TEST BANK for Contemporary Strategy Analysis, 10th Edition by Robert Gran

Contemporary Strategy Analysis 10e

TEST BANK: CHAPTER 1 The Concept of Strategy True or False Questions 1. Strategy is a unifying theme that gives coherence and direction to the actions and decisions of an organization.

[See p.4] a. T* b. F 2. The successful careers of both Queen Elizabeth II and Lady Gaga may be attributed to their commitment to systematic strategic planning [See p.5] a. T b. F* 3. A key component of an effective strategy is clear, consistent, long-term goals.

[See pp.5-6] *a. T b. F

4. If a firm can devise a brilliant strategy, it will be successful irrespective of how effectively it is implemented.

[See p.5] a. T *b. F

5. A major problem of using SWOT analyses in distinguishing strengths from weaknesses and opportunities from threats.

[See p.10] *a. T b. F 6. “Strategic fit” refers to the consistency between a firm’s strategy and, on one hand, its external environment and, on the other, its internal resources and capabilities.

[See p.10] *a. T b. F 7. Contingency theory postulates that a firm’s strategy must to flexible in order to meet any possible contingency.

[See pp.10-11] a. T *b. F 8. Strategy denotes an overall plan whereas a tactic is a scheme for a specific action.

[See p.11] *a. T b. F 9. The principles of military strategy are rarely applicable to business situations.

[See pp.11-12] a. T *b. F

10. Strategic decisions are important, involve a significant commitment of resources, and should be easily reversible.

[See p.11] a. T *b. F 11. Game theory is a useful for studying competitive behavior in politics, military campaigns and international relations, but it cannot be used to analyze business strategies.

[See p.12] a. T *b. F 12. The main factor causing the transition from corporate planning to strategic management was the increasing inability of companies to forecast economic conditions four or five years into the future.

[See p.12] *a. T b. F 13. Strategy is a detailed plan that programs the actions of an organization or an individual.

[See pp.14-15] a. T *b. F 14. Strategic choices involve two basic questions: where and how to compete?

[See p.18] *a. T b. F 15. In the large, complex firm, two main levels of strategy can be distinguished: corporate strategy and business (or competitive) strategy.

[See pp.18-19] *a. T b. F 16. When describing the strategy of a firm, it is best to ignore the current positioning of the firm in order to concentrate upon the direction in which the firm will develop in the future.

[See pp.19-20] a. T *b. F 17. The reason that a firm’s realized strategy diverges from its intended strategy is because strategy making is, to a great extent, an emergent process.

[See pp.20-21] *a. T b. F 18. According to Henry Mintzberg, firm strategy should be formulated by top management through rational deliberation utilizing all available data.

[See p.21] a. T *b. F 19. The dynamic, future-oriented dimension of a firm’s strategy is described by its

mission and vision statements and its performance targets.

[See p.21] *a. T b. F 20. The balance between intended and emergent strategy depends primarily upon the stability and predictability of the organization’s business environment. The more stable and predictable the environment, the greater the importance of emergent strategy.

[See p.23] a. T *b. F

21. Applying the tools of strategy analysis to not-for-profit organizations is simplified by the fact that they do not need to be concerned with maximizing profit.

[See p.27] a. T *b. F

Multiple Choice Questions 1. The primary purpose of strategy is: [See p.4] a. To maximize shareholder value *b. To achieve success c. To ensure that all stakeholders benefit from the value created by the firm d. To be a responsible corporate citizen 2. The successful careers of both Queen Elizabeth II and Lady Gaga may be attributed to the fact that both: [See pp.4-8] a. Have used dressing up as a means of attracting attention and establishing identity b. Have a knack for being in the right place at the right time *c. Have a consistency of direction based on clear goals d. Have built a loyal fan base based on astute use of the media.

3. For both individuals and businesses, successful strategies are characterized by: [See p.5] a. Unrelenting commitment to ambitious goals *b. Clear goals, understanding their competitive environment, awareness of internal strengths and weaknesses, and effective implementation c. Meticulous planning d. Possessing superior resources that are deployed to build competitive advantage.

4. Strategic goals should be: [See pp.5-9] a. Simple b. Consistent c. Long term *d. All of the above 5. The main problem of SWOT as a framework for strategy analysis is that: [See p.10] *a. Distinguishing opportunities from threats and strengths from weaknesses is often difficult b. It has now been superseded by more sophisticated analytical frameworks c. It is focused on strategy formulation and fails to take account of strategy implementation

d. It is so widely used that it no longer has any novelty.

6. Strategic fit refers to: [See p.10] a. The need for a firm’s strategy to be consistent with its vision, mission, and culture *b. The consistency of a firm’s strategy with its external and internal environments c. The need for a firm’s strategy to be unique d. The need for a firm’s strategy to fit the needs of all its stakeholders, not just shareholders 7. A conceptualization the firm as an “activity system” is a means of depicting: [See pp.10-11] a. How a firm’s strategy should be implemented b. The extent to which a firm’s resources and capabilities are aligned with its strategic goals c. The extent to which a firm’s strategic goals are aligned with its industry environment *d. The components of a firm’s strategy and consistency with which they fit together 8. Ryanair’s strategic position is as Europe’s lowest-cost airline may be attributed to: [See p.11] a. The willingness of its CEO, Michael O’Leary, to challenge conventional notions of customer and employee satisfaction b. Its use of secondary airports where costs are lower c. The high operating costs of major airlines such as British Airways, Lufthansa, and Air France-KLM on short-haul routes *d. An integrated, consistent set of activities designed to maximize productivity and minimize operating costs 9. The principal similarity between business and military strategy is that: [See p.12] a. They share the same objective: to annihilate rivals *b. They share common concepts and principles c. The nature of leadership is much the same whether in a military or business context d. They are both concerned with tactical maneuvers to establish positions of advantage.

10. Military strategy and business strategy differ in that: [See p.12] a. There is no concept like tactics in business b. Military strategy can only be learned through field experience; business strategy can be developed through analytical frameworks *c. The objective of military strategy is to defeat the enemy; most business strategies seek coexistence rather than annihilation d. None - there is no conceptual difference 11. The book that is considered as the first treatise on strategy is: [See p.11] a. Carl Von Clausewitz’s “On War” (“Vom Kriege”) b. Sun Tzu’s “The Art of War”* c. The Bible d. Niccolo Machiavelli’s “The Art of War” (“Dell’arte della Guerra”) 12. Strategic decisions are those decisions that are: [See p.12] *a. Important, commit resources, and are irreversible b. Long term c. Are confined to the senior executives of an organization d. Concerned with establishing competitive advantage 13. The main reason for the transition from corporate planning to strategic management during the late 1970s and 1980s was:

[See p.12] a. The increasing costs of corporate planning departments b. Disappointing outcomes of corporate diversification *c. A more turbulent business environment that was increasingly difficult to predict d. Growing disillusionment with central planning.

14. Between the 1980sand 1990s the emphasis of strategic analysis shifted from: [See p.13] a. Corporate strategy to business strategy *b. Industry analysis to resource and capability analysis c. Forecasting macro trends to understanding technological change d. Generic strategies to strategic differentiation 15. In the late 1970s and early 1980s, Michael Porter pioneered: [See pp.12-13] *a. The application of industrial organization economics to strategic management b. Empirical research into the relationship between market share and firm profitability c. The resource-based view of the firm d. The application of game theory to competitive analysis 16. During the 21st century, the complexity of the challenges posed by disruptive, digital technologies and accelerating rates of change have encouraged companies to: [See p.13] a. Shift their strategic focus towards the growth markets of Asia, Africa, and Latin America. b. Rejecting shareholder value maximization in favor of maximizing stakeholder interests *c. Depend increasingly upon strategic alliances and other forms of collaboration d. Prefer mergers and acquisitions to organic growth.

17. The more turbulent a firm’s external environment, the more must its strategy: [See p.14] a. Be formulated top-down rather than bottom-up *b. Be about direction rather than specific plans c. Emphasize innovation d. Rely upon inputs from external consultants 18. When a firm’s external environment becomes more turbulent and unpredictable: [See pp.13-14] *a. Strategy becomes an increasingly important in providing direction for the business b. Strategy becomes based upon intuition rather than analysis c. Cost cutting becomes a dominant priority d. Strategy becomes an impossible exercise 19. A description of a company’s organizational purpose is called a: [See p.16] a. Vision statement b. Values statement *c. Mission statement d. All the above 20. The primary distinction between corporate strategy and business strategy is: [See p.18] a. Corporate strategy is the responsibility of the CEO, business strategy is formulated by the heads of business units *b. Corporate strategy is concerned with where the firm competes; business strategy with how it competes in particular markets c. Corporate strategy is concerned with establishing competitive advantage; business strategy with strategy implementation in individual businesses

d. Corporate strategy is concerned with the long-term performance of the firm; business strategy with resource deployment.

21. Strategy assists the quality of strategic decision making by: [See p.15] a. Expanding the range of decision alternatives under consideration b. Ensuring that strategic decisions are restricted to senior executives who possess the most relevant knowledge *c. Facilitating the use of analytical tools d. All of the above 22. Which of the following is not one of the ways in which a systematic, strategy-making process improves an organization’s decision making: [See pp.15-16] a. Reducing the number of choices being considered b. Integrating and pooling the knowledge of different members of the organization c. Facilitating the use of analytic tools *d. Providing algorithms that generate optimal solutions to strategic problems 23. The two questions of “where” and “how” to compete define: [See p18] *a. A firm’s corporate and business strategies b. A firm’s strategic management process c. A firm’s vision and mission d. A firm’s values and culture 24. When identifying a company’s strategy, its statements of a strategy found in its public documents need to be: [See pp.17-18] a. Treated with skepticism *b. Checked against the company’s decisions and actions c. Interpreted using modern techniques of textual analysis d. Checked against its statements of vision and mission 25. Business strategy defines: [See p.14] *a. How a firm competes in a particular industry or market b. Which industries or markets a firm chooses to compete in c. Both of the above d. Neither of the above 26. The principal temporal challenge of that strategic management faces is: [See p.19] a. The need to match internal organizational change with the rate of change in the external environment *b. The need to compete for today while preparing for the future c. The need to keep abreast of technological change d. Increasing responsiveness and innovation 27. The relationship between design and emergence in strategy making is best described as: [See pp.20-21] a. An interactive process between strategic planners and line managers b. A tension between the forces of centralization and decentralization *c. A process in which intended strategy is adapted as it is implemented d. An example of the agency problem in which the interests of salaried managers displace the interests of owners 29. The extent to which an organization’s strategy is determined by decentralized emergence rather than by centralized design depends mainly upon:

[See pp.21-22] *a. How turbulent and unpredictable is the external environment of the organization b. How the organization is structured c. The commitment of the organization to experimentation d. Whether the organization has a formalized process of strategic planning.

30. The main value of analytical approaches to strategy formulation is: [See pp.22-23] a. To identify the optimal strategy that a firm should adopt *b. To provide understanding of strategic issues c. To substitute for manager’s intuition and creativity d. To ensure that strategic decision making is assigned to the capable people within the organization

31. The applicability of the tools and techniques of strategy analysis to not-for-profit organizations is: [See p.26-28] *a. Greater for organizations that face competition than those that do not b. Greater for organizations that charge for their services than those which do not c. Greater for organizations that compete to for funding than those which compete for customers. d. Is severely limited by the lack of a profit motive 32. For charities and other not-for-profit organizations that supply goods and services for free, the most important focus for strategy making tends to be: a. Competing in the market for finance from donors and other sources b. Competing with other organizations seeking to supply similar goods or services to the same consumers c. Establishing internal consensus around organizational goals d. Managing relations with government and regulatory bodies.

Contemporary Strategy Analysis 10e

TEST BANK: CHAPTER 2 Goals, Values and Performance True or false questions 1. The entrepreneurs who create business enterprises are motivated primarily by the desire for personal wealth.

[See p. 35] a. T *b. F 2. “Value” refers to the estimated monetary worth of a product or asset.

[See p.35] *a. T b. F 3. The value created by a firm is the value received by the customers for that firm’s products, minus the real cost of producing the products.

[See p.36] * a. T b. F 4. If a firm to pursue stakeholder interests rather than shareholder interests, it means that it maximizes value received by all stakeholders rather than the value received by shareholders alone.

[See pp.36-37] * a. T b. F 5. Implementing stakeholder value maximization is not inherently more difficult than implementing shareholder value maximization since the decision tools of management can easily be adapted to serve the interests of all the firm’s stakeholder groups.

[See pp.36-37] a. T *b. F 6. In most continental European countries, company law requires boards of directors to ensure that their companies operate primarily in the interests of shareholders, while in most English-speaking countries are required to take account of employees, society, and the interests of the company as a whole. {See 37] a. T *b. F 7. In practice, pursuing stakeholder interests and pursuing shareholder interests are identical since in order to make profits a firm must satisfy all its stakeholders.

[See p.38] a. T *b. F 8. Firms are often constrained from pursing goals other than profit maximization by the pressure of competition and threat of acquisition.

[See p.38] *a. T b. F

9. Because profit is defined by accounting rules and measured in financial statements, profit maximization is an unambiguous performance goal for a firm.

[See p.39] a. T *b. F 10. Economic profit is a better indicator of a firm’s performance than accounting profit because economic profit takes account of the normal, expected return to capital.

[See p.40] *a. T b. F 11. Basing management decisions on economic profit (e.g. Economic Value Added) rather than accounting profit is more important for companies with few fixed assets (such as software companies and consulting firms) than capital-intensive companies such as chemical companies and vehicle manufacturers.

[See p.40] a. T *b. F 12. Maximizing profit over the life of the firm bears no relationship to the goal of maximizing shareholder value.

[See p.41] a. T *b. F

13. Stock market capitalization offers the best available indicator of the net present value of a firm’s future free cash flows.

[See pp.41-42] *a. T b. F 14. Estimating a firm’s future cash flows is a fairly straightforward task.

[See pp.42-43] a. T *b. F 15. When comparing the profitability of firms in different industries, it is better to use profit margins on sales rather than profitability ratios based upon balance sheet items (such as return on equity or return on capital employed)?

[See Table 2.3, p. 44] a. T *b. F

16. Disaggregating return on capital employed into sales margin and capital turnover offers a useful starting point for diagnosing firm performance.

[See pp.45-46] *a. T b. F 17. Since the long term is a series of short terms, short-term profit maximization will always lead to longterm profit maximization.

[See p.47] a. T *b. F

18. A major difficulty in selecting performance targets for a firm is that performance goals tend to be long term, but effective monitoring must be short term.

[See p.47] *a. T b. F 19. The balanced scorecard is a useful tool for setting and monitoring performance targets for firms that pursue stakeholder goals; it is less useful for firms that seek to maximize profits over the long term.

[See p.48] a. T *b. F 20. If a firm is to achieve superior profit performance, it is essential that profitability targets are set for managers. If managers focus on the drivers of profitability rather than profitability itself, their efforts will be diffused.

[See pp.48-49] a. T *b. F 21. A major problem encountered by firms that adopt the goal of maximizing shareholder value is the tendency to concentrate on increasing short-term profits at the expense of long-term profits.

[See pp.48-49] *a. T b. F 22. According to Milton Friedman, the social purpose of a business is to make profit.

[See p.50] *a. T b. F 23. Values and ethical principles can complement a firm’s strategy through creating a sense of identity and supporting cohesion.

[See p.50] *a. T b. F 24. Michael Porter and Mark Kramer’s concept of shared value is based upon the notion that business enterprises should focus, first, on creating value and, second, on distributing that value among different participants (including shareholders and society-at-large).

[See p.52] a. T *b. F 25. “Bottom of the pyramid” initiatives embody the notion that multinational corporations should use a portion of their profits on community-based projects in developing countries.

[See p.52] a. T *b. F 26. One implication of real option analysis is that when pursuing a new strategic initiative, there is value in a firm making an irreversible commitment to continuing that initiative.

[See pp.53-54] a. T *b. F 27. A “phases and gates” approach to new product development is an example of a business process designed to create option value.

[See p.54]

*a. T b. F 28. Real options are a useful tool for thinking about strategic decisions under uncertainty, however, quantitative techniques designed to value financial options (e.g. the Black-Scholes option pricing model) cannot be applied to real options.

[See p.55] a. T *b. F

Multiple choice questions 1. The main challenge of establishing the goal of the firm is that: [See p.35] a. Flexibility of accounting rules allow different firms to measure profit in different ways b. Each firm has different set of stakeholders, hence will define stakeholder value differently *c. Each enterprise has a distinct business purpose d. The goal of the firm is not directly observable 2. Every business enterprise has a distinct purpose, however, common to all businesses is the goal of: [See p.35] a. Satisfying customers *b. Creating value c. Satisfying stakeholders d. Maximizing shareholder value.

3. The two processes through which firms create value are: [See p.35] a. Restructuring existing businesses and creating new businesses through entrepreneurship b. Increases prices and reducing costs *c. Production and commerce d. Production to create real value and marketing to create perceived value 4. The total value created by a firm is equal to: [See pp.36-37] a. The total revenue the firm receives for the products it sells b. The total revenue the firm receives less the cost of bought-in materials and components *c. The sum of producer surplus and consumer surplus the firm creates d. None of the above 5. Consumer surplus is equal to : [See p.36] a. The amount consumers pay for a product *b. The difference between the amount consumers would be willing to pay for a product and what they actually pay c. The difference between the sales value of a firm’s output and the direct costs of producing it d. The amount consumers pay for a product adjusted for the social costs and benefits of the product.

6. For the purposes of strategy analysis, it is convenient to view business strategy is primarily a quest for: [See p.38] a. Attractive markets *b. Profit c. Customer loyalty d. Motivated and talented personnel 7. The main problems in implementing stakeholder value maximization are:

[See pp.37-38] a. Adjudicating conflicts between different stakeholders b. The propensity for customers and employees to be even more short-term oriented than shareholders *c. The difficulties of quantifying value creation and creating a governance system to manage the tradeoffs among the interests of different stakeholders. d. The legal obligation of boards of directors to operate companies in the interests of their shareholders.

8. For a firm to survive over the long term it must: [See p.37] a. Pay a satisfactory level of dividends to its shareholders b. Create customer loyalty, that can then be converted into profit through increasing prices *c. Earn as rate of return that covers its cost of capital d. Balance the interests of all its stakeholders.

9. Although firms may pursue a variety of goals, the assumption that primary goal of strategy is to maximize profits over the long term may be justified by: [See p.38] a. The fact that in today’s intensely competitive markets, firms must focus on profit maximization in order to survive *b. The external pressures on firms that arise from (i) strong competition in product markets and (ii) the threat that firms that do not maximize profits will be acquired by firms that do c. The legal requirement on Boards of Directors to ensure that companies are operated in the interests of their shareholders d. Shareholder pressure on CEOs to maximize profits.

10. The principal difference between accounting profit and economic profit is: [See p.40] a. Accounting profit is distorted by the arbitrary treatment of depreciation and unusual items *b. Accounting profit includes both economic profit and the normal return on capital to the providers of equity capital c. Economic profit is cash flow based and is, hence, less subject to manipulation that accounting profit d. Economic profit is endorsed by economists who tend to be more rigorous than accountants.

11. The divergence between accounting profit and economic profit is likely to: [See p.40] a. Greater for highly leveraged firms than for equity-financed firms b. Greater for labor-intensive firms than for capital-intensive firms *c. Greater for capital-intensive firms than for labor-intensive firms d. Greater for technology-based firms than firms in mature industries 12. Profit and value of the firm are two concepts which are: [See pp.41-42] a. Unrelated because cash flow not profit is the main determinant of firm value *b. Closely linked because the present value of a firm’s expected future profits approximates to the market value of its securities c. Closely linked because dividends are paid out of profits and it is dividends that determine the market value of a firm’s shares d. Closely linked because the market value of a firm is determined by its profits multiplied by the priceearnings ratio of its shares 13. The main difference between accounting measures of firm performance and stock-market measures of firm performance is: [See pp.42-43] a. Accounting measures are less reliable because of firms’ discretion over how they apply accounting conventions b. Stock market measures are less reliable because share prices are so volatile c. Accounting data offers a sound basis for forecasting future performance

*d. Accounting measures are backward looking; stock market measures are forward looking 14. Maximizing enterprise value and maximizing shareholder value are closely linked because: [See p.40] a. Enterprise value and shareholder value are the same thing b. Shareholder value is calculated by adding debt and other non-equity financial claims to the DCF value of the firm *c. Shareholder value is calculated by subtracting debt and other non-equity financial claims from the enterprise value of the firm d. A business enterprise is owned by its shareholders.

15. In using accounting ratios to appraise a firm’s performance, it is helpful to use: [See pp.42-43] a. Benchmarks b. Trends in these ratios over the past 5 years or more c. Multiple indicators *d. All of the above 16. To assess the adequacy of the return on capital employed (ROCE) that a firm earned in its most recent financial year, which of the following would not be an appropriate benchmark: [See pp.43-45] a. The ROCE earned by the same firm in previous years b. The ROCE earned by competitors during the same period *c. The firm’s cost of equity capital d. The firm’s weighted average cost of capital 17. In appraising a firm’s profit performance: [See pp.43-44] a. Return on sales is a better indicator than return on invested capital *b. Return on capital employed is a better indicator than return on sales c. Net margin is a better indicator than operating margin d. Narrow measures of profit (such as after-tax net income) are better indicators than broad-based measures (such as EBITDA—earnings before interest, tax, depreciation and amortization).

18. To assess whether or not a firm is earning an adequate rate of profit, return on capital employed (ROCE) is a better indicator than return on sales because: [See pp.43-44] a. Sales are more variable than capital employed *b. Return on sales vary between industries according to their capital intensity c. A firm’s return on sales depends upon the choice between gross margin, operating margin, and net margin d. ROCE is based upon cash flow 19. To diagnose the sources of a firm’s poor financial performance, it is useful to: [See pp.44-45] a. Focus on the firm’s cash flow statement rather than its income statement and balance sheet b. Concentrate on sales growth and market share rather than profit data c. Adopt a forward-looking approach through analyzing share price performance rather than looking at backward-looking accounting statements *d. Disaggregate overall return on capital into its component items 20. The biggest problem in designing a performance management system arises as a result of: [See p.47] a. The tendency for performance management systems to be based entirely on financial targets *b. A performance management system needs short-term indicators to monitor performance, yet the ultimate goal is to enhance the long-term performance of the firm c. Performance targets are always ineffective because individuals will “game the system” d. The personal interests of organizational members need to be taken into account

21. The Balanced Scorecard is a technique of performance management that establishes and monitors four dimensions of performance: [See pp.47-48] a. Financial, strategic, operational, and ethical performance *b. Financial, customer, internal, and learning/innovation performance c. Profit, sales, productivity, and asset management performance d. Shareholder, customer, employee, supplier, and social performance 22. The main problem of a company establishing shareholder value creation as its primary performance goal is: [See pp.48-49] a. Shareholder value maximization is appropriate only for financial service companies b. Pursuing shareholder value inevitably leads to unethical behavior by senior managers *c. Focusing on shareholder value does not necessarily encourage managers to concentrate on the actions and activities that create the profits that are the source of shareholder value d. Pursuing shareholder value is likely to be detrimental to employee morale and customer satisfaction 23. In relation to the social responsibilities of firms, leading economists and management theorists: [See pp.50-52] a. Agree that CSR is an essential “moral imperative” *b. Have fundamental disagreements about the justification for CSR c. Believe that the capitalist system would operate better if all firms adopted CSR d. Regard most firms’ CSR initiatives as primarily exercises in public relations 24. Michael Porter and Mark Kramer’s notion of “shared value” reconceptualizes CSR (corporate social responsibility) by emphasizing: [See p.52] *a. CSR as a value creating activity b. CSR as a source of legitimacy for a company c. CSR a means of transferring value from shareholders to less fortunate members of society d. CSR as a counterweight to greed and amorality among managers and investors.

25. Which of the following activities by Starbucks Inc. is least likely to be an example of Michael Porter and Mark Kramer’s “shared value creation”: [See p.54] *a. The 2015 “Race Together” initiative to combat racism and promote racial harmony b. The introduction in 2014 of college tuition benefits to employees c. Participating in the Coffee and Farm Equity program to benefit growers d. Setting targets for reducing energy utilization and increasing recycling.

