Business Strategy
Study Guide Questions
Course Introduction
Business Strategy explores the fundamental concepts, frameworks, and tools that organizations use to achieve competitive advantage and long-term success. The course covers topics such as industry analysis, internal resource evaluation, strategy formulation, implementation, and evaluation. Students learn to assess external opportunities and threats, analyze competitors, and formulate strategies at the business and corporate levels. Through case studies, simulations, and practical exercises, the course emphasizes critical thinking and decision-making skills essential for navigating complex business environments and responding effectively to changes in the marketplace.
Recommended Textbook
Economics of Strategy 5th Edition by David Besanko
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18 Chapters
450 Verified Questions
450 Flashcards
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Page 2
Chapter 1: Basic Microeconomic Principles
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Sample Questions
Q1) What is the revenue destruction effect?
A)The loss in revenue a firm incurs on units it would have sold at a higher price when reducing price to sell extra units
B)The loss in revenue a firm incurs as a result of selling fewer units of output when raising price to increase profit
C)The loss in revenue a firm incurs due to brand level elasticities
D)The loss in revenue a firm incurs due to being in a perfectly competitive market
E)The loss in revenue a firm incurs due to predatory pricing
Answer: A
Q2) Suppose a factory is producing 100 units and the price of each unit is $10.If raising the price to $12 per unit results in a drop in sales of 12 units,what is the price elasticity of demand, ?
A)6
B).6
C)1.67
D).8
E).17
Answer: B
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Chapter 2: Economies of Scale and Scope
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Q1) Which of the following is not a major source of scale or scope economy?
A)Indivisibilities and the spreading of fixed costs
B)Increased productivity of variable inputs (mainly having to do with specialization)
C)Movement of production from smaller to larger facilities
D)Inventories
E)Engineering principles associated with the "cube-square rule"
Answer: C
Q2) What is the minimum efficient scale (MES)of production?
A)The point on an average cost curve where the cost per unit begins to decline more rapidly
B)The minimum point on a U-shaped average cost curve
C)The minimum level of production at a plant for it to be considered profitable
D)The level of production for a small sized plant
E)The threshold at which capacity is constraining for a firm's production
Answer: B
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Chapter 3: Agency and Coordination
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Sample Questions
Q1) Given an employee cost of effort function (where e is given in hours worked per week and each unit of e produces an extra $100 in sales):
c(e)= 0 if e<=40 (1/3)*(e-40)² if e>40
If the firm offers a salary-plus-commission job of $400 per week (instead of $500)plus 20% of sales,at what effort level does the employee maximize their payoff?
Answer: 70 hours (marginal cost of effort is still equal to $20 and thus the employee is willing to work an additional 30 hours)
Q2) Which of the following is not a performance based incentive?
A)A Nordstrom salesperson being paid a commission
B)A Kraft brand manager receiving an end of year bonus
C)A CEO receiving a stock option
D)A recurring standard percentage end of year pay raise
E)An employee receiving a special parking privilege award for the month
Answer: D
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Chapter 4: The Power of Principles - an Historical Perspective
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Q1) What was a key contribution to the dominance of the family-run small business in 1840?
A)Factories
B)Infrastructure
C)Raw Materials
D)Management
E)Laws
Q2) By simultaneously halting air traffic and financial markets,what recent historical event highlighted the interdependence company infrastructure?
A)2000 Presidential Election
B)2004 Olympics
C)Fall of Enron
D)September 11, 2001
E)Hurricane Katrina
Q3) What was the major role of private banks in the early 1800s?
A)Serve as an institution for deposits
B)Issue credit
C)Reduce the risk of price fluctuation
D)Create futures markets
E)Sell stocks
Page 6
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Chapter 5: The Vertical Boundaries of the Firm
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Q1) Suppose you manufacture 10 million hard drives per year specifically for Dell laptop computers.Suppose your average variable cost C=$20/unit and annualized cost of investment to build a hard drive factory I=$30 million.If Dell agrees to purchase the 10 million hard drives at a price P*=$25/unit,what is your company's "rent?
Q2) What is a market firm?
A)Firm representing a particular industry
B)Financial firm
C)Subsidiary of the larger parent firm
D)Large scale firm
E)An independent outsourcing partner
Q3) What problem preventing complete contracts refers to a lack of transparency/equal access to the details surrounding a contract?
A)Agency costs
B)Bounded rationality
C)Performance measurement difficulties
D)Asymmetric information
E)Contract body of law
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Chapter 6: Organizing Vertical Boundariesvertical
Integration and Its Alternatives
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Q1) Which of the following is a characteristic of an implicit contract?
