CH-5 Organizational Strategy – Effective Management : Exam Guide

Chapter 5: Organizational Strategy TRUE/FALSE 1. There are four conditions that must be met if a firm's resources are to be used to achieve a sustainable competitive advantage. The resources must be valuable, rare, imperfectly imitable, and non-substitutable. Answer: True 2. A non-substitutable resource is a resource that is impossible or extremely costly or difficult for other firms to duplicate. Answer: False This is the definition of an imperfectly imitable resource. A non-substitutable resource is defined as a resource, without equivalent substitutes or replacements, that produces value or competitive advantage. 3. A competitive advantage becomes a sustainable competitive advantage when other companies have found it very expensive to duplicate the value a firm is providing to customers. Answer: False Sustainable competitive advantage refers to a competitive advantage that other companies have tried unsuccessfully to duplicate and have, for the moment, stopped trying to duplicate. 4. The three steps of the strategy-making process are (1) assess the need for strategic change, (2) conduct a situational analysis, and (3) choose the strategic alternatives. Answer: True 5. Companies face very little uncertainty in their strategic business environments. Answer: False There's a great deal of uncertainty in strategic business environments. 6. Companies that succeed are constantly re-examining strategies or competitive practices that have been successful in the past in order to ascertain their probable future success. Answer: False Success often leads to competitive inertia--a reluctance to change strategies or competitive practices that have been successful in the past. 7. Strategic myopia is a discrepancy between a company's intended strategy and the strategy actually implemented by management. Answer: False Strategic dissonance is a discrepancy between a company's intended strategy and the strategy actually implemented by management. 8. According to the What Really Works, "Strategy Making for Firms, Big and Small," the probability that the strategy-making process will increase a firm's profits and growth the same for both large firms and small firms. Answer: False The probability that the strategy-making process will increase a firm's profits and growth is greater for large firms than for small firms 9. An analysis of an organization's external environment begins with an assessment of the company's distinctive competencies and core capabilities. Answer: False An analysis of an organization's internal environment, that is, a company's strengths and weaknesses, begins with an assessment of distinctive competencies and core capabilities. 10. A strategic group is a group of other companies within an industry that top managers choose for comparing, evaluating, and benchmarking their company's strategic threats and opportunities. Answer: True 11. When scanning the environment for strategic threats and opportunities, managers tend to categorize the different companies in their industries into core firms, secondary firms, and transient firms. Answer: True 12. When companies are performing above or better than their strategic reference points, top management is more likely to choose a daring, risk-taking strategy. Answer: False When companies are performing above or better than their strategic reference points, top management will typically be satisfied with the company’s strategy and select a conservative, risk-avoiding strategy. 13. Corporate-level strategy is the overall organizational strategy that addresses the question "What business or businesses are we in or should we be in?" Answer: True 14. Portfolio strategy is a corporate-level strategy that minimizes risk by diversifying investment among various businesses or product lines. Answer: True 15. Based upon the research evidence, related diversification appears to be a better strategy for portfolio management than unrelated diversification. Answer: True 16. If retrenchment works, it is typically followed by a stability strategy. Answer: False If retrenchment works, it is often followed by a recovery strategy that focuses on growing the business again. 17. Companies often choose a stability strategy when their external environment doesn't change much, or after they have struggled with periods of explosive growth. Answer: True 18. Companies can grow either externally or internally. Answer: True 19. Industry-level strategy is a corporate strategy that addresses the question "How should we compete against a particular firm in our industry?" Answer: False Industry-level strategy is a corporate strategy that addresses the question "How should we compete in this industry?" 20. Character of the rivalry is a measure of the intensity of competitive behavior between companies in an industry. Answer: True 21. The threat of substitute products is a measure of the ease with which customers can find substitutes for an industry's goods or services. Answer: True 22. The three positioning strategies are cost leadership, differentiation, and niche. Answer: False The three positioning strategies are cost leadership, differentiation, and focus. 23. Bargaining power of buyers tends to be higher when a company sells a popular product to multiple buyers, than when a company is dependent on just a few high-volume buyers. Answer: False If a company is dependent on just a few high-volume buyers, those buyers will typically have enough bargaining power to dictate prices. By contrast, if a company sells a popular product or service to multiple buyers, then the company has more power to set prices. Thus, bargaining power of buyers is lower in this case. 24. Differentiation is the positioning strategy of producing a product or service of acceptable quality at consistently lower production costs than competitors can, so that the firm can offer the product or service at the lowest price in the industry. Answer: False This is the definition of cost leadership. Differentiation is the positioning strategy of providing a product or service that is sufficiently different from competitors' offerings such that customers are willing to pay a premium price for it. 25. The four kinds of adaptive strategies are defenders, analyzers, prospectors, and reactors. Answer: True 26. Reactors follow the consistent strategy of anticipating and reacting to potential external opportunities and threats prior to their occurrence. Answer: False Unlike defenders, prospectors, or analyzers, reactors do not follow a consistent strategy. Furthermore, rather than anticipating and preparing for external opportunities and threats, reactors tend to "react" to changes in their external environment after they occur. 27. Most companies compete directly with all the firms in their industry. Answer: False Most companies do not compete directly with all the firms in their industry. Instead of "competing" with the industry, most firms compete directly with just a few companies. 28. The two factors that determine the extent to which firms will be in direct competition with each other are market commonality and resource similarity. Answer: True 29. The greater the market commonality, the less intense the direct competition between two companies. Answer: False Market commonality is the degree to which two companies have overlapping products, services, or customers in multiple markets. The more markets in which there is product, service, or customer overlap, the more intense the direct competition between the two companies. 