervisory tier of the Board). (D) Large institutional investors such as pension funds, and insurance companies are relatively insignificant owners of corporate stock. Answer : (B)
127. Japanese keiretsu are:
(A) management structures related to total quality management systems. (B) company unions, which are a type of governance system. (C) the banks owing the largest shares of stock in the firm. (D) a system of cross-shareholding among firms. Answer : (D)
128. In Japan, the principal source of the active monitoring of large companies comes from: (A) Boards of Directors. (B) stock brokerage companies. (C) the government. (D) banks. Answer : (D)
129. ____ is an important influence in Japanese corporate governance structures. (A) Innovation (B) Consensus (C) Competition (D) Individualism Answer : (B)
130. Which of the following is TRUE of trends in Japan's corporate governance structure? (A) Compensation of CEOs in both private and public companies is being tied more closely to observable performance goals. (B) Increased regulation in the financial sector has increased the cost of mounting hostile takeovers. (C) Banks' influence over corporations is increasing. (D) The gap in compensation between CEOs in public and private companies is increasing. Answer : (A)
131. Which of the following is FALSE about corporate governance in China? (A) The Chinese governance system may be tilting toward the Western model.
(B) With increasing frequency, the compensation of top executives of Chinese companies is closely related to prior and current financial performance of the firm. (C) The state still uses direct and/or indirect controls to influence the strategies employed by most firms. (D) Firms with higher state ownership tend to have lower market value and more volatility in those values over time. Answer : (C)
132. The CEO of Skyco, a publicly-traded company that has been earning below-average returns, has been publicly criticized by shareholders for persuading the Board of Directors to give her interest-free loans, for having the company purchase and furnish a lavish apartment in Paris for her personal use on her twice-yearly trips there, and for excessive stock options. The CEO's behavior may be indication of: (A) reasonably compensating a CEO. (B) a weak Board of Directors. (C) the laxity of institutional investors. (D) the difference in risk propensity between owners and managers. Answer : (B)
133. The governance mechanism most closely connected with deterring unethical behaviors by holding top management accountable for the corporate culture is: (A) ownership concentration. (B) the market for corporate control. (C) executive compensation systems. (D) the Board of Directors. Answer : (D)
134. International Food Services (IFS) has a contract with the Marines to supply meals for its troops in Afghanistan and other foreign assignments. As a means of increasing profits, IFS has used substandard ingredients in these meals and has consistently lied about this practice during quality investigations by the Marines. Who is ultimately responsible for the corporate climate that resulted in this wrongdoing? (A) The director of food service for IFS (B) The Board of Directors of IFS (C) The employees directly involved in the wrongdoing
(D) The head of contract services for the Marines Answer : (B)
ESSAY 135. What is corporate governance and how is it used to monitor and control managers' decisions?
Graders Info : Corporate governance is the relationship among stakeholders that is used to determine and control the firm's strategic direction and its performance. Effective governance that aligns top-level managers' interests with shareholders' interests can produce a competitive advantage for the firm. Corporate governance includes oversight in areas where there are conflicts of interest among major stakeholders, including the election of directors, supervision of CEO pay, and the organization's overall structure and strategic direction. Three internal governance mechanisms (ownership concentration, the Board of Directors, and executive compensation) and an external mechanism (the market for corporate control) are used in U.S. corporations. Unfortunately, corporate governance mechanisms are not always successful. 136. Discuss the effect of the separation of ownership and control in the modern corporation.
Graders Info : Ownership is typically separated from control in the large U.S. corporation. Owners (principals) hire managers (agents) to make decisions that maximize the value of their firm. As risk specialists, owners diversify their risk by investing in an array of corporations. As decision-making specialists, top executives are expected by owners to make decisions that will result in earning above-average returns for which they are compensated. Thus, the typical corporation is characterized by an agency relationship that is created when one party (the firm's owners) hires and pays another party (top executives) to use decision-making skills. Since owners may not possess the specialized skill to run a large company, delegating these tasks to managers should produce higher returns for owners. 137. Define the agency relationship and managerial opportunism and discuss their strategic implications.
Graders Info : The separation of owners and managers creates an agency relationship. An agency relationship exists when a principal hires an agent as a decision-making specialist to perform a service. Some problems that result from the agency relationship between owners and managers include the potential for a divergence of interests and a lack of direct control of the firm by shareholders. Managerial opportunism is the seeking of self-interest with guile. It is both an attitude and a set of behaviors, which cannot be perfectly predicted from the agent's reputation. Top executives may
make strategic decisions that maximize their personal welfare and minimize their personal risk, such as excessive product diversification. Decisions such as these prevent the maximization of shareholder wealth, which is supposed to be the top executives' priority. Although shareholders implement corporate governance mechanisms to protect themselves from managerial opportunism, these mechanisms are imperfect. Agency costs include the costs of managerial incentives, monitoring costs, enforcement costs, and the individual financial losses incurred by principals (owners of the firm) because governance mechanisms cannot guarantee total compliance by the agents (managers). 138. Define the three internal corporate governance mechanisms and how they may be used to control and monitor managerial decisions.
Graders Info : The three internal corporate governance mechanisms are: ownership concentration, the Board of Directors, and executive compensation. Ownership concentration is based on the number of largeblock shareholders and the percentage of shares they own. With significant ownership percentage, institutional investors, such as mutual funds and pension funds, are often able to influence top executives' strategic decisions and actions. Thus, unlike diffuse ownership, which tends to result in relatively weak monitoring and control of managerial decisions, concentrated ownership produces more active and effective monitoring of top executives. An increasingly powerful force in corporate America, institutional owners are actively using their positions of concentrated ownership in individual companies to force managers and Boards of Directors to make decisions that maximize a firm's value. These owners (e.g., CalPERS) have caused poorly performing CEOs to be ousted from the firm. The Board of Directors, elected by shareholders, is composed of insiders, related outsiders, and outsiders. The Board of Directors is a governance mechanism shareholders expect to run the firm in such a ways as to maximize shareholder wealth. Outside directors are expected to be more independent of a firm's top executives than are those who hold top management positions within the firm. A Board with a significant percentage of insiders tends to be weak in monitoring and controlling management decisions. Boards of Directors have been criticized for being ineffective, and there is a movement to more formally evaluate the performance of Boards and their individual members. Executive compensation is a highly visible and often criticized governance mechanism. Salary, bonuses, and long-term incentives such as stock options are intended to reward top executives for aligning their goals with the interests of shareholders. A firm's Board of Directors has the responsibility of determining the degree to which executive compensation succeeds in controlling managerial behavior. But, it is difficult to evaluate top executives' performance, and so executive compensation tends to be linked to financial measures which do not necessarily reflect the effectiveness of the executive's decision on long-term shareholder outcomes. In addition, many external factors affect the performance of a firm. Moreover, performance incentive plans can be subject to management manipulation. Consequently, executive compensation is a far-from-perfect governance mechanism. 139. Discuss the difficulties in establishing performance-based compensation plans for executives.
Graders Info : Executive compensation, especially long-term incentive compensation, is complicated. First, the strategic decisions made by top-level managers are typically complex and non-routine; as such,
direct supervision of executives is inappropriate for judging the quality of their decisions. Because of this, there is a tendency to link the compensation of top-level managers to measurable outcomes such as financial performance. Second, an executive's decision often affects a firm's financial outcomes over an extended period of time, making it difficult to assess the effect of current decisions on the corporation's performance. In fact, strategic decisions are more likely to have longterm, rather than short-term, effects on a company's strategic outcomes. Third, a number of other factors affect firm performance. Unpredictable economic, social, or legal changes make it difficult to discern the effects of strategic decisions. Thus, although performance-based compensation may provide incentives to managers to make decisions that best serve shareholders' interests, such compensation plans alone are imperfect in their ability to monitor and control managers. Although incentive compensation plans may increase firm value in line with shareholder expectations, they are subject to managerial manipulation. For instance, annual bonuses may provide incentives to pursue short-run objectives at the expense of the firm's long-term interests. Supporting this conclusion, some research has found that bonuses based on annual performance were negatively related to investments in R&D, which may affect the firm's long-term strategic competitiveness. Although long-term performance-based incentives may reduce the temptation to underinvest in the short run, they increase executive exposure to risks associated with uncontrollable events, such as market fluctuations and industry decline. Long-term incentives may not be highly valued by a manager: thus, firms may have to overcompensate managers when they use long-term incentives.
140. Describe the market for corporate control and its implications for organizations.
Graders Info : The market for corporate control is composed of individuals and firms who buy ownership positions in (e.g., take over) potentially undervalued firms to form a new division in an established firm or to merge the two previously separate firms. The target firm's top management team is usually replaced because it is assumed to be partly responsible for formulating and implementing the strategy that led to poor firm performance. The market for corporate control is (supposedly) triggered by low corporate performance by a firm relative to competitors in its industry. Thus, the market for corporate control should act as a control mechanism for corporate governance that leads to the replacement of under-performing executives. But, the market for corporate control is not an efficient governance mechanism because in reality many of the firms taken over have above-average performance. Hostile takeovers, on the other hand, are typically triggered by poor performance. Some managers have sought to buffer themselves from the effect of the market for corporate control (hostile takeovers) by instituting golden parachutes that will pay the managers significant extra compensation if the firm is taken over. Those and other takeover defenses are intended to increase the costs of mounting a takeover and reducing the managers' risk of losing their jobs. Examples of takeover defenses include asset restructuring, changes in the financial structure of the firm, reincorporation in another state, and greenmail. These defense tactics are controversial and the research on their effectiveness is inconclusive. Most institutional investors oppose them. 141. Briefly compare and contrast corporate governance in the United States, Germany, and Japan, and China.
Graders Info :
Corporate governance structures used in Germany and Japan differ from each other and from the ones used in the United States. Historically, the U.S. governance structure has focused on maximizing shareholder value. Banks have been at the center of the German corporate governance structure, because as lenders, banks become major shareholders in the firms. Shareholders usually allow the banks to vote their ownership positions, so banks have majority positions in many German firms. The German system has other unique features. For example, German firms with more than 2,000 employees are required to have a two-tier Board structure, separating the Board's management supervision function from other duties that it would normally perform in the United States (e.g., nominating new Board members). Historically, German executives have not been dedicated to the maximization of shareholder value, because private shareholders rarely have major ownership in German firms, nor do larger institutional investors play a significant role. Attitudes toward corporate governance in Japan are affected by the concepts of obligation, family, and consensus. Japan continues to follow a bank-based financial and corporate governance structure compared to the market-based financial and corporate governance structure in the United States. In addition, Japanese firms belong to keiretsu, groups of firms tied together by cross-shareholding. In many cases, the main-bank relationship of the firm is part of a keiretsu. However, the influence of banks in monitoring and controlling managerial behavior and firm outcomes is beginning to lessen and a minor market for corporate control is emerging. Chinese corporate governance has become stronger in recent years. There has been a decline in equity held in state-owned enterprises, but the state still dominates the strategies employed by most firms. Firms with higher state ownership tend to have lower market value and more volatility in those values over time. In a broad sense, the Chinese governance system has been moving toward the Western model in recent years. For example, YCT International recently announced that it was strengthening its corporate governance with the establishment of an audit committee within its Board of Directors, and appointing three new independent directors. In addition, recent research shows that the compensation of top executives in Chinese companies is closely related to prior and current financial performance of the firm.
142. How does corporate governance foster ethical strategic decisions and how important is this to top-level executives?
Graders Info :
Governance mechanisms focus on the control of managerial decisions to ensure that the interest of shareholders, the most important stakeholder, will be served. But shareholders are just one stakeholder along with product market stakeholders (e.g., customers, suppliers, and host communities) and organizational stakeholders (e.g., managerial and nonmanagerial employees). These stakeholders are important as well. Therefore, at least the minimal interests or needs of all stakeholders must be satisfied through the firm's actions. Otherwise, dissatisfied stakeholders will withdraw their support from one firm and provide it to another (e.g., employees will exit and seek another employer, customers seek other vendors, etc.). Some believe that ethically responsible companies design and use governance mechanisms to ensure that the interests of all stakeholders are served.
Top-level executives are monitored by the Board of Directors. All corporate stakeholders are vulnerable to unethical behaviors by the firm. If the image of the firm is tarnished, the image of customers, suppliers, shareholders, and Board members is also tarnished. Top-level managers, as the agents who have been hired to make decisions that are in shareholders' best interests, are ultimately responsible for the development and support of an organizational culture that allows unethical decisions and behaviors. The Board of Directors has the power and responsibility to enforce this expectation. The decisions and actions of a corporation's Board of Directors can be an effective deterrent to unethical behaviors. The Board has the power to hold top managers accountable for unethical actions as they can hire and fire these managers. Thus, the Board of Directors, which holds a position above the firm's highest-level managers, holds considerable power over top-level executives and can set and enforce standards for ethical behaviors within the organization.