A)It is an understanding between parties in a business relationship
B)It is generally enforceable in court
C)The threat of losing future business makes implicit contracts not viable
D)They are typically used in firms that have little relationship with one another
E)It is an alternative agreement method to the Keiretsu understandings between members
Q2) Which of the following features of transactions make those transactions excellent candidates for alliances?
A)The transaction involves impediments to comprehensive contracting
B)The transaction is complex, not routine.
C)The transaction involves the creation of relationship-specific assets by both parties in the relationship, and each party to the transaction could hold up the other
D)It is excessively costly for one party to develop all the necessary expertise to carry out all the activities itself
E)All of the above
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8
Chapter 7: Diversificationpart Threemarket and Competitive Analysis
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Q1) After American Can's initial transition from only producing manufacturing tin cans and other metal containers (1950)to diversifying with businesses that included paper products,printing,record distribution,and direct mail marketing,what Rumelt relatedness classification best described the firm (1980)?
A)Conglomerated-business
B)Single-business
C)Dominant-business
D)Related-business
E)Unrelated-business
Q2) What diversification benefit argument is countered with Lamont's study indicating that oil firm investments in their nonoil subsidiaries fell sharply after oil price drops in the 1980s?
A)Use of internal capital markets
B)Economies of scale and scope
C)Economizing on transaction costs
D)Diversifying shareholder portfolios
E)Identifying undervalued firms
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Chapter 8: Competitors and Competition
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Q1) In a two firm market,let the marginal cost of producing a product be $20,the market demand be given by the function Q=60-P/2 and the market quantity be equal to Q +Q .What is the Cournot equilibrium quantity each firm would produce in this market?
Q2) In a two firm market,let the marginal cost of producing a product be $20 and the market demand for their products be given by Q =12-P +P and Q =12-P +P .What is the Bertrand equilibrium price each firm would produce in this market?
Q3) What term describes a firm that faces little or no competition in one of its input markets?
A)Monopolist
B)Monopsonist
C)Oligopolist
D)Oligopsonist
E)Cartelist
Q4) Suppose the demand for a product faces by a monopolist firm is given by Q=60-P/2.If the marginal cost of producing the product is $20,what is the profit maximizing price the firm should charge for the product? What are the firm's profits?
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Page 10
Chapter 9: Strategic Commitment
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Q1) Suppose a firm has $50 million to invest in a new market.Given market uncertainties,the firm forecasts a high-scenario where the present value of the investment is $200 million and a low-scenario where the present value of the investment is $20 million.If the firm believes each scenario is equally likely and invests today,what is the net present value of the investment?
Q2) Which of the following statements is true about a soft commitment?
A)It is bad for competitors
B)It is good for competitors
C)In Cournot competition, capacity expansion is an example of a soft commitment
D)In Betrand competition, a commitment to reduce prices is an example of a soft commitment
E)Tough commitments are always in the best interest of a firm
Q3) What key element of a competitive move adds credibility to a making it a "true" commitment?
A)Fund raising
B)Public announcement
C)Relatedness factor
D)Irreversibility
E)Capacity expansion
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Page 11
Chapter 10: The Dynamics of Pricing Rivalry
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Q1) Suppose that a firm offers secret discounts to 200 customers in a particular industry to attract those customers from a competitor firm.If there is a 2% probability that any one of those customers will disclose the pricing,what is the probability that the firms competitors will hear from one of those 200 customers? Suppose there are instead 20 buyers to which discounts are offered.What is the probability then that the competitors may find out about one of the discounts?
Q2) What term refers to situations in which firms can sustain prices in excess of those that would arise in a non-cooperative single-shot price or quantity-setting game?
A)Dedicated pricing
B)Strategic pricing
C)Marginal pricing
D)Cost-plus pricing
E)Cooperative pricing
Q3) Which of the following practices can help firms facilitate cooperative pricing?
A)Price leadership
B)Advance announcement of price changes
C)Price following
D)Most favored customer clauses
E)Uniform delivered prices
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Page 12
Chapter 11: Entry and Exit
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Q1) Which of the following firms maintains a monopoly or cartel by controlling essential inputs thus creating a barrier to entry?
A)DeBeers in diamonds
B)Nike in shoes
C)Pepsi in beverages
D)Subway in sandwich fast food
E)Levis in denim jeans
Q2) Which of the following is a method a monopolist firm might use to prevent entry into a market?
A)Limit pricing
B)Predatory pricing
C)Capacity expansion
D)All of the above
E)None of the above
Q3) Which of the following is not an exit barrier for firms in an industry?