30. The Home Depot, the world's largest home improvement retailer, spent years developing a business in which it sold wholesale construction supplies. This endeavor was an attempt at related diversification. Answer: True 31. Japanese-based Bandai, the world's third-biggest toymaker, plans to acquire several smaller companies in an effort to knock Mattel out of its top position in the industry. Bandai is implementing a growth strategy, a type of grand strategy. Answer: True 32. The Home Depot, the world's largest home improvement retailer, spent years developing a business in which it sold wholesale construction supplies. In 2007, the store admitted that its retail business had suffered as a result of this effort and implemented a stability strategy to stem retail losses. Answer: False This is a recovery strategy. The Home Depot is trying to return to a growth strategy. 33. The Carl Zeiss Company is the leading manufacturer of optical systems, industrial measurements, and medical devices. It's competitor Optovue introduced RTVue FD-OCT to the U.S. market. RTVue is a high-speed, high resolution OCT scanner used for retina imaging and analysis. One year after the introduction of RTVue FD-OCT, Optovue won the coveted Medical Design Excellence Award for this innovative technology. Zeiss should use an attack strategy to defend its market share. Answer: False It would use a response strategy to respond to RTVue's attack. MULTIPLE CHOICE 1. An organization that has _____________ has the assets, capabilities, processes, information, and knowledge that an organization uses to improve its effectiveness and efficiency, to create and sustain competitive advantage, and to fulfill a need or solve a problem. A. grand strategies B. distinctive competencies C. competitive advantages D. resources E. strategic stances Answer: D 2. In 2007, Harry Potter fans waited outside bookstores for the midnight release of the seventh and final book in the series. J. K. Rowling, the author, has produced a series of books that have had phenomenal sales. Others have attempted to write similar books, but Rowling’s audience perceives hers to be better written and more enjoyable. Rowling’s Harry Potter has a: A. strategic stance B. synergistic role C. competitive advantage D. competitive window E. differential challenge Answer: C The Harry Potter series is providing greater value to its readers than other similar series can. 3. A situational analysis for a manufacturer of pet food might reveal: A. a growing dog and cat population in the United States B. scientific research that indicates dogs need less calcium in their diet C. a less expensive, more nutritious imported brand of pet food D. a growing demand for gourmet pet food E. all of these Answer: E All are examples of external opportunities and threats. 4. A sustainable competitive advantage exists for an organization when other companies have tried unsuccessfully to duplicate the advantage and: A. those companies have been prohibited from duplicating the advantage by federal law B. those companies have, for the moment, stopped trying to duplicate the advantage C. the organization is able to implement exclusive distribution D. the organization operates in the international marketplace E. the organization has a follower strategic stance Answer: B 5. A(n) _____________ resource is a resource that is not controlled or possessed by many competing firms. A. rare B. imperfectly imitable C. nonsubstitutable D. strategically dissonant E. permanent Answer: A 6. A(n) _____________ is a resource that is impossible or extremely costly or difficult for other firms to duplicate. A. rare B. imperfectly imitable C. nonsubstitutable D. strategically dissonant E. reliable Answer: B 7. There are numerous competitive brands of cosmetics, perfumes, hair-care, and skin-care products on the market. One such brand is Aveda. To differentiate its products from other similar brand, Aveda focuses on educating its customers on general skin and hair care. Its salespeople are trained to answer questions and help customers find solutions. Aveda has used customer education and employee training to: A. create synergy through relationship marketing B. prevent product duplication C. make efficient use of imitable resources D. eliminate the need for nonsubstitutable resources E. create a competitive advantage Answer: E Aveda is providing greater value for its customers than its competition can. 8. Top-Flite manufactures Strata golf balls and prices these balls at about three times what ordinary golf balls costs. The Strata ball is selling exceptionally well because customers perceive the ball's patented three-layer construction to improve handling and increase distance. The patent on these golf balls gives Top-Flite a(n): A. sustainable competitive advantage B. aggregate marketing strategy C. reliable differentiation D. strategic stance E. differential stance Answer: A Rationale: A rare resource--in this case, a patent--is one that is controlled or possessed by a single company. It gives Top-Flite a sustainable competitive advantage. 9. While QVC was not the first home shopping television show, it has become the most successful. The company has had a 14 percent growth rate since 1996. The company attributes its success to its inimitable ability to create entertainment, the blend of entertainment and retailing. This ability gives QVC: A. a strategic orientation B. a value-based advantage C. strategic myopia D. a sustainable competitive advantage E. diversification capabilities Answer: D A sustainable competitive advantage is a competitive advantage that others have tried unsuccessfully to duplicate. 10. Bill Gates, in a talk at the Computer History Museum in Mountain View, California, said to the interviewer, "Microsoft has had competitors in the past. It's a good thing we have museums to document this stuff." If this were really the case, Microsoft would: A. believe that it had a permanent sustainable competitive advantage B. never experience competitive inertia C. never need to conduct a situation analysis D. operate as if competitive advantages were unnecessary E. locate more imitable resources Answer: A A sustainable competitive advantage is not permanent. Eventually, competitors will be able to replicate it. 11. Which of the following is a condition that must be met if a firm's resources are to be used to achieve a sustainable competitive advantage? A. differentiation B. imperfectly imitable resources C. diversification D. entrepreneurial orientation E. a matrix organizational structure Answer: B 12. Deutsche Bank is the largest bank in the world. Would this give it a sustainable competitive advantage? A. yes, because it would make its operations synergistic B. no, because size is not a criterion for sustainable competitive advantage C. no, because large institutions make less effective use of resources D. no, because large organizations are always targeted for antitrust activities E. yes, because size is directly and positively related to efficiency Answer: B A sustainable competitive advantage is a competitive advantage that others have tried unsuccessfully to duplicate. Size through mergers and acquisitions can be duplicated if the company’s pockets are deep enough. 