Chapter 11 Organizational Structure and Controls TRUEFALSE 1. Strategy has an important influence on structure, once a particular structure is in place, that structure influences strategy. (A) True (B) False Answer : (A)
2. Failure to properly structure an organization can contribute to poor strategic decisions and eventually bankruptcy. (A) True (B) False Answer : (A)
3. Strategy has an important influence on structure, although once in place, structures influence strategy. (A) True (B) False Answer : (A)
4. Over time, large and complex organizations must customize their structure to fit their unique strategic needs. (A) True (B) False Answer : (A)
5. Organizational structures must be both stable and flexible. (A) True (B) False Answer : (A)
6. Organizational inertia often prompts top management to initiate structural change when organizational performance levels drop. (A) True (B) False Answer : (B)
7. With a related diversification corporate-level strategy, financial controls are used by corporate leaders to verify the sharing of appropriate strategic factors such as knowledge, markets, and technologies across businesses. (A) True (B) False Answer : (B)
8. Strategic controls are largely subjective criteria intended to verify that the firm is using appropriate strategies for the conditions in the external environment and the company's competitive advantages. (A) True (B) False Answer : (A)
9. Organizational controls guide the use of strategy, indicate how to compare actual results with expected results, and suggest corrective actions to take when the difference is unacceptable. (A) True (B) False Answer : (A)
10. To properly execute strategic controls in firms using related diversification, the executives must have a deep understanding of each unit's business-level strategy. (A) True (B) False Answer : (A)
11. RexMacDonald, Inc., uses a differentiation strategy that relies on cooperation, communication, and sharing of ideas among employees. In order to foster this behavior, RexMacDonald should
emphasize strategic controls over financial controls. (A) True (B) False Answer : (A)
12. Companies and business units of large diversified firms using the cost leadership strategy should use strategic controls. (A) True (B) False Answer : (B)
13. Companies and business units using the differentiation strategy should emphasize financial rather than strategic controls. (A) True (B) False Answer : (B)
14. According to Michael Dell, an overemphasis on financial controls to produce attractive shortterm results contributed to performance difficulties at Dell, Inc. This point emphasizes the importance of properly balancing the use of strategic and financial controls. (A) True (B) False Answer : (A)
15. Research shows that structure has a more important influence on strategy than the reverse and hence the emphasis of the chapter on the subject of structure. (A) True (B) False Answer : (B)
16. A centralized structure does not provide information from local stores that would be useful in changing its technology quickly. This example illustrates the effect of structure on strategy. (A) True
(B) False Answer : (A)
17. Research has consistently shown that there is one best way to structure all organizations, regardless of competitive strategy. (A) True (B) False Answer : (B)
18. The simple structure is used by owner-managed firms which are characterized by informal relationships, few rules, limited task specialization, and unsophisticated information systems. (A) True (B) False Answer : (A)
19. As a firm grows, it typically shifts from a simple structure to a functional structure. (A) True (B) False Answer : (A)
20. A simple structure is an organizational form in which the owner-manager makes all major decisions directly and monitors all activities, while the staff merely serves as an extension of the manager's supervisory authority. (A) True (B) False Answer : (A)
21. Specialization refers to the extent to which authority for decision making is retained at higher managerial levels. (A) True (B) False Answer : (B)
22. There are three variations of the multidivisional structure. (A) True (B) False Answer : (A)
23. High levels of formalization of rules and procedures which often emanate from the centralized staff are a characteristic of the structure used to implement the cost leadership strategy. (A) True (B) False Answer : (A)
24. Centralized and formalized procedures allow for greater flexibility, an important factor for firms using a cost leadership strategy. (A) True (B) False Answer : (B)
25. The marketing and R&D functions are emphasized in the differentiation strategy's functional structure. (A) True (B) False Answer : (A)
26. Firms using the differentiation strategy need to respond quickly to environmental opportunities and threats. The structural features that are best for these requirements are centralization, specialization, and many rules and procedures. (A) True (B) False Answer : (B)
27. The integrated cost leadership/differentiation strategy needs structural features that are partially centralized and partially decentralized, jobs that are semi-specialized, and rules and procedures that call for some formal and some informal job behavior.
(A) True (B) False Answer : (A)
28. Firms switch from a functional structure to a multidivisional structure because greater levels of environmental complexity and uncertainty make it necessary for the firm to develop cooperative relationships with its stakeholders. (A) True (B) False Answer : (B)
29. The three multidivisional structures that are used to implement a diversification strategy are the competitive form, the strategic business unit form, and the integrated form. (A) True (B) False Answer : (B)
30. The cooperative form is an M-form structure in which horizontal integration is used to bring about interdivisional cooperation. (A) True (B) False Answer : (A)
31. To implement a related constrained strategy, firms should use the cooperative form of the multidivisional structure. (A) True (B) False Answer : (A)
32. The matrix organization has a dual structure combining functional specialization and business product or project specialization. (A) True (B) False
Answer : (A)
33. To implement a related linked strategy, a firm usually needs an SBU structure. (A) True (B) False Answer : (A)
34. An SBU structure consists of at least three levels: the top level, the corporate headquarters; the next level, the strategic business units (SBUs); and the final level, SBU divisions. (A) True (B) False Answer : (A)
35. The divisions within each SBU are related in terms of shared products or markets, but the divisions of one SBU have little in common with the divisions of the other SBUs. (A) True (B) False Answer : (A)
36. The competitive form of the M-form structure is characterized by complete independence among the form's divisions. Unlike the divisions included in the cooperative structure, divisions that are part of the competitive structure do not share common strengths. (A) True (B) False Answer : (A)
37. Internal competition for corporate resources is effective for companies with an unrelated diversification strategy, but dysfunctional for companies with a related constrained strategy. (A) True (B) False Answer : (A)
38. The selection of an organizational structure for an internationally diversified firm should
consider the international corporate-level strategy the firm is using. (A) True (B) False Answer : (A)
39. The organizational structure for an internationally diversified firm requires trade-offs between global integration and local market responsiveness. (A) True (B) False Answer : (A)
40. Firms implementing the multidomestic strategy often attempt to isolate themselves from global competitive forces by establishing protected market positions or by competing in industry segments that are most affected by differences among local countries. (A) True (B) False Answer : (A)
41. The worldwide geographic area structure differs from the worldwide product divisional structure in the level of centralization of decision making. (A) True (B) False Answer : (A)
42. The worldwide product divisional structure has centralized decision-making authority in the worldwide division headquarters to coordinate and integrate decisions and actions among business units. (A) True (B) False Answer : (A)
43. In the hybrid form of the combination structure, some divisions are oriented toward products while others are oriented toward market areas.
(A) True (B) False Answer : (A)
44. A strategic network can be characterized as a loose federation of partners revolving around a strategic center firm. (A) True (B) False Answer : (A)
45. Arnold Schwartz, CEO and founder of Schwartz Engineering, has repeatedly rebuffed efforts by other firms to draw Schwartz Engineering into strategic alliances. Schwartz Engineering has built its highly successful business around proprietary processes invented by Mr. Schwartz in the 1980s. Mr. Schwartz is concerned that his firm will be required to share the sources of its competitive advantage with alliance partners. This is a reasonable fear. (A) True (B) False Answer : (A)
46. For firms in a vertical complementary alliance (such as between Toyota and its suppliers), it is more difficult to identify the strategic center firm than in a horizontal complementary alliance (for example, airline alliances). (A) True (B) False Answer : (B)
47. Alliances of organizations in the same position on the value chain are known as vertical alliances. (A) True (B) False Answer : (B)
48. If firms band together in a large number of vertical complementary strategic alliances, there is a danger that the government will suspect them of illegal collusive activities.
(A) True (B) False Answer : (B)
49. Distributed strategic networks are the organizational structure used to manage international cooperative strategies. (A) True (B) False Answer : (A)
MULTICHOICE 50. Which of the following is TRUE? (A) Organizations tend to change structure too frequently, which erodes their competitive advantage. (B) Large organizations can retain a simple structure as long as they have a focus strategy. (C) Flexibility in structure is more important than stability. (D) Strategy has a more important influence on structure than structure has on strategy. Answer : (D)
51. Organizational structure: (A) specifies the firm's formal reporting relationships, procedures, controls, and authority and decision-making processes. (B) specifies the firm's informal reporting relationships, procedures, controls, and authority and decision-making processes. (C) specifies the firm's formal value proposition, the markets it will serve, and how the firm will provide value in those markets. (D) specifies the firm's control mechanisms, grievance procedures, reporting relationships, procedures, and authority over decision-making processes. Answer : (A)
52. The Amos Ball Printing Company was established in 1866. Currently, Amos Ball V is the CEO and chairman of the board. The company has traditionally used a functional structure. Five years
ago, the company branched into online publishing and small-batch printing in addition to its regular large-batch operations. Both new businesses are significantly different in technology and marketing from each other and from Ball's traditional business. Despite the hiring of experienced professionals in these new endeavors, performance continues to be poor and is affecting Ball's overall performance. Which of the following statements is TRUE? (A) Amos should consider adopting the multidivisional structure. (B) Mr. Ball has insufficient power to change the structure of the organization. (C) Restructuring must only be done from a position of strength, so it is necessary to wait until the company's overall performance improves before making radical changes. (D) These businesses are too disparate to coordinate within one corporate structure. Answer : (A)
53. A firm's ______ specifies the work to be done and how to do it given the firm's strategy or strategies. (A) structure (B) controls (C) culture (D) strategy Answer : (A)
54. Structural stability affects the organization's ability to: (A) resist organizational inertia. (B) cope with uncertainty about cause-and-effect relationships in the global economy. (C) develop new competitive advantages. (D) consistently and predictably manage its daily work routines. Answer : (D)
55. Selecting the organizational structure and controls that effectively implement the chosen strategy is a challenge for managers because: (A) firms must be flexible while retaining a degree of stability. (B) managers are never able to obtain all the information necessary to make the best selection. (C) the structure of a firm should not duplicate the structures of its competitors.
(D) the environment changes too rapidly for corporations to maintain a consistent corporate structure. Answer : (A)
56. One reason why a long-tenured top-level manager may hesitate to conclude the firm's structure is a problem is that doing so: (A) indicates to competitors that the firm is vulnerable to a hostile takeover. (B) will only lead to inefficiencies. (C) requires that the firm undertake a multi-year restructuring period that will delay retirement. (D) suggests that the firm's previous choices were not the best ones. Answer : (D)
57. Strategic controls allow corporate-level managers to: (A) evaluate business-level performance on objective criteria. (B) concentrate on day-to-day corporate operations. (C) assess performance of employees and managers in each business unit. (D) examine the fit between what the firm might do and what it can do. Answer : (D)
58. Financial controls are most important in the ______ strategy. (A) single business (B) related constrained (C) unrelated diversified (D) vertical complementary Answer : (C)
59. ______ controls are objective criteria that allow corporate managers to evaluate the returns earned by individual business units. (A) Strategic (B) Managerial (C) Financial
(D) Environmental Answer : (C)
60. Alfred Chandler found that firms grow in a predictable pattern and that the firm's growth patterns determine its structural form. Which form corresponds to the FINAL stage in Chandler's theory? (A) Functional (B) Simple (C) Vertically integrated (D) Multidivisional Answer : (D)
61. Andermeyer Jewelers, which specializes in high-end jewelry, has been in existence since the 1870s and has served generations of wealthy families. Owned and managed by the Andermeyer family since its founding, it has never had more than 20 designers and jewelers in its shop. Andermeyer Jewelers should use the ______ structure. (A) simple (B) functional (C) matrix (D) network Answer : (A)
62. Typically, an organization using a simple structure would be: (A) large. (B) small. (C) of any size if the firm is privately held. (D) a family-owned-and-managed firm of any size. Answer : (B)
63. In most cases, the focus strategy is best managed using a ______ structure. (A) simple (B) functional
(C) multidivisional (D) vertical Answer : (A)
64. The benefits of a simple structure include all of the following EXCEPT: (A) ease of coordination within the organization. (B) the lack of a need for sophisticated information systems. (C) active involvement by the owner-manager. (D) the ability of specialists to develop deep expertise. Answer : (D)
65. Functional structures work best for firms for all of the following strategies EXCEPT: (A) cost leadership strategy. (B) differentiation strategy. (C) related constrained diversification strategy. (D) single or dominant business corporate strategy. Answer : (C)
66. Leslie is a newly graduated certified public accountant with a specialty in corporate tax. She wishes to join an organization (not an accounting firm) that will allow her to concentrate on corporate tax and become deeply proficient in this area. Leslie should look for a position in a firm with a ______ structure. (A) simple (B) functional (C) multidivisional (D) network Answer : (B)
67. One disadvantage of the functional structure is that: (A) career paths and professional development are limited. (B) dual reporting relationships blur lines of authority.
(C) the CEO cannot coordinate and control the efforts of functional-level employees. (D) communication and coordination are difficult among organizational functions. Answer : (D)
68. Which of the following does NOT cause a firm to move from a functional structure to a multidivisional structure? (A) Increasing diversification (B) Coordination and control issues (C) Need for knowledge-sharing among specialists (D) Greater amounts of data and information to process Answer : (C)
69. The multidivisional structure was initially designed to produce three major benefits over the functional form. Which of the following is NOT one of the three benefits? (A) Aligning the corporate structure with the demands of global expansion (B) More accurate monitoring of the performance of each business (C) Dacilitating comparison between divisions (D) Stimulating managers of poorly performing divisions to look for ways of improving performance Answer : (A)
70. Jumbo Industrial Supply has grown from a one-location firm with a restricted product line to a multi-state organization with numerous product lines and a large sales staff. Sales have doubled every year for the last three years. It currently has a simple structure with Jared Smith, the ownermanager, making all major decisions. Jumbo is probably now experiencing or will soon experience: (A) coordination and control problems. (B) bureaucratic inefficiencies. (C) excessive competition among division managers. (D) limited communication among functional specialists. Answer : (A)
71. The noted business historian Alfred Chandler viewed the multidivisional structure as an innovative response to:
(A) an emerging professional management philosophy. (B) the increasing demand by consumers for both high quality and low prices. (C) coordination and control problems. (D) a shift toward the global economy. Answer : (C)
72. Some experts consider the ______ structure to be one of the 20th century's most significant organizational innovations because of its value to diversified firms. (A) network (B) cooperative (C) multidivisional (D) functional Answer : (C)
73. The three structural characteristics that differ among organizational structures include all of the following EXCEPT: (A) centralization. (B) formalization. (C) specialization. (D) intermediation. Answer : (D)
74. Which of the following is NOT associated with an organizational structure that supports a cost leadership strategy? (A) Centralization (B) Specialization (C) Formalization (D) Integration Answer : (D)
75. ______ is the degree to which rules and procedures govern work.