26. In new product development, a “phases and gates” approach means that: [See p.54] a. A firm’s market is divided into specific segments (or “phases”) linked by “gates” which allow synergies to be exploited b. A firm’s product development relies on time segments that must be linked through gates *c. The process is divided into consecutive stages, at the end of each a decision is made as to whether to continue to the next stage of development d. The product is divided into separate modules where the interface between them are viewed as gates 27. Viewing strategy as a portfolio of options rather than a portfolio of investments, relies upon the rationale that: [See pp.54-55] a. Uncertainty means that flexibility is valuable b. Committing to a long-term program of investment can be disastrous if circumstances change c. Most investment projects can be divided into a sequence of stages where, at any point of time, it is only necessary to decide the next stage *d. All of the above

28. The value of a real option can be calculated using: [See p.55] a. The Black-Scholes option pricing model b. Binomial options pricing model c. Discounted cash flow analysis *d. (a) or (b) 29. The two main categories of real options are growth options and flexibility options. Which of the following investments is not a growth option?

[See pp.54-55] *a. Ford’s acquisition of programmable robots that allow different models of car to be produced on a single assembly line b. Facebook’s acquisition of WhatsApp 2014 c. Apple’s program of research into virtual reality d. Callaway Golf’s strategic alliance with Automobili Lamborghini to develop new composite materials

Contemporary Strategy Analysis 10e

TEST BANK: CHAPTER 3 Industry Analysis: The Fundamentals True or false questions 1. According to Warren Buffett brilliant managers can succeed, even in businesses with poor fundamental economics.

[See p.59] a. T *b. F 2. According to Charlie Munger, the profitability in the reinsurance industry is depressed by the fact that many companies believe it to be an attractive business.

[See p.59] *a. T b. F 3. Formal, broad-based scanning of the external environment is an essential activity for all business enterprises.

[See p.61] a. T *b. F 4. If a firm is to create profit, the first condition is that it must supply a product for which the price the customer is willing to pay exceeds the cost incurred in supplying that product.

[See pp.61-62] *a. T b. F 5. “Producer surplus” is not a form of “economic rent.”

[See p.62] a. T *b. F 6. The greater the value of a product to its customers, the more profitable will it be to supply that product.

[See pp.61-62] a. T *b. F 7. The main reason that niche markets are often highly profitable for incumbents is because their customers tend to be insensitive to prices.

[See pp.62-64] a. T *b. F 8. Michael Porter’s five forces of competition framework links the structure of an industry to its overall level of profitability.

[See p.64] *a. T b. F 9. A product that has close substitutes will tend to have inelastic demand.

[See p.64] a. T © 2019 John Wiley & Sons, Inc.

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*b. F 10. In a “contestable market” it is actual entry rather than the threat of entry that keeps prices at their competitive level.

[See p.66] a. T *b. F 11. Economies of scale, absolute cost advantages, high capital requirements, and limited access to channels of distribution give incumbent firms an advantage over new entrants to an industry.

[See pp.66-67] *a. T b. F 12. Threats of retaliation by incumbents against a new entrant (e.g. threatening to make aggressive pricecuts), cannot be regarded as a source of entry barriers.

[See p.67] a. T *b. F 13. Entry barriers that are effective against small, start-up companies tend to be equally effective against established firms diversifying from other industries.

[See p.67] a. T *b. F 14. Concentration in an industry is measured by its concentration ratio—a common measure of which is the combined market share of the leading firms.

[See p.68] *a. T b. F 15. The more similar are the firms in an industry in terms of costs, strategies, and locations, the more intensely will they compete.

[See p.68] a. T *b. F 16. Lower levels of capacity utilization impose higher costs on firms (as fixed costs are spread over a smaller volume of business). This encourages firms to raise prices.

[See pp.68-69] a. T *b. F 17. An exit barrier is anything that is an impediment to excess capacity leaving an industry.

[See pp.68-69] *a. T b. F 18. The reason that the shares of steel, automobile and chemical companies are regarded as “cyclical” is that the high fixed costs of these industries make profits highly sensitive to changes in the level of demand.

[See p.69] *a. T b. F

© 2019 John Wiley & Sons, Inc.

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19. The bargaining power of a buyer when negotiating with a supplier is all about relationship management; it does not depend upon the threat of walking away from the deal.

[See pp. 69-71] a. T *b. F 18. Suppliers of technically-sophisticated components are more likely to be able to exercise supplier power than the suppliers of raw materials.

[See p.71] *a. T b. F 19. Batteries represented about 45% of the cost of electric vehicles in 2018. Because battery prices are expected to decline at the rate of about 5% per year for the next six years, electric vehicles will become increasingly profitable for automobile manufacturers [See p.73] a. T *b. F 20. The mergers and acquisitions that have increased seller concentration in iron ore mining, chemicals, and the US airline industry and in the world metals mining industry were motivated by the desire to save costs, not to reduce competition in order to raise prices.

[See p.74] a. T *b. F

21. Official industry classifications such as the Standard Industrial Classification mean that there is no ambiguity over delineating industry boundaries.

[See p.76] a. T *b. F 22. Although washing machines and refrigerators are not close substitutes as far as consumers are concerned, we can consider them to be part of the same industry because of supply-side substitutability.

[See p.76] *a. T b. F 23. In identifying key success factors in an industry, it is sufficient to concentrate upon the factors which determine how customers choose between alternative suppliers.

[See pp.77-78] a. T *b. F 24. In commodity businesses, such as growing wheat, mining for gold, or fabricating DRAM semiconductors, the principal key success factors are concerned with the sources of cost efficiency.

[See pp.77-78] *a. T b. F

Multiple choice questions 1. Given the range of external influences that impact a firm, understanding the external environment requires managers to: [See pp.60-61] © 2019 John Wiley & Sons, Inc.

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*a. Use a framework or a system to organize relevant information b. Monitor competitors closely c. Use all existing sources and techniques to gather and analyze information d. Devote a large proportion of their time to this task 2. The core of a firm’s business environment is comprised by: [See p.61] *a. Its relationships with customers, competitors and suppliers b. Its technological environment c. Its relationships with all stakeholders d. The nation state 3. Economic value is created when: [See pp.61-62] a. The price that customers pay for a product exceeds the costs of producing it b. Competition causes surplus value to be transferred from producers to consumers c. The price that customers are willing to pay for a product exceeds the price they actually pay *d. The price that customers are willing to pay for a product exceeds the cost producing it 4. The profits earned by firms in an industry, are determined by: [See p. 62] a. The intensity of competition among the firms within the industry b. How much customers value the products supplied by the industry c. The extent to which the industry is protected by barriers to entry *d. The value of the product tor customers, the intensity of competition, and the relative bargaining powers of producers, their suppliers and their buyers 4. The basic premise of industry analysis is that: [See p.63] a. Most industries lie on a spectrum between perfect competition at one end and monopoly at the other *b. The level of profitability within an industry is determined by the systematic influence of the industry structure c. Industry profitability depends upon the interaction among competing firms d. Technology and consumer demand are the basic forces that shape industry structure 5. Firms supplying niche markets are often highly profitable because: [See pp.62, 64] a. They tend to supply specialty products for high income consumers *b. They tend to be sufficiently small that a single firm can often establish a dominant position c. They tend to be disregarded by major corporations d. They tend to have high entry barriers 6. If an industry earns a return on capital in excess of its cost of capital: [See p.66] a. It will soon attracts the attention of competition authorities b. Workers will push for higher pay and benefits causing the level of profitability to fall *c. It will attract the attention of potential entrants and, unless protected by high barriers to entry, the return on capital will fall d. Firms within the industry will over-invest causing the return on capital to fall 7. Economies of scale are a barrier to entry because: [See p.66] a. New entrants are positioned at the top of their learning curve b. New entrants are uncertain about their future costs which discourages then from making investments c. New entrants face a risk of retaliation from the incumbents whose large scale of operation allows them to flood the market *d. New entrants face high unit costs either because they enter at sub-optimal scale, or they make a largescale entry that initially operates with substantial excess capacity © 2019 John Wiley & Sons, Inc.

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8. The effectiveness of barriers to entry depends upon: [See p.67] a. How quickly new technologies emerge b. How fiercely incumbents retaliate against new entrants *c. The resources and capabilities that potential entrants possess d. How vigorously governments enforce competition law 9. The relationship between seller concentration and industry profitability is: [See p.68] a. Strongly positive—increasing concentration is almost always followed by increasing profit margins b. Mainly negative—as industries become more concentrated, the competition between leading firms for market dominance becomes more aggressive c. Dependent upon the size of the industry *d. Statistically weak.

10. As the competitors in an industry become more diverse in terms of their goals, cost structures, and strategies, it is likely that: [See p.68] a. Their incentives to collude on price increase *b. They will compete more fiercely on price c. Their products will become increasingly differentiated d. Mergers, acquisitions and alliances among them will increase 11. Industries where a decline in demand is most likely to cause industry-wide losses tend to have the following characteristics: [See pp.68-69] a. High concentration, lack of product differentiation and scale economies *b. High exit barriers, lack of product differentiation, and a high ratio of fixed to variable costs c. High exit barriers, lack of product differentiation, and powerful buyers d. Powerful buyers and suppliers and high exit barriers 12. Which of the following does not enhance buyers’ bargaining power [See pp.69-71] a. Low switching costs for buyers b. The size of buyers relative to that of sellers *c. A high level of differentiation among the products that buyers purchase d. The ability of buyers to backward integrate 13. Bargaining power rests, ultimately, on: [See p.70] a. The negotiating skills of the buyer versus the seller b. Tradition c. The respective effectiveness and cohesion of top management teams *d. The relative costs that each party would incur from walking away from the deal 14. The restrictions that governments place on the advertising of tobacco products: [See pp.64-69) a. Reduce the demand for tobacco thereby depressing profitability b. Reduce the marketing costs of tobacco companies and impede the entry of newcomers to the market, boosting the profitability *c. Cause both (a) and (b) d. Cause neither (a) nor (b) 15. To obtain a license to drive a “black cab” taxi in London, requires passing a rigorous test of the driver’s knowledge of London’s streets and buildings involving 2 to 4 years of study. This test affects the profitability of the London taxi industry: [See pp.66-67] © 2019 John Wiley & Sons, Inc.

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a. Negatively, because of the debts that future taxi drivers accumulate during their training b. Negatively, because it encourages native Londoners, who are already familiar with the city, to enter the industry *c. Positively because they restrict entry to the industry d. Positively, because “doing the knowledge” increases solidarity among London’s taxi drivers. if such licenses can be sold on a secondary market 16. Profitability of the wireless communications services industry tends to be low throughout the world. A major reason for this is:: [See pp.64-71] a. In most markets there are only three or four competitors *b. In almost every country, the national government is a monopoly supplier of wireless spectrum c. Entry barriers are high due to the high costs of infrastructure d. Increased video streaming is increasing the demand for wireless telecommunications 17. The most useful approach to forecasting industry profitability in the future is: [See pp.71-73] a. To estimate the industry’s revenues and costs in future years b. To use an industry’s probability at similar stages of the business cycle in the past as an indicator of future profitability c. To extrapolate the trend of industry profitability into the future *d. To understand how the industry’s structure has determined competitive intensity and profitability in the past, then to use information on an industry’s changing structure to predict how profitability is likely to change in the future 18. Airlines’ frequent flyer programs and retailer loyalty schemes are both examples of efforts to: [See p.74] a. Offer disguised price reductions to customers *b. Establish product differentiation by measures that reward customer loyalty c. Establish competitive advantage that failed because they could be easily imitated by competitors d. Promote a company’s product to new customers 19. Initiatives to improve an industry’s profitability through changing its structure are: [See p.74] a. Only feasible for the dominant player within an industry *b. More difficult in fragmented industries than in concentrated industries c. Feasible in any industry that is subject to ruinous price competition d. Always risky because they attract the attention of antitrust authorities 20. A market’s boundaries are determined by: [See pp.75-76] a. The geographical extent of the markets that are supplied by the incumbents b. The type of product which is sold, and the type of customers willing to pay for the product c. Price homogeneity—within the confines of a market, a single price rules *d. Substitutability on both the demand side and the supply side 21. In practice, drawing industry boundaries is: [See pp.75-76] a. A subjective exercise that depends upon the personal preferences of top managers b. An objective exercise that requires estimating cross-elasticities of demand for the industry’s products *c. A matter of judgment that depends upon the purpose of the analysis d. Critical to the output of the analysis and therefore should only be undertaken with the help of an academic or consultant 22. For most business enterprises a market is: [See pp.75-76] a. An abstract concept—from the point of view of competition it is a continuum from a firm’s closest competitor towards more distant competitors © 2019 John Wiley & Sons, Inc.

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b. A sociological concept that is defined mainly by convention and institutions c. Geographical concept defined by the location of customers and competitors *d. All the above* 23. Key success factors are: [See pp.77-80] a. Factors that allow rivals to undermine a firm’s competitive advantage *b. The sources of competitive advantage within an industry c. The forces of competition that are most influential in determining industry profitability d. The generic strategy that is most closely aligned with customer preferences 24. Identifying key success factors within an industry requires answers to the following questions: [See pp.77-80] *a. What do customers want and what should the firm do to survive competition? b. What is a firm’s unique selling proposition? c. Which of the five forces of competition most threaten a firm’s survival and how could the firm deal with them? d. What are the main sources of a company’s cost efficiency?

© 2019 John Wiley & Sons, Inc.

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Contemporary Strategy Analysis 10e

TEST BANK: CHAPTER 04 Further Topics in Industry and Competitive Analysis True or false questions 1. Porter’s five forces model offers a rigorous, empirically-validated approach to explaining the variation in profitability across industries [See pp.84-85] a. T *b. F 2. Industry membership is the single most important source of profitability differences between firms.

[See p.84] a. T *b. F 3. The Schumpeterian view of competition emphasizes the role of innovation and entrepreneurship [See p.85] *a. T b. F 4. In common with the Porter five forces framework, the Schumpeterian approach views competitive behavior as the outcome of industry structure.

[See p.85] a. T *b. F 5. In hypercompetitive markets, the quest for sustainable competitive advantage is the overwhelmingly important priority for firm strategy.

[See p.85] a. T *b. F 6. Empirical studies on hypercompetition show unanimously that industries are becoming increasingly turbulent and competitive advantage increasingly short-lived [See p.85] a. T *b. F 7. A “winner-take-all industry” is one in which the market leader earns the great majority of the industry’s total profits.

[See pp.85-86] *a. T b. F 8. The profitability of making inkjet cartridges depends critically upon their complementary relationship with between inkjet printers.

[See pp.86-87] *a. T b. F 9. The value of a product to its consumers tends to be reduced by availability of close substitutes.

Similarly, the value if a product to its consumers is reduced by the availability of complements.

[See pp.86-87] © 2019 John Wiley & Sons, Inc.

a. T *b. F 10. When products A and B are complements, the division of profit between the supplier of A and the supplier of B will depend upon which builds the stronger market position and is better able to reduce the value contributed by the other.

[See p.87] *a. T b. F 11. The suppliers of video game consoles (Sony, Microsoft and Nintendo) are less able to appropriate the profits generated by the sales of video game systems because of d the growing size and power of the video game developers and publishers.

[See pp.86-87] *a. T b. F 12. Where different firms supply different products that link together to form a system, power typically resides with the form that supplies the platform—the interface between the different component products.

[See p.87] *a. T b. F 13. Within a business ecosystem, the migrates of value between groups f firms is the result of external forces such as technology, regulation, and changing customer preferences. Individual firms have little power to influence value migration.

[See p.88] a. T *b. F 14. Unlike most strategic management concepts, there is little ambiguity over what a business model is.

[See p.88] a. T *b. F 15. Business models can assist strategy formulation for firms that are located within complex business ecosystems.

[See pp.88-90] *a. T b. F 16. Game theory seeks to predict the outcome of competitive situations by modeling the interactive decisions by firms, [See p.91] *a. T b. F 17. In the world of business, competition and cooperation seldom coexist.

[See p.92] a. T *b. F 18. The propensity for similar businesses to cluster in the same locality (e.g. IT companies in Silicon Valley, fashion houses in Milan) is evidence of the intensity of the competitive instincts that drive the owners of these businesses.

[See p.92] a. T *b. F © 2019 John Wiley & Sons, Inc.

19. Deterrence is effective when it imposes costs upon other players, but s costless for the initiating firm.

[See p.92] a. T *b. F 20. After arriving in Mexico in 1519, the destruction by Hernan Cortes of his own ships was a signal, in game theory terminology, of “commitment” for his troops to the conquest of the Aztec empire [See p.92] *a. T b. F 21. The tendency for both Coca-Cola and Pepsi to compete through large advertising budgets which have little impact on their relative market shares cannot be a true example of a “prisoners’ dilemma” because both firms remain highly profitable.

[See p.93] a. T *b. F 22. The “prisoners’ dilemma” can be resolved by changing the payoffs in a way that induces cooperative behavior.

[See pp.93-94] *a. T b. F 23. A “prisoners’ dilemma” situation in which a failure to cooperate leaves both parties worse off is just as likely in a multi-period game as in a single-period game.

[See p.93] a. T *b. F 24. Deterrence is a competitive action that is more attractive to firms that compete in multiple markets than in a single market because the resulting reputation can be transferred from one market to another.

[See p.94] *a. T b. F

25. When applied to real business situations, the usefulness of game theory is enhanced by its ability to predict very different outcomes on the basis of small changes in initial conditions.

[See pp.94-95] a. T *b. F 26. Competitive intelligence involves the systematic collection and analysis of public information about suppliers and customers to aid decision making.

[See pp.95-96] a. T *b. F 27. The aim of competitive intelligence is to predict competitor behavior on the basis of verifiable facts.

Attempts to “get inside the heads of your rivals” are inherently unreliable and should be avoided.

[See p.96] a. T *b. F 28. A company whose primary goal is profitability is likely to be a much more aggressive competitor than one whose primary goal is market share. © 2019 John Wiley & Sons, Inc.

[See p.97] a. T *b. F 29. The ability to predict a competitor’s behavior is facilitated by the tendency for the managers within an industry to share common beliefs about their industry and about the key success factors within it.

[See p.97] *a. T b. F 30. Industries are the central arenas in which competition takes place. Disaggregating industries into segments and groups of firms add little to our understanding of competition.

[See pp.98-101] a. T *b. F 31. To divide an industry into segments it is always preferable to focus on the characteristics of different customers rather than the characteristics of different products.

[See p.98] a. T *b. F 32. The more variables that are deployed to segment a market, the more useful is the resulting segmentation likely to be.

[See p.98] a. T *b. F 33. To analyze the profit potential of different industry segments, we can use the same Porter five forces of competition framework that we use to analyze the profit potential of different industries.

[See pp.98-99] *a. T b. F 34. In the automobile industry barriers to firms’ mobility between different segments tend to be low, hence profitability differences between segments are not sustained over long periods of time.

[See pp.99-100] *a. T b. F 35. The more similar are key success factors across the different segments of an industry, the more likely it is that the firms within that industry will specialize by segment.

[See p.101] a. T *b. F

36. Industry segmentation is always horizontal—it is based upon the products an industry supplies and the customers to which they are supplied. The notion of vertical segmentation—segmenting an industry along its value chain is attractive in principle but impossible in practice.

[See pp.98, 101] a. T *b. F 37. A strategic group is a group of firms in an industry that serving the same market segment.

[See p.102] a. T *b. F © 2019 John Wiley & Sons, Inc.

38. The main usefulness of strategic group analysis is in analyzing interfirm profitability differences within an industry; it is less useful as a tool for describing the strategic positioning of firms within an industry.

[See p.102] a. T *b. F

Multiple choice questions 1. Empirical research shows that proportion of inter-firm differences in profitability that industry factors explain is: [See pp.84-85] a. More than 75% b. About half *c. Less than 25% d. The question is unanswerable because “industry” is a meaningless concept.

2. A key limitation of Porter’s five forces framework is that: [See p.85] a. I looks only at single industries not at relationships between industries *b. Competitive strategies may shape industry structure, rather than structure shaping competition c. Industries are more complex than can be reduced to five competitive forces d. It offers qualitative, not quantitative predictions 3. Joseph Schumpeter perceived competition among companies as: [See p.85] a. Corresponding closely to economists’ model of perfect competition where profits are competed away b. A process of oligopolistic rivalry *c. A process of creative destruction d. A process of punctuated equilibrium in which periods of stability were interspersed by bouts of intense competition 4. Schumpeter’s process of “creative destruction” challenges Porter’s five forces of competition framework by: [See p.85] a. Introducing concepts of renewal and rebirth into the analysis of industrial change b. Recognizing the cooperation is as important in business as competition *c. Proposing that competitive behavior determines industry structure rather than the other way round d. Viewing competition is essential for the renewal of mature and declining industries 5. The key implication of “hypercompetition” in business is that: [See p.85] *a. Competitive advantage is temporary b. Technological change will continue to accelerate c. “If it ain’t broke, don’t fix it” is an obsolete piece of advice d. The concept of Schumpeterian competition needs to be updated to realities of the 21st century.

6. The prediction that hypercompetition makes competitive advantage temporary: [See p.85] a. Is confirmed by empirical research shows that the answer is Yes b. Is refuted by empirical research shows that the answer is No *c. Has not been answered by empirical research d. Cannot be answered by empirical research because competitive advantage cannot be measured.

7. Winner-take-all industries, where the leading firm accounts for the great majority of the industry’s total profit, are usually the result of: © 2019 John Wiley & Sons, Inc.

[See pp.85-86] a. Economies of scale b. Economies of scope *c. Network externalities d. Product differentiation 8. The difference between substitute and complementary products may be summarized as follows: [See pp.86-87] *a. Substitutes reduce the value of a product, whereas complements increase value b. Complements reduce the value of a product, whereas substitutes increase value c. Substitutes cannot be used together, whereas complements must be used in combination d. Complementary relationships increase the profitability of all firms engaged in supplying them; substitute relationships reduce the profitability of all firms supplying them.

9. Video game consoles and video games are complementary products: the availability of one increases the value of the other. In the past the suppliers of consoles were able to appropriate most of the profits generated by video game systems because: [See pp.86-87] a. Video game consoles cost more to develop than video games b. The consoles were more powerful determinant of the consumer experience than the games *c. The console suppliers controlled technology and distribution giving them more bargaining power than the suppliers of video games d. The console makers—Nintendo, Sony and Microsoft—were bigger companies than the suppliers of video games.

10. The producer of a complementary product can maximize its relative bargaining power by means of: [See pp.86-87] a. Adopting a differentiation strategy that allows it to sell at a premium price b. Adopting a cost cutting strategy to provide its product at the lowest possible cost and so exploit economies of scale c. Restricting complementors’ access to the market *d. Commoditizing the market for the complementary good.

11. The key problem facing Nespresso in implementing a “razors and blades” strategy for its Nespresso system is that: [See p.87] *a. It has been unable to prevent the emergence of other suppliers of Nespresso-compatible coffee capsules b. Its Nespresso coffee machines are manufactured under license by other companies c. Keurig Green Mountain is the market leader for capsule coffee systems in the US d. The high cost of Nespresso capsules compared to traditionally-packaged coffee 12. Business model mapping is a useful technique for developing strategy for firms: [See pp.88-89] a. In mature industries b. In technology-based industries *c. Which inhabit complex business ecosystems d. Which are seeking venture capital funding 13. The contribution of game theory to the field of strategic management is in: [See p.91] a. Generating more accurate predictions about competitive behavior b. Extending the theory of competition to embrace cooperation c. Extending the analysis of competitive behavior to the realms of politics, diplomacy, and social behavior *d. Permitting a more rigorous framing of competitive situations and strategic decisions 14. The key insight from the “prisoners’ dilemma” game is: [See pp.92-93] © 2019 John Wiley & Sons, Inc.

