Test Bank for Strategic Management and Competitive Advantage Concepts and Cases 6th Edition by Jay B

Strategic Management and Competitive Advantage, 6e (Barney) Chapter 1 What is Strategy and the Strategic Management Process?

1) A firm's ________ is defined as its theory about how to gain competitive advantages.

A) objective B) mission C) vision D) strategy Answer: D Diff: 1 Page Ref: 4 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 2) A sequential set of analyses and choices that can increase the likelihood that a firm will choose a strategy that generates competitive advantages is the A) organizational change process.

B) strategic management process.

C) mission statement process.

D) goal setting process.

Answer: B Diff: 2 Page Ref: 5 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 3) A firm's ________ is its long-term purpose that defines both what it aspires to be in the long run and what it wants to avoid in the meantime.

A) mission B) strategy C) objective D) goal Answer: A Diff: 1 Page Ref: 5 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 4) The strategic management process begins when a firm A) determines its objectives.

B) defines its mission.

C) makes a strategic choice.

D) implements its strategy.

Answer: B Diff: 2 Page Ref: 5 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking

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5) Firms whose mission is central to all they do are known as ________ firms.

A) missionary B) emergent C) parity D) visionary Answer: D Diff: 2 Page Ref: 6 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 6) From 1926 to 1995, visionary firms earned ________ returns compared to firms that were not visionary firms.

A) substantially lower B) substantially higher C) marginally lower D) equivalent Answer: B Diff: 2 Page Ref: 6 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 7) The mission statements of visionary firms A) suggest that profit maximizing, while an important corporate objective, is not their primary reason for existence.

B) suggest that profit maximizing is neither an important corporate objective nor their primary reason for existence.

C) suggest that profit maximizing is their primary reason for existence.

D) suggest that value maximizing is their primary reason of existence.

Answer: A Diff: 2 Page Ref: 6 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 8) Which of the following statements regarding firm mission is accurate?

A) While some firms have used their missions to develop strategies that create significant competitive advantages, firm missions can hurt a firm's performance as well.

B) Virtually all firms have used missions to develop strategies that create significant competitive advantages, while very few firms have used missions that can hurt their performance.

C) It is very rare for firms to be able to use their missions to develop strategies that create significant competitive advantages, and most firm missions actually hurt their performance.

D) Missions tend to have very little impact on a firm's ability to create significant competitive advantages.

Answer: A Diff: 3 Page Ref: 6 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

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9) ________ are specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission.

A) Strategies B) Missions C) Competitive advantages D) Objectives Answer: D Diff: 1 Page Ref: 6 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 10) High quality objectives are those that are A) tightly connected to elements of a firm's mission and are relatively easy to measure and track over time.

B) difficult to measure and track over time.

C) non-existent.

D) not quantitative.

Answer: A Diff: 2 Page Ref: 6 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 11) By conducting a(n) ________, a firm identifies the critical threats and opportunities in its competitive environment.

A) internal analysis B) competitive analysis C) external analysis D) strategic choice Answer: C Diff: 1 Page Ref: 7 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 12) ________ helps a firm understand which of its resources and capabilities are likely to be sources of competitive advantage.

A) Competitive analysis B) Internal analysis C) Strategic choice D) External analysis Answer: B Diff: 2 Page Ref: 7 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

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13) Actions firms take to gain competitive advantages in a single market or industry are known as A) business level strategies.

B) corporate level strategies.

C) diversification strategies.

D) strategy implementation.

Answer: A Diff: 2 Page Ref: 7 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 14) Actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously are known as A) corporate level strategies.

B) diversification strategies.

C) business level strategies.

D) strategic alliance strategies.

Answer: A Diff: 2 Page Ref: 7 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 15) ________ occurs when a firm adopts organizational policies and practices that are consistent with its strategy.

A) Strategy formulation B) Strategic choice C) Strategy implementation D) Strategic control Answer: C Diff: 1 Page Ref: 8 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 16) Green Frog is an environmentally friendly firm in the cosmetics industry that has decided to undertake a strategic planning project. It wants to ensure that it performs the process correctly and so intends to start the process with the first step of the strategic planning process, which is A) defining its mission.

B) setting objectives.

C) measuring performance.

D) defining its business level strategy.

Answer: A Diff: 1 Page Ref: 5 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

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17) Green Frog is an environmentally friendly firm in the cosmetics industry. Even though Green Frog is environmentally friendly, the strategic planning team had decided that financial performance is one of the company's top priorities. Which of the following is the best example of an objective the company might use to help it achieve its goal of superior financial performance?

A) increasing profitability B) growing market share annually C) improving product quality every quarter D) growth in earnings per share averaging 15% or better annually for the next five years Answer: D Diff: 2 Page Ref: 7 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Application of Knowledge 18) Green Frog is an environmentally friendly firm in the cosmetics industry. If during the strategic planning process Green Frog tried to determine the critical threats and opportunities in its competitive environment, it would be performing a(n) A) internal analysis.

B) external analysis.

C) WACC analysis.

D) economic analysis.

Answer: B Diff: 2 Page Ref: 7 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Application of Knowledge 19) Green Frog is an environmentally friendly firm in the cosmetics industry. If Green Frog undertook an analysis to help it understand which of its resources and capabilities are likely to be sources of competitive advantage and which are less likely to sources of such advantages it would be performing a(n) A) internal analysis.

B) external analysis.

C) WACC analysis.

D) economic analysis.

Answer: A Diff: 2 Page Ref: 7 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

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20) Green Frog is an environmentally friendly firm in the cosmetics industry. If Green Frog were considering expanding beyond the cosmetics industry into pharmaceuticals in order to gain competitive advantages by operating in multiple markets and industries, this would be an example of which type of strategy?

A) business level strategy B) cost leadership strategy C) product differentiation strategy D) corporate level strategy Answer: D Diff: 2 Page Ref: 7 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Application of Knowledge 21) One of the central questions that all strategic managers must address, regardless of the industry they work in, is "How is the industry likely to evolve?"

Answer: TRUE Diff: 1 Page Ref: 4 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 22) There is complete consensus among strategic managers and academic researchers about what a "strategy" is.

Answer: FALSE Diff: 1 Page Ref: 4 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 23) For the purposes of this book, a firm's strategy is defined as its theory about how to gain competitive advantages.

Answer: TRUE Diff: 1 Page Ref: 4 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 24) A "good strategy" does not necessarily have to generate a competitive advantage.

Answer: FALSE Diff: 2 Page Ref: 4 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

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25) The greater the extent to which a firm's assumptions and hypotheses accurately describe how the competition in the industry is likely to evolve, and how that evolution can be exploited to earn a profit, the more likely it is that a firm will gain a competitive advantage from implementing its strategies.

Answer: TRUE Diff: 1 Page Ref: 4 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 26) It is usually possible to know for sure that a firm is choosing the right strategy.

Answer: FALSE Diff: 2 Page Ref: 5 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 27) The strategic management process is a sequential set of analyses and choices that can increase the likelihood that a firm will choose a good strategy that generates competitive advantages.

Answer: TRUE Diff: 1 Page Ref: 5 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 28) The second step in the strategic management process is the definition of a firm's mission.

Answer: FALSE Diff: 1 Page Ref: 5 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 29) A firm's mission defines both what it wants to be in the long run and what it wants to avoid in the meantime.

Answer: TRUE Diff: 1 Page Ref: 5 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 30) Mission statements often contain so many common elements that even if a firm's mission statement does not influence behavior throughout an organization, it is likely to have a significant impact on a firm's actions.

Answer: FALSE Diff: 2 Page Ref: 5 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

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31) Firms whose mission statement is central to all they do are known as missionary firms.

Answer: FALSE Diff: 1 Page Ref: 6 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 32) Visionary firms earn substantially higher returns than average firms because they acknowledge that profit maximizing is their primary reason for existence.

Answer: FALSE Diff: 3 Page Ref: 6 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 33) Mission statements that are very inwardly focused and are defined only with reference to the personal values and priorities of its founders and top managers can hurt a firm's performance.

Answer: TRUE Diff: 2 Page Ref: 6 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 34) Objectives are the specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission.

Answer: TRUE Diff: 1 Page Ref: 6 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 35) High quality objectives are tightly connected to the elements of a firm's mission but tend to be relatively difficult to measure and track over time.

Answer: FALSE Diff: 3 Page Ref: 6 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 36) By conducting an external analysis, a firm identifies the critical threats and opportunities in the industry's competitive environment.

Answer: TRUE Diff: 2 Page Ref: 7 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 37) Corporate level strategies are actions firms take to gain competitive advantages in a single market or industry.

Answer: FALSE Diff: 1 Page Ref: 7 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

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38) Business level strategies are actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously.

Answer: FALSE Diff: 1 Page Ref: 7 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 39) Strategy implementation occurs when a firm adopts organizational policies and practices that are consistent with its strategy.

Answer: TRUE Diff: 1 Page Ref: 8 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 40) Define the term "strategy," discuss the set of assumptions and hypotheses that a strategy is based on and discuss what makes a good strategy.

Answer: A firm's strategy is defined as its theory about how to gain competitive advantages.

This theory is based on a set of assumptions and hypotheses about how competition in this industry is likely to evolve and how that evolution can be exploited to earn a profit. To the extent that these assumptions and hypotheses accurately describe how competition in this industry actually evolves, the more likely it is that a firm will gain a competitive advantage from implementing its strategies. Thus, a "good strategy" is a strategy that actually generates such advantages.

Diff: 2 Page Ref: 4 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 41) Define the term "mission" and discuss how a firm's mission can both positively and negatively impact a firm's performance.

Answer: A firm's mission is its long-term purpose and it defines both what a firm aspires to be in the long run and what it wants to avoid in the meantime. If a mission statement does not influence firm behavior, it is unlikely to have an impact on a firm's actions. However, visionary firms, or firms whose mission is central to all they do, tend to earn substantially higher returns than average over the long run even though their mission statements suggest that profit maximization is not their primary reason for existence. However, missions that are inwardly focused and defined only with reference to the personal values and priorities of their founders or top managers, independent of whether or not those values and priorities are consistent with the economic realities facing a firm, are not likely to be a source of competitive advantage.

Diff: 2 Page Ref: 5 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

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42) What are objectives, what role do they play in the strategic management process and what differentiates high quality objectives from low quality objectives?

Answer: Objectives are specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission. High quality objectives are tightly connected to elements of a firm's mission and are relatively easy to measure and track over time. Low quality objectives either do not exist or are not connected to elements of a firm's mission, are not quantitative, or are difficult to measure or are difficult to track over time.

Diff: 2 Page Ref: 5 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 43) Differentiate between business level and corporate level strategies and give examples of each.

Answer: Business level strategies are actions firms take to gain competitive advantages in a single market or industry. The two most common business level strategies are cost leadership, such as Wal-Mart, and product differentiation, such as Tiffany's. Corporate level strategies are actions firms take to gain competitive advantages in multiple markets or industries simultaneously. Common corporate level strategies include vertical integration strategies, diversification strategies, strategic alliance strategies and merger and acquisition strategies.

Diff: 2 Page Ref: 7 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 44) Define strategy implementation and discuss three specific organizational policies and practices that are particularly important in implementing a strategy.

Answer: Strategy implementation occurs when a firm adopts organizational policies and practices that are consistent with its strategy. Three specific organizational policies and practices are particularly important in implementing a strategy: a firm's formal organizational structure, its formal and informal management control systems, and employee compensation policies.

Diff: 2 Page Ref: 8 Learning Obj.: 1.1: Define Strategy and Describe the Strategic Management Process.

AACSB: Analytical Thinking 45) When a firm is able to create more economic value than rival firms it is said to have a(n) A) comparative advantage.

B) competitive advantage.

C) residual advantage.

D) economic advantage.

Answer: B Diff: 2 Page Ref: 8 Learning Obj.: 1.2: Define Competitive Advantage and Explain its Relationship to Economic Value Creation.

AACSB: Analytical Thinking

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46) The difference between what customers are willing to pay for a firm's products or services and the full economic cost of these products or services is the A) value proposition.

B) cost advantage.

C) economic value.

D) competitive advantage.

Answer: C Diff: 1 Page Ref: 8 Learning Obj.: 1.2: Define Competitive Advantage and Explain its Relationship to Economic Value Creation.

AACSB: Analytical Thinking 47) If TechnoGeek and VarsityBlue compete in the same market for the same customer and TechnoGeek generates $900 of economic value each time it sells a product or service while VarsityBlue generates $400 of economic value each time it sells a product or service, TechnoGeek has a(n) ________ of $500.

A) perceived benefit B) economic value C) cost advantage D) competitive advantage Answer: D Diff: 3 Page Ref: 8 Learning Obj.: 1.2: Define Competitive Advantage and Explain its Relationship to Economic Value Creation.

AACSB: Application of Knowledge 48) A competitive advantage that lasts a very short period of time is known as a ________ competitive advantage.

A) temporary B) sustained C) transient D) perpetual Answer: A Diff: 1 Page Ref: 9 Learning Obj.: 1.2: Define Competitive Advantage and Explain its Relationship to Economic Value Creation.

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49) Firms that generate less economic value than their rivals experience a competitive A) advantage.

B) parity.

C) disadvantage.

D) perceived benefit.

Answer: C Diff: 2 Page Ref: 9 Learning Obj.: 1.2: Define Competitive Advantage and Explain its Relationship to Economic Value Creation.

AACSB: Analytical Thinking 50) In many ways, the difference between traditional economics research and strategic management research is that the former attempts to explain why ________, while the latter attempts to explain ________.

A) competitive advantages should not persist; when they can B) competitive advantages should persist; when they can C) competitive advantages should persist; why they should not D) competitive parity should not persist; why they should Answer: A Diff: 3 Page Ref: 10 Learning Obj.: 1.2: Define Competitive Advantage and Explain its Relationship to Economic Value Creation.

AACSB: Analytical Thinking 51) One of the first scholars to examine the longevity of competitive advantage was A) Dennis Mueller.

B) Geoffrey Waring.

C) Peter Roberts.

D) Rich Houston.

Answer: A Diff: 3 Page Ref: 10 Learning Obj.: 1.2: Define Competitive Advantage and Explain its Relationship to Economic Value Creation.

AACSB: Analytical Thinking 52) The ultimate objective of the strategic management process is to enable a firm to choose and implement a strategy that leads to a competitive advantage.

Answer: TRUE Diff: 1 Page Ref: 8 Learning Obj.: 1.2: Define Competitive Advantage and Explain its Relationship to Economic Value Creation.

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53) The size of a firm's competitive advantage is the sum of the economic value a firm is able to create and the economic value rivals are able to create.

Answer: FALSE Diff: 2 Page Ref: 8 Learning Obj.: 1.2: Define Competitive Advantage and Explain its Relationship to Economic Value Creation.

AACSB: Analytical Thinking 54) A sustained competitive advantage is virtually permanent.

Answer: FALSE Diff: 2 Page Ref: 9 Learning Obj.: 1.2: Define Competitive Advantage and Explain its Relationship to Economic Value Creation.

AACSB: Analytical Thinking 55) Waring found that firms that operate in industries that are informationally complex, require customers to know a great deal in order to use the industry's products, require a great deal of R & D, and have significant economies of scale are more likely to have sustained competitive advantage than those firms in industries without those characteristics.

Answer: TRUE Diff: 3 Page Ref: 10 Learning Obj.: 1.2: Define Competitive Advantage and Explain its Relationship to Economic Value Creation.

AACSB: Analytical Thinking 56) Discuss a firm's competitive advantage. Identify when a firm has a competitive advantage and distinguish between a temporary competitive advantage and a sustainable competitive advantage.

Answer: In general, a firm has a competitive advantage when it is able to generate more economic value than rival firms. A temporary competitive advantage is a competitive advantage that lasts a very short period of time while a sustained competitive advantage lasts much longer.

Diff: 2 Page Ref: 8 Learning Obj.: 1.2: Define Competitive Advantage and Explain its Relationship to Economic Value Creation.

AACSB: Analytical Thinking 57) The center of Osterwalder and Pigneur's business model canvas is the A) parity point.

B) value proposition.

C) competitive advantage.

D) strategy box.

Answer: B Diff: 1 Page Ref: 12 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

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58) The two types of measures of competitive advantage include A) accounting measures and strategic measures.

B) strategic measures and economic measures.

C) accounting measures and economic measures.

D) qualitative measures and quantitative measures.

Answer: C Diff: 2 Page Ref: 11 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 59) A firm's ________ is a measure of its competitive advantage calculated using information from a firm's published profit and loss and balance sheet statements.

A) economic performance B) accounting performance C) strategic performance D) sustainable performance Answer: B Diff: 2 Page Ref: 11 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 60) ________ are ratios with some measure of profit in the numerator and some measure of firms' size or assets in the denominator.

A) Liquidity ratios B) Leverage ratios C) Activity ratios D) Profitability ratios Answer: D Diff: 1 Page Ref: 14 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 61) Ratios that focus on the level of a firm's financial flexibility, including its ability to obtain more debt, are known as A) leverage ratios.

B) liquidity ratios.

C) activity ratios.

D) profitability ratios.

Answer: A Diff: 1 Page Ref: 14 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

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62) Using ratio analysis, a firm earns ________ when its performance is greater than the industry average.

A) above average economic performance B) below average accounting performance C) above average accounting performance D) below average economic performance Answer: C Diff: 1 Page Ref: 15 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 63) The ________ is the rate of return that a firm promises to pay its suppliers of capital to induce them to invest in the firm.

A) cost of debt B) cost of advantage C) cost of parity D) cost of capital Answer: D Diff: 2 Page Ref: 16 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 64) ________ measures of competitive advantage compare a firm's level of return to its cost of capital instead of to the average level of return in the industry.

A) Economic B) Accounting C) Strategic D) Sustainable Answer: A Diff: 2 Page Ref: 16 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 65) The percentage of a firm's total capital that is debt times the cost of debt plus the percentage of a firm's total capital; or equity times the cost of equity is the A) weighted cost of capital.

B) weighted average cost of capital.

C) cost of capital.

D) average cost of capital.

Answer: B Diff: 3 Page Ref: 16 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

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66) A firm that is able to attract additional capital because debt holders and equity holders will scramble to make additional funds available for it is likely earning A) normal economic performance.

B) average accounting performance.

C) temporary advantage.

D) above normal economic performance.

Answer: D Diff: 3 Page Ref: 17 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 67) An important limitation of comparing a firm's performance to its cost of capital occurs when a firm is A) privately held.

B) an IPO. C) an entrepreneurial venture.

D) experiencing below normal economic performance.

Answer: A Diff: 2 Page Ref: 17 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 68) A firm that earns its cost of capital is said to be earning A) above normal economic performance.

B) normal economic performance.

C) below normal economic performance.

D) normal accounting performance.

Answer: B Diff: 1 Page Ref: 17 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 69) The view that equity holders only receive payment on their investment in a firm after all legitimate claims by a firm's other stakeholders are satisfied is known as the ________ view of equity holders.

A) stakeholder B) residual claimants C) legitimate claimants D) extraordinary claims Answer: B Diff: 2 Page Ref: 18 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

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70) Which type of ratios focus on the ability of a firm to meet its short-term financial obligations?

A) activity ratios B) liquidity ratios C) leverage ratios D) profitability ratios Answer: B Diff: 1 Page Ref: 14 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 71) Which ratio signals a greater risk of bankruptcy as it increases?

A) debt to equity B) quick ratio C) debt to assets D) cash flow per share Answer: C Diff: 2 Page Ref: 14 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Application of Knowledge 72) Accounts receivable turnover is an example of which type of ratio?

A) profitability B) activity C) liquidity D) leverage Answer: B Diff: 2 Page Ref: 14 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 73) Thermacorp's weighted average cost of capital is 13.5. If the average WACC in the heating and cooling industry is 19, Thermacorp can be said to be earning A) above normal economic performance.

B) above normal accounting performance.

C) below normal economic performance.

D) below normal accounting performance.

Answer: C Diff: 2 Page Ref: 16 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

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74) Thermacorp's 17.3% ROE is an example of a(n) ________ ratio.

A) liquidity B) profitability C) activity D) leverage Answer: B Diff: 1 Page Ref: 14 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Application of Knowledge 75) If the average ROE in the heating and cooling industry is 10.1%, and Thermacorp's ROE is 17.3%, Thermacorp is said to have A) below average accounting performance.

B) above average economic performance.

C) above average accounting performance.

D) below average economic performance.

Answer: C Diff: 2 Page Ref: 15 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Application of Knowledge 76) A firm's accounting performance is a measure of its competitive advantage calculated using information from a firm's published profit and loss and balance sheet statements.

Answer: TRUE Diff: 1 Page Ref: 11 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 77) Applying accounting measures of competitive advantage for firms that are headquartered in different countries has become less challenging today with the globalization of business.

Answer: FALSE Diff: 2 Page Ref: 11 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 78) Activity ratios are ratios with some measure of profit in the numerator and some measure of firm size or assets in the denominator.

Answer: FALSE Diff: 1 Page Ref: 14 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking

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79) Liquidity ratios are ratios that focus on the firm's ability to meet its short-term financial obligations.

Answer: TRUE Diff: 1 Page Ref: 14 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 80) When a firm earns above average accounting performance, it is said to enjoy competitive parity.

Answer: FALSE Diff: 2 Page Ref: 16 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 81) A firm that earns below average accounting performance generally experiences a competitive disadvantage.

Answer: TRUE Diff: 2 Page Ref: 16 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 82) The greatest disadvantage of accounting measures of competitive performance is that they are relatively difficult to compute.

Answer: FALSE Diff: 1 Page Ref: 16 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 83) Economic measures of competitive advantage compare a firm's level of return to its costs of capital instead of to the average level of return to the industry.

Answer: TRUE Diff: 1 Page Ref: 16 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 84) The cost of equity is equal to the interest a firm must pay its debt holders in order to induce those debt holders to lend money to the firm.

Answer: FALSE Diff: 1 Page Ref: 16 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

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85) The residual claimants' view of equity holders argues that the interests of equity holders come before all other stakeholders of the firm in receiving payment.

Answer: FALSE Diff: 3 Page Ref: 18 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 86) The correlation between economic and accounting measures of competitive advantage is generally low.

Answer: FALSE Diff: 2 Page Ref: 19 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 87) Identify two approaches to estimating a firm's competitive advantages and discuss the strengths and weaknesses of each.

Answer: The two general approaches to estimating a firm's competitive advantage are measuring accounting performance and measuring economic performance. A firm's accounting performance is a measure of its competitive advantage calculated using information from a firm's published profit and loss and balance sheets. A firm's accounting performance is determined by comparing a firm's accounting ratios with other firms in the industry. The greatest advantage of accounting measures of competitive advantage is that they are relatively easy to compute. The most significant drawback to accounting measures is that they do not consider a firm's cost of capital. Additionally, accounting measures can be difficult to compare across countries.

Economic measures of competitive advantage compare a firm's level of return to its cost of capital instead of to the average level of return in the industry. The primary benefit of economic measures is that if a firm earns at least its cost of capital, it is satisfying two of its important stakeholders, debt holders and equity holders. Disadvantages of economic measures include that it can be difficult to calculate a firm's cost of capital, especially for privately held firms, and economic measures may overstate the importance of debt and equity holders.

Diff: 2 Page Ref: 11 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

AACSB: Analytical Thinking 88) What is the residual claimants view of equity holders?

Answer: The residual claimants view is that equity holders only receive payment on their investment in a firm after all legitimate claims by a firm's other stakeholders are satisfied. This view posits that by maximizing returns to its equity holders, a firm is ensuring that its other stakeholders are fully compensated for investing in a firm.

Diff: 2 Page Ref: 18 Learning Obj.: 1.3: Describe Two Different Approaches to Measuring Competitive Advantage.

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89) Theories of how to gain competitive advantage in an industry that emerge over time or that have been radically reshaped once they are initially implemented are known as A) emergent strategies.

B) objective strategies.

C) planned strategies.

D) ad hoc strategies.

Answer: A Diff: 1 Page Ref: 19 Learning Obj.: 1.4: Explain the Difference Between Emergent and Intended Strategies.

AACSB: Analytical Thinking 90) Johnson & Johnson's strategy to get into the baby powder business is an example of a(n) ________ strategy.

A) planned B) intended C) emergent D) deliberate Answer: C Diff: 2 Page Ref: 20 Learning Obj.: 1.4: Explain the Difference Between Emergent and Intended Strategies.

AACSB: Application of Knowledge 91) Fed Ex entered their market with a well-defined mission and objectives, making strategic choices and implementing those strategies. This is an example of which type of strategy?

A) intended B) economic C) emergent D) visionary Answer: A Diff: 2 Page Ref: 19 Learning Obj.: 1.4: Explain the Difference Between Emergent and Intended Strategies.

AACSB: Application of Knowledge 92) Emergent strategies are theories of how to gain competitive advantage in an industry that emerge over time or that have been radically reshaped once they are initially implemented.

Answer: TRUE Diff: 2 Page Ref: 19 Learning Obj.: 1.4: Explain the Difference Between Emergent and Intended Strategies.

AACSB: Analytical Thinking 93) Johnson & Johnson's introduction of "Johnson's Toilet and Baby Powder" as a result of customers asking to purchase the talcum powder is an example of a planned strategy.

Answer: FALSE Diff: 2 Page Ref: 20 Learning Obj.: 1.4: Explain the Difference Between Emergent and Intended Strategies.

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94) Emergent strategies are only important when a firm fails to implement the strategic management process effectively.

Answer: FALSE Diff: 2 Page Ref: 20 Learning Obj.: 1.4: Explain the Difference Between Emergent and Intended Strategies.

AACSB: Analytical Thinking 95) All firms have almost entirely emergent strategies.

Answer: FALSE Diff: 2 Page Ref: 20 Learning Obj.: 1.4: Explain the Difference Between Emergent and Intended Strategies.

AACSB: Analytical Thinking 96) Describe the difference between emergent and intended strategies. Why might firms employ an emergent strategy?

Answer: Intended strategies can best be described as a firm's theories of how to gain a competitive advantage that are developed as a result of the strategic management process.

Intended strategies are developed when firms choose and implement their strategies exactly as described by the strategic management process. Alternately, emergent strategies are theories of how to gain a competitive advantage in an industry that emerge over time or that have been radically reshaped once they are implemented. Firms employ emergent strategies since some of the information needed to complete the strategic management process may not be available when firms are developing their intended strategies.

Diff: 2 Page Ref: 19 Learning Obj.: 1.4: Explain the Difference Between Emergent and Intended Strategies.

AACSB: Analytical Thinking 97) Which of the following is a reason why it is important for students to study strategy and the strategic management process?

A) Studying strategy and the strategic management process can give students tools to evaluate the strategies of firms that may employ them.

B) It can be very important to a new hire's career success to understand the strategies of the firm that hired them and their place in implementing these strategies.

C) While strategic choices are generally limited to very experienced senior managers in large organizations, in smaller and entrepreneurial firms many employees end up being involved in the strategic management process.

D) All of the above.

Answer: D Diff: 2 Page Ref: 21 Learning Obj.: 1.5: Discuss Why It Is Important for You to Study Strategy and the Strategic Management Process.

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98) Firms with strategies that are unlikely to be a source of competitive advantage will rarely provide the same career opportunities as firms with strategies that do generate such advantages.

Answer: TRUE Diff: 1 Page Ref: 21 Learning Obj.: 1.5: Discuss Why It Is Important for You to Study Strategy and the Strategic Management Process.

AACSB: Analytical Thinking 99) Strategic choices are generally limited to very experienced senior managers in large corporations; in smaller and entrepreneurial firms, many employees end up being involved in the strategic management process.

Answer: TRUE Diff: 1 Page Ref: 21 Learning Obj.: 1.5: Discuss Why It Is Important for You to Study Strategy and the Strategic Management Process.

AACSB: Analytical Thinking 100) Why is it important to understand a firm's strategy, even if you are not a senior manager in a firm?

Answer: First, studying strategy and the strategic management process can give individuals the tools they need to evaluate the strategies of the firms that may hire them. Second, once an individual is working for a firm, understanding that firm's strategy, and their place in it, can be very important to their personal success since the expectations of how they perform their function will be impacted by the firm's strategy. Finally, while strategic choices are generally limited to very experienced managers in large organizations, in smaller and entrepreneurial firms, many employees end up being involved in the strategic management process.

Diff: 2 Page Ref: 20 Learning Obj.: 1.5: Discuss Why It Is Important for You to Study Strategy and the Strategic Management Process.

AACSB: Analytical Thinking

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Strategic Management and Competitive Advantage, 6e (Barney) Chapter 2 Evaluating a Firm's External Environment 1) The ________ consists of broad trends in the context in which a firm operates that can have an impact on a firm's strategic choices.

A) micro-environment B) general environment C) task environment D) internal environment Answer: B Diff: 1 Page Ref: 28 Learning Obj.: 2.1: Describe the Dimensions of the General Environment Facing a Firm and How this Environment can Affect a Firm's Opportunities and Threats.

AACSB: Analytical Thinking 2) All of the following are elements of the general environment except A) technological trends.

B) demographic trends.

C) industrial trends.

D) cultural trends.

Answer: C Diff: 2 Page Ref: 28 Learning Obj.: 2.1: Describe the Dimensions of the General Environment Facing a Firm and How this Environment can Affect a Firm's Opportunities and Threats.

AACSB: Analytical Thinking 3) ________ is/are the distribution of individuals in a society in terms of age, sex, marital status, income, ethnicity, and other personal attributes that may determine buying patterns.

A) Demographics B) Economics C) Technological trends D) Culture Answer: A Diff: 1 Page Ref: 29 Learning Obj.: 2.1: Describe the Dimensions of the General Environment Facing a Firm and How this Environment can Affect a Firm's Opportunities and Threats.

AACSB: Analytical Thinking

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4) The values, beliefs and norms that guide behavior in a society are known as A) climate.

B) demographics.

C) economics.

D) culture.

Answer: D Diff: 1 Page Ref: 30 Learning Obj.: 2.1: Describe the Dimensions of the General Environment Facing a Firm and How this Environment can Affect a Firm's Opportunities and Threats.

AACSB: Analytical Thinking 5) When activity in an economy is relatively low for a short period of time, the economy is said to be in a A) recession.

B) depression.

C) prosperous cycle.

D) boom.

Answer: A Diff: 2 Page Ref: 30 Learning Obj.: 2.1: Describe the Dimensions of the General Environment Facing a Firm and How this Environment can Affect a Firm's Opportunities and Threats.

AACSB: Analytical Thinking 6) Civil wars, political coups, terrorism, wars between countries, famines, and country or regional economic recessions are all examples of which element of the general environment?

A) demographics B) specific international events C) economics D) culture Answer: B Diff: 2 Page Ref: 31 Learning Obj.: 2.1: Describe the Dimensions of the General Environment Facing a Firm and How this Environment can Affect a Firm's Opportunities and Threats.

AACSB: Application of Knowledge 7) A firm's general environment consists of broad trends in the context within which the firm operates that can have an impact on the firm's strategic choices.

Answer: TRUE Diff: 1 Page Ref: 28 Learning Obj.: 2.1: Describe the Dimensions of the General Environment Facing a Firm and How this Environment can Affect a Firm's Opportunities and Threats.

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8) In general, technological change creates opportunities, but not threats.

Answer: FALSE Diff: 2 Page Ref: 29 Learning Obj.: 2.1: Describe the Dimensions of the General Environment Facing a Firm and How this Environment can Affect a Firm's Opportunities and Threats.

AACSB: Analytical Thinking 9) The aging of the "baby boomer" generation in American society is an example of a demographic trend.

Answer: TRUE Diff: 2 Page Ref: 29 Learning Obj.: 2.1: Describe the Dimensions of the General Environment Facing a Firm and How this Environment can Affect a Firm's Opportunities and Threats.

AACSB: Diverse and Multicultural Work Environment 10) Culture is largely the same across the world.

Answer: FALSE Diff: 2 Page Ref: 30 Learning Obj.: 2.1: Describe the Dimensions of the General Environment Facing a Firm and How this Environment can Affect a Firm's Opportunities and Threats.

AACSB: Analytical Thinking 11) Understanding a firm's general environment can help the firm identify some of the threats and opportunities it faces.

Answer: TRUE Diff: 1 Page Ref: 31 Learning Obj.: 2.1: Describe the Dimensions of the General Environment Facing a Firm and How this Environment can Affect a Firm's Opportunities and Threats.

AACSB: Analytical Thinking 12) Identify the six interrelated elements that comprise a firm's general environment.

Answer: The six interrelated elements of a firm's general environment include technological change, demographic trends, cultural trends, the economic climate, legal and political conditions and specific international events.

Diff: 1 Page Ref: 28 Learning Obj.: 2.1: Describe the Dimensions of the General Environment Facing a Firm and How this Environment can Affect a Firm's Opportunities and Threats.

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13) In the S-C-P model, ________ refers to the strategies that firms in an industry implement.

A) structure B) strategy C) conduct D) performance Answer: C Diff: 2 Page Ref: 33 Learning Obj.: 2.2: Describe How the Structure-Conduct-Performance (S-C-P) Model Suggests that Industry Structure Can Influence a Firm's Competitive Choices.

AACSB: Analytical Thinking 14) In a perfectly competitive industry, A) there are relatively few firms operating in the industry.

B) the products and services sold by firms in the industry are very different from each other.

C) it is very costly for firms to enter the industry.

D) it is not very costly for firms to enter or exit the industry.

Answer: D Diff: 3 Page Ref: 35 Learning Obj.: 2.2: Describe How the Structure-Conduct-Performance (S-C-P) Model Suggests that Industry Structure Can Influence a Firm's Competitive Choices.

AACSB: Analytical Thinking BidBuy is the world's leading online auction company. When BidBuy was founded ten years ago it was the first online auction company, and it has been the leader since it was founded. Although there are other firms in the industry, BidBuy controls over 75% of the market in the United States, and three additional firms control another 20% of the U.S. market. One of the aspects of BidBuy that keeps users from changing to other online auction companies is the large user base BidBuy has built and a feedback rating system that allows buyers and sellers to rate their satisfaction with each other following each transaction. This allows users to build a reputation for honesty and trustworthiness. Sellers with a high feedback rating tend to receive more bids on their auctions and a higher price for their goods. To help facilitate payment transfers between buyers and sellers following successful online auctions, companies such as DollarDog have been founded, and these companies have facilitated growth for BidBuy. Having attained a 75% market share in the U.S., BidBuy has begun expanding internationally, opening its own sites in some countries and purchasing incumbents in others. In its international expansion, BidBuy has allowed its individual companies to customize their offerings according to the needs and desires of the countries in which they operate and when these companies are successful, BidBuy works to transfer these successful capabilities throughout the firm.

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15) Which of the following best describes the competition in the U.S. online auction industry?

A) perfect competition B) monopolistic competition C) oligopoly D) monopoly Answer: C Diff: 2 Page Ref: 35 Learning Obj.: 2.2: Describe How the Structure-Conduct-Performance (S-C-P) Model Suggests that Industry Structure Can Influence a Firm's Competitive Choices.

AACSB: Application of Knowledge 16) In the structure-conduct-performance model, the term "structure" refers to industry structure, which can be measured by such factors as the number of competitors in an industry.

Answer: TRUE Diff: 2 Page Ref: 33 Learning Obj.: 2.2: Describe How the Structure-Conduct-Performance (S-C-P) Model Suggests that Industry Structure Can Influence a Firm's Competitive Choices.

AACSB: Analytical Thinking 17) In the structure-conduct-performance model, the term "performance" refers solely to the performance of individual firms.

Answer: FALSE Diff: 2 Page Ref: 33 Learning Obj.: 2.2: Describe How the Structure-Conduct-Performance (S-C-P) Model Suggests that Industry Structure Can Influence a Firm's Competitive Choices.

AACSB: Analytical Thinking 18) In a perfectly competitive industry, a large number of firms have products and services that are similar to each other and it is not very costly for firms to enter into or exit these markets.

Answer: TRUE Diff: 2 Page Ref: 32 Learning Obj.: 2.2: Describe How the Structure-Conduct-Performance (S-C-P) Model Suggests that Industry Structure Can Influence a Firm's Competitive Choices.

AACSB: Analytical Thinking 19) The S-C-P model assumes that any competitive advantages a firm has in an industry must benefit society.

Answer: FALSE Diff: 3 Page Ref: 32 Learning Obj.: 2.2: Describe How the Structure-Conduct-Performance (S-C-P) Model Suggests that Industry Structure Can Influence a Firm's Competitive Choices.

AACSB: Analytical Thinking

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20) According to the S-C-P model, attributes of the industry structure within which a firm operates define the range of options and constraints facing a firm.

Answer: TRUE Diff: 2 Page Ref: 33 Learning Obj.: 2.2: Describe How the Structure-Conduct-Performance (S-C-P) Model Suggests that Industry Structure Can Influence a Firm's Competitive Choices.

AACSB: Analytical Thinking 21) Monopolistically competitive industries consist of only a single firm.

Answer: FALSE Diff: 3 Page Ref: 35 Learning Obj.: 2.2: Describe How the Structure-Conduct-Performance (S-C-P) Model Suggests that Industry Structure Can Influence a Firm's Competitive Choices.

AACSB: Analytical Thinking 22) Identify and define the three elements of the S-C-P model.

Answer: The three elements of the (structure-conduct-performance S-C-P) model are structure, which in this model refers to industry structure, measured by such factors as the number of competitors in an industry, the heterogeneity of products in an industry, and the cost of entry and exit in an industry, conduct, which refers to the strategies that firms in an industry implement and performance, which includes both the performance of individual firms and the performance of the economy as a whole.

Diff: 2 Page Ref: 33 Learning Obj.: 2.2: Describe How the Structure-Conduct-Performance (S-C-P) Model Suggests that Industry Structure Can Influence a Firm's Competitive Choices.

AACSB: Analytical Thinking 23) Within the five forces framework, the five most common threats facing firms from their competitive environment include each of the following except A) substitutes.

B) complementors.

C) suppliers.

D) buyers.

Answer: B Diff: 2 Page Ref: 34 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking

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24) Firms in industries characterized by ________ can expect to earn only competitive parity.

A) perfect competition B) monopolistic competition C) oligopoly D) monopoly Answer: A Diff: 3 Page Ref: 35 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 25) Which type of competition is characterized by a large number of firms, heterogeneous products and low cost of entry and exit?

A) perfect competition B) monopolistic competition C) oligopoly D) monopoly Answer: B Diff: 2 Page Ref: 35 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 26) Which type of competition is characterized by a small number of firms, homogeneous products and costly entry and exit?

A) perfect competition B) monopolistic competition C) oligopoly D) monopoly Answer: C Diff: 2 Page Ref: 35 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 27) A(n) ________ is any individual, group, or organization outside a firm that seeks to reduce the level of that firm's performance.

A) environmental threat B) environmental opportunity C) environmental equalizer D) competitive advantage Answer: A Diff: 1 Page Ref: 34 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

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28) Firms that have either recently begun operations in an industry or that threaten to begin operations in an industry soon are considered to be ________ in the five forces framework.

A) barriers to entry B) new competitors C) suppliers D) buyers Answer: B Diff: 1 Page Ref: 34 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 29) ________ exist when a firm's costs rise as a function of its volume of production.

A) Economies of scale B) Economies of scope C) Diseconomies of scale D) Learning curve effects Answer: C Diff: 2 Page Ref: 36 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 30) All other things being equal, which of the following would lead to lower barriers to entry in an industry?

A) The existence of economies of scale in the industry.

B) Products are highly differentiated in the industry.

C) Industry incumbents have learning-curve cost advantages.

D) Raw materials are widely and readily available at a competitive price.

Answer: D Diff: 3 Page Ref: 36 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 31) Frequent price cutting by firms in an industry, frequent introduction of new products by firms in an industry and intense advertising campaigns are indications of A) high power of buyers.

B) high threat of new entrants.

C) high levels of direct competition.

D) high threat of substitutes.

Answer: C Diff: 2 Page Ref: 40 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

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32) The threat of direct competition tends to be high when A) there are few firms in an industry and these firms tend to be unequal in size.

B) the industry growth rate is high.

C) firms are unable to differentiate their products.

D) production capacity can be added in small increments.

Answer: C Diff: 3 Page Ref: 40 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 33) The products or services provided by a firm's direct competitors meet ________ customer needs in ________ ways as the product provided by the firm itself.

A) different; the same B) approximately the same; the same C) different; different D) approximately the same; different Answer: B Diff: 3 Page Ref: 41 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 34) The products or services provided by a firm's substitutes meet ________ customer needs in ________ ways as the product provided by the firm itself.

A) different; the same B) approximately the same; the same C) different; different D) approximately the same; different Answer: D Diff: 3 Page Ref: 41 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 35) Which of the following statements regarding substitutes is accurate?

A) In the extreme, substitutes can ultimately replace an industry's products or services.

B) Substitutes place a floor on the prices firms in an industry can charge and on the profits firms in an industry can earn.

C) Substitutes rarely impact the profitability that firms in an industry can earn.

D) The importance of substitutes in reducing the profit potential in a wide variety of industries is decreasing.

Answer: A Diff: 3 Page Ref: 41 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

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36) ________ make a wide variety of raw materials, labor and other critical assets available to firms.

A) Buyers B) Rivals C) Suppliers D) Substitutes Answer: C Diff: 1 Page Ref: 42 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 37) Which of the following attributes makes suppliers a stronger threat?

A) The supplier's industry is dominated by a small number of firms.

B) The product or service provided by suppliers is not highly differentiated.

C) Suppliers are threatened by substitutes.

D) Suppliers are not able to engage in forward vertical integration.

Answer: A Diff: 2 Page Ref: 42 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 38) Which of the following is the best example of forward vertical integration?

A) a car dealership opening up its own automobile manufacturing plant B) a car company opening its own dealerships to sell its products directly to customers C) a car company opening its own chain of video rental stores D) a car company opening a plant to produce motorcycles Answer: B Diff: 3 Page Ref: 43 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Application of Knowledge 39) Buyers tend to have less power when A) a firm has only one buyer, or a small number of buyers.

B) the products or services being sold to buyers are standard and not differentiated.

C) the supplies they purchase are an insignificant portion of the costs of their final products.

D) they are not earning significant economic profits.

Answer: C Diff: 2 Page Ref: 43 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking

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40) Overall, the average level of performance in an industry is likely to be highest when A) the threat level of all five forces is high.

B) the threat level of rivalry and substitutes is low, but the threat level of suppliers, buyers and new entrants is high.

C) the threat level of rivalry, substitutes and new entrants is high, but the threat level of buyers and supplies is low.

D) the threat level of all five forces is low.

Answer: D Diff: 3 Page Ref: 44 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 41) The level of direct competition in the fastfood industry can best be described as A) low because of the numerous firms in the industry and the slowing growth rate.

B) low because of the slowing growth rate and the competition from composite wood furniture.

C) high because of the numerous firms in the industry and the slowing growth rate.

D) moderate because the slowing growth rate offsets the numerous firms in the industry.

Answer: C Diff: 3 Page Ref: 40 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Application of Knowledge 42) The threat of suppliers in the legal industry can best be described as A) low because there are a large number of suppliers selling an undifferentiated product.

B) high because there are a large number of suppliers selling an undifferentiated product.

C) moderate because the large number of suppliers is offset by the undifferentiated products they are selling.

D) moderate because of the slowing growth rate in the industry and the commodity nature of the products produced by suppliers.

Answer: A Diff: 3 Page Ref: 42 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Application of Knowledge

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43) Jay Z recently started Tidal, an "artist friendly" streaming company. This would be an example of A) complementors.

B) backward vertical integration.

C) consolidation.

D) forward vertical integration.

Answer: D Diff: 2 Page Ref: 43 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Application of Knowledge 44) In the hardwood furniture industry, composite wood furniture would be an example of a(n) A) substitute.

B) rival.

C) new entrant.

D) complementor.

Answer: A Diff: 2 Page Ref: 41 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Application of Knowledge 45) The threat of buyers in the hardwood furniture industry is best described as A) high because there are many suppliers, none of which represents a significant portion of the hardwood furniture industry's sales.

B) low because of the slow industry growth and the commodity nature of the suppliers.

C) low because there are many suppliers, none of which represents a significant portion of the hardwood furniture industry's sales.

D) high because of the slow industry growth and the commodity nature of the suppliers.

Answer: C Diff: 2 Page Ref: 43 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Application of Knowledge 46) The five forces framework is based on the S-C-P model and identifies the five most common threats facing firms from their local competitive environment and the conditions under which these threats are more or less likely to be present.

Answer: TRUE Diff: 1 Page Ref: 34 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking

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47) Within the five forces framework, when all five threats are very high, competition in the industry begins to approach a monopoly.

Answer: FALSE Diff: 2 Page Ref: 35 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 48) Incumbent firms may have a whole range of cost advantages compared to new competitors.

Answer: TRUE Diff: 2 Page Ref: 36 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 49) The threat of entry in an industry depends on the cost of entry, and the cost of entry, in turn, depends upon the existence and "height" of barriers to entry.

Answer: TRUE Diff: 1 Page Ref: 36 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 50) Diseconomies of scale exist in an industry when a firm's costs fall as a function of that firm's volume of production.

Answer: FALSE Diff: 2 Page Ref: 36 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 51) Brand identification and customer loyalty serve as entry barriers because new entrants not only have to absorb the standard costs associated with starting production in a new industry, but also have to absorb the costs associated with overcoming an incumbent firm's differentiation advantages.

Answer: TRUE Diff: 2 Page Ref: 38 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Application of Knowledge

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52) Proprietary technology often is more important as a barrier to entry than is managerial knowhow.

Answer: FALSE Diff: 3 Page Ref: 39 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 53) Learning-curve cost advantages are present when the cost of production falls with the cumulative volume of production.

Answer: TRUE Diff: 1 Page Ref: 40 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 54) The threat of existing competition tends to be high in an industry when firms are able to meaningfully differentiate their products.

Answer: FALSE Diff: 2 Page Ref: 40 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 55) In an industry, the products or services provided by a firm's direct competition meet approximately the same customer needs in the same way as the products or services provided by the firm itself, whereas substitutes meet approximately the same customer needs but do so in different ways.

Answer: TRUE Diff: 3 Page Ref: 41 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 56) A firm's supplier poses a greater threat if the supplier's industry has a large number of firms, none of which dominate the supplying industry, than if the supplier's industry is dominated by a small number of firms.

Answer: FALSE Diff: 3 Page Ref: 42 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

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57) Suppliers are a greater threat to firms in an industry when suppliers are threatened by substitutes.

Answer: FALSE Diff: 2 Page Ref: 42 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 58) The threat of buyers is greater if the products or services that are being sold to buyers are standard and not differentiated than if the products sold to buyers are highly differentiated.

Answer: TRUE Diff: 2 Page Ref: 43 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 59) If the owner of a jewelry store who normally purchased diamonds from a diamond brokerage firm were to open his own diamond brokerage firm, this would be an example of forward vertical integration.

Answer: FALSE Diff: 2 Page Ref: 43 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Application of Knowledge 60) In general, it is rarely the case that all five forces in the five forces framework will be equally threatening at the same time.

Answer: TRUE Diff: 1 Page Ref: 44 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 61) Identify the five most common threats facing firms from their local competitive environment that are represented in the five forces framework, and discuss under what conditions firms in a specific industry are most likely to earn an above average profit and when they are likely to earn a below average profit.

Answer: The five threats that constitute the five forces framework include the threat from new competition, the threat from competition among existing companies, the threat of substitutes, the threat of suppliers, and the threat of buyers. When all five threats are low, competition begins to approach what economists call a monopoly and firms are able to earn above average profits.

Alternatively, when all five forces are very high, competition begins to approach perfect competition and the best firms can hope to earn is competitive parity.

Diff: 2 Page Ref: 34 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

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62) Identify the four types of competition, the attributes of each type and the expected performance under each.

Answer: The four types of competition include perfect competition, monopolistic competition, oligopoly and monopoly. Perfect competition is characterized by a large number of firms, homogeneous products and low cost entry and exit. Firms in these industries can expect to earn only competitive parity. Monopolistic competition is characterized by a large number of firms, heterogeneous products and low cost entry and exit. Firms in such industries can earn a competitive advantage. Oligopoly is characterized by a small number of firms, homogeneous products, and costly entry and exit; firms in such industries can earn a competitive advantage.

Finally, monopoly is characterized by one firm and costly entry. Firms in such industries can earn a competitive advantage.

Diff: 2 Page Ref: 35 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 63) Discuss the difference between a company's existing direct competitors and its substitutes and discuss the role substitutes play in an industry.

Answer: The products or services provided by a firm's rivals meet approximately the same customers' needs in the same ways as the products or services provided by the firm itself, while substitutes meet approximately the same customers' needs but do so in different ways.

Substitutes place a ceiling on the prices firms in an industry can charge and on the profits firms in an industry can earn.

Diff: 2 Page Ref: 40 Learning Obj.: 2.3: Describe the Five Environmental Threats and Indicators of When each of These Threats will Enhance or Reduce the Attractiveness of an Industry.

AACSB: Analytical Thinking 64) If your customers value your products more when they have your product and another firm's product rather than when they have your product alone, the other firm is considered to be a A) competitor.

B) complementor.

C) rival.

D) substitute.

Answer: B Diff: 2 Page Ref: 45 Learning Obj.: 2.4: Discuss the Role of Complements in Analyzing Competition within an Industry.

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BidBuy is the world's leading online auction company. When BidBuy was founded ten years ago it was the first online auction company, and it has been the leader since it was founded. Although there are other firms in the industry, BidBuy controls over 75% of the market in the United States, and three additional firms control another 20% of the U.S. market. One of the aspects of BidBuy that keeps users from changing to other online auction companies is the large user base BidBuy has built and a feedback rating system that allows buyers and sellers to rate their satisfaction with each other following each transaction. This allows users to build a reputation for honesty and trustworthiness. Sellers with a high feedback rating tend to receive more bids on their auctions and a higher price for their goods. To help facilitate payment transfers between buyers and sellers following successful online auctions, companies such as DollarDog have been founded, and these companies have facilitated growth for BidBuy. Having attained a 75% market share in the U.S., BidBuy has begun expanding internationally, opening its own sites in some countries and purchasing incumbents in others. In its international expansion, BidBuy has allowed its individual companies to customize their offerings according to the needs and desires of the countries in which they operate and when these companies are successful, BidBuy works to transfer these successful capabilities throughout the firm.