(A) Formalization (B) Centralization (C) Specialization (D) Unification Answer : (A)
76. ____ is the degree to which decision-making authority is retained at higher managerial levels. (A) Formalization (B) Centralization (C) Specialization (D) Unification Answer : (B)
77. Successfully implementing a cost leadership strategy requires: (A) freedom from constraining rules. (B) centralization of authority. (C) communication between functional silos. (D) sharing of competencies among divisions. Answer : (B)
78. Agatha Adams founded Insurance Specialists to process medical claims for physicians' practices. She plans to compete on the basis of cost, offering the lowest processing cost per claim in her market area. Ms. Adams' company should: (A) be the strategic center firm in a network structure. (B) have a specialized multidivisional structure. (C) develop alliances with firms with complementary competencies. (D) have a highly centralized, functional structure. Answer : (D)
79. Walmart's effective strategy/structure configuration is: (A) cost leadership/functional.
(B) differentiation/functional. (C) related constrained/multidivisional. (D) related linked/multidivisional. Answer : (A)
80. Firms seeking to compete on the basis of cost leadership particularly need support from the ______ and ______ functions. (A) finance; accounting (B) manufacturing; process R&D (C) product R&D; marketing (D) management information; finance Answer : (B)
81. Firms seeking to differentiate particularly need support from the ______ and ______ functions. (A) finance; accounting (B) engineering; operations (C) product R&D; marketing (D) management information; finance Answer : (C)
82. Typically, a successful firm pursuing a differentiation strategy will: (A) have a very hierarchical structure. (B) require a structure that is very formal. (C) use cross-functional development teams. (D) develop free-standing business units. Answer : (C)
83. Which of the following is a TRUE statement about organizational structures for implementing business-level strategies? (A) A cost leadership strategy requires a simple structure emphasizing high specialization, centralization, and structured job roles.
(B) A differentiation strategy requires a functional structure with limited formalization, broad job descriptions, and an emphasis on the product R&D and marketing functions. (C) An integrated cost leadership/differentiation strategy requires a multidivisional structure using high formalization, decentralized decision making, and vertical coordination. (D) A focused strategy requires a functional structure featuring high levels of both specialization and formalization. Answer : (B)
84. Successful implementation of the differentiation strategy requires a structure that: (A) has specialized jobs. (B) decentralizes decision making. (C) focuses on the finance function. (D) is dominated by the operations function. Answer : (B)
85. The integrated cost leadership/differentiation strategy is difficult to implement mostly because: (A) different primary and support activities are emphasized when using cost leadership and differentiation strategies. (B) this strategic approach demands more flexibility than most firms can manage. (C) the dual reporting relationships required for this strategy slow organizational decision making. (D) the cost leadership strategy requires less structured job roles than does the differentiation strategy. Answer : (A)
86. The ______ structure is the most appropriate structure for implementing the integrated cost leadership/differentiation strategy. (A) simple (B) functional (C) multidivisional (D) strategic business unit Answer : (B)
87. The ______ structure is best for implementing the related-constrained diversification strategy. (A) functional (B) competitive form of the multidivisional (C) SBU form of the multidivisional (D) cooperative form of the multidivisional Answer : (D)
88. Which of the following is NOT a variation of the multidivisional structure? (A) Competitive form (B) Regional form (C) Cooperative form (D) Strategic business unit form Answer : (B)
89. The BEST multidivisional structure to use: (A) is the competitive form. (B) is the SBU form. (C) is the cooperative form. (D) depends on the degree of diversification. Answer : (D)
90. Ortiz is a manager of BRS Corp. Ortiz's division did not meet financial targets this year. Ramirez, manager of another division, has indicated that Ortiz's division incurred significant costs which resulted in Ramirez's division setting record profits for the year. As a result, performance for BRS as a whole exceeded projections. Which pairing of organizational structures for BRS and bonus for Ortiz is most plausible? (A) Cooperative structure; no bonus due to failure to meet divisional target (B) Competitive structure; no bonus due to failure to meet divisional target (C) Cooperative structure; a bonus for increasing organizational performance (D) Competitive structure; a bonus for increasing organizational performance Answer : (C)
91. The cooperative multidivisional firm: (A) establishes profit centers based on products or markets. (B) has a flat organizational structure which broadens jobs and empowers workers. (C) has a structure organized around both functional specialization and business projects. (D) has a structure requiring heavy use of horizontal integrative devices. Answer : (D)
92. Which organizational structure will emphasize financial controls for headquarters' evaluation of operating units while the operating units will emphasize strategic controls within their units' performance? (A) Functional (B) Cooperative M-Form (C) SBU form (D) Competitive M-Form Answer : (C)
93. Which of the following is a TRUE statement about implementing corporate-level strategies and effective organizational structures? (A) Firms pursuing a related linked strategy should implement a competitive structure with a competitive culture and centralized strategic-planning activities. (B) Firms pursuing an unrelated diversification strategy should use an SBU structure with a small corporate staff, emphasize the R&D function, and integrate divisions to achieve synergies. (C) Firms pursuing a related linked strategy should use an SBU structure, emphasize interdependence among divisions, and manage the strategic planning function from the central office. (D) Firms pursuing a related constrained strategy should implement a cooperative structure, use integrative devices to link divisions, centralize the R&D function, and emphasize sharing. Answer : (D)
94. The ______ structure is an organizational structure that combines both functional specialization and business product or project specialization. (A) functional (B) worldwide geographic area
(C) network (D) matrix Answer : (D)
95. The heavy use of integrative mechanisms in the ______ multidivisional organizational structure is intended to achieve _______. (A) cooperative; economies of scope (B) competitive; cost efficiencies (C) functional; sensitivity to cultural diversity (D) SBU; quick response to local customer needs Answer : (A)
96. When a corporation pursues a related constrained diversification strategy, financial controls may not add value to strategy implementation efforts because it is difficult to: (A) use them without reducing cooperation among divisional managers. (B) transfer capital between units. (C) maintain an arms-length relationship between headquarters and the divisions. (D) identify which objective criteria to monitor. Answer : (A)
97. A firm pursuing a related constrained diversification strategy would typically need all of the following EXCEPT: (A) centralization of some organizational functions for the sake of coordination. (B) frequent, direct contact between division managers. (C) division managers' rewards based on division financial performance. (D) temporary teams or task forces formed around specific projects. Answer : (C)
98. Icarus Aviation, Athena Instrumentation, and Hercules Miniaturization are strategic business units of Olympia Industries. One can expect that Icarus, Athena, and Hercules: (A) use integrative mechanisms to share core competencies.
(B) compete with one another in Olympia's internal capital markets. (C) are not necessarily related to one another in terms of products or markets. (D) are network member firms while Olympia is the strategic center firm. Answer : (C)
99. A private university is made up of various "schools," such as the School of Journalism, the School of Business, the School of Law, the School of Arts and Sciences, and so forth. The university is experiencing some financial problems, so the administration has decided to have each school of the university become a profit center. This scheme is somewhat parallel to the ______ organizational structure. (A) network (B) strategic business unit multidivisional (C) functional (D) matrix Answer : (B)
100. In an SBU structure, ______ is/are evaluated using strategic controls, whereas ______ is/are evaluated using financial controls. (A) each SBU; divisions within the SBUs (B) divisions within the SBUs; each SBU (C) managers of the SBUs; headquarters staff (D) headquarters staff; managers of the SBUs Answer : (B)
101. The most centralized and most costly form of the multidivisional structure is the: (A) integrated. (B) competitive. (C) SBU. (D) cooperative. Answer : (D)
102. Which of the following multidivisional structures is CORRECTLY paired with the appropriate
corporate-level strategy? (A) Competitive form with related-constrained strategy (B) Cooperative form with unrelated strategy (C) SBU form with related-linked strategy (D) Competitive form with related-linked strategy Answer : (C)
103. A firm pursuing an unrelated diversification strategy will utilize a ______ structure. (A) network (B) cooperative form multidivisional (C) competitive form multidivisional (D) functional Answer : (C)
104. In the ______ multidivisional structure there is complete independence among the firm's divisions. (A) cooperative (B) matrix (C) competitive (D) SBU Answer : (C)
105. The fewest integrative devices are used in the ______ structure. (A) simple (B) competitive multidivisional (C) SBU (D) network Answer : (B)
106. In the ______ structure hierarchy, the headquarters relies on strategic controls to set rate-o-return targets and financial controls to monitor divisional performance relative to those targets.
(A) functional (B) cooperative (C) competitive (D) SBU Answer : (C)
107. Firms such as Textron Inc. that frequently acquire and divest other firms are most likely to use the ______ structure. (A) matrix (B) competitive multidivisional (C) hybrid combination (D) horizontal complementary strategic alliance Answer : (B)
108. The CEO of Transector, Inc., set a 6.5 percent rate-of-return target for all divisions for the past year. Now, at the end of the year, three of Transector's seven divisions have not met this rate-o-return goal. The division managers of these three under-performing divisions have all secretly contacted executive-placement firms to investigate openings at other firms, because they know their future at Transector is in jeopardy as financial performance is all-important at Transector. Transector probably uses the ______ structure. (A) competitive form of the multidivisional (B) SBU form of the multidivisional (C) worldwide geographic area (D) distributed strategic network Answer : (A)
109. Megaline, Inc., with five divisions, follows the competitive form of the multidivisional structure. One division has not met the rate-of-return goals for the past year. Another division has exceeded the rate-of-return goals. The other three divisions met the rate-of-return goals. The headquarters office must decide where to allocate capital in the next year. Which scenario is the MOST likely? (A) The poorest-performing division will get the highest capital allocation so that it can fix its problems and achieve the rate-of-return goal next year. (B) The highest-performing division will get the highest capital allocation because it has the best prospects for creating more wealth for the shareholders next year.
(C) The average-performing divisions which met the rate-of-return goals will receive the highest allocation because their performance exactly matched corporate requirements. (D) All divisions will receive the same capital allocation for the next year because this organizational structure rewards divisional managers based on achievement of strategic goals. Answer : (B)
110. In the competitive form of the multidivisional structure, the focus of headquarters is on all of the following EXCEPT: (A) integration. (B) performance appraisal. (C) resource allocation. (D) long-range planning. Answer : (A)
111. TheLG Company has units operating in significantly different industries and uses financial controls to manage its portfolio. LG is most likely using the ______ structure. (A) combination-matrix (B) cooperative form of the multidivisional (C) competitive form of the multidivisional (D) strategic business unit multidivisional Answer : (C)
112. Implementing the multi-domestic strategy requires decentralization to: (A) facilitate the tailoring of products to the demand in local markets. (B) develop economies of scale. (C) achieve economies of scope. (D) reduce bureaucracy and speed up decision making. Answer : (A)
113. A worldwide geographic area structure is an organizational form in which: (A) multiple alliances across the globe link complementary businesses.
(B) standardized products are offered across country markets. (C) national interests dominate and management adapts to local or cultural differences. (D) responsiveness to local demand is combined with economies of scale. Answer : (C)
114. A multidomestic strategy would be associated with: (A) high levels of coordination. (B) informal coordination among units. (C) many integrative mechanisms. (D) interdependent divisions. Answer : (B)
115. Galatea Foods was founded in Greece by Galatea Chronos in 1978, and the company spread rapidly through Western Europe. Ms. Chronos retains the office of CEO. The Spanish division is headed by her oldest son. The North European division is headed by her only daughter, and the French-Italian division is headed by Ms. Chronos' brother. This company probably uses the ______ strategy. (A) network (B) multi-domestic (C) global (D) transnational Answer : (B)
116. The primary disadvantage of the multi-domestic strategy and worldwide geographic area structure relates to limited: (A) centralization. (B) coordination across divisions. (C) ability to meet local market needs. (D) potential for global efficiency. Answer : (D)
117. One of the primary disadvantages of the global strategy and worldwide product divisional
structure is that: (A) it is difficult to achieve economies of scale. (B) the firm must develop centers to offer after-sales service to customers. (C) it is difficult to respond effectively to local market needs and preferences. (D) achieving economies of scale with this strategy/structure combination is nearly impossible. Answer : (C)
118. Ichabod Industries has a Latin American Division, a European Division, an Industrial Lubricants Division, and a Food Service Division. Ichabod Industries probably uses the ______ organizational structure. (A) horizontal complementary strategic alliance (B) competitive multidivisional (C) strategic business unit multidivisional (D) hybrid combination Answer : (D)
119. The need for the organization to combine local responsiveness and efficiency is most critical in a ______ strategy. (A) multi-domestic (B) transnational (C) global (D) focus Answer : (B)
120. IKEA is a global furniture retailer with more than 300 outlets in 39 countries and regions. IKEA focuses on lowering its costs as well as understanding customer needs, especially younger ones. IKEA's international strategy is best described as ______, and the appropriate organizational structure to implement this strategy is the ______ structure. (A) transnational; combination (B) global; worldwide product divisional (C) multi-domestic; worldwide geographic area (D) competitive; strategic business unit multidivisional
Answer : (A)
121. Which of the following is NOT a preliminary task of the strategic center firm in a strategic network? (A) Strategic outsourcing (B) Encouraging friendly rivalry among network members (C) Allocating internal capital (D) Supporting development of new core competencies Answer : (C)
122. It is easiest to identify the company that functions as the strategic center firm in: (A) horizontal complementary strategic alliances. (B) vertical complementary strategic alliances. (C) corporate-level cooperative partnerships. (D) international cooperative partnerships. Answer : (B)
123. Toyota and its suppliers have a relationship in which Toyota encourages suppliers to modernize their facilities and provides them with technical and financial assistance to do so. It also promotes longer-term contracts with suppliers and enables engineers in the supplier companies to have better communication with Toyota. This is an example of a(n): (A) worldwide product divisional structure. (B) functional structure. (C) SBU multidivisional structure. (D) strategic network. Answer : (D)
124. McDonald's operates through a franchising system wherein the head office uses strategic and financial controls to ensure that the franchises are creating the greatest possible value. This is an example of a(n): (A) worldwide product divisional structure. (B) strategic network.