13. According to the text, valuable, rare, imperfectly imitable resources can produce sustainable competitive advantage only if they are _____________ resources. A. nonsubstitutable B. substitutable C. reliable D. expensive E. imitable Answer: A 14. When making travel plans, many tourists have selected Thomas Cook, a British tour operation, because they perceive the tour company as being superior to all others. No other tour service can duplicate the customer service and satisfaction that Thomas Cook has provided over its years of operation. Thomas Cook has apparently created a sustainable competitive advantage by using _____________ resources. A. synergistic B. valuable C. tangible D. non-substitutable E. rare Answer: D Non-substitutable resources are resources that produce a competitive advantage but have no equivalent substitutes or replacements. 15. While QVC was not the first home shopping television show, it has become the most successful. The company has had a 14 percent growth rate since 1996. The company attributes its success to its inimitable ability to create entertainment, the blend of entertainment and retailing. Other cable television networks have tried unsuccessfully to recreate QVC's ability to make retailing entertainment. This ability indicates that QVC uses _____________ resources to its advantage. A. synergistic B. valuable C. tangible D. non-substitutable E. rare Answer: D Non-substitutable resources are resources that produce a competitive advantage but have no equivalent substitutes or replacements. 16. Sherre McMahon is the inventor and manufacturer of Shooks--a product that extends the length of any necklace. Her method is patented, which means she has a _____________ resource until competitors can develop a substitute product. A. synergistic B. valuable C. tangible D. non-substitutable E. rare Answer: E A rare resource--in this case, a patent--is one that is controlled or possessed by a single company. 17. The first step in the strategy-making process is to: A. assess the need for strategic change B. conduct a situation analysis C. choose strategic alternatives D. evaluate the impact of changes on the internal environment E. create a strategic budget Answer: A 18. NTL is the largest cable company in the United Kingdom. The company has recently declared bankruptcy and needs to engage in restructuring in order to give the company more flexibility and to allow it to raise capital. Since it has identified the need for strategic change, what would be the organization's next step in this strategy-making process? A. finding the optimal strategic solution B. brainstorming C. conducting focus groups D. assessing the need for strategic change E. conducting a situation analysis Answer: E NTL is at the second stage of the strategy-making process. See also Exhibit 5.2. 19. Royal Dutch Shell stunned Wall Street when it suddenly announced it's missing more than $60 billion in oil and gas reserves. Industry analysts were not surprised because they have continually criticized the company's accounting techniques. In terms of the strategy-making process, Royal Dutch Shell would have discovered this shortage when it: A. looked at its strategic alternatives B. sought to develop more competitive advantages C. conducted a situational analysis D. assessed the need for strategic changes E. created a strategy to avoid competitive myopia Answer: C The situational analysis would have revealed this weakness. 20. When you're a bike-lock maker whose slogan is "Tough World, Tough Locks," it doesn't get much tougher than finding out that most of the locks you've been making for the last 30 years can be picked with a Bic pen. That, sadly, is what happened to Ingersoll-Rand subsidiary Kryptonite, after bloggers begin posting videos showing just how easy it is to pop open the company's U-shaped locks. A spokeswoman for the company said that the locks nonetheless provide "an effective deterrent against theft." This reluctance to change how the lock was made is known as: A. competitive dissonance B. strategic apathy C. competitive inertia D. strategic inertia E. competitive apathy Answer: C Kryptonite lost business because it did not want to accept the inferiority of its lock design. 21. Revlon was once the world's biggest cosmetics company. But over the past few years, its brands have lost sales and struggled through a series of management setbacks, but still it was reluctant to give up policies that were no longer operational. For example, its top management wanted to manage such minutiae as whether a lipstick perfectly matched a nail polish. Revlon was experiencing: A. competitive dissonance B. strategic apathy C. competitive inertia D. strategic inertia E. competitive apathy Answer: C Revlon lost revenues because its management did not want to change how it did business. 22. Abercrombie & Fitch paid $50 million to settle claims that it discriminated against minorities in hiring salespeople for its "all-American" line of clothing. This policy was an example of an: A. internal strength B. internal weakness C. internal threat D. external weakness E. external opportunity Answer: B Policies originate from within the company. 23. U.S. residents account for over 75 percent of cruise ship passengers, and U.S. ports had 8 million passengers leaving on cruises in 2004. The growth in cruise travel was phenomenal after the terrorist attacks on September 11, 2001. According to a situational analysis, this event created an _____________ for the industry. A. internal strength B. internal weakness C. internal threat D. external weakness E. external opportunity Answer: E The terrorist attacks reduced flying for vacations. Cruise ships became a viable alternative for travelers who were looking for relaxation 24. According to the What Really Works, "Strategy Making for Firms, Big and Small," the strategy-making process: A. is done more frequently by smaller companies than by larger ones B. can benefit both small and large companies C. is done annually at the beginning of each fiscal year D. can only benefit large companies E. only examines the external environment Answer: B 25. An organization is experiencing _____________ when it is reluctant to change strategies or competitive practices that have been successful in the past. A. strategic dissonance B. strategic inertia C. competitive dissonance D. competitive inertia E. sustained competitive disarray Answer: D 26. One of the reasons why the highly fragmented chemical industry in Europe has experienced decreasing profits is due to an industry reluctance to change the way it conducts business—especially in how it competes against the lower-priced U.S. imports. This is an example of: A. competitive dissonance B. strategic apathy C. competitive inertia D. strategic inertia E. competitive apathy Answer: C Competitive inertia is a reluctance to change strategies or competitive practices that have been successful in the past. 27. A _____________, also called a SWOT analysis for strengths, weaknesses, opportunities, and threats, is an assessment of the strengths and weaknesses in an organization's internal environment and the opportunities and threats in its external environment. A. market audit B. firm-level strategy C. competitive advantage D. differentiation analysis E. situational analysis Answer: E 28. An organization is experiencing _____________ when there is a discrepancy between the company's intended strategy and the strategic actions actually implemented by management. A. competitive myopia B. character of the rivalry C. strategic dissonance D. competitive inertia E. an organizational roadblock Answer: C 29. The Thomas Cook travel agency has experienced financial setbacks due to the Iraq war, the SARS epidemic, and unusually hot weather in Europe. A situational analysis would conclude that its setbacks were due to: A. threats in its external environment B. opportunities in its environmental environment C. weaknesses in its external environment D. the absence of strengths in its internal environment E. weaknesses in its internal environment Answer: A Threats come from an organization’s external environment. 