65) For BidBuy, services such as those offered by DollarDog that make BidBuy's services more valuable for customers who use the services of both companies are best described as A) complementors.

B) substitutes.

C) rivals.

D) suppliers.

Answer: A Diff: 2 Page Ref: 45 Learning Obj.: 2.4: Discuss the Role of Complements in Analyzing Competition within an Industry.

AACSB: Application of Knowledge 66) Factors such as BidBuy's feedback rating system that are valuable to the company's customers but which are not useful on other online auction sites are examples of A) first-mover advantages.

B) complementors.

C) substitutes.

D) customer-switching costs.

Answer: D Diff: 2 Page Ref: 51 Learning Obj.: 2.4: Discuss the Role of Complements in Analyzing Competition within an Industry.

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67) BidBuy has a ________ advantage.

A) visionary B) global C) first-mover D) comparative Answer: C Diff: 3 Page Ref: 50 Learning Obj.: 2.4: Discuss the Role of Complements in Analyzing Competition within an Industry.

AACSB: Application of Knowledge 68) Sophisticated software can enhance the value that customers receive from a personal computer. Therefore, software can be said to be a complementor of a personal computer.

Answer: TRUE Diff: 2 Page Ref: 45 Learning Obj.: 2.4: Discuss the Role of Complements in Analyzing Competition within an Industry.

AACSB: Application of Knowledge 69) According to Bradenburger and Nalebluff, a firm's competitors help increase the size of a firm's markets while complementors divide this market among a set of firms.

Answer: FALSE Diff: 2 Page Ref: 45 Learning Obj.: 2.4: Discuss the Role of Complements in Analyzing Competition within an Industry.

AACSB: Analytical Thinking 70) It is possible for a single firm to be a complementor of one firm and a competitor of another.

Answer: TRUE Diff: 2 Page Ref: 45 Learning Obj.: 2.4: Discuss the Role of Complements in Analyzing Competition within an Industry.

AACSB: Analytical Thinking 71) Describe the difference between a competitor and a complementor and identify the role complementors play in an industry.

Answer: A firm is a competitor if your customers value your product less when they have this other firm's product than when they have your product alone. On the other hand, another firm is a complementor if your customers value your products more when they have this other firm's product than when they have your product alone. It is possible for a firm to be a complementor for some firms and competitors for others and it is also possible for a single firm to be both a competitor and a complementor, especially in industries where it is important to create technological standards.

Diff: 2 Page Ref: 45 Learning Obj.: 2.4: Discuss the Role of Complements in Analyzing Competition within an Industry.

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72) An industry in which a large number of small or medium-sized firms operate and no small set of firms has dominant market share or creates dominant technologies is known as a(n) ________ industry.

A) fragmented B) consolidated C) mature D) emerging Answer: A Diff: 1 Page Ref: 49 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 73) The major opportunity facing firms in fragmented industries is A) refining their current products and emphasizing an increase in service quality.

B) developing new products and technologies.

C) creating a first-mover advantage through technological leadership.

D) the implementation of strategies that began to consolidate the industry into a smaller number of firms.

Answer: D Diff: 2 Page Ref: 50 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 74) The advantages that come to firms that make important strategic and technological decisions early in the development of an industry are known as ________ advantages.

A) first-mover B) competitive C) comparative D) emerging Answer: A Diff: 1 Page Ref: 50 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 75) In general, first-mover advantages can arise from any of these sources except A) technological leadership.

B) preemption of strategically valuable assets.

C) the creation of customer switching costs.

D) using an imitative strategy to introduce improved versions of competitors' new products.

Answer: D Diff: 3 Page Ref: 50 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

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76) Mature industries are characterized by A) an increase in total industry demand.

B) faster increases in production capacity.

C) a slowdown in the introduction of new products or services.

D) a decrease in the amount of international competition.

Answer: C Diff: 2 Page Ref: 53 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 77) The most promising opportunity for a firm in a declining industry is to A) establish itself as a first mover in the post-shakeout industry.

B) become a market leader in the pre-shakeout industry.

C) become a fast follower in the pre-shakeout industry.

D) merge with another firm.

Answer: B Diff: 2 Page Ref: 55 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 78) Firms in a declining industry that engage in a long, systematic phased withdrawal from the industry, extracting as much value as possible during the withdrawal period, are following a(n) ________ strategy.

A) niche B) expansion C) divestment D) harvest Answer: D Diff: 2 Page Ref: 56 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 79) In the 1980s, the video cassette rental industry had a large number of small firms with no firm with a dominant market share. The video cassette rental industry in the 1980s was a(n) ________ industry.

A) fragmented B) mature C) emerging D) declining Answer: A Diff: 2 Page Ref: 49 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

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80) ________ are advantages that come to firms that make important strategic and technological decisions early in the development of an industry.

A) Visionary advantages B) First-mover advantages C) Comparative advantages D) Missionary advantages Answer: B Diff: 1 Page Ref: 50 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 81) A consolidation strategy is a good option in what type of industry?

A) mature B) emerging C) fragmented D) declining Answer: C Diff: 2 Page Ref: 50 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 82) ________ are resources required to successfully compete in an industry.

A) Strategically valuable assets B) Technological leader strategies C) Process innovations D) Product innovations Answer: A Diff: 2 Page Ref: 51 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 83) ________ costs exist when customers make investments in order to use a firm's particular products or services.

A) First-mover-switching B) Technological leadership-switching C) Customer-switching D) Process-switching Answer: C Diff: 1 Page Ref: 51 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

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Hickory Divine is one of the leading manufacturers in the hardwood furniture industry. Hickory Divine has many small competitors, none of which controls a significant portion of the industry.

Hickory, like most of the furniture manufacturers, sells its products to a broad variety of small furniture stores throughout the country, none of which represents a large percentage of Hickory's sales. When purchasing the products it uses for manufacturing its furniture, Hickory is able to choose from many suppliers since the wood it uses is an undifferentiated commodity, and Hickory is able to easily switch to any supplier that has the best price and delivery times. While growth in the hardwood furniture industry has historically been in the double digits, the industry growth rate has slowed considerably into the single digits, to approximately 5% in recent years; consumers have been purchasing less expensive furniture made of composite wood that is considerably less expensive than hardwood furniture but that looks and functions very similarly once it is painted.

84) Based on the above description, the hardwood furniture industry can best be described as a(n) ________ industry.

A) emerging B) fragmented C) consolidated D) declining Answer: B Diff: 2 Page Ref: 49 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Application of Knowledge 85) An emerging industry is an industry in which a large number of small or medium-sized firms operate and no small set of firms has a dominant market share or creates dominant technologies.

Answer: FALSE Diff: 2 Page Ref: 50 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 86) The major opportunity facing firms in fragmented industries is the implementation of strategies that begin to consolidate the industry into a smaller number of firms.

Answer: TRUE Diff: 1 Page Ref: 50 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

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87) First movers that invest only in technology usually obtain sustained competitive advantages, even if they do not tie up strategically valuable resources in an industry before their full value is widely understood.

Answer: FALSE Diff: 2 Page Ref: 50 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 88) If you were to purchase a new Apple iPod and were unable to use your previously downloaded library of digital music with your new iPod, this would be an example of a customer-switching cost you would incur to use Apple's product.

Answer: TRUE Diff: 3 Page Ref: 51 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Application of Knowledge 89) Mature industries are characterized by elements such as increasing growth in total industry demand, significant increases in product capacity, and an overall increase in the profitability of firms in the industry.

Answer: FALSE Diff: 3 Page Ref: 53 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 90) Product innovation is an effort to refine and improve a firm's current processes.

Answer: FALSE Diff: 2 Page Ref: 54 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 91) A fragmented industry is an industry that has experienced an absolute decline in unit sales over a sustained period of time.

Answer: FALSE Diff: 2 Page Ref: 54 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

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92) A firm following a niche strategy in a declining industry reduces its scope of operations and focuses on narrow segments of the declining industry.

Answer: TRUE Diff: 1 Page Ref: 55 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 93) Firms pursuing a harvest strategy in a declining industry do not expect to remain in the industry over the long term.

Answer: TRUE Diff: 2 Page Ref: 56 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 94) The objective of divestment is to extract a firm from a declining industry.

Answer: TRUE Diff: 2 Page Ref: 56 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 95) All divestments are caused by industry decline.

Answer: FALSE Diff: 2 Page Ref: 56 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

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96) Identify the four generic industry structures and the specific strategic opportunities in each of these industries.

Answer: The four generic industry structures are fragmented industries, emerging industries, mature industries, and declining industries.

Fragmented industries are industries in which a large number of small or medium-sized firms operate and no small set of firms has dominant market share or creates dominant technologies.

The major opportunity facing firms in fragmented industries is the implementation of strategies that begin to consolidate the industry into smaller firms.

Emerging industries are newly created, or newly recreated industries formed by technological innovations, changes in demand, and the emergence of new customer needs. The opportunities that face firms in emerging industries fall into the general category of first-mover advantages or making important strategic and technological decisions early in the development of an industry.

Mature industries are those experiencing slowing growth in total industry demand, the development of experienced repeat customers, a slowdown in increases in production capacity, a slow-down in the introduction of new products and services, an increase in the amount of international competition, and overall reduction in the profitability of firms in the industry.

Opportunities for firms in mature industries focus on a greater emphasis on refining a firm's current products, on increasing the quality of service, on reducing manufacturing costs, and on increasing quality through process innovations.

A declining industry is an industry that has experienced an absolute decline in unit sales over a sustained period of time. The major strategic options that face firms in this kind of industry are leadership, niche, harvest and divestment.

Diff: 2 Page Ref: 47 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 97) Identify and clearly distinguish between the four strategic options available to firms in a declining industry.

Answer: The four major strategic options available to firms in a declining industry are leadership, niche, harvest and divestment. One strategy is for a firm to position itself to become a market leader in the pre-shakeout industry by becoming the firm with the largest market share in that industry. The purpose of becoming the marker leader is to facilitate the exit of firms that are not likely to survive a shakeout. A firm following a niche strategy in a declining industry reduces its scope of operations and focuses on narrow segments of the declining industry. Firms pursuing a harvest strategy engage in a long, systematic, phased withdrawal, extracting as much value as possible during the withdrawal period. Finally, firms pursuing divestment extract a firm from the declining industry, but do so soon after a pattern of decline is established in an industry.

Diff: 2 Page Ref: 55 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

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98) What are customer-switching costs?

Answer: Customer-switching costs exist when customers make investments in order to use a firm's particular products or services. These investments tie customers to a particular firm and make it more difficult for customers to begin purchasing from other firms.

Diff: 2 Page Ref: 51 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

AACSB: Analytical Thinking 99) What is a harvest strategy?

Answer: In a harvest strategy, which is usually employed in a declining industry, the firm engages in a long, systematic withdrawal, extracting as much value as possible during the withdrawal period. This can work if there is some value to harvest.

Diff: 2 Page Ref: 56 Learning Obj.: 2.5: Describe Four Generic Industry Structures and Specific Strategic Opportunities in Those Industries.

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Strategic Management and Competitive Advantage, 6e (Barney) Chapter 3 Evaluating a Firm's Internal Capabilities 1) ________ in the RBV are defined as the tangible and intangible assets that a firm controls that it can use to conceive and implement its strategies.

A) Management controls B) Capabilities C) Resources D) Compensation policies Answer: C Diff: 1 Page Ref: 4 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Analytical Thinking 2) ________ are a subset of a firm's resources and are defined as tangible and intangible assets that enable a firm to take full advantage of other resources it controls.

A) Retained earnings B) Capabilities C) Human resources D) Financial resources Answer: B Diff: 2 Page Ref: 4 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Analytical Thinking 3) A firm's marketing skills and teamwork as well as its cooperation among managers are examples of A) financial resources.

B) human resources.

C) physical resources.

D) capabilities.

Answer: D Diff: 2 Page Ref: 4 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

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4) The training, experience, judgment, intelligence, relationships and insight of individual managers and workers in a firm are examples of A) physical resources.

B) human resources.

C) organizational resources.

D) financial resources.

Answer: B Diff: 2 Page Ref: 5 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Analytical Thinking 5) Computer hardware and software technology, robots used in manufacturing and automated warehouses are examples of which type of resources?

A) financial resources B) physical resources C) human resources D) organizational resources Answer: B Diff: 2 Page Ref: 5 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Analytical Thinking 6) A firm's formal reporting structure, its formal and informal planning and its controlling and coordinating systems are examples of which type of resources?

A) financial resources B) physical resources C) human resources D) organizational resources Answer: D Diff: 2 Page Ref: 5 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

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7) The assumption that some of the resource and capability differences among firms may be long lasting because it may be very costly for firms without certain resources and capabilities to develop or acquire them is known as A) resource mobility.

B) resource homogeneity.

C) resource immobility.

D) resource heterogeneity.

Answer: C Diff: 2 Page Ref: 5 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Analytical Thinking 8) ________ implies that for a given business activity, some firms may be more skilled in accomplishing this activity than other firms.

A) Resource mobility B) Resource homogeneity C) Resource immobility D) Resource heterogeneity Answer: D Diff: 2 Page Ref: 5 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Analytical Thinking 9) The theoretical roots of the resource-based view can be traced to research done by A) David Ricardo.

B) Adam Smith.

C) Oliver Williamson.

D) Joseph Schumpeter.

Answer: A Diff: 1 Page Ref: 6 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Analytical Thinking 10) Inputs whose quantity of supply is fixed and does not respond to price increases are said to be A) elastic in supply.

B) inelastic in supply.

C) elastic in demand.

D) perfectly competitive.

Answer: B Diff: 2 Page Ref: 6 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

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LaserTech is a manufacturer of industrial lasers and has developed a new, patented technology that allows its customers to manufacture their products more precisely with a higher level of consistency and at a lower cost than they could previously. LaserTech's executives believe that no rivals have a similar technology and that it would be very difficult for rivals to copy this technology since the benefits of the new technology can only be realized within LaserTech's system, which includes processes that are protected by trade secrets, making it difficult for rivals to understand the relationship between the company's new technology and its competitive advantage.

11) LaserTech's new technology is an example of A) financial resources.

B) physical resources.

C) human resources.

D) organizational resources.

Answer: B Diff: 1 Page Ref: 5 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Application of Knowledge 12) The inability of rivals to develop or acquire technology similar to that of LaserTech is an illustration of A) resource immobility.

B) resource heterogeneity.

C) causal ambiguity.

D) path dependence.

Answer: A Diff: 3 Page Ref: 6 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Application of Knowledge 13) Capabilities are a subset of a firm's resources and are defined as tangible and intangible assets that enable a firm to take full advantage of other resources it controls.

Answer: TRUE Diff: 1 Page Ref: 4 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Analytical Thinking

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14) Resources in the resource based view are defined as the tangible and intangible assets that a firm controls, which it can use to conceive and implement its strategies.

Answer: TRUE Diff: 1 Page Ref: 4 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Analytical Thinking 15) Financial resources include only the profits a firm has made earlier in its history and that it has reinvested in itself.

Answer: FALSE Diff: 2 Page Ref: 4 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Analytical Thinking 16) Organizational resources include the training, experience, judgment, intelligence, relationships and insight of individual managers and workers in a firm, while human resources are an attribute of collections of individuals.

Answer: FALSE Diff: 2 Page Ref: 5 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Analytical Thinking 17) One of the key assumptions of the RBV is resource heterogeneity.

Answer: TRUE Diff: 2 Page Ref: 5 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Analytical Thinking 18) The assumption of resource immobility holds that it may be very costly for firms without certain resources and capabilities to develop or acquire them.

Answer: TRUE Diff: 2 Page Ref: 6 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Analytical Thinking 19) Inputs whose quantity of supply is fixed and whose demand does not respond to price increases are said to be elastic in supply.

Answer: FALSE Diff: 2 Page Ref: 6 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

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20) Describe the difference between resources and capabilities.

Answer: Resources in the RBV are defined as the tangible and intangible assets that a firm controls that it can use to conceive of and implement its strategies. Examples of resources might include a firm's factories (a tangible asset), its products (a tangible asset), its reputation among customers (an intangible asset), and teamwork among its managers (an intangible asset).

Capabilities are a subset of a firm's resources and are defined as tangible and intangible assets that enable a firm to take full advantage of other resources it controls. That is, capabilities do not enable a firm to conceive of and implement its strategies by themselves but enable a firm to use other resources to conceive of and implement such strategies. Examples of capabilities might include a firm's marketing skills and teamwork and cooperation among its managers.

Diff: 1 Page Ref: 4 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Analytical Thinking 21) Identify the four broad categories that a firm's resources and capabilities can be classified into.

Answer: A firm's resources and capabilities can be classified into four broad categories: financial resources, physical resources, individual resources, and organizational resources.

Financial resources include all the money, from whatever source, that a firm uses to conceive of and implement strategies.

Physical resources include all the physical technology used in a firm. This includes a firm's plant and equipment, its geographic location, and its access to raw materials.

Human resources include the training, experience, judgment, intelligence, relationships, and insight of individual managers and workers in a firm.

Organizational resources are an attribute of collections of individuals.

Diff: 1 Page Ref: 4 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

AACSB: Analytical Thinking 22) Identify and describe the two fundamental assumptions about the resources and capabilities that firms may control that the RBV rests on.

Answer: The two fundamental assumptions that the RBV rests on are resource heterogeneity and resource immobility.

Resource heterogeneity implies that for a given business activity, some firms may be more skilled in accomplishing this activity than other firms.

Resource immobility implies that it may be very costly for firms without certain resources and capabilities to develop or acquire them.

Diff: 1 Page Ref: 5 Learning Obj.: 3.1: Describe the Resource-based View and How it Differs from the S-C-P Model.

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23) To the extent that a firm's resources and capabilities enhance a firm's competitive position by enabling a firm to exploit its opportunities or neutralize its threats, these resources and capabilities are valuable and are known as A) temporary competitive advantages.

B) sustainable competitive advantages.

C) core competencies.

D) strengths.

Answer: D Diff: 2 Page Ref: 8 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 24) The set of business activities in which a firm engages to develop, produce, and market its products or services is known as its A) value chain.

B) physical resources.

C) organizational resources.

D) human resources.

Answer: A Diff: 2 Page Ref: 9 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 25) If in the process of maximizing its performance, a firm engages in activities that pollute the environment, the impact of that pollution is a(n) A) capability.

B) externality.

C) competitive advantage.

D) weakness.

Answer: B Diff: 2 Page Ref: 9 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

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26) ESPN's development of an extensive offering of X-Games coverage that is unmatched by any other sports outlet is an example of which element of the VRIO framework?

A) organization B) imitability C) competitive parity D) rarity Answer: D Diff: 3 Page Ref: 12 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Application of Knowledge 27) Most firms have a resource base that is composed primarily of resources and capabilities that are A) valuable but not rare.

B) neither valuable nor rare.

C) valuable and rare.

D) rare but not valuable.

Answer: A Diff: 2 Page Ref: 12 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 28) Which of the following is not one of the six distinct activities in McKinsey and Company's value chain model?

A) technology development B) product design C) manufacturing D) inbound logistics Answer: D Diff: 2 Page Ref: 12 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

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29) In general, as long as the number of firms that possess a particular valuable resource or capability is less than the number of firms needed to generate perfect competition dynamics in an industry, that resource or capability can be considered ________ and a potential source of competitive advantage.

A) valuable B) rare C) inimitable D) un-substitutable Answer: B Diff: 2 Page Ref: 6 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 30) If firms that do not possess valuable and rare resources or capabilities face a cost disadvantage in obtaining these resources or capabilities compared to the firms that already possess them, these resources and capabilities are termed A) rare.

B) valuable.

C) imperfectly imitable.

D) perfectly imitable.

Answer: C Diff: 2 Page Ref: 13 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 31) Firms that possess and exploit costly-to-imitate, rare and valuable resources in choosing and implementing their strategies may enjoy a period of A) temporary competitive advantage.

B) competitive disadvantage.

C) competitive parity.

D) sustained competitive advantage.

Answer: D Diff: 2 Page Ref: 20 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

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32) If a firm's resources and capabilities are costly to imitate because imitating firms may not understand the relationship between the resources and capabilities controlled by a firm and that firm's competitive advantage, this competitive advantage is said to be protected from imitation by A) path dependence.

B) causal ambiguity.

C) unique historical conditions.

D) social complexity.

Answer: B Diff: 3 Page Ref: 15 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 33) Resources and capabilities, such as interpersonal relations among managers and a firm's culture, that may be costly to imitate because they are beyond the ability of firms to systematically manage and influence are referred to as A) socially complex.

B) causally ambiguous.

C) path dependent.

D) the result of unique historical conditions.

Answer: A Diff: 2 Page Ref: 16 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 34) According to the research in strategic human resources management, A) firms that are able to use human resource practices to develop socially complex human and organizational resources are able to gain competitive advantage over firms that do not engage in these practices.

B) firms that are able to use human resource practices to develop socially simplistic human and organizational resources are able to gain competitive advantage over firms that do not engage in these practices.

C) firms that are able to use human resource practices to develop socially complex human and organizational resources gain little advantage over firms that do not engage in these practices.

D) firms that are able to use human resource practices to develop socially complex human and organizational resources are at a competitive disadvantage when compared to firms that do not engage in these practices.

Answer: A Diff: 2 Page Ref: 17 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

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35) Which of the following statements regarding patents is accurate?

A) Patents always increase the costs of imitation.

B) Patents may decrease, rather than increase, the costs of imitation.

C) Patents always decrease the costs of imitation.

D) Patents have no impact on the costs of imitation.

Answer: B Diff: 2 Page Ref: 17 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 36) The range of formal and informal mechanisms to ensure that managers are behaving in ways consistent with a firm's strategies are referred to as A) formal reporting structures.

B) organizational charts.

C) compensation policies.

D) management control systems.

Answer: D Diff: 1 Page Ref: 18 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 37) Which of the following is an example of formal management controls?

A) a firm's culture B) the willingness of employees to monitor each other C) budgeting and reporting activities D) managerial motivation Answer: C Diff: 2 Page Ref: 18 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 38) A process is said to be ________ when events early in the evolution of a process have significant effects on subsequent events.

A) causally ambiguous B) path dependent C) socially complex D) path independent Answer: B Diff: 2 Page Ref: 15 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

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LaserTech is a manufacturer of industrial lasers and has developed a new, patented technology that allows its customers to manufacture their products more precisely with a higher level of consistency and at a lower cost than they could previously. LaserTech's executives believe that no rivals have a similar technology and that it would be very difficult for rivals to copy this technology since the benefits of the new technology can only be realized within LaserTech's system, which includes processes that are protected by trade secrets, making it difficult for rivals to understand the relationship between the company's new technology and its competitive advantage.

39) If LaserTech's new technological development were due to proprietary investments the company made when it was first founded twenty years ago, this would be an example of A) social complexity.

B) tacit collusion.

C) path dependence.

D) causal ambiguity.

Answer: C Diff: 2 Page Ref: 15 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Application of Knowledge 40) A firm's plant and equipment, its geographic location and its access to raw materials are all examples of physical resources.

Answer: TRUE Diff: 1 Page Ref: 5 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 41) In the VRIO framework, the R represents resources.

Answer: FALSE Diff: 2 Page Ref: 8 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 42) Within the VRIO framework, valuable resources and capabilities are also known as strengths.

Answer: TRUE Diff: 1 Page Ref: 8 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

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43) Within the VRIO framework, resources and capabilities that are not valuable are also known as weaknesses.

Answer: TRUE Diff: 1 Page Ref: 8 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 44) In general, firms that use their resources and capabilities to exploit opportunities or neutralize threats will see no increase in their net revenues nor a decrease in their net costs compared to the situation where they are not using these resources and capabilities to exploit opportunities or neutralize threats.

Answer: FALSE Diff: 2 Page Ref: 8 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 45) Many firms have resources and capabilities that are used to neutralize threats and the use of these resources enables the firms to increase their net revenues.

Answer: TRUE Diff: 2 Page Ref: 8 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 46) Studying a firm's value chain forces us to think about firm resources in an aggregated way.

Answer: FALSE Diff: 2 Page Ref: 9 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 47) If a firm creates environmental pollution in the process of manufacturing its goods, the pollution is known as an externality.

Answer: TRUE Diff: 2 Page Ref: 9 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Application of Knowledge

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48) The value chain model developed by McKinsey and Company divides value-creating activities into two large categories: primary activities and secondary activities.

Answer: FALSE Diff: 2 Page Ref: 11 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 49) A resource can be a source of competitive advantage even if the resource is controlled by numerous firms.

Answer: FALSE Diff: 3 Page Ref: 11 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 50) Most firms have a resource base that is composed primarily of valuable but common resources and capabilities, some of which are essential if a firm is to gain competitive parity.

Answer: TRUE Diff: 2 Page Ref: 12 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 51) In general, as long as the number of firms that possess a particular valuable resource or capability is less than the number of firms needed to generate perfect competition dynamics in an industry, that resource or capability can be considered rare and a potential source of competitive advantage.

Answer: TRUE Diff: 2 Page Ref: 13 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 52) When firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it, this resource or capability is described as perfectly imitable.

Answer: FALSE Diff: 3 Page Ref: 13 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

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53) A sustained competitive advantage can be competed away by strategic imitation if competing firms face an important cost disadvantage in duplicating a successful firm's valuable resources.

Answer: FALSE Diff: 2 Page Ref: 13 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 54) In general, imitation can occur in one of two ways: direct duplication or substitution.

Answer: TRUE Diff: 1 Page Ref: 14 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 55) The ability of firms to acquire, develop, and use resources often depends upon their place in time and space, and firms that do not have space-and-time-dependent resources face a significant cost disadvantage in obtaining and developing them.

Answer: TRUE Diff: 2 Page Ref: 14 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 56) A process is said to be path dependent when imitating firms are not able to understand the relationship between the resources and capabilities controlled by a firm and that firm's competitive advantage.

Answer: FALSE Diff: 3 Page Ref: 15 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 57) The interpersonal relations among managers in a firm, a firm's culture, and a firm's reputation among suppliers and customers can all act to make a firm's resources and capabilities socially complex.

Answer: TRUE Diff: 2 Page Ref: 16 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking

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58) Whenever the sources for competitive advantage are widely diffused across people, locations, and processes in a firm, those sources will be costly to imitate.

Answer: TRUE Diff: 2 Page Ref: 16 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 59) Most technological developments in an industry are diffused throughout firms in that industry in a relatively brief period of time, but only if the technology in question has not been patented.

Answer: FALSE Diff: 3 Page Ref: 17 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 60) A firm's formal reporting structure is a description of who in an organization reports to whom and is often embedded in a firm's organizational chart.

Answer: TRUE Diff: 1 Page Ref: 18 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 61) Compensation policies are the ways that firms pay employees, and such policies create incentives for employees to behave in certain ways.

Answer: TRUE Diff: 1 Page Ref: 22 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking

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62) Identify the four questions represented in the VRIO framework that one must ask about a resource or capability to determine its competitive potential.

Answer: The four questions are: The Question of Value Does a resource enable a firm to exploit an external opportunity or neutralize an external threat?

The Question of Rarity How many competing firms already possess particular valuable resources and capabilities?

The Question of Imitability Do firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it?

The Question of Organization Is a firm organized to exploit the full competitive potential of its resources and capabilities?

Diff: 2 Page Ref: 8 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 63) Define the concept of a value chain.

Answer: A firm's value chain is the set of business activities in which it engages to develop, produce, and market its products or services. One model is the McKinsey and Company value chain model, which suggests that the creation of value almost always involves six distinct activities: technology development, product design, manufacturing, marketing, distribution, and service. Firms can develop distinctive capabilities in any one or any combination of these activities.

Diff: 2 Page Ref: 9 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 64) Discuss whether a firm must be the only one to possess a valuable resource or capability in order for the firm to benefit from the resource or capability's rarity or if other firms may own it as well.

Answer: A firm does not have to be the sole possessor of a valuable resource or capability for the firm to benefit from the rarity of a resource or capability. It may be possible for a small number of firms in an industry to possess a particular valuable resource or capability and still obtain a competitive advantage. In general, as long as the number of firms that possess a particular valuable resource or capability is less than the number of firms needed to generate perfect competition dynamics in an industry, that resource or capability can be considered rare and a potential source of competitive advantage.

Diff: 3 Page Ref: 11 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

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65) Identify two forms of imitation and describe four sources of costly imitation.

Answer: In general, imitation occurs in one of two ways: direct duplication or substitution.

Imitating firms can attempt to directly duplicate the resources possessed by the firm with a competitive advantage. Imitating firms can also attempt to substitute other resources for a costlyto-imitate resource possessed by a firm with a competitive advantage. The four sources of costly imitation include: • Unique Historical Conditions. It may be the case that a firm was able to acquire or develop its resources and capabilities in a low-cost manner because of its unique historical conditions. The ability of firms to acquire, develop, and use resources often depends upon their place in time and space.

• Causal Ambiguity. A second reason why a firm's resources and capabilities may be costly to imitate is that imitating firms may not understand the relationship between the resources and capabilities controlled by a firm and that firm's competitive advantage.

• Social Complexity. A third reason that a firm's resources and capabilities may be costly to imitate is that they may be socially complex phenomena, beyond the ability of firms to systematically manage and influence.

• The existence of patents is the fourth. Patents may restrict direct duplication for a time, but they may actually increase the chances of substitution by functionally equivalent technologies.

Diff: 2 Page Ref: 14 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

AACSB: Analytical Thinking 66) Identify four components of a firm's organization that are relevant to the question of organization and discuss what role they play in building a competitive advantage.

Answer: Numerous components of a firm's organization are relevant to the question of organization, including its formal reporting structure, its formal and informal management control systems, and its compensation policies. A firm's formal reporting structure is a description of whom in an organization reports to who and is often embodied in a firm's organizational chart. Management control systems include a range of formal and informal mechanisms to ensure that managers are behaving in ways consistent with a firm's strategies.

Formal management controls include a firm's budgeting and reporting activities that keep people higher up in a firm's organizational chart informed about the actions taken by people lower down in a firm's organizational chart. Informal management controls might include a firm's culture and the willingness of employees to monitor each other's behavior. Compensation policies are the ways that firms pay employees. Such policies create incentives for employees to behave in certain ways.

These components of a firm's organization are often called complementary resources and capabilities because they have limited ability to generate competitive advantage in isolation.

However, in combination with other resources and capabilities, they can enable a firm to realize its full potential for competitive advantage potential.

Diff: 2 Page Ref: 18 Learning Obj.: 3.2: Describe the VRIO Framework and How it Relates to the Resource-based View.

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67) Southwest Airlines' strong internal culture that helps ensure that employees act in ways consistent with the company's strategy is an example of a(n) A) informal management control.

B) formal management control.

C) compensation policy.

D) formal reporting structure.

Answer: A Diff: 3 Page Ref: 23 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

AACSB: Application of Knowledge 68) Resources that are valuable but not rare can be categorized as A) organizational weaknesses.

B) distinctive competencies.

C) organizational strengths.

D) complementary resources and capabilities.

Answer: C Diff: 2 Page Ref: 21 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

AACSB: Analytical Thinking 69) Resources that generate a temporary competitive advantage are A) valuable, rare and costly to imitate.

B) valuable but neither rare nor costly to imitate.

C) valuable and either rare or costly to imitate.

D) valuable and rare but not costly to imitate.

Answer: D Diff: 3 Page Ref: 21 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

AACSB: Analytical Thinking 70) If a resource or capability is valuable and rare but not costly to imitate, exploiting this resource will generate a(n) A) sustained competitive advantage.

B) perfectly competitive environment.

C) temporary competitive advantage.

D) environment characterized by competitive parity.

Answer: C Diff: 2 Page Ref: 21 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

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71) Resources and capabilities that are valuable, rare, and costly to imitate are best described as A) distinctive competencies.

B) entry barriers.

C) complementary resources and capabilities.

D) sustainable distinctive competencies.

Answer: D Diff: 2 Page Ref: 21 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

AACSB: Analytical Thinking 72) Any actions a firm takes that have the effect of reducing the level of rivalry in an industry that also do not require firms in an industry to directly communicate or negotiate with each other can be thought of as A) tacit cooperation.

B) tacit collusion.

C) explicit collusion.

D) competitive parity.

Answer: B Diff: 2 Page Ref: 24 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

AACSB: Analytical Thinking 73) When tacit cooperation has the effect of reducing supply and increasing prices, it is known as A) monopolistic competition.

B) explicit collusion.

C) competitive parity.

D) tacit collusion.

Answer: D Diff: 2 Page Ref: 24 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

AACSB: Analytical Thinking 74) Tacit cooperation is only a viable strategy when A) an industry is perfectly competitive.

B) an industry is heterogeneous with respect to the products it sells and their cost structure.

C) there is a strong market share leader in the industry.

D) there are low entry barriers in the industry.

Answer: C Diff: 3 Page Ref: 24 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

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75) The specific actions a firm takes to implement its strategies are known as A) competitive advantages.

B) objectives.

C) goals.

D) tactics.

Answer: D Diff: 2 Page Ref: 24 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

AACSB: Analytical Thinking LaserTech is a manufacturer of industrial lasers and has developed a new, patented technology that allows its customers to manufacture their products more precisely with a higher level of consistency and at a lower cost than they could previously. LaserTech's executives believe that no rivals have a similar technology and that it would be very difficult for rivals to copy this technology since the benefits of the new technology can only be realized within LaserTech's system, which includes processes that are protected by trade secrets, making it difficult for rivals to understand the relationship between the company's new technology and its competitive advantage.

76) LaserTech's new technology appears to be A) valuable and rare but not costly to imitate.

B) valuable and either rare or costly to imitate.

C) valuable but neither rare nor costly to imitate.

D) valuable, rare and costly to imitate.

Answer: D Diff: 2 Page Ref: 8 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

AACSB: Application of Knowledge

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The Bates Company has been producing tools for over fifty years. In that time the company has been acknowledged as a producer of high quality tools at a reasonable price. Bates' competitive prices can be attributed to three factors. First, the company recognized early in its development that tools made from specific blends of various types of metal were less costly to produce and had superior performance compared to traditional metals. Accordingly, Bates made investments in developing tools made for specialty metals long before other competitors and has made a series of investments over its operating history that have put it far ahead of its competitors in terms of product development. Industry analysts believe that based on these investments it would be difficult and extremely costly, if it were even possible, for rivals to catch up with Bates.

Second, in recognizing the importance of certain metals, Bates was able to sign long-term contracts with suppliers of the metals that have provided Bates with a lasting cost advantage.

Finally, Bates maintains its cost advantages by using a thorough budgeting and reporting system that allows it to closely control costs, and these systems are supported by a frugal company culture and financial incentives that reward employees for finding ways to save money throughout the company.

77) Bates' culture is an example of a(n) A) informal management control.

B) formal management control.

C) compensation policy.

D) formal reporting structure.

Answer: A Diff: 2 Page Ref: 18 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

AACSB: Application of Knowledge 78) The budgeting and reporting activities that Bates uses are examples of A) informal management controls.

B) formal reporting structures.

C) formal management controls.

D) primary value chain activities.

Answer: C Diff: 2 Page Ref: 18 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

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79) The reward system Bates uses to encourage employees to find ways to reduce costs is an example of a(n) A) sustained distinctive competence.

B) informal management control.

C) formal reporting structure.

D) compensation policy.

Answer: D Diff: 2 Page Ref: 18 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

AACSB: Application of Knowledge 80) The fact that it would be would be difficult and costly for firms to match Bates' capabilities in the tool industry indicates that these capabilities are A) imperfectly imitable.

B) causally ambiguous.

C) substitutable.

D) perfectly imitable.

Answer: A Diff: 3 Page Ref: 20 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

AACSB: Application of Knowledge 81) It would be costly for competitors to duplicate Bates due to A) path dependence and causal ambiguity.

B) causal ambiguity and unique historical conditions.

C) path dependence and unique historical conditions.

D) causal ambiguity and patents.

Answer: C Diff: 3 Page Ref: 15 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

AACSB: Application of Knowledge 82) For Southwest Airlines, competitive advantage falls into two big categories: financial decisions made by Southwest and Southwest's approach to managing people.

Answer: FALSE Diff: 2 Page Ref: 21 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

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83) If a resource or capability is valuable and rare but not costly to imitate, exploiting this resource will generate a sustainable competitive advantage for a firm.

Answer: FALSE Diff: 2 Page Ref: 21 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

AACSB: Analytical Thinking 84) Discuss the questions underlying the VRIO framework and use these questions to differentiate between a simple distinctive competence and a sustained distinctive competence.

Answer: The four questions underlying the VRIO framework are value, rarity, inimitability and organization. If a resource or capability is valuable and rare but not costly to imitate, exploiting this resource will generate a temporary competitive advantage for a firm. Consequently, this type of resource or capability can be thought of as an organizational strength and as a distinctive competence. If a resource or capability is valuable, rare, and costly to imitate, exploiting this resource will generate a sustained competitive advantage. In this case, competing firms face a significant cost disadvantage in imitating a successful firm's resources and capabilities and thus cannot imitate this firm's strategies. This cost advantage may reflect the unique history of the successful firm, causal ambiguity about which resources to imitate, the socially complex nature of these resources and capabilities, or any patent advantages a firm might possess. In any case, attempts to compete away the advantages of firms that exploit these resources will not generate competitive advantage or even competitive parity for imitating firms. Even if these firms are able to acquire or develop the resources or capabilities in question, the very high costs of doing so would put them at a competitive disadvantage compared to the firm that already possessed the valuable, rare, and costly-to-imitate resources. These kinds of resources and capabilities are organizational strengths and sustainable distinctive competencies.

Diff: 3 Page Ref: 20 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

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85) Define the nature of competitive dynamics and identify three reasons why a firm might not respond to another firm's competitive advantage.

Answer: Decisions made by other firms given the strategic choices of a particular firm define the nature of the competitive dynamics that exist in an industry.

There are at least three reasons why a firm might not respond to another firm's competitive advantage.

• First, this firm might have its own competitive advantage. Responding to another firm's competitive advantage might destroy, or at least compromise, this firm's sources of competitive advantage.

• Second, a firm may not respond to another firm's competitive advantage because it does not have the resources and capabilities to do so.

• Finally, a firm may not respond to the advantages of a competitor because it is trying to reduce the level of rivalry in an industry.

Diff: 2 Page Ref: 23 Learning Obj.: 3.3: Be Able to Apply the VRIO Framework to Identify the Competitive Implications of a Firm's Resources and Capabilities.

AACSB: Analytical Thinking 86) If Delta Airlines were to significantly change its fare structure and flight schedule to enhance its competitive position in response to aggressive price cutting by Southwest Airlines, this would be an example of A) explicit collusion.

B) tacit collusion.

C) competitive dynamics.

D) a harvest strategy.

Answer: C Diff: 3 Page Ref: 23 Learning Obj.: 3.4: Discuss Important Implications of the Resource-based View, Including (a) How Value Chain Analysis Can be used to Identify a Firm's Valuable Resources and Capabilities. (b) The Kinds of Resources and Capabilities that are Likely to be Costly to Imitate. (c) How a Firm Uses its Structure, Formal and Informal Control Processes, and Compensation Policy to Exploit its Resources.

AACSB: Application of Knowledge

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87) Which of the following statements regarding the resource-based view is accurate?

A) Competitively valuable resources and capabilities are controlled only by a firm's general managers.

B) Only lower level employees need to accept the responsibility of creating, nurturing and exploiting resources and capabilities that can generate competitive advantages for a firm.

C) Employees should define their jobs in functional terms instead of in competitive and economic terms.

D) Competitive advantage is too important to remain the sole property of senior management.

Answer: D Diff: 2 Page Ref: 26 Learning Obj.: 3.4: Discuss Important Implications of the Resource-based View, Including (a) How Value Chain Analysis Can be used to Identify a Firm's Valuable Resources and Capabilities. (b) The Kinds of Resources and Capabilities that are Likely to be Costly to Imitate. (c) How a Firm Uses its Structure, Formal and Informal Control Processes, and Compensation Policy to Exploit its Resources.

AACSB: Analytical Thinking 88) Which of the following statements regarding competitive parity and competitive advantage is accurate?

A) Some firms develop valuable, rare, and costly-to-imitate resources and capabilities in being efficient second movers, that is, in rapidly imitating and improving on the product and technological innovations of other firms.

B) Firms that benchmark their performance against the performance of successful competitors can expect to develop at least a temporary competitive advantage.

C) Firms must be first movers to gain competitive advantages.

D) Even if all a firm does is create value in the same way as its competitors, the firm can expect to earn at least a temporary competitive advantage.

Answer: A Diff: 3 Page Ref: 26 Learning Obj.: 3.4: Discuss Important Implications of the Resource-based View, Including (a) How Value Chain Analysis Can be used to Identify a Firm's Valuable Resources and Capabilities. (b) The Kinds of Resources and Capabilities that are Likely to be Costly to Imitate. (c) How a Firm Uses its Structure, Formal and Informal Control Processes, and Compensation Policy to Exploit its Resources.

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89) If there is a conflict between the resources a firm controls and that firm's organization, ________ should be changed.

A) the resources B) both C) nothing D) the organization Answer: D Diff: 3 Page Ref: 26 Learning Obj.: 3.4: Discuss Important Implications of the Resource-based View, Including (a) How Value Chain Analysis Can be used to Identify a Firm's Valuable Resources and Capabilities. (b) The Kinds of Resources and Capabilities that are Likely to be Costly to Imitate. (c) How a Firm Uses its Structure, Formal and Informal Control Processes, and Compensation Policy to Exploit its Resources.

AACSB: Analytical Thinking LaserTech is a manufacturer of industrial lasers and has developed a new, patented technology that allows its customers to manufacture their products more precisely with a higher level of consistency and at a lower cost than they could previously. LaserTech's executives believe that no rivals have a similar technology and that it would be very difficult for rivals to copy this technology since the benefits of the new technology can only be realized within LaserTech's system, which includes processes that are protected by trade secrets, making it difficult for rivals to understand the relationship between the company's new technology and its competitive advantage.

90) If one of LaserTech's rivals were to decide to divest its industrial laser manufacturing business in response to LaserTech's new technology, this would be an example of A) competitive dynamics.

B) tacit collusion.

C) a sustainable distinctive competence.

D) competitive parity.

Answer: A Diff: 2 Page Ref: 23 Learning Obj.: 3.4: Discuss Important Implications of the Resource-based View, Including (a) How Value Chain Analysis Can be used to Identify a Firm's Valuable Resources and Capabilities. (b) The Kinds of Resources and Capabilities that are Likely to be Costly to Imitate. (c) How a Firm Uses its Structure, Formal and Informal Control Processes, and Compensation Policy to Exploit its Resources.

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91) Decisions made by other firms given the strategic choices of a particular firm define the nature of the competitive dynamics that exist in an industry.

Answer: TRUE Diff: 2 Page Ref: 23 Learning Obj.: 3.4: Discuss Important Implications of the Resource-based View, Including (a) How Value Chain Analysis Can be used to Identify a Firm's Valuable Resources and Capabilities. (b) The Kinds of Resources and Capabilities that are Likely to be Costly to Imitate. (c) How a Firm Uses its Structure, Formal and Informal Control Processes, and Compensation Policy to Exploit its Resources.

AACSB: Analytical Thinking 92) One reason a firm may not respond to another firm's competitive advantage is because it does not have the resources or capabilities to do so.

Answer: TRUE Diff: 1 Page Ref: 24 Learning Obj.: 3.4: Discuss Important Implications of the Resource-based View, Including (a) How Value Chain Analysis Can be used to Identify a Firm's Valuable Resources and Capabilities. (b) The Kinds of Resources and Capabilities that are Likely to be Costly to Imitate. (c) How a Firm Uses its Structure, Formal and Informal Control Processes, and Compensation Policy to Exploit its Resources.

AACSB: Analytical Thinking 93) Any actions that a firm takes that have the effect of reducing the level of rivalry in an industry that also do not require firms in an industry to negotiate with each other can be thought of as explicit cooperation.

Answer: FALSE Diff: 2 Page Ref: 24 Learning Obj.: 3.4: Discuss Important Implications of the Resource-based View, Including (a) How Value Chain Analysis Can be used to Identify a Firm's Valuable Resources and Capabilities. (b) The Kinds of Resources and Capabilities that are Likely to be Costly to Imitate. (c) How a Firm Uses its Structure, Formal and Informal Control Processes, and Compensation Policy to Exploit its Resources.

AACSB: Analytical Thinking 94) When tacit cooperation has the effect of reducing supply and increasing prices, it is known as tacit collusion.

Answer: TRUE Diff: 1 Page Ref: 24 Learning Obj.: 3.4: Discuss Important Implications of the Resource-based View, Including (a) How Value Chain Analysis Can be used to Identify a Firm's Valuable Resources and Capabilities. (b) The Kinds of Resources and Capabilities that are Likely to be Costly to Imitate. (c) How a Firm Uses its Structure, Formal and Informal Control Processes, and Compensation Policy to Exploit its Resources.

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95) Tacit cooperation is only a viable strategy when an industry is perfectly competitive.

Answer: FALSE Diff: 3 Page Ref: 24 Learning Obj.: 3.4: Discuss Important Implications of the Resource-based View, Including (a) How Value Chain Analysis Can be used to Identify a Firm's Valuable Resources and Capabilities. (b) The Kinds of Resources and Capabilities that are Likely to be Costly to Imitate. (c) How a Firm Uses its Structure, Formal and Informal Control Processes, and Compensation Policy to Exploit its Resources.

AACSB: Analytical Thinking 96) In the end, competitive advantage is so important to a firm's success, it must remain the sole property of senior management.

Answer: FALSE Diff: 2 Page Ref: 26 Learning Obj.: 3.4: Discuss Important Implications of the Resource-based View, Including (a) How Value Chain Analysis Can be used to Identify a Firm's Valuable Resources and Capabilities. (b) The Kinds of Resources and Capabilities that are Likely to be Costly to Imitate. (c) How a Firm Uses its Structure, Formal and Informal Control Processes, and Compensation Policy to Exploit its Resources.

AACSB: Analytical Thinking 97) If there is a conflict between the resources a firm controls and the firm's organization, the resources should be changed.

Answer: FALSE Diff: 2 Page Ref: 26 Learning Obj.: 3.4: Discuss Important Implications of the Resource-based View, Including (a) How Value Chain Analysis Can be used to Identify a Firm's Valuable Resources and Capabilities. (b) The Kinds of Resources and Capabilities that are Likely to be Costly to Imitate. (c) How a Firm Uses its Structure, Formal and Informal Control Processes, and Compensation Policy to Exploit its Resources.

AACSB: Analytical Thinking 98) If all a firm does is create value in the same way as its competitors, the best performance it can ever expect to gain is competitive parity.

Answer: TRUE Diff: 2 Page Ref: 26 Learning Obj.: 3.4: Discuss Important Implications of the Resource-based View, Including (a) How Value Chain Analysis Can be used to Identify a Firm's Valuable Resources and Capabilities. (b) The Kinds of Resources and Capabilities that are Likely to be Costly to Imitate. (c) How a Firm Uses its Structure, Formal and Informal Control Processes, and Compensation Policy to Exploit its Resources.

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Strategic Management and Competitive Advantage, 6e (Barney) Chapter 4 Cost Leadership 1) Actions that firms take to gain competitive advantage in a single market or industry are known as A) business-level strategies.

B) corporate-level strategies.

C) functional-level strategies.

D) macro-level strategies.

Answer: A Diff: 1 Page Ref: 98 Learning Obj.: 4.1: Define Business Level Strategies.

AACSB: Analytical Thinking 2) Actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously are known as A) business-level strategies.

B) corporate-level strategies.

C) functional-level strategies.

D) macro-level strategies.

Answer: B Diff: 1 Page Ref: 98 Learning Obj.: 4.1: Define Business Level Strategies.

AACSB: Analytical Thinking 3) Cost-leadership and product-differentiation strategies are so widely recognized that they are often called A) common business strategies.

B) generic corporate strategies.

C) generic business strategies.

D) common corporate strategies.

Answer: C Diff: 2 Page Ref: 98 Learning Obj.: 4.1: Define Business Level Strategies.

AACSB: Analytical Thinking 4) Corporate level strategies are actions firms take to gain competitive advantages in a single market or industry.

Answer: FALSE Diff: 1 Page Ref: 98 Learning Obj.: 4.1: Define Business Level Strategies.

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5) Cost leadership, flexibility, collusion, and product differentiation are so widely recognized that they are often called generic business strategies.

Answer: TRUE Diff: 1 Page Ref: 98 Learning Obj.: 4.1: Define Business Level Strategies.

AACSB: Analytical Thinking 6) A firm that chooses a ________ focuses on gaining advantages by reducing its cost below all of its competitors.

A) diversification strategy B) product-differentiation business strategy C) corporate strategy D) cost-leadership business strategy Answer: D Diff: 1 Page Ref: 98 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 7) The best example of a firm following a cost-leadership business strategy is A) Mercedes Benz.

B) Macy's.

C) Ryanair.

D) Rolls Royce.

Answer: C Diff: 1 Page Ref: 98 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 8) ________ are said to exist when the increase in firm size (measured in terms of volume of production) are associated with lower costs (measured in terms of average costs per unit of production).

A) Sustainable competitive advantages B) Economies of scale C) Temporary competitive advantages D) Economies of scope Answer: B Diff: 2 Page Ref: 99 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

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9) As the volume of production in a firm increases, the average cost per unit decreases until some optimal volume of production is reached, after which the average costs of production begin to rise because of A) diseconomies of scale.

B) economies of scope.

C) diseconomies of scope.

D) economies of scale.

Answer: A Diff: 2 Page Ref: 99 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 10) The link between volume of production and the cost of building manufacturing operations is particularly important in industries characterized by A) process innovations.

B) product manufacturing.

C) product innovation.

D) process manufacturing.

Answer: D Diff: 2 Page Ref: 100 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 11) ________ levels of production are associated with ________ levels of employee specialization.

A) High; high B) High; low C) Low; high D) Low; moderate Answer: A Diff: 2 Page Ref: 100 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 12) Which of the following is NOT a potential source of diseconomies of scale?