(C) SBU multidivisional structure. (D) simple structure. Answer : (B)
125. Airlines have forged a number of complementary strategic alliances, in part because many airlines are not profitable. Some airlines participate in several alliances simultaneously. This tends to: (A) make the partners' true loyalties and intentions unclear. (B) make the role of the strategic center firms more critical to alliance success. (C) distribute the alliances along several segments of the airline industry value chain. (D) be most effective when the alliances are with airlines headquartered in different nations. Answer : (A)
126. Toyota heavily uses a strategic network of vertical relationships. Toyota enables engineers in supplier firms to communicate easily with companies with which Toyota has contracts for services. This results in the suppliers and Toyota (the strategic center firm) being more: (A) interdependent. (B) competitive with one another. (C) creative. (D) complementary. Answer : (A)
127. After years of negotiating short-term contracts with its suppliers, Icon Images has decided to agree to longer-term contracts. In doing this, Icon Images is hoping to: (A) reduce transaction costs. (B) increase negotiating leverage with suppliers. (C) become less dependent on its suppliers. (D) move toward horizontal alliances with its suppliers. Answer : (A)
128. In Japan, the center firm in a strategic network of vertical relationships might be expected to undertake all of the following EXCEPT:
(A) reducing its transaction costs by promoting longer-term contracts with subcontractors. (B) enabling engineers in upstream companies to have better communication with those companies with which it has contracts for services. (C) encouraging subcontractors to modernize their facilities and providing them with technical and financial assistance to do so. (D) decreasing communications between network members to reduce communication costs. Answer : (D)
ESSAY 129. Discuss the difference between strategic controls and financial controls.
Graders Info : Strategic and financial controls are both types of organizational controls that guide the use of strategy, indicate how to compare actual results with expected results, and suggest corrective actions if there is an unacceptable difference. Strategic controls are largely subjective criteria intended to verify that the firm is using appropriate strategies for the conditions in the external environment and the company's competitive advantages. Strategic controls are concerned with the fit between what the firm might do (opportunities) and what it can do (competitive advantages). Financial controls are largely objective criteria used to measure the firm's performance against previously established quantitative standards. Accounting-based measures, such as return on investment and return on assets, and market-based measures, such as economic value added, are examples of financial controls. 130. Describe the three major types of organizational structure and their appropriate use.
Graders Info : Firms typically have a simple structure when they are small and the owner-manager makes all the important decisions and monitors all activities. Informal relationships, few rules, limited task specialization, and unsophisticated information systems are characteristic of simple structures. A simple structure is appropriate for firms offering a single product line in a single geographic market. It is well-matched with focus strategies and business-level strategies. As firms grow larger and more complex, the functional structure is adopted. A professional CEO with a limited corporate staff and functional line managers are required. This allows for specialization of organizational functions such as accounting, production, and human resources. Coordination and communication systems are more complex in the functional structure than in the simple structure. As firms diversify in products and/or geographic areas, they evolve to the multidivisional structure and one of its related forms (cooperative, competitive, SBU). The cooperative multidivisional structure, used to implement the related constrained corporate-level strategy, has a centralized corporate office and extensive integrating mechanisms. Divisional incentives are linked to overall corporate performance. The
related linked SBU multidivisional structure establishes separate profit centers within the diversified firm. Each profit center may have divisions offering similar products, but the centers are unrelated to each other. The competitive multidivisional structure used to implement the unrelated diversification strategy is highly decentralized and makes little use of integrating mechanisms. It employs objective financial criteria to evaluate each unit's performance. All units compete for corporate resources. 131. Discuss the organizational structures used to implement the different business-level strategies.
Graders Info : Business-level strategies are usually implemented through the functional structure. The cost leadership strategy requires a centralized functional structure, one in which manufacturing efficiency and process improvements are emphasized. Jobs are specialized, and rules and procedures are formal. The differentiation strategy's functional structure focuses on marketing and research and development. Decision making and authority are decentralized. Jobs are not highly specialized and procedures are informal. These characteristics allow employees to exchange ideas and to be more creative. The organizational structure supporting the integrated cost leadership/differentiation strategy must be simultaneously centralized and decentralized. Jobs are semi-specialized and procedures call for some formal and some informal job behavior. 132. Define the three major dimensions of organizational structure: specialization, centralization, and formalization. How do these dimensions vary in organizations implementing the cost leadership, differentiation, and cost leadership/differentiation strategies?
Graders Info : Specialization is concerned with the number and types of jobs required to complete the work of the organization. Centralization is the extent to which authority for decision making is retained at higher managerial levels in the organization. Formalization is the degree to which formal rules and procedures govern work in the organization. Cost leadership strategies are best implemented with high specialization, centralization, and formalization. This results in efficiency. The differentiation strategy is best implemented with decentralized organizations, unspecialized jobs, and low formalization. This allows employees to interact frequently and develop new ideas for products. The cost leadership/differentiation strategy is difficult to implement because it requires decision making that is centralized and decentralized, jobs that are semi-specialized, and rules and procedures that produce both formal and informal job behavior. 133. Discuss the organizational structures used to implement corporate-level strategies.
Graders Info : Corporate-level strategies involve multidivisional structures, which have three forms. The cooperative form of the multidivisional structure is used to implement a related constrained strategy. The cooperative form emphasizes integrating mechanisms, such as liaisons, temporary teams, and task forces. The intent is to share divisional competencies and create economies of
scope. A centralized corporate office facilitates cooperation among divisions. Rewards are linked to overall corporate performance and divisional performance. The SBU form of the multidivisional structure is used to implement a related linked strategy. Each strategic business unit is a profit center, and divisions within an SBU are organized to achieve economies of scope and, perhaps, economies of scale. The SBUs are fairly independent, but the divisions within each SBU may be integrated to share competencies. The corporate headquarters is mainly involved in strategic planning for the whole portfolio of businesses, although it also provides strategic help and training to the SBUs. The competitive form of the multidivisional structure is used to implement an unrelated diversification strategy. The structure is highly decentralized. Controls emphasize competition between divisions for internal capital allocations. No integrating mechanisms are used. Objective financial criteria are used to evaluate each unit's performance. Corporate headquarters focuses on long-range planning. 134. Describe the organizational structure associated with a firm that pursues an unrelated diversification strategy.
Graders Info : An unrelated diversification strategy seeks to create value through the efficient internal allocation of capital or through the buying, restructuring, and selling of businesses. Therefore, the unrelated diversified firm employs the competitive form of the multidivisional structure, which emphasizes competition between separate units for corporate capital. To realize the benefits of the efficient allocation of capital, the businesses must have separate and identifiable profit performances. In this structure, the corporate headquarters sets rate-of-return expectations and maintains an arms-length relationship with the divisions. Headquarters audits operations and disciplines managers in divisions that do not meet those rate-of-return standards. Thus, financial controls are heavily used and integrating devices are not needed. 135. Describe the organizational structures used to implement the three international strategies.
Graders Info : A multi-domestic strategy is implemented with a worldwide geographic area structure. This structure uses no integrating mechanisms, and it emphasizes decentralization, low formalization, and informal coordination among units. This facilitates the strategic objective of responding to local market differences. The worldwide product divisional structure is used to implement a global strategy. Because the type of firm that uses this structure offers standardized products across the globe, this organizational structure emphasizes centralization to achieve economies of scale and scope. Decision making is centralized. Integrating mechanisms, such as liaison roles and teams, are important. The transnational strategy is implemented with a combination structure. Because it must be simultaneously centralized and decentralized, integrated and nonintegrated, formalized and nonformalized, the combination structure is difficult to organize. There is a strong emphasis on cultural diversity. There are two combination structures, the global matrix structure and the hybrid global design. The matrix structure involves multiple reporting relationships and promotes flexibility and responsiveness to customer needs. The hybrid global design combines some divisions which are product oriented and some which are oriented to particular geographic markets. 136. Describe the organizational structures used to implement cooperative strategies, giving
attention to the role of the strategic center firm.
Graders Info : Generally, cooperative strategies are implemented through organizational structures framed around strategic networks (a grouping of organizations that has been formed to create value through participation in an array of cooperative arrangements such as joint ventures and alliances). There are two types of business-level complementary alliances, vertical and horizontal. Vertical alliances group firms with competencies in different stages of the value chain. Horizontal alliances group firms with competencies at the same stage of the value chain. Vertical alliances are much more common than horizontal alliances. To facilitate the effectiveness of a strategic network, a strategic center firm may be necessary. The strategic center firm performs four critical functions. First, it uses strategic outsourcing to partner with firms other than just network members. The strategic center firm also requires the alliance members to find opportunities for the network to create value through cooperative work. The second function concerns competencies. The strategic center firm seeks ways to support each member's efforts to create core competencies that can benefit the network. Third, the strategic center firm focuses on technology, managing the development and sharing of technology-based ideas among network partners. Finally, in a race to learn, the strategic center firm guides participants in efforts to form network-specific competitive advantages through friendly rivalry to develop skills needed to form capabilities that create value for the network.
Chapter 12 Strategic Leadership TRUEFALSE 1. Financial controls provide feedback about the outcomes of the firm's past actions and predictions about the results of the firm's future actions. (A) True (B) False Answer : (B)
2. Effectively managing the firm's resource portfolio (financial, human, social, and organizational capital) may be the most important strategic leadership task. (A) True (B) False Answer : (A)
3. Selection of an insider as a new CEO indicates a firm's desire to encourage innovation and strategic change. (A) True (B) False Answer : (B)
4. The more homogeneous a top management team, the more likely those managers will be innovative and willing to pursue strategic change. (A) True (B) False Answer : (B)
5. Rewarding those who use proper channels and procedures to report observed wrongdoings is an example of an action that should be taken by a strategic leader to develop an ethical organizational culture. (A) True (B) False Answer : (A)
6. Strategic leaders are most likely to integrate ethical values into their decisions when the company has explicit ethics codes that are integrated into the business through extensive ethics training. (A) True (B) False Answer : (A)
7. The firm's envisioned future encourages employees to stretch beyond their expectations of accomplishment and requires significant change and progress to be realized. (A) True (B) False Answer : (A)
8. Internal labor markets consist of the career opportunities for managers within the firm for which they currently work. (A) True (B) False Answer : (A)
9. When the new CEO is from inside the firm and a heterogeneous top management team is in place, the strategy may not change, but innovation is likely to continue. (A) True (B) False Answer : (A)
10. Employees usually have a strong preference for firms to use the internal managerial labor market when selecting top management team members and the CEO. (A) True (B) False Answer : (A)
11. The Chapter 12 Strategic Focus reports on recent successes of NBC News, Nokia, and Standard Charter because of the top managers' decisions. (A) True
(B) False Answer : (B)
12. Firm size, firm age, the executive's tolerance for ambiguity, and his or her commitment to strategic outcomes are all factors that may affect managerial discretion. (A) True (B) False Answer : (A)
13. Criteria such as asset utilization improvements and changes in employee turnover rates are part of the internal business processes perspective of the balanced scorecard. (A) True (B) False Answer : (A)
14. The experience that results from long tenure in a firm is known to extend the breadth of an executive's knowledge base. (A) True (B) False Answer : (B)
15. Strategic control focuses on the content of strategic actions rather than their outcomes. (A) True (B) False Answer : (A)
16. The more heterogeneous and the larger the top management team, the easier it is to implement strategy effectively. (A) True (B) False Answer : (B)
17. In the past, companies had a preference for insiders to fill top-level management positions because of the desire for continuity and a continuing commitment to the firm's current vision, mission, and chosen strategies. (A) True (B) False Answer : (A)
18. As the dynamics of competition accelerate, people are perhaps the only truly sustainable source of competitive advantage. (A) True (B) False Answer : (A)
19. Transformational leadership is the most effective strategic leadership style. (A) True (B) False Answer : (A)
20. The balanced scorecard's perspective on learning and growth is intended to improve the firm's ability to innovate. (A) True (B) False Answer : (A)
21. The decision-making discretion of top-level managers is determined partly by external environmental factors such as the industry structure, the industry's rate of growth, and the degree to which products can be differentiated. (A) True (B) False Answer : (A)
22. The CEO is the individual with primary responsibility for effective strategic leadership within an organization.
(A) True (B) False Answer : (A)
23. Competitive aggressiveness, proactiveness, risk aversion, innovativeness, and autonomy are the five dimensions characterizing the entrepreneurial mind-set. (A) True (B) False Answer : (B)
24. When a new CEO is selected from outside the firm, a change of strategy is likely, especially if the top management team is homogenous and highly cohesive. (A) True (B) False Answer : (B)
25. Because of the current changing competitive landscape and varying levels of performance, an increasing number of Boards of Directors are turning to insiders to succeed CEOs. (A) True (B) False Answer : (A)
26. The advantages of long tenure (firm-specific human and social capital, knowledge, and power) seem to outweigh the disadvantages of rigidity and maintaining the status quo. (A) True (B) False Answer : (A)
27. To influence employees' judgment and behavior, ethical practices must shape the firm's decision-making process, but should be a peripheral part of organizational culture. (A) True (B) False
Answer : (B)
28. The strategic direction of a firm usually focuses on the coming 3 to 5 years. (A) True (B) False Answer : (A)
29. Including talent from both the internal and external labor markets increases the likelihood that the firm will be able to form an effective top management team. (A) True (B) False Answer : (A)
30. An emphasis on strategic controls encourages managers to be risk averse. (A) True (B) False Answer : (B)
31. Members with substantive expertise in the firm's core functions and businesses aid the effectiveness of the top management team. (A) True (B) False Answer : (A)
32. The firm's core ideology motivates the firm's employees through the company's heritage. (A) True (B) False Answer : (A)
33. Compared to homogeneous top management teams, heterogeneous top management teams with an internally promoted CEO are more likely to change their firm's strategies when necessary and to support innovation.