30. Companies in the chemical industry are struggling to attract the most talented college graduates. One of the biggest challenges facing these companies is attracting new talent to organizations with an “old economy” image. A situational analysis would term this challenge a(n): A. internal threat B. external opportunity C. internal weakness D. internal opportunity E. external strength Answer: C Corporate image is created by the company’s internal environment. 31. In a situational analysis, a strategic group is a group of _____________ that top managers choose for comparing, evaluating, and benchmarking their company's strategic threats and opportunities. A. non-industry-specific companies B. expert managers C. trade journals and other relevant periodicals D. other firms within an industry E. consulting firms that use the Delphi technique Answer: D 32. Last year QVC, the home shopping cable network, rang up $5.7 billion in sales and $760 million in operating profit, making it nearly as big and roughly twice as profitable as Amazon.com. It is the most profitable of all the home shopping networks. This gives it a(n): A. customer sustainability B. organizational advantage C. relative competence D. distinctive competence E. superlative advantage Answer: D A distinctive competence is what a company can do, make, or perform better than its competitors. 33. By selling mostly independent-label titles on CDs and vinyl, Insound.com has won a following among music snobs nationwide. The kind of hard-core fan that Insound attracts buys 21 records a year while a typical consumer's annual purchases can be counted on one hand. The company was slowly built by forging partnerships with distributors, labels, and artists. In return, the labels and distributors directed their customers to Insound. The source of Insound's distinctive competencies is its: A. imperfectly imitable resources B. valuable resources C. reference-point strategies D. core capabilities E. sources of innovation Answer: D Core capabilities are the internal decision-making routines, problem-solving processes, and organizational culture that determine the efficiency of an organization. 34. Top managers at Reebok looked at what Nike, New Balance, and smaller athletic shoe manufacturers like Majestic were doing to reach their chosen target markets and decided upon comparison that it wanted to risk targeting the hip-hop market. For Reebok, the athletic shoe manufacturers are: A. part of its strategic group B. the source of its competitive myopia C. companies without distinctive competencies D. companies that use a similar matrix strategy E. the source of its sustainable core competency Answer: A A strategic group is a group of companies within an industry that top managers choose to compare, evaluate, and benchmark strategic threats and opportunities. 35. Specialized Bicycle Components, Inc. introduced the first major production mountain bike in 1980. Two-thirds of its profits come from the sale of mountain bikes. It is recognized worldwide for its ability to design and produce superior mountain bikes. This ability is its: A. customer sustainability B. organizational advantage C. relative competence D. distinctive competence E. superlative advantage Answer: D A distinctive competence is what a company can do, make, or perform better than its competitors. 36. Which of the following is a mechanism used to examine external threats and opportunities facing a firm as well as its internal strengths and weaknesses? A. organizational scanning B. internal marketing C. shadow-strategy task forces D. benchmarking E. a situation analysis Answer: E 37. Specialized Bicycle Components, Inc. introduced the first major production mountain bike in 1980. Since then, the company has maintained a technological leadership in the production of bikes and bike accessories and an organizational culture that encourages innovation. This technological leadership as well as its organizational culture is the company’s: A. customer sustainabilities B. organizational advantages C. relative competencies D. core capabilities E. superlative advantages Answer: D Core capabilities are the internal decision-making routines, problem-solving processes, and organizational culture that determine the efficiency of an organization. 38. While _____________ are tangible, _____________ are not. A. core capabilities; distinctive competencies B. competitive advantages; differential advantages C. strengths and weaknesses; opportunities and threats D. opportunities and threats; strengths and weaknesses E. distinctive competencies; core capabilities Answer: E 39. In any organization, the _____________ are the less visible, internal decision-making routines, problem-solving processes, and organization cultures that determine how efficiently inputs can be turned into outputs. A. imperfectly imitable resources B. valuable resources C. distinctive competencies D. core capabilities E. sources of innovation Answer: D 40. Imagine Dow Chemical is conducting a situational analysis. According to its sales, Dow is the second largest chemical company in the world. BASF is the largest. Both companies use a similar strategy. Within Dow's situational analysis, BASF would be classified as a: A. cash cow B. primary firms C. transient firm D. core firm E. secondary firm Answer: D Core firms are the central companies in a strategic group. 41. Polaroid and Kodak are two companies in the film-based imaging industry that use similar strategies and would likely have been _____________ in each other's strategic groups until Polaroid declared bankruptcy, and Kodak took the leadership role in developing digital technology. A. core firms B. rival firms C. primary firms D. defender firms E. advantageous rivals Answer: A A core firm is a central company in a strategic group. 42. Top managers at Reebok looked at what Nike, New Balance, and smaller athletic shoe manufacturers like Majestic were doing to reach their chosen target markets and decided upon comparison that it wanted to risk targeting the hip-hop market. Reebok's strategy is much more like the one implemented by New Balance. Unlike Nike, neither Reebok nor New Balance uses athletes as spokespeople for its products. Therefore, Nike would be an example of a _____________, and New Balance would be an example of a _____________ for Reebok. A. transient firm; secondary firm B. secondary firm; core firm C. transient firm; core firm D. core firm; secondary firm E. secondary firm; transient firm Answer: B Both Nike and New Balance are part of Reebok's strategic group. Nike is a secondary firm because it follows strategies related to but somewhat different from Reebok's. New Balance is one of the central companies in Reebok's strategic group. 