A) physical limits to efficient size B) worker de-motivation C) distance to markets and suppliers D) learning-curve economies Answer: D Diff: 2 Page Ref: 103 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

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13) If Temper Company, a manufacturer of mattresses, was considering moving its production facilities to China but decided against it because the additional costs of shipping the mattresses back to the U.S. would offset the cost savings associated with moving the production facilities, the increased costs associated with shipping would be an example of A) learning-curve economies.

B) diseconomies of scale.

C) economies of scale.

D) competitive advantages.

Answer: B Diff: 2 Page Ref: 103 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Application of Knowledge 14) ________ focus(es) on the relationship between the volume of production at a given point in time and average unit costs, the ________ focus(es) on the relationship between the cumulative volume of production and average unit costs.

A) Economies of scale; learning curve B) Competitive advantage; economies of scale C) Learning curve; economies of scale D) Economies of scale; competitive advantage Answer: A Diff: 3 Page Ref: 103 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 15) Which of the following statements regarding the learning curve and economies of scale is accurate?

A) Just as diseconomies of scale are presumed to exist if a firm gets too large, there is a corresponding increase in costs in the learning-curve model as the cumulative volume of production grows.

B) Where diseconomies of scale are presumed to exist if a firm gets too large, there is no corresponding increase in costs in the learning-curve model as the cumulative volume of production grows.

C) Where diseconomies of scale are presumed to exist if a firm gets too small, there is no corresponding increase in costs in the learning-curve model as the cumulative volume of production grows.

D) Just as diseconomies of scale are presumed to exist if a firm gets too small, there is a corresponding increase in costs in the learning-curve model as the cumulative volume of production grows.

Answer: B Diff: 3 Page Ref: 104 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

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16) Learning-curve-cost advantages are A) restricted only to manufacturing firms.

B) restricted only to firms in services industries.

C) restricted only to firms in extraction industries.

D) not restricted to manufacturing.

Answer: D Diff: 2 Page Ref: 104 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 17) ________ are any supplies used by a firm in conducting its business activities.

A) Productive assets B) Productive inputs C) Productive outputs D) Productive inventory Answer: B Diff: 2 Page Ref: 105 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 18) In order to create a cost advantage, the cost of acquiring low-cost productive inputs must be ________ the cost savings generated by these factors.

A) greater than B) equal to C) less than D) greater than or equal to Answer: C Diff: 2 Page Ref: 106 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 19) Machines and robots are examples of A) technological software.

B) economies of scale.

C) learning-curve effects.

D) technological hardware.

Answer: D Diff: 1 Page Ref: 107 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

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20) The quality of relations among labor and management, an organization's culture, and the quality of management controls are all examples of A) technological hardware.

B) technological software.

C) productive inputs.

D) economies of scale.

Answer: B Diff: 2 Page Ref: 107 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 21) Choices which firms make about the kinds of products and services they will sell that impact their relative cost position are known as A) technological hardware.

B) policy choices.

C) technological software.

D) corporate level strategies.

Answer: B Diff: 2 Page Ref: 108 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking Sematech is a producer of computer chips. To gain an advantage over other computer chip makers, Sematech focuses on reducing its costs below all of its competitors and has aligned its value chain accordingly. Recently, several of Sematech's competitors have begun to reduce the company's competitive advantage. In response to this threat, Sematech has decided to add production capacity in an effort to lower costs.

22) Sematech is pursuing which strategy?

A) cost-leadership business strategy B) product-differentiation business strategy C) cost-leadership corporate strategy D) product-differentiation corporate strategy Answer: A Diff: 2 Page Ref: 98 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

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23) By increasing production volume in an effort to reduce costs, Sematech is pursuing which sources of cost advantage?

A) size differences and diseconomies of scale B) differential access to productive inputs C) size differences and economies of scale D) technological advantages Answer: C Diff: 2 Page Ref: 99 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Application of Knowledge 24) If Sematech's efforts to increase its production capacity resulted in increased complexity and an inability of managers to control and operate the firm efficiently, this would be an example of A) physical limits to efficient size.

B) worker de-motivation.

C) distance to markets and suppliers.

D) diseconomies of scale.

Answer: D Diff: 2 Page Ref: 99 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Application of Knowledge 25) If Sematech decided to focus on building its technological hardware, it would focus on elements such as A) robots.

B) organizational culture.

C) the quality of organizational controls.

D) the quality of relations among labor and management.

Answer: A Diff: 1 Page Ref: 107 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Application of Knowledge 26) If Sematech were to choose to narrow its product line in an effort to reduce costs, this would be an example of A) technological software.

B) a policy choice.

C) a competitive advantage.

D) a learning-curve effect.

Answer: B Diff: 3 Page Ref: 108 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

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27) A firm that chooses a cost-leadership business strategy focuses on gaining advantages by reducing its costs to a level equal to all of its competitors.

Answer: FALSE Diff: 1 Page Ref: 98 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 28) Firms that are successful in pursuing a cost-leadership strategy focus solely on keeping costs low and abandoning other business or corporate strategies.

Answer: FALSE Diff: 2 Page Ref: 98 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 29) In general, cost advantages are not possible when competing firms produce similar products.

Answer: FALSE Diff: 2 Page Ref: 98 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 30) Economies of scale are said to exist when the increase in firm size (measured in terms of volume of production) are associated with lower costs (measured in terms of average costs per unit of production).

Answer: TRUE Diff: 2 Page Ref: 99 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 31) As the volume of production in a firm increases, the average cost per unit decreases until some optimal volume of production is reached, after which the average costs per unit of production begin to rise because of diseconomies of scale.

Answer: TRUE Diff: 2 Page Ref: 99 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

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32) When a firm has high levels of production, it is often able to purchase and use specialized manufacturing tools that cannot be kept in operation in small firms.

Answer: TRUE Diff: 1 Page Ref: 99 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 33) The link between volume of production and the cost of building manufacturing operations is particularly important in industries characterized by product manufacturing, such as chemical and oil refining.

Answer: FALSE Diff: 2 Page Ref: 100 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 34) High volumes of production are also associated with high levels of generality in employee tasks and as workers become increasingly generalized in accomplishing a variety of tasks; they can become more effective at these tasks, thereby reducing the firm's costs.

Answer: FALSE Diff: 3 Page Ref: 100 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 35) There are physical limitations to the size of some manufacturing processes and when this size is exceeded, diseconomies of scale are experienced.

Answer: TRUE Diff: 2 Page Ref: 101 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 36) As a firm increases in size, it often increases in complexity; however, the ability of managers to control and operate the firm efficiently are virtually unlimited and therefore costs do not substantially increase.

Answer: FALSE Diff: 2 Page Ref: 101 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

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37) Increased worker specialization associated with higher levels of production can lead to worker de-motivation and diseconomies of scale.

Answer: TRUE Diff: 2 Page Ref: 102 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 38) Large transportation costs can offset cost reductions attributable to the exploitation of economies of scale in manufacturing.

Answer: TRUE Diff: 1 Page Ref: 103 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 39) The link between cumulative volumes of production and cost has been formalized in the concept of the learning curve.

Answer: TRUE Diff: 2 Page Ref: 103 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 40) Economies of scale focus on the relationship between the cumulative volume of production and average unit costs, while the learning curve focuses on the relationship between the volume of production at a given time and average unit costs.

Answer: FALSE Diff: 3 Page Ref: 103 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 41) If a firm gets too large, it will eventually experience both diseconomies of scale and an increase in costs associated with the learning-curve effect as cumulative volume of production grows.

Answer: FALSE Diff: 2 Page Ref: 104 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

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42) Learning curve-cost advantages are restricted solely to manufacturing and the advantage associated only with the manufacturing business function.

Answer: FALSE Diff: 2 Page Ref: 104 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 43) Efforts to move down the learning curve quickly by acquiring market share may not necessarily enable the firm to obtain a cost advantage over rivals.

Answer: TRUE Diff: 2 Page Ref: 104 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 44) Differential low-cost access to productive inputs may create cost differences among firms producing similar products in an industry.

Answer: TRUE Diff: 2 Page Ref: 105 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 45) Productive inputs are any supplies used by a firm in conducting its business activities.

Answer: TRUE Diff: 1 Page Ref: 105 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 46) One of the least important productive inputs in almost all companies is labor and it is unlikely that differential low cost access to labor can give a firm a cost advantage.

Answer: FALSE Diff: 2 Page Ref: 107 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 47) Physical technology-based cost advantages apply only in manufacturing firms.

Answer: FALSE Diff: 2 Page Ref: 107 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

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48) Technological software includes things like the quality of relations among labor and management, an organization's culture, and the quality of managerial controls.

Answer: TRUE Diff: 2 Page Ref: 107 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 49) In general, firms that are attempting to implement a cost-leadership strategy will choose to produce relatively simple standardized products that sell for relatively low prices compared to the products and prices of firms pursuing other business or corporate strategies.

Answer: TRUE Diff: 1 Page Ref: 108 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 50) Firms for whom the prices of the products or services they sell are determined by market conditions and not by the individual decisions of the firms themselves are known as price makers.

Answer: FALSE Diff: 3 Page Ref: 110 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 51) Differentiate between business strategies and corporate strategies and define the nature of a cost-leadership strategy.

Answer: Business-level strategies are actions firms take to gain competitive advantages in a single market or industry. Corporate-level strategies are actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously. A firm that chooses a cost-leadership business strategy focuses on gaining advantages by reducing its costs below all of its competitors.

Diff: 2 Page Ref: 98 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

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52) Identify six sources of cost advantages for firms.

Answer: There are several reasons that firms producing essentially the same products can have different costs. Some of the most important of these are: (1) size differences and economies of scale, (2) size differences and diseconomies of scale, (3) experience differences and learningcurve economies, (4) differential low-cost access to productive inputs, (5) technological advantages independent of scale, and (6)policy choices.

Diff: 2 Page Ref: 99 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

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53) Identify four reasons why economies of scale can exist and four reasons why diseconomies of scale can exist.

Answer: The four reasons why economies of scale can exist include: a. Volume of Production and Specialized Machines. When a firm has high levels of production, it is often able to purchase and use specialized manufacturing tools that cannot be kept in operation in small firms. b. Volume of Production and the Cost of Plant and Equipment. In some industries, the cost of building manufacturing operations per unit of production is lower than the cost of building smaller manufacturing operations per unit of production. Thus large-volume firms, other factors being equal, will be able to build lower per unit cost manufacturing operations and will have lower average costs of production. c. Volume of Production and Employee Specialization. High volumes of production are also associated with high levels of employee specialization. As workers specialize in accomplishing a narrow task, they can become more and more efficient at this task, thereby reducing their firm's costs. d. Volume of Production and Overhead Costs. A firm with high volumes of production has the luxury of spreading its overhead costs over more units and thereby reducing the overhead costs per unit.

The four reasons why diseconomies of scale can exist include: a. Physical Limits to Efficient Size. There are some important physical limitations to the size of some manufacturing processes and when these limitations are reached, additional volume increases can lead to higher per unit costs. b. Managerial Diseconomies. As a firm increases in size, it often increases in complexity, and the ability of managers to control and operate it efficiently becomes limited. c. Worker De-Motivation. As firms become larger, employee specialization increases. With specialization, workers become more and more efficient at the particular task facing them.

However, very specialized jobs can be very de-motivating for employees and productivity and quality both suffer, resulting in cost increases. d. Distance to Markets and Suppliers. Any reductions in cost attributable to the exploitation of economies of scale in manufacturing may be more than offset by large transportation costs associated with moving supplies and products to and from the manufacturing facility. Firms that build highly efficient plants without recognizing these significant transportation costs may put themselves in a competitive disadvantage compared to firms with slightly less efficient plants but plants that are located nearer suppliers and key markets.

Diff: 2 Page Ref: 99 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

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54) Discuss the difference between the learning curve and economies of scale.

Answer: The learning curve is very similar to the concept of economies of scale. However, there are two important differences. First, where economies of scale focus on the relationship between the volume of production at a given point in time and average unit costs, the learning curve focuses on the relationship between the cumulative volume of production, that is, how much a firm has produced over time, and average unit costs. Second, where diseconomies of scale are presumed to exist if a firm gets too large, there is no corresponding increase in costs in the learning-curve model as the cumulative volume of production grows. Rather, costs continue to fall until they approach the technologically lowest possible cost.

Diff: 2 Page Ref: 103 Learning Obj.: 4.2: Define Cost Leadership as a Business Level Strategy and Identify Six Reasons Firms can Differ in their Costs.

AACSB: Analytical Thinking 55) Firms for whom the price of the products or services they sell is determined by market conditions and not by the individual decision of the firms are known as A) profit takers.

B) price makers.

C) price takers.

D) profit makers.

Answer: C Diff: 2 Page Ref: 110 Learning Obj.: 4.3: Describe How Cost Leadership can Create Economic Value for a Firm.

AACSB: Analytical Thinking 56) Which of the following statements is accurate?

A) A cost-leadership competitive strategy increases the threat of new entrants by lowering costbased barriers to entry.

B) Firms with a low-cost position can reduce the threat of rivalry in an industry.

C) Cost leaders are especially vulnerable to substitute products.

D) Cost leaders are especially vulnerable to the threat of suppliers.

Answer: B Diff: 2 Page Ref: 109 Learning Obj.: 4.3: Describe How Cost Leadership can Create Economic Value for a Firm.

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57) If the potential responses of competing firms are likely to be very detrimental to the costs advantages of cost leaders, firms pursuing a cost-leadership competitive strategy should A) drop their prices below competitors' prices to increase overall economic performance through increased volumes of profitable sales.

B) raise their prices above competitors, increasing overall economic performance through higher margins.

C) focus on a specific niche market to avoid direct competition with aggressive competitors.

D) set their prices equal to competitors' prices, sacrificing some market share for increased profit margins.

Answer: D Diff: 3 Page Ref: 109 Learning Obj.: 4.3: Describe How Cost Leadership can Create Economic Value for a Firm.

AACSB: Analytical Thinking 58) Which of the following statements about cost leadership and the threat of buyers is accurate?

A) If buyers demand increased quality or service, cost leaders can absorb these costs and may still have a cost advantage over the competition.

B) Being a cost leader encourages buyer backward vertical integration.

C) Firms pursuing a cost-leadership strategy are especially vulnerable to powerful buyers who insist on low prices or higher quality and service from their suppliers.

D) Cost leaders are not able to absorb costs associated with buyers' demands for increased quality or service.

Answer: A Diff: 2 Page Ref: 110 Learning Obj.: 4.3: Describe How Cost Leadership can Create Economic Value for a Firm.

AACSB: Analytical Thinking Sematech is a producer of computer chips. To gain an advantage over other computer chip makers, Sematech focuses on reducing its costs below all of its competitors and has aligned its value chain accordingly. Recently, several of Sematech's competitors have begun to reduce the company's competitive advantage. In response to this threat, Sematech has decided to add production capacity in an effort to lower costs.

59) By employing a low-cost competitive strategy, Sematech has made itself A) less able to withstand industry price wars.

B) more vulnerable to rivals.

C) less vulnerable to the power of suppliers.

D) more vulnerable to the power of buyers.

Answer: C Diff: 2 Page Ref: 110 Learning Obj.: 4.3: Describe How Cost Leadership can Create Economic Value for a Firm.

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60) A cost-leadership competitive strategy helps reduce the threat of entry by creating cost-based barriers to entry.

Answer: TRUE Diff: 1 Page Ref: 109 Learning Obj.: 4.3: Describe How Cost Leadership can Create Economic Value for a Firm.

AACSB: Analytical Thinking 61) The threat of rivalry is increased when low-cost firms set their prices equal to those of higher cost competitors.

Answer: FALSE Diff: 2 Page Ref: 109 Learning Obj.: 4.3: Describe How Cost Leadership can Create Economic Value for a Firm.

AACSB: Analytical Thinking 62) A cost-leadership competitive strategy can reduce both the threat of substitutes and the threat of suppliers that a firm may face.

Answer: TRUE Diff: 1 Page Ref: 109 Learning Obj.: 4.3: Describe How Cost Leadership can Create Economic Value for a Firm.

AACSB: Analytical Thinking 63) Given the relatively low margins of firms pursuing a cost-leadership strategy, firms pursuing this strategy are especially vulnerable to buyers having their revenues reduced to a point where they are unable to earn normal or above-normal performance.

Answer: FALSE Diff: 2 Page Ref: 110 Learning Obj.: 4.3: Describe How Cost Leadership can Create Economic Value for a Firm.

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64) Identify how cost leadership helps neutralize each of the major threats in an industry.

Answer: Threat of New Entrants. A cost-leadership competitive strategy helps reduce the threat of new entrants by creating cost-based barriers to entry such as economies of scale and cost advantages independent of scale.

Threat of Rivalry. Firms with a low-cost position reduce the threat of rivalry. The threat of rivalry is reduced through pricing strategies that low-cost firms can engage in and through their relative impact on the performance of a low-cost firm and its higher-cost rivals.

Threat of Substitutes. Substitutes become a threat to a firm when their cost and performance, relative to a firm's current products or services, become more attractive to customers. Cost leaders have the ability to keep their products and services attractive relative to substitutes.

Threat of Suppliers. Suppliers can become a threat to a firm by charging higher prices for the goods or services they supply or by reducing the quality of those goods or services. However, when a supplier sells to a cost leader, that firm has greater flexibility in absorbing higher-cost supplies than does a high-cost firm.

Threat of Buyers. Powerful buyers are a threat to firms when they insist on low prices or higher quality and service from their suppliers. Lower prices threaten firm revenues; higher quality can increase a firm's costs. Cost leaders can have their revenues reduced by buyer threats and still earn normal or above-normal performance. These firms can also absorb the greater costs of increased quality or service and may still have a cost advantage over their competition. Cost leaders can also reduce the threat of buyers by deterring backward vertical integration and through large volumes of production.

Diff: 3 Page Ref: 109 Learning Obj.: 4.3: Describe How Cost Leadership can Create Economic Value for a Firm.

AACSB: Analytical Thinking 65) Which of the following is likely to be a rare source of cost advantage?

A) technological software B) if the efficient size of a firm or plant is significantly smaller than the total size of an industry C) cost disadvantages based on diseconomies of scale D) technological hardware Answer: A Diff: 2 Page Ref: 112 Learning Obj.: 4.4: Identify the Bases of Cost Leadership that are More Likely to be Rare and Costly to Imitate and Those that area Less Likely to be Rare and Costly to Imitate.

AACSB: Analytical Thinking 66) Which of the following is less likely to be a rare source of cost advantage?

A) technological software B) learning-curve economies of scale C) differential low-cost access to productive inputs D) policy choices Answer: D Diff: 3 Page Ref: 112 Learning Obj.: 4.4: Identify the Bases of Cost Leadership that are More Likely to be Rare and Costly to Imitate and Those that area Less Likely to be Rare and Costly to Imitate.

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67) Perhaps the only time economies of scale are not subject to low-cost duplication is when the ________ size of operations is a significant percentage of ________ in an industry.

A) minimum; marginal demand B) efficient; total demand C) maximum; marginal demand D) efficient; marginal demand Answer: B Diff: 3 Page Ref: 113 Learning Obj.: 4.4: Identify the Bases of Cost Leadership that are More Likely to be Rare and Costly to Imitate and Those that area Less Likely to be Rare and Costly to Imitate.

AACSB: Analytical Thinking 68) Which of the following statements is accurate?

A) In general, economies of scale are relatively easy-to-duplicate bases of cost leadership, but diseconomies of scale are not.

B) In general, diseconomies of scale are relatively easy-to-duplicate bases of cost leadership, but economies of scale are not.

C) In general, neither economies of scale nor economies are relatively easy-to-duplicate bases of cost leadership.

D) In general, both economies of scale and diseconomies of scale are relatively easy-to-duplicate bases of cost leadership.

Answer: D Diff: 2 Page Ref: 113 Learning Obj.: 4.4: Identify the Bases of Cost Leadership that are More Likely to be Rare and Costly to Imitate and Those that area Less Likely to be Rare and Costly to Imitate.

AACSB: Analytical Thinking 69) When managers committed to an incorrect course of action increase their commitment to this action even as its limitations become manifest, this is known as A) de-escalation of commitment.

B) diseconomies of scale.

C) escalation of commitment.

D) economies of scale.

Answer: C Diff: 2 Page Ref: 114 Learning Obj.: 4.4: Identify the Bases of Cost Leadership that are More Likely to be Rare and Costly to Imitate and Those that area Less Likely to be Rare and Costly to Imitate.

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70) Cost advantages based on learning-curve economies are A) rare, but they usually are not costly to duplicate.

B) costly to duplicate, but they usually are not rare.

C) both rare and usually costly to duplicate.

D) not rare and usually are not costly to duplicate.

Answer: A Diff: 3 Page Ref: 114 Learning Obj.: 4.4: Identify the Bases of Cost Leadership that are More Likely to be Rare and Costly to Imitate and Those that area Less Likely to be Rare and Costly to Imitate.

AACSB: Analytical Thinking Sematech is a producer of computer chips. To gain an advantage over other computer chip makers, Sematech focuses on reducing its costs below all of its competitors and has aligned its value chain accordingly. Recently, several of Sematech's competitors have begun to reduce the company's competitive advantage. In response to this threat, Sematech has decided to add production capacity in an effort to lower costs.

71) If Sematech's expansion plans did not produce the desired cost savings but the company decided to continue production expansion in an effort to capture cost reductions, this would be an example of A) economies of scale.

B) escalation of commitment.

C) diseconomies of scale.

D) managerial diseconomies.

Answer: B Diff: 2 Page Ref: 114 Learning Obj.: 4.4: Identify the Bases of Cost Leadership that are More Likely to be Rare and Costly to Imitate and Those that area Less Likely to be Rare and Costly to Imitate.

AACSB: Application of Knowledge 72) If Sematech were to continue seeking methods to maintain the company's cost-leadership position that would be costly to duplicate, which of the following is most likely to be a basis of cost leadership that may be costly to duplicate?

A) establishing economies of scale B) exploiting learning-curve economies C) purchasing new technological hardware D) securing differential access to low-cost productive inputs Answer: D Diff: 3 Page Ref: 114 Learning Obj.: 4.4: Identify the Bases of Cost Leadership that are More Likely to be Rare and Costly to Imitate and Those that area Less Likely to be Rare and Costly to Imitate.

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73) If cost-leadership strategies can be implemented by numerous firms in an industry, or if no firms face a cost disadvantage in imitating a cost-leadership strategy, then being a cost leader does not generate a sustained competitive advantage for a firm.

Answer: TRUE Diff: 2 Page Ref: 111 Learning Obj.: 4.4: Identify the Bases of Cost Leadership that are More Likely to be Rare and Costly to Imitate and Those that area Less Likely to be Rare and Costly to Imitate.

AACSB: Analytical Thinking 74) Sources of cost advantage that are unlikely to be rare include learning-curve economies, differential low-cost access to productive inputs and technological software.

Answer: FALSE Diff: 2 Page Ref: 112 Learning Obj.: 4.4: Identify the Bases of Cost Leadership that are More Likely to be Rare and Costly to Imitate and Those that area Less Likely to be Rare and Costly to Imitate.

AACSB: Analytical Thinking 75) When the efficient size of a firm or plant is significantly smaller than the total size of an industry, there will usually be numerous efficient firms/plants in that industry, and a costleadership strategy based on economies of scale will be rare.

Answer: FALSE Diff: 3 Page Ref: 112 Learning Obj.: 4.4: Identify the Bases of Cost Leadership that are More Likely to be Rare and Costly to Imitate and Those that area Less Likely to be Rare and Costly to Imitate.

AACSB: Analytical Thinking 76) Cost advantages based on diseconomies of scale are likely to be rare.

Answer: FALSE Diff: 3 Page Ref: 112 Learning Obj.: 4.4: Identify the Bases of Cost Leadership that are More Likely to be Rare and Costly to Imitate and Those that area Less Likely to be Rare and Costly to Imitate.

AACSB: Analytical Thinking 77) In general, economies of scale and diseconomies of scale are relatively easy-to-duplicate bases of cost leadership.

Answer: TRUE Diff: 2 Page Ref: 112 Learning Obj.: 4.4: Identify the Bases of Cost Leadership that are More Likely to be Rare and Costly to Imitate and Those that area Less Likely to be Rare and Costly to Imitate.

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78) Even when a particular source of cost advantage is rare, it must be costly to imitate in order to be a source of sustained competitive advantage.

Answer: TRUE Diff: 2 Page Ref: 113 Learning Obj.: 4.4: Identify the Bases of Cost Leadership that are More Likely to be Rare and Costly to Imitate and Those that area Less Likely to be Rare and Costly to Imitate.

AACSB: Analytical Thinking 79) Identify which bases of cost leadership are more likely to be rare and costly to imitate.

Answer: Sources of cost advantage that are likely to be rare include learning-curve economies (at least in emerging industries), differential low-cost access to productive inputs, and technological "software." Even when a particular source of cost advantage is rare, it must be costly to imitate in order to be a source of sustained competitive advantage. However, learningcurve economies may not be costly to duplicate in some industries. Only differential low-cost access to productive inputs and technological software are both rare and costly to imitate, because they build on historical, uncertain, and socially complex resources and capabilities.

Diff: 3 Page Ref: 112 Learning Obj.: 4.4: Identify the Bases of Cost Leadership that are More Likely to be Rare and Costly to Imitate and Those that area Less Likely to be Rare and Costly to Imitate.

AACSB: Analytical Thinking 80) Firms implementing cost-leadership strategies will generally adopt a A) multidivisional structure.

B) product divisional structure.

C) functional organizational structure.

D) matrix structure.

Answer: C Diff: 1 Page Ref: 117 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

AACSB: Analytical Thinking 81) In a functional structure, each of the major business functions is managed by a A) functional manager.

B) divisional manager.

C) chief executive officer.

D) line manager.

Answer: A Diff: 1 Page Ref: 117 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

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82) The only person in a functional organization who has to have a multifunctional perspective is the A) CFO. B) CEO. C) COO. D) marketing manager.

Answer: B Diff: 2 Page Ref: 117 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

AACSB: Analytical Thinking 83) Firms pursuing a cost-leadership strategy are typically characterized by A) loose cost control systems.

B) a de-emphasis on quantitative cost goals and costs.

C) infrequent cost control reports.

D) close supervision of labor, raw materials, inventory, and other costs.

Answer: D Diff: 2 Page Ref: 117 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

AACSB: Analytical Thinking 84) Which of the following compensation policies is most likely to enhance a firm's ability to pursue a low-cost strategy?

A) awarding employees bonuses based on the total amount of goods produced B) awarding employees bonuses based on customer comment cards C) awarding employees bonuses that are equal to 50% of the total cost savings achieved based on employee suggestions and initiatives D) awarding employees bonuses based solely on how long they have been employed with the company Answer: C Diff: 3 Page Ref: 117 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

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85) Cost-leadership firms are typically characterized by very ________ cost-control systems.

A) tight B) flexible C) loose D) decentralized Answer: A Diff: 2 Page Ref: 117 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

AACSB: Analytical Thinking 86) The U in U-form structure stands for A) "uniform."

B) "unitary."

C) "unilateral."

D) "unambiguous."

Answer: B Diff: 2 Page Ref: 118 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

AACSB: Analytical Thinking 87) In ________ structures, employees report to two or more people.

A) unilateral B) functional C) divisional D) matrix Answer: D Diff: 2 Page Ref: 118 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

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88) A marketing manager leading the marketing department is an example of a(n) ________ manager.

A) ambidextrous B) divisional C) functional D) unitary Answer: C Diff: 2 Page Ref: 118 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

AACSB: Analytical Thinking 89) Firms implementing cost-leadership strategies will have ________ layers in their reporting structure.

A) many B) relatively simple C) relatively few D) relatively complex Answer: C Diff: 3 Page Ref: 118 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

AACSB: Analytical Thinking Sematech is a producer of computer chips. To gain an advantage over other computer chip makers, Sematech focuses on reducing its costs below all of its competitors and has aligned its value chain accordingly. Recently, several of Sematech's competitors have begun to reduce the company's competitive advantage. In response to this threat, Sematech has decided to add production capacity in an effort to lower costs.

90) Given Sematech's business level strategy, which organizational structure is the most appropriate?

A) matrix structure B) U-form structure C) multidivisional structure D) product-divisional structure Answer: B Diff: 3 Page Ref: 118 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

AACSB: Application of Knowledge

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91) If Lucy Sullivan were a Sematech manager who oversaw the finance operations in the company's functional structure, Lucy would be considered a A) chief executive officer.

B) divisional manager.

C) chief operating officer.

D) functional manager.

Answer: D Diff: 3 Page Ref: 117 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

AACSB: Application of Knowledge 92) Cost-leadership firms are typically characterized by very tight cost control systems; frequent and detailed cost control reports; an emphasis on quantitative cost goals and targets; and close supervision of labor, raw materials, inventory, and other costs.

Answer: TRUE Diff: 2 Page Ref: 117 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

AACSB: Analytical Thinking 93) Compensation at cost-leadership firms is usually tied directly to product innovation and customer service efforts.

Answer: FALSE Diff: 2 Page Ref: 117 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

AACSB: Analytical Thinking 94) Even the best formulated strategy is competitively irrelevant if it is not implemented.

Answer: TRUE Diff: 2 Page Ref: 119 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

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95) Limiting the involvement of functional managers in strategy formulation can limit their commitment to the chosen strategy.

Answer: TRUE Diff: 2 Page Ref: 119 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

AACSB: Analytical Thinking 96) Identify the most appropriate organizational structure for a firm pursuing a cost-leadership strategy.

Answer: The most appropriate organizational structure is a functional structure, or the U-form that divides the company by major business function such as manufacturing, marketing, finance accounting, sales, etc. Each of these functions is managed by a functional manager and all functional managers' report to the chief executive officer or CEO. Diff: 3 Page Ref: 117 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

AACSB: Analytical Thinking 97) Identify the types of control systems that are appropriate for firms pursuing a cost-leadership strategy.

Answer: Cost-leadership firms are typically characterized by very tight cost control systems; frequent and detailed cost control reports; an emphasis on quantitative cost goals and targets; and close supervision of labor, raw materials, inventory, and other costs. Less formal management control systems, such as organizational culture, also drive a cost-reduction philosophy at costleadership firms.

Diff: 1 Page Ref: 117 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

AACSB: Analytical Thinking 98) Identify the types of compensation policies that are appropriate for firms pursuing a costleadership strategy.

Answer: Compensation at cost-leadership firms is usually tied directly to cost-reducing efforts.

Such firms often provide incentives for employees to work together to reduce costs and increase or maintain quality, and they expect every employee to take responsibility for both costs and quality.

Diff: 1 Page Ref: 117 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

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99) What are the responsibilities of the CEO in a functional organization?

Answer: The U-form structure (the other name for a functional organization) goes well with the cost-leadership strategy. The CEO in a U-form structure has the responsibility of formulating the strategy of the firm and the additional responsibility of coordinating the activities of the functional specialists in the firm to facilitate the implementation of the strategy. The CEO has a unique role in this structure since he/she is the only person in the organization that has a broad, multifunctional corporate perspective.

Diff: 2 Page Ref: 117 Learning Obj.: 4.5: Explain How Firms use a Functional Organizational Structure, Formal and Informal Management Controls, and Compensation Policies to Implement Cost Leadership Strategies.

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Strategic Management and Competitive Advantage, 6e (Barney) Chapter 5 Product Differentiation 1) ________ is a business strategy whereby firms attempt to gain a competitive advantage by increasing the perceived value of their products or services relative to the perceived value of other firms' products or services.

A) Product differentiation B) Related diversification C) Cost leadership D) Best-cost provider Answer: A Diff: 1 Page Ref: 126 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 2) By increasing the perceived value of a firm's products or services, a firm will be able to A) charge a lower price than it would otherwise be able to do.

B) charge a higher price than it would otherwise be able to do.

C) sell its products at lower prices than firms pursuing a cost-leadership strategy.

D) gain significantly more market share than firms pursuing a cost-leadership strategy.

Answer: B Diff: 2 Page Ref: 126 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 3) While firms often alter the ________ of their products or services in order to implement a product-differentiation strategy, the existence of product differentiation, in the end, is always a matter of ________.

A) customer perceptions; objective properties B) objective properties; price C) customer perceptions; price D) objective properties; customer perception Answer: D Diff: 3 Page Ref: 126 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

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4) If an individual is considering purchasing a Toyota Camry or a Ferrari and decides that it is worth paying the extra money for the prestige that is associated with the Ferrari, the additional money the customer is willing to pay for the prestige is known as a(n) A) altruistic price.

B) hedonic price.

C) fair market value.

D) margin price.

Answer: B Diff: 3 Page Ref: 129 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Application of Knowledge 5) The most obvious way that firms can try to differentiate their products is by A) making the product more complex.

B) introducing the product at the right time.

C) customizing the product for a particular segment.

D) altering the features of the products they sell.

Answer: D Diff: 2 Page Ref: 127 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 6) Which of the following bases of product differentiation attempts to create the perception that a firm's products or services are unusually valuable by focusing directly on the attributes of the products or services a firm sells?

A) product complexity B) product customization C) consumer marketing D) reputation Answer: A Diff: 3 Page Ref: 128 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

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7) The ability of companies that produce complex software packages to tailor these packages to the specific needs of their customers is an example of product differentiation through A) complexity.

B) consumer marketing.

C) product customization.

D) timing.

Answer: C Diff: 2 Page Ref: 129 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 8) A firm's ________ is really no more than a socially complex relationship between a firm and its customers and can serve as a basis for product differentiation.

A) location B) reputation C) consumer marketing D) architectural competence Answer: B Diff: 2 Page Ref: 130 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 9) In the bicycle industry, the feel of high-end bicycles when they are ridden is important. As a serious rider becomes accustomed to a particular bicycle, it is very difficult for that rider to switch to an alternative supplier. This is an example of product differentiation through which of the following?

A) linkages between functions B) product customization C) location D) product complexity Answer: B Diff: 2 Page Ref: 130 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

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10) Through which bases of competitive advantage do firms attempt to alter the perceptions of current and potential customers, whether or not specific attributes of a firm's products or services are altered?

A) reputation B) location C) product customization D) consumer marketing Answer: D Diff: 2 Page Ref: 130 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 11) ________ is the ability to use organizational structure to facilitate coordination among specific disciplines to conduct research.

A) Architectural competence B) Cross-functional linking C) Organizational coordination D) Managerial leverage Answer: A Diff: 2 Page Ref: 131 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 12) Which of the following bases of product differentiation attempts to create the perception that a firm's products or services are unusually valuable by focusing on links within and between firms?

A) reputation B) product complexity C) consumer marketing D) product mix Answer: D Diff: 2 Page Ref: 131 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

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13) ________ can be can be a source of product differentiation when a single set of customers purchases several of a firm's products.

A) Product placements B) Reputation C) Product mix D) Architectural competence Answer: C Diff: 3 Page Ref: 131 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 14) Product differentiation is ultimately an expression of the ________ of individuals and groups within firms and is limited only by the ________ that exist, or that can be created, in a particular industry.

A) creativity; resources B) resources; opportunities C) creativity; opportunities D) opportunities; resources Answer: C Diff: 2 Page Ref: 132 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

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According to Coach's website, the company has built a distinctive style and prestigious image over the past 40 years to develop a reputation as "America's preeminent designer, producer, and marketer of fine accessories and gifts for women and men including handbags, business cases, luggage and travel accessories, wallets, outerwear, eyewear, gloves, scarves and fine jewelry."

Coach employs a multi-channel distribution channel to reach its customers, including companyowned stores and boutiques in the stores of prominent specialty retailers both within the United States and abroad, and the company operates an online store. Consumers who purchase coach products are generally willing to pay the premium price due to the superior quality of Coach's products as well as the perceived prestige of owning a Coach product. Coach stresses these features in its advertising campaigns and regularly allows movies and television shows to favorably feature Coach products in appropriate scenes. Over the last five years. Coach has partnered with automobile manufacturers such as Lexus to produce automobiles with Coach interiors. In an effort to expand its international reach, Coach intends to increase its international distribution and is expanding into Japan through Coach Japan, Inc., a joint venture with a local company that will allow Coach to control international distribution and to maintain a consistent brand strategy domestically and abroad.

15) Which generic business level strategy is Coach pursuing?

A) cost leadership B) related diversification C) product differentiation D) unrelated diversification Answer: C Diff: 1 Page Ref: 126 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Application of Knowledge 16) The price premium that customers are willing to pay for the superior quality and perceived prestige of Coach's products over the prices of similar products are known as A) marginal prices.

B) hedonic prices.

C) heroic prices.

D) elastic prices.

Answer: B Diff: 3 Page Ref: 129 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

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17) Which of the following bases of product differentiation does Coach appear to be employing?

A) product features, product complexity, and consumer marketing B) location, linkages between functions, and reputation C) reputation, consumer marketing, and product features D) distribution channels, service and support, and links with other firms Answer: C Diff: 3 Page Ref: 127 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Application of Knowledge 18) Coach's agreement with Lexus to produce automobiles with Coach leather interior is an example of A) cooperative strategic alliance.

B) architectural competence.

C) skunk works.

D) product placement.

Answer: A Diff: 2 Page Ref: 131 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Application of Knowledge 19) Warby Parker exemplifies a firm pursuing a product-differentiation strategy while Victoria's Secret exemplifies a firm pursuing a cost-leadership strategy.

Answer: FALSE Diff: 1 Page Ref: 126 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Application of Knowledge 20) Product differentiation is a business strategy whereby firms attempt to gain a competitive advantage by increasing the perceived value of their products and services relative to the perceived value of other firms' products or services.

Answer: TRUE Diff: 1 Page Ref: 126 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

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21) Attempts to create differences in the relative perceived value of a firm's products or services are rarely made by altering the objective properties of those products or services.

Answer: FALSE Diff: 2 Page Ref: 126 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 22) While firms often alter the objective properties of their products or services in order to implement a product-differentiation strategy, the existence of product differentiation is always a matter of customer perception.

Answer: TRUE Diff: 2 Page Ref: 126 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 23) If products or services are perceived as being different in a way that is valued by customers, even if there is no physical differentiation, then product differentiation exists.

Answer: TRUE Diff: 2 Page Ref: 126 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 24) A hedonic price is that part of a products' or services' actual price that is not attributable to a particular attribute of that product or service.

Answer: FALSE Diff: 3 Page Ref: 129 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 25) Bentley's introduction of a new 48-volt electric system in one of its high-end SUVs was an attempt at differentiation through product features.

Answer: TRUE Diff: 3 Page Ref: 128 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

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26) To the extent that differences in product complexity lead customers to conclude that the products of some firms are more valuable than the product of other firms, then product complexity can be a basis of product differentiation.

Answer: TRUE Diff: 2 Page Ref: 128 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 27) Timing-based product differentiation relies solely on being a first mover.

Answer: FALSE Diff: 2 Page Ref: 128 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 28) The physical location of a firm cannot be a source of product differentiation.

Answer: FALSE Diff: 1 Page Ref: 128 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 29) Products can be differentiated by the extent to which they are customized for particular customer applications.

Answer: TRUE Diff: 1 Page Ref: 129 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 30) Through advertising and other consumer marketing efforts, firms attempt to alter the perceptions of current and potential customers, but only when specific attributes of a firm's products or services are altered.

Answer: FALSE Diff: 2 Page Ref: 130 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

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31) Once developed, a firm's reputation can last a long time, even if the basis for that reputation no longer exists.

Answer: TRUE Diff: 2 Page Ref: 130 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 32) The ability to use organization structure to facilitate coordination among scientific disciplines to conduct research is known as architectural competence.

Answer: TRUE Diff: 2 Page Ref: 131 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 33) Differentiation can be based on explicit linkages between one firm's products and the products and services of other firms.

Answer: TRUE Diff: 3 Page Ref: 131 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 34) In the information technology business, interconnectivity is a relatively unimportant basis of potential product differentiation.

Answer: FALSE Diff: 2 Page Ref: 131 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 35) Product differentiation is ultimately an expression of the creativity of individuals and groups within firms and is limited only by the opportunities that exist, or that can be created, in a particular industry and by the willingness and ability of firms to creatively explore ways to take advantage of those opportunities.

Answer: TRUE Diff: 2 Page Ref: 132 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

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36) It is reasonable to expect that in the near future a marketing specialist will develop a definitive list of bases of product differentiation.

Answer: FALSE Diff: 2 Page Ref: 132 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 37) Define product differentiation and discuss the role that customer perceptions play in product differentiation.

Answer: Product differentiation is a business strategy whereby firms attempt to gain a competitive advantage by increasing the perceived value of their products or services relative to the perceived value of other firms' products or services. These other firms can be either that firm's rivals or firms that provide substitute products or services. By increasing the perceived value of a firm's products or services, a firm will be able to charge a higher price than it would otherwise be able to do. This higher price can increase a firm's revenues and can generate competitive advantages. While firms often alter the objective properties of their products or services in order to implement a product differentiation strategy, the existence of product differentiation, in the end, is ALWAYS a matter of customer perception. If products or services are perceived as being different in a way that is valued by consumers, then product differentiation exists. However, just as perceptions can create product differentiation between products that are essentially identical, the lack of perceived differences between products with very different characteristics can prevent product differentiation.

Diff: 2 Page Ref: 126 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 38) Identify the three broad categories of product differentiation and identify two bases of differentiation under each category.

Answer: The first category of bases of product differentiation attempts to create perceptions of product differentiation by focusing directly on the attributes of the products or services a firm sells and includes altering the features of products, increasing product complexity, advantageous timing of product introduction, and choosing a physical location. The second category attempts to create the perception of product differentiation by developing a relationship between a firm and its customers and includes product customization, consumer marketing, and establishing a reputation. The last category attempts to create a perception of product differentiation through linkages within and between firms and includes bases such as linkages between functions, links with other firms, changing the mix of products a firm brings to the market, establishing a distribution network, and offering products with significant levels of service and support.

Diff: 2 Page Ref: 127 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

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39) What is the relationship between product differentiation and managerial creativity?

Answer: Product differentiation is ultimately an expression of the creativity of individuals and groups within firms and is limited only by the opportunities that exist, or that can be created, in a particular industry and by the willingness and ability of firms to creatively explore ways to take advantage of those opportunities. Thus, in general, the potential bases of product differentiation are limited only by managerial creativity.

Diff: 1 Page Ref: 132 Learning Obj.: 5.1: Define Product Differentiation, Describe 11 Bases of Product Differentiation, and How These Bases of Product Differentiation Can Be Grouped into Three Categories.

AACSB: Analytical Thinking 40) In general, firms selling differentiated products face a demand curve that is A) upward sloping.

B) horizontal.

C) vertical.

D) downward sloping.

Answer: D Diff: 3 Page Ref: 134 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

AACSB: Analytical Thinking 41) According to Chamberlin, firms selling differentiated products and facing a downward sloping demand curve are in an industry described as A) perfect competition.

B) monopolistic competition.

C) oligopolistic competition.

D) semi-structured competition.

Answer: B Diff: 3 Page Ref: 134 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

AACSB: Analytical Thinking 42) Which of the following statements regarding the impact of product differentiation on the threat of new entry is accurate?

A) Product differentiation helps reduce the threat of new entry by forcing potential new entrants to absorb costs associated with overcoming incumbent firms' product-differentiation advantages.

B) Product differentiation increases the threat of new entry by allowing potential new entrants to avoid costs associated with overcoming incumbent firms' product-differentiation advantages.

C) Product differentiation has no impact on the threat of new entry.

D) It is not possible to determine the impact of product differentiation on the threat of new entry.

Answer: A Diff: 2 Page Ref: 133 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

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43) When considering the impact of product differentiation on the threat of rivalry, product differentiation A) reduces the threat of rivalry to zero.

B) increases the threat of rivalry by forcing each firm in an industry to compete directly with one another instead of allowing them to carve out their own unique product niche.

C) has no impact on the threat of rivalry.

D) reduces the threat of rivalry because each firm in an industry attempts to carve out its own unique product niche.

Answer: D Diff: 3 Page Ref: 133 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

AACSB: Analytical Thinking 44) With regard to the threat of suppliers, product differentiation A) reduces the threat of suppliers because a firm with a highly differentiated product can pass increased costs on to customers.

B) increases the threat of suppliers because a firm with a highly differentiated product is unable to pass increased costs on to customers.

C) has no impact on the threat of suppliers.

D) can either increase or reduce the threat of suppliers.

Answer: A Diff: 2 Page Ref: 133 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

AACSB: Analytical Thinking 45) In emerging industries A) firms that are first movers are unlikely to gain product-differentiation advantages based on buyer loyalty and high switching costs.

B) firms that are first movers can gain product-differentiation advantages based on perceived technological leadership.

C) product-differentiation efforts are focused on product refinement as a basis of product differentiation.

D) firms can sometimes be tempted to exaggerate the extent to which they have refined and improved their products and services.

Answer: B Diff: 2 Page Ref: 135 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

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46) In a declining industry A) product-differentiation efforts are focused on product refinement as a basis of product differentiation.

B) firms that are first movers can gain product-differentiation advantages based on perceived technological leadership.

C) highly differentiated firms may be able to gain product-differentiation advantages by preempting strategically valuable assets.

D) highly differentiated firms may be able to discover a viable market niche that will enable them to survive despite the overall decline in the market.

Answer: D Diff: 3 Page Ref: 135 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

AACSB: Analytical Thinking According to Coach's website, the company has built a distinctive style and prestigious image over the past 40 years to develop a reputation as "America's preeminent designer, producer, and marketer of fine accessories and gifts for women and men including handbags, business cases, luggage and travel accessories, wallets, outerwear, eyewear, gloves, scarves and fine jewelry."

Coach employs a multi-channel distribution channel to reach its customers, including companyowned stores and boutiques in the stores of prominent specialty retailers both within the United States and abroad, and the company operates an online store. Consumers who purchase coach products are generally willing to pay the premium price due to the superior quality of Coach's products as well as the perceived prestige of owning a Coach product. Coach stresses these features in its advertising campaigns and regularly allows movies and television shows to favorably feature Coach products in appropriate scenes. Over the last five years. Coach has partnered with automobile manufacturers such as Lexus to produce automobiles with Coach interiors. In an effort to expand its international reach, Coach intends to increase its international distribution and is expanding into Japan through Coach Japan, Inc., a joint venture with a local company that will allow Coach to control international distribution and to maintain a consistent brand strategy domestically and abroad.

47) The business level strategy Coach is pursuing is likely to A) reduce the threat of rivalry to virtually zero.

B) increase the threat of substitutes due to premium pricing.

C) decrease the threat of new entrants due to the additional cost they would face to overcome Coach's reputation advantages.

D) decrease the threat of buyers since Coach can lower its prices due to its efficient manufacturing operations.

Answer: C Diff: 3 Page Ref: 133 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

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48) Given that the leather handbag market that Coach largely competes in can be considered a mature market, Coach should focus its product-differentiation efforts on A) exploiting a first-mover advantage as a basis of product differentiation.

B) introducing radically new technologies as a basis of product differentiation.

C) seeking a viable market niche that will enable it to survive.

D) refining products as a basis of product differentiation.

Answer: D Diff: 3 Page Ref: 135 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

AACSB: Application of Knowledge 49) Firms selling differentiated products face a horizontal demand curve.

Answer: FALSE Diff: 3 Page Ref: 134 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

AACSB: Analytical Thinking 50) Edward Chamberlin described firms selling differentiated products and facing a downwardsloping demand curve as being in an industry characterized by monopolistic competition.

Answer: TRUE Diff: 3 Page Ref: 134 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

AACSB: Analytical Thinking 51) Product differentiation helps reduce the threat of new entry by forcing potential entrants to an industry to absorb not only the standard costs of beginning business but also the additional costs associated with overcoming incumbent firms' product-differentiation advantages.

Answer: TRUE Diff: 2 Page Ref: 133 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

AACSB: Analytical Thinking 52) Product differentiation effectively reduces rivalry to zero.

Answer: FALSE Diff: 2 Page Ref: 133 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

AACSB: Analytical Thinking 53) Product differentiation increases the threat of substitutes by making a firm's current products appear less attractive than substitutes.

Answer: FALSE Diff: 1 Page Ref: 133 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

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54) Firms with highly differentiated products may have loyal customers, or customers who are unable to purchase similar products or services from other firms and are therefore more likely to accept increased prices due to a firm passing on increased costs by a powerful supplier.

Answer: TRUE Diff: 2 Page Ref: 133 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

AACSB: Analytical Thinking 55) When a firm sells a highly differentiated product, it enjoys a quasi-monopoly in that segment of the market.

Answer: TRUE Diff: 3 Page Ref: 133 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

AACSB: Analytical Thinking 56) In fragmented industries firms can use product differentiation to help consolidate a market.

Answer: TRUE Diff: 2 Page Ref: 135 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

AACSB: Analytical Thinking 57) In emerging industries, product-differentiation efforts often focus on product refinement as a basis for product differentiation.

Answer: FALSE Diff: 2 Page Ref: 135 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

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58) What is the impact of product differentiation on each of the environmental threats identified in the five forces framework?

Answer: Successful product differentiation helps a firm respond to each of the environmental threats identified in the five forces framework.

• Product differentiation helps reduce the threat of new entry by forcing potential entrants to an industry to absorb not only the standard costs of beginning business but also the additional costs associated with overcoming incumbent firms' product-differentiation advantages.

• Product differentiation reduces the threat of rivalry because each firm in an industry attempts to carve out its own unique product niche.

• Product differentiation also helps firms reduce the threat of substitutes by making a firm's current products appear more attractive than substitute products.

• Product differentiation can also reduce the threat of suppliers since higher prices charged by suppliers can often be passed on to a firm's customers due to strong customer loyalty.

• Finally, product differentiation can reduce the threat of buyers. When a firm sells a highly differentiated product, it enjoys a "quasi-monopoly" in that segment of the market. Buyers interested in purchasing this particular product must buy it from a particular firm. Any potential buyer power is reduced by the ability of a firm to withhold highly valued products for services from a buyer.

Diff: 2 Page Ref: 133 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

AACSB: Analytical Thinking 59) Describe the role of product differentiation and how product differentiation helps firms take advantage of opportunities in fragmented industries, in emerging industries, in mature industries and in declining industries.

Answer: Fragmented industries In fragmented industries, firms can use product differentiation strategies to help consolidate a market.