(A) True (B) False Answer : (B)
34. The most critical ability of a strategic leader is the ability to attract and then manage human capital. (A) True (B) False Answer : (A)
35. The training of future strategic leaders yields a competitive advantage for a firm, in part because knowledge and skills are necessary for successful execution of strategy. (A) True (B) False Answer : (A)
36. GM's previous CEO, Dan Akerson, was building new capabilities in technology development and marketing, especially in customer service. This is an example of a CEO developing capabilities into core competencies. (A) True (B) False Answer : (A)
37. Organizational culture is a complex set of ideologies, symbols, and core values that are shared throughout the firm, but its development is so subtle and poorly understood that top managers cannot influence its content. (A) True (B) False Answer : (B)
38. Strategic leadership is the ability to anticipate, envision, maintain flexibility, and empower others to create strategic change as necessary. (A) True
(B) False Answer : (A)
39. Typically, a vice president would NOT be considered to hold a high enough position to be included in the top management team of an organization. (A) True (B) False Answer : (B)
40. The CEO of YorkMark, Inc., has an exceptional amount of power in the organization. It is likely the Board of Directors is composed of sympathetic outside members and insiders who report to the CEO. (A) True (B) False Answer : (A)
41. External social capital is increasingly critical to firm success as few if any companies have all the resources to successfully compete against their rivals. (A) True (B) False Answer : (A)
42. For 15 years, Edward was a compensation specialist at a mid-sized firm. He was laid off when the firm experienced financial setbacks. Edward has decided to open his own business as a compensation consultant to small firms. He can expect that his main source of human capital will be a bank line of credit. (A) True (B) False Answer : (B)
43. Incremental changes to a firm's culture can be used to implement strategies effectively. (A) True (B) False
Answer : (A)
44. A CEO may gain power by holding the titles of both CEO and Chairman of the Board. (A) True (B) False Answer : (A)
45. The underlying premise of the balanced scorecard is that firms jeopardize their future performance possibilities when strategic controls are emphasized at the expense of financial controls. (A) True (B) False Answer : (B)
46. The balanced scorecard focuses on both financial and non-financial controls. (A) True (B) False Answer : (A)
47. Top management team members and CEOs who have long tenure on the team and in the organization have greater influence in Board decisions. (A) True (B) False Answer : (A)
48. In addition to determining new strategic initiatives, top-level managers also develop the appropriate organizational structure and reward systems of a firm. (A) True (B) False Answer : (A)
MULTICHOICE
49. An example of the external labor market is the situation where: (A) an assessment center operated by an external consulting firm evaluates company managers for promotion potential. (B) a new vice president of marketing is hired from a competitor. (C) the senior vice president of finance is promoted to CEO. (D) a vice president of human resources is sent to a university executive MBA program for professional development. Answer : (B)
50. In the balanced scorecard framework, ____ controls are used to assess the organization's success in creating a climate that supports change and innovation. (A) learning and growth (B) financial (C) operational (D) innovational Answer : (A)
51. Two key strategic leadership actions include: (A) monitoring the hiring of key employees and focusing on growth but not learning initiatives. (B) designing and then implementing the balanced scorecard. (C) setting appropriate financial targets and establishing an effective business level synergy. (D) determining strategic direction and establishing balanced organizational controls. Answer : (D)
52. The Enron employee who reported the financial manipulations at the company to her superiors can be considered to have engaged in: (A) managerial opportunism. (B) white-collar crime. (C) vindictive disloyalty. (D) an act of courage. Answer : (D)
53. Shaping and reinforcing a new organizational culture requires all of the following EXCEPT: (A) effective communication. (B) effective performance appraisals. (C) adherence to the firm's traditional core values. (D) an appropriate reward system. Answer : (C)
54. Which of the following will increase the probability that a lower-level manager will become a successful strategic leader? (A) Appointing many outside Board members. (B) Increasing the firm's sales. (C) Increasing the homogeneity of the top management team. (D) Training and development programs. Answer : (D)
55. Billy Kroghmen is the son of a very prominent Fortune 500 CEO. Billy has had troubles. He failed out of multiple colleges, universities, and correspondence schools. He finally received his undergraduate degree from a university with only a post office box for an address. He then enrolled in the school's combined graduate accounting and law school programs, graduating with honor with degrees in both areas. After graduation, he twice failed both the CPA and bar exams, managing to set record low scores on the ethics portions of both. Despite these academic setbacks, Billy's career now seems to be thriving. He has been appointed to a number of "blue ribbon" government committees, is on the Board of Directors of two corporations and one prestigious not-for-profit organization. In at least one instance, a donor credited Billy with the idea for making a large contribution to the not-for-profit. Widespread speculation is that his career advancement is based largely on social relationships through friends and family. We would classify Billy as ____ on ____ capital, and ____ on ____ capital. (A) high; social; low; human (B) high; human; high; social (C) high; human; low; social (D) None of these options are correct. Answer : (A)
56. The most effective leadership style is ____ leadership. (A) pragmatic
(B) charismatic (C) inspirational (D) transformational Answer : (D)
57. A heterogeneous top management team is composed of individuals with: (A) different functional backgrounds, experience, and education. (B) similar commitments to the organization's core ideology and culture. (C) a high level of education and industry expertise. (D) long tenure in the organization who have held various functional positions. Answer : (A)
58. Clarita Cosmetics is confronting a decline in sales due largely to a general economic downturn. The top management team is debating whether to lay off employees. In the debate, the following statements are made. Which of the statements is FALSE? (A) If Clarita Cosmetics lays off a large number of employees, there will be a significant loss of human capital that will cause further downturns in the firm's performance. (B) A moderate-sized layoff at Clarita Cosmetics will probably improve firm performance. (C) If Clarita Cosmetics restructures, it ought to increase investments in training and development. (D) A layoff will increase the slack at Clarita Cosmetics and allow the firm to absorb the increased number of errors employees may make until they learn their new tasks. Answer : (D)
59. The effective development and management of the firm's ____ may be its only sustainable competitive advantage. (A) capital base (B) human capital (C) technology (D) organizational culture Answer : (B)
60. The premise of the balanced scorecard is that firms jeopardize future performance possibilities
when they: (A) overemphasize financial controls and neglect strategic controls. (B) overemphasize strategic control and neglect financial controls. (C) overemphasize strategic and financial controls and neglect ethical controls. (D) neglect short-term controls of all kinds in favor of long-term strategic controls. Answer : (A)
61. The Board of Directors for TundraPro, Inc., is searching for a new CEO. The firm is in need of new direction after suffering several years of declining performance and increasingly demoralized management and employees. The Board has decided it needs a CEO who can be a transformational leader. To this specific end, the Board needs to identify applicants who have (A) high levels of honesty, trustworthiness, and integrity. (B) high emotional intelligence. (C) Both A and B are correct. (D) low tolerance for ambiguity. Answer : (C)
62. Which of the following is NOT associated with heterogeneous top management teams? (A) Higher firm performance (B) Innovation and strategic change (C) Diminished debate among top managers (D) Better strategic decisions Answer : (C)
63. Organizational controls provide: (A) the parameters within which strategies are to be implemented. (B) goals and objectives that must be achieved. (C) information on action steps to be taken to implement the corporate strategy. (D) managers with guidelines on how to treat employees. Answer : (A)
64. Which of the statements about CEO duality is FALSE? (A) CEO duality is associated with high CEO power. (B) CEO duality has been blamed for slow response to change by the organization. (C) CEO duality is relatively rare in the U.S. except in large Fortune 500 firms. (D) If the CEO acts a steward, CEO duality facilitates effective decisions and actions. Answer : (C)
65. Which key strategic leadership action plays a key role in influencing how the firm conducts its business and regulates and controls employees' behavior? (A) Effectively Managing the Firm's Resource Portfolio. (B) Determining Strategic Direction. (C) Regulating and Controlling Employees. (D) Sustaining an Effective Organizational Culture. Answer : (D)
66. Determining the strategic direction of a firm involves: (A) implementation of a balanced scorecard. (B) developing an entrepreneurial mind set. (C) specifying the vision and the strategy to achieve that vision over time. (D) exploiting and maintaining core competencies. Answer : (C)
67. Which of the following factors most encourages stability in a firm's strategy? (A) A new CEO hired from outside the firm but within the industry (B) Internal CEO succession and a homogeneous top management team (C) External CEO succession and a heterogeneous top management team (D) A new CEO hired from outside the industry Answer : (B)
68. The more heterogeneous the top management team, the:
(A) more difficult it will be for the team to implement strategies. (B) more likely it is that the team will be cohesive. (C) less innovative the team's decisions will tend to be. (D) less diverse the team membership will be. Answer : (A)
69. Competitive aggressiveness describes a firm's: (A) tendency to engage in new ideas and creative processes. (B) willingness to allow employees to take actions free of organizational constraints. (C) ability to be a leader in the marketplace. (D) propensity to take actions that allow it to outperform rivals consistently and substantially. Answer : (D)
70. Which of the following is NOT related to a CEO having long tenure in his or her position? (A) More effective strategic control (B) Greater influence on board decisions (C) More limited perspective (D) A broader knowledge base Answer : (D)
71. Firms needing to change their strategies should: (A) create more heterogeneous top management teams. (B) focus on their core customer base. (C) implement transformational leadership. (D) emphasize the training and development of internal managerial talent. Answer : (A)
72. Normally, the more involved a Board of Directors is in shaping the firm's strategic direction, the: (A) more balanced the organization is. (B) higher the corporation's performance is.
(C) more rapidly executive decisions can be made. (D) more difficult it becomes to make effective executive decisions. Answer : (B)
73. The top management team is composed of the: (A) heterogeneous group of advisors selected by the CEO. (B) CEO and chairperson of the Board. (C) key individuals who are responsible for selecting and implementing a firm's strategy. (D) officers listed in a firm's annual report and the Board of Directors. Answer : (C)
74. A characteristic of the manager that may affect managerial discretion is his/her: (A) amount of industry experience. (B) level of education. (C) tolerance for ambiguity. (D) length of tenure. Answer : (C)
75. Which of the following statements is TRUE regarding effective organizational cultures? (A) Once a corporate culture is developed, strategic leaders can focus on other activities. (B) A strategy that is historically new for a firm should be implemented by incremental changes in the organization's culture. (C) A central task of strategic leaders is to revise the corporate culture on an annual basis after analyzing the changes occurring in the competitive environment. (D) Organizational culture can be a source of competitive advantage because it influences employee behavior and how the firm's conducts its business. Answer : (D)
76. The ____ is a framework firms can use to verify that they have established both strategic and financial controls to assess their performance. (A) managerial model
(B) holistic control system (C) balanced scorecard (D) internal auditing system Answer : (C)
77. The top management team at Ingenuity, Inc., has assigned a team of scientists to a multi-year project to investigate the viability of growing large amounts of fur from cloned cells of minks and foxes to produce no-kill fur products for coats and other clothing items. This idea would satisfy all the dimensions of the entrepreneurial orientation EXCEPT: (A) innovativeness. (B) risk taking. (C) proactiveness. (D) competitive autonomy. Answer : (D)
78. Human capital refers to: (A) the net present value of the future competencies of the workforce. (B) the amount of money purchasers of the firm would pay for the continuing employment of the present workforce. (C) the value-added that the firm's workforce contributes to each product produced or service rendered. (D) knowledge and skills of the firm's work force. Answer : (D)
79. Strategic control focuses on the ________ of strategic actions, whereas financial controls focus on the _____ of strategic actions. (A) revenues; costs (B) long-term financial outcomes; short-term financial performance (C) content; outcomes (D) outcomes; content Answer : (C)
80. Four perspectives are integrated to form the balanced scorecard framework. The financial perspective focuses on the view of the firm by the: (A) customer. (B) employee. (C) shareholder. (D) general society. Answer : (C)
81. When the top management team is homogeneous and a new CEO is selected from inside the firm, it is: (A) unlikely that the current strategy will change. (B) likely that product innovation will continue. (C) likely there will be a change in strategy. (D) unlikely the new CEO will have a long tenure. Answer : (A)
82. Actions that effective strategic leaders can take to develop an ethical organizational culture include all of the following EXCEPT: (A) relying on the fundamental goodness of individuals. (B) using reward systems that recognize acts of courage. (C) communicating goals that describe the firm's ethical standards. (D) creating a work environment where individuals are treated with dignity. Answer : (A)
83. Monahegan Plasma Company is facing a performance downturn and realizes that a major rethinking of its strategy is in order. Under these circumstances, Monahegan Plasma would benefit from a(n): (A) internal CEO with short tenure. (B) external CEO with a heterogeneous top management team. (C) dual CEO/chairperson with a homogenous top management team. (D) CEO with long tenure who has a strong sense of hubris.