43. When doing an analysis of strategic groups to assess external environmental threats and opportunities, _____________ firms are firms that use related but somewhat different strategies than _____________ firms. A. secondary; pioneering B. secondary; core C. transient; core D. pioneering; secondary E. core; transient Answer: B 44. Reebok hopes to change the rules of sneaker marketing, abandoning high-priced celebrity-athlete endorsements in favor of the harder-to-control world of high fashion. It must also convince consumers that a company that was once decidedly unhip is producing cool shoes through its marriage of hip-hop and Japanese fashion. In terms of the Strategic Reference Point Theory, Reebok has adopted a _____________ strategy. A. risk-seeking B. diversification C. core competency D. risk-avoiding E. focus Answer: A Reebok's managers viewed the company as failing to create the core competencies that it needed to create a sustainable competitive advantage. Therefore, it is taking the risks needed to create those competencies. 45. Which of the following statements about the Strategic Reference Point Theory is true? A. The theory does not consider risk factors. B. The theory is deterministic. C. The theory may lead to bureaucratic management. D. This theory recommends that managers not change strategic reference points. E. None of these statements about the Strategic Reference Point Theory is true. Answer: E 46. _____________ are the targets that managers use to measure whether their firm has developed the core competencies that it needs to achieve a sustainable competitive advantage. A. Strategic reference points B. Strategic focus points C. Differentiation targets D. Imperfectly imitable resources E. Strategic monitors Answer: A 47. According to Strategic Reference Point Theory, managers have two basic strategic alternatives. They are: A. risk-avoiding strategy and pioneering strategy B. risk-avoiding strategy and risk-seeking strategy C. risk-maintenance strategy and conflict-avoidance strategy D. frontal attack strategy and guerrilla strategy E. none of these Answer: B 48. The term _____________ refers to the overall organizational strategy that addresses the question "What business or businesses are we in or should we be in?" A. firm-level strategy B. corporate-level strategy C. industry-level strategy D. portfolio strategy E. vision Answer: B 49. The two major approaches to corporate-level strategy are: A. portfolio strategies and secondary strategies B. grand strategies and temporal strategies C. grand strategies and the portfolio strategy D. the Boston matrix strategy and the Maslow strategy E. major strategies and minor strategies Answer: C 50. Which of the following is an example of a common approach to corporate-level strategy? A. portfolio strategy B. adaptive strategies C. pioneering strategies D. matrix strategies E. transient strategies Answer: A 51. Which of the following is an example of a common approach to corporate-level strategy? A. positioning strategies B. adaptive strategies C. ROI strategies D. grand strategies E. risk-seeking strategies Answer: D 52. Starbucks, the operator of Starbucks coffeehouses, also markets a line of compilation CDs under the brand name Hear Music. The making and marketing of CDs would be an example of: A. related differentiation B. related diversification C. an integrated acquisition D. competency acquisition E. unrelated diversification Answer: E Unrelated diversification is the acquiring of companies in completely unrelated businesses. 53. When India's largest manufacturer of soaps and detergents, Nirma Ltd., entered the cement manufacturing business, it was an example of: A. related diversification B. market aggregation C. acquisition D. unrelated diversification E. market development Answer: D Unrelated diversification is the acquiring of companies in completely unrelated businesses. 54. When Clorox Corporation, the manufacturer of bleach and bleach-based cleaning products, acquired Kingsford Charcoal and Prime Choice brand steak sauce, it was an example of: A. related differentiation B. related diversification C. an integrated acquisition D. competency acquisition E. unrelated diversification Answer: E Unrelated diversification is the acquiring of companies in completely unrelated businesses. 55. The _____________ is a portfolio strategy that managers use to categorize their corporation's businesses by growth rate and relative market share. This strategy helps them to decide how to invest corporate funds. A. investment matrix B. SWOT matrix C. BCG matrix D. portfolio management matrix E. Maslow grid Answer: C 56. The Swiss-based health-care group Roche sold its vitamin division to Dutch-based DMS. The Roche division was the world’s leading supplier of vitamins, but Roche wanted to concentrate on its pharmaceuticals and diagnostics divisions. DMS is pleased with its acquisition because it allows it to concentrate on life science products and performance products, both products in high-growth markets. In terms of portfolio strategy, the Roche vitamin division was most likely an example of a(n): A. cash cow B. star C. exclamation mark D. problem child E. question mark Answer: B A star has a large market share in a high-growth market, but if it does not support the company's goals, it must be sold. See also Exhibit 6.8. 57. The greatest disadvantage associated with using the BCG matrix and other forms of portfolio strategy is: A. how difficult it is to separate related diversification from unrelated diversification B. there is no evidence that unrelated diversification is useful C. the difficulty in labeling those products that are in the median range D. carrying the strategy over into market globalization E. concern about how the strategy appeals to some unethical businesspeople Answer: B See also Exhibit 6.7, Portfolio Strategy: Problems and Recommendations. 58. Specialized Bicycle Components, Inc. introduced the first major production mountain bike in 1980. Two-thirds of its profits come from the sale of mountain bikes. Specialized bikes have a large share of a fast-growing market. According to the BCG matrix, Specialized mountain bikes would be classified as: A. problem children B. cash cows C. exclamation points D. stars E. question marks Answer: D The mountain bike is a high-growth product, and Specialized Bicycle Components has a large share of this market. 59. Coca-Cola deleted Fruitopia from its product line in the United States. The product had a low share of a fast-growing market. According to the BCG matrix, Fruitopia was an example of a(n): A. cash cow B. exclamation point C. question mark D. dog E. shooting star Answer: C See Exhibit 6.8. 