Emerging industries By being a first mover in these industries, firms can gain product-differentiation advantages based on perceived technological leadership, preemption of strategically valuable assets, and buyer loyalty due to high switching costs.

Mature industries In mature industries, product-differentiation efforts often switch from attempts to introduce radically new technologies to product refinement as a basis of product differentiation.

Declining industries In a declining industry, product-differentiating firms may be able to become leaders in this kind of industry based on their reputation, on unique product attributes, or on some other productdifferentiation basis. Alternatively, highly differentiated firms may be able to discover a viable market niche that will enable them to survive despite the overall decline in the market.

Diff: 2 Page Ref: 135 Learning Obj.: 5.2: Describe How Product Differentiation can Create Economic Value.

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60) Which of the following bases of product differentiation is almost always easy to duplicate?

A) product features B) product mix C) product customization D) consumer marketing Answer: A Diff: 2 Page Ref: 139 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

AACSB: Analytical Thinking 61) Which of the following bases of product differentiation is usually costly to duplicate?

A) product features B) links with other firms C) reputation D) product mix Answer: C Diff: 3 Page Ref: 141 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

AACSB: Analytical Thinking 62) Which of the following bases of product differentiation is by far the most popular way for firms to try to differentiate their products but is identified as almost always being easy to duplicate?

A) product mix B) product features C) customization D) distribution channels Answer: B Diff: 2 Page Ref: 142 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

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63) Product features, by themselves, are A) usually not a source of temporary competitive advantage, but they can be a source of a sustainable competitive advantage.

B) usually not a source of either a temporary competitive advantage, or a source of a sustainable competitive advantage.

C) usually can be a source of both a temporary competitive advantage and a source of a sustainable competitive advantage.

D) usually not a source of sustained competitive advantage, but they can be a source of a temporary competitive advantage.

Answer: D Diff: 3 Page Ref: 139 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

AACSB: Analytical Thinking 64) Under which of the following conditions is the product mix advantage as a basis of product differentiation the least difficult to duplicate?

A) when the base of a product mix advantage is a common customer B) when the mix of products is highly integrated with each other C) if each of the products in a product mix has unique features D) if a firm brings a series of products to market Answer: A Diff: 2 Page Ref: 139 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

AACSB: Analytical Thinking 65) Research on architectural competence in pharmaceutical firms suggests that A) not only do some firms possess this competence, but that other firms do not; firms without this competence have, on average, been able develop it with minimal investment.

B) very few firms possess this competence, but firms without this competence, on average, are able to develop it.

C) not only do some firms possess this competence, but also that other firms do not and firms without this competence have, on average, been unable to develop it.

D) virtually every firm possesses this competence to some extent.

Answer: C Diff: 3 Page Ref: 141 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

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66) Which of the following bases of product differentiation is generally viewed as the most difficult to duplicate?

A) product features B) reputation C) linkages with other firms D) location Answer: B Diff: 2 Page Ref: 141 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

AACSB: Analytical Thinking 67) Ultimately the ________ of a product differentiation strategy depends on the ability of individual firms to be creative in finding new ways to differentiate their products.

A) sustained competitive advantage B) rarity C) imitation D) innovation Answer: B Diff: 2 Page Ref: 137 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

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According to Coach's website, the company has built a distinctive style and prestigious image over the past 40 years to develop a reputation as "America's preeminent designer, producer, and marketer of fine accessories and gifts for women and men including handbags, business cases, luggage and travel accessories, wallets, outerwear, eyewear, gloves, scarves and fine jewelry."

Coach employs a multi-channel distribution channel to reach its customers, including companyowned stores and boutiques in the stores of prominent specialty retailers both within the United States and abroad, and the company operates an online store. Consumers who purchase coach products are generally willing to pay the premium price due to the superior quality of Coach's products as well as the perceived prestige of owning a Coach product. Coach stresses these features in its advertising campaigns and regularly allows movies and television shows to favorably feature Coach products in appropriate scenes. Over the last five years. Coach has partnered with automobile manufacturers such as Lexus to produce automobiles with Coach interiors. In an effort to expand its international reach, Coach intends to increase its international distribution and is expanding into Japan through Coach Japan, Inc., a joint venture with a local company that will allow Coach to control international distribution and to maintain a consistent brand strategy domestically and abroad.

68) Which of the following bases of Coach's competitive advantage is likely to be the most difficult to duplicate?

A) product features B) consumer marketing C) location D) reputation Answer: D Diff: 2 Page Ref: 141 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

AACSB: Application of Knowledge 69) Which of the following bases of Coach's competitive advantage is likely to be the easiest to duplicate?

A) product features B) consumer marketing C) location D) reputation Answer: A Diff: 1 Page Ref: 139 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

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70) The concept of product differentiation generally assumes that the number of firms that have been able to differentiate their products in a particular way is, at some point in time, less than the number of firms needed to generate perfect competition dynamics.

Answer: TRUE Diff: 2 Page Ref: 137 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

AACSB: Analytical Thinking 71) Firms that pursue a product-differentiation strategy can choose whether or not they want to reveal this strategic choice to their competition by adjusting their prices.

Answer: FALSE Diff: 2 Page Ref: 137 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

AACSB: Analytical Thinking 72) Knowing how a firm is differentiating its products means that competitors will be able to duplicate a firm's product-differentiation strategy at a lower cost.

Answer: FALSE Diff: 2 Page Ref: 137 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

AACSB: Analytical Thinking 73) Product features as a basis for product differentiation are generally not easy to duplicate.

Answer: FALSE Diff: 2 Page Ref: 138 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

AACSB: Analytical Thinking 74) While product features, by themselves, are usually not a source of sustained competitive advantage, they can be a source of a temporary competitive advantage.

Answer: TRUE Diff: 1 Page Ref: 139 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

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75) Product features, product customization, and product complexity have few obvious close substitutes and may be sources of sustained competitive advantages.

Answer: FALSE Diff: 3 Page Ref: 142 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

AACSB: Analytical Thinking 76) Timing, location, distribution channels, and service and support are all very similar bases of product differentiation and can act as substitutes for each other.

Answer: FALSE Diff: 3 Page Ref: 142 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

AACSB: Analytical Thinking 77) Identify which bases of product differentiation are likely to be almost always easy to duplicate, which can sometimes be costly to duplicate and which are usually costly to duplicate and discuss under what conditions a base of differentiation is likely to be costly to imitate and can be a source of sustained competitive advantage.

Answer: Some bases of product differentiation such as product features are almost always easy to duplicate. Other bases of product differentiation such as product mix, links with other firms, product customization, product complexity, and consumer marketing can sometimes be costly to duplicate. Finally, still other bases of product differentiation such as links between functions, timing, location, reputation, distribution channels, and service and support are usually costly to duplicate.

How costly it is to duplicate a particular basis of product differentiation depends on the kinds of resources and capabilities that a basis of product differentiation uses. When those resources and capabilities are acquired in unique historical settings, when there is some uncertainty about how to build these resources and capabilities, or when these resources and capabilities are socially complex in nature, then product-differentiation strategies that exploit these kinds of resources and capabilities will be costly to imitate. These product-differentiation strategies can be a source of sustained competitive advantage for a firm. However, when a product-differentiation strategy exploits resources and capabilities that do not possess these attributes, then those strategies are likely to be less costly to duplicate, and even if they are valuable and rare, will only be sources of temporary competitive advantage.

Diff: 2 Page Ref: 137 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

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78) Identify the two primary forms that the substitutes for bases of product differentiation can take.

Answer: Although some bases of product differentiation, including timing, location, distribution channels, and service and support, have few obvious close substitutes, others have readily available substitutes. Substitutes for these bases of product differentiation can take two forms. First, many of the bases of product differentiation can be partial substitutes for each other.

For example, product features, product customization, and product complexity are all very similar bases of product differentiation and thus can act as substitutes for each other. In a similar way, linkages between functions, linkages between firms, and product mix, as bases of product differentiation, can also be substitutes for each other. IBM links its sales, service, and consulting functions to differentiate itself in the computer market. Second, other strategies can be substitutes for many of the bases of product differentiation. For example, one firm may try to gain a competitive advantage through adjusting its product mix, and another firm may substitute strategic alliances to create the same type of product differentiation.

Diff: 2 Page Ref: 142 Learning Obj.: 5.3: Describe (a) Those Bases of Product Differentiation that are Not Likely to be Costly to Duplicate, Those that May be Costly to Duplicate, and Those that will Often be Costly to Duplicate (b) The Main Substitutes for Product Differentiation Strategies.

AACSB: Analytical Thinking 79) The U-form structure used to implement a product-differentiation strategy A) rarely uses temporary cross-divisional and cross-functional teams to manage the development and implementation of new, innovative, and highly differentiated products.

B) has simple reporting relationships.

C) often uses temporary cross-divisional and cross-functional teams to manage the development and implementation of new, innovative, and highly differentiated products.

D) has a small corporate staff.

Answer: C Diff: 2 Page Ref: 143 Learning Obj.: 5.4: Describe How Organizational Structure, Control Processes, and Compensation Policies can be Used to Implement Product Differentiation Strategies.

AACSB: Analytical Thinking 80) A ________ structure exists when individuals in a firm have two or more bosses simultaneously.

A) U-form B) multidivisional C) cross-divisional D) matrix Answer: D Diff: 2 Page Ref: 144 Learning Obj.: 5.4: Describe How Organizational Structure, Control Processes, and Compensation Policies can be Used to Implement Product Differentiation Strategies.

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81) The Lockheed Corporation Skunk Works is an example of a(n) A) cross-divisional or cross-functional team.

B) M-form structure.

C) U-form structure.

D) multidivisional structure.

Answer: A Diff: 1 Page Ref: 144 Learning Obj.: 5.4: Describe How Organizational Structure, Control Processes, and Compensation Policies can be Used to Implement Product Differentiation Strategies.

AACSB: Analytical Thinking 82) A ________ exists when firms are committed to engage in several related productdifferentiation strategies simultaneously.

A) policy of substitution B) policy of extrapolation C) policy of exploration D) policy of experimentation Answer: D Diff: 2 Page Ref: 147 Learning Obj.: 5.4: Describe How Organizational Structure, Control Processes, and Compensation Policies can be Used to Implement Product Differentiation Strategies.

AACSB: Analytical Thinking 83) In developing a compensation policy used to implement a product-differentiation strategy, firms will A) hold individuals responsible for experiments that fail.

B) punish individuals for taking risks when their projects are not successful.

C) simultaneously use multiple dimensions to examine employee performance.

D) provide appropriate incentives for managers and employees to reduce costs.

Answer: C Diff: 2 Page Ref: 147 Learning Obj.: 5.4: Describe How Organizational Structure, Control Processes, and Compensation Policies can be Used to Implement Product Differentiation Strategies.

AACSB: Analytical Thinking 84) Cross-functional product development teams are suitable for a firm pursuing a ________ strategy.

A) cost-leadership B) confrontation C) product-differentiation D) stuck-in-the-middle Answer: C Diff: 3 Page Ref: 143 Learning Obj.: 5.4: Describe How Organizational Structure, Control Processes, and Compensation Policies can be Used to Implement Product Differentiation Strategies.

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According to Coach's website, the company has built a distinctive style and prestigious image over the past 40 years to develop a reputation as "America's preeminent designer, producer, and marketer of fine accessories and gifts for women and men including handbags, business cases, luggage and travel accessories, wallets, outerwear, eyewear, gloves, scarves and fine jewelry."

Coach employs a multi-channel distribution channel to reach its customers, including companyowned stores and boutiques in the stores of prominent specialty retailers both within the United States and abroad, and the company operates an online store. Consumers who purchase coach products are generally willing to pay the premium price due to the superior quality of Coach's products as well as the perceived prestige of owning a Coach product. Coach stresses these features in its advertising campaigns and regularly allows movies and television shows to favorably feature Coach products in appropriate scenes. Over the last five years. Coach has partnered with automobile manufacturers such as Lexus to produce automobiles with Coach interiors. In an effort to expand its international reach, Coach intends to increase its international distribution and is expanding into Japan through Coach Japan, Inc., a joint venture with a local company that will allow Coach to control international distribution and to maintain a consistent brand strategy domestically and abroad.

85) If Coach had an organizational structure that used cross-functional teams, the members of which reported not only to their functional boss (i.e. the head of production) but also to the head of the team, Coach could be said to be using which organizational structure?

A) product divisional B) matrix C) U-form D) multi-domestic Answer: B Diff: 2 Page Ref: 144 Learning Obj.: 5.4: Describe How Organizational Structure, Control Processes, and Compensation Policies can be Used to Implement Product Differentiation Strategies.

AACSB: Application of Knowledge 86) While the U-form structure for a firm pursuing cost leadership is relatively simple, the Uform structure for a firm implementing a product-differentiation strategy can be somewhat more complex.

Answer: TRUE Diff: 2 Page Ref: 143 Learning Obj.: 5.4: Describe How Organizational Structure, Control Processes, and Compensation Policies can be Used to Implement Product Differentiation Strategies.

AACSB: Analytical Thinking 87) Firms pursuing a differentiation strategy often use temporary cross-divisional and crossfunctional teams to manage the development and implementation of new, innovative and highly differentiated products.

Answer: TRUE Diff: 1 Page Ref: 143 Learning Obj.: 5.4: Describe How Organizational Structure, Control Processes, and Compensation Policies can be Used to Implement Product Differentiation Strategies.

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88) Discuss the similarities and differences of the organizational structures used by firms pursuing a cost-leadership and a product-differentiation strategy and discuss the importance of broad decision-making authority within a product-differentiation strategy.

Answer: Both cost-leadership and product-differentiation strategies are implemented through the use of a functional, or U-form, organizational structure. However, where the U-form structure used to implement a cost-leadership strategy has few layers, simple reporting relationships, a small corporate staff, and focuses on only a few business functions, the U-form structure for a firm implementing a product-differentiation strategy can be somewhat more complex. For example, firms pursuing a product-differentiation strategy often use a matrix structure that includes temporary cross-divisional and cross-functional teams to manage the development and implementation of new, innovative, and highly differentiated products. These teams bring individuals together from different businesses and different functional areas to cooperate on a particular new product or service.

One of the key management controls in a product-differentiation strategy is broad decisionmaking guidelines. These broad decision-making guidelines help bring order to what otherwise might be a chaotic decision-making process. When managers have no constraints in their decision-making, they can make decisions that are disconnected from each other and inconsistent with a firm's overall mission and objectives. This results in decisions that are either not implemented or not implemented well.

However, if decision-making guidelines become too narrow, they can stifle creativity within a firm, and a firm's ability to differentiate its products is only limited by its creativity. Thus, decision guidelines must be narrow enough to ensure that decisions that are made are consistent with a firm's mission and objectives.

Diff: 2 Page Ref: 143 Learning Obj.: 5.4: Describe How Organizational Structure, Control Processes, and Compensation Policies can be Used to Implement Product Differentiation Strategies.

AACSB: Analytical Thinking 89) More recent work in the area of strategic management regarding assertions about being stuck in the middle A) supports the argument that firms that attempt to simultaneously pursue cost leadership and product differentiation will find themselves at a competitive disadvantage.

B) contradicts the argument and finds that firms that successfully pursue cost leadership and product differentiation simultaneously can often expect to gain a sustained competitive advantage.

C) partially contradicts the argument and finds that firms that successfully simultaneously pursue cost leadership and product differentiation can only expect to gain a temporary competitive advantage.

D) partially contradicts the argument and finds that only firms in certain select industries can successfully simultaneously pursue cost leadership and product differentiation and gain a temporary competitive advantage.

Answer: B Diff: 3 Page Ref: 149 Learning Obj.: 5.5: Discuss Whether it is Possible for a Firm to Implement Cost Leadership and Product Differentiation Strategies Simultaneously.

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90) Firms that are stuck in the middle attempt to sell A) high-priced products and gain small market share.

B) low-priced products and gain large market share.

C) high-priced products and gain a large market share.

D) medium-priced products and gain medium market share.

Answer: D Diff: 3 Page Ref: 149 Learning Obj.: 5.5: Discuss Whether it is Possible for a Firm to Implement Cost Leadership and Product Differentiation Strategies Simultaneously.

AACSB: Analytical Thinking 91) While cost leadership requires rewards for cost reduction, product differentiation requires rewards for ________.

A) creative flair B) efficiency C) quantitative goals D) production goals Answer: A Diff: 2 Page Ref: 149 Learning Obj.: 5.5: Discuss Whether it is Possible for a Firm to Implement Cost Leadership and Product Differentiation Strategies Simultaneously.

AACSB: Analytical Thinking 92) Recent research suggests that ________ firms must have competitive levels of cost to survive.

A) low-cost B) all C) domestic D) product-differentiation Answer: D Diff: 2 Page Ref: 150 Learning Obj.: 5.5: Discuss Whether it is Possible for a Firm to Implement Cost Leadership and Product Differentiation Strategies Simultaneously.

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93) Recent research shows that firms can simultaneously implement cost-leadership and productdifferentiation strategies if they learn how to manage the ________ inherent in these two strategies.

A) consistencies B) similarities C) contradictions D) superfluousness Answer: C Diff: 3 Page Ref: 149 Learning Obj.: 5.5: Discuss Whether it is Possible for a Firm to Implement Cost Leadership and Product Differentiation Strategies Simultaneously.

AACSB: Analytical Thinking According to Coach's website, the company has built a distinctive style and prestigious image over the past 40 years to develop a reputation as "America's preeminent designer, producer, and marketer of fine accessories and gifts for women and men including handbags, business cases, luggage and travel accessories, wallets, outerwear, eyewear, gloves, scarves and fine jewelry."

Coach employs a multi-channel distribution channel to reach its customers, including companyowned stores and boutiques in the stores of prominent specialty retailers both within the United States and abroad, and the company operates an online store. Consumers who purchase coach products are generally willing to pay the premium price due to the superior quality of Coach's products as well as the perceived prestige of owning a Coach product. Coach stresses these features in its advertising campaigns and regularly allows movies and television shows to favorably feature Coach products in appropriate scenes. Over the last five years. Coach has partnered with automobile manufacturers such as Lexus to produce automobiles with Coach interiors. In an effort to expand its international reach, Coach intends to increase its international distribution and is expanding into Japan through Coach Japan, Inc., a joint venture with a local company that will allow Coach to control international distribution and to maintain a consistent brand strategy domestically and abroad.

94) One feature of Coach's compensation policies is likely to be A) rewards for cost reduction.

B) rewards for efficiency.

C) rewards for creative flair.

D) rewards for manufacturing efficiency.

Answer: C Diff: 3 Page Ref: 147 Learning Obj.: 5.5: Discuss Whether it is Possible for a Firm to Implement Cost Leadership and Product Differentiation Strategies Simultaneously.

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95) More recent work contradicts the argument about being "stuck in the middle" and suggests that firms that are successful in both cost leadership and product differentiation often can expect to gain a sustained competitive advantage.

Answer: TRUE Diff: 1 Page Ref: 149 Learning Obj.: 5.5: Discuss Whether it is Possible for a Firm to Implement Cost Leadership and Product Differentiation Strategies Simultaneously.

AACSB: Analytical Thinking 96) McDonald's is an excellent example of a firm that simultaneously employs both a productdifferentiation and a cost-leadership strategy since their product differentiation based on cleanliness, consistency and fun in its fast food outlets allowed the company to become the market share leader in the industry and to reduce its costs.

Answer: TRUE Diff: 3 Page Ref: 149 Learning Obj.: 5.5: Discuss Whether it is Possible for a Firm to Implement Cost Leadership and Product Differentiation Strategies Simultaneously.

AACSB: Application of Knowledge 97) Firms able to successfully differentiate their products and services are likely to see a decrease in their volume of sales.

Answer: FALSE Diff: 3 Page Ref: 149 Learning Obj.: 5.5: Discuss Whether it is Possible for a Firm to Implement Cost Leadership and Product Differentiation Strategies Simultaneously.

AACSB: Analytical Thinking 98) Product differentiation can lead to high market share and low costs.

Answer: TRUE Diff: 2 Page Ref: 149 Learning Obj.: 5.5: Discuss Whether it is Possible for a Firm to Implement Cost Leadership and Product Differentiation Strategies Simultaneously.

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99) Is it possible for a firm to implement a cost-leadership and product-differentiation strategy simultaneously?

Answer: While traditional management thought held that this was not possible, recent work has argued that it is. Firms that are able to successfully differentiate their products and services are likely to see an increase in their volume of sales. This is especially the case if the basis of product differentiation is attractive to a large number of potential customers. Thus product differentiation can lead to increased volumes of sales which, in turn, can lead to economies of scale, learning, and other forms of cost reduction. Additionally, it may also be the case that some firms develop special skills in managing the contradictions that are part of simultaneously implementing low-cost and product-differentiation strategies. However, the management of these contradictions depends on socially complex relations among employees, between employees and the technology they use, and between employees and the firm for which they work.

Diff: 2 Page Ref: 148 Learning Obj.: 5.5: Discuss Whether it is Possible for a Firm to Implement Cost Leadership and Product Differentiation Strategies Simultaneously.

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Strategic Management and Competitive Advantage, 6e (Barney) Chapter 6 Flexibility and Real Options 1) Strategic options exist when firms have the ________, but not the ________, to invest in a particular strategy.

A) ability; obligation B) obligation; ability C) money; people D) people; money Answer: A Diff: 1 Page Ref: 156 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Analytical Thinking 2) A ________ exists when a firm has the ability, but not the obligation, to invest in real assets of some type.

A) core competency B) corporate option C) real option D) strategic intent Answer: C Diff: 2 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Analytical Thinking 3) Real assets are ________ resources that can have an impact on a firm's production.

A) intangible B) ephemeral C) transitory D) tangible Answer: D Diff: 2 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Analytical Thinking 4) Which of the following is NOT an example of a real asset?

A) land B) brand name C) building D) raw material Answer: B Diff: 2 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

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5) An oil company leasing land for potential exploration instead of buying it is an example of the option to ________.

A) defer B) grow C) contract D) expand Answer: A Diff: 2 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Application of Knowledge 6) A firm building a manufacturing plant that employs only general-purpose machinery is an example of the option to ________.

A) defer B) grow C) abandon D) contract Answer: C Diff: 2 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Application of Knowledge 7) A firm building a plant with the ability to add capacity at low cost is an example of the option to ________.

A) defer B) grow C) contract D) abandon Answer: B Diff: 2 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Application of Knowledge 8) A firm investing to create one product because that investment could lead to the development of other products in the future is an example of the option to ________.

A) defer B) grow C) contract D) expand Answer: D Diff: 2 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

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9) A firm hiring contract and temporary employees instead of full-time employees is an example of the option to ________.

A) defer B) contract C) grow D) abandon Answer: B Diff: 2 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Application of Knowledge 10) A firm outsourcing distribution to a firm that distributes the products of many firms instead of outsourcing distribution to a firm that distributes only its production is an example of the option to ________.

A) defer B) contract C) grow D) shut down and restart Answer: D Diff: 3 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

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Seymour Semiconductors is a major global player in the semiconductor and microchip industry.

In the space that they compete in, there is tremendous technological uncertainty as disruptive innovations seemingly come out of nowhere to upend well-entrenched incumbents. These disruptions are often fast and are increasingly by companies that do not compete head-to-head with Seymour Semiconductors. In addition, market tastes for the end products that feature Seymour Semiconductors' components also change rapidly. The company was hurt financially when the market shifted away from personal computers (that accounted for a significant portion of Seymour Semiconductors' revenues), first to tablets, and then to other mobile devices. The company's new CEO, Lisa Monroe, has decided that the company's basic approach to strategy should change. Toward this, she has mandated that, at any point in time, Seymour Semiconductors should be able to choose from several different strategic options instead of a fixed and planned course of action that the company has pursued since it beginning. One of her mandates called for the company's future manufacturing plants to be built with the ability to add capacity at low cost. In addition, she wants to lay off 1,000 of the company's employees and hire contract and temporary workers in their stead. Finally, Monroe wants the company to use the real options approach to manage the combination of technological and market uncertainties.

11) Lisa Monroe's decision that called for Seymour Semiconductors to be able to choose from several strategic options instead of a fixed and planned course of action is called ________.

A) intended strategy B) strategic flexibility C) deliberate strategy D) strategic intent Answer: B Diff: 2 Page Ref: 156 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Application of Knowledge 12) Seymour Semiconductors has strategic options when it has the ________, but not the ________, to invest in a particular strategy.

A) responsibility; resources B) resources; manpower C) obligation; ability D) ability; obligation Answer: D Diff: 2 Page Ref: 156 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

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13) Lisa Monroe's mandate that called for the company's future manufacturing plants to be built with the ability to add capacity at low cost gives Seymour Semiconductors the option to ________.

A) defer B) abandon C) grow D) contract Answer: C Diff: 2 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Application of Knowledge 14) Lisa Monroe's decision to lay off 1,000 of the company's employees and hire contract and temporary workers in their stead gives Seymour Semiconductors the option to ________.

A) defer B) contract C) grow D) abandon Answer: B Diff: 2 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Application of Knowledge 15) Maintaining options that create strategic flexibility can be thought of as a third generic business level strategy.

Answer: TRUE Diff: 1 Page Ref: 156 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Analytical Thinking 16) Firms may not be able to create flexibility in their cost leadership strategy.

Answer: FALSE Diff: 2 Page Ref: 156 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Analytical Thinking 17) Strategic options exist when firms have the obligation but not the ability to invest in a particular strategy.

Answer: FALSE Diff: 1 Page Ref: 156 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

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18) For a firm to have strategic flexibility, it must possess strategic options.

Answer: TRUE Diff: 2 Page Ref: 156 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Analytical Thinking 19) Strategic options are different from real options.

Answer: FALSE Diff: 2 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Reflective Thinking 20) A real option exists when a firm has the ability, but not the obligation, to invest in real assets of some type.

Answer: TRUE Diff: 1 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Analytical Thinking 21) The option to abandon is a type of flexibility.

Answer: TRUE Diff: 2 Page Ref: 158 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Analytical Thinking 22) Real assets are tangible resources that can have an impact on a firm's production.

Answer: TRUE Diff: 2 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Analytical Thinking 23) An example of the option to contract is to use contract and temporary employees instead of full-time employees.

Answer: TRUE Diff: 2 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Analytical Thinking 24) In most countries, contract and temporary employees are much more expensive to lay off than full-time employees.

Answer: FALSE Diff: 2 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

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25) What is strategic flexibility? Why is it thought of as a third generic business level strategy?

Answer: Strategic flexibility refers to the ability of a company to choose among several strategic options. An example would be a company choosing to implement a product differentiation strategy, but not completely committing to a single basis for differentiating its product. Cost leadership and product differentiation are business level strategies that require both focus and commitment to implement. In contrast, a firm can have a business level strategy of maintaining options that create strategic flexibility.

Diff: 2 Page Ref: 156 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Analytical Thinking 26) What are strategic options?

Answer: A firm has a strategic option when it has the ability, but not the obligation, to invest in a particular strategy. Options are well-known in the financial field. They allow the holder to buy stock at a particular price at a future date. Strategic options allow the firm to delay an important decision to a future date when the uncertainty regarding that option is reduced.

Diff: 3 Page Ref: 156 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Analytical Thinking 27) What are real options?

Answer: A real option exists when a firm has the ability, but not the obligation, to invest in real assets of some type. Real assets are tangible resources (land, buildings, raw materials, finished goods inventories, distribution systems, information technology, etc.) that can have an impact on a firm's myriad processes and activities.

Diff: 3 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

AACSB: Analytical Thinking 28) How is the option to defer different from the option to contract?

Answer: A firm can make strategic choices that enhance its ability to postpone additional investments in a strategy until some later period. This is called the option to defer. Leasing an asset (land, building, etc.) instead of purchasing it is an example of an option to defer. In contrast to postponing a decision, a firm can make the choice to enhance its ability to get smaller and reduce investment in a strategy, should that option turn out to be valuable in the future. This is what is called the option to contract. An example would be a company using contract and temporary employees instead of full-time employees. In most countries (including the U.S.), contract and temporary employees are much less costly to lay off than full-time employees.

Diff: 2 Page Ref: 157 Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.

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29) A decision-making setting is said to be ________ when the outcome of that decision is not known with certainty, but the possible outcomes associated with that decision, and their probability, are known before a decision is made.

A) risky B) uncertain C) typical D) atypical Answer: A Diff: 2 Page Ref: 158 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 30) Gambling at a casino is a classic example of a(n) ________ decision.

A) uncertain B) deferred C) managed D) risky Answer: D Diff: 2 Page Ref: 159 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Reflective Thinking 31) The ________ value of the cash flows generated by choosing and implementing a particular strategy is equal to the sum of those cash flows, discounted by how risky they are.

A) future B) optional C) present D) strategic Answer: C Diff: 2 Page Ref: 159 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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32) A decision making setting is said to be ________ when the outcomes of that decision are not known with certainty, and the possible outcomes associated with that decision, and their probability, are also not known before a decision is made.

A) risky B) uncertain C) strategic D) typical Answer: B Diff: 2 Page Ref: 159 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 33) Under conditions of uncertainty, cash flow projections are ________.

A) simply unreliable B) fairly certain C) risk free D) quite risky Answer: A Diff: 2 Page Ref: 160 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 34) Under conditions of ________, the riskiness of the cash flows generated cannot be reliably anticipated.

A) constraint B) certainty C) uncertainty D) competition Answer: C Diff: 2 Page Ref: 160 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 35) In reality, strategic choices are often made over time, in a ________ manner.

A) planned B) staged C) deliberate D) flexible Answer: B Diff: 2 Page Ref: 160 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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36) The riskiest cash flows receive the ________ discount rates.

A) largest B) smallest C) standard D) bank Answer: A Diff: 2 Page Ref: 160 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 37) The Black-Scholes model is used for valuing ________ options.

A) strategic B) financial C) corporate D) business Answer: B Diff: 2 Page Ref: 161 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 38) If the value of an option is $4.59, it means an investor should be willing to pay up to $4.59 for the ________, but not the ________ to buy the stock.

A) right; obligation B) obligation; right C) chance; right D) obligation; opportunity Answer: A Diff: 3 Page Ref: 161 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 39) The lower the ________ price, the greater is the value of a real option.

A) stock B) operational C) exercise D) market Answer: C Diff: 3 Page Ref: 162 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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40) The longer the time to ________, the greater is the value of a real option.

A) market B) profitability C) exercise D) maturity Answer: D Diff: 2 Page Ref: 162 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 41) The higher the ________ interest rate, the greater is the value of a real option.

A) risk-free B) risk-adjusted C) risk-linked D) risk-mandated Answer: A Diff: 2 Page Ref: 162 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 42) The greater the uncertainty the uncertainty about future ________, the greater is the value of a real option.

A) interest rates B) cash flows C) profitability D) economic cycles Answer: B Diff: 2 Page Ref: 162 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 43) Real options are all about the flexibility afforded a firm under conditions of ________.

A) competition B) risk C) uncertainty D) growth Answer: C Diff: 2 Page Ref: 162 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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44) To see if valuing an investment as a real option creates any extra value for a firm, it is necessary to establish a ________.

A) timeline B) benchmark C) ceiling D) floor Answer: B Diff: 2 Page Ref: 168 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 45) According to Rita McGrath and Ian MacMillan, ________ uncertainty refers to the extent to which managers understand the process by which a new product or service will be developed before that process is undertaken.

A) technical B) financial C) functional D) market Answer: A Diff: 2 Page Ref: 169 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 46) According to Rita McGrath and Ian MacMillan, ________ uncertainty refers to the extent to which managers understand how a new product or service will be received in the market.

A) technical B) financial C) functional D) market Answer: D Diff: 2 Page Ref: 169 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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47) Under conditions of ________ market uncertainty and ________ technical uncertainty, investments in new products and services have limited real option value.

A) low; low B) low; high C) high; low D) high; high Answer: A Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 48) When technical uncertainty is high and market uncertainty is low, Rita McGrath and Ian MacMillan suggest a ________ option.

A) scouting B) positioning C) corporate D) stepping-stone Answer: B Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 49) When technical uncertainty is low and market uncertainty is high, Rita McGrath and Ian MacMillan suggest a ________ option.

A) scouting B) positioning C) corporate D) stepping-stone Answer: A Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 50) When both technical and market uncertainty are high, Rita McGrath and Ian MacMillan suggest a ________ option.

A) scouting B) positioning C) corporate D) stepping-stone Answer: D Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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51) Putting several new offerings in consumers hand to gauge their reactions and investing once consumer preferences are clear is what is meant by a ________ option.

A) financial B) positioning C) stepping-stone D) scouting Answer: D Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 52) Taking multiple small positions in alternative technologies and waiting until technological uncertainty is resolved to invest is what is meant by a ________ option.

A) financial B) positioning C) stepping-stone D) scouting Answer: B Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 53) Avoiding fixing on a particular design or set of features early, failing fast, failing cheap, learning fast, and trying again is what is meant by a ________ option.

A) financial B) positioning C) stepping-stone D) scouting Answer: C Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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54) Toryn, Inc., a major player in semiconductors, makes small investments of 5-10 percent of a firm's equity in many emerging technology companies. Toryn buys the company outright once that company's technological uncertainty resolves. The option that Toryn, Inc. uses is called a ________ option.

A) positioning B) scouting C) strategic D) stepping-stone Answer: A Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 55) Miranda Fashions competes in the fast-changing world of fickle teenage apparel tastes. To manage this uncertainty, Miranda Fashions typically puts out several new apparel offerings in small quantities to get customer reaction and once customer preferences are clear, it invests heavily to go all out. The option that Miranda Fashions uses is called a ________ option.

A) stepping-stone B) scouting C) staged D) positioning Answer: B Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Application of Knowledge 56) Amberger Products competes in consumer electronics where there is a high level of market and technological uncertainty. To address these challenges, Amberger Products does not commit itself to a particular product design or features early on; instead, it is geared to quickly and inexpensively assess if it has succeeded or failed with a design or feature, learn from its past, regroup and try again quickly. The option that Amberger Products uses is called a ________ option.

A) staged B) positioning C) stepping-stone D) scouting Answer: C Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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57) According to Rita McGrath and Ian MacMillan, there are ________ real options for a company to consider under technical and market uncertainty.

A) 3 B) 5 C) 4 D) 2 Answer: A Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 58) Which of the following is NOT a type of option to combat technological and market uncertainty according to Rita McGrath and Ian MacMillan?

A) staged B) scouting C) stepping-stone D) positioning Answer: A Diff: 3 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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Seymour Semiconductors is a major global player in the semiconductor and microchip industry.

In the space that they compete in, there is tremendous technological uncertainty as disruptive innovations seemingly come out of nowhere to upend well-entrenched incumbents. These disruptions are often fast and are increasingly by companies that do not compete head-to-head with Seymour Semiconductors. In addition, market tastes for the end products that feature Seymour Semiconductors' components also change rapidly. The company was hurt financially when the market shifted away from personal computers (that accounted for a significant portion of Seymour Semiconductors' revenues), first to tablets, and then to other mobile devices. The company's new CEO, Lisa Monroe, has decided that the company's basic approach to strategy should change. Toward this, she has mandated that, at any point in time, Seymour Semiconductors should be able to choose from several different strategic options instead of a fixed and planned course of action that the company has pursued since it beginning. One of her mandates called for the company's future manufacturing plants to be built with the ability to add capacity at low cost. In addition, she wants to lay off 1,000 of the company's employees and hire contract and temporary workers in their stead. Finally, Monroe wants the company to use the real options approach to manage the combination of technological and market uncertainties.

59) The uncertainty that Seymour Semiconductors faces is with regard to ________.

A) the economy B) the market C) technology D) both technology and market Answer: D Diff: 2 Page Ref: 169 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Application of Knowledge 60) Per the Rita McGrath and Ian MacMillan typology, to combat the uncertainty that Seymour Semiconductors faces, the company should use ________ options.

A) stepping-stone B) staged C) positioning D) scouting Answer: A Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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61) To combat the uncertainty that Seymour Semiconductors faces, Lisa Monroe should direct the company to ________.

A) take small positions in alternative technologies and wait until technological uncertainty resolves, then invest B) decide on a particular course of action, invest, and continue commitment C) put several new offerings in buyers' hands to gauge their reactions, once their preferences are clear, invest D) avoid fixing on a particular design or set of features early; fail fast, fail cheap; learn fast, and try again Answer: D Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Application of Knowledge 62) In 2019, if Lisa Monroe decides that the market uncertainty for Seymour Semiconductors has reduced considerably while the high technological uncertainty continues, she should move the company to using ________ options.

A) staged B) positioning C) stepping-stone D) scouting Answer: B Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Application of Knowledge 63) In 2019, if Lisa Monroe decides that the market uncertainty for Seymour Semiconductors persists while the technological uncertainty has reduced considerably, she should move the company to using ________ options.

A) staged B) positioning C) stepping-stone D) scouting Answer: D Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Application of Knowledge 64) Strategic flexibility is most likely to be valuable under conditions of uncertainty.

Answer: TRUE Diff: 2 Page Ref: 158 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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65) There is no distinction between the concepts of risk and uncertainty.

Answer: FALSE Diff: 2 Page Ref: 158 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 66) Gambling at a casino is an example of a risky decision.

Answer: TRUE Diff: 2 Page Ref: 159 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Reflective Thinking 67) The future value of the cash flows generated by choosing and implementing a particular strategy is equal to the sum of those cash flows, discounted by how risky they are.

Answer: FALSE Diff: 2 Page Ref: 159 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 68) A decision making setting is said to be risky when the outcome of that decision is not known with certainty, and the possible outcomes associated with that decision, and their probability, are also not known before a decision is made.

Answer: FALSE Diff: 2 Page Ref: 159 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 69) Using present value analysis does not work under conditions of uncertainty.

Answer: TRUE Diff: 2 Page Ref: 159 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 70) Cash flow projections can be reliable under conditions of uncertainty.

Answer: FALSE Diff: 3 Page Ref: 160 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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71) Under conditions of uncertainty, the riskiness of the cash flows generated can be reliably anticipated.

Answer: FALSE Diff: 3 Page Ref: 160 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 72) Strategic choices are often made over time, in a staged manner.

Answer: TRUE Diff: 2 Page Ref: 160 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 73) While present value approaches do a wonderful job of incorporating risk into strategic decision making, they cannot be applied under conditions of uncertainty.

Answer: TRUE Diff: 2 Page Ref: 160 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 74) The Black-Scholes model is used in valuing financial options.

Answer: TRUE Diff: 2 Page Ref: 161 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 75) The lower the cost of exercising a real option, the lower is the value of that real option.

Answer: FALSE Diff: 3 Page Ref: 162 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 76) A low exercise price suggests a higher probability of the option being exercised.

Answer: TRUE Diff: 2 Page Ref: 163 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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77) The shorter the time to maturity, the more valuable a real option is.

Answer: FALSE Diff: 3 Page Ref: 163 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 78) The greater the uncertainty, the more valuable a real option is.

Answer: TRUE Diff: 2 Page Ref: 163 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 79) The lower the risk-free interest rate, the more valuable the option is.

Answer: FALSE Diff: 3 Page Ref: 163 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 80) The effect of uncertainty on the value of a real option is extremely important.

Answer: TRUE Diff: 2 Page Ref: 163 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 81) The downside risk of a real option is fixed.

Answer: TRUE Diff: 3 Page Ref: 163 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 82) The greater the uncertainty, the less valuable is the real option.

Answer: FALSE Diff: 2 Page Ref: 163 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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83) To see if valuing an investment as a real option creates any extra value for the firm, it is necessary to establish a benchmark.

Answer: TRUE Diff: 2 Page Ref: 168 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 84) Market uncertainty refers to the extent to which managers understand the process by which a new product or service will be developed before that process is undertaken.

Answer: FALSE Diff: 2 Page Ref: 169 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 85) A scouting option is used when market uncertainty is high and technical uncertainty is low.

Answer: TRUE Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 86) A stepping-stone option is recommended when both market and technical uncertainty are low.

Answer: FALSE Diff: 3 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 87) Market uncertainty refers to the extent to which managers understand how a new product or service will be received in the market.

Answer: TRUE Diff: 2 Page Ref: 169 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 88) The lower the cash flows generated by exercising a real option, the greater is the value of that real option.

Answer: FALSE Diff: 2 Page Ref: 162 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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89) What is the difference between risk and uncertainty?

Answer: A decision-making setting is said to be risky when the outcome of that decision is not known with certainty, but the possible outcomes associated with that decision, and their probability, are known before a decision is made. Gambling at a casino is a good example of a risky decision. While a specific outcome is not known, all possible outcomes and their probabilities can be calculated. A decision-making setting, in contrast, is said to be uncertain when the outcome of that decision is not known with certainty, and the possible outcomes associated with that decision, and their probability, are also not known before a decision is made.

To extend the casino gambling example, it changes from risky to uncertain when the rules of the game you are playing in the casino change in unpredictable ways.

Diff: 2 Page Ref: 158 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 90) Why does present value analysis not work under conditions of uncertainty?

Answer: Using present value analysis (of cash flows) does not work under conditions of uncertainty for three reasons. One is that, under conditions of uncertainty, cash flow projections are simply unreliable. Under uncertainty, unforeseeable costs and opportunities may affect realized cash flows in ways that could not have been anticipated. Second, under conditions of uncertainty, the riskiness of cash flows generated cannot be reliably anticipated. This affects the discount rate that is to be applied in the analysis. Third, a fundamental assumption that the present value approach makes is that decision about strategies and how they are implemented are made all at once, at the moment a strategic choice is made and implemented. This doesn't reflect reality, because strategic choices are often made over time, in a staged manner.

Diff: 2 Page Ref: 160 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 91) What are positioning options? How are they different from scouting options?

Answer: Rita McGrath and Ian MacMillan have developed a typology of options based on technological and market uncertainties. A positioning option is recommended when technological uncertainty is high and marketing uncertainty is either low or medium. In contrast, they suggest the use of scouting options when a company faces high market uncertainty but low to medium technological uncertainty.

Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

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92) What are stepping-stone options? What does a company do in a stepping-stone option?

Answer: According to the McGrath-MacMillan typology, when a company faces both market and technological uncertainty, it should use a stepping-stone option. In pursuing a stepping-stone option, a firm avoids fixing on a particular design or set of features early. It is set up to fail fast and fail cheap. In addition, the option calls for learning fast and trying again.

Diff: 2 Page Ref: 170 Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options Will be Valuable for Firms.

AACSB: Analytical Thinking 93) The concepts of flexibility and real options are closely related to the importance of history and ________ described as potential sources of sustained competitive advantage.

A) cost control B) causal ambiguity C) path dependence D) commitment Answer: C Diff: 2 Page Ref: 172 Learning Obj.: 6.3: Identify When Strategic Flexibility and Real Options can be a Source of Sustained Competitive Advantage.

AACSB: Analytical Thinking 94) Under conditions of high certainty, flexibility is often valuable because it creates real options for firms.

Answer: FALSE Diff: 2 Page Ref: 172 Learning Obj.: 6.3: Identify When Strategic Flexibility and Real Options can be a Source of Sustained Competitive Advantage.

AACSB: Analytical Thinking 95) The concepts of flexibility and real options are closely related to the importance of history and path dependence that are potential sources of sustained competitive advantage.

Answer: TRUE Diff: 2 Page Ref: 72 Learning Obj.: 6.3: Identify When Strategic Flexibility and Real Options can be a Source of Sustained Competitive Advantage.

AACSB: Analytical Thinking 96) When real options are path dependent, they are not likely to be a source of competitive advantage for a firm.

Answer: FALSE Diff: 3 Page Ref: 172 Learning Obj.: 6.3: Identify When Strategic Flexibility and Real Options can be a Source of Sustained Competitive Advantage.

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97) Vertically integrating into an exchange is generally ________ than using market contracts or strategic alliances to manage an exchange.

A) more flexible B) less strategic C) more strategic D) less flexible Answer: D Diff: 2 Page Ref: 173 Learning Obj.: 6.4: Identify the Organizational Challenges Associated with Implementing Strategic Flexibility and a Real Options Strategy.

AACSB: Analytical Thinking 98) Firms seeking to implement a strategy of flexibility under conditions of uncertainty should adopt flexible forms of organization.

Answer: TRUE Diff: 2 Page Ref: 173 Learning Obj.: 6.4: Identify the Organizational Challenges Associated with Implementing Strategic Flexibility and a Real Options Strategy.

AACSB: Analytical Thinking 99) Vertically integrating into an exchange is generally less flexible, that is, costlier to change, than using market contracts or strategic alliances to manage an exchange.

Answer: TRUE Diff: 2 Page Ref: 173 Learning Obj.: 6.4: Identify the Organizational Challenges Associated with Implementing Strategic Flexibility and a Real Options Strategy.

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Strategic Management and Competitive Advantage, 6e (Barney) Chapter 7 Collusion 1) The economic profits generated by generic business strategies—cost leadership, product differentiation, and flexibility—can be thought of as ________ profits.

A) efficiency B) normal C) abnormal D) sustainable Answer: A Diff: 1 Page Ref: 179 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking 2) The ability of a group of firms to work together to reduce competition in their market or industry is called ________.

A) collaboration B) fragmentation C) collusion D) differentiation Answer: C Diff: 2 Page Ref: 179 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking 3) General Electric's decision to focus on large electric generation turbines and Westinghouse's decision to focus on small electric generation turbines is an example of ________.

A) differentiation B) collaboration C) segmentation D) collusion Answer: D Diff: 2 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

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4) Which of the following is NOT an instance of collusion?.

A) General Motors and Ford Motor Company forming a strategic alliance to make electric cars.

B) Members of OPEC agreeing to reduce oil shipments in 1973.

C) Coca-Cola's decision to focus on the Western European market and Pepsi's decision to focus on the Russian market.

D) General Electric's decision to focus on large electric generation turbines and Westinghouse's decision to focus on small electric generation turbines.

Answer: A Diff: 2 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Application of Knowledge 5) Collusion can take one of two forms, ________ collusion or ________ collusion.

A) strategic; non-strategic B) explicit; tacit C) market; product D) intra-industry; inter-industry Answer: B Diff: 2 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking 6) ________ collusion exists when firms in an industry directly negotiate agreements about how to reduce competition.

A) Explicit B) Strategic C) Intra-industry D) Tacit Answer: A Diff: 2 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking 7) ________ collusion exists when firms cooperate in reducing competition, but engage in no face to face negotiations to do so.

A) Explicit B) Strategic C) Intra-industry D) Tacit Answer: D Diff: 2 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

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8) ________ collusion can be legal.

A) Tacit B) Explicit C) Strategic D) Any Answer: A Diff: 2 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking 9) ________ collusion is illegal in most developed countries.

A) Any B) Explicit C) Tacit D) Strategic Answer: B Diff: 2 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking 10) Firms with homogeneous resources and capabilities that cooperate to reduce competition below a perfect competition level can generate economic profits, but in doing so reduce social welfare in a phenomenon called ________ loss.

A) abnormal B) ethical C) collusion D) dead weight Answer: D Diff: 2 Page Ref: 181 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Ethical Understanding and Reasoning

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Gamma Food Products competes in the "center-of-the-aisle" packaged foods business. Ever since its founding and membership in the industry, the company has focused on gaining market share.

In 2017, it had, by far, the largest market share in the industry and used this advantage to create order and discipline in the industry, particularly in terms of prices. Starting in late 2016, Gamma Food Products' VP of Marketing, Polly Kundig noticed the heads of Gamma's four largest competitors were meeting often surreptitiously, particularly at trade shows. Parallelly, Kundig also noticed that the four firms were pricing their products at around the same level and distinct from the prices of others, including Gamma. In addition, when one of the four made a move in pricing or capacity planning, the others made quick responses.

11) The frequent surreptitious meetings of Gamma Food Products' four largest competitors, observed by Polly Kundig, suggests that they are engaged in ________.

A) strategic planning B) explicit collusion C) industry promotion D) market expansion Answer: B Diff: 2 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Application of Knowledge 12) The economic profits generated by the strategies of cost leadership, product differentiation, and flexibility can be thought of as efficiency profits.

Answer: TRUE Diff: 1 Page Ref: 179 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking 13) Collusion is the ability of a group of firms to work together to increase competition in their market or industry.

Answer: FALSE Diff: 1 Page Ref: 179 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking 14) Explicit collusion is legal in most developed economies.

Answer: FALSE Diff: 1 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

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15) Coca-Cola's decision to focus on the Western European market and Pepsi's decision to focus on the Russian market is an example of collusion.

Answer: TRUE Diff: 1 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking 16) Explicit collusion exists when firms in an industry directly negotiate agreements about how to reduce competition.

Answer: TRUE Diff: 2 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking 17) Tacit collusion is always illegal.

Answer: FALSE Diff: 2 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking 18) Tacit collusion exists when firms cooperate in reducing competition, but engage in no face to face negotiations to do so.

Answer: TRUE Diff: 2 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking 19) Tacit collusion can be legal.

Answer: TRUE Diff: 2 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking 20) Tacit collusion requires firms to signal their willingness to cooperate to reduce competition directly.

Answer: FALSE Diff: 2 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking

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21) Whether explicit or implicit, firms that engage in collusion face a number of fundamental ethical challenges.

Answer: TRUE Diff: 2 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Ethical Understanding and Reasoning 22) It is well established in economic theory that imperfectly competitive markets are consistent with social welfare.

Answer: FALSE Diff: 2 Page Ref: 181 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking 23) What is collusion?

Answer: Firms pursuing the generic strategies of cost leadership, product differentiation, or flexibility are essentially generating economic profits by more efficiently and effectively meeting their customer's needs. In such approaches, the source of profits is the differential strategic efficiency and effectiveness of a firm. Collusion exists when firms in an industry or market cooperate to reduce competition. Thus, firms engaged in collusion are attempting to profit, not via efficiency or effectiveness, but by reducing competition.

Diff: 1 Page Ref: 179 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking 24) What are the two types of collusion and how are they different?

Answer: Collusion can take one of two forms, explicit collusion or tacit collusion. Explicit collusion exists when firms in an industry directly negotiate agreements about how to reduce competition. When members of OPEC met and agreed to reduce oil shipments in 1973, they were engaged in explicit collusion. Explicit collusion is illegal in most developed countries.