Answer : (B)
84. Executive headhunters have approached Charles about taking the position of senior vice president of marketing for a well-known company. Although this company has been highly successful since 1995, Charles has heard persistent rumors of overly aggressive marketing tactics, questionable reporting of sales data, and an atmosphere of intolerance of criticism. The CEO is a powerful and charismatic individual, who built the company from a small regional firm to an international powerhouse in only a decade. The other top managers have been hand-picked by the CEO, as have a number of the members of the Board of Directors. The salary for this position is very high and includes generous stock options. It would be a major step up in Charles's career and would position him to move to CEO of another company in the future. Charles has prided himself on his high moral values and is viewed as an exceptionally ethical person by his peers. What should Charles do? (A) Charles should take the job because he can effect real change in the culture of the organization, and take advantage of the personal financial and career opportunities. (B) Charles should realize that personal moral values and the realities of the corporate world differ in both quality and degree. Consequently, he can take a job in an ethically borderline company without tainting his personal moral standing. (C) Charles should not rely on rumors to dissuade him from making an advantageous career decision. (D) Charles should not take the job because the culture of the organization is set by the CEO and other top managers. He would have little influence on the organizational culture as one of many top managers. Answer : (D)
85. The primary responsibility for effective strategic leadership of the organization rests with the: (A) Board of Directors. (B) top management team. (C) CEO. (D) stakeholders. Answer : (C)
86. The ability to attract and manage ____ may be the most important skill a strategic leader must have. (A) human capital (B) financial resources (C) responses to competitors' actions
(D) investment strategies Answer : (A)
87. ____ capital increases cooperation among individuals inside and outside the firm. (A) Human (B) Social (C) Visionary (D) Cultural Answer : (B)
88. Which of the following is NOT a factor that determines the amount of a manager's decision discretion? (A) Characteristics of the manager (B) Characteristics of the organization (C) Cohesiveness of the Board of Directors (D) The external environmental Answer : (C)
89. Christina is evaluating Maximum Brands as an investment opportunity. She is very concerned about future financial performance by Maximum Brands. Christina does not believe that the CEO can act as a steward. Christina will probably be most concerned if: (A) there is CEO duality. (B) many of the members of the Board of Directors are outsiders. (C) the positions of chairman of the Board and CEO are held by different persons. (D) there is an independent Board leadership structure. Answer : (A)
90. Faced with declining enrollment and increased competition from not-for-profit organizations offering inexpensive art courses for new hobbyists, the for-profit Delta Academy of Art has steadfastly stayed true to its mission of offering high-quality classical art instruction for both beginners and advanced artists at high tuition. Delta has been noted for the excellence of its artistic training for decades. This is an example of: (A) adhesion to the status quo.
(B) lack of an envisioned future. (C) competence becoming a liability. (D) failure to have a clear core ideology. Answer : (A)
91. Criteria for reevaluating internal business processes using the balanced scorecard include all of the following EXCEPT: (A) asset utilization improvements. (B) improvements in employee morale. (C) increases in employee skills. (D) changes in turnover rates. Answer : (C)
92. A CEO's breadth of knowledge base is constrained by: (A) his or her relationship with the Board of Directors. (B) whether he or she is also the chairperson of the Board of Directors. (C) his or her long tenure with the firm. (D) the level of social capital in the firm. Answer : (C)
93. The CEO/chairman of PharmaPacifica was recently killed in an airplane crash. This tragedy has thrown PharmaPacifica into turmoil as there is no one in the organization qualified to step into the former CEO's shoes. This is an example of: (A) a failure of succession management. (B) managerial hubris. (C) the risk inherent in CEO duality. (D) excessive reliance on the internal managerial labor market. Answer : (A)
94. The goal of investing in human capital is to: (A) increase the number of employees in the firm.
(B) reduce organizational slack. (C) maximize current productivity per employee. (D) develop a workforce capable of continuous learning. Answer : (D)
95. Research shows that ____________ is the most effective means of ensuring that employees comply with the firm's ethical requirements. (A) a written code of ethics (B) a statement in the firm's mission statement (C) a speech on ethics by the CEO of the company (D) a value-based culture Answer : (D)
96. Which of the following is NOT one of the five dimensions thought to characterize an employee's entrepreneurial mind-set? (A) Autonomy (B) Reactivity (C) Risk taking (D) Innovativeness Answer : (B)
97. The CEO of CLEO, Inc., in all her communications to employees consistently refers to her dream of CLEO becoming the company of choice for employee assistance programs. She keeps this theme uppermost and it is reflected in the firm's motto, the title of its Web newsletter, and even on the company t-shirts and mugs. This is an example of the firm's: (A) core ideology. (B) organizational culture. (C) strategy. (D) envisioned future. Answer : (D)
98. An organization's ____ is composed of the key individuals who are responsible for selecting and
implementing the firm's strategies. (A) top management team (B) Board of Directors (C) keiretsu (D) governance circle Answer : (A)
99. All of the following are external environmental sources that affect managerial discretion EXCEPT: (A) industry structure. (B) corporate culture. (C) market growth rate. (D) potential for product differentiation. Answer : (B)
100. Which of the following is NOT a benefit to the firm using the internal labor market to select a new CEO? (A) Internal hiring results in an increased level of innovation. (B) Insiders are familiar with the firm's products, markets, technologies, and operating procedures. (C) Use of the internal labor market reduces turnover among existing employees. (D) Insiders are more familiar with a firm's operating procedures. Answer : (A)
101. Omicron Artificial Intelligence is able to respond quickly to competitors' actions and to opportunities in the marketplace. This is an example of: (A) agility. (B) a core competency. (C) flexibility. (D) responsiveness. Answer : (B)
102. A CEO gains power from all of the following circumstances EXCEPT: (A) when many of the outside directors are appointed by the CEO. (B) when the CEO is also the chairman of the Board. (C) when tenure of the top management team is shorter than the tenure of the Board. (D) the fact that inside Board members report to the CEO. Answer : (C)
103. Which of the following is NOT one of the four perspectives in the balanced scorecard framework? (A) entrepreneurial (B) financial (C) customer (D) learning and growth Answer : (A)
104. ____ provide information about the results of past actions, but do not communicate the drivers of the firm's future performance. (A) Financial controls (B) Accounting information systems (C) Policies and procedures (D) Strategic feedback systems Answer : (A)
105. Sony previously selected Sir Howard Stringer as CEO. Sir Howard was not Japanese and he was not a Sony employee before his selection. Which of the following statements is FALSE? (A) Sony's top management team will be more heterogeneous with the addition of Sir Howard. (B) Sir Howard will have a broader perspective of the firm and its competitive environment than would a Sony insider. (C) If Sony's top management team is homogeneous, Sir Howard's future impact on Sony's strategy is ambiguous. (D) The decision-making process on Sony's top management team will be smoother and faster with the addition of Sir Howard.
Answer : (D)
106. To successfully implement a firm's strategy, the workforce must be viewed as a: (A) variable cost. (B) depreciating asset. (C) resource to be maximized. (D) renewable asset. Answer : (C)
107. The firm of Bergeron has existed for hundreds of years, having made exquisite clocks and watches. In its advertising it refers to clocks the firm made for such past royalty as Marie Antoinette and the Czars of Russia. Employees are constantly reminded of the firm's rich history and its long tradition of excellence of design and execution. Bergeron is motivating its employees through its: (A) core ideology. (B) envisioned future. (C) organizational culture. (D) business strategy. Answer : (A)
108. Exploiting and maintaining core competencies is part of the key strategic leadership action "Effectively Managing the Firm's Resource Portfolio." Which of the following is most important for developing and using core competencies? (A) Extensive financial assets (B) Transformational leadership (C) High-quality human capital (D) An ethical organizational culture Answer : (C)
109. The CEO of Icon Image Associates wishes to radically change the corporate culture of the firm. She knows that she must convince others at Icon Image of the necessity for the culture change and gain their active support. The CEO knows that the key players in energizing the culture change and fostering alignment with the new strategic vision are: (A) the members of the Board of Directors.
(B) top management team members. (C) the CEO, top managers, and middle managers. (D) rank-and-file employees. Answer : (C)
110. CEO duality refers to: (A) firms where there is both a president and a CEO. (B) CEOs who sit on the Board of Directors of other firms. (C) CEOs who hold office in more than one company. (D) the situation where the CEO is also chairperson of the Doard of Directors. Answer : (D)
111. Managerial actions that support development of an ethical organizational culture include all of the following EXCEPT: (A) establishing a code of conduct. (B) disseminating the code of conduct to all stakeholders to inform them of the firm's ethical standards and practices. (C) creating a work environment in which people are treated with dignity. (D) disciplining whistle-blowers. Answer : (D)
ESSAY 112. What is strategic leadership, who has primary responsibility for strategic leadership, and what are the five key strategic leadership actions?
Graders Info : Strategic leadership is the ability to anticipate, envision, maintain flexibility, and empower others to create strategic change. The CEO has primary responsibility for strategic leadership, which is shared with the Board of Directors, the top management team and divisional general managers. The five key strategic leadership actions are: determining a strategic direction, effectively managing the firm's resource portfolio, sustaining an effective organizational culture, emphasizing ethical practices, and establishing balanced organizational controls.
113. Discuss how the managerial succession process and the composition of the top management team interact to affect strategy.
Graders Info : Internal labor markets represent the opportunities for employees to take managerial positions (including the position of CEO) within a firm. The external labor market is the collection of career opportunities for managers in firms outside of the one for which they currently work. CEOs may be selected from internal or external candidates. Internal CEO selection is preferred by employees and by those who wish the firm to continue in its present strategies. External CEO succession is considered a sign that the Board of Directors wants change. Internal CEOs are less likely to seek change in the firm's strategy than external CEOs. It is important to note that the source of the CEO (from the internal or external labor market) and the top management team's composition interact to affect the likelihood of strategic change. If a firm hires a new internal CEO and has a homogeneous top management team, it is unlikely that the firm's strategy will change. If the firm employs a new internal CEO but has a heterogeneous top management team, it will probably continue the current strategy, but innovation will be encouraged. If the top management team is homogeneous, but an external CEO is chosen, the situation will be ambiguous. Finally, if the top management team is heterogeneous and an external CEO is chosen, strategic change is likely. 114. What are organizational controls? Why are strategic controls and financial controls important aspects of the strategic management process?
Graders Info : Organizational controls are the formal, information-based procedures used by managers to maintain or alter patterns in organizational activities. Controls provide the parameters within which strategies are to be implemented, as well as forming guidelines for corrective actions when adjustments are required. There are two main types of controls: financial and strategic. Financial controls focus on short-term financial outcomes. Strategic controls focus on the content of strategic actions. Financial controls give feedback about the outcomes of past actions. Strategic controls focus on the drivers of the firm's future performance. Emphasizing either financial or strategic controls has important implications for the strategic management process. For example, emphasizing financial controls often produces more short-term and risk-averse managerial actions because financial outcomes may be caused by events beyond the managers' direct control. In contrast, strategic control encourages lower-level managers to make decisions that incorporate moderate and acceptable levels of risk because outcomes are shared between the business-level executives making strategic proposals and the corporate-level executives evaluating them. 115. Define human capital and its importance to the firm's success.
Graders Info : Human capital represents the knowledge and skills of the firm's entire workforce. Effective strategic leaders view human capital as a capital resource that requires investment rather than as a cost to be minimized. It is thought that people are the organization's only truly sustainable source of
competitive advantage. So, effective human resource management practices are necessary to successfully select and use people to attain the firm's goals. Not only must future leaders be trained, but the entire workforce must be able to learn continuously to build skills and knowledge that lead toward innovation. Layoffs can be disastrous because they strip skills and knowledge from the firm, leaving remaining employees unable to perform their tasks effectively. 116. What is a top management team, and how does it affect a firm's performance and its abilities to innovate and design and implement effective strategic changes?
Graders Info : The top management team is composed of the key managers in the organization who are responsible for selecting and implementing the firm's strategy. Typically, the top management team includes all officers of the firm (defined by the title of vice president or above) and/or those who serve as a member of the Board of Directors. Team characteristics have been shown to affect the strategy of the organization. A heterogeneous top management team is composed of individuals with varied functional backgrounds, experiences, and education. A homogeneous team's members are similar to one another in characteristics and experiences. A heterogeneous team is more likely to formulate an effective strategy because of its varied expertise and knowledge. Additionally, heterogeneous top management teams have been shown to positively affect performance. In particular, heterogeneous teams positively affect innovation and strategic change in firms. But, heterogeneous teams are less cohesive than homogeneous teams because of communication difficulties, and it is more difficult for heterogeneous teams to implement strategies. Consequently, a heterogeneous top management team must be managed effectively to use the diversity in a positive way. 117. As a strategic leader, what actions could you take to establish and emphasize ethical practices in your firm?