60. BASF AG is the biggest chemical company in the world. Its portfolio is helping it weather the weak demand and high raw material prices plaguing the rest of industry. The company's main problem is its crop science businesses, which have a small share of a fast-growing market. According to the BCG matrix, BASF's crop science businesses would be classified as a(n): A. cash cow B. exclamation point C. question mark D. dog E. shooting star Answer: C Question marks are companies with small shares of a fast-growing market. 61. Which of the following statements about portfolio strategy is true? A. The evidence supports the usefulness of acquiring unrelated businesses. B. Dysfunctional consequences can occur when companies are categorized. C. The strategy may weaken the strongest performer in the corporate portfolio, the problem child. D. Labeling a top performer as a cash cow will strengthen employee morale. E. Maslow's hierarchy can be used to determine the level of motivation needed to acquire and make a success of portfolio strategy. Answer: B The evidence does not support the value of unrelated diversification. The strongest performers are the cash cow and the star. Morale can be hurt as funds from the cash cow are shifted to other divisions. There is no relationship between portfolio strategy and Maslow’s hierarchy. 62. In 1977, at age 23, Jake Burton Carpenter left a job at an investment firm to work in a wood shop where he developed the first marketable snow board. Three decades later, he is the owner of Burton Snowboards, the leader in the $2.3 billion snow sports industry. Last year, his company acquired Channel Islands Surfboards. This is an example of _____________. A. related differentiation B. related diversification C. and integrated acquisition D. competency acquisition E. unrelated diversification Answer: B In related diversification, different business units share similar products, manufacturing, technology, or culture. 63. A _____________ strategy, which is manifested in three ways, is a broad corporate-level strategic plan used to achieve strategic goals and guide the strategic alternatives that managers of individual businesses or subunits may use. A. grand B. growth C. stability D. retrenchment/recovery E. repositioning Answer: A 64. Deutsche Bank became the world’s largest bank through a merger with Bankers Trust, a transatlantic banking operation. Since both banking companies had similar core capabilities, this would be classified as an example of: A. related differentiation B. related diversification C. an integrated acquisition D. competency acquisition E. unrelated diversification Answer: B Both banks had similar core competencies. 65. The Hindu is India's leading daily newspaper. It also publishes Praxis, a management journal, a market-research-based journal called Urban Pulse, and Sportstar, a weekly sports publication. The publishers of The Hindu have engaged in: A. related diversification B. market aggregation C. acquisition D. unrelated diversification E. market development Answer: A The newspaper has created other publishing vehicles that share similar technology. 66. When QVC added an Internet retailing site, experts were surprised at its success. The online store carries the same merchandise at the same prices that are available on the cable television show. QVC Internet is the nation's sixth largest general merchandise retailer and is an example of: A. related diversification B. market aggregation C. acquisition D. unrelated diversification E. market development Answer: A QVC has created a second retailing outlet that uses the same product and pricing strategies. 67. The research on diversification in portfolio management indicates that the best approach is probably: A. related differentiation B. related diversification C. unrelated diversification D. repositioning E. no diversification Answer: B 68. McDonald's uses a _____________ strategy (a kind of grand strategy) as it increases its profits in France by offering uniquely French products such as Croque McDo, the McDonald's version of the popular French grilled sandwich. A. growth B. decline C. retrenchment/recovery D. repositioning E. pioneering Answer: A A growth strategy focuses on increasing profits, revenues, market share, or the number of places in which the company does business. 69. The purpose of a _____________ strategy is to turn around very poor company performance by shrinking the size or scope of the business. A. growth B. stability C. retrenchment D. maturity E. repositioning Answer: C 70. Companies often choose a _____________ strategy when their external environment doesn't change much, or after they have struggled with periods of explosive growth. A. stability B. growth C. pioneering D. portfolio E. retrenchment Answer: A 71. Significant cost reductions, layoffs of employees, closing of poorly performing stores, offices, or manufacturing plants, or closing or selling entire lines of products or services would be characteristic of a _____________ strategy. A. portfolio B. retrenchment C. stability D. firm-level E. rehabilitation Answer: B A retrenchment strategy shrinks the size or the scope of the business. 72. If successful, the _____________ strategy is often followed by a growth strategy. A. retrenchment B. stability C. portfolio D. focus E. differentiation Answer: A 73. Swiss-based health-care group Roche sold its vitamin division to Dutch-based DMS. The Roche division was the world’s leading supplier of vitamins, but Roche wanted to concentrate on its pharmaceuticals and diagnostics divisions. DMS is pleased with its acquisition because it allows the company to concentrate on improving its market share of life science products and performance products. In terms of grand strategies, DMS is using a _____________ strategy. A. harvesting B. recovery C. growth D. retrenchment E. stability Answer: C A growth strategy focuses on increasing profits, revenues, and market share. 74. Revlon was once the world's biggest cosmetics company. But over the past few years, its brands have lost sales and struggled through a series of management setbacks, but still it was reluctant to give up divisions that were no longer profitable. Which grand strategy does Revlon need to implement if it is to stay in business? A. harvesting B. recovery C. growth D. retrenchment E. stability Answer: D A retrenchment strategy focuses on turning around very poor company performance by shrinking the size and the scope of the firm. 75. The headline read, "With its share languishing at the lowest point in a decade, Kraft Foods needs to convert reorganization into growth." What kind of a grand strategy is the headline recommending Kraft implement? A. harvesting B. recovery C. growth D. retrenchment E. stability Answer: B A recovery strategy is defined as the strategic actions taken after retrenchment to return to a growth strategy. 76. In an attempt to stop declining profitability, ICI, a British chemical company, deleted petrochemical products from its production and concentrated on specialty chemicals, a less capital intensive, less cyclical business. What type of a grand strategy was ICI using? A. retrenchment B. stability C. growth D. maturity E. cutback Answer: A A retrenchment strategy focuses on turning around very poor company performance by shrinking the size or the scope of the business. 