Tacit collusion exists when firms cooperate in reducing competition, but engage in no face to face negotiations to do so. Tacit collusion can be legal. However, firms that engage in any kind of collusion face fundamental ethical challenges.

Diff: 2 Page Ref: 180 Learning Obj.: 7.1: Define Explicit and Tacit Collusion and Explain Why Collusion is Typically Inconsistent with Social Welfare in an Economy.

AACSB: Analytical Thinking

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25) Which of the following is NOT a way by which firms can collude to reduce the threat of new competitors?

A) Working together to increase the barriers to entry.

B) Developing common technology standards that act as barriers to entry.

C) Moving away from using product differentiation as a barrier to entry.

D) Joint lobbying to increase the cost of entry.

Answer: C Diff: 2 Page Ref: 182 Learning Obj.: 7.2: Describe How Collusion can Create Economic Profits.

AACSB: Analytical Thinking 26) Which of the following is NOT a way to create economic profits via collusion?

A) Colluding to increase the bargaining power of buyers.

B) Colluding to reduce the threat of new competitors.

C) Colluding to reduce the threat of current competitors.

D) Colluding to reduce supplier leverage threats.

Answer: A Diff: 2 Page Ref: 182 Learning Obj.: 7.2: Describe How Collusion can Create Economic Profits.

AACSB: Analytical Thinking 27) Firms can collude to reduce the threats from new competitors by working together to decrease the barriers to entry into an industry.

Answer: FALSE Diff: 3 Page Ref: 182 Learning Obj.: 7.2: Describe How Collusion can Create Economic Profits.

AACSB: Analytical Thinking 28) Firms can develop competing technological standards that make it very difficult for new firms to enter an industry.

Answer: FALSE Diff: 2 Page Ref: 182 Learning Obj.: 7.2: Describe How Collusion can Create Economic Profits.

AACSB: Analytical Thinking 29) Collusion with other firms in an industry involves increasing competition among those firms.

Answer: FALSE Diff: 2 Page Ref: 183 Learning Obj.: 7.2: Describe How Collusion can Create Economic Profits.

AACSB: Analytical Thinking 30) Joint lobbying efforts by industry incumbents can increase the cost of entry into an industry.

Answer: TRUE Diff: 2 Page Ref: 183 Learning Obj.: 7.2: Describe How Collusion can Create Economic Profits.

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31) Members of OPEC discovered the limits of their ability to collude in reducing the volume of oil they were willing to sell when the increased price of crude oil led a variety of companies to explore alternative sources of energy and consumers to conserve.

Answer: TRUE Diff: 2 Page Ref: 184 Learning Obj.: 7.2: Describe How Collusion can Create Economic Profits.

AACSB: Analytical Thinking 32) The reason that collusion is a difficult strategy to maintain over time is that while parties to these cooperative agreements often have strong incentives to cooperate, they also have strong incentives to ________ those cooperative agreements.

A) profit from B) maintain C) go along with D) cheat on Answer: D Diff: 2 Page Ref: 184 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 33) According to the ________ cheating model, assuming little or no product differentiation among a small number of firms, if one firm decides to cheat on a collusive agreement by reducing its prices, others will as well and, in the long run, firms in this industry will earn no economic profits.

A) Cournot B) Edgeworth C) Stackelberg D) Bertrand Answer: D Diff: 3 Page Ref: 185 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking

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34) Which of the following models is NOT an important form of cheating in collusive agreements?

A) Schumpeter B) Bertrand C) Cournot D) Edgeworth Answer: A Diff: 1 Page Ref: 185 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 35) In examining cheating in collusions, ________ examined the performance consequences if colluding firms cheat by adjusting the quantity of their output and let market forces determine prices.

A) Bertrand B) Cournot C) Edgeworth D) Stackelberg Answer: B Diff: 2 Page Ref: 186 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Application of Knowledge 36) Generally, long-run profits for firms that cheat on purely collusive agreements fall ________ the perfect competition, zero-economic-profit solution and the perfect competition, sharedmonopoly-profit solution.

A) clearly outside of B) at one side of C) somewhere outside of D) somewhere between Answer: D Diff: 3 Page Ref: 186 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking

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37) Instead of communicating directly, ________ colluding firms send and interpret signals of intent to co-operate (or intent not to co-operate) sent by potential collusion partners.

A) tacitly B) explicitly C) strategically D) operationally Answer: A Diff: 3 Page Ref: 189 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 38) Firms that consciously make price and output decisions in order to reduce competition may be engaging in what the courts call ________.

A) conspicuous consumption B) conscious parallelism C) predatory action D) coalitionary action Answer: B Diff: 2 Page Ref: 189 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 39) In general, firms can send one of two signals to collusion partners who may cheat on their cooperative agreements: a ________ signal or a ________ signal.

A) explicit; implicit B) explicit; tacit C) visual; verbal D) tough; soft Answer: D Diff: 2 Page Ref: 189 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking

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40) Omega, Inc. signals that if parties cheat on collusive agreements, it will decrease prices more or increase output more than would have otherwise been the case. Omega, Inc. is sending a(n) ________ signal.

A) explicit B) tacit C) tough D) soft Answer: C Diff: 3 Page Ref: 189 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Application of Knowledge 41) Omega, Inc. signals that if parties cheat on collusive agreements, it will decrease its prices less or increase its output less than would have otherwise been the case. Omega, Inc. is sending a(n) ________ signal.

A) explicit B) tacit C) tough D) soft Answer: D Diff: 2 Page Ref: 189 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Application of Knowledge 42) Investing in a new production process that reduces a firm's marginal cost of production is an example of a ________ signal.

A) strategic B) functional C) soft D) tough Answer: D Diff: 2 Page Ref: 190 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking

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43) Positioning a firm's product so that it does not compete directly with the products of a colluding firm is an example of a ________ signal.

A) soft B) tough C) strategic D) functional Answer: A Diff: 2 Page Ref: 190 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 44) When price is likely to be the major basis of competition in an industry, firms should not make investments that send a(n) ________ signal.

A) soft B) tough C) explicit D) tacit Answer: B Diff: 2 Page Ref: 190 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 45) Ben & Jerry's decision to not enter the frozen yogurt business is an example of the ________.

A) "puppy-dog-play" B) "fat-cat effect" C) "top-dog strategy" D) "lean-and-hungry look" Answer: A Diff: 1 Page Ref: 190 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking

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46) When price is likely to be the basis of competition in an industry, firms should invest proactively in ________ signals.

A) soft B) tough C) tacit D) explicit Answer: A Diff: 2 Page Ref: 190 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 47) In an industry where the primary basis of competition is quantity, firms may invest heavily in, say, manufacturing capacity, even if those investments do not generate positive economic profits directly. Sending this kind of a signal is called ________.

A) "puppy-dog-play" B) "fat-cat effect" C) "top-dog strategy" D) "lean-and-hungry look" Answer: C Diff: 2 Page Ref: 190 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 48) Hewlett-Packard's (HP) decision to spin off its electronic instruments business into a separate company is an example of a firm that has adopted a ________.

A) "puppy-dog-play" B) "fat-cat effect" C) "top-dog strategy" D) "lean-and-hungry look" Answer: D Diff: 2 Page Ref: 192 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking

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49) Which of the following is NOT a ploy used in signaling?

A) "puppy-dog-play" B) "lap-dog effect" C) "top-dog strategy" D) "lean-and-hungry look" Answer: B Diff: 2 Page Ref: 192 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 50) Which of the following is NOT an industry attribute that facilitates the development and maintenance of tacit collusion?

A) Small number of firms B) Product homogeneity C) Cost homogeneity D) Exit barriers Answer: D Diff: 2 Page Ref: 192 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 51) Tacit collusion is more likely to be successful if there ________ firms in an industry.

A) are a large number of B) is a small number of C) are unequally sized D) are successful Answer: B Diff: 2 Page Ref: 192 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking

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52) Tacit collusion is more likely when firms produce and sell ________ products or services.

A) similar B) dissimilar C) many D) diverse Answer: A Diff: 2 Page Ref: 194 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 53) ________ of economic costs enhances the opportunities to implement tacit collusion.

A) Heterogeneity B) Transparency C) Homogeneity D) Opacity Answer: C Diff: 2 Page Ref: 194 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 54) A ________ is a firm that sets "acceptable" industry prices or acceptable "profit margins" in an industry.

A) price leader B) differentiator C) cost leader D) flag bearer Answer: A Diff: 2 Page Ref: 194 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking

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55) Existence of industry ________ creates opportunities for tacit collusion.

A) flag bearers B) price leaders C) differentiators D) pioneers Answer: B Diff: 3 Page Ref: 194 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 56) In general, price leaders can be thought of as ________ leaders.

A) Stackelberg B) Cournot C) Bertrand D) Edgeworth Answer: A Diff: 3 Page Ref: 194 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 57) Industry ________ structure can create opportunities for tacit collusion.

A) physical B) cost C) competitive D) social Answer: D Diff: 2 Page Ref: 195 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking

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58) Firms may have incentives to cheat on cooperative agreements when maintaining a collusive agreement has high ________ costs.

A) opportunity B) strategic C) signaling D) social Answer: A Diff: 2 Page Ref: 195 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 59) The ability of firms to produce for inventory and to create order backlogs helps ________ tacit collusion.

A) avoid B) ramp down C) facilitate D) prevent Answer: C Diff: 2 Page Ref: 196 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 60) Eight major firms in the rubber products industry are located in the same town. Company managers from these firms all socialize at the same two private clubs and attend the same charity events in town. This suggests that the ________ structure of the rubber industry in this town can create opportunities for tacit collusion.

A) physical B) cost C) competitive D) social Answer: D Diff: 2 Page Ref: 195 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Application of Knowledge

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61) While a number of industry attributes have an effect on the level of opportunity for tacit collusion in an industry, none is more important than ________.

A) cost homogeneity B) product homogeneity C) the industry social structure D) the existence of barriers to entry Answer: D Diff: 2 Page Ref: 196 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking Gamma Food Products competes in the "center-of-the-aisle" packaged foods business. Ever since its founding and membership in the industry, the company has focused on gaining market share.

In 2017, it had, by far, the largest market share in the industry and used this advantage to create order and discipline in the industry, particularly in terms of prices. Starting in late 2016, Gamma Food Products' VP of Marketing, Polly Kundig noticed the heads of Gamma's four largest competitors were meeting often surreptitiously, particularly at trade shows. Parallelly, Kundig also noticed that the four firms were pricing their products at around the same level and distinct from the prices of others, including Gamma. In addition, when one of the four made a move in pricing or capacity planning, the others made quick responses.

62) In 2017, Gamma Food Products is likely the ________ leader in the industry.

A) strategic B) profitability C) price D) operational Answer: C Diff: 2 Page Ref: 194 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Application of Knowledge 63) The fact that Gamma Food Products' four competitors were pricing their products at around the same level and reacting quickly to each other's moves suggests that they are ________.

A) signaling B) competing C) strategizing D) organizing Answer: A Diff: 3 Page Ref: 189 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Application of Knowledge 18 Copyright © 2019 Pearson Education, Inc.

64) If Polly Kundig decides that Gamma Food Products should react by either decreasing its prices or increase its output, the company is sending out a(n) ________ signal.

A) soft B) strategic C) operational D) tough Answer: A Diff: 3 Page Ref: 190 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Application of Knowledge 65) If Polly Kundig and Gamma Food Products indicate that the company will not cut its prices nor increase its capacity, it is sending out a ________ signal.

A) tough B) strategic C) competitive D) soft Answer: D Diff: 2 Page Ref: 190 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Application of Knowledge 66) Gamma Food Products finds that its core product, a fruit-based yogurt is losing steam to Greek yogurt. Polly Kundig decides not to get into Greek yogurt because doing so will force Gamma to compete directly with Greek yogurt firms. Gamma's decision is called ________.

A) "puppy-dog ploy" B) "fat-cat effect" C) "top-dog strategy" D) "lean-and-hungry look" Answer: A Diff: 3 Page Ref: 190 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Application of Knowledge

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67) Gamma Food Products' industry is facing intense competition and both tacit and explicit collusion. Since price is the primary basis of competition in the packaged foods industry, it is recommended that Gamma Food Products invest proactively in ________ signals.

A) tough B) soft C) explicit D) financial Answer: B Diff: 2 Page Ref: 190 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Application of Knowledge 68) Collusion is often an easy strategy to maintain over long periods.

Answer: FALSE Diff: 3 Page Ref: 184 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 69) The reason that collusion is a difficult strategy to maintain over time is because the parties to the collusion have strong incentives to cheat on these cooperative agreements.

Answer: TRUE Diff: 2 Page Ref: 184 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 70) According to Cournot cheating, assuming little or no product differentiation among a small number of firms, if one firm decides to cheat on a collusive agreement by reducing its prices, others will as well and, in the long run, firms in this industry will earn no economic profits.

Answer: FALSE Diff: 3 Page Ref: 185 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking

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71) In Bertrand cheating, Joseph Bertrand makes the realistic assumption that each time cheating firms adjust their prices, they assume that other firms in the industry will continue cooperating.

Answer: FALSE Diff: 2 Page Ref: 185 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 72) Economist and mathematician Joseph Bertrand examined what happens to profits when colluding firms begin cheating by lowering prices below the cooperative price.

Answer: TRUE Diff: 2 Page Ref: 185 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 73) Bertrand's analysis suggests that the superior profits that can be obtained by colluding firms are quite robust.

Answer: FALSE Diff: 1 Page Ref: 185 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 74) Cournot examined the performance consequences if colluding firms cheat by adjusting the quantity of their output and let market forces determine prices.

Answer: TRUE Diff: 2 Page Ref: 186 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 75) In examining cheating via collusion, where Bertrand focused on quantity produced, Cournot focused on prices.

Answer: FALSE Diff: 2 Page Ref: 186 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking

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76) The performance results associated with both Bertrand cheating and Cournot cheating depend on assumptions that firms make about how other firms will respond to their own cheating.

Answer: TRUE Diff: 2 Page Ref: 188 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 77) Both Bertrand and Cournot, in their collusion cheating models, assume that firms take other firms' prices/outputs in the previous period as variable.

Answer: FALSE Diff: 2 Page Ref: 188 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 78) Generally, long-run profits for firms that cheat on purely collusive agreements in various ways fall somewhere between the perfect competition, zero-economic-profit solution and the perfect cooperation, shared-monopoly-profit solution.

Answer: TRUE Diff: 2 Page Ref: 188 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 79) Instead of communicating directly, explicitly colluding firms send and interpret signals of intent to cooperate (or intent not to cooperate) sent by potential collusion partners.

Answer: FALSE Diff: 2 Page Ref: 189 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 80) A "tough" signal is one where the signaling firm indicates that they will aggressively respond to cheating.

Answer: TRUE Diff: 2 Page Ref: 189 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 22 Copyright © 2019 Pearson Education, Inc.

81) A "soft" signal is an indication that the signaling firm will not aggressively respond to cheating.

Answer: TRUE Diff: 1 Page Ref: 189 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 82) Conscious parallelism is not subject to antitrust laws because it is not considered explicit collusion.

Answer: FALSE Diff: 2 Page Ref: 189 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 83) If the probability of detecting cheating in a collusive industry is high, the likelihood that cheating in this industry will actually occur is high.

Answer: FALSE Diff: 2 Page Ref: 190 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 84) Tacit collusion is more likely to be successful if there is a small number of firms in an industry.

Answer: TRUE Diff: 2 Page Ref: 192 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 85) Tacit collusion is more likely when firms produce and sell similar products or services.

Answer: TRUE Diff: 2 Page Ref: 192 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking

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86) Homogeneity of economic costs enhances the opportunities to implement tacit collusion.

Answer: TRUE Diff: 2 Page Ref: 194 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 87) A "price leader" is the firm that sells at the lowest price in the industry.

Answer: FALSE Diff: 2 Page Ref: 194 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 88) Industry economic structure refers to accepted norms of behavior and competition that often evolve in industries.

Answer: FALSE Diff: 3 Page Ref: 195 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 89) Firms may have incentives to cheat on cooperative agreements when maintaining a collusive agreement has high opportunity costs.

Answer: TRUE Diff: 1 Page Ref: 195 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 90) The ability of firms to produce for inventory and to create order backlogs helps reduce tacit collusion.

Answer: FALSE Diff: 2 Page Ref: 196 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking

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91) How does signaling relate to collusion?

Answer: In tacit collusion, firms agree to reduce competition but do so without face to face negotiations. Tacit collusion, in short, is implemented via signals and signaling. Signaling both promotes tacit collusion as well as work to reduce the impact of such collusion. Signals can be tough or soft. In a tough signal, if parties cheat on collusive agreements, the firm sending the signal will decrease prices more or increase output more than would have otherwise been the case. Tough signals keep tacit collusion in check. In contrast, in a soft signal, if parties cheat on collusive agreements, the firm sending the signal will decrease its prices less or increase its output less than would have otherwise been the case. Essentially, the firm sending a soft signal is indicating that it is avoiding competition.

Diff: 1 Page Ref: 189 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 92) How does product homogeneity facilitate tacit collusion?

Answer: One of the industry attributes that facilitates tacit collusion is product homogeneity.

Tacit collusion is more likely when firms produce and sell similar products or services. In general, changes in prices are easier to monitor than are changes in product characteristics or features. A firm may cheat on a tacit collusion strategy by charging the agreed upon price but providing more features, higher quality, or better service (thereby creating heterogeneity in its offerings). These efforts at product differentiation are somewhat more difficult to monitor and thus create strong incentives for cheating. When product homogeneity is high, cheating is easier to monitor.

Diff: 3 Page Ref: 194 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 93) Who are price leaders and what effect does their presence have on tacit collusion?

Answer: A price leader is a firm that sets "acceptable" industry prices or "acceptable" profit margins in an industry. Typically, the price leader is the one with the largest market share. This helps create the order and discipline needed to make tacit collusion last over time. Also, a price leader can assist an industry adjusting to higher or lower prices, without jeopardizing an overall cooperative agreement, by defining industry standards for price or margin changes. Thus, the existence of a price leader creates opportunities for tacit collusion in an industry.

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94) While there are several industry attributes that facilitate tacit collusion, entry barriers are considered the most important. Why? Answer: Without barriers to entry, the economic profits associated with tacit collusion create incentives for firms to enter into an industry. New entry into an industry reduces the collusionenhancing attributes of the other industry characteristics. For example, new entry is likely to create both product heterogeneity (as new firms introduce new products) and cost heterogeneity (new firms often have costs different from colluding incumbents). In general, new entrants can be thought of as loose cannons in otherwise placid and calm industries. To reduce the threat of new entrants, tacitly colluding firms must be protected by barriers to entry.

Diff: 2 Page Ref: 196 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 95) How does industry social structure explain collusion among Major League Baseball franchises in the 1980s?

Answer: Industry social structure refers to accepted norms of behavior and competition that often evolve in industries. These norms are usually implicit and constitute what might be called an industry culture. While each Major League Baseball franchise is independently owned, franchise owners must cooperate in leagues to establish playing schedules, a common set of rules, and other operating standards. While engaging in this legal cooperation, informal agreements not to bid aggressively on free agents were apparently struck. An arbitrator ruled that the owners had colluded.

Diff: 1 Page Ref: 195 Learning Obj.: 7.3: Describe Different Ways That Collusive Agreements can Fall Apart, and How it is Possible to Use the Attributes of an Industry to Anticipate How Sustainable These Agreements are Likely to Be. AACSB: Analytical Thinking 96) One of the most significant organizational issues facing tacitly colluding firms concerns the ________.

A) reputation of the firm B) efficiency of their operations C) financial viability of their products D) effect on their employees Answer: B Diff: 2 Page Ref: 197 Learning Obj.: 7.4: Describe Two Unique Challenges Associated With Organizing to Implement a Collusion Strategy.

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97) One of the most significant organizational issues facing tacitly colluding firms concerns the efficiency of their operations.

Answer: TRUE Diff: 1 Page Ref: 197 Learning Obj.: 7.4: Describe Two Unique Challenges Associated With Organizing to Implement a Collusion Strategy.

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Strategic Management and Competitive Advantage, 6e (Barney) Chapter 8 Vertical Integration 1) Vertical integration is a type of A) business strategy.

B) generic strategy.

C) differentiation strategy.

D) corporate strategy.

Answer: D Diff: 2 Page Ref: 4 Learning Obj.: 8.1: Define Corporate Strategy.

AACSB: Analytical Thinking 2) Business strategy is a firm's theory of how to gain competitive advantage by operating in several businesses simultaneously.

Answer: FALSE Diff: 1 Page Ref: 4 Learning Obj.: 8.1: Define Corporate Strategy.

AACSB: Analytical Thinking 3) Decisions about whether or not to vertically integrate often determine whether or not a firm is operating in a single business or industry or multiple businesses or industries.

Answer: TRUE Diff: 1 Page Ref: 4 Learning Obj.: 8.1: Define Corporate Strategy.

AACSB: Analytical Thinking 4) The number of steps in a firm's value chain that it accomplishes within its boundaries describes the firm's level of A) product differentiation.

B) diversification.

C) vertical integration.

D) competitive dynamics.

Answer: C Diff: 2 Page Ref: 4 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

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5) When Apple, Inc. opened retail stores to sell its computers and iPods, this was an example of A) forward vertical integration.

B) backward vertical integration.

C) forward horizontal integration.

D) backward horizontal integration.

Answer: A Diff: 3 Page Ref: 5 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

AACSB: Application of Knowledge 6) If Dell computers were to open its own factory to manufacture the LCD televisions it sells at its online store, this would be an example of A) forward vertical integration.

B) product differentiation.

C) forward horizontal integration.

D) backward vertical integration.

Answer: D Diff: 3 Page Ref: 4 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

AACSB: Application of Knowledge 7) A firm's ________ measures the percentage of a firm's sales that is generated by activities done within the boundaries of a firm.

A) value added as a percentage of sales B) simple product diversification C) competitive advantage D) competitive dynamic Answer: A Diff: 2 Page Ref: 6 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

AACSB: Analytical Thinking 8) Which of the following is not used to determine a firm's level of vertical integration using the value added as a percentage of sales approach?

A) value added B) net income C) sales D) gross margin Answer: D Diff: 3 Page Ref: 6 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

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9) A firm with a ________ ratio between value added and sales has brought ________ of the value-creating activities associated with its business inside its boundaries, consistent with a high level of vertical integration.

A) low; many B) high; many C) medium; many D) medium; few Answer: B Diff: 3 Page Ref: 6 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

AACSB: Analytical Thinking 10) If Digipics were to begin manufacturing lenses for the cameras they assembled, this would be an example of A) backward vertical integration.

B) a strategic alliance.

C) forward vertical integration.

D) opportunism.

Answer: A Diff: 2 Page Ref: 4 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

AACSB: Application of Knowledge 11) If Digipics were to begin selling the cameras it assembled directly to customers through a website operated by the company, this would be an example of A) backward vertical integration.

B) a strategic alliance.

C) forward vertical integration.

D) opportunism.

Answer: C Diff: 2 Page Ref: 5 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

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12) If one of the suppliers that Digipics purchases its components from purposefully delivered a batch of its product that was substandard but did not inform Digipics of this, this would be an example of A) flexibility.

B) opportunism.

C) uncertainty.

D) vertical integration.

Answer: B Diff: 2 Page Ref: 7 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

AACSB: Application of Knowledge 13) If Digipics were to agree to spend a significant amount of money to establish a new assembly line for a large client, PicPro, that has unique needs that would make this assembly line largely useless for any other customer, the funds Digipics spent in establishing this line would be an example of A) forward vertical integration.

B) backward vertical integration.

C) a transaction-specific investment.

D) opportunism.

Answer: C Diff: 3 Page Ref: 8 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

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TerraLoc competes in the market for global positioning devices and services. The company manufactures its own GPS units, which are smaller than those of any other competitor and include a proprietary battery that lasts 200% longer than any other competitor's battery and that TerraLoc manufacturers on-site. TerraLoc also has developed proprietary software that is much faster and more precise than that of any competitor. When developing the proprietary battery, TerraLoc decided to manufacturer the battery in-house to reduce the possibility that the company it outsourced the battery manufacturing to might reverse engineer the battery and sell a similar product to competitors. This possibility was especially troubling given that the company expected a significant increase in demand due to the improved battery life. Additionally, TerraLoc sells its products and services through its own direct sales force to ensure that its representatives highlight the longer battery life of TerraLoc's units.

14) If TerraLoc wanted to expand into selling its GPS units through company-owned retail stores, this would be an example of ________.

A) forward vertical integration B) backward vertical integration C) opportunism D) a joint venture Answer: A Diff: 2 Page Ref: 5 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

AACSB: Application of Knowledge 15) A firm's level of vertical integration is the number of steps in its value chain that the firm accomplishes within its boundaries.

Answer: TRUE Diff: 2 Page Ref: 4 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

AACSB: Analytical Thinking 16) More vertically integrated firms accomplish fewer stages of the value chain within their boundaries than less vertically integrated firms.

Answer: FALSE Diff: 2 Page Ref: 4 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

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17) A firm engages in backward vertical integration when it incorporates more stages of the value chain within its boundaries and those stages bring it closer to gaining access to raw materials.

Answer: TRUE Diff: 2 Page Ref: 4 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

AACSB: Analytical Thinking 18) If Wal-Mart were to purchase a factory to make socks and it planned to sell these socks in its stores, this would be an example of forward vertical integration.

Answer: FALSE Diff: 2 Page Ref: 4 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

AACSB: Application of Knowledge 19) When companies developed their own software in the United States, they were engaging in backward vertical integration, but when they started using independent companies in India to develop these software, they were more vertically integrated.

Answer: FALSE Diff: 3 Page Ref: 4 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

AACSB: Application of Knowledge 20) A firm with a high ratio between value added and sales has brought many of the valuecreating activities associated with its business inside its boundaries, consistent with a high level of vertical integration.

Answer: TRUE Diff: 3 Page Ref: 6 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

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21) Define vertical integration and differentiate between forward vertical integration and backward vertical integration.

Answer: Vertical integration is a corporate strategy. A firm's level of vertical integration is simply the number of steps in this value chain that a firm accomplishes within its boundaries.

More vertically integrated firms accomplish more stages of the value chain within their boundaries than less vertically integrated firms. Less vertically integrated firms accomplish fewer stages of the value chain within their boundaries than more vertically integrated firms. A firm engages in backward vertical integration when it incorporates more stages of the value chain within its boundaries and those stages bring a firm closer to the beginning of the value chain, i.e., closer to gaining access to raw materials. A firm engages in forward vertical integration when it incorporates more stages of the value chain within its boundaries and those stages bring a firm closer to the end of the value chain, i.e., closer to interacting directly with final customers.

Diff: 2 Page Ref: 4 Learning Obj.: 8.2: Define Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration.

AACSB: Analytical Thinking 22) In 1937, which Nobel Prize-winning economist first articulated the question of vertical integration, i.e., which stages of the value chain should be included within a firm's boundaries and why?

A) Ronald Coase B) Adam Smith C) David Ricardo D) Milton Freidman Answer: A Diff: 2 Page Ref: 7 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 23) ________ exists when a firm is unfairly exploited in an exchange.

A) Competitive advantage B) Business level strategy C) Opportunism D) Corporate level strategy Answer: C Diff: 2 Page Ref: 7 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

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24) A(n) ________ is any investment in an exchange that has significantly more value in the current exchange than it does in alternative exchanges.

A) opportunity-specific investment B) transaction-specific investment C) competition-specific investment D) opportunistic investment Answer: B Diff: 1 Page Ref: 8 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 25) According to ________ of when vertical integration creates value, vertical integration is valuable when it reduces threats from a firm's suppliers or buyers due to any transaction-specific investments a firm has made.

A) firm capability explanations B) opportunity-based explanations C) flexibility-based explanations D) opportunism-based explanations Answer: D Diff: 2 Page Ref: 9 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 26) The essence of the ________ to vertical integration is that if a firm possesses valuable, rare, and costly-to-imitate resources in a business activity, it should vertically integrate into that activity otherwise it should not vertically integrate into that activity.

A) flexibility-based explanation B) opportunism-based explanation C) firm capability explanation D) opportunity-based explanation Answer: C Diff: 2 Page Ref: 9 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

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27) To the extent that other firms may have competitive advantages in business activities that a firm is considering to enter through vertical integration, vertically integrating into these activities could put the firm at a A) competitive advantage.

B) temporary dynamic disadvantage.

C) sustainable competitive advantage.

D) competitive disadvantage.

Answer: D Diff: 2 Page Ref: 10 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 28) ________ refers to how costly it is for a firm to alter its strategic and organizational decisions.

A) Flexibility B) Dynamic capability C) Opportunism D) Uncertainty Answer: A Diff: 1 Page Ref: 10 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 29) Research suggests that, in general, vertically integrating is ________ than not vertically integrating.

A) significantly more flexible B) somewhat more flexible C) comparatively flexible D) less flexible Answer: D Diff: 2 Page Ref: 11 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

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30) A decision-making setting is ________ when the future of an exchange cannot be known when investments in that exchange are being made.

A) uncertain B) opportunistic C) flexible D) dynamic Answer: A Diff: 2 Page Ref: 11 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 31) A(n) ________ approach to vertical integration suggests that rather than vertically integrating into a business activity whose value is highly uncertain firms should not vertically integrate and instead should form a strategic alliance to manage this exchange.

A) alliance-based B) flexibility-based C) firm capabilities-based D) opportunism-based Answer: B Diff: 2 Page Ref: 11 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 32) Which of the explanations of vertical integration is the oldest and has received the greatest empirical support?

A) opportunism-based B) flexibility-based C) firm capabilities-based D) alliance-based Answer: A Diff: 3 Page Ref: 12 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

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33) If a firm decided to maintain relationships with several different call center management companies, each of which have adopted different technological solutions to the problem of how to use call center employees to assist customers who are using very complex products, to reduce the uncertainty of whether the people staffing the phone can help the firm's customers, this would be consistent with which explanation of vertical integration?

A) opportunism-based B) flexibility-based C) firm capabilities-based D) alliance-based Answer: B Diff: 3 Page Ref: 14 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Application of Knowledge 34) Some observers predict that by ________ an additional 3.3 million jobs in the United States will be outsourced, many to operations overseas.

A) 2014 B) 2015 C) 2016 D) 2017 Answer: B Diff: 2 Page Ref: 16 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 35) If a computer company decided to open its own call centers to provide technical support to its corporate customers because the employees in these call centers need a significant level of indepth training that was highly specialized to the computer company's products, this would be consistent with which explanation of vertical integration?

A) opportunism-based B) flexibility-based C) firm capabilities-based D) alliance-based Answer: A Diff: 3 Page Ref: 15 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

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36) The fact that it would be very costly for Digipics to alter its operations if the large customer referred to in the previous question decided to stop doing business with Digipics suggests that Digipics has ________ in this situation.

A) low flexibility B) low opportunism C) high flexibility D) high opportunism Answer: A Diff: 2 Page Ref: 10 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Application of Knowledge TerraLoc competes in the market for global positioning devices and services. The company manufactures its own GPS units, which are smaller than those of any other competitor and include a proprietary battery that lasts 200% longer than any other competitor's battery and that TerraLoc manufacturers on-site. TerraLoc also has developed proprietary software that is much faster and more precise than that of any competitor. When developing the proprietary battery, TerraLoc decided to manufacturer the battery in-house to reduce the possibility that the company it outsourced the battery manufacturing to might reverse engineer the battery and sell a similar product to competitors. This possibility was especially troubling given that the company expected a significant increase in demand due to the improved battery life. Additionally, TerraLoc sells its products and services through its own direct sales force to ensure that its representatives highlight the longer battery life of TerraLoc's units.

37) TerraLoc's decision to manufacture the battery in-house is most consistent with which explanation of vertical integration?

A) flexibility-based explanations B) firm capability-based explanations C) alliance-based explanations D) opportunism-based explanations Answer: D Diff: 3 Page Ref: 9 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Application of Knowledge 38) Opportunism exists when a firm is unfairly exploited in an exchange.

Answer: TRUE Diff: 1 Page Ref: 7 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

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39) If Iron Horse Helmets (IHH) were to contract with a Chinese manufacturing firm to provide IHH with superior quality helmets for sale in the United States but discovered that the shipments were actually of inferior quality when they were received, IHH would be said to be acting opportunistically.

Answer: FALSE Diff: 3 Page Ref: 7 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Application of Knowledge 40) If one of a firm's exchange partners behaves opportunistically, this reduces the economic value of the firm.

Answer: TRUE Diff: 2 Page Ref: 7 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 41) Firms should only bring market exchanges within their boundaries when the cost of vertical integration is more than the cost of opportunism.

Answer: FALSE Diff: 3 Page Ref: 7 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 42) The threat of opportunism is the least when a party to an exchange has made transactionspecific investments.

Answer: FALSE Diff: 2 Page Ref: 7 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 43) A transaction-specific investment is any investment in an exchange that has significantly more value in the current exchange than it does in alternative exchanges.

Answer: TRUE Diff: 2 Page Ref: 8 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

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44) Transaction-specific investments make parties to an exchange vulnerable to opportunism, and vertical integration solves this vulnerability problem.

Answer: TRUE Diff: 2 Page Ref: 8 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 45) Firms should avoid vertically integrating in those businesses where they possess valuable, rare, and costly-to-imitate resources and capabilities.

Answer: FALSE Diff: 2 Page Ref: 10 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 46) Firms should not vertically integrate into business activities where they do not possess the resources necessary to gain competitive advantages.

Answer: TRUE Diff: 1 Page Ref: 10 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 47) If a firm engages in vertical integration into a business activity where it does not possess any of the valuable, rare, or costly-to-imitate resources it needs to gain a competitive advantage, it may find itself at a competitive disadvantage to the extent that some firms already have competitive advantages in these business activities.

Answer: TRUE Diff: 2 Page Ref: 10 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 48) One of the biggest uncertainties in providing customer service through call centers is the question of whether the people staffing the phones actually help a firm's customers.

Answer: TRUE Diff: 2 Page Ref: 13 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

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49) Flexibility refers to how costly it is for a firm to alter its strategic and organizational decisions.

Answer: TRUE Diff: 1 Page Ref: 10 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 50) Flexibility is low when the cost of changing strategic choices is low.

Answer: FALSE Diff: 2 Page Ref: 11 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 51) Research suggests that, in general, vertically integrating is more flexible than not vertically integrating.

Answer: FALSE Diff: 3 Page Ref: 11 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 52) Once a firm has vertically integrated it has committed its organizational structure, its management controls, and its compensation policies to a particular vertically integrated way of doing business and it has enhanced its flexibility.

Answer: FALSE Diff: 3 Page Ref: 11 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 53) Flexibility is always valuable.

Answer: FALSE Diff: 2 Page Ref: 11 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

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54) Flexibility is only valuable when the decision-making setting a firm is facing is uncertain.

Answer: TRUE Diff: 1 Page Ref: 11 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 55) A decision-making setting is uncertain when the future value of an exchange cannot be known when investments in that exchange are being made.

Answer: TRUE Diff: 2 Page Ref: 11 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 56) A flexibility-based approach to vertical integration suggests that when the decision-making setting regarding a business activity is highly uncertain, firms should form a strategic alliance to enter this activity instead of vertically integrating.

Answer: TRUE Diff: 2 Page Ref: 11 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 57) The downside risks associated with investing in a strategic alliance are unknown but fixed.

Answer: FALSE Diff: 2 Page Ref: 11 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

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58) Identify the three fundamental explanations of how vertical integration can create value and discuss how value is created under each.

Answer: There are three explanations of how firms can create value through vertical integration: a. Opportunism-Based Explanation: Reducing opportunistic threats from a firm's buyers and suppliers due to any transaction specific investments it may have made. b. Capabilities-Based Explanation: By enabling a firm to exploit its valuable, rare, and costlyto-imitate resources and capabilities. c. Flexibility-Based Explanation: When the decision-making environment is uncertain, firms create value by engaging in vertical integration. Under high uncertainty vertical integration can commit a firm to a costly-to-reverse course of action and the flexibility of a non-vertically integrated may be preferred.

Diff: 2 Page Ref: 7 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 59) Discuss the opportunism-based explanation of vertical integration value creation and identify when, under this explanation, firms should vertically integrate. In your answer be sure to clearly define opportunism and the role that transaction-specific investments play in the opportunismbased explanation.

Answer: One of the best known explanations of when vertical integration can be valuable focuses on using vertical integration to reduce the threat of opportunism. Opportunism exists when a firm is unfairly exploited in an exchange. Obviously, when one of its exchange partners behaves opportunistically, this reduces the economic value of a firm. The threat of opportunism is greatest when a party to an exchange has made what are called transaction-specific investments. A transaction-specific investment is any investment in an exchange that has significantly more value in the current exchange than it does in alternative exchanges.

One way to reduce the threat of opportunism is to bring an exchange within the boundary of a firm. That is, one way to reduce the threat of opportunism is to vertically integrate into this exchange. This way, managers in a firm can directly monitor and control this exchange instead of relying on the market to manage this exchange. If the exchange that is brought within the boundary of a firm brings a firm closer to its ultimate suppliers, it is an example of backward vertical integration. If the exchange that is brought within the boundary of a firm brings a firm closer to its ultimate customer, it is an example of forward vertical integration.

Of course, firms should only bring market exchanges within their boundaries when the cost of vertical integration is less than the cost of opportunism. If the cost of vertical integration is greater than the cost of opportunism, then firms should not vertically integrate into an exchange.

This is the case for both backward and forward vertical integration decisions.

Diff: 2 Page Ref: 7 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

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60) Discuss the firm capabilities-based explanation of how vertical integration can create value.

In your discussion identify the two broad implications of this approach and when, under this approach, firms should engage in vertical integration.

Answer: The capabilities-based explanation of how vertical integration can create value focuses on firm capabilities and their ability to generate sustained competitive advantages. This approach has two broad implications. First, it suggests that firms should vertically integrate into those business activities where they possess valuable, rare, and costly-to-imitate resources and capabilities. This way, firms can appropriate at least some of the profits that using these capabilities to exploit environmental opportunities will create. Second, this approach also suggests that firms should not vertically integrate into business activities where they do not possess the resources necessary to gain competitive advantages. Such vertical integration decisions would not be a source of profits to a firm since they do not possess any of the valuable, rare, or costly-to-imitate resources needed to gain competitive advantages in these business activities. Indeed, to the extent that some other firms have competitive advantages in these business activities, vertically integrating into them could put a firm at a competitive disadvantage. Under this approach, a firm should pursue vertical integration into an activity when it has valuable, rare, and costly-to-imitate resources in a business activity, vertically integrate into that activity. If a firm does not have valuable, rare, and costly-to-imitate resources in a business activity and other firms already engaging in this activity do, the firm will find itself at a competitive disadvantage.

Diff: 2 Page Ref: 9 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 61) Discuss the flexibility-based explanation of vertical integration. In discussing this explanation be sure to define flexibility, the role of uncertainty in this explanation, and identify when, under this explanation, firms should engage in vertical integration.

Answer: The flexibility-based explanation of vertical integration focuses on the impact of vertical integration on a firm's flexibility. Flexibility refers to how costly it is for a firm to alter its strategic and organizational decisions. Flexibility is high when the cost of changing strategic choices is low; flexibility is low when the cost of changing strategic choices is high. In general, vertical integration reduces flexibility since it has committed its organizational structure, its management controls, and its compensation policies to a particular vertically integrated way of doing business. When a decision-making environment is uncertain, that is when the future value of an exchange cannot be known; when investments in that exchange are being made, the value of vertical integration is decreased and should be avoided.

Diff: 2 Page Ref: 10 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

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62) Within the flexibility-based approach to vertical integration when should firms engage in strategic alliances instead of vertical integration, and what are the advantages of alliances under these conditions?

Answer: A flexibility-based approach to vertical integration suggests that rather than vertically integrating into a business activity whose value is highly uncertain, firms should not vertically integrate and, instead, should form a strategic alliance to manage this exchange. A strategic alliance is more flexible than vertical integration but still gives a firm enough information about an exchange to estimate its value over time.

An alliance has a second advantage in this setting. The downside risks associated with investing in a strategic alliance are known and fixed. They equal the cost of creating and maintaining the alliance. If an uncertain investment turns out to not be valuable, parties to this alliance know the maximum amount they can lose, an amount equal to the cost of creating and maintaining the alliance. On the other hand, if this exchange turns out to be very valuable, then maintaining an alliance can give a firm access to this huge upside potential.

Diff: 2 Page Ref: 11 Learning Obj.: 8.3: Discuss How Vertical Integration can Create Value by (a) Reducing the Threat of Opportunism (b) Enabling a Firm to Exploit its Valuable, Rare, and Costly-to-Imitate Resources and Capabilities, (c) Enabling a Firm to Retain its Flexibility.

AACSB: Analytical Thinking 63) A firm is likely to be among the first in its industry to vertically disintegrate an exchange when A) the firm concludes that the level of specific investment required to manage an economic exchange is high.

B) the firm believes that the exchange is costly to imitate.

C) the level of uncertainty about the value of an exchange has increased.

D) the firm believes that the exchange is rare.

Answer: C Diff: 3 Page Ref: 16 Learning Obj.: 8.4: Describe Conditions Under Which Vertical Integration can be a Source of Sustained Competitive Advantage.

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64) Which of the following statements regarding direct duplication and substitutes for vertical integration is accurate?

A) A firm's valuable and rare vertical integration choices may be subject to direct duplication and substitutes.

B) A firm's valuable and rare vertical integration choices are subject to neither direct duplication nor substitutes.

C) A firm's valuable and rare vertical integration choices may be subject to direct duplication but not to substitutes.

D) A firm's valuable and rare vertical integration choices may be subject to substitutes but not to direct duplication.

Answer: A Diff: 2 Page Ref: 17 Learning Obj.: 8.4: Describe Conditions Under Which Vertical Integration can be a Source of Sustained Competitive Advantage.

AACSB: Analytical Thinking 65) The major substitute for vertical integration is A) vertical disintegration.

B) strategic alliances.

C) a product-differentiation strategy.

D) a low-cost strategy.

Answer: B Diff: 1 Page Ref: 18 Learning Obj.: 8.4: Describe Conditions Under Which Vertical Integration can be a Source of Sustained Competitive Advantage.

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TerraLoc competes in the market for global positioning devices and services. The company manufactures its own GPS units, which are smaller than those of any other competitor and include a proprietary battery that lasts 200% longer than any other competitor's battery and that TerraLoc manufacturers on-site. TerraLoc also has developed proprietary software that is much faster and more precise than that of any competitor. When developing the proprietary battery, TerraLoc decided to manufacturer the battery in-house to reduce the possibility that the company it outsourced the battery manufacturing to might reverse engineer the battery and sell a similar product to competitors. This possibility was especially troubling given that the company expected a significant increase in demand due to the improved battery life. Additionally, TerraLoc sells its products and services through its own direct sales force to ensure that its representatives highlight the longer battery life of TerraLoc's units.

66) TerraLoc's development of the new battery technology is likely to A) reduce the rarity of TerraLoc's vertical integration strategy since competitors can purchase batteries from other sources.

B) increase the rarity of TerraLoc's vertical integration strategy since TerraLoc has reduced uncertainties related to increased battery life in its products.

C) increase the imitability of TerraLoc's vertical integration strategy since competitors can purchase traditional batteries from other sources.

D) decrease the imitability of TerraLoc's vertical integration strategy since it increases competitors' flexibility.

Answer: B Diff: 3 Page Ref: 15 Learning Obj.: 8.4: Describe Conditions Under Which Vertical Integration can be a Source of Sustained Competitive Advantage.

AACSB: Application of Knowledge 67) A firm's vertical integration strategy is rare when few competing firms are able to create value by vertically integrating in the same way.

Answer: TRUE Diff: 2 Page Ref: 15 Learning Obj.: 8.4: Describe Conditions Under Which Vertical Integration can be a Source of Sustained Competitive Advantage.

AACSB: Analytical Thinking 68) Outsourcing can help firms reduce costs and focus their efforts on those business functions that are central to their competitive advantage.

Answer: TRUE Diff: 2 Page Ref: 16 Learning Obj.: 8.4: Describe Conditions Under Which Vertical Integration can be a Source of Sustained Competitive Advantage.

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69) A firm's vertical integration strategy can only be rare when it is the only firm that is able to vertically integrate efficiently.

Answer: FALSE Diff: 2 Page Ref: 15 Learning Obj.: 8.4: Describe Conditions Under Which Vertical Integration can be a Source of Sustained Competitive Advantage.

AACSB: Analytical Thinking 70) If a firm has capabilities that are valuable and rare, then vertically integrating into businesses that exploit these capabilities can enable the firm to gain at least a temporary competitive advantage.

Answer: TRUE Diff: 2 Page Ref: 17 Learning Obj.: 8.4: Describe Conditions Under Which Vertical Integration can be a Source of Sustained Competitive Advantage.

AACSB: Analytical Thinking 71) A firm may be able to gain an advantage from vertically integrating when it resolves some uncertainty it faces sooner than its competition.

Answer: TRUE Diff: 2 Page Ref: 17 Learning Obj.: 8.4: Describe Conditions Under Which Vertical Integration can be a Source of Sustained Competitive Advantage.

AACSB: Analytical Thinking 72) A firm's ability to conceive and implement vertical integration strategies tends to be highly susceptible to direct duplication.

Answer: FALSE Diff: 3 Page Ref: 17 Learning Obj.: 8.4: Describe Conditions Under Which Vertical Integration can be a Source of Sustained Competitive Advantage.

AACSB: Analytical Thinking 73) Strategic alliances are the major substitute for vertical integration.

Answer: TRUE Diff: 2 Page Ref: 18 Learning Obj.: 8.4: Describe Conditions Under Which Vertical Integration can be a Source of Sustained Competitive Advantage.

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74) Identify three reasons why a firm may be able to create value through vertical integration when most of its competitors are not able to create value through vertical integration.

Answer: There are at least three reasons why vertical integration can be rare. First, a firm may have developed a new technology or a new approach to doing business that requires its business partners to make substantial transaction-specific investments. Firms that engage in these activities will find it in their self-interest to vertically integrate, while firms that have not engaged in these activities will not find it in their self-interest to vertically integrate. If these activities are rare and costly to imitate, they can be a source of competitive advantage for a vertically integrating firm. Second, a firm may have unusual skills or capabilities. If these skills or capabilities are valuable and rare, then vertically integrating into businesses that exploit these capabilities can enable a firm to gain at least a temporary competitive advantage. Finally, a firm may be able to gain an advantage from vertically integrating when it resolves some uncertainty it faces sooner than its competition. In this situation, the firm no longer needs to retain the flexibility and can gain some of the advantages of vertical integration sooner than its competitors and can gain at least a temporary competitive advantage.

Diff: 2 Page Ref: 15 Learning Obj.: 8.4: Describe Conditions Under Which Vertical Integration can be a Source of Sustained Competitive Advantage.

AACSB: Analytical Thinking 75) Which organizational structure is used to implement a vertical integration strategy?

A) matrix B) functional C) multidivisional D) product-divisional Answer: B Diff: 1 Page Ref: 18 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Analytical Thinking 76) From a CEO's perspective, coordinating functional specialists to implement a vertical integration strategy almost always involves A) conflict resolution.

B) competitive positioning.

C) product differentiation.

D) corporate expansion.

Answer: A Diff: 1 Page Ref: 18 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

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77) If Brenda Thompson, Tom Mix's supervisor, wanted to use a budgeting process to help evaluate Tom's performance but wanted to ensure that using a budget did not encourage Tom to focus on short-term behaviors at the expense of long-term results, she should A) develop the budget herself using realistic goals based on the economic reality facing Tom's function and use both quantitative and qualitative evaluations of the performance of Tom's function and then give the budget to Tom to follow.

B) work with Tom in an open and participative process to develop the budget based on the most optimistic scenario possible and use both quantitative and qualitative evaluations of the performance of Tom's function.

C) develop the budget herself based on the most pessimistic scenario possible and use both quantitative and qualitative evaluations of the performance of Tom's function and then give the budget to Tom to follow.

D) work with Tom in an open and participative process to develop the budget based on the economic reality facing Tom's function and use both quantitative and qualitative evaluations of the performance of Tom's function.

Answer: D Diff: 3 Page Ref: 19 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Application of Knowledge 78) Evaluating a functional manager's performance relative to budgets can be an effective control when A) the process used in developing budgets is open and participative.

B) the process reflects the economic best-case scenario developed by the functional manager.

C) the process reflects the economic worst-case scenario developed by the functional manager.

D) the process relies solely on quantitative criteria to evaluate the functional manager's performance.

Answer: A Diff: 2 Page Ref: 19 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Analytical Thinking 79) Which committee in a U-form organization meets monthly and usually consists of the CEO and each of the heads of the functional areas included in a firm?

A) executive committee B) functional committee C) operations committee D) managerial committee Answer: C Diff: 2 Page Ref: 20 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

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80) Which committee in a U-form organization meets weekly and reviews the performance of the firm on a weekly basis and typically consists of a CEO and two or three functional senior managers?

A) top management team B) executive committee C) operations committee D) functional committee Answer: B Diff: 2 Page Ref: 20 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Analytical Thinking 81) Investments made by employees that have more value in a particular company than in alternative companies are known as A) firm-specific investments.

B) individual-specific investments.

C) group-specific investments.

D) opportunistic investments.

Answer: A Diff: 2 Page Ref: 21 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Analytical Thinking 82) According to the opportunism-based explanations of vertical integration, which of the following would be the most appropriate type of compensation to support strategy implementation?

A) cash bonuses for corporate performance B) cash bonuses for group performance C) stock options for individual performance D) stock grants for individual performance Answer: D Diff: 3 Page Ref: 22 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

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83) According to the capabilities-based explanations of vertical integration, which of the following would be the most appropriate type of compensation to support strategy implementation?

A) salary B) cash bonuses for corporate performance C) cash bonuses for individual performance D) stock grants for individual performance Answer: B Diff: 2 Page Ref: 22 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Analytical Thinking 84) According to the flexibility-based explanations of vertical integration, which of the following would be the most appropriate type of compensation to support strategy implementation?

A) stock options for individual performance B) stock grants for individual performance C) stock grants for corporate performance D) cash bonuses for individual performance Answer: A Diff: 3 Page Ref: 22 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Analytical Thinking 85) ________ are payments to employees in a firm's stock.