*a. Competitive behavior can create an outcome that is inferior for all involved in a situation b. The principle of “honor among thieves” is inapplicable either to thieves or to business executives c. In every social interaction, the inability to communicate effectively always results in an inferior outcome d. Trust can play a critical role in creating favorable outcomes form both crime and business 15. If administering deterrence is costly or unpleasant for the threatening party, then: [See p.92] *a. It may lack credibility b. It will always lack effectiveness c. It will need to be supported by appropriate signaling d. It reinforces the power of the threatening party 16. The relationship between commitment and strategic options may be best described as: [See p.92] a. Commitments increase the value of real options b. By committing to a set of options, a firm can reconcile two sources of value: value from deterring competitors and value from real options *c. Making commitments inevitably involve giving up options d. The two reside in different realms of analysis: commitments can be analyzed using game theory; real options can be analyzed using financial theory 17. Signaling refers to: [See p.94] a. Communications that announce your strategic intentions or plans to rivals *b. Any deliberate action that is intended to influence other players’ perceptions or behavior c. Deception through misinformation d. Internal communications that divert strategic orientations and obtain the buy-in of the organization’s key stakeholders 18. The relationship between competition and cooperation can be described as follows: [See pp.92-93] a. Industries either compete or cooperate; if they cooperate, they are likely to be in breach of competition law b. Cooperation and competition may exist in an industry, but not at the same time *c. Both can co-exist simultaneously d. Both can co-exist at the same time, but not in the same industry segment or strategic group 19. In a market where Firm A and Firm B are leading suppliers, if Firm A initiates a price cut, the likelihood that Firm B responds with an identical price cut will be greater: [See pp.96-99] a. If Firm B’s goal is to maximize profit *b. If Firm B’s goal is to maximize market share c. If Firm B is a private rather than a public (listed) company d. If the market is growing.

20. Competitive intelligence, the systematic collection and analysis of information about rival firms, is: [See pp.95-98] a. A practice which, though legal in most countries, is unethical b. Likely to distract firms from their efforts to establish positions of competitive advantage based upon their distinctive strengths *c. An important component of a firm’s environmental scanning and strategic analysis d. A useful activity because it can help firms imitate the strategies of their more successful competitors.

21. The main purpose of competitive intelligence is to: [See pp.95-98] *a. Forecast competitors’ behavior b. Assess competitors’ resources and capabilities © 2019 John Wiley & Sons, Inc.

c. Signal to competitors in order to influence their behavior d. Gain access to competitors’ trade secrets 22. The distinction between legitimate competitive intelligence and industrial espionage: [See pp.95-98] a. Is clearly defined by legislation and case law relating to trade secrets *b. Is not always clear c. Is non-existent – they overlap d. Is easily resolved by hiring a good lawyer 23. To attempt to predict competitive behaviors, Porter suggests a four-step framework, where analysts must identify: [See pp.95-98] *a. The competitor’s current strategy, its objectives, its assumptions about the industry and itself, and its available resources and capabilities b. The competitor’s current strategy, its future strategy, its assumptions, and its vulnerabilities c. The competitor’s assumptions about the industry, its available resources and competencies, its objectives, and its competitive advantage d. The competitor’s available resources and competencies, its objectives, then its competitive advantage, and finally its performance 24. Segmentation is a process through which: [See pp.98-101] a. Market demand is analyzed through identifying different customer groups *b. Industries are disaggregated into more narrowly-drawn markets c. Industries are divided into groups of similar products d. Industries are divided into separate geographical markets 25. The main use of industry segmentation analysis is to: [See pp.98-101] *a. Identify the most attractive segments for a firm to locate within b. Understand better the needs of different customer groups c. Formulate better marketing strategies d. Predict the likely evolution of market structure 26. Barriers to mobility are: [See p.99] *a. Barriers that protect a segment from firms established in other segments of the same industry b. Barriers that protect incumbents from established firms in other industries rather than from new start-up companies c. Obstacles that a firm faces in changing its strategy d. Barriers that prevent globalization and developing a firm’s business abroad 27. The difference between barriers to entry and barriers to mobility is: [See p.99] a. The sources of barriers to mobility are different than the sources of barriers to mobility b. There is no real difference c. Barriers to mobility are less effective than barriers to entry *d. Barriers to entry protect the industry as a whole whereas barriers to mobility protect segments within the industry 28. A firm will choose to compete across multiple segments rather than specialize in a single segment if: [See p.101] a. It is a publicly-listed company that than a family owned company *b. The same resources and capabilities can be deployed in different segments c. Segments are defined by distinct socio-economic groups of customers d. Barriers to mobility are high. © 2019 John Wiley & Sons, Inc.

29. “Profit pool mapping” describes a technique for: [See p.101] *a. Analyzing the distribution of profit across different stages of an industry’s value chain b. Analyzing the distribution of value added across different stages of an industry’s value chain c. Analyzing competitive advantage in the different stages of an industry’s value chain d. Analyzing the distribution of an industry’s profit among the member firms of that industry 30. A strategic groups consists of: [See p.102] a. Firms that follow the same generic strategies (e.g. cost leadership or differentiation) *b. Firms within an industry that have similar strategies c. Firms that occupy the same industry segment d. Firms that target the same customer groups 31. Strategic group analysis is primarily useful for: [See p.102] a. Identifying “blue ocean” opportunities *b. Describing and understanding the strategic positioning of firms within an industry c. Identifying the strategies that are most conducive to profitability within an industry d. Identifying which strategic niches in an industry are least saturated and therefore have the greatest profit potential 32. In the European airline industry, EasyJet, Baltic Air, WizzAir, and Ryanair:

[See p.102] a. Have different route networks, therefore belong to different strategic groups *b. Have similar strategies, hence belong to the same strategic group c. Belong to the same strategic group and can therefore be expected to have similar financial performance d. Have little in common

© 2019 John Wiley & Sons, Inc.

Contemporary Strategy Analysis 10e

TEST BANK: CHAPTER 5 Analyzing Resources and Capabilities True or False Questions 1. Strategy is concerned with matching a firm’s resources and capabilities to the opportunities emerging from its environment.

[See p.108] *a. T b. F 2. David’s victory of over Goliath (as portrayed in The Bible) demonstrates the importance of aligning strategy with one’s resources and capabilities.

[See pp.108-109] *a. T b. F

3. The “resource-based view” emphasizes that a firm’s strategy needs to be environmentally sustainable.

[See p.108] a. T *b. F 4. The more stable is a firm’s external environment, the more likely it is that the firm’s resources and capabilities, rather than customer needs, will offer a more stable foundation for strategy.

[See p.109] a. T *b. F 5. Honda Motor Company, Microsoft, and 3M Corporation are examples of companies whose corporate strategies have been focused on satisfying a clearly defined customer need.

[See pp.109-110] a. T *b. F

6. The failure of Eastman Kodak points to the difficulties that companies face in acquiring the resources and capabilities needed to adapt to a radical technological change that transforms their core business.

[See p.111] *a. T b. F 7. The ability of established firms to reconfigure their resources and capabilities around new technologies means that, typically, disruptive technologies are pioneered by established rather than new firms.

[See p.111] a. T *b. F 8. The profits arising from market power are called monopoly rents, whereas those arising from superior resources are Ricardian rents [See p.111] *a. T b. F

© 2019 John Wiley & Sons, Inc.

9. The resource-based approach to strategy implies that strategic management is more about exploiting distinctive differences rather than trying to emulate other companies.

[See pp.111-112] a. T *b. F 10. Corporate balance sheets do not include human resources (since these are not owned by the firm), apart from this major exception, balance sheets offer a comprehensive picture of a firm’s resources.

[See p.113] a. T *b. F 11. One indicator of the growing importance of intangible resources is the widening difference between firms’ market capitalization and the balance sheet value of their assets.

[See p.114]. *a. T b. F 12. Companies with the highest ratios of market value to book value tend to be those, either with valuable brands or valuable proprietary technologies.

[See pp. 114-115] *a. T b. F 13. The trend among companies to “hire for attitude; train for skills” is the result of research identifying that the importance of psychological and social aptitudes in determining superior work performance.

[See p.115] *a. T b. F 14. “Organizational capability” and “organizational competence” refer to two concepts which, although related, are different.

[See p.117] a. T *b. F 15. According to Prahalad and Hamel, a company’s core competences are those capabilities that are fundamental to its strategy and to its performance.

[See p.117] *a. T b. F 16. Porter’s value chain is useful tool for understanding the sequence of activities that a firm performs but is of limited value in mapping a firm’s resources and capabilities.

[See p.117] a. T *b. F 17. Organizational capabilities are built upon an organization’s processes and routines.

[See p.118] *a. T b. F 18. The notion that organizational capabilities form a “hierarchy of integration” in which specialized capabilities are combined to form more general capabilities is only relevant to mature, stable industries.

[See p.118] a. T © 2019 John Wiley & Sons, Inc.

*b. F 19. Superior capability need to be based upon superior resources.

[See p.119] a. T *b. F 20. For a resource or capability to be a source of competitive advantage, two conditions must be present: scarcity and relevance [See p.120] *a. T b. F 21. A strong brand is unlikely to be a source of sustainable competitive advantage since brands lack durability and can be purchased or created through advertising and promotion.

[See pp.120-121] a. T *b. F

22. The more a capability is based on complex networks of interacting organizational routines, the more strategically important it is because it is difficult for rivals to replicate.

[See p.122], *a. T b. F 23. When a firm’s capabilities are based upon team effort rather than the skills of star employees the returns from those capabilities accrue to employees rather than to shareholders.

[See p.123] a. T *b. F 24. Benchmarking is seldom an effective means of assessing the strength of a firm’s resources and capabilities relative to those of competitors.

[See p.123] *a. T b. F 25. When a firm identifies a resource or capability that is a key weakness, the strategic response should be to upgrade that resource or capability through investment.

[See p.125] a. T *b. F 26. For the purposes of strategy formulation, a firm needs to consider only those resources and capabilities that are strategically unimportant. Any strengths in what appear to be strategically unimportant resources and capabilities (“superfluous strengths”) are best ignored.

[See p.125] a. T *b. F* 27. The framework of resource and capability analysis does not generate strategy options for a firm, it is a tool for helping the firm to identify its potential for competitive advantage.

[See pp.126-127] *a. T b. F

© 2019 John Wiley & Sons, Inc.

Multiple choice questions 1. The main implication of the resource-based view of firm is: [See pp.108-109] a. The boundaries of the firm are determined by the firm’s resources rather than by transaction costs b. The resources of the firm are the foundation for its capabilities *c. Resources and capabilities are the principal basis for firm strategy and the primary source of profitability d. Ricardian rents are a more important source of firm profitability than monopoly rents 2. Strategy needs to take account of both the requirements of the firm’s external environment and the firm’s own resources and capabilities. Resources and capabilities rather than requirements of the external environment offer a more stable basis for strategy formulation when: [See pp.108, 109, 111] a. The firm is engaged in the exploitation of natural resources such as petroleum or metal *b. The external environment is in a state of flux c. When the firm is supplying producer goods rather than consumer goods d. When the firm is a multinational corporation.

3. The main strategic lesson to be drawn from the Biblical story of David and Goliath is: [See p.109] a. The importance of first-mover advantage *b. Adapt strategy to your relative strengths c. Conventional strategies don’t work for newcomers d. The Israelis usually win.

4. In 1990, C.K. Prahalad and Gary Hamel introduced the concept of “core competence.” Their argument was that: [See p.109] a. Competence was more important than capability as a basis for sustainable competitive advantage b. Management should accumulate the resources that form the basis of competences *c. Strategy should be focused on both developing and exploiting firms’ distinctive capabilities d. Competitive advantage rather than industry attractiveness was the primary source of superior profitability 5. The difficulties faced by Eastman Kodak, Smith Corona. and Olivetti in adapting to radical technological change within their markets point to: [See p.111] a. The failure of senior managers to understand the implications of new technologies. b. The power of digital technology as a force for creative destruction c. The need for firms to devote more resources to technological forecasting *d. The difficulties established firms experience in building the new capabilities 6.There are two types of economic rent (pure profit): [See pp.111] *a. Monopoly rent and Ricardian rent b. Market power and competitive advantage c. Monopoly rent and quasi rent d. Cost advantage and differentiation advantage 7. One implication of the resource-based perspective is that: [See pp.111-112] a. Firms tend to adopt similar or close strategies *b. Aligning strategies with resources and capabilities implies that firms emphasize their differences rather than their similarities c. Firms focus on building a stronger portfolio of capabilities than their rivals d. Firms focus on reducing their vulnerability by eliminating their weaknesses © 2019 John Wiley & Sons, Inc.

8. The difference between a resource and a capability is: [See pp.112-113] *a. A resource is a productive asset; a capability refers to what the firm can do b. A resources are static; capabilities are dynamic c. A resource is a weak source of competitive advantage whereas a capability is a strong one d. There is no clear distinction: a capability is a type of resource 9. The main problem in using a company’s balance sheet to identify its resources and capabilities is that: [See pp.113-115] a. Human resources are not included b. Intangible resources are mis-valued, and some are excluded *c. Both (a) and (b) d. Neither (a) nor (b) 10. To exploit its tangible assets more effectively requires that a firm: [See pp.113-114] a. Economizes on these assets by changing its depreciation policy *b. Economizes on underutilized assets and redeploys assets into more profitable uses c. Expands sales in order to ensure they are fully deployed d. Leases assets rather than owning them in order to boost return on capital employed 11. Organizational culture is an important resource for most business enterprises because: [See p.114] a. It help employees to understand one another b. It has a powerful motivating effect *c. It influences the capabilities a business develops and how these capabilities are exercised d. It shapes a business’s vision 12. Intangible resources tend to be more valuable than tangible resources because: [See p.114, 121-122] a. They are easier to acquire b. They are cheaper to acquire *c. They are more likely to provide sustainable competitive advantage d. All of the above 13. A major reason why many companies have the high valuation ratios (ratio of stock market value to balance sheet net asset value) is: [See p.114-115] a. Stock market irrationality which results in some companies becoming overvalued *b. The undervaluation of intangible resources on companies’ balance sheets c. Stock market doubts over the valuation of financial assets by companies and their auditors d. The rise of intellectual property valuation as a result of recent patent litigation.

14. For most organizations, geographical location should be regarded as: [See pp.113-115, 125] *a. A resource whose characteristics can be an important source of competitive advantage b. A formerly-important resource which is becoming increasingly irrelevant in a digital world c. An organizational characteristic, not a resource d. A source of competitive advantage only if it offers access to an industry ecosystem such as Silicon Valley for IT firms and New York for advertising firms 15. Firm’s with outstanding capabilities are typically those which: [See pp.116-119] a. Possess the best resources b. Have developed their organizational routines over the longest periods of time *c. Are able to integrate their resources most effectively © 2019 John Wiley & Sons, Inc.

d. Have the most effective leaders.

16. Prahalad and Hamel’s “core competences” tend to be broad-based organizational capabilities that: [See p.118] *a. Integrate a number of more specialist organizational capabilities b. Are also known as “dynamic capabilities” c. Are found primarily in Japanese companies d. Are mainly concerned with technological expertise 17. Enterprise Resource Planning software (such as that supplied by SAP) is unlikely, on its own, to be source of competitive advantage because: [See p.120] a. It is expensive to install hence its benefits are offset by its costs *b. It is available to any firm that wishes to purchase it; hence, it is not scarce c. It needs to be updated periodically, hence it lacks durability d. Its benefits are limited to those activities that require substantial information processing 18. A well-established brand can be a source of sustainable competitive advantage because: [See pp.121-122 a. Consumers will always pay a premium for a recognized brand b. Brands are protected by trademark law, hence cannot be copied c. Brand create product differentiation barriers to entry that protect a firm from competition from new entrants *d. Brands are durable, they lose value when transferred between firms, and are costly to create.

19. Resources lack transferability between firms when: [See pp.121-122] a. They are tangible (rather than intangible) b. They are difficult to replicate c. When the firms involved are in different industries *d. Lack of information about the characteristics of the resources impedes market transactions 20. “Benchmarking” is: [See p.123] a. A process to ensure that a firm is as similar to competitors as possible b. An HR manager’s tool to set and justify the firm’s salary scheme versus the industry norm *c. A way to compare a firm’s resources and capabilities against those of competitors d. All of the above 21. The firm’s ability to appropriate the rents generated by its organizational capabilities: [See pp.122-123] a. Is guaranteed by the fact that firms have full ownership of their capabilities b. Is greater for firms in high technology than in low technology industries c. Is weakened if a firm uses independent contractors instead of full-time employees *d. Depends upon the extent to those capabilities are embedded in team-based processes that are heavily dependent upon corporate systems 22. A bank is establishing a fixed income trading department. It is considering whether to hire a team of star traders or to invest a similar sum of money in developing a proprietary, automated trading system. The most valid reason for investing in the automated trading system in preference to hiring star traders is: [See pp.122-123] *a. The proprietary trading system is likely to generate better returns since star traders are in a powerful position to negotiate pay packages which appropriate the major part of the profit they create b. Advanced software is better than human intuition at identifying mispricing in financial markets c. Star traders are difficult to manage and can easily become “rogue traders” d. It’s difficult to motivate traders once they have earned their first few million.

© 2019 John Wiley & Sons, Inc.

23. When a company has weaknesses relative to competitors among strategically important resources and capabilities, the appropriate strategic response is to: [See pp.124-125] a. Invest heavy in order to upgrade weaknesses b. Diversify in order to find new areas of business where these resources and capabilities are unimportant to competitive advantage *c. Outsource those activities where third parties can offer superior capabilities while positioning the business to reduce vulnerable to remaining weaknesses d. Employ management consultants to seek a solution.

24. If an organization possesses strengths in a resource or capability that bears little relationship to the industry’s key success factors it should: [See p.125] a. Regard that resource or capability as strategically irrelevant b. Seek to sell that resource r capability to another organization *c. Seek an innovative approach to making that resource or capability strategically relevant d. Adopt a niche strategy.

© 2019 John Wiley & Sons, Inc.

Contemporary Strategy Analysis 10e

TEST BANK: CHAPTER 7 The Sources and Dimensions of Competitive Advantage True or false questions 1. Of the two sources of superior profitability, industry attractiveness and competitive advantage within an industry, the latter is more important.

[See p.156] *a. T b. F 2. If a firm is more profitable than its rivals, this invariably means that it possesses a competitive advantage.

[See pp.156-157] a. T *b. F 3. Competitive advantage without purposeful activity by a firm—it may arise through it being favored by an external change.

[See pp.157-158] *a. T b. F 4. Strategic innovation comprises the introduction of novel products or processes that embody new technology [See p.158] a. T *b. F 5. Most business model innovation involves novel approaches to creating and/or capturing value within an industry.

[See pp.158-159] *a. T b. F 6. Most of the business models deployed in electronic commerce have no historical precedence [See p. 159] a. T *b. F 7. The main challenge of business model innovations is conceiving of novel business models, not implementing them.

[See p. 160] a. T *b. F 8. In order to discover a “blue ocean” of uncontested market space, a firm must use technological innovation to create a new product market [See pp.160-161] a. T *b. F 9. Kim and Mauborgne’s “strategy canvas” is a tool for identifying novel recombinations of product attributes. © 2019 John Wiley & Sons, Inc.

[See pp.160-161] *a. T b. F 10. A firm’s competitive advantages can only be sustained if it is protected by some form of “isolating mechanisms.”

[See p.162] *a. T b. F 11, Between July 2012 and August 2014, Uber launched in 42 countries outside the US. The speed of this global rollout may be viewed as an attempt to pre-empt the market for ride-sharing services.

[See p.163] *a. T b. F 12. Causal ambiguity—difficulties over diagnosing the sources of a rival’s competitive advantage—creates uncertain imitability—uncertainty over the ability to replicate that competitive advantage.

[See p.163] *a. T b. F 13. Causal ambiguity is a type of isolating mechanism.

[See pp.162-163] *a. T b. F 14. The fact that a firm’s “activity system” comprises closely linked, complementary activities simplifies the task of imitating a competitor’s strategy.

[See pp.163-164] a. T *b. F 15. Sustainable competitive advantage can be established in all types of market—including those financial markets deemed to be “efficient.”

[See p.165] a. T *b. F 16. If the prices of securities fully reflect all the information available, then passive investors are best advised to invest in index-based mutual funds (unit trusts) with the lowest administration costs.

[See p. 165] *a. T b. F 17. A contrarian strategy—doing the opposite to what the majority of other market participants are doing— is likely to generate superior returns in markets subject to systematic behavioral trends.

[See p. 165] *a. T b. F 18. There are two primary sources of competitive advantage: cost advantage and differentiation advantage.

[See p.166] *a. T b. F 19. The cost reductions that firms derive from moving down their experience curves are mainly the result of learning which increases the productivity of labor. © 2019 John Wiley & Sons, Inc.

[See pp.166, 167, 170] *a. T b. F 20. The main strategy implication of the Boston Consulting Group’s analysis of experience curves was that firms should avoid cutting prices in order to expand market share.

[See p.167] a. T *b. F 21. The predominance of large companies in most manufacturing industries is mainly the result of economies of scale.

[See p.168] *a. T b. F 22. In highly concentrated industries such as passenger jet aircraft, microprocessors, construction equipment, and video game consoles, the scale economies in production are more important than scale economies in product development.

[See p.169] a. T *b. F 23. Achieving productivity gains from process innovation usually requires that new production processes are matched by other management changes—including changes in human resource management.

[See p.170] *a. T b. F 24. A basic principle of Business Process Reengineering is that dramatic improvements in cost efficiency are better achieved through incremental improvements rather than fundamental redesign.

[See pp.170-171] a. T *b. F 25. Business Process Reengineering that starts with a “clean sheet of paper” runs the risk of destroying some valuable organizational capabilities which have taken many years to build [See pp.170-171] *a. T b. F 26. The potential for spreading fixed costs over a greater volume of output means that unit cost continues to decline even after full capacity utilization has been reached.

[See pp.171-172] a. T *b. F 27. One reason that the value chain analysis is a valuable tool for cost analysis is that cost drivers tend to be very different between the different activities of the firm.

[See pp.172-173] *a. T b. F 28. Achieving a differentiation means making your offering unique in a way that makes it more valuable to customers, irrespective of the costs of creating that differentiation.

[See p.173] a. T *b. F

© 2019 John Wiley & Sons, Inc.

29, Commodity products lack the potential for differentiation: competitive strategy is limited to exploiting the sources of cost advantage.

[See p.173] a. T *b. F 30. Physical characteristics of a product are of little importance in determining its potential for differentiation [See pp.173-174] a. T *b. F 31. Designing a differentiation strategy requires understanding every possible interaction between a firm and its customers [See pp.174-175] *a. T b. F 32. Tangible differentiation comprises observable product features such as shape, color, size, and style; it does not include performance dimensions such of the product – for instance its reliability and durability.

[See pp.175, 179] a. T *b. F 33. The principal distinction between segmentation and differentiation is that segmentation is a strategic choice by a firm while differentiation is a feature of market structure.

[See p.176] a. T *b. F 34. Cost and differentiation strategies are similar in terms of their potential to confer sustainable competitive advantage.

[See p.176] a. T *b. F 35. To understand customer’ willingness to pay for differentiation, it is important to know what motivates customers, and the criteria they apply when choosing among competing products.

[See pp.176-178] *a. T b. F 36. Product integrity refers to the consistency of a firm’s differentiation across all differentiated features – it is the balance of the overall impression left on most customers’ minds [See p.180] *a. T b. F 37. The difference between “search goods” and “experience goods” depends upon whether customers can ascertain the product’s true attributes: on inspection or only after consuming the product [See pp.180-181] *a. T b. F

Multiple choice questions 1. Competitive advantage can be defined as: [See pp.156-157] © 2019 John Wiley & Sons, Inc.

a. A firm’s ability to establish market leadership b. A firm’s ability to grow faster than its competitors *c. A firm’s potential to earn a rate of profit that is persistently higher than its rivals d. A firm’s potential for launching innovative new products.

2. A firm’s competitive advantage is not necessarily revealed in higher profitability; it may be reflected in: [See p.157] a. Expanding market share b. An aggressive quest for acquisitions c. Increasing employee bonuses *d. Expanding market share and/or increasing employee bonuses ○ 3. When an industry is subject to externally generated changes, the firms which are most likely to establish a competitive advantage are: [See pp.157-158] a. Those with the highest market share *b. Those that that respond most quickly to the change and have the resources and capabilities that are most closely aligned to the emerging success factors c. Those with the greatest agility and capacity for innovation d. A combination of (a), (b), and (c).