A)Sunk costs
B)Labor agreements or commitments to purchase raw materials
C)Obligations to input suppliers
D)Excess capacity
E)Government restrictions
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Chapter 12: Industry Analysispart Fourstrategic Position and Dynamics
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Q1) Which of following factors should be considered when assessing complements and substitutes?
A)Availability of close substitutes and/or complements
B)Price-value characteristics of substitutes/complements
C)Price elasticity of industry demand
D)All of the above
E)None of the above
Q2) What entity as a supplier has the most substantial power over manufacturers in the commercial aircraft market?
A)Raw materials suppliers
B)Airlines
C)Aircraft leasing companies
D)Unions
E)Passengers
Q3) What professional sports complement poses the biggest dilemma?
A)Cheerleaders
B)Mascots
C)Gambling
D)Television
E)Radio
Page 14
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Chapter 13: Strategic Positioning for Competitive Advantage
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Q1) When multiple firms' price-quality positions line up along the same indifference curve offering a consumer the same amount of consumer surplus,what term describes the situation?
A)Price-quality parity
B)Price matching
C)Maximum willingness-to-pay
D)Consumer surplus parity
E)Consumer surplus
Q2) Which of the following is a capability?
A)Patents and trademarks
B)Brand-name reputation
C)Installed base
D)Organizational culture
E)Sourcing skills
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Chapter 14: Sustaining Competitive Advantage
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Q1) What term coined by Richard Rumelt refers to economic forces that limit the extent to which a competitive advantage can be duplicated or neutralized through resource-creation activities of other firms?
A)Capability-based theory of the firm
B)Resource-based theory of the firm
C)Early-mover advantages
D)Impediments to imitation
E)Isolating mechanisms
Q2) What term best describes clusters of activities that a firm does especially well in comparison with other firms?
A)Competitive advantage
B)Resources
C)Capabilities
D)Threats to sustainability
E)Strategic firm assets
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16
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Q1) Which of the following terms best describes a phenomenon whereby,despite equal innovative capabilities,an entrant is willing to spend more to develop an innovation?
A)The replacement effect
B)Strategic intent
C)Strategic stretch
D)Hypercompetition
E)The sunk cost effect
Q2) Which of the following is the least likely factor contributing to early British dominance in the watchmaking industry?
A)Watchmakers employed laborers in the British countryside at a considerably lower wage than laborers in London would demand
B)British watches were priced lower than other makers
C)Watchmakers benefitted from a division of labor
D)Large local demand made specialization of labor possible
E)Crucible steel was manufactured by a British monopoly
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Chapter 16: Performance Measurement and Incentives in Firms
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Q1) Which of the following terms best describes a contract that guarantees an agent some payment,but provides enough incentive so that the agent does not shirk?
A)Certainty equivalent contract
B)Risk-sharing contract
C)Risk premium contract
D)Variability reduction contract
E)Risk-averse contract
Q2) Which of the following terms describes an incentive contract that can be enforced by an outside third party such as a judge or an arbitrator?
A)Explicit incentive contract
B)Implicit incentive contract
C)Risk sharing contract
D)Compensation contract
E)Pay-for-performance
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Chapter 17: Strategy and Structure
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Q1) Which of the following modes of task interdependence exists between two or more workers,positions,or groups when one depends on the outcome of others,but not vice versa?
A)Technology interdependence
B)Environment interdependence
C)Reciprocal interdependence
D)Sequential interdependence
E)Pooled interdependence
Q2) Which of the following terms involves the flow of information within an organization to facilitate subunit decisions that are consistent with each other and with organizational objectives?
A)Complex hierarchy
B)Coordination
C)Control
D)Hierarchy of authority
E)Departmentalization
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Chapter 18: Environment, power, and Culture
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Q1) What does Andrew Pettigrew identify to be the key issue that plagued Imperial Chemical Industries that stymied the organizational adaptation that was necessary to keep it successful in the 1970s?
A)Contracts
B)Cultural inertia
C)Pricing
D)Entry-deterring behaviors
E)Employment practices
Q2) Which of the following is most true regarding the strategic value of institutional logics?
A)When institutional logics are stable, they have the most strategic importance
B)Institutional logics are coveted by firms (not taken for granted)
C)If firms share an institutional logic, the logic provides a basis for relative advantage among firms
D)Institutional logics are valuable because they raise the costs for firms adapting to their environments
E)Competitive advantage must come on some other dimension than institutional logic if firms share that institutional logic
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