A) Stock grants B) Cash grants C) Flexibility grants D) Option grants Answer: A Diff: 2 Page Ref: 22 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Analytical Thinking 86) ________ are when employees are given the right, but not the obligation, to purchase stock at predetermined prices.

A) Flexibility grants B) Stock grants C) Stock options D) Grant options Answer: C Diff: 2 Page Ref: 23 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

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87) The ________ explanations call for compensation that focuses on individual employees, such as cash bonuses for individual performance.

A) capabilities-based B) strategically-based C) flexibility-based D) opportunism-based Answer: D Diff: 2 Page Ref: 23 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Analytical Thinking 88) Compensation that focuses on groups of employees such as cash bonuses and stock grants are best suited for ________ explanations of vertical integration.

A) flexibility-based B) capabilities-based C) strategically-based D) opportunism-based Answer: B Diff: 2 Page Ref: 23 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Analytical Thinking 89) The ________ logic suggests that compensation that has a fixed and known downside risk and significant upside potential is important for firms implementing vertical integration strategies.

A) opportunism B) strategic C) capabilities D) flexibility Answer: D Diff: 3 Page Ref: 23 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

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90) Firm-specific investments are a type of ________ investments.

A) operational B) contingent C) transaction-specific D) horizontal Answer: C Diff: 2 Page Ref: 21 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Analytical Thinking TerraLoc competes in the market for global positioning devices and services. The company manufactures its own GPS units, which are smaller than those of any other competitor and include a proprietary battery that lasts 200% longer than any other competitor's battery and that TerraLoc manufacturers on-site. TerraLoc also has developed proprietary software that is much faster and more precise than that of any competitor. When developing the proprietary battery, TerraLoc decided to manufacturer the battery in-house to reduce the possibility that the company it outsourced the battery manufacturing to might reverse engineer the battery and sell a similar product to competitors. This possibility was especially troubling given that the company expected a significant increase in demand due to the improved battery life. Additionally, TerraLoc sells its products and services through its own direct sales force to ensure that its representatives highlight the longer battery life of TerraLoc's units.

91) TerraLoc is most likely to use the ________ organizational structure.

A) matrix B) product-based multidivisional C) functional D) geography-based multidivisional Answer: C Diff: 2 Page Ref: 18 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Application of Knowledge 92) If TerraLoc were to use a U-form organizational structure and the CEO decided to use budgets as a management control but wanted to make sure that the managers did not become too focused on the short term, the CEO should do all of the following except A) use an open process in developing budgets.

B) determine budgets for her managers and allow them to focus only on meeting the budgets.

C) use both quantitative and qualitative evaluations of managers' performance.

D) make sure that the process used in developing budgets reflects the economic reality facing the firm's managers.

Answer: B Diff: 3 Page Ref: 19 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

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93) The use of budgets in a vertically integrated U-form organization can lead functional managers to overemphasize short-term behavior that is easy to measure and underemphasize longer-term behavior that is more difficult to measure.

Answer: TRUE Diff: 2 Page Ref: 18 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Analytical Thinking 94) Budgets are an important control tool and they contribute to only positive outcomes.

Answer: FALSE Diff: 3 Page Ref: 19 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Analytical Thinking 95) From a CEO's perspective, coordinating functional specialists to implement a vertical integration strategy rarely involves conflict resolution.

Answer: FALSE Diff: 2 Page Ref: 19 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Analytical Thinking 96) Numerous conflicts can arise among functional managers in a vertically integrated U-form organization.

Answer: TRUE Diff: 2 Page Ref: 21 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Analytical Thinking 97) Capability explanations of vertical integration acknowledge the importance of firm-specific investments in creating value for a firm.

Answer: TRUE Diff: 2 Page Ref: 22 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

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98) Identify the organizational structure that is used to implement a vertical integration strategy and why from a CEO's perspective coordinating functional specialists to implement a vertical integration strategy almost always involves conflict resolution and how this conflict can be resolved.

Answer: The organizational structure that is used to implement a cost-leadership and productdifferentiation strategy, the functional or U-form structure, is also used to implement a vertical integration strategy. Indeed, each of the exchanges included within the boundaries of a firm as a result of vertical integration decisions are incorporated into one of the functions in a functional organizational structure. From a CEO's perspective, coordinating functional specialists to implement a vertical integration strategy almost always involves conflict resolution. Conflicts among functional managers in a U-form organization are both expected and normal. Indeed, if there is no conflict among certain functional managers in a U-form organization, then some of these managers probably are not doing their jobs.

The task facing the CEO is not to pretend this conflict does not exist, or to ignore it, but to manage it in a way that facilitates strategy implementation. The CEO's job is to help resolve conflicts in ways that facilitate the implementation of the firm's strategy. Functional managers do not have to "like" each other. However, if a firm's vertical integration strategy is correct, the reason that a function has been included within the boundaries of a firm is that this decision creates value for the firm. Allowing functional conflicts to get in the way of taking advantage of each of the functions within a firm's boundaries can destroy this potential value.

Diff: 3 Page Ref: 18 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

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99) Discuss the role of the budgeting process as a control mechanism in vertically integrated Uform organizations, the potential unintended negative consequence budgets can have, and three things CEOs can do to counter this potential consequence.

Answer: Budgeting is one of the most important control mechanisms available to CEOs in vertically integrated U-form organizations. Indeed, in most U-form companies, enormous management effort goes into the creation of budgets and the evaluation of performance relative to budgets. Budgets are developed for costs, revenues, and a variety of other activities performed by a firm's functional managers. Often, managerial compensation and promotion opportunities depend on the ability of a manager to meet budget expectations.

Although budgets are an important control tool, they can also have unintended negative consequences. For example, the use of budgets can lead functional managers to overemphasize short-term behavior that is easy to measure and underemphasize longer-term behavior that is more difficult to measure. CEOs can do a variety of things to counter the "short-termism" effects of the budgeting process. Three things a CEO can do to counter "short-termism" are to 1. Ensure that the process used in developing budgets is open and participative 2. Make sure the budgeting process reflects the economic reality facing functional managers and the firm, and 3. Augment quantitative evaluations of a functional manager's performance with qualitative evaluations of that performance.

Diff: 3 Page Ref: 19 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

AACSB: Analytical Thinking 100) What type of compensation approach goes best with the flexibility explanation of vertical integration?

Answer: The creation of flexibility in a firm depends on employees being willing to engage in activities that have fixed and known downside risks and significant upside potential. Stock options for individual, corporate, or group performance is apt in this situation.

Diff: 1 Page Ref: 22 Learning Obj.: 8.5: Describe How the Functional Organization Structure, Management Controls, and Compensation Policies are used to Implement Vertical Integration.

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Strategic Management and Competitive Advantage, 6e (Barney) Chapter 9 Corporate Diversification 1) A firm implements a ________ when it operates in multiple industries or markets simultaneously.

A) vertical integration strategy B) corporate diversification strategy C) business diversification strategy D) product-differentiation strategy Answer: B Diff: 1 Page Ref: 4 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking 2) When a firm operates in multiple industries simultaneously, it is said to be implementing a A) product diversification strategy.

B) product-differentiation strategy.

C) geographic market diversification strategy.

D) geographic market differentiation strategy.

Answer: A Diff: 1 Page Ref: 4 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking 3) When a firm operates in multiple geographic markets simultaneously it is said to be implementing a(n) A) international diversification strategy.

B) product-differentiation strategy.

C) geographic market diversification strategy.

D) geographic market differentiation strategy.

Answer: C Diff: 2 Page Ref: 4 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

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4) When a firm simultaneously implements both a product diversification strategy and a geographic market diversification strategy it is said to be implementing a(n) A) mixed-market diversification strategy.

B) unrelated-diversification strategy.

C) product-differentiation strategy.

D) product-market diversification strategy.

Answer: D Diff: 2 Page Ref: 4 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking 5) A firm has implemented a strategy of ________ when all or most of its activities fall within a single industry and geographic market.

A) limited corporate diversification B) related diversification C) unrelated diversification D) related-linked diversification Answer: A Diff: 2 Page Ref: 5 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking 6) In which type of limited corporate diversification do firms have greater than 95% of their total sales in a single product market?

A) dominant-business firms B) single-business firms C) related-constrained firms D) related-linked firms Answer: B Diff: 2 Page Ref: 5 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking 7) Firms pursuing ________ have between 70% and 95% of their sales in a single product market.

A) dominant-business diversification B) single-business diversification C) related-constrained diversification D) related-linked diversification Answer: A Diff: 2 Page Ref: 5 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

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8) The analysis of firms pursuing a strategy of ________ is logically equivalent to the analysis of business-level strategies.

A) unrelated diversification B) related-linked diversification C) related-constrained diversification D) limited corporate diversification Answer: D Diff: 2 Page Ref: 6 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking 9) Firms such as PepsiCo that operate a number of businesses around the world that share a number of inputs, production technologies, or distribution channels but none of whose businesses account for more than 70% of a firm's revenues are said to be implementing a A) related-constrained diversification.

B) related-linked diversification.

C) dominant-business diversification.

D) single-business diversification.

Answer: A Diff: 2 Page Ref: 6 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking 10) Firms such as Disney that own and operate businesses that share a limited number of inputs, production technologies or distribution channels are said to be pursuing a ________ corporate diversification strategy.

A) related-constrained B) related-linked C) dominant-business D) single-business Answer: B Diff: 2 Page Ref: 6 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

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11) Firms that generate less than 70% of their revenues from a single product market and whose businesses share few, if any, common attributes are said to be pursuing ________ corporate diversification.

A) limited B) related-linked C) related-constrained D) unrelated Answer: D Diff: 2 Page Ref: 6 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking At the beginning of 2001, Peach Computers competed exclusively in the computer industry and generated approximately 96% of its revenue from the sales of computers and computer-related software and approximately 4% of its revenues were generated from sales of other peripherals.

Further, of these revenues, 60% was from sales in the U.S., 30% was from sales in Europe, 7% was from sales in Asia and 3% was from other areas. In October 2001, Peach entered the personal electronics industry by introducing a new MP3 player known as the PeachPit. In developing and selling the PeachPit, Peach Computers was able to use many of the same R&D facilities, suppliers, production facilities, and distribution and sales outlets as the computers and software Peach Computers traditionally sold. By 2003, the PeachPit MP3 Player, accessories for the unit, and sales of songs on Peach Computers' NectarTunes website accounted for 35% of Peach Computers' revenues.

12) In 2001, Peach Computers' diversification strategy was best characterized as A) related-linked diversification.

B) dominant-business diversification.

C) single-business diversification.

D) related-constrained diversification.

Answer: C Diff: 2 Page Ref: 5 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Application of Knowledge 13) By 2003, Peach Computers' diversification strategy was best characterized as A) unrelated diversification.

B) related-constrained diversification.

C) related-linked diversification.

D) dominant-business diversification.

Answer: B Diff: 2 Page Ref: 5 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

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14) If Peach Computers were looking to getting into the business of making telephones, its diversification would be called A) related-linked.

B) related-constrained.

C) related-corporate.

D) unrelated.

Answer: D Diff: 2 Page Ref: 5 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Application of Knowledge 15) A firm implements a corporate diversification strategy when it operates in multiple industries or markets simultaneously.

Answer: TRUE Diff: 1 Page Ref: 4 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking 16) When a firm operates in multiple industries simultaneously it is said to be implementing a geographic market diversification strategy.

Answer: FALSE Diff: 1 Page Ref: 4 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking 17) When a firm operates in multiple geographic markets simultaneously it is said to be implementing a product diversification strategy.

Answer: FALSE Diff: 1 Page Ref: 4 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking 18) A firm has implemented a strategy of limited corporate diversification when all or most of its business activities fall within a single industry and geographic market.

Answer: TRUE Diff: 1 Page Ref: 5 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

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19) Firms that pursue a strategy of related corporate diversification have some type of linkages among most of the different businesses they pursue.

Answer: TRUE Diff: 2 Page Ref: 5 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking 20) A dominant-business firm is pursuing a related diversification strategy and has between 70 and 95 percent of firm revenues from a single business.

Answer: FALSE Diff: 2 Page Ref: 5 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking 21) If all the businesses in which a firm operates share a significant number of inputs, production technologies, distribution channels, similar customers, and so forth, this corporate diversification strategy is called related-constrained diversification.

Answer: TRUE Diff: 2 Page Ref: 6 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking 22) If the different businesses that a single firm pursues are linked on only a couple of dimensions, or if different sets of businesses are linked along very different dimensions, that corporate diversification strategy is called related-linked diversification.

Answer: TRUE Diff: 2 Page Ref: 6 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking 23) When less than 90 percent of a firm's revenues are generated in a single product market and when a firm's business share few, if any, common attributes, then that firm is pursuing a strategy of unrelated corporate diversification.

Answer: FALSE Diff: 2 Page Ref: 5 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

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24) Discuss when a firm is implementing a corporate diversification strategy and differentiate between a product diversification strategy, a geographic market diversification strategy and a product-market diversification strategy.

Answer: A firm is implementing a corporate diversification strategy when it operates in multiple industries or markets simultaneously. A firm is said to be implementing a product diversification strategy when it operates in multiple industries simultaneously. A firm is said to be pursuing a geographic market diversification strategy when it operates in multiple geographic markets simultaneously. When a firm implements both a product diversification strategy and a geographic market diversification strategy simultaneously, it is said to be implementing a product-market diversification strategy.

Diff: 1 Page Ref: 4 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

AACSB: Analytical Thinking 25) Identify and distinguish between the five different levels of diversification discussed in Chapter 7.

Answer: The five different levels of diversification that firms can pursue: Single-business firms—These firms operate in a single business and 95% or more of firm revenues come from this business.

Dominant-business diversification—Firms using this type of limited diversification strategy operate in two or more businesses, one of which accounts for between 70% and 95% of firm revenues.

Related-constrained diversification—A firm using this type of related diversification operates in multiple businesses, none of which accounts for more than 70% of firm revenues that share a significant number of dimensions including inputs, production technologies, distribution channels, similar customers, etc. This strategy is termed "constrained" because corporate managers pursue business opportunities in new markets or industries only if those markets or industries share numerous resource and capability requirements with the businesses the firm is currently pursuing.

Related-linked diversification—Firms using this type of related diversification operate in multiple businesses, none of which accounts for more than 70% of a firm's revenues, and these businesses share only a couple of dimensions or have businesses that are linked along very different dimensions.

Unrelated corporate diversification—When less than 70 percent of a firm's revenues is generated in a single product market and when a firm's businesses share few, if any, common attributes, then that firm is pursuing a strategy of unrelated corporate diversification.

Diff: 2 Page Ref: 5 Learning Obj.: 9.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification.

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26) In order for corporate diversification to be economically valuable A) there must be some valuable economy of scope among the multiple businesses in which a firm is operating and it must be more costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.

B) there must not be any valuable economy of scope among the multiple businesses in which a firm is operating and it must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.

C) there must be some valuable economy of scope among the multiple businesses in which a firm is operating and it must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.

D) there must not be any valuable economy of scope among the multiple businesses in which a firm is operating and it must be more costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.

Answer: C Diff: 2 Page Ref: 7 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 27) When the value of the products or services a firm sells increases as a function of the number of business that the firm operates in, ________ are said to exist.

A) economies of scope B) vertical economies C) economies of scale D) diseconomies of scope Answer: A Diff: 2 Page Ref: 7 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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28) Which of the following statements regarding economies of scope is accurate?

A) Only firms pursuing single-business diversification can exploit economies of scope.

B) Only firms pursuing related-constrained diversification can exploit economies of scope.

C) Only firms not pursuing diversification can exploit economies of scope.

D) Only diversified firms can exploit economies of scope.

Answer: D Diff: 2 Page Ref: 7 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 29) Currently, most scholars believe that exploiting economies of scope through corporate diversification, on average, A) destroyed about 25% of a firm's market value.

B) had no impact on a firm's market value.

C) destroyed about 55% of a firm's market value.

D) increased a firm's market value.

Answer: D Diff: 3 Page Ref: 8 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 30) Which type of economies of scope includes shared activities and core competencies?

A) operational economies of scope B) financial economies of scope C) anticompetitive economies of scope D) employee and stakeholder incentives for diversification Answer: A Diff: 1 Page Ref: 8 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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31) If a diversified firm had three businesses and these companies shared a common marketing and service operation, as well as common technology and development, this would be an example of which type of economy of scope?

A) core competencies B) shared activities C) risk reduction D) multipoint competition Answer: B Diff: 2 Page Ref: 8 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Application of Knowledge 32) Shared activities are quite common between both ________ and ________ diversified firms.

A) single-business; dominant-business B) related-constrained; single-business C) related-linked; dominant-business D) related-constrained; related-linked Answer: D Diff: 2 Page Ref: 9 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 33) Limits of activity sharing include A) substantial organizational issues that are often associated with a diversified firm's learning how to manage cross-business relationships and in which failure can lead to excess bureaucracy, inefficiency, and organizational gridlock.

B) a significant reduction in an organization's innovation and flexibility.

C) substantial organizational issues related to adequately compensating personnel across businesses and setting transfer prices.

D) a significant reduction in an organization's ability to meet the needs of any of its customers.

Answer: A Diff: 3 Page Ref: 12 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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34) ________ are complex sets of resources and capabilities that link different businesses in a diversified firm through managerial and technical know-how, experience and wisdom.

A) Managerial competencies B) Core competencies C) Competitive advantages D) Core advantages Answer: B Diff: 2 Page Ref: 12 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 35) A firm that diversifies by exploiting its resources and capability advantages in its original business will have ________ costs than (as) firms that begin a new business without these resource and capability advantages, or ________ revenues than (as) firms lacking these advantages.

A) higher; lower B) the same; higher C) lower; the same D) lower; higher Answer: D Diff: 2 Page Ref: 13 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 36) If all of a firm's businesses share the same core competencies, then that firm has implemented a strategy of ________ diversification.

A) single-business B) related-linked C) related-constrained D) dominant-business Answer: C Diff: 3 Page Ref: 13 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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37) Diversified firms that are exploiting core competencies as an economy of scope but are not doing so with any shared activities are sometimes called ________ diversified firms.

A) seemingly unrelated B) unrelated C) semi-related D) link-related Answer: A Diff: 2 Page Ref: 13 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 38) A common way of thinking about strategy across different businesses within a firm is known as the firm's A) core competency.

B) competitive advantage.

C) economy of scope.

D) dominant logic.

Answer: D Diff: 2 Page Ref: 14 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 39) In general, as a source of capital a diversified firm has ________ information about a business that it owns compared to external sources of capital.

A) more and better B) the same C) less and inferior D) more but biased Answer: A Diff: 2 Page Ref: 15 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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40) Compared to two very risky businesses that have cash flows that are not highly correlated over time and that are operating separately, the risk of a diversified firm operating in those same two businesses simultaneously is A) somewhat higher.

B) lower.

C) the same.

D) substantially higher.

Answer: B Diff: 2 Page Ref: 17 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 41) ________ exists when two or more diversified firms simultaneously compete in multiple markets.

A) Multipoint competition B) Dynamic competition C) Multipoint cooperation D) Dynamic cooperation Answer: A Diff: 1 Page Ref: 18 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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42) For multipoint competition to lead to mutual forbearance, A) the threat of retaliation must be substantial and the firms pursuing this strategy must have strong linkages among their diversified businesses.

B) the threat of retaliation must be low and the firms pursuing this strategy must have strong linkages among their diversified businesses.

C) the threat of retaliation must be low and the firms pursuing this strategy must have weak linkages among their diversified businesses.

D) the threat of retaliation must be substantial and the firms pursuing this strategy must have weak linkages among their diversified businesses.

Answer: A Diff: 2 Page Ref: 18 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 43) When diversified firms use the revenues from profitable businesses to subsidize the operations of another business and then set the prices of the subsidized firm's products at a level that is below the subsidized business's cost to produce these items, this is known as ________ pricing.

A) dynamic B) monopoly C) predatory D) beneficial Answer: C Diff: 2 Page Ref: 19 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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44) Research over the years has demonstrated conclusively that the primary determinant of the compensation of top managers in a firm is A) not the size of the firm, usually measured in sales, but the economic performance of the firm.

B) both the economic performance of the firm as well as the size of the firm, usually measured in sales.

C) not the economic performance of the firm but the size of the firm, usually measured in sales.

D) neither the economic performance of the firm nor the size of the firm.

Answer: C Diff: 2 Page Ref: 20 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 45) Which of the following economies of scope do not have the potential for generating positive returns for a firm's equity holders since the economies of scope can be realized by outside equity holders at a low cost by investing in a diversified portfolio of stock?

A) shared activities B) diversification to maximize the size of a firm C) internal capital allocation D) exploiting market power Answer: B Diff: 2 Page Ref: 21 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 46) The only economy of scope that an unrelated firm can try to realize is A) core competencies.

B) tax advantages.

C) multipoint competition.

D) risk reduction.

Answer: D Diff: 2 Page Ref: 21 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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At the beginning of 2001, Peach Computers competed exclusively in the computer industry and generated approximately 96% of its revenue from the sales of computers and computer-related software and approximately 4% of its revenues were generated from sales of other peripherals.

Further, of these revenues, 60% was from sales in the U.S., 30% was from sales in Europe, 7% was from sales in Asia and 3% was from other areas. In October 2001, Peach entered the personal electronics industry by introducing a new MP3 player known as the PeachPit. In developing and selling the PeachPit, Peach Computers was able to use many of the same R&D facilities, suppliers, production facilities, and distribution and sales outlets as the computers and software Peach Computers traditionally sold. By 2003, the PeachPit MP3 Player, accessories for the unit, and sales of songs on Peach Computers' NectarTunes website accounted for 35% of Peach Computers' revenues.

47) Which type of economies of scope is Peach Computers experiencing between its units?

A) shared activities B) core competencies C) multipoint competition D) tax advantages Answer: A Diff: 3 Page Ref: 8 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Application of Knowledge 48) One of the limits of the economies of scope that Peach Computers is leveraging in its diversification strategy is A) they may limit the ability of a particular business to meet specific customers' needs.

B) they are significantly affected by the way a diversified firm is organized.

C) they are not tangible and may be reflected only in the shared knowledge, experience and wisdom across businesses.

D) the level and type of diversification that a firm pursues can affect the efficiency of this allocation process.

Answer: A Diff: 3 Page Ref: 12 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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49) If one of the reasons that Peach Computers entered into the electronics industry was to offset weakness in the computer industry because when the computer industry was weak, the electronics industry was strong, and vice versa, Peach Computers would be pursuing which economy of scope?

A) core competencies B) multipoint competition C) tax advantages D) risk reduction Answer: D Diff: 2 Page Ref: 9 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Application of Knowledge 50) If, when Peach Computers introduced its PeachPit in 2001, the company used its profits in the computer industry to subsidize its operations in the electronics industry and used this subsidy to sell the PeachPit for a price that was less than the cost of producing and selling the MP3 players, this would be an example of A) mutual forbearance.

B) escalation of commitment.

C) predatory pricing.

D) multipoint competition.

Answer: C Diff: 3 Page Ref: 19 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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51) Peach Computers' equity holders, its employees, suppliers and customers along with all of those groups and individuals who have an interest in how Peach Computers performs are referred to as A) focal groups.

B) stakeholders.

C) supporters.

D) stockholders.

Answer: B Diff: 2 Page Ref: 23 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Application of Knowledge 52) Economies of scope exist in a firm when the value of the products or services it sells increase as a function of the number of businesses in which the firm operates.

Answer: TRUE Diff: 2 Page Ref: 7 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 53) In order for corporate diversification to be economically valuable there must either be some valuable economy of scope among the multiple businesses in which a firm is operating or it must be less costly for managers in a firm to realize these economies of scope than for an outside equity holder on his or her own.

Answer: FALSE Diff: 2 Page Ref: 7 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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54) Currently, most scholars believe that when a firm implements a corporate diversification strategy it destroys about 25% of its market value.

Answer: FALSE Diff: 3 Page Ref: 8 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 55) Shared activities can increase the expenses for a diversified firm's business.

Answer: FALSE Diff: 2 Page Ref: 8 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 56) Shared activities that can provide the basis for operational economies of scope are quite common among related-constrained and related-linked diversified firms, as well as firms following an unrelated diversification strategy.

Answer: FALSE Diff: 2 Page Ref: 9 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 57) Shared activities can increase the revenues in diversified firms' businesses, and failure to exploit shared activities across businesses can lead to out-of-control costs.

Answer: TRUE Diff: 2 Page Ref: 11 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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58) One of the limits of activity sharing is that sharing activities may limit the ability of a particular business to meet its specific customers' needs.

Answer: TRUE Diff: 2 Page Ref: 12 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 59) Over the last decade, more and more diversified firms have been abandoning efforts at managing each business's activities independently in favor of increased activity sharing.

Answer: FALSE Diff: 3 Page Ref: 12 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 60) Core competencies are complex sets of resources and capabilities that link different businesses in a diversified firm through managerial and technical know-how, experience, and wisdom.

Answer: TRUE Diff: 2 Page Ref: 12 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 61) A firm that diversifies by exploiting its resources and capability advantages in its original business will have higher costs than firms that begin new business without these revenues and capability advantages or lower revenues than firms lacking these advantages, or both.

Answer: FALSE Diff: 3 Page Ref: 13 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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62) Firms that may appear to be unrelated diversified firms, but that are, in fact, related diversified firms without any shared activities are referred to as seemingly related firms.

Answer: FALSE Diff: 2 Page Ref: 13 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 63) A firm's dominant logic is a common way of thinking about strategy across different businesses.

Answer: TRUE Diff: 2 Page Ref: 14 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 64) The businesses within a diversified firm always gain cost-of-capital advantages by being part of a diversified firm's portfolio.

Answer: FALSE Diff: 1 Page Ref: 15 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 65) Multipoint competition exists when two or more diversified firms simultaneously compete in multiple markets, and multipoint competition can serve to facilitate a particular type of tacit collusion called mutual forbearance.

Answer: TRUE Diff: 2 Page Ref: 18 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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66) Predatory pricing is a type of cross-subsidization in which a firm uses revenues from other businesses to set its prices in a particular business so that the prices are substantially more than the subsidized business's costs.

Answer: FALSE Diff: 2 Page Ref: 19 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 67) Both shared activities and internal capital allocation are examples of economies of scope that have the potential for generating positive returns for a firm's equity holders.

Answer: TRUE Diff: 2 Page Ref: 21 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 68) Overall, related diversification is less likely to be consistent with the interests of a firm's equity holders than is unrelated diversification.

Answer: FALSE Diff: 2 Page Ref: 21 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 69) The only two economies of scope that do not have the potential for generating positive returns for a firm's equity holders are diversification in order to maximize the size of a firm and diversification to reduce risk.

Answer: TRUE Diff: 2 Page Ref: 21 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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70) A firm's stakeholders include all of those groups or individuals who have an interest in how a firm performs.

Answer: TRUE Diff: 2 Page Ref: 23 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 71) Most of the different types of economies of scope cannot be realized by equity holders on their own.

Answer: TRUE Diff: 1 Page Ref: 21 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 72) Specify the two conditions that a corporate diversification strategy must meet in order to create economic value.

Answer: In order for corporate diversification to be economically valuable, two conditions must hold. First, there must be some valuable economy of scope among the multiple businesses in which a firm is operating. Second, it must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own. If outside investors could realize the value of a particular economy of scope on their own, and at low cost, then they would have few incentives to "hire" managers to realize this economy of scope for them.

Diff: 1 Page Ref: 7 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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73) Define the concept of economies of scope, discuss when they are valuable and identify and differentiate between four of the eight potential economies of scope a diversified firm might try to exploit.

Answer: Economies of scope exist in a firm when the value of the products or services it sells increases as a function of the number of businesses that firm operates in. The term "scope" in this definition refers to the range of businesses in which a diversified firm operates. For this reason, only diversified firms can, by definition, exploit economies of scope. Economies of scope are valuable to the extent that they increase a firm's revenues or decrease its costs, compared to what would be the case if these economies of scope were not exploited.

There are eight different types of economies of scope: • Shared activities in which a firm's businesses share a variety of activities throughout their value chains can serve as the basis for operational economies of scope.

• Core competencies are complex sets of resources and capabilities that link different businesses in a diversified firm through managerial and technical know-how, experience, and wisdom.

• Internal capital allocation. In a sense, diversification creates an internal capital market in which businesses in a diversified firm compete for corporate capital. An internal capital market creates value for a diversified firm when it offers some efficiency advantages over an external capital market.

• Risk reduction. Diversified firms can achieve a lower level of risk if they build a business portfolio that has a low correlation between the cash flows of the businesses in the portfolio.

• Tax advantages. A diversified firm can use losses in some of its businesses to offset profits in others, thereby reducing its overall tax liability. Second, because diversification can reduce the riskiness of a firm's cash flows, it can also reduce the probability that a firm will declare bankruptcy. This can increase a firm's debt capacity, which is particularly important in tax environments where interest payments on debt are tax deductible.

• Multipoint competition is an anticompetitive economy of scope that exists when two or more diversified firms simultaneously compete in multiple markets. Multipoint competition can serve to facilitate a particular type of tacit collusion called mutual forbearance in which firms forgo acts of competitive strategies in one business because of the possibility of retaliation by a competitor in another business.

• Exploiting market power. Internal allocations of capital among a diversified firm's businesses may enable it to exploit in some of its businesses the market power advantages it enjoys in other of its businesses through actions such as subsidizing the operations of another of its businesses.

• Maximizing management compensation. Managers seeking to maximize their income should attempt to grow their firm. One of the easiest ways to grow a firm is through diversification, especially unrelated diversification through mergers and acquisitions that can allow a diversified firm to grow substantially in a short period of time, leading senior managers to earn higher incomes.

Diff: 3 Page Ref: 7 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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74) Discuss shared activities as a potential source of economies of scope for diversified firms and identify the potential benefits and limits of activity sharing.

Answer: When the companies in a diversified firm share a variety of activities throughout their value chains, these activities can serve as the basis for operational economies of scope. Potential shared activities can be found throughout a firm's value chain from input activities through dealer support and service. Activity sharing can have the effect of reducing a diversified firm's costs, and failure to exploit share activities across business can lead to out-of-control costs.

Shared activities can also increase the revenues in a diversified firm's businesses through shared product development and sales activities as well as by enhancing business revenues by exploiting strong, positive reputations of some of a firm's businesses in other of its businesses. There are three important limits to activity sharing. First, substantial organizational issues can be associated with a diversified firm's learning how to manage cross-business relationships. Second, sharing activities may limit the ability of a particular business to meet its specific customer's needs. Finally, if one business in a diversified firm has a poor reputation, sharing activities with that business can reduce the quality of the reputation of other businesses in the firm.

Diff: 2 Page Ref: 8 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

AACSB: Analytical Thinking 75) Identify and discuss the two economies of scope that do not have the potential for generating positive returns for a firm's outside equity investors.

Answer: The only two economies of scope that do not have the potential for generating positive returns for a firm's equity holders are diversification in order to maximize the size of a firm and diversification to reduce risk. Diversification in order to maximize the size of a firm does not generate positive returns because firm size, per se, is not valuable. Diversification in order to reduce risk does not generate positive returns because equity holders can do this on their own at a very low cost by simply investing in a diversified portfolio of stocks.

Diff: 1 Page Ref: 8 Learning Obj.: 9.2: Specify the Two Conditions that a Corporate Diversification Strategy Must Meet to Create Economic Value (a) Define the Concept of "Economies of Scope" and Identify Nine Potential Economies of Scope a Diversified Firm Might Try to Exploit (b) Identify Which of These Economies of Scope a Firm's Outside Equity Investors can Realize on Their Own at Low Cost.

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76) Which of the following economies of scope is costly to duplicate?

A) shared activities B) internal capital allocation C) risk reduction D) tax advantages Answer: B Diff: 2 Page Ref: 25 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

AACSB: Analytical Thinking 77) Which of the following economies of scope is less costly to duplicate?

A) employee compensation B) core competencies C) multipoint competition D) exploiting market power Answer: A Diff: 2 Page Ref: 25 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

AACSB: Analytical Thinking 78) Substitutes for exploiting economies of scope in diversification include A) growing and developing independent businesses within a diversified firm and vertical integration.

B) vertical integration and strategic alliances.

C) growing and developing independent businesses within a diversified firm and strategic alliances.

D) strategic alliances and multipoint competition.

Answer: C Diff: 2 Page Ref: 26 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

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79) Which of the following statements regarding the rarity of diversification is accurate?

A) If only a few competing firms have exploited a particular economy of scope, that economy of scope can be rare.

B) A particular economy of scope can only be rare if no other firms are exploiting that economy of scope.

C) A particular economy of scope can be rare even if many other firms are exploiting that economy of scope.

D) If only a few competing firms have exploited a particular economy of scope, that economy of scope can be rare but only if the firm is pursuing unrelated diversification.

Answer: A Diff: 2 Page Ref: 25 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

AACSB: Analytical Thinking 80) Which of the following economies of scope is costly-to-duplicate?

A) employee compensation B) core competencies C) shared activities D) risk reduction Answer: B Diff: 3 Page Ref: 25 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

AACSB: Analytical Thinking 81) ________ is an example of a less costly-to-duplicate economies of scope.

A) Tax advantages B) Core competencies C) Internal capital allocation D) Multipoint competition Answer: A Diff: 3 Page Ref: 25 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

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82) ________ are substitutes for exploiting economies of scope in diversification.

A) Tax havens B) Tax shelters C) Tax freedom D) Strategic alliances Answer: D Diff: 2 Page Ref: 26 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

AACSB: Analytical Thinking At the beginning of 2001, Peach Computers competed exclusively in the computer industry and generated approximately 96% of its revenue from the sales of computers and computer-related software and approximately 4% of its revenues were generated from sales of other peripherals.

Further, of these revenues, 60% was from sales in the U.S., 30% was from sales in Europe, 7% was from sales in Asia and 3% was from other areas. In October 2001, Peach entered the personal electronics industry by introducing a new MP3 player known as the PeachPit. In developing and selling the PeachPit, Peach Computers was able to use many of the same R&D facilities, suppliers, production facilities, and distribution and sales outlets as the computers and software Peach Computers traditionally sold. By 2003, the PeachPit MP3 Player, accessories for the unit, and sales of songs on Peach Computers' NectarTunes website accounted for 35% of Peach Computers' revenues.

83) If no other firm in the computer industry were using a diversification strategy similar to Peach Computers', this diversification strategy could be said to be A) rare and costly to duplicate.

B) rare and less costly to duplicate.

C) common but costly to duplicate.

D) common and less costly to duplicate.

Answer: A Diff: 3 Page Ref: 23 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

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84) In 2001, if Peach Computers did not want to employ a diversification strategy to enter the personal electronics industry, it could use which substitute for diversification?

A) backward vertical integration B) product differentiation C) strategic alliances D) forward vertical integration Answer: C Diff: 2 Page Ref: 26 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

AACSB: Application of Knowledge 85) Diversification per se is usually not a rare firm strategy regardless of how rare the particular economies of scope associated with that diversification are.

Answer: FALSE Diff: 2 Page Ref: 23 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

AACSB: Analytical Thinking 86) Shared activities and risk reduction are usually difficult-to-duplicate bases for corporate diversification, but tax advantages and employee compensation are usually relatively easy to duplicate.

Answer: FALSE Diff: 2 Page Ref: 25 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

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87) Strategic alliances are generally viewed as a poor substitute for diversification since the economies of scope in diversification can be found in strategic alliances.

Answer: FALSE Diff: 2 Page Ref: 26 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

AACSB: Analytical Thinking 88) One substitute for diversification that exists is that instead of obtaining cost or revenue advantages from exploiting economies of scope across businesses in a diversified firm, a firm may decide to simply grow and develop each of its businesses separately.

Answer: TRUE Diff: 2 Page Ref: 26 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

AACSB: Analytical Thinking 89) Core competencies are an example of costly-to-duplicate economies of scope.

Answer: TRUE Diff: 2 Page Ref: 25 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

AACSB: Analytical Thinking 90) Exploiting market power is an example of costly-to-duplicate economies of scope.

Answer: TRUE Diff: 2 Page Ref: 25 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

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91) Employee compensation is an example of costly-to-duplicate economies of scope.

Answer: FALSE Diff: 2 Page Ref: 25 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

AACSB: Analytical Thinking 92) Internal capital allocation is an example of less costly-to-duplicate economies of scope.

Answer: FALSE Diff: 3 Page Ref: 25 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

AACSB: Analytical Thinking 93) Shared activities, risk reduction, tax advantages, and employee compensation as bases for corporate diversification are usually relatively easy to duplicate.

Answer: TRUE Diff: 1 Page Ref: 25 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

AACSB: Analytical Thinking 94) Multipoint competition requires loose coordination between the different businesses in which a firm operates.

Answer: FALSE Diff: 2 Page Ref: 25 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

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95) Discuss the conditions under which a firm's diversification strategy will be rare.

Answer: The rarity of diversification depends not on diversification per se but on how rare the particular economies of scope associated with that diversification are. If only a few competing firms have exploited a particular economy of scope, that economy of scope can be rare. If numerous firms have done so, it will be common and not a source of competitive advantage.

Diff: 1 Page Ref: 23 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

AACSB: Analytical Thinking 96) Identify which economies of scope are more likely to be subject to low-cost imitation and which are less likely to be subject to low-cost imitation and discuss why each is either costly or less costly to duplicate.

Answer: The extent to which a valuable and rare corporate diversification strategy is immune from direct duplication depends on how costly it is for competing firms to realize this same economy of scope. Some economies of scope are, in general, more costly to duplicate than others. Shared activities, risk reduction, tax advantages, and employee compensation as bases for corporate diversification are usually relatively easy to duplicate. Because shared activities are based on tangible assets that a firm exploits across multiple businesses, such as common R&D labs, common sales forces, and common manufacturing, they are usually relatively easy to duplicate. The only duplication issues for shared activities concern developing the cooperative cross-business relationships that often facilitate the use of shared activities. Moreover, because risk reduction, tax advantages, and employee compensation motives for diversifying can be accomplished through both related and unrelated diversification, these motives for diversifying tend to be relatively easy to duplicate.

On the other hand, other economies of scope are much more difficult to duplicate. These difficult-to-duplicate economies of scope include core competencies, internal capital allocation efficiencies, multipoint competition, and exploitation of market power. Because core competencies are more intangible, their direct duplication is often challenging. The realization of capital allocation economies of scope requires very substantial information-processing capabilities. These capabilities are often very difficult to develop. Multipoint competition requires very close coordination between the different businesses in which a firm operates. This kind of coordination is socially complex and thus may often be immune from direct duplication.

Finally, exploitation of market power may be costly to duplicate because it requires that a firm must possess significant market power in one of its lines of business. A firm that does not have this market power advantage would have to obtain it. The cost of doing so, in most situations, would be prohibitive.

Diff: 2 Page Ref: 25 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

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97) Identify two potential substitutes for corporate diversification and discuss how each can provide benefits similar to corporate diversification.

Answer: Two obvious substitutes for diversification exist. First, instead of obtaining cost or revenue advantages from exploiting economies of scope ACROSS businesses in a diversified firm, a firm may decide to simply grow and develop each of its businesses separately. In this sense, a firm that successfully implements a cost-leadership strategy or a product-differentiation strategy in a single business can obtain the same cost or revenue advantages it could have obtained by exploiting economies of scope, but without having to develop cross-business relations. Growing independent businesses within a diversified firm can be a substitute for exploiting economies of scope in a diversification strategy.

A second substitute for exploiting economies of scope in diversification can be found in strategic alliances. By using a strategic alliance, firms may be able to gain the economies of scope they could have obtained if they had carefully exploited economies of scope across businesses they own. Thus, for example, instead of a firm exploiting research and development economies of scope between two businesses it owns, it could form a strategic alliance with a different firm and form a joint research and development lab. Instead of a firm exploiting sales economies of scope by linking its businesses through a common sales force, it might develop a sales agreement with another firm and obtain cost or revenue advantages in this way.

Diff: 2 Page Ref: 26 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

AACSB: Analytical Thinking 98) Explain how strategic alliances are a substitute for exploiting economies of scope in diversification.

Answer: By using a strategic alliance, a firm may be able to gain the economies of scope it could have obtained if it had carefully exploited economies of scope across its businesses. For example, instead of a firm exploiting research and development economies between two businesses it owns, it could form a strategic alliance with a different firm and form a joint R&D lab.

Diff: 2 Page Ref: 26 Learning Obj.: 9.3: Specify the Circumstances Under Which a Firm's Diversification Strategy Will be a Source of Sustained Competitive Advantage (a) Explain Which of the Economies of Scope Identified in this Chapter are More Likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation (b) Identify Two Potential Substitutes for Corporate Diversification.

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Strategic Management and Competitive Advantage, 6e (Barney) Chapter 10 Organizing to Implement Corporate Diversification 1) The most common organizational structure for implementing a corporate diversification strategy is the ________ structure.

A) matrix B) U-form C) M-form D) functional Answer: C Diff: 1 Page Ref: 4 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 2) In a multidivisional structure, each business that the firm engages in is managed through a A) product line.

B) division.

C) geographic unit.

D) function.

Answer: B Diff: 1 Page Ref: 4 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 3) The divisions of an M-form organization are true A) profit-and-loss centers.

B) functional units.

C) matrix teams.

D) organic structures.

Answer: A Diff: 2 Page Ref: 4 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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4) The M-form structure is designed to create checks and balances for managers that increase the probability that a diversified firm will be managed in ways consistent with A) the interests of all of its stakeholders.

B) an exclusively short-term perspective.

C) an exclusively long-term perspective.

D) the interests of its equity holders.

Answer: D Diff: 2 Page Ref: 5 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 5) In an agency relationship, the party that delegates decision-making authority to another individual is known as the A) stakeholder.

B) principal.

C) agent.

D) stockholder.

Answer: B Diff: 2 Page Ref: 7 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 6) Two common agency problems include A) managers investing some of a firm's capital in managerial perquisites that do not add economic value to a firm and managerial risk aversion.

B) managers not investing enough of a firm's capital in managerial perquisites and managerial risk aversion.

C) managers investing some of a firm's capital in managerial perquisites that do not add economic value to a firm and managerial risk seeking.

D) managers not investing enough of a firm's capital in managerial perquisites and managerial risk seeking.

Answer: A Diff: 3 Page Ref: 7 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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7) Which component of the M-form structure evaluates the firm's decision making to ensure that it is consistent with the interests of equity holders?

A) senior executives B) corporate staff C) board of directors D) division general managers Answer: C Diff: 1 Page Ref: 5 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 8) A board of directors typically consists of A) 10 to 15 individuals drawn from a firm's top management group and from individuals outside the firm.

B) 10 to 15 individuals drawn exclusively from a firm's top management group.

C) 10 to 15 individuals drawn exclusively from individuals outside the firm.

D) 10 to 15 individuals drawn from all stakeholder groups associated with the firm.

Answer: A Diff: 2 Page Ref: 5 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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9) Which of the following statements regarding outside members of boards of directors is accurate?

A) Outside directors, as compared to insiders, tend to focus less on monitoring a firm's economic performance than on other measures of firm performance and are more likely than insider members to dismiss CEOs following poor performance.

B) Outside directors, as compared to insiders, tend to focus less on monitoring a firm's economic performance than on other measures of firm performance and are less likely than insider members to dismiss CEOs following poor performance.

C) Outside directors, as compared to insiders, tend to focus more on monitoring a firm's economic performance than on other measures of firm performance and are less likely than insider members to dismiss CEOs following poor performance.

D) Outside directors, as compared to insiders, tend to focus more on monitoring a firm's economic performance than on other measures of firm performance and are more likely than insider members to dismiss CEOs following poor performance.

Answer: D Diff: 3 Page Ref: 8 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 10) In examining the question of whether the roles of CEO and chairman should be combined, empirical research on this question suggests A) that combining these roles is always positively related with firm performance.

B) that separating these roles is always positively related with firm performance.

C) that combining these roles is positively correlated with firm performance when the firm operates in slow-growth and simple competitive environments.

D) that separating these roles is positively correlated with firm performance when the firm operates in slow-growth and simple competitive environments.

Answer: C Diff: 3 Page Ref: 8 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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11) The ________ is the subcommittee of the board of directors that is responsible for ensuring the accuracy of accounting and financial statements.

A) audit committee B) finance committee C) nominating committee D) personnel and compensation committee Answer: A Diff: 2 Page Ref: 9 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 12) The ________ is a subcommittee of the board of directors that maintains the relationship between the firm and external capital markets.

A) nominating committee B) audit committee C) personnel and compensation committee D) finance committee Answer: D Diff: 2 Page Ref: 9 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 13) In 2005, what percentage of the equity traded in the United States was owned by institutional investors?

A) 20% B) 38% C) 59% D) 69% Answer: C Diff: 3 Page Ref: 9 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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14) Supervision of the board of directors in its monitoring role is the responsibility of A) the CEO. B) the chairman of the board.

C) the chief operating officer.

D) the president.

Answer: B Diff: 2 Page Ref: 9 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 15) The senior executive (the president or CEO) in an M-form organization has two responsibilities: A) budgeting and accounting.

B) budgeting and mission setting.

C) strategy formulation and strategy implementation.

D) strategy formulation and budgeting.

Answer: C Diff: 2 Page Ref: 10 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 16) In 1970, institutions owned ________ percent of the equity traded in the United States and by 2005 they owned ________ percent of the equity traded in the United States.

A) 32; 59 B) 62; 32 C) 48; 62 D) 32; 38 Answer: A Diff: 2 Page Ref: 9 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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17) Which of the following statements regarding institutional investors is accurate?

A) Institutional investors tend to be more interested in maximizing the short-term value of their portfolios than in the long-term performance of firms in those portfolios.

B) High levels of institutional ownership are negatively related to the level of R&D in a firm.

C) High levels of institutional ownership have a strong, positive relationship with the level of R&D in a firm.

D) High levels of institutional ownership lead firms to sell strategically unrelated businesses.

Answer: D Diff: 2 Page Ref: 10 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 18) Which role in the office of the president is responsible for strategy implementation?

A) chairman of the board B) chief executive officer C) chief operating officer D) chief strategist Answer: C Diff: 2 Page Ref: 11 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 19) The primary responsibility of the ________ is to provide information about the firm's external and internal environments to the firm's senior executive.

A) corporate staff B) board of directors C) division general managers D) shared activity managers Answer: A Diff: 2 Page Ref: 11 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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20) The divided loyalties that divisional staff managers have between corporate staff managers and functional managers are potentially the most problematic in ________ staff functions.

A) marketing B) accounting C) logistics D) production Answer: B Diff: 2 Page Ref: 12 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 21) In an M-form organization, the management of day-to-day operations is delegated to A) divisional general managers and corporate staff managers.

B) corporate staff managers and functional managers who report to corporate staff managers.

C) divisional general managers and functional managers who report to division general managers.

D) the board of directors and corporate staff managers who report to the board of directors.

Answer: C Diff: 3 Page Ref: 13 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 22) ________ have full profit-and-loss responsibility and typically have multiple functional managers reporting to them.

A) Division general managers B) Corporate staff managers C) Senior executives D) Shared activity managers Answer: A Diff: 2 Page Ref: 13 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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23) When compared to the strategy implementation responsibilities of senior executives in Uform organizations, when implementing strategy, division general managers in M-form organizations A) tend to have to deal with less conflict.

B) have to compete for external capital funding.

C) tend to have to deal with substantially more conflict.

D) must cooperate with other divisions to exploit corporate economies of scope.

Answer: D Diff: 2 Page Ref: 13 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 24) Rather than having profit-and-loss responsibilities, ________ are assigned a budget and manage their operations to that budget.

A) profit centers B) cost centers C) operation centers D) functional centers Answer: B Diff: 2 Page Ref: 14 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 25) When the cost of services from a shared activity is ________ the cost of comparable services provided by a division itself or by an outside supplier than the division, general managers have a strong incentive ________.

A) less than; to use the services of shared activities B) greater than; to use the services of shared activities C) less than; to use the services of an outside supplier D) equal to; to use the services of an outside supplier Answer: A Diff: 2 Page Ref: 15 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders.

26) Which organizational structure is SpandoCorp using?

A) U-form B) matrix C) M-form D) functional Answer: C Diff: 2 Page Ref: 4 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Application of Knowledge 27) Grace McKenna is best described as a(n) ________ in SpandoCorp.

A) senior executive B) corporate staff member C) division general manager D) institutional investor Answer: A Diff: 2 Page Ref: 5 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Application of Knowledge 28) Wells Tucker's position in SpandoCorp is best described as A) a division general manager.

B) a member of the corporate staff.

C) the senior executive.

D) a member of the board of directors.

Answer: B Diff: 3 Page Ref: 11 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Application of Knowledge 10 Copyright © 2019 Pearson Education, Inc.

29) Kelly Rae's position is SpandoCorp is best described as a(n) A) institutional investor.

B) senior executive.

C) division general manager.

D) member of the board of directors.

Answer: D Diff: 2 Page Ref: 5 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Application of Knowledge 30) If Todd Heinz were the chief operating officer for SpandoCorp, his responsibilities would include A) supervision of the board of directors in its monitoring role.

B) strategy implementation.

C) strategy formulation.

D) strategy control.

Answer: B Diff: 2 Page Ref: 11 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Application of Knowledge 31) The most common organization structure for implementing a corporate diversification strategy is the U-form.

Answer: FALSE Diff: 1 Page Ref: 4 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 32) Another name for the M-form is the multidivisional structure.

Answer: TRUE Diff: 1 Page Ref: 4 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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33) In the multidivisional structure, each business that the firm engages in is managed through a division.

Answer: TRUE Diff: 1 Page Ref: 4 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 34) The divisions in an M-form organization are true profit-and-loss centers.

Answer: TRUE Diff: 2 Page Ref: 4 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 35) All firms that use the multidivisional structure use the same criteria for defining the boundaries of profit-and-loss centers.

Answer: FALSE Diff: 2 Page Ref: 4 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 36) Divisions in an M-form organization should be large enough to represent identifiable business entities but small enough so that a division general manager can manage each one effectively.

Answer: TRUE Diff: 2 Page Ref: 4 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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37) Each division in an M-form organization typically adopts a matrix structure and the division general manager takes on the role of senior project executive.