4. As markets become more turbulent and unpredictable, seizing opportunities to establish competitive advantage depends primarily upon: [See p.158] a. Good forecasting b. Quick identification of emerging changes c. Speed of response *d. Agility: quick identification of emerging changes and speed in responding to them 5. Most of the innovative business models deployed by e-commerce firms: [See pp.158-159] a. Could not have been conceived of prior to the advent of digital technology *b. Have their roots in in business models developed by firms in the pre-digital era c. Exploit network externalities d. Are dependent upon the ability to generate revenues from advertising 6. Conceiving of innovative business models typically involves: [See p.160] *a. Using analogies to transfer and adapt business models from other business sectors b. Using brain storming to generate creative ideas c. Deploying artificial intelligence d. Exploring the interface between customer need and the firm’s resources and capabilities 7. In strategic management, the expression “blue oceans” refers to: [See p.160] a. Radical innovation *b. The potential offered by uncontested market space c. The campaign to reduce pollution in the world’s oceans d. Cost reduction through offshoring production 8. The usefulness of the strategy canvas in developing blue ocean strategies rests on its ability to: [See pp.160-161] a. Suggest possible applications of frontier technologies *b. Identify opportunities for recombining existing product attributes in novel ways c. Identify unfulfilled customer needs d. Reconfigure a firm’s value chain 9. Isolating mechanisms are: [See p.162] © 2019 John Wiley & Sons, Inc.

*a. Barriers to the erosion of interfirm profit differentials b. Mechanisms that impede the equilibration of rents between industries c. The same as “barriers to mobility” d. Sources of disequilibrium that cause the profitability of different firms in an industry to diverge over time 10. Which of the following is not an isolating mechanism?

[See pp.162-165] a. Private ownership of a company which means that it is not obliged to publish its financial statements b. Competitive advantage which is based upon the interaction of a number of different resources and capabilities *c. Competitive advantage based upon exploiting pricing anomalies d. Competitive advantage based upon resources that are difficult to transfer and slow to replicate.

11. Pre-emption strategies can help sustain a firm’s competitive advantage through: [See p.163] *a. Reducing the opportunities available to competitors to invade the firm’s strategic space b. Threatening competitors with retaliation c. Engaging in limit pricing that makes entry unprofitable for would-be rivals d. Reinforcing barriers of mobility 12. Causal ambiguity allows a firm’s competitive advantage to be sustained because potential rivals are: [See pp.163-164] a Deterred from directly competing with the advantaged firm *b. Unable to identify the sources of the advantaged firm’s superior performance c. Unable to acquire the resources needed to compete against the advantaged firm d. All the above 13. Complementarity between a firm’s management practices implies that: [See pp.164-165] Sa. If a firm wishes to imitate the strategy of a rival will need to replicate that rival’s entire set of management practices b. Adopting an industry “best practice” is may cause performance to deteriorate *c. Both (a) and (b) d. Neither (a) nor (b) 14. The principal strategy implication of the experience curve is that: [See pp.166-167] *a. Firms should aim to drive volume growth through increasing their market shares. b. To reduce costs firms should prioritize learning c. Firms should concentrate on those products with the greatest sales potential d. Firms that aim to become cost leaders need to focus on mass production and mass marketing 15. Economies of scale in activities such as R&D, new product development, advertising, and government lobbying arise mainly because of: [See p.169] a. Specialization—as these activities grow in scale, there are productivity gains from division of labor *b. Indivisibilities—these activities involve large fixed costs that can be spread over a larger volume of output c. Technical input–output relationships—increases in output do not require proportionate increases in input d. Increased bargaining power—large companies can negotiate lower input prices for these activities 16. In retailing, the cost advantages of large retail chains (such as Wal-Mart in the US, Tesco in Britain, Metro in Germany, and Carrefour in France) is primarily the result of: [See pp.169-172] a. Scale economies in operating large individual retail units *b. Lower costs of bought-in products as a result of superior bargaining power○ c. Higher capacity utilization in retailing and distribution d. Using superior bargaining power to pay lower wage rates.

© 2019 John Wiley & Sons, Inc.

17. Compared with simple products like flour or toilet paper, complex products such as cars or hotels: [See p.173] a. Require less efforts to create image differentiation *b. Greater potential for differentiation○ c. Offer similar opportunities for differentiation--it all depends upon the creativity of product designers and marketers d. Run the risk that differentiation will restrict them to a narrow market niche 18. Which of the following product categories offers the greatest potential for differentiation?

[See pp.173-175] *a. Clothes and restaurants b. Cement and wheat c. Jet fuel for airline jets d. Sulfur and ethylene 19. What is the difference between differentiation and segmentation?

[See p.176] a. There is no difference between the two3 *b. Differentiation deals with the “how” a firm chooses to compete, while segmentation describes “where” in the entire market a firm chooses to compete c. Differentiation is a firm’s strategic choice, whereas segmentation is given by its environment d. Segmentation is the head of the marketing department’s responsibility, whereas the CEO is in charge of differentiation 20. In supplying “lifestyle” products which are designed to meet consumers’ social and psychological needs, the key to effective differentiation is: [See pp.178,180] a. A relentless pursuit of quality b. Thorough market research *c. Product integrity d. Market segmentation.

21. Banks spend more money on their head office buildings than most other large corporations because: [See pp.189-181] a. They tend to be located in financial centers where property prices are high *b. They offer “experience goods”, hence they need to signal wealth and stability c. Their CEOs are more committed to the display of wealth than other CEOs d. Because their products are essentially commodities, they need to find alternative ways of differentiating.

22. “Experience goods” are those which: [See pp.189-181] *a. Have performance attributes that are difficult to ascertain at the moment of purchase b. Only customers with previous experience of using these goods would rationally consider purchasing c. Only firms with wide experience in an industry would rationally consider making d. Have been produced by the firm furthest down the learning curve 23. Firms pursuing differentiation advantages will implement their strategies differently from those pursuing cost advantage. The implementation of differentiation strategy is likely to feature: [See p.199] a. Employee remuneration based upon individual productivity b. Frequent performance reporting c. High levels of outsourcing *d. Low levels of job specialization.

24. According to Porter, cost leadership and differentiation are: [See pp.183-185] a. What leads a firm to “be stuck in the middle” b. Two names for the same fundamental strategy © 2019 John Wiley & Sons, Inc.

*c. Distinct generic strategies d. Strategies that can be pursued simultaneously 25. The examples of Ikea and Southwest Airlines demonstrate: [See pp.183-185] a. The power of brand as a factor of success b. The quality of the top management of these firms c. The power of advertising *d. How a cost-leadership strategy can be combined with distinctive product differentiation

© 2019 John Wiley & Sons, Inc.

Contemporary Strategy Analysis 10e

TEST BANK: CHAPTER 7 The Sources and Dimensions of Competitive Advantage True or false questions 1. Of the two sources of superior profitability, industry attractiveness and competitive advantage within an industry, the latter is more important.

[See p.156] *a. T b. F 2. If a firm is more profitable than its rivals, this invariably means that it possesses a competitive advantage.

[See pp.156-157] a. T *b. F 3. Competitive advantage without purposeful activity by a firm—it may arise through it being favored by an external change.

[See pp.157-158] *a. T b. F 4. Strategic innovation comprises the introduction of novel products or processes that embody new technology [See p.158] a. T *b. F 5. Most business model innovation involves novel approaches to creating and/or capturing value within an industry.

[See pp.158-159] *a. T b. F 6. Most of the business models deployed in electronic commerce have no historical precedence [See p. 159] a. T *b. F 7. The main challenge of business model innovations is conceiving of novel business models, not implementing them.

[See p. 160] a. T *b. F 8. In order to discover a “blue ocean” of uncontested market space, a firm must use technological innovation to create a new product market [See pp.160-161] a. T *b. F

© 2019 John Wiley & Sons, Inc.

9. Kim and Mauborgne’s “strategy canvas” is a tool for identifying novel recombinations of product attributes.

[See pp.160-161] *a. T b. F 10. A firm’s competitive advantages can only be sustained if it is protected by some form of “isolating mechanisms.”

[See p.162] *a. T b. F 11, Between July 2012 and August 2014, Uber launched in 42 countires outside the US. The speed of this global rollout may be viewed as an attempt to pre-empt the market for ride-sharing services.

[See p.163] *a. T b. F 12. Causal ambiguity—difficulties over diagnosing the sources of a rival’s compeititve advantage—creates uncertain imitability—uncertainty over the ability to replicate that competitive advantage.

[See p.163] *a. T b. F 13. Causal ambiguity is a type of isolating mechanism.

[See pp.162-163] *a. T b. F 14. The fact that a firm’s “activity system” comprises closely linked, complementary activities simplifies the task of imitating a competitor’s strategy.

[See pp.163-164] a. T *b. F 15. Sustainable competitive advantage can be established in all types of market—including those financial markets deemed to be “efficient.”

[See p.165] a. T *b. F 16. If the prices of securities fully reflect all the information available, then passive investors are best advised to invest in index-based mutual funds (unit trusts) with the lowest administration costs.

[See p. 165] *a. T b. F 17. A contrarian strategy—doing the opposite to what the majority of other market participants are doing— is likely to generate superior returns in markets subject to systematic behavioral trends.

[See p. 165] *a. T b. F 18. There are two primary sources of competitive advantage: cost advantage and differentiation advantage.

[See p.166] *a. T b. F © 2019 John Wiley & Sons, Inc.

19. The cost reductions that firms derive from moving down their experience curves are mainly the result of learning which increases the productivity of labor.

[See pp.166, 167, 170] *a. T b. F 20. The main strategy implication of the Boston Consulting Group’s analysis of experience curves was that firms should avoid cutting prices in order to expand market share.

[See p.167] a. T *b. F 21. The predominance of large companies in most manufacturing industries is mainly the result of economies of scale.

[See p.168] *a. T b. F 22. In highly concentrated industries such as passenger jet aircraft, microprocessors, construction equipment, and video game consoles, the scale economies in production are more important than scake economies in product developmnet.

[See p.169] a. T *b. F 23. Achieving productivity gains from process innovation usually requires that new production processes are matched by other management changes—including changes in human resource management.

[See p.170] *a. T b. F 24. A basic principle of Business Process Reengineering is that dramatic improvements in cost efficiency are better achieved through incremental improvements rather than fundamental redesign.

[See pp.170-171] a. T *b. F 25. Business Process Reengineering that starts with a “clean sheet of paper” runs the risk of destroying some valuable organizational capabilities which have taken many years to build [See pp.170-171] *a. T b. F 26. The potential for spreading fixed costs over a greater volume of output means that unit cost continues to decline even after full capacity utilization has been reached.

[See pp.171-172] a. T *b. F 27. One reason that the value chain analysis is a valuable tool for cost analysis is that cost drivers tend to be very different between the different activities of the firm.

[See pp.172-173] *a. T b. F 28. Achieving a differentiation means making your offering unique in a way that makes it more valuable to customers, irrespective of the costs of creating that differentiation. © 2019 John Wiley & Sons, Inc.

[See p.173] a. T *b. F 29, Commodity products lack the potential for differentiation: competitive strategy is limited to exploiting the sources of cost advantage.

[See p.173] a. T *b. F 30. Physical characteristics of a product are of little importance in determining its potential for differentiation [See pp.173-174] a. T *b. F 31. Designing a differentiation strategy requires understanding every possible interaction between a firm and its customers [See pp.174-175] *a. T b. F 32. Tangible differentiation comprises observable product features such as shape, color, size, and style; it does not include performance dimensions such of the product – for instance its reliability and durability.

[See pp.175, 179] a. T *b. F 33. The principal distinction between segmentation and differentiation is that segmentation is a strategic choice by a firm while differentiation is a feature of market structure.

[See p.176] a. T *b. F 34. Cost and differentiation strategies are similar in terms of their potential to confer sustainable competitive advantage.

[See p.176] a. T *b. F 35. To understand customer’ willingness to pay for differentiation, it is important to know what motivates customers, and the criteria they apply when choosing among competing products.

[See pp.176-178] *a. T b. F 36. Product integrity refers to the consistency of a firm’s differentiation across all differentiated features – it is the balance of the overall impression left on most customers’ minds [See p.180] *a. T b. F 37. The difference between “search goods” and “experience goods” depends upon whether customers can ascertain the product’s true attributes: on inspection or only after consuming the product [See pp.180-181] *a. T b. F

© 2019 John Wiley & Sons, Inc.

Multiple choice questions 31. Competitive advantage can be defined as: [See pp.156-157] a. A firm’s ability to establish market leadership b. A firm’s ability to grow faster than its competitors *c. A firm’s potential to earn a rate of profit that is persistently higher than its rivals d. A firm’s potential for launching innovative new products.

32. A firm’s competitive advantage is not necessarily revealed in higher profitability; it may be reflected in: [See p.157] a. Expanding market share b. An aggressive quest for acquisitions c. Increasing employee bonuses *d. Expanding market share and/or increasing employee bonuses ○ 33. When an industry is subject to externally generated changes, the firms which are most likely to establish a competitive advantage are: [See pp.157-158] a. Those with the highest market share *b. Those that that respond most quickly to the change and have the resources and capabilities that are most closely aligned to the emerging success factors c. Those with the greatest agility and capacity for innovation d. A combination of (a), (b), and (c).

34. As markets become more turbulent and unpredictable, seizing opportunities to establish competitive advantage depends primarily upon: [See p.158] a. Good forecasting b. Quick identification of emerging changes c. Speed of response *d Agility: quick identification of emerging changes and speed in responding to them 35. Most of the innovative business models deployed by e-commerce firms: [See pp.158-159] a. Could not have been conceived of prior to the advent of digital technology *b. Have their roots in in business models developed by firms in the pre-digital era c. Exploit network externalities d. Are dependent uponthe ability to generate revenues from advertising 36. Conceiving of innovative business models typically involves: [See p.160] *a. Using analogies to transfer and adapt business models from other business sectors b. Using brain storming to generate creative ideas c. Deploying articficial intelligence d. Exploring the interface between custimewr need and the firm’s resources and capabilities 41. In strategic management, the expression “blue oceans” refers to: [See p.160] a. Radical innovation *b. The potential offered by uncontested market space c. The campaign to reduce pollution in the world’s oceans d. Cost reduction through offshoring production 38. The usefulness of the strategy canvas in developing blue ocean strategies rests on its ability to: [See pp.160-161] a. Suggest possible applications of frontier technologies © 2019 John Wiley & Sons, Inc.

*b. Identify opportunities for recombining existing product attributes in novel ways c. Identify unfulfilled customwer needs d. Reconfigure a firm’s value chain 36. Isolating mechanisms are: [See p.162] *a. Barriers to the erosion of interfirm profit differentials b. Mechanisms that impede the equilibration of rents between industries c. The same as “barriers to mobility” d. Sources of disequilibrium that cause the profitability of different firms in an industry to diverge over time 37. Which of the following is not an isolating mechanism?

[See pp.162-165] a. Private ownership of a company which means that it is not obliged to publish its financial statements b. Competitive advantage which is based upon the interaction of a number of different resources and capabilities *c. Competitive advantage based upon exploiting pricing anomalies d. Competitive advantage based upon resources that are difficult to transfer and slow to replicate.

35. Pre-emption strategies can help sustain a firm’s competitive advantage through: [See p.163] *a. Reducing the opportunities available to competiors to invade the firm’s strategic space b. Threatening compeitors with retaliation c. Engaging in limit pricing that makes entry unprofitable for would-be rivals d. Reinforcing barriers of mobility 38. Causal ambiguity allows a firm’s competitive advantage to be sustained because potential rivals are: [See pp.163-164] a Deterred from directly competing with the advantaged firm *b. Unable to identify the sources of the advantaged firm’s superior performance c. Unable to acquire the resources needed to compete against the advantaged firm d. All the above 39. Complementarity between a firm’s management practices means that: [See pp.164-165] a. None: the concepts are identical in practice *b. The performance impact of a generic practice is independent of the firm’s other practices; the impact of a contextual practice depends upon the firm’s other practices c. Generic practices relate to basic functions; contextual practices tend to be more idiosyncratic d. A generic practices offers incremental performance improvement; a contextual practices leads to a new fitness peak.

41. In retailing, the cost advantages of large retail chains (such as Wal-Mart in the US, Tesco in Britain, Metro in Germany, and Carrefour in France) is primarily the result of: [See pp.179-185] a. Scale economies in operating large individual retail units *b. Lower costs of bought-in products as a result of superior bargaining power○ c. Higher capacity utilization in retailing and distribution d. Using superior bargaining power to pay lower wage rates.

42. Compared with simple products like flour or toilet paper, complex products such as cars or hotels: [See p.188] a. Fewer opportunities for differentiation *b. Greater potential for differentiation○ c. Offer similar opportunities for differentiation--it all depends upon the creativity of product designers and marketers d. Fewer incentives for differentiation because of their high costs © 2019 John Wiley & Sons, Inc.

43. Which of the following product categories offers the greatest potential for differentiation?

[See pp.188-189] *a. Clothes and restaurants b. Cement and wheat c. Jet fuel for airline jets d. Sulfur and ethylene 44. What is the difference between differentiation and segmentation?

[See p.189] a. There is no difference between the two *b. Differentiation deals with the “how” a firm chooses to compete, while segmentation describes “where” in the entire market a firm chooses to compete c. Differentiation is a firm’s strategic choice, whereas segmentation is given by its environment d. Segmentation is the head of the marketing department’s responsibility, whereas the CEO is in charge of differentiation 45. In supplying “lifestyle” products which are designed to meet consumers’ social and psychological needs, the key to differentiation advantage is: [See pp.190-193] a. A relentless pursuit of quality b. Thorough market research *c. Product integrity d. Market segmentation.

46. Banks spend more money on their head office buildings than most other large corporations because: [See p.195] a. They tend to be located in financial centers where property prices are high *b. They offer “experience goods”, hence they need to signal wealth and stability c. Their CEOs are more committed to the display of wealth than other CEOs d. Because their products are essentially commodities, they need to find alternative ways of differentiating.

47. “Experience goods” are those which: [See p.194] *a. Have performance attributes that are difficult to ascertain at the moment of purchase b. Only customers with previous experience of using these goods would rationally consider purchasing c. Only firms with wide experience in an industry would rationally consider making d. Have been produced by the firm furthest down the learning curve 48. Firms pursuing differentiation advantages will implement their strategies differently from those pursuing cost advantage. The implementation of differentiation strategy is likely to feature: [See p.199] a. Employee remuneration based upon individual productivity b. Frequent performance reporting c. High levels of outsourcing *d. Low levels of job specialization.

49. According to Porter, cost leadership and differentiation are: [See p.198] a. What leads a firm to “be stuck in the middle” b. Two names for the same fundamental strategy *c. Distinct generic strategies d. Strategies that can be pursued simultaneously 50. The examples of Ikea and Southwest Airlines demonstrate: [See p.199]

© 2019 John Wiley & Sons, Inc.

a. The power of brand as a factor of success b. The quality of the top management of these firms c. The power of advertising *d. How a cost-leadership strategy can be combined with distinctive product differentiation

© 2019 John Wiley & Sons, Inc.

Contemporary Strategy Analysis 10e

TEST BANK: CHAPTER 8 Industry Evolution and Strategic Change True/false questions 1. According to Charles Darwin it is the strongest of a species that survives.

[See p.189] a. T *b. F

2. The main drivers of industry evolution are growth of demand and the production and diffusion of knowledge.

[See p.191] *a. T b. F

3. The industry life cycle follows different phases from the product life cycle.

[See p.191] a. T *b. F

4. During the introduction phase of the industry life cycle, different technologies and design configurations compete for market acceptance.

[See p.192] *a. T b. F

5. The firm which sets the dominant product design usually goes on to be the most profitable firm in the industry.

[See p. 192] a. T *b. F 6. The establishment of a dominant design in an industry requires convergence around a common technical standard.

[See p.192] a. T *b. F 7. The establishment of a dominant design is usually associated with an industry’s transition from the maturity phase to the decline phase.

[See p.193] a. T *b. F 8. Technical standards are usually associated with network effects, dominant designs are usually not.

[See p.193] *a. T b. F © 2019 John Wiley & Sons, Inc.

9. The emergence of a dominant product design tends to coincide with a shift from process innovation to product innovation [See p.209] a. T *b. F

10. Ford’s assembly-line, mass production system and Toyota’s system of lean production were the two process innovations that transformed the manufacture of automobiles during the 20th century.

[See p.194] *a. T b. F 11. Over time, industry life cycles have become increasingly compressed.

[See p.194] *a. T b. F 12. The field of organizational ecology (a.k.a. organizational demography) proposes that a key factor encouraging the entry of new firms during an industry’s early phases of development is the increasing legitimacy of the industry.

[See pp.195-196] *a. T b. F 13. With the onset of maturity, industries often experience a “shake-out” period.

[See p.196] *a. T b. F 14. With the onset of maturity, industries often migrate from advanced industrial countries to emerging countries.

[See p.197] *a. T b. F 15. Firms that develop high levels of capability tend to find change easy because they are also able to develop new capabilities.

[See p.199] a. T *b. F 16. Organizations tend to prefer exploration for new opportunities over exploitation of existing knowledge.

[See p.199] *a. T b. F 17. “Punctuated equilibrium” refers to the tendency for organizations to follow a gradual process of transition from one equilibrium to another [See p. 200] a. T *b. F 18. Long-term change within most industries is achieved through the birth and death of companies rather than through adaptation by existing companies.

[See pp.201-202]

© 2019 John Wiley & Sons, Inc.

*a. T b. F 19. For aircraft manufacturers, the jet engine was a threat since it was a “competence destroying” innovation.

[See p.203] a. T *b. F 20. Start-up companies tend to be better at exploiting architectural innovations than established companies.

[See p.203] *a. T b. F 21. If a firm pays closely to the needs of its existing customers, it is unlikely to be blindsided by disruptive technologies.

[See p.203] a. T *b. F 22. The steam engine was a disruptive innovation for the builders of ocean-going sailing ships because steam ships were initially slower and less reliable than sailing ships.

[See p.203] *a. T b. F 23. Organizational ambidexterity refers to the ability of a single organization to possess more than one organizational capability [See p.204] a. T *b. F 24. IBM’s decision in the late 1970s to establish its new personal computer division in Florida, rather than close to its headquarters in New York state is an example of “contextual ambidexterity.”

[See pp.204-205] a. T *b. F 25. Steve Jobs’ insistence that Apple’s development teams commit to “insanely great products” that combined seemingly-impossible performance attributes is an example of how “stretch goals” can combat organizational inertia.

[See p.206] *a. T b. F 26. Multiple scenario analysis is an approach to forecasting that relies heavily upon applying advanced statistical analysis to “big data.”

[See pp.206-208] a. T *b. F 27. Organizations are like people: their essential characteristics—including their capabilities—are formed in their early stages of development.

[See pp.207-209] *a. T b. F

© 2019 John Wiley & Sons, Inc.

28. Dynamic capabilities are “higher order” capabilities that orchestrate change among operational capabilities.

[See pp. 210-11] *a. T b. F 29. Knowledge management is the application of information technology to management processes.

[See pp. 211-12] a. T *b. F 30. A major challenge for businesses that rely upon individual, tacit knowledge is that, unless that knowledge can be systematized and embodied in standardized processes, the growth prospects of the business are limited.

[See p.214] *a. T b. F

Multiple choice questions 1. The main forces driving industry evolution are: [See p.191] *a. Technology and demand b. Technology and globalization c. The quest for cost and differentiation advantage d. Government policies and global financial flows.

2. The different stages of the industry life cycles are defined primarily on the basis of: [See p.191] *a. The rate of growth of industry sales b. The characteristics of competition within the industry c. The pace of innovation within the industry d. None of the above 3. The characteristic profile of an industry life cycle has an ‘S’ shaped curve because: [See p.191] a. It is modeled on the Product Life Cycle, which is also ‘S’ shaped b. It is generated by a quadratic function c. It reflects the changing pace at which technology is diffused *d. It is the result of changes in rates of growth of market demand.

4. Which of the following developments is not a typical feature of the transition from the “introductory” to the “growth” phase of the industry life cycle?