Graders Info : Ethical practices should be institutionalized within the organization by being an integral part of the organizational culture. Sustaining an effective organizational culture is one of the key leadership actions and one aspect of an effective culture is that it promotes ethical behavior in the organization. Strategic leaders also develop explicit codes of conduct and provide ethics training to disseminate those codes. Examples of specific actions taken by strategic leaders to develop an ethical organizational culture include: (1) establishing and communicating specific goals to describe the firm's ethical standards (e.g., developing and disseminating a code of conduct), (2) continuously revising and updating the code of conduct, based on inputs from people throughout the firm and from other stakeholders (e.g., customers and suppliers), (3) disseminating the code of conduct to all stakeholders to inform them of the firm's ethical standards and practices, (4) developing and implementing methods and procedures to use in achieving the firm's ethical standards (e.g., use of internal auditing practices that are consistent with the standards), (5) creating and using explicit reward systems that recognize acts of courage (e.g., rewarding those who use proper channels and procedures to report observed wrongdoing), and (6) creating a work environment in which all people are treated with dignity. 118. What is organizational culture? What must strategic leaders do to develop and sustain an effective organizational culture?
Graders Info : Organizational culture is the set of ideologies, symbols, and core values that is shared throughout the organization and that influences the way the firm conducts its business. An organization's culture can be a source of competitive advantage. It is more difficult to change a firm's culture than to sustain it. But effective strategic leadership recognizes when a change in a firm's culture is necessary. Incremental changes to the firm's culture are typically used to implement strategies. Sometimes radical changes are used to support strategies that differ from the firm's historical pattern. Shaping and reinforcing change in an organization's culture require communication and problem solving, selection processes that find people with the right values, effective performance appraisals focused on goals reflecting the new culture, and reward systems that reward behaviors reflecting the new core values. Change occurs only when it is actively supported by the CEO, other top managers, and middle management.
Chapter 13 Strategic Entrepreneurship TRUEFALSE 1. An organization engaging in strategic entrepreneurship focuses on identifying opportunities that it can exploit through innovations. (A) True (B) False Answer : (A)
2. Most large, complex firms innovate through cooperative strategies or strategic alliances, but not through internal activities. (A) True (B) False Answer : (B)
3. Corporate entrepreneurship describes the opportunity seeking and exploitation of innovations in new start-up enterprises. (A) True (B) False Answer : (B)
4. Entrepreneurial opportunities exist because of competitive imperfections in the markets and among the factors of production. (A) True (B) False Answer : (A)
5. The essence of entrepreneurship is to capture most of the existing markets from less aggressive and innovative competitors. (A) True (B) False Answer : (B)
6. Entrepreneurship is the economic engine driving national economic growth in many nations. (A) True (B) False Answer : (A)
7. Innovation is the means by which the entrepreneur creates wealth. (A) True (B) False Answer : (A)
8. Entrepreneurial opportunities are conditions in which new goods or services can satisfy a need in the market. (A) True (B) False Answer : (A)
9. As a process, entrepreneurship results in the "creative destruction" of existing products (goods or services) or methods of producing them and replaces them with new products and production methods. (A) True (B) False Answer : (A)
10. Invention is defined as the adoption of a similar innovation by different firms. (A) True (B) False Answer : (B)
11. Joseph Schumpeter suggested that firms engage in three types of innovative activity when managing the innovation process: imitation, invention, and innovation. (A) True (B) False
Answer : (A)
12. Evidence demonstrates that large firms with well-funded R&D operations are more effective at innovation than are smaller firms. (A) True (B) False Answer : (B)
13. Given the rapid rate of technological change, patents are not a useful gauge of a firm's entrepreneurial prowess. (A) True (B) False Answer : (B)
14. Rosalie has become totally preoccupied by her idea for creating a business leasing horses to riders on the same principle as time-shares on condominiums. Rosalie is researching the legal, financial, and insurance aspects of her idea and is preparing a prospectus to take to banks to ask for a business loan. Rosalie's significant other is complaining that she "sleeps, eats, and drinks" this concept. Rosalie has the entrepreneurial characteristic of passion. (A) True (B) False Answer : (A)
15. The entrepreneurial mind-set is found primarily among managerial and scientific employees. (A) True (B) False Answer : (B)
16. Bill Kroganski is the owner of a moderately successful industrial services firm. His reaction to the introduction of a new process technology that could be a direct competitor to the process his firm utilizes is fear. He spends his time considering ways to isolate his firm from this new technology. Bill has characteristics consistent with the entrepreneurial mind-set. (A) True (B) False
Answer : (B)
17. If the company's workers have scant existing knowledge, their "absorptive capacity" to learn new knowledge will be limited. (A) True (B) False Answer : (A)
18. For firms to be entrepreneurial, they must stress individualism in their employees above all other characteristics. (A) True (B) False Answer : (B)
19. A society's cultural characteristics influence a nation's rate of entrepreneurship and its related practices. (A) True (B) False Answer : (A)
20. In order to be successful, a new entrepreneurial enterprise should be sheltered from the global environment until it is firmly established in domestic markets. (A) True (B) False Answer : (B)
21. Research has shown that internationally diversified firms are generally more innovative. (A) True (B) False Answer : (A)
22. Larger, established firms, mainly those competing globally, use their R&D labs to create disruptive technologies and products.
(A) True (B) False Answer : (A)
23. Most innovations are incremental, not novel. (A) True (B) False Answer : (A)
24. Toyota's Prius, the first mass-produced hybrid-electric car is an example of a novel innovation that has changed the industry by providing new functionalities for users. (A) True (B) False Answer : (A)
25. A company with a need for immediate, large returns should invest in research and development. (A) True (B) False Answer : (B)
26. While both incremental and novel innovations can create value, incremental innovations have the potential to contribute more significantly to a firm's efforts to earn above-average returns. (A) True (B) False Answer : (B)
27. A product champion should come from outside the organization in order to ensure that the entrepreneurial vision has the objective support it needs. (A) True (B) False Answer : (B)
28. An innovation developed through autonomous strategic behavior will probably take the firm into new markets not addressed by its current strategy. (A) True (B) False Answer : (A)
29. Firms that continually change their strategic context and strategies because of the continuous changes in the current competitive landscape are in danger of losing sight of their main competitive strengths. (A) True (B) False Answer : (B)
30. Induced strategic behavior does not result in true innovation because it is a top-down process rather than a bottom-up process. (A) True (B) False Answer : (B)
31. Autonomous strategic behavior results in internal innovations that are highly consistent with the firm's current strategy. (A) True (B) False Answer : (B)
32. The iPod likely resulted from autonomous strategic behavior at Apple, though the iPhone was more the result of induced strategic behavior. (A) True (B) False Answer : (A)
33. Cross-functional work teams are best supported by vertical organizational structures. (A) True
(B) False Answer : (B)
34. Political activity that is centered on the allocation of resources to the different functions may limit the effective use of cross-functional teams. (A) True (B) False Answer : (A)
35. An entrepreneurial mind-set, cross-functional product development teams, and shared values/leadership are the three ways that firms implement internal innovations. (A) True (B) False Answer : (A)
36. Innovations can only be produced by actions and activities within the firm. (A) True (B) False Answer : (B)
37. While smaller firms must use cooperative strategies as a means of producing innovations, larger firms with large R&D units such as P&G and 3M can produce most if not all innovations internally. (A) True (B) False Answer : (B)
38. Acquisitions are a means of extending the company's product line and increasing revenues. The capital market values growth. Therefore, some firms make acquisitions to improve their standing in the capital markets. (A) True (B) False Answer : (A)
39. Acquisitions are a low-risk approach to producing and managing innovation. (A) True (B) False Answer : (B)
40. A key risk of acquisitions is that a firm may substitute an ability to buy innovations for an ability to produce innovations internally. (A) True (B) False Answer : (A)
41. Entrepreneurial ventures often produce more novel innovations than do their larger, more established counterparts. (A) True (B) False Answer : (A)
MULTICHOICE 42. Firms develop innovations in all the following ways EXCEPT: (A) through autonomous or induced strategic behavior. (B) by acquiring other companies. (C) through cooperative strategies. (D) via divestiture of low-performing units. Answer : (D)
43. Pet Care Companion Connection (PCCC) is an organization that trains persons with mild-t-moderate mental disabilities to care for pets in a pet boarding facility. This organization has been successful in providing a quality service for pet owners and a supportive training environment for their trainees. The tuition charged to trainees is only somewhat higher than the fee, which day-care providers would charge for these individuals. Graduates of the program are qualified for employment by commercial kennels. PCCC is an example of: (A) taking advantage of a need in the marketplace.
(B) creative destruction of existing services for pet boarding. (C) institutionalized entrepreneurship. (D) internal corporate venturing. Answer : (A)
44. Isidore Security Services is a national provider of guard and security services for businesses. It has been in business for over 90 years, having been founded by one of Teddy Roosevelt's Rough Riders (Isidore O'Malley). Lately it has been losing clients to more aggressive and innovative firms offering remote security monitoring systems instead of a guard-based approach. The board of directors of Isidore Security Services is concerned that this downward trend may threaten the existence of this venerable firm and the jobs of its employees. Which one of the following is true? (A) This is an example of an established firm neglecting the opportunity-seeking aspect of strategic entrepreneurship. (B) This example shows the dysfunctional aspects of unrestricted entrepreneurialism. (C) This is an example of the lack of human capital hampering internal innovation. (D) Isidore Security Services is suffering from the "novelty effect" wherein new firms are more attractive to clients/customers merely because they are new and not because they add value. Answer : (A)
45. The use or application of entrepreneurship within an established firm is called: (A) corporate emergence. (B) transformational leadership. (C) exceptional R&D. (D) corporate entrepreneurship. Answer : (D)
46. Entrepreneurship is the process by which individuals or groups identify and pursue ____ without being immediately constrained by the ____ they currently control. (A) opportunities; resources (B) opportunities; core competencies (C) threats; resources (D) threats; core competencies Answer : (A)
47. ____ exist(s) when there is a need in the market that can be satisfied by new goods or services. (A) Potentiality (B) Market readiness (C) Entrepreneurial opportunities (D) Critical core competencies Answer : (C)
48. Because it replaces existing products and methods of production, entrepreneurship is a process of: (A) harnessing the human potential. (B) creative destruction. (C) creation of opportunity. (D) exploitation of innovation. Answer : (B)
49. GreenBox, a company that recycles paper products to make cardboard cartons, has introduced a new product that resists damage by moisture. GreenBox can expect that: (A) this innovation will resist competitors' attempts to imitate it. (B) its investors will react positively to the introduction of the new product because of the potential for higher returns. (C) its investors will react negatively because of the risk and cost entailed in introducing a new product. (D) this will be recognized in the industry as a radical innovation. Answer : (B)
50. Innovation creates a(n): (A) opportunity for a new product or process. (B) new product or process. (C) commercial product. (D) idea for potential exploitation. Answer : (C)
51. According to Peter Drucker,the primary goal of innovation is to: (A) promote social well-being. (B) increase the number of jobs. (C) create wealth. (D) support national economies. Answer : (C)
52. The three types of innovative activity include all of the following EXCEPT: (A) invention. (B) imitation. (C) implementation. (D) innovation. Answer : (C)
53. Products developed through ______ are often offered at lower prices without as many features as products developed through ______. (A) innovation; imitation (B) imitation; invention (C) imitation; innovation (D) innovation; invention Answer : (C)
54. The number of patents held by an organization is a rough guide to the: (A) effective use of organizational politics. (B) future success of an initial public offering. (C) amount of venture capital a firm will be able to attract. (D) level of innovation in a firm. Answer : (D)
55. 3M's Cubitron II, described as "an industrial abrasive that cuts faster, lasts longer, sharpens itself, and requires less elbow grease than any other abrasive on the market" is an example of:
(A) imitation of a competitor's product. (B) a novel innovation. (C) an incremental innovation. (D) a(n) innovation created through a cooperative strategy. Answer : (C)
56. ____are individuals, acting independently or as part of an organization, who see an opportunity and then take risks to develop an innovation to exploit it. (A) Leaders (B) Innovators (C) Entrepreneurs (D) Transformative leaders Answer : (C)
57. Entrepreneurs tend to have all the following characteristics EXCEPT: (A) willing to take responsibility for projects. (B) passion. (C) preference for certainly about projects. (D) optimism. Answer : (C)
58. Roland has developed and patented an inexpensive and organic way to enhance the fertility of clay soils without the addition of chemical fertilizers. But established agricultural chemical companies have rejected his proposals. After 6 months of promoting his invention during his time off from his regular job, Roland has decided to set his dream aside. Roland lacks a key characteristic of successful entrepreneurs, which is: (A) the ability to identify opportunities. (B) a corporate sponsor. (C) financial slack. (D) passion for his invention. Answer : (D)
59. If the firm's current employees are well-trained in their jobs, but also have other knowledge, skills, and abilities, these employees have: (A) social capital. (B) entrepreneurial capabilities. (C) high absorptive capacity to learn. (D) intellectual slack. Answer : (C)
60. Knowledge must be transferred to others in the firm to enhance the entrepreneurial competence of the firm. This requires that: (A) the receiving party has adequate absorptive capacity to learn. (B) the communication process be highly intensive. (C) the knowledge be broken into the smallest comprehensible units. (D) training consultants be involved in every step of transference. Answer : (A)
61. The risks of international entrepreneurship include all the following EXCEPT: (A) unstable foreign currencies. (B) problems with market efficiencies. (C) limitations on market size. (D) strong "buy-domestic" programs. Answer : (D)
62. Research shows that internationally diversified firms tend to be ____ than domestic-only firms. (A) less profitable (B) more innovative (C) less technologically advanced (D) more likely to have an individualistic culture Answer : (B)