Answer: FALSE Diff: 2 Page Ref: 4 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 38) The M-form structure is designed to create checks and balances for managers that increase the probability that a diversified firm will be managed in ways consistent with the interests of its equity holders.

Answer: TRUE Diff: 2 Page Ref: 5 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 39) Whenever one party to an exchange delegates decision-making authority to a second party, an agency relationship has been created between these parties.

Answer: TRUE Diff: 2 Page Ref: 7 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 40) In an agency relationship the party delegating the decision-making authority is called the agent.

Answer: FALSE Diff: 2 Page Ref: 7 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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41) One common agency problem occurs when managers decide to take some of a firm's capital and invest it in managerial perquisites that do not add economic value to the firm but that do directly benefit those managers.

Answer: TRUE Diff: 2 Page Ref: 7 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 42) In an M-form organization the role of the board of directors is to formulate corporate strategies consistent with equity holders' interests and to assure strategy implementation.

Answer: FALSE Diff: 3 Page Ref: 6 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 43) In principle, only the CEO and the president report to the board of directors while other senior managers report only to the CEO. Answer: FALSE Diff: 2 Page Ref: 5 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 44) Research on outside members of boards of directors tends to show that outside directors, as compared to insiders, tend to focus less on monitoring a firm's economic performance than on other measures of firm performance.

Answer: FALSE Diff: 3 Page Ref: 8 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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45) Research has shown that separating the roles of CEO and board chair is positively correlated with firm performance when firms operated in high-growth and very complex environments.

Answer: TRUE Diff: 2 Page Ref: 8 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 46) To the extent that a board of directors begins to operate a business on a day-to-day basis, it goes beyond its capabilities.

Answer: TRUE Diff: 2 Page Ref: 9 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 47) A board of directors typically consists of 15 to 30 individuals drawn from a firm's top management group and from individuals outside the firm.

Answer: FALSE Diff: 3 Page Ref: 5 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 48) Managerial risk aversion is not as important in diversified firms where risk is distributed.

Answer: FALSE Diff: 2 Page Ref: 7 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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49) Institutional owners are usually pension funds, mutual funds, insurance companies, or other groups of investors that have joined together to manage their investments.

Answer: TRUE Diff: 2 Page Ref: 9 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 50) In 1970, institutions owned 62 percent of the equity traded in the United States; by 1990, institutions owned 48 percent of this equity and by 2005, they owned only 32 percent of this equity.

Answer: FALSE Diff: 3 Page Ref: 9 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 51) The senior executive in an M-form organization has two responsibilities: strategy formulation and strategy implementation.

Answer: TRUE Diff: 1 Page Ref: 10 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 52) If institutional investors are biopic, they should influence firms to invest in relatively less R&D. Answer: FALSE Diff: 2 Page Ref: 10 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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53) The greatest risk associated with treating shared activities as profit centers is that divisions may choose to obtain no services from the shared activities.

Answer: TRUE Diff: 2 Page Ref: 19 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 54) Describe the multidivisional, or M-form structure, and how it is used to implement a corporate diversification strategy.

Answer: The most common organizational structure for implementing a corporate diversification strategy is the M-form, or multidivisional, structure. The M-form structure is designed to create checks and balances for managers in a firm that increase the probability that a diversified firm will be managed in ways consistent with the interests of its equity holders. In the multidivisional structure, each business that the firm engages in is managed through a division, which is treated as a true profit-and-loss center in that the profits and losses are calculated at the level of the division in these firms. Divisions in an M-form organization typically adopt a Uform structure and are large enough to represent identifiable business entities but small enough so that a division general manager can effectively manage each one.

Diff: 2 Page Ref: 4 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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55) Define what constitutes an agency relationship and the roles of the principal and the agent; discuss how the agency relationship is reflected in the context of corporate diversification and when the agency relationship can be effective; and identify two common agency problems.

Answer: An agency relationship exists whenever one party to an exchange delegates decisionmaking authority to a second party. In the agency relationship, the party delegating the decisionmaking authority is called the agent and the party to whom the authority is delegated is called the agent. In the context of corporate diversification, an agency relationship exists between a firm's outside equity holders (as principals) and its managers (as agents) to the extent that equity holders delegate the day-to-day management of their investment to those managers. The agency relationship between equity holders and managers can be very effective as long as managers make investment decisions in ways that are consistent with equity holders' interests. Thus, if equity holders are interested in maximizing the rate of return on their investment in a firm and if managers make their investment decisions with this objective in mind, then equity holders will have few concerns about delegating the day-to-day management of their investments to managers. Unfortunately, in numerous situations the interests of a firm's outside equity holders and its managers do not coincide. When parties in an agency relationship differ in their decisionmaking objectives, agency problems arise. Two common agency problems have been identified: 1. Managers can decide to take some of a firm's capital and invest it in managerial perquisites that do not add economic value to the firm but do directly benefit those managers.

2. To the extent that very risky investments may jeopardize a firm's survival and thus management's compensation and positions, managers may be more risk averse in their decision making than equity holders would prefer them to be.

Diff: 2 Page Ref: 7 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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56) Describe the nature and role of the board of directors in an M-form organization and discuss who generally serves on the board, the role of outside members on a board of directors and when the roles of CEO and chairman of the board should be combined or separated.

Answer: In an M-form organization, the board of director's primary responsibility is to monitor decision making in the firm to ensure that it is consistent with the interests of outside equity holders. In principle, all of a firm's senior managers report to the board. A board of directors typically consists of 10 to 15 individuals drawn from a firm's top management group and from individuals outside the firm. A firm's senior executive (often identified by the title president, chief executive officer, or CEO), its chief financial officer (CFO), and a few other senior managers are usually on the board although outsiders typically outnumber managers on the board. The firm's senior executive is often but not always the chairman of the board. The task of managerial board members, including the board chair, is to provide other board members information and insights about critical decisions being made in the firm and the effect those decisions are likely to have on a firm's equity holders. The task of outsiders on the board is to evaluate the past, current, and future performance of the firm and of its senior managers to ensure that the actions taken in the firm are consistent with equity holders' interests. Outside directors, as compared to insiders, tend to focus more on monitoring a firm's economic performance rather than other measures of firm performance. Outside board members are also more likely than inside members to dismiss CEOs following poor performance. Also, outside board members have a stronger incentive than inside members to maintain their reputation as effective monitors. This incentive by itself can lead to more effective monitoring by outside board members. Moreover, the monitoring effectiveness of outside board members seems to be substantially enhanced when they personally own a substantial amount of a firm's equity. There is currently some debate about whether the roles of board chair and CEO should be combined or separated, and if separated, what kinds of people should occupy these positions. Empirical research on this question suggests that whether the roles of CEO and chairman should be combined or not depends on the complexity of the information analysis and monitoring task facing the CEO and chairman. Some researchers have found that combining the roles of CEO and chairman is positively correlated with firm performance when firms operate in slow-growth and simple competitive environments, environments that do not overtax the cognitive capability of a single individual. This finding suggests that combining these roles does not necessarily increase conflicts between a firm and its equity holders. This research also found that separating the roles of CEO and board chair is positively correlated with firm performance when firms operate in high-growth and very complex environments. In such environments, a single individual cannot fulfill all the responsibilities of both CEO and chairman, and thus the two roles need to be held by separate individuals.

Diff: 3 Page Ref: 5 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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57) Discuss the role of institutional investors in an M-form organization. In addressing this question, be sure to identify who institutional investors are and discuss trends in institutional ownership and whether institutional investors encourage managers to act in ways that are consistent with the interests of equity holders or if institutional investors are overly myopic.

Answer: Institutional owners are usually pension funds, mutual funds, insurance companies or other groups of individual investors that have joined together to manage their investments. In 1970, institutions owned 32 percent of the equity traded in the United States. By 1990, institutions owned 48 percent of this equity. In 2005, they owned 59% of the equity traded in the United States. Institutional investors can use their investment clout to insist that a firm's management behaves in ways consistent with the interests of equity holders. Observers who assume that institutional investors are interested more in maximizing the short-term value of their portfolios than in the long-term performance of firms in those portfolios fear that such power will force firms to make only short-term investments. Recent research in the United States and Japan, however, suggests that institutional investors are not unduly myopic. Additionally, other researchers have shown that high levels of institutional ownership leads firms to sell strategically unrelated businesses. This effect of institutional investors is enhanced if, in addition, outside directors on a firm's board have substantial equity investments in the firm.

Diff: 2 Page Ref: 9 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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58) Identify the responsibilities of the senior executive in an M-form organization and discuss the three different roles in the office of the president and the responsibilities of each role.

Answer: The senior executive (the president or CEO) in an M-form organization has two responsibilities: strategy formulation and strategy implementation. Strategy formulation entails deciding in which set of businesses a diversified firm will operate. At the broadest level, deciding which businesses a diversified firm should operate in is equivalent to discovering and developing valuable economies of scope among a firm's current and potential businesses. If these economies of scope are also rare and costly to imitate, they can be a source of sustained competitive advantage for a diversified firm. The senior executive is uniquely positioned to discover, develop, and nurture valuable economies of scope in a diversified firm, but the senior executive in an M-form organization should involve numerous other divisional and functional managers in strategy formulation to ensure complete and accurate information as input to the process and a broad understanding of and commitment to that strategy once it has been formulated. Strategy implementation focuses on encouraging behavior in a firm that is consistent with this strategy and almost always involves resolving conflicts within and between each of the major managerial components of the M-form structure: corporate staff, division general managers, and shared activity managers. It is often the case that the roles and responsibilities of the senior executive in an M-form organization are greater than what can be reasonably managed by a single individual. This is especially likely if a firm is broadly diversified across numerous complex products and markets. In this situation, it is not uncommon for the tasks of the senior executive to be divided among two or three people: the chairman of the board (responsible for the supervision of the board of directors in its monitoring role), the chief executive officer (responsible for strategy formulation), and the chief operating officer (responsible for strategy implementation). Together, these roles are known as the office of the president.

Diff: 2 Page Ref: 10 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

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59) Discuss the role of division general managers in an M-form organization and compare and contrast this role with that of senior executives in U-form organizations.

Answer: Division general managers in an M-form organization have primary responsibility for managing the day-to-day operations of a firm's businesses. Division general managers have full profit-and-loss responsibility and typically have multiple functional managers reporting to them.

As general managers, they have both strategy formulation and strategy implementation responsibilities. On the strategy formulation side, division general managers choose strategies for their divisions within the broader strategic context established by the senior executive of the firm.

The strategy implementation responsibilities of division general managers in an M-form organization parallel the strategy implementation responsibilities of senior executives in U-form organizations. In particular, division general managers must be able to coordinate the activities of often conflicting functional managers in order to implement a division's strategies.

In addition to their responsibilities as a U-form senior executive, division general managers in an M-form organization have two additional responsibilities: to compete for corporate capital and to cooperate with other divisions to exploit corporate economies of scope. Division general managers compete for corporate capital by promising high rates of return on capital invested in previous periods by the corporations in their business. In most firms, divisions that have demonstrated the ability to generate high rates of return on earlier capital investments gain access to more capital, or to lower-cost capital, compared to divisions that have not demonstrated a history of such performance.

Division general managers cooperate to exploit economies of scope by working with shared activity managers, corporate staff managers, and the senior executive in the firm to isolate, understand, and use the economies of scope around which the diversified firm was originally organized. Division general managers can even become involved in discovering new economies of scope that were not anticipated when the firm's diversification strategy was originally implemented but nevertheless may be both valuable and costly for outside investors to create on their own.

Diff: 2 Page Ref: 13 Learning Obj.: 10.1: Describe the Multidivisional, or M-Form, Organizational Structure and the Roles of the Board of Directors, Institutional Investors, the Senior Executive, Corporate Staff, Division General Managers, and Shared Activity Managers in Making the M-Form Structure Work.

AACSB: Analytical Thinking 60) ________ is an economic measure of divisional performance.

A) Return on assets B) Return on a division's sales C) Economic value added D) A division's growth rate Answer: C Diff: 2 Page Ref: 17 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

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61) Which of the following is a weakness of using a hurdle rate as a standard of evaluating the performance of a division?

A) The process is time-consuming.

B) The process is fraught with political intrigue.

C) This approach lets other firms determine what is and what is not excellent performance for a division within a diversified firm.

D) The use of such a single standard ignores important differences in performance that might exist across divisions.

Answer: D Diff: 3 Page Ref: 19 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 62) Most accounting measures of divisional performance have a common limitation in that they A) have a short-term bias.

B) are costly to implement.

C) are difficult to interpret.

D) have a long-term bias.

Answer: A Diff: 2 Page Ref: 17 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 63) If a division of a multidivisional firm has adjusted accounting earnings of $10 million, a weighted average cost of capital of 10% and a total capital employed by the division of $50 million, the division has an EVA of A) $25 million.

B) $5 million.

C) $15 million.

D) $20 million.

Answer: B Diff: 3 Page Ref: 17 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

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64) When adjusting a division's accounting earnings for use in the economic value added calculations, R&D spending is usually A) subtracted from the division's performance.

B) depreciated over the life of the average R&D projected and subtracted from the division's performance.

C) amortized over the life of the average R&D projected and added back to the division's performance.

D) added back into the division's performance.

Answer: D Diff: 2 Page Ref: 17 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 65) In ________ budgeting, corporate executives create a list of all capital allocation requests from divisions in a firm, rank them from "most important" to "least important" and then fund all the projects a firm can afford, given the amount of capital that is available and no project receives funding simply because it was funded in the past.

A) cost-plus B) activity-based C) zero-based D) revenue-based Answer: C Diff: 2 Page Ref: 19 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 66) In a multidivisional company, one division "sells" its products or services to a second division for a(n) ________, which is set by a firm's corporate management to accomplish corporate objectives.

A) allocation price B) transfer cost C) market price D) transfer price Answer: D Diff: 2 Page Ref: 20 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

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67) Under which transfer pricing scheme is the transfer price set equal to the selling division's actual cost of production or set equal to the cost of production if the selling division were operating at maximum efficiency?

A) exchange autonomy B) mandated full cost C) mandated market based D) dual pricing Answer: C Diff: 2 Page Ref: 21 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 68) Economic theory tells us that transfer prices should equal ________ cost.

A) marginal B) variable C) fixed D) opportunity Answer: D Diff: 2 Page Ref: 22 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 69) Some scholars suggest that the search for optimal transfer pricing should be abandoned in favor of setting transfer pricing as a(n) ________ process.

A) negotiation B) arbitrary C) conflict resolution D) marketing Answer: C Diff: 2 Page Ref: 22 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

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70) Which of the following is not an alternative transfer-pricing scheme?

A) exchange autonomy B) mandated full cost C) solo pricing D) mandated market based Answer: D Diff: 2 Page Ref: 21 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 71) Transfer pricing should equal A) selling price.

B) opportunity cost.

C) total cost.

D) marginal cost.

Answer: B Diff: 3 Page Ref: 22 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders.

72) If SpandoCorp wanted to measure the performance of its divisions with a method that would minimize any potential short-term bias, it should use a(n) A) hurdle rate based measure of divisional performance.

B) divisional budget based measure of performance.

C) economic value added measure of divisional performance.

D) measure of performance based on the average level of profitability of firms in a division's industry.

Answer: C Diff: 3 Page Ref: 17 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

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73) If SpandoCorp used a ________ budgeting process, it would assume that no project would receive funding for the future simply because it was funded in the past and would require each project to stand on its own merits each year to be included in a list of important projects that the firm can afford to fund.

A) zero-based B) cost plus C) dynamic D) traditional Answer: A Diff: 2 Page Ref: 19 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Application of Knowledge 74) If the bulk materials division of SpandoCorp sold its reams of Spandex to the military division and set the transfer price of these reams equal to the bulk materials actual cost of production, SpandoCorp would be using the ________ transfer pricing scheme.

A) exchange autonomy B) mandated full cost C) mandated market based D) dual pricing Answer: B Diff: 2 Page Ref: 21 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Application of Knowledge 75) Only accounting measures of performance can be used in accurately measuring the performance of divisions within a diversified firm.

Answer: FALSE Diff: 1 Page Ref: 16 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 76) One of the strengths of using a hurdle rate to measure the performance of divisions in a diversified firm is that if the corporation has a single hurdle rate, there is little ambiguity about the performance objectives of divisions.

Answer: TRUE Diff: 2 Page Ref: 16 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

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77) Most accounting measures of divisional performance focus on long-term benefits and minimize the possibility of a short-term bias.

Answer: FALSE Diff: 2 Page Ref: 17 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 78) Economic methods of divisional performance in a diversified firm build on accounting methods but adjust those methods to incorporate short-term investments that may generate longterm benefits.

Answer: TRUE Diff: 2 Page Ref: 17 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 79) Economic measures of divisional performance in a diversified firm compare a division's performance with a firm's cost of capital and these measures increase the potential for gaming, which is generally minimized by accounting measures.

Answer: FALSE Diff: 2 Page Ref: 17 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 80) By adjusting for a division's earnings and accounting for the cost of investing in a division, economic value added is a much more accurate estimate of a division's economic performance than are traditional accounting measures of performance.

Answer: TRUE Diff: 2 Page Ref: 18 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

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81) If a well-managed diversified firm uses both accounting and economic measures, it will be able to unambiguously evaluate divisional performance.

Answer: FALSE Diff: 3 Page Ref: 18 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 82) To the extent that a firm exploits real economies of scope in implementing a diversification strategy, it will be able to unambiguously evaluate the performance of individual divisions in that firm.

Answer: FALSE Diff: 3 Page Ref: 18 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 83) In zero-based budgeting, each project has to stand on its own merits each year by being included among the important projects that a firm can afford to fund and no project receives funding for the future simply because it received funding in the past.

Answer: TRUE Diff: 2 Page Ref: 19 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 84) Intermediate products or services are those products or services that are produced in one division of a diversified firm that are used as inputs by another division.

Answer: TRUE Diff: 2 Page Ref: 20 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 85) In a diversified firm, market prices are set by a firm's corporate management to accomplish corporate objectives while transfer prices are determined by the market forces of supply and demand.

Answer: FALSE Diff: 2 Page Ref: 20 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

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86) In choosing which transfer pricing system to use, a firm should be less concerned about finding the "right" transfer-pricing mechanism and be more concerned about choosing a transferpricing policy that creates the fewest management problems.

Answer: TRUE Diff: 2 Page Ref: 22 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 87) It is unusual for a diversified firm to change its transfer-pricing mechanisms every few years in an attempt to find the "right" transfer-pricing mechanism.

Answer: FALSE Diff: 3 Page Ref: 22 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 88) Transfer prices should equal opportunity cost.

Answer: TRUE Diff: 2 Page Ref: 22 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 89) The transfer of intermediate products or services among divisions is usually managed through a transfer-pricing system.

Answer: TRUE Diff: 2 Page Ref: 20 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

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90) Discuss the role of accounting measures of divisional performance, identify three different standards of comparison that can be used when evaluating the accounting performance of a division along with the strengths and weaknesses of each standard, and describe the potential weaknesses of accounting measures of divisional performance.

Answer: Common accounting measures of divisional performance include the return on the assets controlled by a division, the return on a division's sales, and a division's sales growth.

These accounting measures of divisional performance are then compared with some standard to see if a division's performance exceeds or falls short of that standard. Diversified firms use three different standards of comparison when evaluating the performance of a division: (1) a hurdle rate that is common across all the different business units in a firm, (2) a division's budgeted level of performance (which may vary by division), and (3) the average level of profitability of firms in a division's industry.

Each of these standards of comparison has its strengths and weaknesses. For example, if a corporation has a single hurdle rate of profitability that all divisions must meet or exceed, there is little ambiguity about the performance objectives of divisions. On the other hand, such a single standard ignores important differences in performance that might exist across divisions.

Comparing a division's actual performance to its budgeted performance allows the performance expectations of different divisions to vary, but the budgeting process is time consuming and fraught with political intrigue. Finally, while comparing a division's performance with the average level of profitability of firms in a division's industry also allows performance expectations to vary across divisions within a diversified firm, this approach lets other firms determine what is and is not excellent performance for a division within a diversified firm. This approach can also be manipulated: By choosing just the "right" firms with which to compare a division's performance, almost any division can be made to look like it's performing better than its industry average.

No matter what standard of comparison is used to evaluate a division's accounting performance, most accounting measures of divisional performance have a common limitation. All these measures have a short-term bias. This short-term bias reflects the fact that all these measures treat investments in resources and capabilities that have the potential for generating value in the long run and costs during a particular year.

Diff: 2 Page Ref: 16 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

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91) Discuss the relationship between accounting methods of measuring divisional performance and economic methods, identify the formula used for calculating economic value added, and discuss methods for adjusting accounting earnings and the importance of making these adjustments.

Answer: Economic methods build on accounting methods but adjust those methods to incorporate short-term investments that may generate long-term benefits. Economic methods also compare a division's performance with a firm's cost of capital. This avoids some of the gaming that can characterize the use of other standards of comparison in applying accounting measures of divisional performance.

Perhaps the most popular of these economically oriented measures of division performance is known as economic value added or EVA. EVA is calculated by subtracting the cost of capital employed in a division from that division's earnings in the following manner: EVA = adjusted accounting earnings - (weighted average cost of capital × total capital employed by a division) The calculation of economic value added begins with a division's "adjusted" accounting earnings. These are a division's traditional accounting earnings adjusted so that they approximate what would be a division's economic earnings. Several adjustments to a division's accounting statements have been described in the literature. For example, traditional accounting practices require R&D spending to be deducted each year from a division's earnings. This can lead division general managers to underinvest in longer-term R&D efforts. In the EVA measure of divisional performance, R&D spending is added back into a division's performance and R&D is then treated as an asset and depreciated over some period of time. By adjusting a division's earnings and accounting for the cost of investing in a division, economic value added is a much more accurate estimate of a division's economic performance than are traditional accounting measures of performance.

Diff: 2 Page Ref: 17 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

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92) Discuss the role of transfer pricing systems in an M-form organization, identify difficulties with setting optimal prices, and identify four alternative transfer pricing schemes.

Answer: The transfer of intermediate products or services produced in one division that are used as inputs for products or services produced by a second division of a multidivisional firm is usually managed through a transfer-pricing system in which one division "sells" its product or service to a second division for a transfer price. Unlike a market price, which is typically determined by market forces of supply and demand, transfer prices are set by a firm's corporate management to accomplish corporate objectives.

From an economic point of view, the rule for establishing the optimal transfer price in a diversified firm is quite simple: The transfer price should be the value of the opportunities forgone when one division's product or service is transferred to another division. Setting transfer prices equal to opportunity costs sounds simple enough, but it is very difficult to do in real diversified firms. Establishing optimal transfer prices requires information about the value of the opportunities forgone by the "selling" division. This, in turn, requires information about this division's marginal costs, its manufacturing capacity, external demand for its products, and so forth. Much of this information is difficult to calculate. Moreover, it is rarely stable. As market conditions change, demand for a division's products can change, marginal costs can change, and the value of opportunities forgone can change. Also, to the extent that a selling division customizes the products or services it transfers to other divisions in a diversified firm, the value of the opportunities forgone by this selling division become even more difficult to calculate.

Even if this information could be obtained and updated rapidly, division general managers in selling divisions have strong incentives to manipulate the information in ways that increase the perceived value of the opportunities forgone by their division. These division general managers can thus increase the transfer price for the products or services they sell to internal customers and thereby appropriate for themselves profits that should have been allocated to buying divisions.

Four alternative transfer pricing schemes that firms use in practice: • Exchange autonomy in which buying and selling division general managers are free to negotiate transfer price without corporate involvement and the transfer price is set equal to the selling division's price to external customers.

• Mandated full cost in which the transfer price is set equal to the selling division's actual cost of product or to the selling division's standard cost.

• Mandated market price in which the transfer price is set equal to the market price in the selling division's market.

• Dual pricing in which the transfer price for the buying division is set equal to the selling division's actual or standard costs and the transfer price for the selling division is equal to the price to external customers or the market price in the selling division's market.

Diff: 2 Page Ref: 20 Learning Obj.: 10.2: Describe How Three Management Control Processes—Measuring Divisional Performance, Allocating Corporate Capital, and Transferring Intermediate Products— are used to Help Implement a Corporate Diversification Strategy.

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93) Which of the following statements regarding CEO compensation is accurate?

A) Differences in CEO cash compensation are very responsive to differences in firm performance.

B) If a substantial percentage of a CEO's compensation comes in the form of stock and stock options in the firm, changes in compensation are closely linked with changes in firm performance.

C) If a substantial percentage of a CEO's compensation comes in the form of stock and stock options in the firm, changes in compensation are not closely linked with changes in firm performance.

D) If a substantial percentage of a CEO's compensation comes in the form of salary, changes in compensation can be expected to be closely linked with changes in firm performance.

Answer: B Diff: 2 Page Ref: 23 Learning Obj.: 10.3: Describe the Role of Management Compensation in Helping to Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders.

94) If SpandoCorp's board of directors wanted to ensure that changes in the CEO's compensation would be closely linked to changes in the firm's performance, it should A) use a compensation package that includes only a salary for the CEO. B) use a compensation package that includes a salary and a cash bonus for the CEO. C) use a compensation package the includes a salary, a cash bonus and stock options that represent only a relatively small percentage of the CEO's total compensation package.

D) use a compensation package that includes a salary and stock options that represent a relatively substantial percentage of the CEO's total compensation package.

Answer: D Diff: 2 Page Ref: 23 Learning Obj.: 10.3: Describe the Role of Management Compensation in Helping to Implement a Corporate Diversification Strategy.

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95) If SpandoCorp decides to use the method of allocating capital where each project receives funding on its merit and not because it received funding the previous year, it is using A) zero-based budgeting.

B) corporate budgeting.

C) centralized budgeting D) coordinated budgeting.

Answer: A Diff: 3 Page Ref: 19 Learning Obj.: 10.3: Describe the Role of Management Compensation in Helping to Implement a Corporate Diversification Strategy.

AACSB: Application of Knowledge 96) Traditionally, the compensation of corporate managers in a diversified firm has been only loosely connected to the firm's economic performance.

Answer: TRUE Diff: 2 Page Ref: 23 Learning Obj.: 10.3: Describe the Role of Management Compensation in Helping to Implement a Corporate Diversification Strategy.

AACSB: Analytical Thinking 97) An important study on executive compensation found that differences in CEO cash compensation is not very responsive to differences in firm performance even if a substantial percentage of the CEO's compensation came in the form of stock and stock options in the firm.

Answer: FALSE Diff: 2 Page Ref: 23 Learning Obj.: 10.3: Describe the Role of Management Compensation in Helping to Implement a Corporate Diversification Strategy.

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98) Discuss the importance of compensation policies in diversified firms and identify the CEO compensation package that most closely aligns the interests of the CEO with those of stockholders.

Answer: A firm's compensation policies constitute a final set of tools for implementing corporation diversification. To the extent that compensation in diversified firms gives managers incentives to make decisions consistent with stockholder's interests, they can be an important part of the process of implementing corporate diversification. Traditionally, the compensation of corporate managers in a diversified firm has been only loosely connected to the firm's economic performance. Research indicates that differences in CEO cash compensation (salary plus cash bonus) are not very responsive to differences in firm performance but if a substantial percentage of a CEO's compensation came in the form of stock and stock options in the firm, changes in compensation would be closely linked with changes in the firm performance. These and similar findings reported elsewhere have led more and more diversified firms to include stock and stock options as part of the compensation package for the CEO to more closely align the interests of the CEO with those of stockholders.

Diff: 1 Page Ref: 23 Learning Obj.: 10.3: Describe the Role of Management Compensation in Helping to Implement a Corporate Diversification Strategy.

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Strategic Management and Competitive Advantage, 6e (Barney) Chapter 11 Strategic Alliances 1) In the computer technology-based industries, over ________ alliances were created between 2001 and 2005.

A) 5,700 B) 1,200 C) 2,200 D) 3,100 Answer: C Diff: 2 Page Ref: 4 Learning Obj.: 11.1: Define a Strategic Alliance and Give Three Specific Examples of Strategic Alliances.

AACSB: Analytical Thinking 2) A(n) ________ exists whenever two or more independent organizations cooperate in the development, manufacture, or sale of products or services.

A) vertical market B) strategic alliance C) initial public offering D) market transaction Answer: B Diff: 2 Page Ref: 4 Learning Obj.: 11.1: Define a Strategic Alliance and Give Three Specific Examples of Strategic Alliances.

AACSB: Analytical Thinking 3) A ________ is a form of nonequity alliance that exists when one firm allows another to use its brand name to sell its products.

A) supply agreement B) distribution agreement C) licensing agreement D) joint venture Answer: C Diff: 2 Page Ref: 4 Learning Obj.: 11.1: Define a Strategic Alliance and Give Three Specific Examples of Strategic Alliances.

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4) In a ________, cooperating firms create a legally independent firm in which they invest and from which they share any profits that are created.

A) licensing agreement B) supply agreement C) distribution agreement D) joint venture Answer: D Diff: 2 Page Ref: 5 Learning Obj.: 11.1: Define a Strategic Alliance and Give Three Specific Examples of Strategic Alliances.

AACSB: Analytical Thinking 5) eBay's agreement with the U.S. Postal Service is most accurately classified as a(n) A) joint venture.

B) equity agreement.

C) licensing agreement.

D) nonequity agreement.

Answer: D Diff: 2 Page Ref: 4 Learning Obj.: 11.1: Define a Strategic Alliance and Give Three Specific Examples of Strategic Alliances.

AACSB: Application of Knowledge 6) eBay's agreement with MBNA is most accurately characterized as a(n) A) supply agreement.

B) licensing agreement.

C) equity alliance.

D) joint venture.

Answer: B Diff: 2 Page Ref: 4 Learning Obj.: 11.1: Define a Strategic Alliance and Give Three Specific Examples of Strategic Alliances.

AACSB: Application of Knowledge 7) eBay's agreement with the Korean online auction company is best characterized as a(n) A) licensing agreement.

B) joint venture.

C) equity alliance.

D) distribution agreement.

Answer: C Diff: 2 Page Ref: 4 Learning Obj.: 11.1: Define a Strategic Alliance and Give Three Specific Examples of Strategic Alliances.

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8) eBay's former agreement with ecorp is best characterized as a(n) A) joint venture.

B) equity alliance.

C) licensing agreement.

D) nonequity alliance.

Answer: A Diff: 2 Page Ref: 5 Learning Obj.: 11.1: Define a Strategic Alliance and Give Three Specific Examples of Strategic Alliances.

AACSB: Application of Knowledge 9) The use of strategic alliances to manage economic exchanges has grown substantially over the last several years.

Answer: TRUE Diff: 1 Page Ref: 4 Learning Obj.: 11.1: Define a Strategic Alliance and Give Three Specific Examples of Strategic Alliances.

AACSB: Analytical Thinking 10) A strategic alliance exists whenever three or more independent organizations cooperate in the development, manufacture, or sale of products or services.

Answer: FALSE Diff: 1 Page Ref: 4 Learning Obj.: 11.1: Define a Strategic Alliance and Give Three Specific Examples of Strategic Alliances.

AACSB: Analytical Thinking 11) In a nonequity alliance, firms create a legally independent firm in which they invest and from which they share any profits that are created.

Answer: FALSE Diff: 2 Page Ref: 4 Learning Obj.: 11.1: Define a Strategic Alliance and Give Three Specific Examples of Strategic Alliances.

AACSB: Analytical Thinking 12) In an equity alliance, cooperating firms supplement contracts with equity holdings and alliance partners.

Answer: TRUE Diff: 2 Page Ref: 4 Learning Obj.: 11.1: Define a Strategic Alliance and Give Three Specific Examples of Strategic Alliances.

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13) Define a strategic alliance and identify and differentiate between three broad categories of strategic alliances.

Answer: A strategic alliance exists whenever two or more independent organizations cooperate in the development, manufacture, or sale of products or services. The three broad categories of alliances include nonequity alliances, joint ventures and equity alliances. In a nonequity alliance, cooperating firms agree to work together to develop, manufacture, or sell products or services, but they do not take equity positions in each other or form an independent organizational unit to manage their cooperative efforts. Rather, these cooperative relations are managed through the use of various forms of contracts. In an equity alliance, cooperating firms supplement contracts with equity holdings in alliance partners. In a joint venture, cooperating firms create a legally independent firm in which they invest and from which they share any profits that are created.

Diff: 1 Page Ref: 4 Learning Obj.: 11.1: Define a Strategic Alliance and Give Three Specific Examples of Strategic Alliances.

AACSB: Analytical Thinking 14) Strategic alliances can create economic value through helping firms improve their current operations by A) facilitating the development of technology standards.

B) facilitating tacit collusion.

C) exploiting economies of scale.

D) managing uncertainty.

Answer: C Diff: 2 Page Ref: 5 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 15) When both parties to an alliance are seeking to learn something from that alliance, a ________ can evolve.

A) learning race B) dynamic race C) learning dynamic D) learning curve Answer: A Diff: 2 Page Ref: 6 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 16) Network industries are characterized by A) increasing diseconomies of scale.

B) increasing returns to scale.

C) decreasing returns to scale.

D) decreasing economies of scale.

Answer: B Diff: 2 Page Ref: 8 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

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17) A firm's ability to learn is known as its A) competitive position.

B) competitive advantage.

C) distinctive competence.

D) absorptive capacity.

Answer: D Diff: 2 Page Ref: 7 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 18) In one study almost ________ percent of the managers in entrepreneurial firms felt unfairly exploited by their large-firm alliance partners.

A) 80 B) 20 C) 50 D) 10 Answer: A Diff: 3 Page Ref: 7 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 19) ________ exist(s) when firms directly communicate with each other to coordinate their levels of production and/or their prices.

A) Economies of scale B) Explicit collusion C) A learning race D) Tacit collusion Answer: B Diff: 2 Page Ref: 9 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 20) ________ exist(s) when firms coordinate their production and pricing decisions not by directly communicating with each other but by exchanging signals with other firms about their intent to cooperate.

A) Economies of scale B) Explicit collusion C) A learning race D) Tacit collusion Answer: D Diff: 2 Page Ref: 9 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

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21) Strategic alliances are particularly valuable in facilitating market entry and exit when the value of market entry or exit is A) high.

B) low.

C) moderate.

D) uncertain.

Answer: D Diff: 2 Page Ref: 10 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 22) Although joint ventures between firms in the same industry ________ collusive implications, research has shown that these kinds of joint ventures are ________.

A) may have; relatively rare B) are not likely to have; relatively rare C) may have; relatively common D) are not likely to have; relatively common Answer: A Diff: 3 Page Ref: 10 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 23) As long as the cost of ________ to enter a new industry is less than the cost of ________, an alliance can be a valuable strategic opportunity.

A) vertically integrating; learning new skills and capabilities B) learning new skills and capabilities; using an alliance C) using an alliance; learning new skills and capabilities D) learning new skills and capabilities; vertically integrating Answer: C Diff: 2 Page Ref: 11 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 24) Consistent with a real options perspective, firms in new and uncertain environments are likely to A) avoid using strategic alliances.

B) develop numerous strategic alliances.

C) develop few strategic alliances.

D) engage in vertical integration.

Answer: B Diff: 2 Page Ref: 12 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

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25) If eBay's agreements with their Korean and Australian partners were intended to increase the number of buyers and sellers and thereby increase the value of eBay's online auction services for every eBay user, this would imply that the online auction industry is an example of a ________ industry.

A) declining B) network C) commodity D) mature Answer: B Diff: 2 Page Ref: 8 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Application of Knowledge 26) If eBay entered into the cooperative agreement with its Australian partner for the purpose of testing the attractiveness of the Australian and New Zealand auction industries prior to making a more significant investment in these industries, this would be an example of A) transaction cost economics.

B) tacit collusion.

C) explicit collusion.

D) real options.

Answer: D Diff: 3 Page Ref: 18 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Application of Knowledge 27) When a firm cannot realize the cost savings from economies of scale all by itself, it may join in a strategic alliance with other firms so that together both firms will have sufficient volume to be able to gain the cost advantages of economies of scale.

Answer: TRUE Diff: 2 Page Ref: 5 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 28) In general, due to the intangible nature of knowledge, firms are not able to use alliances to learn from their competitors.

Answer: FALSE Diff: 2 Page Ref: 6 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 29) When both parties to an alliance are seeking to learn something from that alliance, a learning race can evolve.

Answer: TRUE Diff: 2 Page Ref: 6 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

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30) Network industries are characterized by decreasing returns to scale.

Answer: FALSE Diff: 2 Page Ref: 8 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 31) Firms with high levels of absorptive capacity will learn at faster rates than firms with low levels of absorptive capacity, even if these two firms are trying to learn exactly the same things in an alliance.

Answer: TRUE Diff: 2 Page Ref: 7 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 32) Learning race dynamics are particularly common in relations among large, well-established firms.

Answer: FALSE Diff: 2 Page Ref: 7 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 33) In network industries with increasing returns to scale where standards are unimportant, strategic alliances can be used to create a more favorable competitive environment.

Answer: FALSE Diff: 3 Page Ref: 8 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 34) Explicit collusion exists when firms directly communicate with each other to coordinate their levels of production or their prices and is legal in most countries.

Answer: FALSE Diff: 2 Page Ref: 9 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 35) Tacit collusion exists when firms coordinate their pricing decisions not by directly communicating with each other but by exchanging signals with other firms about their intent to cooperate.

Answer: TRUE Diff: 2 Page Ref: 9 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

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36) A learning race exists in a strategic alliance when both parties seek to learn from each other.

Answer: TRUE Diff: 2 Page Ref: 6 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 37) Research shows that joint ventures between firms in the same industry may have collusive implications and that these kinds of joint ventures are relatively common.

Answer: FALSE Diff: 2 Page Ref: 10 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 38) Alliances to facilitate entry into new industries are only valuable when the skills needed in these industries are complex and difficult to learn.

Answer: FALSE Diff: 2 Page Ref: 10 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 39) When information asymmetry exists between firms that currently own assets and firms that may want to purchase these assets, the selling firm will often have difficulty obtaining the full economic value of these assets.

Answer: TRUE Diff: 2 Page Ref: 11 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 40) In new and uncertain environments it is not unusual for firms to develop numerous strategic alliances.

Answer: TRUE Diff: 2 Page Ref: 12 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

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41) Identify and discuss the three ways alliances can create economic value by helping firms improve the performance of their current operations.

Answer: One way that firms can use strategic alliances to improve their current operations is to use alliances to realize economies of scale. To realize economies of scale, firms have to have a large volume of production, or at least a volume of production large enough so that the cost advantages associated with scale can be realized. When a firm cannot realize the cost savings from economies of scale all by itself, it may join in a strategic alliance with other firms. Jointly, these firms may have sufficient volume to be able to gain the cost advantages of economies of scale.

Firms can also use alliances to improve their current operations by learning from their competitors. Different firms in an industry may have different resources and capabilities and these resources can give some firms competitive advantages over other firms. Firms that are at a competitive disadvantage may want to form alliances with the firms that have an advantage in order to learn about their resources and capabilities.

Finally, firms can use alliances to improve their current operations through sharing costs and risks. This is especially valuable when the future state of the environment or the growth rate of the industry is uncertain.

Diff: 2 Page Ref: 5 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 42) Discuss the concept of a learning race and identify three reasons why firms in an alliance may differ in the rate they learn from each other.

Answer: A learning race exists in a strategic alliance when both parties to that alliance seek to learn from each other but when the rate at which these two firms learn varies. In this setting, the first firm to learn what it wants to learn from an alliance has the option to begin to underinvest in, and perhaps even withdraw from, an alliance. In this way, the firm that learns the fastest is able to prevent the slow-learning firm from learning all it wanted from an alliance. There are a variety of reasons why firms in an alliance may vary in the rate they learn from each other. First, they may be looking to learn different things, and some things are easier to learn than others.

Second, firms may differ in terms of their ability to learn or their absorptive capacity. Firms with high levels of absorptive capacity will learn at higher rates than firms with low levels of absorptive capacity, even if these two firms are trying to learn exactly the same things in an alliance. Third, firms can engage in activities such as withholding information necessary to exploit technology in an alliance or withholding critical employees from an alliance to try to slow the rate of learning of their alliance partners.

Diff: 2 Page Ref: 6 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

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43) What is the connection between strategic alliances and real options?

Answer: Real options are options that are embedded in certain decisions that a firm makes. A joint venture (which is a form of strategic alliance) is an option that a firm buys under conditions of uncertainty to retain the ability to move quickly into a market or industry if valuable opportunities present themselves. Thus, firms in new and uncertain environments develop numerous strategic alliances that they treat as real options.

Diff: 2 Page Ref: 18 Learning Obj.: 11.2: Describe How Strategic Alliances can Create Value for Firms.

AACSB: Analytical Thinking 44) Research shows that as many as ________ of all strategic alliances do not meet the expectations of at least one alliance partner.

A) one-third B) five-eighths C) one-half D) two-thirds Answer: A Diff: 2 Page Ref: 12 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

AACSB: Analytical Thinking 45) If TeleCo were to enter into a strategic alliance with a partner that promised it could deliver a high quality wireless infrastructure when in fact the potential partner had neither the skills nor abilities to provide this infrastructure, TeleCo could be said to be impacted by A) moral hazard.

B) adverse selection.

C) holdup.

D) tacit collusion.

Answer: B Diff: 2 Page Ref: 13 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

AACSB: Application of Knowledge 46) Adverse selection in a strategic alliance is likely only when A) it is difficult or costly to observe the resources or capabilities that a partner brings to an alliance.

B) a potential partner can easily see the resources and capabilities that a firm is bringing to an alliance.

C) it is difficult or costly to know how competitors will react to the strategic alliance.

D) there are significant transaction-specific assets devoted to the alliance.

Answer: A Diff: 2 Page Ref: 13 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

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47) In general, the ________ tangible the resources and capabilities that are to be brought to a strategy alliance, the ________ costly it will be to estimate their value before an alliance is created, and the ________ likely it is that adverse selection will occur.

A) more; more; more B) less; more; less C) less; more; more D) more; more; less Answer: C Diff: 3 Page Ref: 13 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

AACSB: Analytical Thinking 48) ________ occurs when partners in an alliance possess high-quality resources and capabilities of significant value in an alliance but fail to make those resources and capabilities available to alliance partners.

A) Moral hazard B) Adverse selection C) Holdup D) Explicit collusion Answer: A Diff: 2 Page Ref: 13 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

AACSB: Analytical Thinking 49) Often both parties in a failed alliance accuse each other of A) adverse selection.

B) tacit collusion.

C) moral hazard.

D) holdup.

Answer: C Diff: 2 Page Ref: 13 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

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50) When one firm makes more transaction-specific investments in a strategic alliance than partner firms make, that firm may be subject to a form of cheating called ________ that occurs when a firm that has not made significant transaction-specific investments demands returns from an alliance that are higher than what the partners agreed to when they created the alliance.

A) adverse selection B) holdup C) moral hazard D) noncompliance Answer: B Diff: 2 Page Ref: 14 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

AACSB: Analytical Thinking 51) Research suggests that ________ are the type of alliance where existence of transactionspecific investments often leads to holdup problems.

A) licensing agreements B) equity alliances C) joint ventures D) distribution agreements Answer: C Diff: 3 Page Ref: 15 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

AACSB: Analytical Thinking 52) If, prior to entering the cooperative agreement with eBay, eBay's Korean partner stated that it had the technological capabilities to facilitate eBay's Korean auction business when, in fact, the Korean company did not have these capabilities, this would be an example of A) adverse selection.

B) explicit collusion.

C) moral hazard.

D) holdup.

Answer: A Diff: 2 Page Ref: 13 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

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53) If eBay's Australian partner agreed to provide marketing and technological skills to help eBay compete in the Australian and New Zealand auction industries but provided skills that were significantly lower than promised, this would be an example of A) holdup.

B) moral hazard.

C) adverse selection.

D) tacit collusion.

Answer: B Diff: 2 Page Ref: 13 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

AACSB: Application of Knowledge 54) eBay's agreement with ________ is the most likely to be susceptible to holdup.

A) the Australian partner B) the Korean partner C) MBNA D) the U.S. Postal Service Answer: A Diff: 3 Page Ref: 14 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

AACSB: Application of Knowledge 55) Research shows that as many as two-thirds of strategic alliances do not meet the expectations of at least one alliance partner.

Answer: FALSE Diff: 2 Page Ref: 12 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

AACSB: Analytical Thinking 56) When potential cooperative partners misrepresent the skills, abilities, and other resources that they will bring to an alliance, this is a form of cheating known as adverse selection.

Answer: TRUE Diff: 2 Page Ref: 13 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

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57) In general, the less tangible the resources and capabilities that are to be brought to a strategic alliance, the less costly it will be to estimate their value before an alliance is created and the more likely it is that adverse selection will occur.

Answer: FALSE Diff: 2 Page Ref: 13 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

AACSB: Analytical Thinking 58) Moral hazard occurs when partners in an alliance possess high-quality resources and capabilities of significant value in an alliance but fail to make those resources and capabilities available to alliance partners.

Answer: TRUE Diff: 2 Page Ref: 13 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

AACSB: Analytical Thinking 59) The existence of moral hazard in a strategic alliance proves that at least one of the parties is either malicious or dishonest.

Answer: FALSE Diff: 2 Page Ref: 13 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

AACSB: Analytical Thinking 60) In an alliance, a holdup occurs when a firm that has not made significant transaction-specific investments demands returns from an alliance that are higher than what the partners agreed to when they created the alliance.

Answer: TRUE Diff: 2 Page Ref: 14 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

AACSB: Analytical Thinking 61) Research on international joint ventures suggests that the existence of transaction-specific investments in their relationships makes these agreements relatively immune to holdup problems.

Answer: FALSE Diff: 2 Page Ref: 14 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

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62) Although holdup is a form of cheating in strategic alliances, the threat of holdup can also be a motivation for creating an alliance.

Answer: TRUE Diff: 2 Page Ref: 15 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

AACSB: Analytical Thinking 63) In the short-run, firms can gain some advantages by cheating their alliance partners but research suggests that cheating does not pay in the long run.

Answer: TRUE Diff: 2 Page Ref: 16 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

AACSB: Analytical Thinking 64) Define the three fundamental forms of cheating in strategic alliances and discuss the shortand long-term implications of cheating in a strategic alliance.

Answer: The three ways to cheat in strategic alliances are adverse selection, moral hazard and holdup. Adverse selection occurs when potential partners misrepresent the value of the skills and abilities they bring to an alliance. In general, the less tangible the resources and capabilities that are to be brought to a strategic alliance, the more costly it will be to estimate their value before an alliance is created and the more likely is adverse selection to occur. Moral hazard occurs when partners provide to the alliance skills and capabilities of lower quality than they promised.

Finally, holdup occurs when a firm that has not made significant transaction-specific investments demands from an alliance returns that are higher than what the partners agreed to when they created the alliance. In the short-run, firms that cheat on their alliance partners can gain some advantages. But research suggests that cheating does not pay in the long run. In the long run, firms that cheat on their alliance partners find it difficult to form alliances with new partners and thus have many valuable exchange opportunities foreclosed to them.

Diff: 2 Page Ref: 13 Learning Obj.: 11.3: Describe How Adverse Selection, Moral Hazard, and Holdup can Threaten the Ability of Alliances to Generate Value.

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65) The rarity of strategic alliances A) depends solely on the number of competing firms that have already implemented an alliance.

B) depends solely on whether or not the benefits that firms obtain from their alliances are not common across firms in the industry.

C) depends not only on the number of competing firms that have already implemented an alliance but also on whether or not the benefits that firms obtain from their alliances are common across competing firms in the industry.

D) depends solely on the number of substitutes available for alliances.

Answer: C Diff: 2 Page Ref: 16 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Analytical Thinking 66) One of the reasons why the benefits that accrue from a particular strategic alliance may be rare is that A) relatively few firms may have the complementary resources and abilities needed to form an alliance.

B) there is a relatively large number of alliance partners available.

C) relatively many firms may have the complementary resources and abilities needed to form an alliance.

D) there may be a relatively low amount of transaction-specific assets to enter into similar alliances.

Answer: A Diff: 2 Page Ref: 17 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Analytical Thinking 67) Research indicates that the most common reason that alliances fail to meet the expectations of partner firms is A) the lack of financial resources.

B) the necessity of transaction-specific investments.

C) the lack of transaction-specific investments.

D) the partners' inability to trust one another.

Answer: D Diff: 2 Page Ref: 17 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

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68) To the extent that a strategic alliance is based on ________ relations, it will make the alliances costly to imitate.

A) socially complex B) tacit collusion C) explicit collusion D) moral hazard Answer: A Diff: 2 Page Ref: 17 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Analytical Thinking 69) Two possible substitutes for strategic alliances include A) going it alone and tacit collision.

B) going it alone and acquisitions.

C) acquisitions and explicit collusion.

D) explicit collusion and tacit collusion.

Answer: B Diff: 2 Page Ref: 17 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Analytical Thinking 70) Firms ________ when they attempt to develop all the resources and capabilities they need to exploit market opportunities and neutralize market threats by themselves.

A) engage in tacit collusion B) form joint ventures C) go it alone D) engage in explicit collusion Answer: C Diff: 2 Page Ref: 17 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Analytical Thinking 71) Alliances will be preferred to going it alone when A) the level of transaction-specific investments required to complete an exchange is low.

B) there are no transaction-specific investments required to complete an exchange is low.

C) when there is low uncertainty about the future value of an exchange.

D) the level of transaction-specific investments required to complete an exchange is moderate.

Answer: D Diff: 2 Page Ref: 18 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

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72) ________ theory suggests that under conditions of high uncertainty, firms may be unwilling to commit to a particular course of action by engaging in an exchange with a firm and will choose, instead, the strategic flexibility associated with alliances.

A) Capabilities B) Real options C) Transaction cost economics D) Resource-based Answer: B Diff: 2 Page Ref: 18 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Analytical Thinking 73) Alliances will be preferred to acquisitions when A) alliances limit a firm's flexibility under conditions of high uncertainty.

B) there is minimal unwanted organizational "baggage" in an acquired firm.

C) there are legal constraints on acquisitions.

D) the value of a firm's resources and capabilities does not depend on its independence.

Answer: C Diff: 2 Page Ref: 19 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Analytical Thinking 74) Which of the following reasons helps explain why eBay may have preferred to enter into an alliance to enter the Korean online auction industry rather than going it alone?