[See pp.192-193] a. The emergence of a dominant design b. The shift from product to process innovation *c. The shift of production from advanced to emerging countries d. Rapid market penetration 5. The duration of the industry life cycle: [See pp.193-194] a. Typically extends over a century or more b. Is determined by the longevity of the firms within the industry *c. Has become compressed as the pace of technological change has accelerated d. Depends upon the ability the industry to sustain innovation © 2019 John Wiley & Sons, Inc.

6. A dominant design is best described as: [See p.192] a. A technical standard b. The product design chosen by the leading firm in an industry *c. A common product architecture d. The culmination of the process of commodification that accompanies industry evolution 7. A technical standard tends to emerge in an industry if: [See p.193] a. Economies of scale are present b. The industry has converged around a dominant design c. The industry is subject to economies of learning *d. Network effects exist 8. Which statement best describes the extent to which different industries conform to the same life cycle pattern?

[See pp.193-194] *a. The duration of the life cycle varies from industry to industry b. The same stages exist whatever the industry c. All industries have experienced a shortening of the stages of their life cycle d. Different go through a renewal of their fife cycle at different stages of their development 9. The transition from the introduction to growth phase of the industry life cycle features: [See pp.192-196] a. Increasing product differentiation b. Declining innovation c. Offshoring of production *d. Product innovation giving way to process innovation 10. Firm entry rates tend to be highest during the growth stage of an industry life cycle because: [See pp.195-196] a. Shortage of production capacity keeps margins attractive b. The propensity for entrepreneurs and venture capitalists to imitate one another c. Growing legitimacy of the industry attracts resources to the industry *d. Both (a) and (c).

11. The history of the retail sector over the past 150 years points to: [See p.195] a. The tendency for retailing to follow the same pattern of growth, maturity and decline as most other industries b. Increasing globalization *c. Revitalization through continuous strategic innovation d. Increasing commoditization as differentiation declines.

12. Industries change mainly as a result of: [See pp.195-197] a. Government policies *b. The death of existing firms and the birth of new firms c. Continuous adaptation by a constant population of firms d. Changing customer preferences.

13. “Shakeout”--a period when many firms exit from an industry following a period of intense competition— characterizes an industry’s transition from: [See p.196] a. Introduction to growth stage *b. From growth to maturity c. From maturity to decline © 2019 John Wiley & Sons, Inc.

d. From product innovation to process innovation.

14. With the onset of the maturity stage, the number of firms in most industries: [See pp.196-197] a. Remains stable *b. Decreases significantly, then stabilizes c. Rises d. Rises sharply until shake-out is triggered 15. The term “competency trap”, refers to: [See p.199] a. The hubris that affects the senior managers of successful firms b. The tendency for firms with competitive advantage based in one industry to fail when they diversify into a new industry *c The tendency for capabilities based on highly developed organizational routines to be a source of inflexibility d. The tendency for managers to be reluctant to change the strategies that brought them their initial success.

16. According to institutional sociologists, the propensity for organizations to adopt similar structures (“institutional isomorphism”) is primarily a result of [See p.199] a. Common key success factors within an industry b. Bounded rationality c. The complementarity among different managerial practices within firms’ “activity systems” *d. The propensity of firms to imitate one another as they seek legitimacy.

17. An organizational routine is: [See p.199] *a. A stable, repeatable, pattern of coordinated activity among organizational members b. A lower-level, operational capability, as opposed to a dynamic capability which tends not to be routinized c. The resource needed to create a new capability d. A new capability after it has been institutionalized within an organization 18. The field of “organizational ecology” studies: [See p.201] a. Companies’ contributions to environmental sustainability *b. Changes in the population of firms in an industry c. The process of competition between different types of firm d. Management practices that promote the evolutionary adaptation of firms.

19. Which of the following is not a source of organizational inertia?

[See pp.199-200] a. The tendency for organizations to limit themselves to local search b. Organizational routines c. Complementarities between the different activities of a firm *d. The hierarchical structure of large firms 20. When an industry is subject to technological change, the ability of new entrants to displace incumbent firms will be increased if: [See pp.203-204] *a. The technological change represents an architectural innovation rather than component innovation b. The technological change is competence enhancing rather than competence destroying c. Incumbent firms are insufficiently attentive to the industry’s largest customers d. Incumbent firms are geographically dispersed.

© 2019 John Wiley & Sons, Inc.

21. The reluctance of shipping companies to switch from sail to steam propulsion can be attributed to the fact that: [See p.203] a. The owners of shipping company were resistant to new technology *b. For several decades after the introduction of steam ships, sailing ships were faster, cheaper, and more reliable c. Complementary resources such as engineers and coaling stations were scarce d. Shipping company owners were over the environmental impact of coal burning ships 22. When a company places its new businesses or new products into separate organizational units from its established business activities, this is an example of: [See pp.204-205] a. Contextual ambidexterity *b. Structural ambidexterity c. Both contextual and structural ambidexterity d. Effective change management 23. The experience of Xerox Corporation with its Palo alto research Center and GM with its Saturn division points to: [See pp.204-205] a. The disadvantages of geographically-separated business units *b. The folly of mixing contextual and structural ambidexterity c. The difficulty of transferring innovation developed in a separate exploration unit back to the main company d. The need for chief executives to be more closely involved in R&D. 24. Changing a company’s organizational structure can facilitate strategic change because: [See p.206] *a. It can help break down established power centers b. It provides a means for CEOs to centralize decision making power c. It can convince investment analysists that real change is taking place d. It can improve the alignment of organizational capabilities with organizational units. The managers which head different organizational capabilities need to have clear lines of reporting 25. The main reason why a firm’s distinctive capabilities reflect the conditions that the firm faced during the early years of its development is because: [See pp.207-208] a. Most managers adhere to the old adage: “If it ain’t broke, don’t fix it” *b. Capabilities that develop early become embedded in a firm’s organizational culture c. Exploitation tends to dominate exploration d. Managers’ bounded rationality 26. The approach that Hyundai Motor and Panasonic have taken to developing organizational capabilities involves: [See pp.209-210] a. An unrelenting commitment to continuous improvement b. Imposing stretch goals on managers backed by strong financial incentives c. Ensuring high levels of collaboration among employees d. A product sequencing approach in which each product phase s linked to the development of specific capabilities.

27. IBM, 3M, and General Electric are companies that demonstrate, over periods of several decades, the capacity to adapt to multiple changes in their external environment. These companies are characterized by: [See p.211] a. Dynamic, entrepreneurial CEOs b. Corporate cultures that value and celebrate risk taking *c. Business processes that sense and seize opportunities © 2019 John Wiley & Sons, Inc.

d. Embracing diversity 28. The capabilities of “craft enterprises” are based upon the tacit knowledge of skilled employees. The capabilities of “industrial enterprises” are based upon systematized knowledge located within processes.

The key advantage of industrial enterprises over craft enterprises is that: [See pp.211-214] *a. They can replicate their capabilities at low cost in multiple locations b. They are less vulnerable to shortages of skilled workers c. They can standardize their offerings d. They can automate their production.

© 2019 John Wiley & Sons, Inc.

Contemporary Strategy Analysis 10e

TEST BANK: CHAPTER 9

Technology-based Industries and the Management of Innovation True or false questions 1. Invention and innovation are essentially the same.

[See p.221 a. T *b. F 2. The cycle of innovation—from the generation of new scientific knowledge to the diffusion of the innovation—takes about the same length of time for digital products as for analogue products.

[See p.222] a. T *b. F 3. The history of innovation supports Emerson’s prediction that superior technology (“a better mousetrap”) is usually translated into commercial success.

[See p.222] a. T *b. F 4. Research shows that across firms, R&D intensity and frequency of new product introductions is positively correlated with profitability [See p.222] a. T *b. F 5. In relation to innovation, the term “regime of appropriability” describes the conditions which influence how the returns to innovation are distributed between the innovator and other parties [See p.222] *a. T b. F 6. The ability of an innovating firm to appropriation of returns to its innovation is wholly dependent on establishing property rights in the innovation [See p.222-225] a. T *b. F 7. Empirical research shows that for both product and process innovations, patents are more effective at protecting innovation than secrecy.

[See p.226] a. T *b. F 8. Willie Wonka’s (Charlie and the Chocolate Factory) commitment to secrecy suggests that his innovative candies probably lacked patent protection.

[See p.226] *a. T © 2019, John Wiley & Sons, Inc.

b. F

9. Across most industries patents offer the greater protection to product innovations than to process innovations.

[See p.226] *a. T b. F 10. ‘Freedom to design’ refers to firms’ ability to use each other’s patents through a comprehensive cross licensing agreement [See pp.226-227] *a. T b. F 11. The main advantage of licensing as a means of exploiting an innovation is that the innovator can profit from the innovation without the need to invest in the complementary resources and capabilities required for commercialization [See pp.227-228] *a. T b. F 12. The best strategy for exploiting an innovation depends on two major factors: first, the strength of the firm’s intellectual property in the innovation and, second, the resources and capabilities available to the firm.

[See pp.227-229] *a. T b. F 13. Being the leader in introducing an innovation to the market is usually better than being a follower.

[See pp.229-230] a. T *b. F 14. It is difficult to be successful as a first mover unless your innovation has strong patent protection.

[See pp.229-230] *a. T b. F 15. The primary consideration in managing the risks of innovation is minimizing commitments in order to maximize flexibility.

[See pp.231-232] *a. T b. F 16. A standard is a format or interface that allows interoperability.

[See p.232] *a. T b. F 17. Network externalities exist when the value of a product to an individual depends on the number of other users.

[See p.233] *a. T b. F

© 2019, John Wiley & Sons, Inc.

18. The network externalities that support eBay’s dominance of the market online auctions are primarily the result of user-based network effects.

[See p.234] *a. T b. F 17. In the markets for digital products, “platforms”—the principal type of interface within two-sided markets is an operating system.

[See pp.234-235] *a. T b. F 18. A shopping mall provides an interface between two types of customer: the retailers which lease retail stores and the consumers that shop at these stores. Hence a shopping mall may be regarded as a platform.

[See p.235] *a. T b. F 19. Where different technological solutions compete to establish a de facto technical standard, the winner is usually best technology.

[See pp.235-238] a. T *b. F 20. The main lesson learned from the standards wars involving VHS and Betamax in VCRs and between the Apple Mac and IBM PC in personal computers was that liberal licensing of technology is the key to building market leadership.

[See pp.236-237] *a. T b. F 24. An organization’s capacity for innovation depends primarily on the innate creativity of the people within the organization rather than the organization’s internal environment.

[See pp.238-239] a. T *b. F 22. Recognition tends to be more effective at motivating innovation than financial rewards.

[See pp.239-240] *a. T b. F 21. Open innovation is based upon the assumption that although there are huge gains from collaborative knowledge sourcing; these gains can be outweighed by risks outsiders expropriating one’s own knowledge.

[See pp. 241-242] a. T *b. F

Multiple choice questions 1. The 1949 quotation that “computers in the future may…weigh only 1.5 tons” indicates: [See p.219] a. Engineers are generally very poor at forecasting © 2019, John Wiley & Sons, Inc.

*b. It is difficult to forecast the development of technology more than a few years ahead c. The lack of communication among technologists—the prediction fails to recognize that the transistor had been invented in 1947 d. The acceleration of technological change during the second half of the 20th century.

2. The principal difference between invention and innovation is: [See p.221] a. Invention requires an inventor, innovation requires no individual person b. You must innovate before you invent *c. Invention is the creation of a new device or process, innovation is its commercialization d. An invention can be patented and hence earn royalties.

3. Which of the following statements about the relationship between innovation and invention are correct?

[See pp.221-222] *a. Invention is often the result of an individual’s efforts; innovation typically involves business organizations b. Intellectual property law offers greater protection to innovation than to invention c. Complementary resources are more important in supporting invention than in supporting innovation d. Innovation requires genius, invention requires practical insight.

4. During recent years, the cycle of innovation (from initial knowledge generation to final diffusion) has: [See pp.221-222] *a. Got faster b. Got slower c. Become more global d. Become more uncertain 18. Comparing the development of the jet engine to satellite-based global positioning (GPS) and instant messaging illustrates that: [See pp.221-222] a. Invention always precedes innovation b. Financial resources are critical to introduce successful innovations *c. The innovation cycle has speeded up over time d. Digital technology has fundamentally changed the nature of innovation 5. An innovator’s ability to derive profit from an innovation depends primarily upon: [See pp.222-226] *a. Factors that prevent would-be competitors from imitating the innovation b. The strength of the patents that protect the innovation c. The innovator’s ability to manufacture and market the innovation d. The innovator’s financial resources.

6. An innovator may fail to earn any significant returns from an innovation if: [See pp.222-226] a. The innovation fails to create value for users b. The innovator is unable to appropriate the value the innovation creates c. Both (a) and (b) are present *d. If either (a) or (c) is present.

7. The personal computer created a huge amount of value for users. The companies that profited most from the personal computer were: [See p.223] a. The innovators b. The followers *c. The suppliers d. None of the above

© 2019, John Wiley & Sons, Inc.

8. The following industry offers a strong regime of appropriability for innovators: [See pp.222-224, 226] a. Financial services b. Processed food products *c. Pharmaceuticals d. Handheld mobile devices.

9. The intellectual property of a firm comprises: [See pp.223-224] a. Copyright and patents b. Patents, trademarks, copyrights, trade secrets, and goodwill c. The total of its intangible assets *d. Patents, trademarks, copyrights, and trade secrets 10. The main factor that determines the relative effectiveness of patents in protecting an innovator is: [See p.224] a. The legal system of the country in which the firm resides b. The effectiveness of the firm’s lawyers c. How much competition the firm faces *d. The characteristics of the innovation that is being protected 19. Monsanto’s NutraSweet artificial sweetener, Pfizer’s Viagra, and Pilkington’s float glass process are

innovations that are examples of: [See pp.223-224] a. Weak regimes of appropriability because the innovations could not be patented *b. Strong regimes of appropriability because of the effectiveness of patent protection c. Strong regimes of appropriability because the innovators possessed strong complementary resources d. Network externalities leading to a winner-take-all market 11. The distinction between codifiable and tacit knowledge is relevant to a firm’s ability to appropriate the returns to its innovation because: [See pp.224-225] a. Technological progress involves advances in codifiable knowledge—hence it is more important b. Patents and copyrights must be articulated clearly—hence they embody only codifiable knowledge c. Tacit knowledge related primarily to traditional skills that are becoming increasingly irrelevant in today’s digital economy *d. If an innovation lacks legal protection, then, if it based on tacit knowledge it cannot be easily be imitated 12. Lead-time refers to: [See p.225] a. The period of time during which a firm is the leader of an industry b. The period of time during which a firm has discovered the largest number of innovations *c. The time it takes followers to catch up d. None of the above 15. If technological breakthroughs increase the feasibility of fuel cells as a means of propulsion for vehicles, the profits that can be earned from the developers of the fuel cell technology will be limited by: [See pp.225-226] a. The greater environmental attractiveness of battery-powered electric vehicles *b. The dependence of fuel cell technology on specialized investments by auto makers in designing new cars and fuel suppliers in supplying hydrogen refueling facilities c. The likely ineffectiveness of patents relating to fuel cells d. Lack of interest in vehicle owners in fuel cell technology 13. A company may seek to patent an invention even if it has no intentions of commercializing it. Which of the following is not an important reason for such strategic patenting?

[See pp.226-227] © 2019, John Wiley & Sons, Inc.

a. To block competitors’ opportunities for innovation b. To generate licensing revenue c. To increase the company’s bargaining power when negotiating cross-licensing deals with other companies *d. To enhance the individual reputations of the company’s leading scientists and technologists 14. The more an innovative product embodies multiple technologies owned by different companies: [See pp.226-227] a. The less useful are patents to the innovating firm b. The more important it is for the innovating firm to develop capabilities that span a wide range of technologies *c. The more important it is for the innovating firm to possess a strong patent portfolio that enhances its bargaining power with other technology-owning firms d. The more difficult it is for the innovating form to launch its innovation 16. The argument that patents are the most effective protection for an innovation is: [See p.226] a. Proven by a century of evidence b. Impossible to confirm or disprove *c. Shown to be true only in a few industries d. True for process innovations, but not for product innovations 17. Which of the following factors does not contribute to the attractiveness of licensing provides as a means of exploiting an innovation: [See pp.227-229] *a. The innovating firm possesses most of the complementary resources needed to exploit the innovation b. Patent are strong c. The potential for the innovation to enhance the performance of existing products has been clearly demonstrated d. The innovation has potential applications is several different industries 20. A firm has an innovation that has weak patent protection, but its exploitation requires a number of complementary resources that it does not possess. It’s best mode of exploiting the innovation is likely to be: [See pp.227-229] a. Licensing *b. Joint venture c. Internal commercialization d. Acquiring a company that does possess the required complementary resources.

21. The choice of being a leader or a follower in innovation should depend on: [See pp.229-230] a. The extent of legal protection of the innovation, the nature of the knowledge involved, and the potential to establish a standard b. The development cost of the innovation, the importance of complementary resources, and the profitability of the industry in which the innovation is to be applied *c. The extent of protection of the innovation, the potential to establish a standard, and the importance of complementary resources d. The potential to establish a standard, the relative powers of the other players in the industry, and the development cost of the innovation 22. In deciding when entering a new product market with an innovative product, an established company should be influenced mainly by : [See pp.229-231] a. The principle that early-mover advantage is the key to success in new markets

© 2019, John Wiley & Sons, Inc.

b. Reducing risk by waiting to see how technology and customer requirements will shape the emerging industry *c. Identifying the optimal tradeoff between early-mover and follower advantages such that the firm’s resources and capabilities can be most effective d. The potential to exploit network externalities in order to establish a dominant standard 23. When reliable forecasting is impossible, the innovating firm should seek to manage risk through: [See pp.231-232] a. Committing to a well-defined strategy b. Devotion itself to serving its customers c. Building relations with investors *d. Avoiding commitments in order to maximize flexibility 24. Cooperation with lead users is a useful tool of innovation management because: [See p.231] a. Lead users set the trend for the mass market b. Due to their price insensitivity, lead users tend to be the most profitable customers *c. Lead users provide both information feedback and revenues that can assist ongoing product development d. Because lead users are so discerning, they provide both discipline and incentives 26. Standards are important in an industry because: [See pp.232-233] *a. They allow interoperability and industry growth, and are linked with network externalities b. They are established by the dominant player in the industry c. They are imposed by the government and have the force of law behind them d. High-tech industries are the only industries that cannot effectively function without standards 28. The principal difference between public and private standards is: [See p.233] a. Standards set by public firms vs. standards established by privately-owned companies b. Standards established by governments vs. standards set by companies *c. Standards available for all organizations and industry players vs. standards owned by firms or individuals d. Free standards vs. standards users have to pay for 29. It may be preferable for government to intervene to impose a public standard rather than let a private, de facto standard be determined through competition because: [See p.233] a. Governments are superior to markets in selecting the best technology *b. A private, de facto standard can take a long time to become established, thereby delaying the adoption of a new technology c. Competition is always wasteful d. De facto standards tend to be set by US companies 25. A common feature of the world’s most valuable companies—Apple, Alphabet, Microsoft, Amazon, Tencent, Facebook, and Alibaba—in mid-2018 was: [See p.235] *a. They owned a platform (or platforms) b. They possessed visionary leaders c. They had focused on building competitive advantage in a clearly defined market d. They had used strategic alliances to build their competitive positions 30. “Network externalities” refer to: [See pp.233-234]

© 2019, John Wiley & Sons, Inc.

a. The benefits that firms derive from using social networks (such as Facebook and Google+) in their marketing *b. The value that the user of a product derives from the number of other users of the same product c. The costs and benefits that are borne by or received by society as a result of the actions of a business enterprise d. The consequences of platform-based competition 31. Network externalities in smartphones arise primarily from: [See pp.233-235] a. Direct user-to-user externalities *b. The availability of complementary products c. The popularity of the Apple iPhone d. Google’s decision to make its Android operating system open source 32. When network externalities are present in a market, the typical outcome is: [See p.234] *a. A winner-take-all market b. Monopolistic abuse requiring antitrust intervention c. More rapid technological innovation d. Lack of consumer choice 34. In video cassette recorders (VCRs), Matsushita’s VHS format won against Sony’s Betamax format because: [See pp.236-237] a. VHS was technically superior to Betamax b. VHS VCRs were cheaper than Betamax VCRs *c. Matsushita’s licensing of its VHS format to other manufacturers of VCRs led to its gaining a lead in market share d. Sony entered the market too early 35. The market share leadership in smartphone operating systems possessed by Google’s Android operating system reveals: [See p.235] a. It’s generally better to be a follower than a first mover b. In digital markets where network externalities are present, Google’s huge user base typically gives it a huge advantage over rivals *c. Where network externalities are present, an open source strategy can often be effective in undermining a competitor’s market share lead d. Strength in complementary resources and capabilities can allow a strong company to overcome the initial lead of an early innovator.

57. For “creative abrasion” to be effective in facilitating new product development, it requires: [See p.239] a. Creating a working environment where assertive individualism is cultivated b. Establishing strong financial incentives for individual creativity *c. Establishing forums where conventions of politeness and respect are temporarily abandoned but criticisms are directed at the product not at individuals d. Establishing a strong sense of community so that team members are not alienated, even when they disagree 58. Cross functional product development teams, product champions, and incubators are organizational devices used: [See p.243] a. By top managers to control the technological development of their firms *b. To reconcile the conflicting requirements of operations and innovation c. To build new organizational structures, inspired by innovation in high-tech industries d. To reconcile coordination and specialization needs © 2019, John Wiley & Sons, Inc.

© 2019, John Wiley & Sons, Inc.

Contemporary Strategy Analysis 10e

TEST BANK: CHAPTER 10 Vertical Integration and the Scope of the Firm True or false questions 1. Corporate strategy is concerned with how a firm competes in a particular industry, whereas business strategy is concerned the choice of which businesses the firm competes in.

[See p.252] a. T *b. F 2. Corporate strategy is concerned with decisions over product scope, geographical scope, and vertical scope.

[See p.252] *a. T b. F 3. Economies of scope and transaction costs are important concepts when analyzing the vertical, geograpjical, amd product scope of the firm.

[See p.252] *a. T b. F 4. Economic organization in the capitalist economy is achieved through markets by the price mechanism and through firms by administrative direction.

[See p.252] *a. T b. F 5. Alfred Chandler described the administrative mechanism of firms as the “invisible hand” of economic coordination.

[See p.253] a. T *b. F 6. Transaction costs of markets include search costs and costs of negotiating contracts, but usually exclude the costs incurred in enforcing contracts.

[See p.253] a. T *b. F 7. Firms exist in situations where the administrative costs of coordinating economic activity are less than the transactions costs of organizing such activity across markets.

[See p.253] *a. T b. F 8. The growth in the size and scope of companies throughout most of the 19th and 20th centuries can be attributed primarily to the increasing transaction cost of markets.

[See pp.254-256] a. T © 2019, John Wiley & Sons, Inc.

*b. F

9. A major factor causing the narrowing in the scope of the activities of large corporations during the last two decades of the 20th century was increasing turbulence of the economic environment.

[See pp.255-256] *a. T b. F 10. When a farmer operates a stall in a local farmers’ market; this is a form of backward integration.

[See p.256] a. T *b. F 11. For most of the 20th century companies expanded their vertical scope in the belief that vertical integration reduced risk and permitted superior coordination compared to relying on markets.

[See p.256] *a. T b. F 12. The main manifestation of the trend towards vertical de-integration is the growth of outsourcing.

[See p.256] a. T *b. F

13. During the past three decades, increased emphasis on flexibility and the need to develop superior organizational capabilities has caused large companies ot reduce their vertical scope.

[See p.296] *a. T b. F 14. When there are technical efficiencies from co-locating vertically-related processes (e.g. the production of pulp and paper or the production of steel and steel strip), vertical integration (in the form of common ownership of the vertically-linked activities) is essential.

[See pp.257-258] a. T *b. F 15. Jewelry companies typically do not own gold and silver mines because the markets for gold and silver are highly competitive and impose few transaction costs on jewelry makers.