77. Borealis is a chemical manufacturer in Denmark. The company is continuing its successful operation by sharpening its focus on innovation and increasing spending on high-end production capacity. In terms of grand strategies, Borealis is using a _____________ strategy. A. growth B. maturity C. focus D. pioneering E. stability Answer: E A stability strategy focuses on improving the way in which the company sells the same products or services to the same customers. 78. Carnival Corp. has purchased a total of 12 different cruise ship lines over the last decade to make it the world’s most profitable cruise line operator. Carnival Corp. used _____________ to increase its profitability. A. internal growth B. a stability strategy C. a pioneering strategy D. external growth E. a repositioning strategy Answer: D Carnival’s growth strategy allowed it to increase profits and the number of ships on which it could offer cruises. This was done through a policy of acquisition. 79. Companies can achieve growth by: A. shrinking the scope of their business B. growing internally through direct expansion or creating new businesses C. deleting all cash cows from their portfolios D. only maintaining stars in their portfolios E. doing all of these Answer: B 80. Companies that are following a _____________ strategy would be most likely to try to improve the way in which they sell the same goods or services to the same customers. A. growth B. pioneering C. retrenchment/recovery D. portfolio E. stability Answer: E 81. eBay, the Internet auction company, acquired Skype, a company whose software enables consumers to make free or low-cost phone calls anywhere in the world via the Internet. Over 50 percent of Skype’s users are in Europe. EBay is planning on its purchase to hasten the auction company’s growth in that region. EBay has initiated: A. a repositioning strategy B. external growth C. niche marketing D. a retrenchment strategy E. internal growth Answer: B eBay is focusing on increasing its profits through acquisition. 82. In an attempt to stop declining profitability, ICI, a British chemical company, deleted petrochemical products from its production and concentrated on specialty chemicals, a less capital intensive, less cyclical business. If ICI is successful in making the needed changes, it will more than likely implement a _____________ strategy. A. harvesting B. revitalization C. diversification D. revival E. recovery Answer: E A recovery strategy focuses on actions taken after retrenchment. 83. The _____________ strategy is analogous to pruning roses. A. growth B. stability C. retrenchment/recovery D. portfolio E. repositioning Answer: C A retrenchment strategy shrinks the size or the scope of the business so that recovery can occur. 84. A(n) _____________ strategy is a corporate strategy that addresses the question "How should we compete in this industry?" A. corporate-level B. industry-level C. firm-level D. niche-specific E. SBU-level Answer: B 85. According to Harvard professor Michael Porter, five industry forces--character of rivalry, threat of new entrants, threat of substitute products or services, bargaining power of suppliers, and the bargaining power of buyers--determine an industry's overall attractiveness and its: A. potential for long-term change B. potential for short-term profitability C. level of risk D. potential for long-term profitability E. potential for short-term growth Answer: D See Exhibit 5.7. 86. According to Michael Porter, five industry forces determine an industry's overall attractiveness and potential for long-term profitability. Which of the following is one of those forces Porter identified? A. existence of complementary products B. organizational structure C. existing benchmarks D. span of management E. bargaining power of suppliers Answer: E See Exhibit 5.7. 87. Which of the following is NOT one of the five industry forces that determine an industry's overall attractiveness and potential for long-term profitability? A. character of rivalry B. existing complementary products C. bargaining power of suppliers D. threat of substitute products E. bargaining power of buyers Answer: B 88. _____________ is the measure of the intensity of competitive behavior between companies in an industry. A. Character of culture B. Competitive barrier C. Character of the rivalry D. Benchmarked rivalries E. Product substitutability Answer: C See Exhibit 5.7. 89. At the beginning of this decade, the first reality television programs were introduced. They were soon followed by a flood of similar type television shows including a couple of spoofs. According to Michael Porter, _____________ apparently made the production of reality shows an attractive industry. A. character of the rivalry B. existing complementary products C. bargaining power of suppliers D. threat of new entrants E. bargaining power of buyers Answer: D The threat of new entrants is a measure of the degree to which barriers to entry make it easy for competitors to enter the market. 90. Players in the cosmetics industry include Procter & Gamble, which owns Cover Girl and Max Factor brands, L'Oreal, which owns L'Oreal and Maybelline brands, Revlon, which owns Revlon and Almay brands, and Estée Lauder. According to Porter, _____________ has the most influence on these company's profits. A. character of culture B. competitive barriers C. character of the industry D. benchmarked rivalries E. threat of substitute products Answer: E This term is a measure of how easily customers can find substitutes for products. The cosmetics industry offers significant substitutability. 91. The original CEO of Revlon once called Estée Lauder, one of his competitors, "his arch and implacable enemy." This description leads you to believe that Michael Porter would want to examine the _____________ as it influences the industry. A. character of culture B. competitive barriers C. character of the rivalry D. benchmarked rivalries E. product substitutability Answer: C The character of the rivalry is a measure of the intensity of competition between companies in an industry. 92. Clorox Corporation controls 60 percent of the bleach market. Imagine you are an entrepreneur who is considering developing and marketing a bleach innovation. Which of Michael Porter's industry forces should you be most concerned about? A. bargaining power of buyers B. threat of substitute products or services C. threat of new entrants D. bargaining power of suppliers E. character of the rivalry Answer: E The strength of the competition (Clorox) would make success in the industry difficult. 93. The positioning strategies identified by Michael Porter are: A. entrepreneurial, growth, and stability B. diversification, acquisition, and divestment C. defender strategy, diversification, and cost leadership D. focus, cost leadership, and differentiation E. divestment, cost leadership, and diversification Answer: D 94. Cost leadership, differentiation, and focus are the three types of _____________ strategies discussed in the text. A. grand B. niche C. positioning D. restructuring E. portfolio Answer: C 95. Many experts claim that Kmart failed because it did not have the lowest prices, it was not perceived as the best in serving a market segment, and it did not provide any specialized services. According to Michael Porter, Kmart should have: A. adopted an entrepreneurial orientation B. diversified C. used a positioning strategy D. implemented a retrenchment strategy E. instituted a value-based culture Answer: C Kmart did not protect itself from the negative effects of industry-wide competition, and it did not have a sustainable competitive advantage. A positioning strategy would have allowed it to do both. 96. When the Home Depot opened stores in Canada, it ran a series of ads featuring an animated hammer that was busily reducing prices to show the U.S.