A) eBay's Korean partner possesses capabilities that are valuable and rare but not costly to imitate.

B) The level of transaction-specific investments required to enter the Korean online auction industry is low.

C) There is little uncertainty about the future of the Korean online auction industry.

D) The level of transaction-specific investments required to enter the Korean online auction industry is moderate.

Answer: D Diff: 3 Page Ref: 17 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Application of Knowledge 75) For a strategic alliance to be a source of sustained competitive advantage it must be valuable in that it exploits an opportunity but avoids a threat and it must also be rare and costly to imitate.

Answer: TRUE Diff: 1 Page Ref: 16 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

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76) The rarity of strategic alliances depends solely on the number of competing firms that have already implemented an alliance.

Answer: FALSE Diff: 1 Page Ref: 16 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Analytical Thinking 77) Successful strategic alliances are often based on socially complex relations among alliance partners but virtually every firm in a given industry is likely to have the organizational and relationship-building skills required for alliance building making the possibility of direct duplication of strategic alliances very high.

Answer: FALSE Diff: 2 Page Ref: 17 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Analytical Thinking 78) In general, firms will prefer a strategic alliance over "going it alone" when the level of transaction-specific investment required to complete an exchange is moderate.

Answer: TRUE Diff: 3 Page Ref: 17 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Analytical Thinking 79) Capabilities theory suggests that an alliance will be preferred over going it alone when an exchange partner possesses valuable, rare, and costly-to-imitate resources and capabilities.

Answer: TRUE Diff: 2 Page Ref: 18 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Analytical Thinking 80) When there is low uncertainty about the future value of an exchange, an alliance will be preferred to going it alone.

Answer: FALSE Diff: 2 Page Ref: 18 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

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81) Transaction cost economics suggests that going it alone is not a substitute for strategic alliances since they are best chosen only when other alternatives are not viable.

Answer: TRUE Diff: 2 Page Ref: 18 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Analytical Thinking 82) An alliance will be preferred to an acquisition when there are legal constraints on acquisitions.

Answer: TRUE Diff: 1 Page Ref: 19 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Analytical Thinking 83) Identify the conditions under which a strategic alliance can be rare and discuss the role that complementary resources can play in the rarity of strategic alliances.

Answer: The rarity of strategic alliances depends both on the number of competing firms that have already implemented an alliance and whether or not the benefits that firms obtain from their alliances are not common across firms competing in an industry. One of the reasons why the benefits that accrue from a particular strategic alliance may be rare is that relatively few firms may have the complementary resources and abilities needed to form an alliance. This is particularly likely when an alliance is formed to enter into a new market and especially a new foreign market. In many less developed economies, only one local firm or a very few local firms may exist with the local knowledge, contacts, and distribution network needed to facilitate entry into that market. Moreover, sometimes the government acts to limit the number of these local firms. Although several firms may seek entry into this market, only a very small number will be able to form a strategic alliance with the local entity and therefore the benefits that accrue to the allied firms will likely be rare.

Diff: 1 Page Ref: 16 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

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84) Discuss when strategic alliances may be costly to directly duplicate.

Answer: To the extent that a strategic alliance goes well beyond simple legal contracts and is characterized by socially complex phenomena such as a trusting relationship between alliance partners, friendship, and even (perhaps) a willingness to suspend narrow self-interest for the longer-term good of the relationship, it will be costly for other firms to directly duplicate.

Additionally, to the extent that the organizational and relationship-building skills required for successful alliance building are rare among a set of competing firms and costly to develop, strategic alliances will be costly to duplicate and firms that are able to exploit these abilities by creating alliances may gain competitive advantages.

Diff: 1 Page Ref: 17 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Analytical Thinking 85) Discuss when firms go it alone and identify three conditions under which alliances will be preferred to going it alone and when going it alone is not an attractive substitute for an alliance.

Answer: Firms go it alone when they attempt to develop all the resources and capabilities they need to exploit market opportunities and neutralize market threats by themselves. Sometimes, going it alone can create the same, or even more, value than using alliances to exploit opportunities and neutralize threats. In these settings, going it alone is a substitute for a strategic alliance. However, in other settings, using an alliance can create substantially more value than going it alone. In these settings, going it alone is not a substitute for a strategic alliance. In general, alliances will be preferred to going it alone when 1. The level of transaction-specific investment required to complex an exchange is moderate.

2. An exchange partner possesses valuable, rare, and costly-to-imitate resources and capabilities.

3. There is great uncertainty about the future value of an exchange.

Diff: 2 Page Ref: 17 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

AACSB: Analytical Thinking 86) Discuss to what extent acquisitions can be a substitute for alliances and identify four conditions under which alliances will be preferred to acquisitions.

Answer: The acquisition of other firms can be a substitute for alliances. In this case, rather than developing a strategic alliance or attempting to develop and exploit the relevant resources by going it alone, a firm seeking to exploit opportunities may simply acquire another firm that already possesses the relevant resources and capabilities. The four conditions under which alliances will be preferred to acquisitions are: 1. There are legal constraints on acquisitions.

2. Acquisitions limit a firm's flexibility under conditions of high uncertainty.

3. There is substantial unwanted organizational "baggage" in an acquired firm.

4. The value of a firm's resources and capabilities depends on its interdependence.

Diff: 2 Page Ref: 19 Learning Obj.: 11.4: Describe the Conditions Under which a Strategic Alliance can be Rare and Costly to Duplicate.

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87) An example of a contractual clause that deals with operating issues would be a A) noncompete clause.

B) minority protection clause.

C) put options clause.

D) termination clause.

Answer: A Diff: 3 Page Ref: 21 Learning Obj.: 11.5: Describe How Contracts, Equity Investments, Firm Reputations, Joint Ventures, and Trust can All Reduce the Threat of Cheating in Strategic Alliances.

AACSB: Analytical Thinking 88) All of the following are tools and mechanisms firms can use to reduce the threat of cheating in strategic alliances except A) contracts.

B) equity investments.

C) joint ventures.

D) tacit collusion.

Answer: D Diff: 2 Page Ref: 20 Learning Obj.: 11.5: Describe How Contracts, Equity Investments, Firm Reputations, Joint Ventures, and Trust can All Reduce the Threat of Cheating in Strategic Alliances.

AACSB: Analytical Thinking 89) Which of the following is a limitation of the reputational control of cheating in a strategic alliance?

A) Subtle cheating in an alliance is likely to become public knowledge.

B) Even if one firm is clearly cheating in an alliance, the other firm may not be sufficiently tied into a network of firms to make this information public.

C) The effect of a tarnished reputation forecloses future opportunities for a firm and it helps reduce the current losses of the firm that was cheated.

D) The reputation of the firm that was impacted by the cheating may be impacted as significantly as the firm that committed the cheating.

Answer: B Diff: 2 Page Ref: 22 Learning Obj.: 11.5: Describe How Contracts, Equity Investments, Firm Reputations, Joint Ventures, and Trust can All Reduce the Threat of Cheating in Strategic Alliances.

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90) When the probability of cheating in a cooperative relationship is greatest, a(n) ________ is the preferred form of cooperation.

A) equity agreement B) licensing agreement C) joint venture D) distribution agreement Answer: C Diff: 2 Page Ref: 23 Learning Obj.: 11.5: Describe How Contracts, Equity Investments, Firm Reputations, Joint Ventures, and Trust can All Reduce the Threat of Cheating in Strategic Alliances.

AACSB: Analytical Thinking 91) ________ may enable partners to explore exchange opportunities that they could not explore if only legal and economic organizing mechanisms were in place.

A) Trust B) Joint ventures C) Reputational effects D) Equity investments Answer: A Diff: 2 Page Ref: 24 Learning Obj.: 11.5: Describe How Contracts, Equity Investments, Firm Reputations, Joint Ventures, and Trust can All Reduce the Threat of Cheating in Strategic Alliances.

AACSB: Analytical Thinking 92) While it is often the case that there will be important information asymmetries between firms in an alliance, these asymmetries are likely to be ________ when alliances partners come from different countries.

A) much less B) about the same as C) much greater D) marginally greater Answer: C Diff: 2 Page Ref: 23 Learning Obj.: 11.5: Describe How Contracts, Equity Investments, Firm Reputations, Joint Ventures, and Trust can All Reduce the Threat of Cheating in Strategic Alliances.

AACSB: Analytical Thinking 93) The primary purpose of organizing a strategic alliance is to enable partners in the alliance to gain all the benefits associated with cooperation while minimizing the probability that cooperating firms will cheat on their cooperative agreements.

Answer: TRUE Diff: 2 Page Ref: 20 Learning Obj.: 11.5: Describe How Contracts, Equity Investments, Firm Reputations, Joint Ventures, and Trust can All Reduce the Threat of Cheating in Strategic Alliances.

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94) In general, contracts are sufficient to resolve all the problems associated with cheating in an alliance.

Answer: FALSE Diff: 2 Page Ref: 20 Learning Obj.: 11.5: Describe How Contracts, Equity Investments, Firm Reputations, Joint Ventures, and Trust can All Reduce the Threat of Cheating in Strategic Alliances.

AACSB: Analytical Thinking 95) Sometimes the value of cheating in a joint venture is sufficiently large that a firm cheats even though doing so hurts the joint venture and forecloses future opportunities.

Answer: TRUE Diff: 2 Page Ref: 23 Learning Obj.: 11.5: Describe How Contracts, Equity Investments, Firm Reputations, Joint Ventures, and Trust can All Reduce the Threat of Cheating in Strategic Alliances.

AACSB: Analytical Thinking 96) In comparison to strategic alliances, joint ventures increase the threat of cheating by partners.

Answer: FALSE Diff: 2 Page Ref: 23 Learning Obj.: 11.5: Describe How Contracts, Equity Investments, Firm Reputations, Joint Ventures, and Trust can All Reduce the Threat of Cheating in Strategic Alliances.

AACSB: Analytical Thinking 97) When the probability of cheating in a cooperative relationship is lowest, a joint venture is usually the preferred form of cooperation.

Answer: FALSE Diff: 2 Page Ref: 23 Learning Obj.: 11.5: Describe How Contracts, Equity Investments, Firm Reputations, Joint Ventures, and Trust can All Reduce the Threat of Cheating in Strategic Alliances.

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98) Describe five tools that firms can use to reduce the threat of cheating in strategic alliances.

Answer: The five tools firms can use to reduce the threat of cheating in strategic alliances are contracts, equity investments, firm reputations, joint ventures, and trust.

Contracts. One way to avoid cheating in strategic alliances is for parties to an alliance to anticipate the ways in which cheating may occur (including adverse selection, moral hazard, and holdup) and to write explicit contracts that define legal liability if cheating does occur. Writing these contracts, together with the close monitoring of contractual compliance and the threat of legal sanctions, can reduce the probability of cheating.

Equity investments. The effectiveness of contracts can be enhanced by having partners in an alliance make equity investments in each other so that if one of the partners to an alliance cheats, they will be negatively impacted through their equity investment in their partner.

Firm reputations. Information about an alliance partner that has cheated is likely to become widely known. A firm with a reputation as a cheater is not likely to be able to develop strategic alliances with other partners in the future, despite any special resources or capabilities that it might be able to bring to an alliance. In this way, cheating in a current alliance may foreclose opportunities for developing valuable alliances. For this reason, firms may decide not to cheat in their current alliances.

Joint ventures. Creating a separate legal entity in which alliance partners invest and from whose profits they earn returns on their investments reduces some of the risks of cheating in strategic alliances. When a joint venture is created, the ability of partners to earn returns on their investments depends on the economic success of the joint venture. Partners in joint ventures have limited interests in behaving in ways that hurt the performance of the joint venture because such behaviors end up hurting themselves. Moreover, unlike reputational consequences of cheating, cheating in a joint venture does not just foreclose future alliance opportunities, it can hurt the cheating firm in the current period as well.

Trust. Trust, in combination with contracts, can help reduce the threat of cheating. More important, trust may enable partners to explore exchange opportunities that they could not explore if only legal and economic organizing mechanisms were in place.

Diff: 2 Page Ref: 20 Learning Obj.: 11.5: Describe How Contracts, Equity Investments, Firm Reputations, Joint Ventures, and Trust can All Reduce the Threat of Cheating in Strategic Alliances.

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Strategic Management and Competitive Advantage, 6e (Barney) Chapter 12 Mergers and Acquisitions 1) A firm engages in a(n) ________ when it purchases a second firm.

A) acquisition B) joint venture C) strategic alliance D) equity alliance Answer: A Diff: 1 Page Ref: 5 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

AACSB: Analytical Thinking 2) When one firm acquires a(n) ________ of another firm, it has acquired enough of that firm's assets so that the acquiring firm is able to make all the management and strategic decisions in the target firm.

A) market stake B) equity share C) controlling share D) equity stake Answer: C Diff: 2 Page Ref: 5 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

AACSB: Analytical Thinking 3) A(n) ________ acquisition occurs when the management of a target firm wants to be acquired.

A) hostile B) admirable C) strategic D) friendly Answer: D Diff: 2 Page Ref: 5 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

AACSB: Analytical Thinking 4) When a firm has not sold shares on the public stock market, it is known as A) closely held.

B) privately held.

C) publicly traded.

D) a small cap stock.

Answer: B Diff: 2 Page Ref: 5 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

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5) The difference between the current market price of a target firm's shares and the price a potential acquirer offers to pay for those shares is known as an A) acquisition premium.

B) acquisition discount.

C) acquisition margin.

D) acquisition price.

Answer: A Diff: 2 Page Ref: 5 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

AACSB: Analytical Thinking 6) When Sears and Kmart, two retail firms of relatively equal size in the United States, agreed to combine their assets, this was an example of a(n) A) joint venture.

B) acquisition.

C) merger.

D) equity agreement.

Answer: C Diff: 2 Page Ref: 6 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

AACSB: Application of Knowledge P&G is a leading consumer goods company in the United States that has grown its business through a combination of international growth, alliances, acquisitions and mergers. In 2003, P&G acquired the beauty care company Wella to acquire products that would complement its current product. In 2004, P&G acquired AG-Hutchison Ltd to establish a stronger presence in the Chinese consumer goods products market. In 2005, P&G acquired Gillette, another consumer goods company, in a deal worth approximately $57 billion dollars.

7) If P&G's bid for Gillette was invited by Gillette's management, this would be an example of a A) hostile acquisition.

B) joint venture.

C) friendly acquisition.

D) merger.

Answer: C Diff: 2 Page Ref: 5 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

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8) If Gillette's total market value on the day the deal was announced was $48.30 billion, P&G's $57 billion offer would represent an A) 18% acquisition premium.

B) 82% acquisition discount.

C) 82% acquisition premium.

D) 18% acquisition discount.

Answer: A Diff: 3 Page Ref: 5 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

AACSB: Application of Knowledge 9) Since both P&G and Gillette are consumer products firms, this acquisition is best described as a A) vertical merger.

B) horizontal merger.

C) market extension merger.

D) conglomerate merger.

Answer: B Diff: 2 Page Ref: 8 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

AACSB: Application of Knowledge 10) P&G's acquisition of Wella in 2003 is an example of a A) market extension merger.

B) conglomerate merger.

C) vertical merger.

D) product extension merger.

Answer: D Diff: 2 Page Ref: 8 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

AACSB: Application of Knowledge 11) P&G's purchase of AG-Hutchison Ltd in 2004 is an example of a A) conglomerate merger.

B) vertical merger.

C) market extension merger.

D) conglomerate acquisition.

Answer: C Diff: 2 Page Ref: 8 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

AACSB: Application of Knowledge 12) A firm engages in an acquisition when it purchases a second firm.

Answer: TRUE Diff: 1 Page Ref: 5 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

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13) For a firm to gain a controlling share in an acquisition, it must purchase more than 51% of the acquired firm's assets.

Answer: FALSE Diff: 2 Page Ref: 5 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

AACSB: Analytical Thinking 14) When the management of a target firm wants the firm to be acquired, this is known as a hostile takeover.

Answer: FALSE Diff: 1 Page Ref: 5 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

AACSB: Analytical Thinking 15) A privately held firm has not sold any shares on the public stock market.

Answer: TRUE Diff: 2 Page Ref: 5 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

AACSB: Analytical Thinking 16) In an acquisition a tender offer can only be made with the support of the management of the acquired firm.

Answer: FALSE Diff: 2 Page Ref: 5 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

AACSB: Analytical Thinking 17) When the assets of two similar-sized firms are combined, this is known as a merger.

Answer: TRUE Diff: 1 Page Ref: 6 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

AACSB: Analytical Thinking 18) While mergers typically begin as a transaction between equals, that is, between firms of equal size and profitability, they often evolve after a merger such that one firm is more dominant in the management of the merged firm than the other.

Answer: TRUE Diff: 2 Page Ref: 6 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

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19) Discuss the differences between mergers and acquisitions and differentiate between friendly and unfriendly acquisitions.

Answer: A firm engages in an acquisition when it purchases a second firm. An acquiring firm can use cash it has generated from its ongoing businesses to purchase a target firm, it can go into debt to purchase a target firm, it can use its own equity to purchase a target firm, or it can use a mix of these mechanisms to purchase a target firm. Also, an acquiring firm can purchase all of a target firm's assets, it can purchase a majority of those assets (greater than 51%), or it can purchase a controlling share of those assets (i.e., enough assets so that the acquiring firm is able to make all the management and strategic decisions in the target firm). Acquisitions can be friendly (when the management of the target firm wants to be acquired) or unfriendly (when the management of the target firm does not want to be acquired). Some unfriendly acquisitions are also known as hostile takeovers. When the assets of two similar-sized firms are combined, this transaction is called a merger.

Diff: 2 Page Ref: 4 Learning Obj.: 12.1: Describe Different Types of Mergers and Acquisitions.

AACSB: Analytical Thinking 20) In 2016, the total value of announced merger and acquisition activities worldwide was $________ trillion.

A) 2.8 B) 4.5 C) 3.2 D) 5.4 Answer: B Diff: 2 Page Ref: 6 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Application of Knowledge 21) In 2015, there were over ________ acquisitions worldwide.

A) 8,000 B) 17,000 C) 45,000 D) 61,000 Answer: C Diff: 2 Page Ref: 6 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

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22) The price of each of a firm's shares multiplied by the number of shares outstanding represents the firm's A) total equity base.

B) current market value.

C) total market share.

D) current market share.

Answer: B Diff: 2 Page Ref: 6 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 23) In an unrelated acquisition, if 5 firms are interested in acquiring a firm and each of the bidding firms had a current market value of $30,000 while the current market value of the target firm is $20,000, this acquisition is likely to generate economic profits of ________ for the acquiring firm.

A) $10,000 B) $20,000 C) $50,000 D) $0.00 Answer: D Diff: 3 Page Ref: 6 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Application of Knowledge 24) If an electronics manufacturer were to acquire a chain of retail electronic stores to sell its products, this would be an example of a ________ merger.

A) vertical B) horizontal C) market extension D) product extension Answer: A Diff: 2 Page Ref: 8 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

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25) If eBay were to acquire a smaller online auction company, this would be an example of a ________ merger.

A) conglomerate B) vertical C) market extension D) horizontal Answer: D Diff: 2 Page Ref: 8 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Application of Knowledge 26) In a ________ merger, firms acquire complementary products through their merger and acquisition activities.

A) vertical B) market extension C) product extension D) horizontal Answer: C Diff: 2 Page Ref: 8 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 27) When eBay acquired Baaze.com, an Indian auction firm, in order to enter the Indian online auction market, this was an example of a ________ merger.

A) product extension B) market extension C) conglomerate D) vertical Answer: B Diff: 2 Page Ref: 8 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Application of Knowledge

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28) If there are no vertical, horizontal, product extension, or market extension links between firms, the FTC defines the merger or acquisition activity between firms as a ________ merger.

A) conglomerate B) vertical C) horizontal D) product extension Answer: A Diff: 2 Page Ref: 8 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 29) ________ economies are scale economies that occur when the physical processes inside a firm are altered so that the same amounts of input produce a higher quantity of outputs.

A) Pecuniary B) Diversification C) Technical D) Vertical Answer: C Diff: 2 Page Ref: 8 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 30) Which of the following is a source of diversification economies?

A) marketing B) production C) scheduling D) portfolio management Answer: D Diff: 3 Page Ref: 9 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking

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31) ________ economies are achieved by the ability of firms to dictate prices by exerting market power.

A) Pecuniary B) Technical C) Diversification D) Production Answer: A Diff: 2 Page Ref: 9 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 32) ________ economies are achieved by improving a firm's performance relative to its risk attributes or lowering its risk attributes relative to its performance.

A) Technical B) Diversification C) Pecuniary D) Market Answer: B Diff: 2 Page Ref: 9 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 33) Which of the following is a financial motivation for why bidding firms might want to engage in merger and acquisition strategies?

A) to increase leverage opportunities B) to capture economies of scale C) to adopt more efficient production or organizational technology D) to engage in vertical integration Answer: A Diff: 3 Page Ref: 9 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking

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34) Which one of the following is not one of the reasons that Jensen and Ruback listed as to why bidding firms might want to engage in merger and acquisition strategies?

A) to reduce production or distribution costs B) to gain market power in product markets C) to expand individual managers' power within an organization D) to eliminate inefficient target management Answer: C Diff: 3 Page Ref: 9 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 35) In a related acquisition, if there is one target firm and ten bidding firms, and the value of each of the bidding firms as a stand-alone entity is $50,000 and the value of the target firm as a stand-alone entity is $30,000, the market value of the combined entity will be A) $0.00.

B) less than $80,000.

C) $80,000.

D) more than $80,000.

Answer: D Diff: 2 Page Ref: 10 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Application of Knowledge 36) The CEO and the top management team at Conglomerate, Inc. have the unrealistic belief that they should have an aggressive merger and acquisition strategy because they can manage the assets of a target firm better than the managers of the target firm. Conglomerate, Inc.'s CEO and the top management team suffer from ________.

A) managerial hubris B) the Icarus paradox C) arbitrage fever D) underconfidence Answer: A Diff: 2 Page Ref: 14 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking

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37) ________ firms typically raise money from numerous smaller investors, which they then invest in a portfolio of entrepreneurial firms.

A) Business angel B) Venture capital C) Closely held D) Private equity Answer: B Diff: 2 Page Ref: 10 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 38) In a(n) ________, a firm, typically working with an investment banker, sells its equity to the public at large.

A) FTC B) merger C) IPO D) acquisition Answer: C Diff: 2 Page Ref: 10 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 39) Entrepreneurs must rely on capital generated from their ongoing operations or ________ and debt capital provided by banks.

A) initial public offering B) retained earnings C) venture capital firms D) operating budgets Answer: B Diff: 2 Page Ref: 10 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking

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40) Managers of bidding firms continue to engage in merger or acquisition strategies even though they usually do not generate profits for bidding firms in order to A) ensure survival.

B) improve firm reputation.

C) reduce agency problems.

D) reduce managerial hubris.

Answer: A Diff: 2 Page Ref: 13 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking P&G is a leading consumer goods company in the United States that has grown its business through a combination of international growth, alliances, acquisitions and mergers. In 2003, P&G acquired the beauty care company Wella to acquire products that would complement its current product. In 2004, P&G acquired AG-Hutchison Ltd to establish a stronger presence in the Chinese consumer goods products market. In 2005, P&G acquired Gillette, another consumer goods company, in a deal worth approximately $57 billion dollars.

41) If one of the reasons P&G acquired Gillette was to gain greater market power in key industries, this would be an example of ________ economies.

A) technical B) pecuniary C) diversification D) vertical Answer: B Diff: 2 Page Ref: 9 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Application of Knowledge 42) The number of firms that have used merger and acquisition strategies to become diversified over the past few years is minimal after the credit crunch crisis in 2008.

Answer: FALSE Diff: 2 Page Ref: 6 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking

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43) In 2016, the total value of mergers and acquisition deals in the United States was $10 trillion.

Answer: FALSE Diff: 2 Page Ref: 6 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 44) The price of each of a firm's shares multiplied by the number of shares outstanding is known as the firm's current market value.

Answer: TRUE Diff: 2 Page Ref: 6 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 45) In all acquisitions bidding, firms will be willing to pay a price for a target up to the value that the firm adds to the bidder once it is acquired.

Answer: TRUE Diff: 2 Page Ref: 6 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 46) The acquisition of strategically unrelated targets will generate substantial economic profits for both the bidding and the target firms.

Answer: FALSE Diff: 2 Page Ref: 7 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking

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47) If there is any hope that mergers and acquisitions will be a source of superior performance for bidding firms, it must be because of some sort of strategic relatedness between bidding and target firms.

Answer: TRUE Diff: 2 Page Ref: 7 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 48) In principle, the Federal Trade Commission will allow any acquisition involving firms with headquarters in the United States that could have the potential for generating monopoly or oligopoly profits in an industry.

Answer: FALSE Diff: 2 Page Ref: 7 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 49) According to the Federal Trade Commission, a firm engages in a horizontal merger when it acquires former suppliers or customers.

Answer: FALSE Diff: 2 Page Ref: 8 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 50) In a product extension merger, a firm acquires complementary products through merger and acquisition activities.

Answer: TRUE Diff: 2 Page Ref: 8 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking

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51) It is clear that mergers and acquisitions create value for firms implementing these strategies.

Answer: FALSE Diff: 3 Page Ref: 8 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 52) Diversification economies are achieved by the ability of firms to dictate prices by exerting market power.

Answer: FALSE Diff: 3 Page Ref: 9 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 53) To be economically valuable, links between bidding and target firms must meet the same criteria as diversification strategies.

Answer: TRUE Diff: 2 Page Ref: 9 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 54) If bidding and target firms are strategically related, then the economic value of these two firms combined is greater than their economic value as separate entities.

Answer: TRUE Diff: 2 Page Ref: 9 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking

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55) Firms should pursue merger and acquisition strategies only to obtain valuable economies of scope that outside investors find too costly to create on their own.

Answer: TRUE Diff: 2 Page Ref: 10 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 56) The existence of strategic relatedness between bidding and target firms is sufficient for the equity holders of bidding firms to earn economic profits from their acquisition strategies.

Answer: FALSE Diff: 2 Page Ref: 10 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 57) The number of firms that have used merger and acquisition strategies over the past few years is staggering.

Answer: TRUE Diff: 2 Page Ref: 11 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 58) One study that reviewed 40 empirical merger and acquisition studies in the finance literature concluded that acquisitions, on average, increased the market value of bidding firms by about 25 percent and left the market value of the target firms unchanged.

Answer: FALSE Diff: 2 Page Ref: 11 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking

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59) Strategy researchers have found that in mergers and acquisitions, the more strategically related bidding and target firms are, the more economic value these mergers and acquisitions create.

Answer: TRUE Diff: 2 Page Ref: 11 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 60) In mergers and acquisitions, the owners of the bidding firm appropriate the economic value created by the transaction.

Answer: FALSE Diff: 2 Page Ref: 11 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 61) The cumulative abnormal return for a merger or acquisition can be positive or negative depending on whether the stock in question performs better or worse than what was expected without an acquisition.

Answer: TRUE Diff: 2 Page Ref: 11 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 62) Free cash flow is simply the amount of cash a firm has to invest after all positive net presentvalue investments in its ongoing businesses have been funded.

Answer: TRUE Diff: 2 Page Ref: 13 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking

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63) Managerial hubris is the well-founded belief held by managers in bidding firms that they can manage the assets of a target firm more efficiently than the target firm's current management.

Answer: FALSE Diff: 2 Page Ref: 14 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 64) The difference between the unexpected value of an acquisition actually obtained by a bidder and the price the bidder paid for the acquisition is a profit for the equity holders of the target firm.

Answer: FALSE Diff: 2 Page Ref: 11 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 65) If there are five bidders (each of which has a current market value of $50,000 ) interested in a target firm that has no strategic relatedness with any of the bidding firms and has a current market value of $25,000, identify the economic profits that will be earned by both the bidding firm's equity holders and the target firm's equity holders and discuss this case.

Answer: The economic value created for both the target firm and the bidding firm will be zero.

The value for the bidding firm will be zero because the value of any one of the bidding firms when combined with the target firm exactly equals the sum of the value of these firms as separate entities. The price of this acquisition will quickly rise to $25,000 because any bid less than $25,000 will generate economic profits for a successful bidder that will, in turn, generate entry into a bidding war for a target. Therefore, the price will quickly rise to its value, and economic profits will not be created. Alternately, the target firm's equity holders will also gain zero economic profits since the market value of the target firm has not been increased; it has only been capitalized in the form of a cash payment from the bidder to the target. The target was worth $25,000 and that is exactly what these equity holders will receive.

Diff: 3 Page Ref: 6 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Application of Knowledge

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66) Identify and differentiate between the five different FTC categories of mergers and acquisitions.

Answer: The five different FTC categories of mergers and acquisitions are vertical merger, horizontal merger, product extension merger, market extension merger, and conglomerate merger. A vertical merger occurs when a firm acquires former suppliers or customers. In a horizontal merger, a firm acquires a former competitor. A product extension merger occurs when a firm gains access to complementary products through an acquisition. In a market extension merger, a firm gains access to complementary markets though an acquisition. Finally, in a conglomerate merger, there is no strategic relatedness between a bidding firm and a target firm.

Diff: 2 Page Ref: 8 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking 67) Identify the three potential sources of strategic relatedness between bidding and target firms that were detailed by Lubatkin in 1983 and the four general reasons why bidding firms might want to engage in merger and acquisitions as detailed by Jensen and Ruback in 1983.

Answer: The three potential sources of strategic relatedness between bidding and target firms that Lubatkin identified in 1983 are: • Technical economies, which are scale economies that occur when the physical processes inside a firm are altered so that the same amounts of input produce a higher quantity of outputs.

• Pecuniary economies that are achieved by the ability of firms to dictate prices by exerting market power.

• Diversification economies that are achieved by improving a firm's performance relative to its risk attributes or lowering its risk attributes to its performance.

The four general reasons that bidding firms might want to engage in merger and acquisitions as detailed by Jensen and Ruback in 1983 are: • To reduce production or distribution costs.

• To pursue financial motivations such as gaining access to underutilized tax shields, avoiding bankruptcy costs, to increase leverage opportunities, and to gain other tax advantages.

• To gain market power in product markets.

• To eliminate inefficient management in the target firm.

Diff: 3 Page Ref: 9 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking

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68) If there is one target firm with a current market value of $20,000 as a stand-alone entity and five bidding firms, each of which has a current market value of $30,000 as a stand-alone entity, and the value of the target firms and any of the bidding firms combined is $60,000, estimate the price the bidding firms would be willing to pay for the target firm and the return to stockholders of bidding and target firms when there is strategic relatedness between firms.

Answer: If bidding and target firms are strategically related, then the economic value of these two firms combined is greater than the economic value of these two firms as separate entities.

The market value of the target firm as a stand-alone entity is $20,000, and the market value of the bidding firms as stand-alone entities is $30,000. The value of any of the bidding firms and the target combined is $60,000. Bidding firms will be willing to pay a price for a target up to the value that a target firm adds once it is acquired. Thus, the maximum price bidding firms are willing to pay is still the difference between the value of the combined entity (here, $60,000) and the value of a bidding firm on its own (here, $30,000).

The price for actually acquiring the target firm in this scenario will rapidly rise to $30,000 because any bid less than $30,000 has the potential for generating profits for a bidding firm. At this $30,000 price, the successful bidding firm earns zero economic profits. After all, this firm has acquired an asset that will generate $30,000 of value and has paid $30,000 to do so.

However, the owners of the target firm will earn an economic profit worth $10,000. As a standalone firm, the target is worth $20,000; when combined with a bidding firm, it is worth $30,000.

The difference between the value of the target as a stand-alone entity and its value in combination with a bidding firm is the value of the economic profit ($10,000) that can be appropriated by the owners of the target firm.

Thus, the existence of strategic relatedness between bidding and target firms is not a sufficient condition for the equity holders of bidding firms to earn economic profits from their acquisition strategies. If the economic potential of acquiring a particular target firm is widely known and if several potential bidding firms can all obtain this value by acquiring a target, the equity holders of bidding firms will, at best, earn only zero economic profits from implementing an acquisition strategy. In this setting, a "strategically related" merger or acquisition will create economic value, but this value will be distributed in the form of economic profits to the equity holders of acquired target firms.

Diff: 3 Page Ref: 7 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

AACSB: Analytical Thinking, Application of Knowledge

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69) Describe and discuss five reasons why bidding firms might still engage in acquisitions even if, on average, they do not create value for a bidding firm's stockholders.

Answer: The five possible motivations to engage in mergers and acquisitions even though they do not generate profits for bidding firms are to ensure survival, to invest free cash flow, agency problems, managerial hubris, and the potential for above-normal profits.

To ensure survival. Even if mergers and acquisitions, on average, generate only zero economic profits for bidding firms, it may be necessary for bidding firms to engage in these activities to ensure their survival. In particular, if all of a bidding firm's competitors have been able to improve their efficiency and effectiveness through a particular type of acquisition, then failing to make such an acquisition may put a firm at a competitive disadvantage. Here, the purpose of a merger or acquisition is not to gain competitive advantages but rather to gain competitive parity.

To invest free cash flow. Free cash flow is simply the amount of cash a firm has to invest after all positive net present-value investments in a firm's ongoing businesses have been funded. Free cash flow is created when a firm's ongoing business operations are very profitable but offer few opportunities for additional investment. In this context, merger and acquisition strategies are a viable option as bidding firms, on average, can expect to generate at least competitive parity. Put differently, while mergers and acquisitions may not be a source of superior profits, there are worse things a firm could do with its free cash flow.

Agency problems. Another reason why firms might continue to engage in mergers and acquisitions despite earning only competitive parity from doing so is that mergers and acquisitions benefit managers directly, independent of any value they may or may not create for a bidding firm's stockholders. Merger and acquisition strategies can benefit managers, even if they do not directly benefit a bidding firm's equity holders, in at least two ways. First, managers can use mergers and acquisitions to help diversify their human capital investments in their firm.

Second, managers can use mergers and acquisitions to quickly increase firm size, measured in either sales or assets. If management compensation is closely linked to firm size, managers who increase firm size are able to increase their compensation.

Managerial hubris. Managers can fall victim to managerial hubris, or the unrealistic belief held by managers in bidding firms that they can manage the assets of a target firm more efficiently than can the target firm's current management. This notion can lead bidding firms to engage in acquisition strategies even though there may not be positive economic profits from doing so.

The potential for above-normal profits. A final reason why managers might continue to pursue merger and acquisition strategies is the potential that these strategies offer for generating profits for at least some bidding firms. The empirical research on returns to bidding firms in mergers and acquisitions is very strong. On average, bidding firms do not gain profits from their merger and acquisition strategies. However, just because bidding firms, on average, do not earn profits on these strategies does not mean that all bidding firms will always fail to earn profits. In some situations, bidding firms may be able to gain competitive advantages from merger and acquisition activities.

Diff: 2 Page Ref: 13 Learning Obj.: 12.2: Describe How Mergers and Acquisitions can Create Economic Value (a) When Bidding and Target Firms Share no Economies of Scope (b) When Bidding and Target Firms Share Economies of Scope (c) and Why Firms Might Engage in these Strategies Even When, on Average, They do Not Create Profits for Bidding Firms.

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70) Which of the following actions should bidding firm managers take to help earn superior performance in an acquisition strategy?

A) Share information with other bidders.

B) Delay the closing of the deal.

C) Avoid winning bidding wars.

D) Operate in competitive acquisition markets.

Answer: C Diff: 2 Page Ref: 10 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

AACSB: Analytical Thinking 71) A thinly traded market is a market where A) there are only a small number of buyers and sellers,where information about opportunities in this market is not widely know, and where interests besides purely maximizing the value of a firm can be important.

B) many firms are implementing acquisition strategies.

C) information about opportunities in this market is widely known.

D) the only important interest is to maximize the value of a firm.

Answer: A Diff: 2 Page Ref: 20 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

AACSB: Analytical Thinking 72) To ensure that the owners of target firms appropriate whatever value is created by a merger or acquisition, managers in these target firms should A) create a thinly traded market for their firm.

B) seek information from bidders.

C) close the acquisition deal quickly.

D) limit the number of bidders involved in the bidding competition.

Answer: B Diff: 2 Page Ref: 22 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

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73) ________ is (are) a maneuver in which a target firm's management purchases any of the target firm's stock owned by a bidder and does so for a price that is greater than the current market value of that stock.

A) Standstill agreements B) Poison pills C) Shark repellents D) Greenmail Answer: D Diff: 2 Page Ref: 23 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

AACSB: Analytical Thinking 74) Firms using ________ fend off an acquisition by taking over the firm or firms bidding for them.

A) shark repellents B) a crown jewel sale C) the Pac Man defense D) a golden parachute Answer: C Diff: 2 Page Ref: 23 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

AACSB: Analytical Thinking 75) A ________ is a compensation arrangement between a firm and its senior management team that promises these individuals substantial cash payment if their firm is acquired and they lose their jobs in the process.

A) white knight agreement B) greenmail agreement C) shark repellent D) golden parachute Answer: D Diff: 2 Page Ref: 26 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

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76) A ________ is another bidding firm that agrees to acquire a particular target in the place of the original bidding firm.

A) golden parachute B) greenmail C) white knight D) crown jewel Answer: C Diff: 2 Page Ref: 25 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

AACSB: Analytical Thinking 77) ________ include a variety of relatively minor corporate governance changes that, in principle, are supposed to make it more difficult to acquire a target firm.

A) Shark repellents B) White knights C) Greenmail D) Poison pills Answer: A Diff: 2 Page Ref: 25 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

AACSB: Analytical Thinking 78) Supermajority voting rules are an example of a A) poison pill.

B) white knight.

C) golden parachute.

D) shark repellent.

Answer: D Diff: 2 Page Ref: 25 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

AACSB: Analytical Thinking 79) ________ does not affect the wealth of target firm equity holders.

A) Blue Man defense B) Pac Man defense C) Golden parachute D) Silver parachute Answer: B Diff: 2 Page Ref: 25 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

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80) ________ is an example of an ineffective and inconsequential response with the idea that sometimes a bidding firm is interested in just a few of the businesses currently being operated by the target firm.

A) A Pac Man defense B) A Blue Man defense C) A crown jewel sale D) A golden parachute defense Answer: C Diff: 2 Page Ref: 25 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

AACSB: Analytical Thinking P&G is a leading consumer goods company in the United States that has grown its business through a combination of international growth, alliances, acquisitions and mergers. In 2003, P&G acquired the beauty care company Wella to acquire products that would complement its current product. In 2004, P&G acquired AG-Hutchison Ltd to establish a stronger presence in the Chinese consumer goods products market. In 2005, P&G acquired Gillette, another consumer goods company, in a deal worth approximately $57 billion dollars.

81) If P&G wanted to increase the probability that it would be able to earn superior economic performance from its acquisition of Gillette, P&G should A) share information about Gillette with other potential bidders.

B) share information about strategic fit potential between P&G and Gillette with Gillette.

C) wait to submit its bid for Gillette until there are multiple interested bidders.

D) close the acquisition deal as quickly as possible.

Answer: D Diff: 2 Page Ref: 20 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

AACSB: Application of Knowledge 82) If Gillette's managers wanted to maximize the value that Gillette received from its acquisition by P&G, they should A) seek information from P&G about the value that P&G will receive from its acquisition of Gillette.

B) not engage in negotiations with any bidder but P&G. C) close the acquisition as quickly as possible.

D) stop the acquisition.

Answer: A Diff: 2 Page Ref: 22 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

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83) If P&G's acquisition of Wella had been delayed because it had to overcome a stipulation in Wella's corporate bylaws requiring that more than 50% of Wella's board of directors had to approve the takeover, this would be an example of A) the Pac Man defense.

B) a poison pill.

C) greenmail.

D) a shark repellent.

Answer: D Diff: 2 Page Ref: 25 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

AACSB: Application of Knowledge 84) The market for corporate control is the market that is created when multiple firms actively seek to acquire one or several firms.

Answer: TRUE Diff: 2 Page Ref: 15 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

AACSB: Analytical Thinking 85) One of the main reasons why bidding firms do not obtain competitive advantages from acquiring strategically related target firms is that several other bidding firms value the target firm the same way.

Answer: TRUE Diff: 2 Page Ref: 15 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

AACSB: Analytical Thinking 86) One of the keys for a bidding firm to earn superior performance in an acquisition strategy is to make sure that multiple bidders are pursuing the same target.

Answer: FALSE Diff: 1 Page Ref: 15 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

AACSB: Analytical Thinking 87) When acquiring a publicly traded firm a bidder has to release all the information it has about the potential value of that target in combination with itself.

Answer: FALSE Diff: 2 Page Ref: 16 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

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88) A thinly traded market is a market where there are only a small number of buyers and sellers, where information about the opportunities in this market is not widely known, and where interests besides purely maximizing the value of a firm can be important.

Answer: TRUE Diff: 2 Page Ref: 20 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

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89) Identify and discuss six rules that firms bidding on a target firm in an acquisition should follow to increase the possibility that an acquisition strategy will earn superior performance.

Answer: In pursuing an acquisition, there are six rules that firms bidding on a target firm should follow to increase the possibility that the target firm will earn superior performance. These rules are: • Search for valuable and rare economies of scope. Bidding firms should seek to acquire targets with which they enjoy valuable and rare linkages. Operationally, the search for rare economies of scope suggests that managers in bidding firms need to consider not only the value of a target firm when combined with their own company, but also the value of a target firm when combined with other potential bidders. This is important because it is the difference between the value of a particular bidding firm's relationship with a target and the value of other bidding firms' relationships with that target that defines the size of the potential economic profits from an acquisition.

• Keep information away from bidders. One of the keys to earning superior performance in an acquisition strategy is to avoid multiple bidders for a single target. One way to accomplish this is to keep information about the bidding process, and about the sources of economies of scope between a bidder and target that underlie this bidding process, as private as possible.

• Keep information away from targets. Unless it is illegal to do so, bidding firms must not fully reveal the value of their economies of scope with a target firm.

• Avoid winning bidding wars. If a number of firms bid for the same target, the probability that the firm that successfully acquires the target will gain competitive advantages is very low.

Therefore, it is to a bidding firm's advantage to avoid a bidding war.

• Close the deal quickly. All the economic processes that make it difficult for bidding firms to earn economic profits from acquiring a strategically related target take time to unfold. It takes time for other bidders to become aware of the economic value associated with acquiring a target; it takes time for the target to recruit other bidders; information leakage becomes more of a problem over time; and so forth. A bidding firm that begins and ends the bidding process quickly may forestall some of these processes and thereby retain some superior performance for itself from an acquisition.

• Operate in thinly traded acquisitions markets. A thinly traded market is a market where there is only a small number of buyers and sellers, where information about opportunities in this market is not widely known, and where interests besides purely maximizing the value of a firm can be important. In the context of mergers and acquisitions, thinly traded markets are markets where only a few (often only one) firms are implementing acquisition strategies. These unique firms may be the only firms that understand the full value of the acquisition opportunities in this market. Even target firm managers may not fully understand the value of the economic opportunities in these markets, and even if they do, they may have other interests besides maximizing the value of their firm if it becomes the object of a takeover.

Diff: 2 Page Ref: 18 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

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90) Identify and discuss the three rules that target firm managers should follow to maximize the probability of earning economic profits from their merger and acquisition strategies.

Answer: The three rules that managers of target firms should follow to maximize the probability of earning economic profits from their merger and acquisition strategies are: • Seek information from bidders. Target firms must inform themselves about the resources and capabilities of current and potential bidders. In this way, target firms can become fully aware of the value that they hold for bidders, and they are more likely to be able to extract this full value in the acquisition process.

• Invite other bidders to join the bidding competition. Once a target firm is fully aware of the nature and value of the economies of scope that exist between it and current bidding firms, it can exploit this information by seeking other firms that may have the same relationship with it and then informing these firms of a potential acquisition opportunity. By inviting other firms into the bidding process, the target firm increases the competitiveness of the market for corporate control, thereby increasing the probability that the value by an acquisition will be fully captured by the target firm.

• Delay but do not stop the acquisition. To increase the probability of receiving more than one bid, target firms have a strong incentive to delay an acquisition. The objective, however, should be to delay an acquisition to create a more competitive market for corporate control, not to stop an acquisition.

Diff: 2 Page Ref: 22 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

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91) Describe three major challenges that firms integrating acquisitions are likely to face.

Answer: Although, in general, organizing to implement merger and acquisition strategies can be seen as a special case of organizing to implement corporate diversification strategies or vertical integration strategies, implementing merger and acquisition strategies can create special problems. Most of these problems reflect the fact that operational, functional, strategic, and cultural differences between bidding and target firms involved in a merger or acquisition are likely to be much greater than these same differences between the different parts of a diversified or vertically integrated business that was not created through acquisition. The reason for this difference is that the firms involved in a merger or acquisition have had a separate existences, separate histories, separate management philosophies, and separate strategies.

One of the most significant challenges in integrating bidding and target firms has to do with cultural differences. Simply because a firm has been acquired does not mean that the culture in that firm will rapidly change to become more like the culture of the bidding firm. Indeed, cultural conflicts can last for very long periods of time. For example, the difference between the relative success of Renault's acquisition of Nissan and Daimler-Chrysler's acquisition of Mitsubishi discussed in the opening case of this chapter has largely been attributed to the inability of Mitsubishi to modify its traditional management culture.

Operational, functional, strategic, and cultural differences between bidding and target firms can all be compounded by the merger and acquisition process especially if that process was unfriendly. Unfriendly takeovers can generate in target firm management anger and animosity toward the management of the bidding firm. Research has shown that top management turnover is much higher in firms that have been taken over compared to firms not subject to takeovers, reflecting one approach to resolving these management conflicts.

The difficulties often associated with organizing to implement a merger and acquisition strategy can be thought of as an additional cost of the acquisition process. Bidding firms, in addition to estimating the value of the strategic relatedness between themselves and a target firm, also need to estimate the cost of organizing to implement an acquisition. The value that a target firm brings to a bidding firm through an acquisition should be discounted by the cost of organizing to implement this strategy. In some circumstances, it may be the case that the cost of organizing to realize the value of strategic relatedness between a bidding firm and a target may be greater than the value of that strategic relatedness, in which case the acquisition should not occur. For this reason, many observers argue that potential economies of scope between bidding and target firms are often not fully realized.

Diff: 2 Page Ref: 27 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

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92) How are poison pills different from shark repellents?

Answer: Both poison pills and shark repellents are mechanisms available to target firms to prevent being taken over. Poison pills include a variety of actions that target firm managers can take to make the acquisition of the target prohibitively expensive. One example of a poison pill is when the target firm issues rights to its current stockholders indicating that if the firm is acquired in an unfriendly takeover, it will distribute a special cash dividend to its stockholders. This cash dividend effectively increases the cost of the acquisition, thereby making it less attractive to the bidding firm.

In contrast, shark repellents are a variety of relatively minor corporate governance changes that, in principle, are supposed to make it somewhat more difficult to acquire a target firm. An example would be the supermajority voting rule, in which more than 50 percent of the target firm's board of directors must approve the takeover.

Diff: 1 Page Ref: 25 Learning Obj.: 12.3: Describe Three Ways that Bidding Firms Might be able to Generate Economic Profits from Implementing Mergers or Acquisitions.

AACSB: Analytical Thinking 93) Mergers and acquisitions used to create diversification strategies should be managed through the A) M-form structure.

B) functional structure.

C) U-form structure.

D) matrix structure.

Answer: A Diff: 2 Page Ref: 27 Learning Obj.: 12.4: Describe the Major Challenges that Firms Integrating Acquisitions are Likely to Face.

AACSB: Analytical Thinking 94) The most significant challenge in integrating bidding and target firms has to do with A) accounting differences.

B) cultural differences.

C) operational differences.

D) logistic differences.

Answer: B Diff: 2 Page Ref: 27 Learning Obj.: 12.4: Describe the Major Challenges that Firms Integrating Acquisitions are Likely to Face.

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P&G is a leading consumer goods company in the United States that has grown its business through a combination of international growth, alliances, acquisitions and mergers. In 2003, P&G acquired the beauty care company Wella to acquire products that would complement its current product. In 2004, P&G acquired AG-Hutchison Ltd to establish a stronger presence in the Chinese consumer goods products market. In 2005, P&G acquired Gillette, another consumer goods company, in a deal worth approximately $57 billion dollars.

95) The most significant challenge P&G is likely to face in integrating each of the acquired companies into P&G's operations is likely to be ________ differences between P&G and each of the companies.

A) logistical B) cultural C) operational D) distribution Answer: B Diff: 2 Page Ref: 27 Learning Obj.: 12.4: Describe the Major Challenges that Firms Integrating Acquisitions are Likely to Face.

AACSB: Application of Knowledge 96) Mergers and acquisitions designed to create vertical integration should be managed through the M-form structure.

Answer: FALSE Diff: 3 Page Ref: 27 Learning Obj.: 12.4: Describe the Major Challenges that Firms Integrating Acquisitions are Likely to Face.

AACSB: Analytical Thinking 97) Perhaps the most significant challenge in integrating bidding and target firms has to do with cultural differences.

Answer: TRUE Diff: 2 Page Ref: 27 Learning Obj.: 12.4: Describe the Major Challenges that Firms Integrating Acquisitions are Likely to Face.

AACSB: Analytical Thinking 98) Operational, functional, strategic, and cultural differences between bidding and target firms can all be compounded by the merger and acquisition process especially if that process was unfriendly.

Answer: TRUE Diff: 2 Page Ref: 28 Learning Obj.: 12.4: Describe the Major Challenges that Firms Integrating Acquisitions are Likely to Face.

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99) Unfriendly takeovers can generate anger and animosity among the target firm management that is directed toward the management of the bidding firm.

Answer: TRUE Diff: 2 Page Ref: 28 Learning Obj.: 12.4: Describe the Major Challenges that Firms Integrating Acquisitions are Likely to Face.

AACSB: Analytical Thinking 100) The value that a bidding firm brings to a target firm through an acquisition should be discounted by the cost of strategizing to implement an acquisition.

Answer: FALSE Diff: 2 Page Ref: 28 Learning Obj.: 12.4: Describe the Major Challenges that Firms Integrating Acquisitions are Likely to Face.

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