[See p.258] *a. T b. F 16. Manufacturers of final products such as motor vehicles, airplanes, and domestic appliances are more likely to backward integrate into the productions of commodity components than components that are specialized to the specific requirements of the manufacturer of the final product.

[See p.259] a. T *b. F 17. Managing vertically-related businesses that are strategically very different is not a problem if companies adopt an appropriate organizational structure.

[See p.260] a. T

© 2019, John Wiley & Sons, Inc.

*b. F 18. One of the advantages of a company providing its own facilities maintenance services is that the incentives that a wholly owned and directly managed maintenance unit is subject to “high powered” incentives.

[See p.260] a. T *b. F 19. Vertical integration allows a firm to extend its monopoly position from one stage of an industry’s value chain to adjacent stages, this allows the firm to increase the amount of monopoly profit it can extract.

[See pp.260-261] a. T *b. F 20. By offering the possibility of repeat business, the suppliers and buyers can avoid the problems of opportunism that give rise to transaction costs.

[See p.265] *a. T b. F 21. In fashion clothing, one reason why mass-market distributors such as H&M, Forever 21, and Gap outsource their production is to reduce new product cycle time (the time between the initial design of a product and its delivery to a retail store).

[See p.264] a. T *b. F 22. Franchising offers a means of reconciling the coordination and control benefits of vertical integration with the entrepreneurial flexibility and high-powered incentives of market contracts.

[See pp.264-265] *a. T b. F

Multiple choice questions 1. The opening quotation concerning Bath Fitter illustrates the following benefits of vertical integration: [See p.251] a. Technical economies from the physical integration of processes *b. Avoiding the transactions costs involved monitoring and enforcing contracts with external suppliers c. Economies of scale d. None of the above.

2. The opening quotation from Tom Peters states that as “yesterday’s highly integrated giants” de-integrate, their vertical relationships are taking the form of: [See p.291] a. Market contracts b. Long-term contracts *c. Alliances and partnerships d. All of the above.

3. Corporate strategy decisions are mainly concerned with: [See p.252] a. Establishing competitive advantage *b. The scope of the firm’s activities c. The geographical boundaries of the firm © 2019, John Wiley & Sons, Inc.

d. Diversification and vertical integration 4. The principal feature of the corporate scope of Tesla Inc, compred to other automobile manufacturers, is: [See p.252] a. Its broad geographical scope b. Its narrow product scope *c. A broad vertical scope d. Its emphasis on technology 5. The main business of the Coca-Cola Company is manufacturing, marketing and distributing concentrate for soda drinks to bottlers in over 200 countries of the world. The corporate scope of the Coca-Cola Company is best described as: [See p.252] a. A broad product, geographical, and vertical scope b. A broad product and vertical scope, and a narrow geographical scope *c. A broad geographical scope and narrow product and vertical scope d. A broad product and geographical scope and narrow vertical scope.

6. The capitalist economy comprises two forms of economic organization, the market mechanism operated by prices and the administrative mechanism of firms.

[See pp.252-253] a. The market mechanism is referred to as the “visible hand” while the administrative mechanism of firms is referred to as the “invisible hand” *b. The market mechanism is referred to as the “invisible hand” while the administrative mechanism of firms is referred to as the “visible hand” c. The simultaneous operation of both “hands” means that the capitalist system is often referred to as an “ambidextrous organization” d. The notion of the capitalist economy as governed by market processes is a myth. In reality the global capitalist economy is controlled by large corporations.

7. The economic organization of the home improvement industry fearures: [See p.293] *a. Self-employed individals and small firms linked by cmarket contracts b. Large integrated companies c. Highly-diversified companies d. Vertical integration 8. The growth in the scope of business enterprises for most of the 19th and 20th centuries can be attributed to a drop in administrative costs of firms relative to the transaction costs of market. This resulted from: [See pp.254-256] a. The monopolistic power of large firms to raise prices and push down wages b. Globalization c. The growing transaction costs of markets as a result of taxes, regulation, and litigation *d. Innovation in information and communications technology and in management 9. The main cause of downsizing, refocusing, and outsourcing during the latter part of the 20 th century was: [See pp.255-256] a. Developments in IT—especially the advent of the internet b. A more turbulent business environment *c. Both (a) and (b) d. Neither (a) nor (b) 10. Vertical integration is: [See p.256] *a. A firm’s ownership and control of vertically-related activities b. A firm’s control over its input sources and the distribution of its output

© 2019, John Wiley & Sons, Inc.

c. A firm establishing close relationships with its suppliers and its buyers d. A firm acquiring an equity stake in a supplier or buyer 11. When a winery opens a tasting room through which it sells its wine to visitors, this represents: [See p.256] a. Backward integration *b. Forward integration c. A marketing initiative d. Diversification 12. When Amazon,com founded Amazon Studios to create content for its Amazon Prime video streaming service, this represented: [See p. 256] a. Forward integration *b. Backward integration c. Full integration d. Outsourcing 13. Vertical integration by industrial firms during the major part of the 20th century was motivated primarily by firms’ desire for: [See p.256] a. Reducing costs b. Securing scare inputs *c. Reducing risk and improving coordination d. Increasing speed 14. The main reason that the producers of wood pulp have often forward integrated into the production of paper is: [See p.258] a. To increase value added by moving closer to the final customer *b. To exploit technical economies of co-locating pulp and paper making plants while avoiding transaction costs caused by transaction-specific investments c. To reduce inventories and improve quality d. To insulate the firm from fluctuations in the price of wood pulp.

15. Which of the following factors is not conducive to vertical integration between two adjacent stages of production?

[See pp.256-262] a. Similarity of the optimum scale of production between the two stages b. Few companies at each of the two stages c. The need for transaction-specific investments by the firms involved *d. Distinctly different organizational capabilities are required at each stage 16. Which of the following factors has not contributed to the trend towards outsourcing in recent decades: [See pp.256, 258 ] a. Increasing emphasis on cost efficiency *b. Increasing transaction costs c. Increasing turbulence of the business environment d. Increasing emphases on the need for competitive advantage based upon superior capabilities 17. The main reason that most universities and other educational instrittions outsource catering services for their students and employees is: [See pp.259-262] Sa. Catering is a less profitable business than edication

© 2019, John Wiley & Sons, Inc.

Sb. Market contracts between catering companies and universities are effieicnet because there is little need for transaction-specific investments *c. The capabilities required in education and catering are very different d. External caterers can respond more effectively to changes in students’ preferences and eating habits than an internal catering service 18. In order for a manufacturer of consumer goods to maximize responsiveness to changes in consumer demand for its products: [See p.261] a. It is best to outsource the production of components and materials b. It is best to be backward integrated into the production of components and materials *c. It depends upon the type of flexibility that is desired d. It is best to be partially backward integrated.

19. McDonalds--like most other fast-food chains--prefers to franchise rather than directly operate its retail outlets. An advantage of franchising over vertical integration is: [See pp.264-265] a. Franchising permits superior coordination of retail activities with upstream activities *b. Franchising subjects the operators of retail outlets to “high-powered” incentives c. Franchising permits more effective quality control of the retail outlet d. Franchising avoids some of the transaction costs that can arise with owning and operating retail outlets 20. Vendor partnerships based on relational contacts—such as the relationships between vehicle manufacturers and their component suppliers—are superior to either pure market contracts or vertical integration because: [See pp.264-265] a. They give manufacturers immense bargaining power over their suppliers b. They offer similar benefits of high-powered incentives and flexibility that market contracts c. They offer similar coordination benefits as vertical integration *d. They combine the coordination benefits of vertical integration with the incentive and flexibility benefits of market contracts.

21. The main lesson to be drawn from the delays to the launch of Boeing’s 787 Dreamliner is that, when developing complex products that embody diverse new technologies: [See p.266] a. It is best to do it in-house without heavy reliance on external suppliers b. Extensive outsourcing is inevitable as no single company has sufficient technological capabilities inhouse *c. The principal firm must possess well-developed integration capabilities ○ d. A competitor such as Airbus Industrie which began as an alliance among a number of separate companies will always have an advantage.

42. Vertical integration by Zara, the main division and brand of the Spanish clothing firm Inditex, illustrates: a. The potential of vertical integration to offer flexibility in responding to seasonal fluctuations in demand *b. The potential for vertical integration to offer flexibility in responding to rapid changes in customer product preferences c. The potential for vertical integration to overcome problems arising from the need for transaction-specific investments by garment manufacturers d. The potential for vertical integration to exploit technical economies from co-locating adjacent processes.

© 2019, John Wiley & Sons, Inc.

Contemporary Strategy Analysis 10e

TEST BANK: CHAPTER 11 Global Strategy and the Multinational Corporation True or false questions 1. Internationalization offers a remarkable opportunity for businesses to expand and prosper. Only the unimaginative and the pessimistic would regard it as a threat.

[See p.270] a. T *b. F 2. Internationalization occurs through two main mechanisms: trade and government policy.

[See p.270] a. T *b. F 3. International trade is motivated by the quest for market opportunities in other countries, while foreign direct investment is motivated by the desire to exploit resources and capabilities in other countries.

[See pp.271-272] a. T *b. F 4. Sheltered industries are shielded from imports by government restrictions such as import quotas and high tariffs and .

[See p.271] a. T *b. F 5. Service industries such as commercial banking and hotels tend to be “multidomestic” in their pattern of internationalization.

[See pp.271-272] *a. T b. F 6. In general, internationalization of an industry results in more competition and lower profitability [See p.272] *a. T b. F 7. Internationalization often involves mergers and acquisitions, hence, it tends to reduce seller concentration within individual national markets.

[See p.272] a. T *b. F 8. Internationalization tends to increase competition by increasing overseas firms entering and building capacity in domestic markets and increasing the diversity of competitors within each national market.

[See pp.272-273 © 2019, John Wiley & Sons, Inc.

+] *a. T b. F

9. When competition is international, competitive advantage depends not just on a firm’s internal resources and capabilities, it also depends upon the availability of resources within each firm’s country base.

[See p.273] *a. T b. F 10. In an international context, comparative advantage and competitive advantage are identical concepts.

[See pp.273-274] a. T *b. F

11. Comparative advantage refers to countries’ relative efficiencies in producing different products [See p.274] *a. T b. F 12. The revealed comparative advantage of the US, India and Australia in cereals is a reflection of these countries’ large natural endowments of land.

[See p.274] *a. T b. F 13. Switzerland’s comparative advantage in clocks and watches is likely to reflect national demand characteristics (e.g. the Swiss emphasis on punctuality) rather than national resource endowments.

[See pp.274-275] *a. T b. F 14. Porter’s “national diamond” framework implies that government policies which foster “national champions” within technology-based industries are likely to be successful in stimulating national competitiveness in these sectors.

[See p.276] a. T *b. F 15. Porter’s “national diamond” framework suggests that a significant factor explaining the dominance by German firms of the world market for luxury and high-performance automobiles is to be found more in the factors of production available in Germany than in the demand characteristics of German consumers.

[See p.275] a. T *b. F

16. For high-tech products such as aircraft and smartphones, the international fragmentation of the value chain tends to be driven less by cost considerations and more by the availability of sophisticated technical capabilities. © 2019, John Wiley & Sons, Inc.

[See pp. 276-278] *a. T b. F 17. The benefits from fragmenting a product’s value chain across multiple locations almost always outweigh the costs of coordinating globally dispersed activities.

[See p.278] a. T *b. F 18. If the firm’s competitive advantage is country-based, the firm can exploit foreign markets either by exports or by direct investment [See pp.279-280] a. T *b. F 19. In pharmaceuticals (where patent protection tends to be strong), exports or direct foreign investment will tend to be preferred over licensing as a means of exploiting overseas markets.

[See pp.279-280] a. T *b. F 20. In most countries of the world, Starbucks owns and operates its retail coffee shops. It’s decision to enter India by means of a joint venture with Tata Group reflects the complexity of the Indian market and Starbucks need for local knowledge and local connections.

[See p.280] a. T *b. F 21. A global strategy involves supplying globally-standardized products.

[See p.281] *a. T b. F 22. A firm would be unwise to pursue a global strategy if global scale does not confer cost advantage, See pp.281-283] a. T *b. F 23. Pankaj Ghemawat’s “CAGE framework,” which analyzes the cultural, administrative and political, geographical, and economic differences between countries, can help firms adapt their strategies to the particular characteristics of a foreign market .

[See p.283] *a. T b. F 24. Traditionally, European-based multinational companies such as Unilever, Shell, and Philips have been highly centralized; Japanese multinationals such as Honda, Sony, and Hitachi have been highly decentralized.

[See pp.287-288] a. T *b. F

© 2019, John Wiley & Sons, Inc.

25. A key difference between Bartlett and Ghoshal’s “transnational corporation” and the conventional US multinational corporation (described by Bartlett and Ghoshal as a “coordinated federation”) is that communication and coordination occurs between national units rather than exclusively between each national unit and the corporate HQ [See pp.288-289] *a. T b. F 26. In Ghemawat’s “Aggregation, Adaptation, Arbitrage” framework, the potential for a multinational enterprise to exploit arbitrage benefits are likely to be greater in a capital-intensive industry than in a labor-intensive industry [See p.289-291] a. T *b. F 27. The declining performance of multinational corporations (MNCs) relative to nationally-focused firms suggests that, for many MNCs, the costs of reconciling the benefits of aggregation, arbitrage, and adaptation may exceed the benefits.

[See pp.292-293] *a. T b. F

Multiple choice questions 1. The rise of Shenzhen to become one of the world’s most important industrial centers is evidence of: [See p.269] a. The superiority of the Chinese economic model over western market *c. The transformative potential of internationalization d. The spillover benefits from being close to a dynamic business hub such as Hong Kong.

2. Firms internationalize through two mechanisms: [See p.270] a. Exports and imports b. Trade in goods (visible trade) and trade in services (invisible trade) c. Direct and indirect investment *d. Trade and direct investment.

3. Global industries are those where: [See pp.271-272] a. International trade (imports and exports) are high in relation to industry sales b. Technology transfers are high c. Foreign direct investment is high *d. Both trade and direct investment are high 4. With internationalization, the threat of new entry into domestic industries are increases because: [See p.272] a. Customers prefer imported products to domestically-produced products b. The World Trade Organization (WTO) prevents governments protecting their domestic industries through subsidies and import restrictions *c. Barriers to entry that would deter domestic firms may be easily overcome by large firms from other countries d. Foreign-based, state-owned enterprises are not deterred by losses earned in overseas markets © 2019, John Wiley & Sons, Inc.

5. Which aspect of internationalization by companies does not increase the intensity of competition within national markets: [See p.272] a. Internationalization increases the diversity of firms competing in each national market b. Internationalization increases the number of firms in each national market *c Internationalization stimulates mergers and acquisitions within an industry d. Internationalization increases investment in new capacity 6. The theory of comparative advantage is concerned with: [See p.273] a. The sources of real income differentials among countries *b. The impact of resource availability on national competitiveness in particular industries c. The competitive advantages of low-wage countries d. The determinants of purchasing power parity (PPP) exchange rates between countries 7. Large countries have an advantage over small countries in technology-intensive and capital-intensive industries, because: [See p.274] a. They can influence the rest of the world’s technical standards b. Small markets discourage ambition among the firms that serve them *c. A large home market facilitates exploitation of scale economies d. Large countries tend to have superior educational systems 8. According to Porter’s “national diamond” analysis, the competitive advantage of Swiss firms in watches, German firms in luxury cars, and Japanese firms in cameras is a result of: [See p.275] a. The availability of highly skilled workers in each of these countries b. The lack of natural resources in each of these countries *c. The characteristics of local demand in each of these countries d. High levels of domestic competition 9. In Porter’s national diamond framework, Porter emphasizes that encouraging mergers in an industry in order to form a “national champion”: [See p.275] *a. Eliminates the pressure of domestic competition to drive innovation, quality, and efficiency b. Creates the scale that I essential to compete in global markets c. Is an effective means for government to channel support to the domestic industry d. Provides a focal point for building a cluster of related and supporting industries 10 Toyota operates automobile assembly plants in all five continents of the worlds. This reflects: [See pp.276-277] a. The widespread availability of the resources needed for automobile production b. The high costs of transporting automobiles between countries c. The need to adapt products to the requirements of local markets *d. Toyota’s ability to transfer its production capabilities worldwide.

11. The value chain for a product will tend to be dispersed across different countries when: [See pp.277-278] *a. Different stages of the value chain require different types of resources and capabilities ○ b. The product is subject to import tariffs and quotas c. The product is knowledge-intensive d. The different stages of the value chain need to be closely coordinated. © 2019, John Wiley & Sons, Inc.

12. Saudi Aramco and Statoil are both major oil producers. Saudi Aramco’s competitive advantage is based on its access to low-cost domestic oil reserves; Statoil’s competitive advantage is its capability in offshore exploration and production. The implications for the internationalization strategies of the two companies are: [See pp.278-280] a. Both companies should focus on exporting from their own countries *b. Saudi Aramco should focus on exporting; Statoil should pursue direct foreign investment c. Saudi Aramco should pursue direct foreign investment; Statoil should focus on exporting d. Both companies should use a mixture of exporting and direct investment depending upon the nature of the foreign opportunity 13. A start-up company based in Canada and led by an academic microbiologist has patented geneticallymodified, drought-resistant maize particularly suitable to arid regions of Africa. The firm has been unable to attract significant venture capital investment. How should the firm exploit commercial opportunities for its product in Africa?

[See pp.278-280] a. It should form a joint venture with a multinational agricultural seed company b. It should establish seed production in Canada and set up sales offices in African countries c. It should establish seed production in Canada and appoint sales agents in different African countries *d. It should license its patent to a multinational agricultural seed company and continue research on other projects for the genetic modification of agricultural crops 14. Internationalization among New York-based law firms is the result of: [See p.281] a. The US possessing a comparative advantage in legal services *b. US law firms following the opportunity to provide global service to their multinational clients c. US law firms seeking to benefit from knowledge transfer between different legal systems d. US law firms seeking to exploit economies of scale in human capital and IT systems.

15. Many retailers that have been outstandingly successful in their how markets have experienced much poorer performance when they have entered overseas markets. These include: Tesco, Marks & Spencer, Laura Ashley, and Body Shop in the UK); Best Buy, Sears, Macy’s, and Walmart in the US. This reflects: [See pp.281-284] a. The lack of major efficiency benefits from international scope in retailing b. The lack of scale economies in retailing c. Limited opportunities for exploiting learning benefits in retailing (e.g. by transferring best practices) *d. The lack of major efficiency benefits from international scope combined with the need for national differentiation.

16. A common approach to reconciling the benefits of global scale with the need for national differentiation is to: [See pp.284-287] a. Develop a global brand but rely on local promotional activities *b. Create standard product platforms in terms of design and components, then adapt product features, complementary services, and marketing approaches to national market conditions. c. Allow major national subsidiaries to the freedom to develop new products, then encourage other national subsidiaries to adopt them d. Develop globally standardized products but sell them under local brand names 17. The “centralized hub” strategy that Japanese multinationals pursued during the 1970s and 1980s is likely to be most successful in industries with: [See pp.287-288] a. Innovation as the primary source of competitive advantage © 2019, John Wiley & Sons, Inc.

*b. Large economies of scale and limited need for national differentiation c. Substantial opportunities for transfer of learning among countries d. Rapid rates of technological change 18. The Dutch-based electrical and consumer electronics multinational, Philips, has transferred the headquarters for several of its global business away from the Netherlands. In terms of Bartlett and Ghoshal’s typology of multinational strategies, this represents a transition from: [See pp.287-290] a. A “centralized hub” to a “decentralized federation” b. A “centralized hub” to a “transnational” *c. A “decentralized federation” to a “transnational” ○ d. A “coordinated federation” to a “decentralized federation” 19. The costs of national differentiation can be low if: [See pp.284-287] a. A firm does not differentiate its products very much b. The firm has a strong brand c. A “global customer” exists *d. A common basic design and common components are used 20. McDonald’s introduction of a greater number of local products on its menus, then transferring these items across national borders points to: [See p.286] a. The tendency for global products to lose their appeal b. The versatility of the McDonald’s business system *c. The potential for localized adaptation within the multinational enterprise to be a source of innovation and strategic renewal d. Growing competition in the fast food industry as the McDonald’s system is increasingly imitated by local rivals.

21. McKinsey & Company’s finding that found that successful MNCs are underperforming successful “national Champions” is evidence of: *a. The benefits of exploiting the benefits of multinationality being outweighed by the cost imposed by the complexity b. The rise of economic nationalism and the governments’ waning commitment to free trade c. The declining importance of global scale economies d. The increasing difficulties of managing business activities across national borders

© 2019, John Wiley & Sons, Inc.

Contemporary Strategy Analysis 10e

TEST BANK: CHAPTER 12 Diversification Strategy True or false questions 1. Harold Geneen’s statement that: “Telephones, hotels, insurance—it’s all the same. If you know the numbers inside out, you know the company inside out” is basically correct: the essentials of a business are revealed by its metrics; industry-specific knowledge is not essential to the effective running of a business.

[See p.297] a. T *b. F 2. Diversification has been an important source of value creation for most of the firms that have dared to expand beyond the boundaries of their own industry.

[See p.298] a. T *b. F 3. A dominant trend in corporate strategy over the past three decades has been for companies to expand their product scope.

[See p.298] a. T *b. F 4. Diversification decisions by firms involve two key issues: how attractive is the industry to be entered and can the firm establish a competitive advantage within it?

[See p.298] *a. T b. F 5. The primary motive for diversification during the period 1960-1980 was the quest to create shareholder value.

[See pp.299-302] a. T *b. F 6. The capital asset pricing model predicts that corporate diversification that reduces the unsystematic risk of a company’s securities will result in those securities being higher valued by the stock market.

[See pp.299, 302] a. T *b. F 7. The history of diversification since the mid-20th century features two periods: during 1950 to 1980, the trend was to diversify; since 1980, most large companies have refocused upon their core businesses.

[See pp.300-301] *a. T b. F

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8. A major reason for the trend to corporate refocusing after 1980 was a shifting of corporate goals from growth to profitability.

[See pp.300-301] *a. T b. F 9. Diversification that reduces company specific (“unsystematic”) risk is beneficial to the company’s bondholders since it reduces the risk of default.

[See p.302] *a. T b. F 10. According to Michael Porter, industry attractiveness is a sufficient justification for diversification.

[See p.302] a. T *b. F 11. The critical test of whether diversification will create shareholder value is whether it will contribute to competitive advantage.

[See p.303] *a. T b. F 12. When a firm is diversifying through acquiring a firm in another industry, the critical issue is whether the synergies that can be realized will offset the acquisition premium paid.

[See pp.302-303] *a. T b. F 13. Economies of scope may be viewed as economies of scale that are exploited over multiple products.

[See p.304] *a. T b. F 14. If a utility company supplies both gas and electricity to its customers, it can exploit economies of scope in billing and customer service.

[See pp.303-304] *a. T b. F 15. Demand-side economies of scope can justify diversification by a firm even if it doesn’t achieve cost savings from supplying multiple products.

[See pp.304-305] a. T *b. F 16. If a company can deploy its intellectual property in a different industry, the higher are the transaction costs of licensing that intellectual property, the more likely it is that the firm will choose to diversify into that industry.

[See pp.305-306] *a. T b. F

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17. Economies of scope in organizational capabilities can be exploited as effectively through contractual agreements with firms in anther industry as through diversifying into that industry.

[See pp.305-306] a. T *b. F 18, The principle of “parenting advantage”—that a company should own a business only if it is able to add more value to that business than any other potential parent—is a more rigorous criterion for justifying diversification than Michael Porter’s “three essential tests.”

[See p.306] *a. T b. F 19. In principle, the information advantages of a diversified company mean that internal capital markets are more efficient than external capital markets. In practice internal capital markets tend not to reallocate investment funds from poorly-performing subsidiaries to highly-performing subsidiaries.

[See p.306-307] *a. T b. F 20. A critical advantage of diversified over specialized firms is in their allocation of human resources where diversified firms can utilize their superior information on their employees to allocate individuals according to their proven abilities.

[See p.307] *a. T b. F 21. The continuing dominance of highly-diversified business groups in many emerging countries is a result of the less developed capital and labor markets in these countries.

[See p.308] *a. T b. F 22. Empirical evidence on the relationship between diversification and profitability shows that diversification has a negative impact on profitability.