63. The level of entrepreneurial activity in a nation is ____ the nation's level of economic
development. (A) negatively related to (B) independent of (C) positively related to (D) weakly related to Answer : (C)
64. ____ is one of the reasons for the differences in rates of entrepreneurship among different countries. (A) Climate (B) Competitiveness (C) Culture (D) Constitution Answer : (C)
65. Research suggests that _________ is needed to encourage entrepreneurial behavior. (A) individualism rather than collectivism (B) a balance between individualism and cooperative behavior (C) collectivism rather than individualism (D) limited autonomy and incentives Answer : (B)
66. AgroPharm is searching for a top-level executive. AgroPharm has marketed its products only to U.S. farmers and agribusinesses in the past. Now, the company plans to expand operations to Mexico and Central America in the next 2 years. To maximize the chances of success it is critical that the new executive: (A) be of Hispanic descent. (B) have international experience. (C) possess an advanced degree in animal science. (D) have a background in managing agribusiness firms. Answer : (B)
67. Which of the following is true? For firms to be entrepreneurial, they require a culture with: (A) an emphasis on individualism in Western nations and an emphasis on collectivism in Eastern nations. (B) an exceptionally high level of collectivism. (C) a balance of individualism and collectivism. (D) an exceptionally high level of individualism. Answer : (C)
68. Successfully creating innovations through internal means requires: (A) a highly individualistic culture. (B) significant spending on R&D. (C) acquisitions of innovative firms. (D) venture capital. Answer : (B)
69. Panera Bread has innovated to improve the quality of its distribution system, to improve the quality of its bread dough, and to introduce new menu items. These are examples of: (A) incremental innovation. (B) invention. (C) imitation. (D) the use of social capital. Answer : (A)
70. QuadroVax is investing heavily in research and development on new methods of vaccine development that would speed up the creation of vaccines for newly emerging viruses and to get these vaccines to the market rapidly. QuadroVax's shareholders can expect: (A) immediate wealth creation. (B) a long wait for an uncertain payoff. (C) a long wait for a high probability payoff. (D) a large payoff in the short term with rapidly decreasing wealth generation in the longer run. Answer : (B)
71. A successful ____ innovation will be less risky but less profitable than a successful ____ innovation. (A) incremental; novel (B) novel; incremental (C) alliance-generated; acquisition-generated (D) acquisition-generated; alliance-generated Answer : (A)
72. The development of the original personal computer (PC) was a(n) ____ innovation at the time, whereas adding a different kind of whitening agent to a soap detergent in an example of a(n) ____ innovation. (A) incremental; novel (B) novel; incremental (C) concentric; novel (D) novel; concentric Answer : (B)
73. Innovations that involve significant technological breakthroughs and create new knowledge: (A) build incrementally on the firm's existing technologies and knowledge. (B) are the most common type of innovation. (C) involve substantial uncertainty and risk. (D) typically have clear market opportunities. Answer : (C)
74. ____ involves internally developed incremental and novel innovations that result from deliberate efforts. (A) Internal corporate venturing (B) Autonomous strategic behaviors (C) Bottom-up strategic behaviors (D) Product championing Answer : (A)
75. Internal corporate venturing does NOT involve: (A) autonomous strategic behavior. (B) induced strategic behavior. (C) strategic alliances. (D) product champions. Answer : (C)
76. WayWard Products has a deliberate strategy to encourage internal innovations. It has established processes to support autonomous strategic behavior as well as induced strategic behavior. WayWard Products is involved in: (A) entrepreneurial incubation. (B) creative destruction. (C) internal corporate venturing. (D) cooperative innovation strategies. Answer : (C)
77. One of the distinguishing differences between the two sources of internal corporate venturing (autonomous strategic behavior and induced strategic behavior) is whether the innovation process: (A) is encouraged through a bottom-up or top-down process. (B) is encouraged by a product champion or an entrepreneur external to the organization. (C) relies on internal structure or existing strategy to encourage innovation. (D) is in a large or small organization. Answer : (A)
78. Autonomous strategic behavior is a(n) ____ process in which product champions pursue new ideas. (A) top-down (B) horizontal (C) integrated (D) bottom-up Answer : (D)
79. The idea that it is "vital to sell the ideas to others in the organization so that innovations will be commercialized" is the rationale behind the use of: (A) product champions. (B) joint ventures. (C) strategic leadership. (D) cross-functional teams. Answer : (A)
80. A negative effect of acquiring other firms for the purpose of innovation is: (A) innovations cannot be transferred between organizations. (B) the effect it can have on the firm's own ability to produce innovations. (C) innovations may not actually be present in the firm after the purchase is completed. (D) the acquired firm's employees usually leave. Answer : (B)
81. Charles is a customer service representative for a home improvement store. He has creative ideas about how to increase customer satisfaction. Charles's talents will be most likely to be used in a firm that: (A) uses the induced strategic behavior form of internal corporate venturing. (B) uses the autonomous strategic behavior form of internal corporate venturing. (C) makes significant investment in research and development. (D) focuses on an acquisition strategy for gaining innovative ideas. Answer : (B)
82. The new abrasive, Cubitron II, was developed through cooperative relationships among 3M business units. As such, Cubitron II is an example of: (A) the use of autonomous strategic behavior. (B) the use of induced strategic behavior. (C) development of novel innovations. (D) innovation through acquisitions. Answer : (B)
83. To be successful, an autonomous process for developing new products relies on: (A) the diffusion of tacit knowledge. (B) the acquisition of innovative firms. (C) strategic alliances with other firms. (D) internal corporate venturing. Answer : (A)
84. Induced strategic behavior is a process that fosters product innovations that: (A) are likely to change a firm's strategic intent and mission. (B) will lead to greater financial returns. (C) are aligned closely with current strategy and structure. (D) will come to market in a short period of time. Answer : (C)
85. Induced strategic behavior as a form of internal innovation is a(n) ____ process. (A) bottom-up (B) top-down (C) free-flowing (D) external Answer : (B)
86. Through the work of cross-functional teams, product development stages are grouped into ____ processes. (A) short-term and long-term (B) parallel or overlapping (C) serially ordered (D) complementary Answer : (B)
87. In the implementation of internal innovations, formal and informal processes are best supported through ____ organizational structures.
(A) vertical (B) horizontal (C) functionally oriented (D) multidivisional Answer : (B)
88. A major barrier to the use of cross-functional teams is: (A) excessive individualism of creative people. (B) lack of communication skills of technical people. (C) independent frames of reference of team members. (D) lack of social capital by team members. Answer : (C)
89. When used effectively, cross-functional teams will often bring about: (A) faster product development processes. (B) an increased need for additional information. (C) conflicting information about the business environment. (D) future cooperative alliances. Answer : (A)
90. Which of the following is one of the barriers to effectiveness when using cross-functional teams to integrate organizational functions? (A) dissension within the top management team (B) informal organizational processes within the firm (C) the firm's strategic orientation (D) organizational politics Answer : (D)
91. A cross-functional work team is having difficulties in operating smoothly and friction has developed among some of the members. Many of the strongest complaints are from the representatives of management who complain that the research scientists are disorganized,
haphazard, and undisciplined. Managers complain the scientists do not adhere to any fixed rules or procedures. On the other hand, the research scientists complain that the managerial representatives are excessively rule-oriented bureaucrats, and have no flexibility or spontaneity. The main problem with this team seems to be centered around differences in: (A) interpersonal orientation. (B) time orientation. (C) goal orientation. (D) formality of structure. Answer : (D)
92. The dimensions on which functional departments can vary include all the following EXCEPT ____ orientation. (A) time (B) customer (C) technological (D) interpersonal Answer : (C)
93. The competition for resources among those representing different organizational functions within a firm often leads to: (A) erosion of social capital. (B) heightened communication. (C) organizational politics. (D) empowerment of organizational members. Answer : (C)
94. The firm's culture promotes unity of purpose for cross-functional work teams through: (A) a collectivist structure. (B) an entrepreneurial mind-set. (C) shared values. (D) resource allocation.
Answer : (C)
95. Value creation through internal innovation originates with: (A) an entrepreneurial mind-set. (B) cross-product development teams. (C) shared values and entrepreneurial leadership. (D) innovation. Answer : (A)
96. PracticalSolutions is a small firm providing employee assistance programs for companies with troubled employees. PracticalSolutions frequently partners with other consulting firms to provide creative solutions for companies with personnel problems. This history of partnering exemplifies: (A) intellectual capital. (B) institutional capital. (C) alignment of complementary assets. (D) technological capital. Answer : (C)
97. Blixin Concrete Products, an established firm, is seeking a technologically advanced partner for a strategic alliance. If the potential partner is a new entrepreneurial venture, the main benefit the Blixin Concrete can offer is probably: (A) investment capital. (B) management expertise. (C) research and development competencies. (D) social networks. Answer : (A)
98. Regarding partnering in cooperative alliances, entrepreneurial new companies may seek ____ while more established companies may need _____. (A) distribution channels; tacit knowledge (B) deep technological expertise; distribution channels (C) social capital; technical capital
(D) investment capital; new technological knowledge Answer : (D)
99. The main risk in a strategic alliance is that: (A) the alliance will not result in a successful innovation. (B) critical employees will be hired away by the strategic partner. (C) one partner will use the other partner's knowledge and use it to enhance its own competitive abilities. (D) the partners will lose control over their internal processes. Answer : (C)
100. Why have large pharmaceutical companies been forming alliances with biotechnology companies? (A) To evade legislative restrictions on drug research in the United States (B) To develop new products and bring them to market (C) Because both firms had declining profitability and needed cash infusions from other firms (D) In order to gain absorptive capacity Answer : (B)
101. New entrepreneurial firms are better than larger established firms at: (A) implementing innovations. (B) gaining competitive advantage. (C) making alliances. (D) identifying entrepreneurial opportunities. Answer : (D)
102. ____ is(are) critical in order for a firm to gain access to resources from partners in a cooperative alliance. (A) Complementary strategic goals (B) Shared values (C) An entrepreneurial mind-set
(D) Compatible organizational cultures Answer : (A)
ESSAY 103. Define the three types of innovative activity. Which is the most critical activity for U.S. firms?
Graders Info : Firms engage in three types of innovative activity. Invention is the act of creating and developing a new product or process. Innovation is the process of commercializing the products or processes that surfaced through invention. The success of an invention is judged by technical criteria. The success of innovation is judged by commercial criteria. Imitation is the adoption of an innovation by similar firms. Imitation usually leads to product or process standardization, offering the product at a lower price without as many features. Innovation is the most critical activity because commercializing inventions is difficult. 104. What is the importance of international entrepreneurship?
Graders Info : In general, internationalization leads to improved firm performance. Research shows that new ventures that enter international markets increase their learning of new technological knowledge, which enhances their performance. Because of the learning and the economies of scale and scope afforded by operating in international markets, firms are often stronger competitors in their domestic markets as well. In addition, internationally diversified firms are generally more innovative than domestic-only firms. 105. Describe the three strategic approaches used to produce and manage innovation: internal corporate venturing, cooperative strategies, and acquisitions.
Graders Info : Internal corporate venturing is the set of activities a firm uses to create inventions and innovations through internal means. There are two forms of internal corporate venturing, (1) autonomous strategic behavior (a bottom-up process employing product champions) and (2) induced strategic behavior (a top-down process whereby product innovations are fostered by the current strategy and structure of the firm). In the cooperative strategy approach to innovation, firms may choose to share their knowledge and skills sets with other organizations through strategic alliances. The ideal partners have complementary assets with the potential to lead to future innovations. Frequently, established firms exchange investment capital and distribution capabilities with newer, entrepreneurial firms with new technical knowledge. Acquisition of other companies represents the third approach firms use to produce and manage innovation. Acquiring another firm rapidly extends
the firm's product line and increases the firm's revenues. However, firms using the acquisition strategy may lose the ability to innovate internally. 106. Discuss the differences between autonomous strategic behavior and induced strategic behavior.
Graders Info : Autonomous strategic behavior and induced strategic behavior are the two processes of internal corporate venturing. Autonomous strategic behavior is a bottom-up process through which a product champion facilitates the commercialization of an innovative good or service. Induced strategic behavior is a top-down process in which a firm's current strategy and structure facilitate product or process innovations that are associated with them. 107. Discuss the methods an organization can use to facilitate cross-functional integration.
Graders Info : Shared values and effective leadership support cross-functional integration. The firm's culture, based on its vision and mission, promotes unity and supports cross-functional integration. Strategic leaders set goals and allocate resources for cross-functional teams. A high-quality communication system allows team members to share knowledge. Effective communications helps create synergy and gains team members' commitment to innovation. 108. Discuss the potential benefits and disadvantages of innovation through cooperative strategies.
Graders Info : A firm may not have the knowledge and capabilities necessary to be entrepreneurial and innovative. A strategic alliance in those cases offers an excellent means to obtain the needed knowledge and resources. However, strategic alliances are not without risks. The strategic alliance partner can appropriate a firm's technology or knowledge and use these to enhance its own competitive abilities. Additionally, a firm can become involved in too many alliances, which can harm its innovative capabilities. 109. Discuss the benefits and risks of acquiring another firm to gain access to innovations.
Graders Info : Through acquisition an organization can gain another firm's innovations and innovative capabilities. Acquisitions are a means to rapidly extend the firm's product lines and increase revenues. Buying innovation, however, comes with the risk of reducing a firm's internal invention and innovative capabilities.