[See p.308] a. T *b. F 23. Empirical studies of the outcomes of corporate refocusing initiatives show that divesting diversified businesses increases profitability and generates positive returns for shareholders.

[See p.308] *a. T b. F 24. One reason for the inconsistent findings over the relative performance of related diversification and unrelated diversification is uncertainty and imprecision over what constitutes related diversification [See pp.308-309] *a. T b. F

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25. Tata Group, the Virgin Group, and Berkshire Hathaway are holding companies that comprise largely independent businesses with few relationships with one another. Inevitably, these groups lack significant potential to add value to the individual businesses.

[See pp.308, 310] a. T *b. F

Multiple choice questions 1. Tyco International’s decision to split into three separate companies was motivated by: [See p.297] a. The scandal involving its former CEO *b. The belief that Tyco’s businesses could achieve greater flexibility and growth as independent companies than as subsidiaries of Tyco c. The belief that the synergies among Tyco’s businesses were outweighed by the costs of Tyco’s corporate HQ d. The recognition that Tyco was subject to a “conglomerate discount.”

2. Diversification decisions by firms involve the following key issues: [See p.298] *a. The attractiveness of the industry to be entered and the potential for competitive advantage b. The potential for the diversification to increase growth and reduce risk c. The opportunities for exploiting economies of scope in resources and capabilities d. The benefits of synergy relative to the costs or coordination.

3. The key drivers of diversification for most of the 20th century were: [See p.298] a. Shareholder value maximization *b. The quest for growth and risk reduction c. The desire to escape mature sectors and enter new, technology-based industries d. The quest to exploit economies of scope.

4. Diversification whose sole impact is to reduce the variability of profits does not create value for shareholders because: [See pp.299, 302] a. Shareholders are interested in return more than in risk b. The most important risks (such as a global financial crisis or the collapse of the Euro) are systemic in nature, against which diversification offers little protection c. The risk which is relevant to stock market valuations is perceived risk--this bears little relationship to profit variability *d. If investors can spread risk by diversifying their portfolios, diversification adds no additional value in terms of risk spreading.

5. Diversification that reduces unsystematic risk is likely to be associated with less variance of a firm’s cash flows. This is likely to benefit: [See pp.299, 302] a. Shareholders, because they are sensitive to all forms of risk *b. Bondholders, because greater variability of cash flows increases a firm’s vulnerability to default on payments to bondholders c. Both groups d. Neither group

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6. The emergence of “conglomerates”—widely diversified companies—during the 1960s and 1970s was a result of: [See p.300] a. The desire of companies to escape low growth industries *b. The belief that the tools of strategic and financial management could be applied to any type of business c. The willingness of some CEOs to ignore shareholder interests and order to build large corporate empires d. Loose monetary policies that increased the availability of corporate finance.

7. The general trend of the past four decades has been for companies to divest their “noncore” businesses. Exceptions to this trend include: [See p.300] a. Large e-commerce companies such as Amazon, Alphabet, Alibaba, and Tencent b. Large business groups in emerging market countries *c. Both (a) and (b) d. Neither (a) nor (b)—the refocussing trend is general across sectors and across countries.

8. The expression “conglomerate discount” means: [See pp.300, 308] a. The ability of a widely diversified firm to exploit economies of scope to reduce its overall costs b. The willingness of stock exchanges to offer discounted listing fees in order to attract highly diversified firms *c. The stock market tends to value diversified companies at less than their break-up value d. The lower rates of return that highly diversified companies offer to their shareholders.

9. Porter’s “three essential tests” help to determine: [See pp.302-303] a. The likely impact of diversification upon risk *b. The potential for diversification to create shareholder value through boosting profitability c. The impact of diversification on stakeholders d. How the financial markets would react to a diversification.

10. When diversification combines two businesses in different industrial sectors, the most important determinant of whether the diversification is likely to create value is whether the diversification: [See p.303] a. Changes the debt/equity ratio of the combined company b. Is between businesses with similar values and management systems c. Causes management to lose its focus on its core business *d. Offers opportunities for sharing resources and capabilities.

11. When a company in industry A acquires a company in industry B, Porter’s “better-off” test is satisfied when: [See p.303] a. The competitive advantage of the business B is increased b. The competitive advantage of business A is increased *c. The competitive advantage of either or both businesses in increased d. There are shared resources and capabilities between the two businesses 12. The key difference between economies of scale and economies of scope: [See p.303] a. Economies of scale relate to manufacturing activities; economies of scope relate to a wide range of functions

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*b. Economies of scale relate to expanding the output of a single product; economies of scope relate to expansion across multiple products c. There is no practical difference d. Scale economies are relevant to business strategy; economies of scope to corporate strategy.

13. Which of the following is not an example of an economy of scope from diversification?

[See pp.303-304] a. Samsung Group applying its Samsung brand name across a wide range of products *b. Royal Dutch Shell engaging in forest development in order to offset some of the carbon dioxide produced by its petroleum business c. Amazon using its server capacity to enter cloud computing and web hosting d. Fuji Film applying its thin-film, coatings, and polymer technologies not only to photographic film, but also to cosmetics.

14. Demand-side economies of scope are economies that accrue to customers from buying bundles of different products. Examples of economies of scope include: [See pp.304-305] Sa. Discount stores that offer a wide range of products b. Suppliers of electronic systems that comprise hardware, an operating system and applications *c. Both (a) and (b) d. Neither (a) nor (b) 15. The continuing prominence of large, highly diversified business groups in many emerging market countries (e.g. Tata Group in India) is mainly the result of: [See p.308] a. The political connections of a few leading business leaders *b. High transaction costs in capital and labor markets in these countries which favor the deployment of resources within large diversified corporations ○ c. Barriers to direct investment which protect these companies from overseas competition d. The failure of emerging market business leaders to appreciate the benefits of refocusing 16. The British fashion company, Burberry, is considering diversifying into the hotel business. Its optimal strategy is to: [See pp.305-306] a. Set up its own luxury hotel chain—that way it can appropriate all the profits from the venture *b. License its brand to an existing hotel operator—that way it can avoid the costs and risks of having to invest in all the resources and capabilities required by the hotel business c. Stay away from hotels all together since this business is unrelated to Burberry’s core fashion business d. Establish a separate start-up company, Burberry Hotels, in which Burberry Group retains a minority equity holding 17. The statement: “Economies of scope in shared resources do not provide a sufficient justification for diversification” is: [See pp.305-306] a. Correct: Cost savings form shared resources are of little value unless there are also organizational capabilities that can be transferred between the businesses *b. Correct: to justify diversification economies of scope need to be supported by transactions costs in the market for the particular resources c. Incorrect: economies of scope are sufficient grounds for diversification on their own d. Incorrect: the benefits from economies of scope need to exceed the administrative costs of the corporate HQ.

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18. The principle difference between the “parenting advantage” framework and Porter’s “three essential tests” in evaluating the value-adding potential of diversification is: [See p.306] a. The “corporate parenting” framework focuses on the role of the corporate headquarters b. Porter’s “three essential tests” emphasizes shareholder value creation; the “parenting advantage” considers value creation for all stakeholders *c. Porter’s “three essential tests” considers whether diversification creates shareholder value; “parenting advantage” considers whether a firm’s ownership of a business creates more value than any other potential parent might d. Porter’s value chain analysis applies to diversification decisions; “parenting advantage” applies to diversification and divestment decisions 19. Which is a more efficient mechanism for allocating capital among different businesses: the internal capital allocation of diversified firms or the external capital market?

[See pp.306-308] a. The internal capital allocation process of diversified firms b. The external capital market c. It depends on the effectiveness of the specific firm’s capital allocation process *d. It depends on the effectiveness of the specific firm’s capital allocation process and the efficiency of the capital market in the country where the firm is located.

20. The internal labor market provides a large, diverse firm with the chance to make savings, by: [See p.307] a. Developing senior managers with wide experience b. Relying less on external recruitment consultants c. Having first-hand knowledge of a large pool of internal recruits for transfer between businesses *d. All of the above 21. Several decades of empirical evidence indicates that the relationship between diversification and performance: [See pp.307-309] a. Varies between countries b. Is mainly positive *c. Is neither consistent nor systematic d. Is negative unless the diversification is between closely-related industries 22. The failure of empirical research to find unambiguous evidence that related diversification outperforms unrelated evidence points to: [See pp.308-309] a. The fact that firm performance is the outcome of many factors of which diversification strategy is only one b. Reverse causation: it may be that poorly performing firms are more likely to take the risk of unrelated diversification c. Difficulties in determining whether diversification is related or unrelated *d. All the above. ○ 23. The main difference between two businesses being strategically related rather thasn operationally related is: [See pp.309-310] *a. Strategic relatedness involves the application of common general management systems and capabilities to the two businesses; operational relatedness involves the sharing of resources b. Strategic related is about corporate-level synergies; operational relatedness involves businesslevel synergies © 2019, John Wiley & Sons, Inc.

c. Operational relatedness requires a multidivisional structure; for strategic relatedness, a holding company structure sufficed d. Operational relatedness requires that the different products share production plants and distribution systems; strategic relatedness does not.

24. “Strategic relatedness” (as distinct from “operational relatedness”) in diversification refers to: [See pp.309-310] a. The ability to use very different marketing strategies that fit with different countries b. The ability to sell similar products *c. The ability to apply similar strategies, resource allocation procedures, and control systems across the businesses d. The ability to maximize the allocation of financial resources across the businesses 25. Despite the heterogeneity of the goods and services supplied by LVMH (e.g. leather bags and shoes, wine and spirits, fashion clothing, jewelry and watches), we can consider LVMH’s diversification to be into strategically-related industries because: [See pp.309-310] a. Most of its products are sold at airport, tax-free shops b. LVMH benefits from massive economies of scope through centralizing common functions such as purchasing, R&D, manufacturing, and marketing c. LVMH’s portfolio balances mature, cash-generating businesses with growing, cash-using businesses *d. The different business all require global marketing to high income consumers, hence draw upon similar management capabilities.

26. To determine whether a firm’s diversification is related or unrelated, we need to consider: [See pp.309-311] a. Whether the businesses are within the same two-digit class of the Standard Industrial Classification b. Whether the two businesses have either common customers or utilize a common technology *c. Whether the two businesses share some of the same resources and capabilities d. Whether the two businesses are in the same stages of their industry life cycles.

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Contemporary Strategy Analysis 10e

TEST BANK: CHAPTER 13 Implementing Corporate Strategy: Managing the Multibusiness Firm True or false questions 1. According to Jack Welch, the advantages of focus that single business companies possess are outweighed the advantage that multibusiness companies possess in terms of their ability to share the ideas from many different sources.

[See p.315] *a. T b. F 2. Implementing corporate strategy mainly involves the relationships between the corporate headquarters and the individual businesses.

[See p.316] *a. T b. F 3. The benefits and the costs from extending (or reducing) corporate scope are critically dependent upon how corporate strategy is implemented.

[See p.317] *a. T b. F 4, In a holding company, such as Berkshire Hathaway, the corporate headquarters is closely involved in strategic decision making in the individual subsidiaries.

[See pp.317-318] a. T *b. F 4. Within a multidivisional company, “portfolio management” involves managing the linkages among the businesses in order to exploit the synergies between them.

[See pp.317-318] a. T *b. F 5. For conglomerate companies (companies that comprise unrelated businesses) portfolio management is likely to be more important source of value creation than in a diversified company that comprises closelyrelated businesses.

[See pp.317-318] a. T *b. F 6.. The GE/McKinsey portfolio planning matrix is less sophisticated than the BCG growth-share matrix, but

is easier to apply.

[See pp.320-321] a. T *b. F 7. The axes of the BCG and GE/McKinsey business portfolio matrixes represent the two fundamental sources of profitability for a business: the attractiveness of its industry and its competitive advantage. © 2019 John Wiley & Sons, Inc.

[See pp.320-321] *a. T b. F 8. The Ashridge portfolio display is distinguished by the fact that it takes account of fit between each business and the corporate owner.

[See pp.320-321] *a. T b. F 9. Increasingly, the corporate headquarters of multibusiness companies are being divided into two parts: that which exerts financial and strategic control over the businesses and that which provided common services to the businesses.

[See p.319] *a. T b. F 10. In large multibusiness, multinational companies shared service organizations are almost always located close to their corporate headquarters.

[See p. 319] a. T *b. F 11. Typically, a common corporate identity and well-established corporate systems means that there are few barriers to transferring best practices between business units within a company.

[See p.322] a. T *b. F 12. Sharing resources and activities between business units can often impose costs which exceed the value of the synergies gained.

[See pp.322-323] *a. T b. F 13. The closer the linkages between the business units of a multibusiness corporation, the more involved must corporate management be in coordinating across the businesses.

[See pp.322-323] *a. T b. F 14. Multibusiness corporations with close linkages between their businesses tend to have smaller corporate headquarters than multibusiness corporations with more independent businesses.

[See p.323] a. T *b. F 15. “Restructuring” is a corporate strategy that involves acquiring companies then intervening to cut costs, divest assets, revise competitive strategies, and adjust financial structure. {see pp.323-324] *a. T b. F 16. The strategic planning systems of multibusiness corporations have been criticized for the fact that they do not make strategy.

[See p.326]

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*a. T b. F 17. Most multibusiness companies have a dual planning process: strategic planning focuses on the short and medium term, financial planning on the medium to long term [See p.327] a. T *b. F 18. A key challenge for the strategic planning systems of large corporations is reconciling top-down strategic leadership with bottom-up strategy initiatives.

[See pp.325-326] *a. T b. F 19. The mechanisms through which the corporate headquarters exercises control over individual businesses can be classified into “input control” and “output control.” Performance management systems represent a form of “input control.”

[See p.327-328] a. T *b. F 20. If corporate management focuses heavily upon enforcing financial performance targets on its individual businesses, this increases the need for corporate management to guide the strategic plans of the individual businesses.

[See p.327-328] a. T *b. F 21. Corporate management systems based upon financial targets and budgetary controls tend to work best in multibusiness companies with relatively few, closely-related, technology-intensive businesses [See pp.328-329] a. T *b. F 22. A strategic inflection point is a point where major changes in a firm’s competitive environment require a complete change of strategy [See p.332] *a. T b. F 23. The record of most large, mature corporations in developing new businesses is poor.

[See p.332] *a. T b. F 23. As boards of directors have become increasingly preoccupied with compliance issues, they have become less effectives in guiding the strategies of the companies they oversee.

[See p.334] *a. T b. F 24. Evidence that companies make only minor changes in their allocation of capital expenditure among their businesses from year to year supports Oliver Williamson’s argument that multidivisional structures (the “M-form”) permit more rationale, less politicized decision making at the corporate level.

[See p.335]

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a. T *b. F 25. Mintzberg identified a key rigidity of the multidivisional firm is its tendency to impose standardized management systems across all of its divisions.

[See p.337] *a. T b. F

Multiple choice questions 1. The fundamental issue that Implementing corporate strategy addresses is: [See pp.316-317] *a. How the multibusiness company can best create value for its different businesses b. Where the firm should be competing c. Managing the business portfolio d. Exploiting linkages among the different businesses.

2. The success of Berkshire Hathaway over the past five decades under the leadership of Warren Buffett may be attributed primarily to: [See pp.317-318] a. Warren Buffett’s ability to guide strategic decisions at each of Berkshire Hathaway’s subsidiaries *b. Acquiring well-managed companies in attractive industries, then exerting rigorous discipline in allocating capital among them c. Acquiring poorly-performing companies at bargain prices, turning around their performance, then divesting them at high prices d. All of the above 3. Besides managing the overall corporate portfolio of businesses, corporate management can add value to individual businesses by: [See p.317] *a. Managing the individual businesses, exploiting linkages between them, and managing change. b. Developing and managing corporate-level capabilities c. Designing strategic orientations, and developing detailed operational plans for each business d. Communicating the strategic orientations to the main stakeholders, and managing conflicts at lower divisional levels 4. The main purpose of a portfolio planning matrix is to: [See p.317] a. Locate potential synergies between businesses b. Forecast the future performance of the different businesses c. Evaluate the group’s market positioning of its different products relative to its leading competitors *d. Represent graphically the different businesses in terms of key strategic variables that determine their potential for profit 5. The development of portfolio planning techniques at the end of the 1960s was initiated by: [See p.320] a. The Rand Corporation *b. General Electric c. Michael Porter d. Peter Drucker 6. The axes of the BCG and GE/McKinsey portfolio planning matrices act as proxies for two key strategic variables: [See pp.320-321] © 2019 John Wiley & Sons, Inc.

a. Market share and market growth b. Competitive advantage and market growth *c. Competitive advantage and market attractiveness ○ d. Individual business unit performance and potential for synergy.

7. Portfolio planning techniques, (also called portfolio matrixes), contribute to the following corporate management function: [See pp.320-321] *a. Allocating resources among businesses b. Selecting diversification opportunities c. Formulating competitive strategies for individual businesses d. Establishing performance targets for each business 8. A major limitation of the BCG matrix in guiding corporate strategy is: [See pp.320-321] a. The assumption that each business has synergistic links with every other business within the portfolio b. Business’ market shares and growth rates are difficult to measure *c. Neither market growth nor relative market share are reliable indicators of a businesses’ future profitability d. Its long history renders it obsolete.

9. The concept of “parenting advantage” is best summarized by the following statement: [See pp.320-321] a. Corporate managers should emulate the role and skills of good parents in disciplining their children *b. The primary criterion for a company’s continued ownership of a business is its ability to add more value than any alternative corporate parent c. The primary role of corporate management is to coach business management d. The ultimate measure of success for a multibusiness company is to develop successful new businesses 10. The primary purpose of the “Ashridge portfolio display” is to: [See pp.320-321] *a. Evaluate the potential for a corporate parent to add value to its individual businesses b. Appraise the performance of each individual business under the corporate umbrella c. Benchmark the strategic position of individual businesses in relation to one another d. Identify businesses that are candidates for divestment.

11. What are the two dimensions of the Ashridge portfolio display?

[See pp.320-321] a. The relative organizational power of the parent, and the business’s innate profitability b. The parent’s potential to add value to a business, and its potential to impose effective control on the business *c. The parent’s potential to create value and to destroy value in a business d. The cultural fit between the parent and the business.

12. The principal merit of the BCG portfolio planning matrix is: [See pp.320-321] a. Its accuracy in predicting profit and cash flow potential b. Its empirical basis: the relationship between market share and profitability has been widely observed *c. Its simplicity d. Its use of metaphor (dogs, cash cows, stars, etc.)

13. By separating their corporate headquarters into a corporate management unit and a shared services organization, large corporations anticipate the following benefits: [See p.322] a. Better exploitation of synergy among the business units

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*b. Economies of scale and greater responsiveness to user needs in supplying services to the business units c. Ensure standardization in the support services provided to business units d. Encourage the identification and transfer of best practices.

14. Managing linkages among businesses through transferring skills and sharing resources would appear to offer greater potential for creating value than portfolio management because: [See pp.317, 322-323] a. Economies of scope have a greater impact on profitability than industry attractiveness b. The size of acquisition premiums means that acquisitions typically destroy value for the acquirer *c. Increasingly efficient capital markets limit the potential either to acquire undervalued companies or to create value through internal capital allocation among businesses d. Stock markets apply a conglomerate discount to highly diversified companies 15. Although sharing resources among the different businesses within the multibusiness corporation can offer substantial cost economies, these savings are often offset by: [See pp. 322-323] a. Internal conflicts between divisional managers b. The need for each business to have resources and facilities that are specialized to its own requirements *c. The costs of coordinating such resource sharing d. The unwillingness of each business to pay for the maintenance of common resources.

16. The corporate headquarters of diversified companies that comprise loosely-related businesses (e.g.

Berkshire Hathaway, Danaher, Jardine Matheson, and the Tata Group) differ from the corporate headquarters of closely-related business (e.g. Royal Dutch Shell, IBM, BASF, and Unilever) in the following way: [See pp. 322-323] a. They are more inclined to intervene in the management of their business units b. They are more oriented towards stakeholder rather than shareholder objectives c. They are more focused upon creating shareholder value *d. They are smaller 17. The type of corporate strategy through which most leading private equity groups such as Carlyle Group, Kohlberg Kravis Roberts, and Blackstone add value to the businesses they acquire is best described as: [See pp.323-324] a. Portfolio management *b. Restructuring c. Transferring skills d. Sharing resources 18. The principal mechanisms through which the corporate headquarters seeks to improve the strategic and operational management of its businesses are: [See pp.323-325] a. Management development activities b. Providing corporate services c. Creating strong financial incentives for business unit managers *d. Direct involvement in business-level management, strategic planning, and performance management and financial control 19. Corporate management can enhance the performance of its individual businesses through imposing corporate systems for performance management and resource allocation, however, the main downside of such corporate intervention is: [See p.325] a. Constraining innovation *b. Undermining autonomy and motivation of business-level managers

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c. Limiting opportunities for exploiting synergies between businesses d. Requiring an excessive focus on shareholder interests over the interests of other stakeholders 20. One of the consequences of the deficiencies of formalized systems of strategic planning is that: [See p.326] a. Operational management is increasingly being prioritized over strategic management b. Strategies are increasingly being formulated outside the formal strategic planning system c. Strategic planning is increasingly viewed as an extension of financial planning d. Companies are increasingly relying upon external consultants for their strategy formulation.

21. The choice between strategic planning and financial control as a corporate management style for a particular company depends upon: [See pp.327-329] a. Whether company is managed in the interest of shareholders or stakeholders b. The degree of maturity of the businesses *c. The relatedness of the businesses and the duration of their investment projects d. Whether the goals of the company are growth or profitability 22, The greatest deficiency of BP plc’s decentralized, performance management system based upon performance contracts for individual managers that was implemented by CEO John Browne at during 1995–2007, was [See p.328] a. Power was not really decentralized because of Browne’s dominant influence b. As a former state-owned oil company, BP’s culture could not adapt to a performance management system that emphasized individual initiative *c. Decentralized, performance management is not appropriate to an oil and gas major where time horizons are long term, key strategic decisions must be centralized, and risk management is critical d. Oil and gas companies must be rum by engineers and technical specialists who do not respond well to performance targets.

23. IBM and Samsung Electronics are examples of large, mature corporations that have: [See pp.330-331] a. Sustained their positions as two of the world’s most innovative companies in terms of patents awarded and new products launched *b. Developed corporate systems that promote large-scale strategic change and the development of major new areas of businesses c. Demonstrate the potential of large established companies rich in complementary resources to outperform technology-based start-ups d. Demonstrate that strong leadership and centralized decision making is the key to corporate success during turbulent times.

24. Corporate governance is: [See p.333] a. The way a firm is organized b. The way a firm makes decisions *c. The system by which the top management of a firm is directed and controlled d. The way a firm appoints and replaces its CEO 25. A major disadvantage of legislation to improve corporate governance by imposing more stringent reporting requirements on public companies and increasing the penalties that directors face for negligence and misconduct is: [See pp.334-335] *a. Preoccupation with compliance means that boards of directors offer less strategy guidance b. More companies are choosing to go private c. Fewer qualified individuals are willing to become board members d. Increased regulation reinforcing the male domination of corporate boards

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26. The changes in the ways in which CEOs and senior executives have been compensated in recent decades, particularly the growth of share options and performance incentives have: [See pp.334-335] a. Done much to align the interests of top management with those of shareholders b. Provided major incentives for CEOs to manipulate and mis-report financial performance *c. Greatly boosted compensation while doing little to align the interests of CEOs and shareholders d. Helped t ensure that market forces determine executive compensation 27. Oliver Williamson said two main corporate governance advantages of the multidivisional structure (“Mform”) for large, diversified companies were: [See pp.335-336] a. Allowing decision-making to be decentralized while centralizing high-frequency decision making b. Allowing decision-making to be decentralizing while centralizing strategic decision making *c. Creating competitive internal capital market in which capital allocation is not dominated by political consideration and creating a corporate headquarters that can represent shareholder interests d. Ensuring that the divisional managers were dependent on capital allocation at the corporate level 28. Which of the following is not a key difference between a multidivisional company and a holding company?

[See p.336] a. Multidivisional companies have a centralized treasury; holding companies do not b. The parent of a holding company appoints the boards of directors of its subsidiaries; the HQ of a multidivisional company directly appoints divisional managers *c. The subsidiaries of a holding company are responsible for their own financing decisions; the divisions of a multidivisional company need only to consider their credit ratings d. Multidivisional corporations typically have a single, integrated strategic planning process; holding companies do not.

29. The failure of companies such as Enron, WorldCom, Royal Bank of Scotland, and Kaupthing Bank of Iceland illustrate: [See p.337] a. The hazards of growth through acquisition b. The ineffectiveness of most company boards of directors *c. The potential for companies to be vehicles for the personal ambitions of chief executives d. How easily the stock market is fooled by ambitious, visionary CEOs

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Contemporary Strategy Analysis 10e

TEST BANK: CHAPTER 14 External Growth Strategies: Mergers, Acquisitions, and Alliances True or false questions 1. Internal business ventures rather than external mergers, acquisitions and alliances are the preferred means by which most established firms achieve major extensions in the scope of their activities.

[See p.341] a. T *b. F 2. Mergers, acquisitions, and alliances may be viewed not just as instruments of corporate strategy but as strategies in themselves.

[See p.341] a. T *b. F 3. The key difference between a merger and an acquisition is that, in the case of a merger, the participating companies combine to create a new company.

[See p.342] *a. T b. F 4. In the case of cross-border amalgamations of companies, concerns of national domination often mean that mergers are preferred to acquisitions.

[See p.342] *a. T b. F 5. Mergers and acquisitions go in waves. Because acquirers prefer to pay low prices for acquired companies, these M&A waves tend to be inversely correlated with stock market fluctuations.

[See pp.342-343] a. T *b. F 6. Mergers and acquisitions are attractive to the managers who instigate them because of the speed with which they can effect strategic changes rather than their proven financial benefits.

[See pp.342-343] *a. T b. F 7. The main parallel between the merger boom in the US at the end of the 19th century and the recent merger boom in the chemicals, beer, food, media and communications, and pharmaceutical industries is that both involves horizontal mergers and resulted in the creation of market-dominating companies: [See pp.342-343] *a. T b. F

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8. The only clear finding from several decades of empirical research into the outcomes of mergers and acquisitions is that the primary beneficiaries are the shareholders of the acquired firms.

[See p.344] Sa. T *b. F 9. Identifying the strategic rationale and likely benefits of mergers and acquisitions is easier in the case of diversifying mergers and acquisitions than for horizontal mergers and acquisitions.

[See p.344] a. T *b. F 10. In order to gain a new organizational capability, it is usually cheaper and less risky to acquire a company that already possesses that capability than to develop that capability internally.

[See p.347] a. T *b. F

11. The “lemons problem” in the market for companies refers to the fact that the sellers of companies have better information about the company than do would-be buyers.

[See p.349] *a. T b. F 12. Cross-border acquisitions tend to have the strongest strategic logic but give rise to the greatest challenges of post-merger integration.

[See p.349] *a. T b. F 13. Issues of pre-acquisition planning and post-acquisition management should be viewed as separate: activities best led by separate teams.

[See pp.348-349] a. T *b. F 14. Hewlett-Packard’s disastrous acquisition of the software and services company, Autonomy, points to the problem that the acquirer has much less information about the company than the seller. An additional problem of the Autonomy acquisition is that acquisitions that are intended to change the acquirer’s business model are riskier than acquisitions that seek to leverage the existing business model.

[See pp.349-351] *a. T b. F 15. The forces that gave rise the created the industrial districts of Italy are essentially the same as those that have caused clustering of film production companies in Hollywood and electronics and IT companies in Silicon Valley.

[See p.401] *a. T © 2019 John Wiley & Sons, Inc.

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b. F 16. Strategic alliances are only stable if they are reinforced by equity ownership between the partners.

[See pp.351-352] a. T *b. F 17. In most cases, the primary goal of a strategic alliance is to acquire that than simply to access the partner’s organizational capabilities.

[See p.353] a. T *b. F 18. An important lesson from the troubled development of Boeing’s 787 Dreamliner is that, for developing complex, technically-advanced products, the hub firm needs to have the capability to manage networks of strategic alliances.

[See p.354] *a. T b. F 19. The main reason that multinational corporations choose t enter emerging markets by means of a joint venture with a local partner is usually the desire t share risk rather than the need to access local knowledge and distribution channels.

[See p.354] a. T *b. F

20. In Capron and Mitchell’s decision framework for selecting the right growth path, if a firm finds that its resources and capabilities do not fit with its current strategy, then acquisition should be first option considered and internal development the last option.

[See p.356] a. T *b. F

Multiple choice questions 1. Mergers and acquisitions are highly effective tools for: [See pp.341-347] a. Creating value for shareholders *b Assembling large, market-dominating companies c. Extending a firm’s capability base d. Reducing a company’s risk 2. Mergers and acquisitions represent paradoxes in the sense that: [See pp.341-344] a. The stock market remains suspicious of them, despite widespread evidence of their effectives as tools of corporate strategy *b. Companies continue to be enthusiastic in initiating acquisitions despite empirical evidence that, on average, acquisitions destroy shareholder value for acquirers © 2019 John Wiley & Sons, Inc.

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c. The CEOs who initiate them are lauded by the business media, despite the suspicious that they are vehicles for CEO testosterone-fueled hubris d. They are often initiated by companies that profess a stakeholder orientation despite the fact that it is investment bankers who are the main beneficiaries, while consumers and employees are the main losers 3. The transformations of: • Interbrew into Anheuser-Busch Inbev, the world’s biggest beer company, • North Carolina National Bank into Bank of America Corporation, the #2 bank in the US • Comcast into the world’s biggest media company Are evidence of: [See p.341] a. The opportunities that the turbulent world offers to ambitious corporate leaders *b. The capacity of mergers and acquisition to effect major strategic transformations within a short time c. The critical importance of timing when using mergers and acquisitions to initiate major strategic transformations d. The need for antitrust policy to concentrate upon preventing the emergence of dominant firms, not on regulating their behavior once they have been created 4. Most of the biggest mergers and acquisitions since 2000 have been horizontal—i.e. between companies in the same industry. This reflects the fact that: [See pp.342-343] a. Antitrust authorities have been more concerned with vertical than horizontal mergers and acquisitions b. By showing that diversification does not offer significant risk-spreading benefits, modern financial theory has undermined the attractions of diversifying mergers and acquisitions *c. Horizontal mergers and acquisitions offer the greatest potential for value creation through cost reduction and moderating competition d. CEOs favor horizontal mergers and acquisitions because of their desire to eliminate rivals.

5. The tendency for M&A activity is highly cyclical, with a heavy clustering in specific sectors (e.g. oil & gas in the 1990s, metals and mining and banks during the early 21st century, media during 2010-18) reflects: [See p.345] a. General economic conditions b. Changing monetary conditions including interest rates and quantitative easing *c. Imitative behavior among companies d. Excessive liquidity on company balance sheets 6. For acquiring firms, empirical studies show that, on average, the returns to shareholders are: [See p.344] a. Slightly positive *b. Slightly negative c. Insignificant from zero d. Too varied to generalize.

7. Studies that compare post-merger accounting profitability with the pre-merger accounting profitability of the companies involved show little consistency. This is because: it to the companies’ performance prior to merging. The problem here is separating the effects of the merger from the multitude of other factors that influence companies’ performance over time. returns fails to provide conclusive evidence on the performance outcomes of mergers and acquisition is that: [See p.344]

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a. The identification problem: it is difficult to distinguish the effects of mergers from the many other factors that influence profitability b. The effects of mergers on profitability are diverse *c. Both (a) and (b) d. Neither (a) nor (b)—we do not know why studies of the effects of mergers on firm performance have been s inconclusive

8. The fact that acquisitions impose substantial costs on acquiring firms (including both the acquisition premium and legal and advisory fees) implies that: [See pp.344, 347] *a. Acquirers need to be sure that potential of the acquisition to create value exceeds the costs of incurred by the acquisition b. Acquisitions tend to be in the interests of managers but contrary to the interests of shareholders c. Small acquisitions to be preferred to large acquisitions d. Boards of directors should be more active in opposing acquisition proposals.

To instill more effective programs of corporate social responsibility 9. Reckitt Benckiser’s multiple acquisitions of consumer products companies has been motivated by its quest for: [See p.347] a. Restructuring opportunities b. International diversification *c. Building a portfolio of consumer brands d. Scale economies in production and marketing.

10. In technology-based industries, the most common reason for established companies to acquire small, start-up firms is in order to: [See p.347] a. Preempt competitive attacks from potential rivals *b. Acquire capabilities in emerging areas of technology c. Boost revenue growth as their own core businesses experience slower growth d. Recruit the entrepreneurial leaders of stat-up companies in order to revitalize their own managerial ranks.

11. A major motive for the acquisition of pubic companies by private equity companies is: [See p.346 a. To remove incompetent senior management teams *b. To create value through increasing financial leverage c. To stimulate innovation d. Reduce risk 12. Acquisition is the preferred mode of diversification for most firms because: [See p.347] a. For companies with high price/earnings ratios, acquiring companies in other sectors that have low price/earnings ratios offers an attractive means of boosting market capitalization b. Empirical research shows that diversifying acquisitions typically create significant value for the acquiring firm c. The alternative of acquiring a minority stake does not give the diversifying firms significant decisionmaking influence over the target firm *d. The alternative of setting up a new enterprise in the industry to be entered is slow and risky. © 2019 John Wiley & Sons, Inc.

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13. The continuing popularity of mergers and acquisitions among companies despite the lack of empirical evidence of their benefits suggests: [See pp.343-347] a. Many mergers and acquisitions are motivated by growth rather than profitability b. Mergers and acquisitions by the leading firms in an industry promotes imitation by other firms in the industry *c. Both (a) and (b) d. Both (a) and (b) plus the fact that most investment analysts view takeovers as a sign of a dynamicallymanaged company.

14. Acquiring companies typically pay between 20% and 40% more than the pre-bid market capitalization to acquire target companies. The main reason for this sizable acquisition premium is: [See pp.344-347] *a. To gain acceptance of the bid by the majority of a target company’s shareholders, acquirers must pay a significant premium over the target company’s stock market valuation b. Information asymmetry: acquiring companies knows less about the true value of target companies than do these companies themselves c. Excessive optimism causes acquirers to overvalue their acquisition targets d. Investment bankers typically mislead the9r clients in their company valuations in an effort to boost their fees 15. Which are the following statements about pre-merger planning is untrue?

[See pp.348-349] a. It is easier to predict the outcomes of horizontal M&A than other types of M&A *b. In the case of horizontal M&A, it is easier to predict the impact on revenues than the impact on costs c. The outcomes of a hostile acquisition are more difficult to predict than the outcomes of a friendly acquisition d. Acquisitions that are directed towards a firm reinventing its business model should be regarded as riskier than those which leverage its existing business model.

16. Which of the following was not a contributory factor to the success of Disney’s post-acquisition integration of Pixar?

[See p.350] a. Personal and professional respect among key personnel at the two companies *b. Disney’s rapid integration of Pixar within its own animated productions unit c. Protection of Pixar’s creative culture and employment arrangements d. Maintaining the support of Pixar’s president by making him head of Disney’s combined animated productions unit.

17. What distinguishes a joint venture from other types of strategic alliance is that in a joint venture: [See p.351] a. The partners hold equity stakes in one another b. The partners combine their top management teams *c. The partners create a new company which they jointly own d. The partners are from different countries.

18. The main reason that a strategic alliance is often an attractive alternative to a merger or acquisition is: [See pp.351-352] a. Alliances avoid government restrictions relating to antitrust and foreign direct investment

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*b. Alliances permit firms to access one another’s resources and capabilities without the costs and risks of a merger or acquisition c. Alliances allow a firm to create growth options d. Alliances allow risk sharing in giant projects.

19. Strategic alliances frequently play an important role in a firm’s internationalization strategy because: [See p.354] a. Alliances offer a means of sharing the high risks involved in international expansion *b. Internationalizing firms often lack the local knowledge and access to distribution channels that a local partner can provide c. Alliances offer greater security than a wholly-owned subsidiary d. Alliances offer greater flexibility than alternative internationalization modes.

20. Compared to alliances between domestic partners, international alliances typically offer: [See pp.354-355] a. Greater risk without greater potential return * b. Higher potential returns but with greater risk of disagreement and failure c. A wider range of possible outcomes dependent upon the compatibility of the national cultures of the partners involves d. Higher potential return and moderate risks so long as the potential for disagreement is recognized and a mechanism is established for arbitrating disputes.

21. For companies that are seeking to augment their own resource and capability base with those of another company, the choice between acquisition and strategic alliance rests primarily upon: [See p.356] *a. How close a relationship is necessary in order to gain use f the desired resource of capability b. Whether or not the companies are located in different countries c. Whether the companies involved are listed or privately held d. Whether the desired resource or capability is tradable

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Contemporary Strategy Analysis 10e

TEST BANK: CHAPTER 15 Current Trends in Strategic Management True or false questions 1. The current business environment is unusually perplexing and unpredictable because many of the trends of the late 20th century—internationalism, the spread of constitutional democracy, and faith in market capitalism—have now gone into reverse.

[See p.361] *a. T b. F 2. The forces reshaping business during the first two decades of the 21st century bear no resemblance to those which reshaped business during the first two decades of the 20th century.

[See p.361] a. T *b. F 3. According to the economist Brian Arthur, the main impact of digital technologies will be the emergence of “external intelligence”: intelligence and decision making that existing machines rather than in humans.

[See pp.361-362] *a. T b. F 4. The growth of the freelance economy, in which taxi services, short-term accommodation, and home maintenance is provided by self-employed individuals rather than by firms, has little to do with technology, its mainly due to the preferences of individuals for the flexibility of self-employment over the rigidities of a full-time employment.

[See p.362] a. T *b. F 5. Rising concentration and growing monopoly power in the 21st century is a feature of mature industries such as beverages, chemicals, and mining. In technology-based sectors, the disruptive effects of digital technologies ensure robust, dynamic competition.

[See p.362] a. T *b. F 6. Increasing levels of interconnectedness within a complex, nonlinear systems help to stabilize the impact of potentially disruptive forces.

[See p.363] a. T *b. F 7. The emergence of a multipolar world where the US no longer exercises a dominant role has meant that the “G7” leading economies now collaborate address the world’s most pressing economic and environmental problems.

[See p.363] a. T *b. F © 2019 John Wiley & Sons, Inc.

8. The financial crisis of 2008-9, a series of corporate scandals, and increasing inequality have undermined the legitimacy of market capitalism.

[See p.363] *a. T b. F

9. Of the 109 Chinese companies that were members of the Fortune Global 500 in 2018, few were state-owned enterprises.

[See p.363] a. T *b. F 10. The increasing number of companies delisting from US stock exchanges to become private companies is a response to the increasingly onerous legal responsibilities of public companies and the increasing scrutiny to which they are subject. public corporations.

[See pp.364-365] *a. T b. F 11. The poor performance of the shares of Goldman Sachs after the 2008 financial crisis, News Corp. after the phone hacking scandal, and VW after its emissions cheating scandal provide support to the argument that maintaining legitimacy is critical to an organization’s success.

[See p.413] *a. T b. F 12 A growing source of competition to western companies has been new computers from emerging market countries which have made the transition from supplying OEM products to Western manufactures and distributors to providing products under their own brand names.

[See p.411] *a. T b. F 13. The growing interconnectedness of the world economy and human society cannot be regarded as a contributing factor to the increasing volatility and unpredictability of global environment of business.

[See pp.412-413] a. T *b. F 14. The three major societal issues that companies are being forced to address are: fairness, ethics, and sustainability [See p.364] *a. T b. F 15. For shareholder value maximization to be a helpful goal for top management it needs to focus not on stock market value but on the fundamental drivers of value.

[See p.365] *a. T b. F

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16. In a more complex business environment where companies must pursue multiple dimensions of competitive advantage is consistent with Jim Collins’ recommendation that companies should seek to be “hedgehogs” rather than “foxes.” (Drawing upon the categorization of intellectuals made by Isaiah Berlin.)

[See pp.365-366] a. T *b. F 17. Companies such as Toyota, Wal-Mart, 3M, and Samsung have sustained strong performance over long periods of time by basing their competitive advantage on a single core competence.

[See p.365] a. T *b. F 18. Among industries based upon digital technologies, the presence of network externalities is critical in determining whether the industry tends towards monopoly or fragmentation.

[See p.366] *a. T b. F 19. “Managing real options” means that firms should take a greater interest in how share option packages are managed, to achieve the best value for shareholders [See pp.366-377] a. T *b. F 20. Applying real options thinking to industry analysis implies that industry attractiveness is less about an industry’s profit potential and is more concerned with the range of strategic opportunities that an industry offers.

[See p.367] *a. T b. F 21. The complementarity of management practices implies that the effectiveness of a particular management practice depends upon how it fits with all the other management practices of the company.

[See p.368] *a. T b. F 22. Complementarity research should not be used by a company as an excuse for not adopting a best practice such as a “six-sigma” quality management systems “lean production” manufacturing processes, or a “360-degree” employee appraisal system.

[See pp.368-369] a. T *b. F 23. Complexity theory predicts that complex, adaptive systems rarely have the capacity to selforganize—to avoid chaos hierarchical control is essential.

[See p.368] a. T *b. F

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24. Applications of complexity thinking to management suggest that top management should set rules governing the interaction of organizational members and their expected behaviour, and relinquish direct supervisory control [See p.368] *a. T b. F 25. If companies are to put in place the capabilities needed to build multiple layers of competitive advantage, their organizational structures need to become more complex.

[See pp.369-370] *a. T b. F 26. Research into leadership generally supports the view that complex organizations facing uncertain environments require leaders that are decisive decision makers rather than humble; empathetic individuals endowed with social and emotional intelligence.

[See pp.371-372] a. T *b. F

Multiple choice questions 1. The first two decades of the 20th and 21st centuries were similar in terms of factors that were reshaping the business environment. The most significant of these common factors were: [See p.361] a. Political turbulence: in the early 20th century the collapse of the Austro-Hungarian and Ottoman empires, in the 21st century the ethnic and religious strife and the rise of populism *b. Technology: in the 20th century electricity, the telephone and the automobile; in the 21st century the internet and mobile communication c. Popular disaffection with big business: in the 20 th century opposition to the concentration of economic power in monopolies and trusts, in the 21st the inequality associated with the capitalist economy d. Corporate social responsibility: in the 20th century outrange against unsafe and unhealthy products and worker exploitation; in the 20th century concerns over environmental irresponsibility and exploitation of third world workers.

2. The principal impact of digital technology on business during the next decade is likely to be: [See pp.361-362] a. Increasing importance of software and declining importance of hardware b. Accelerated growth of the “sharing economy” c. China displacing the US as world leader in digital technology *d. External intelligence: business decisions and the management of transactions undertaken by machines 3. The main impact of digital technology on the competitive structure of industries during the 21st century has been: [See pp.361-362] a. Lower entry barriers b. Increased fragmentation of established industries *c. The rise of large, market dominating digital giants d. “Business ecosystems” displacing “industries” as the relevant arenas in which competition occurs 4. According to systems theory, high levels of interconnectedness can lead to: [See pp.362-363]

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a. More pressure on governments to regulate the economy and increase their interventionism b. A spiral of economic catastrophes and business failures c. Greater stability in the whole system *d. A tendency for small initial disturbances to become amplified in unpredictable ways 5. The first 16 years of the 21st century have been characterized by unprecedented turbulence in the global economy, politics, and society. This turbulence is likely to continue into the future because: [See p.363] a. Declining legitimacy of political leaders in many countries and growing ineffectiveness of international institutions b. A growing ineffectiveness of international institutions and a decline in US global influence *c. Increased global interconnectedness causes disturbances to be amplified while the declining global influence of the US implies a lack leadership in managing these disturbances d. The global financial system remains fragile 6. Achieving social legitimacy requires that businesses should: [See pp.363-364] a. Seek permission from the local community to operate *b. Adapt to societal pressures c. Follow accepted ethical codes d. Replace shareholder value maximization by stakeholder value maximization.

7. A major implication of corporate scandals, inequality, and environmental sustainability implies that company executives need for firm strategy to pay greater attention to: [See p.363] a. Risk management b. Business ethics *c. Social legitimacy d. Achieving greater diversity among boards of directors.

8. The declining public support for market capitalism during the 21st century is the result of: [See p.363] a. The rise of populism and nationalism b. Distaste for the greed that was the root cause of the 2008-9 financial crisis *c. Corporate scandals, the financial crisis, and rising inequality Production costs to fall *d. The markets for once-separate products to converge.

9. In 2016, the ratio of US CEO compensation to that of US production workers averaged about: [See p.364] a. 420 *b. 260 c. 150 d. 80 10. The reduction in the number of companies listed on US stock exchanges over the past two decades is mainly a result of: [See pp.364-365] a. Mergers and acquisitions b. Companies going private in order to avoid the regulation and public scrutiny that public corporations are subject to c. US companies transferring their listing to non-US stock exchanges d. Corporate bankruptcies

© 2019 John Wiley & Sons, Inc.

11. The most effective remedy for the problems that have arisen from top managements’ pursuit of shareholder value is likely to be: [See p.365] a. Increased government regulation *b. Recognition that management should focus not on stock market capitalization but upon the underlying drivers of long run profitability c. Companies explicit commitment to the goal creating stakeholder value d. Increased shareholder activism.

12. If competition, market turbulence, and accelerating technological change are increasing the pace at which firms’ competitive advantage is eroded, to sustain competitive advantage companies need to: [See pp.365-366] *a. Create multiple sources of competitive advantage b. Build strength in intellectual property c. Foster innovation d. Adopt global strategies that arbitrage the resource advantages of multiple countries.

13. Among industries based upon digital technologies, a key factor that determines the industry’s structure and sources of its competitive advantage are whether: [See p.366] *a. It is subject to network externalities b. It supplies hardware or software c. The firms within it deploy the same business model or different business models d. The scope of competition is national or global 14. As strategy becomes increasingly viewed as the management of a portfolio of options, the emphasis of strategy formulation shifts: [See pp.366-367] a. From strategic planning to business model innovation b. From growth through acquisition to growth through creating a network of strategic alliances c. From shareholder value maximization to stakeholder value maximizations *d. From making resource commitments to the creation of opportunities 15. Real options theory may change strategic management by: [See pp.366-368] a. Requiring top management to become familiar with the fundamental of options theory *b. Reframing the tools of industry analysis and the analysis of resources and capabilities to take account not just of the potential for profitability, but also the implications for strategic options c. Both (a) and (b) d. Neither (a) nor (b) 16. To successfully transition from mass manufacturing to lean manufacturing, a company should: [See p.368] a. Upgrade its information technology *b. Adapt its human resource management practices c. Reduce the number of its suppliers d. Hire external consultants 17. An implication of complexity theory for the leadership of business enterprises is: [See pp.368-370] *a. CEOs should relinquish rigid control and foster significant degrees of autonomy among more junior managers b. CEOs should rely more on strategic planning and less on financial control c. Organizations in the future will not need a CEO, they can rely on the self-organizing capacity of complex, adaptive systems

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d. Organisational hierarchies will become obsolete 18. If organizations are to become increasingly self-managed rather than controlled through top-down commands, they need to develop: [See p.370] a. Advanced artificial intelligence systems b. A strong organizational culture *c. A sense of identity, free-flowing information, and well-established internal relationships d. Organizational members who are well trained and possess a sense of empowerment 19. Organizational identity refers to: [See p.370] *a. A collective understanding among employees of what is core, enduring, and distinctive about the character of an organization b. The set of an organization’s recipes for successfully competing in the marketplace c. Organizational values that are shared at the system level d. The norms, values, symbols, and traditions of the organization.

20. To develop and deploy the broad range of capabilities that a company needs to possess to preserve its competitive advantage in competitive, rapidly changing markets, companies need to: [See p.371] a. Combine both incremental and radical change initiatives b. Appoint corporate leaders with well-developed emotional intelligence *c. Establish permeable corporate boundaries that allows flexible collaboration with a range of external partners d. An optimal level of adaptive tension.

© 2019 John Wiley & Sons, Inc.