-based home improvement store had the lowest prices. According to Michael Porter, which of the following positioning strategies did the Home Depot adopt to deal with existing Canadian stores that sold similar products? A. cost leadership B. diversification C. focus D. differentiation E. repositioning Answer: A Cost leadership is a positioning strategy in which the company provides products of acceptable quality at consistently lower prices. 97. Glassmaker AFG Industries positions itself as the primary supplier of glass used in microwave doors, shower doors, and patio tables. What type of a positioning strategy does the glass manufacturer use? A. adaptive B. growth C. diversification D. differentiation E. focus Answer: E AFG Industries produces a specialized product. 98. The ad for ASKO washer reads, “Since our humble Swedish beginnings back in 1950, ASKO has been dedicated to building machines with superior cleaning power, reliability, and style.” ASKO is more than likely using which kind of positioning strategy? A. differentiation B. retrenchment C. diversification D. focus E. stability Answer: A With a differentiation strategy, a company provides a product that is sufficiently different from the competitors’ offerings that customers are willing to pay a premium price for it. 99. By selling mostly independent-label titles on CDs and vinyl, Insound.com has won a following among music snobs nationwide. The kind of hard-core fan that Insound attracts buys 21 records a year while a typical consumer's annual purchases can be counted on one hand. What type of positioning strategy does Insound use? A. focus B. differentiation C. cost leadership D. diversification E. repositioning Answer: A It provides a specialized service that other music retailers cannot provide. 100. Callaway Golf, known for its Big Bertha brand golf clubs and Top-Flite brand golf balls, markets two brands that have a high-quality, premium-price image. The company is trying to maintain steady growth even though the number of golfers is declining. What type of adaptive strategy is Callaway Golf implementing? A. proactors B. analyzers C. prospectors D. defenders E. reactors Answer: D Callaway Golf seeks moderate growth and offers a limited range of high-quality products to golfers. 101. The Carl Zeiss Company is the leading manufacturer of optical systems, industrial measurements, and medical devices. Its competitor, Optovue introduced RTVue, a new medical technology that uses a high speed, high resolution infrared beam to probe a patient's eyes for ailments like glaucoma. What type of adaptive strategy is Optovue using? A. defender B. pioneer C. analyzer D. reactor E. prospector Answer: E Prospectors strive for fast growth by searching for new market opportunities, encouraging risk taking, and being the first to bring innovative products to market. 102. Liz Elting is the CEO of Transperfect Translations, a language translation service for businesses. She started the company in her dorm room in 1992. The company now includes 21 offices on three continents and employs 160 full-time employees and 4,000 certified language specialists worldwide with $35 million in revenue in 2004. In terms of the adaptive strategy, Elting is an example of a(n): A. proactor B. analyzer C. prospector D. defender E. reactor Answer: C Prospectors seek fast growth by searching for new markets. 103. The positioning strategy that uses one of the other two positioning strategies to produce a specialized product or service is: A. focus B. differentiation C. cost leadership D. diversification E. repositioning Answer: A 104. Hohner is a company that manufactures and markets harmonica, a product with a steady demand rate. It is so successful at what it does that the company controls 85 percent of the world's harmonica industry. In terms of the adaptive strategies, Hohner would most likely be categorized as a(n): A. reactor B. diversifier C. stabilizer D. analyzer E. defender Answer: E Defending is an adaptive strategy aimed at defending a strategic position by maintaining a moderate, steady growth rate. 105. Sales of Arm & Hammer baking soda had flattened when its manufacturer started promoting new, innovative uses for its product. By searching for new market opportunities, the manufacturer of Arm & Hammer is using which type of adaptive strategy? A. defenders B. cost leaders C. analyzers D. reactors E. prospectors Answer: E Prospecting is an adaptive strategy that seeks fast growth by searching for new market opportunities and using innovation. 106. The purpose of _____________ strategies is to choose an industry-level strategy that is best suited to changes in the organization's external environment. A. positioning B. differentiation C. growth D. adaptive E. diversification Answer: D 107. An organization implementing a(n) _____________ strategy would NOT follow a consistent strategy. A. defender B. pioneer C. analyzer D. reactor E. prospector Answer: D Companies using a reactor strategy simply react to changes in the external environment. 108. Among the adaptive strategies, _____________ are a blend of the _____________ strategies. A. prospectors; analyzers and reactors B. analyzers; defenders and reactors C. reactors; prospectors and analyzers D. reactors; defenders and prospectors E. analyzers; defenders and prospectors Answer: E Analyzers seek moderate, steady growth and limited opportunities for fast growth. 109. Which of the adaptive strategies tends to result in the poorest performance? A. niche marketers B. analyzers C. prospectors D. defenders E. reactors Answer: E Reactors do not anticipate or prepare for change. 110. Japanese-based Bandai, the world's third-biggest toymaker, plans to acquire several smaller companies in an effort to knock Mattel out of its top position in the industry. The $2.2 billion that Bandai dedicated to this goal and the companies it acquired are examples of the Japanese organization's _____________. A. grand strategies B. distinctive competencies C. competitive advantages D. resources E. strategic stances Answer: D An organization’s resources are the assets, capabilities, processes, information, and knowledge it uses to improve effectiveness and efficiency, to create and sustain competitive advantage, and to fulfill a need or solve a problem. 111. Which of the following organizations are most directly in competition with each other? A. Wal-Mart and Limited Too B. a local delicatessen and Kroger’s C. FedEx and UPS D. an independent bookstore and a library E. Good Housekeeping magazine and The Journal of Interactive Marketing Answer: C Only FedEx and UPS sell similar products and acknowledge each other as rivals. 112. Miami Children's Hospital in Florida has developed nationally-ranked cardiac and neuroscience departments through an alliance of entrepreneurial physicians, hospital administrators, and wealthy donors. By specializing in cardiology and neuroscience, the hospital distanced itself from competing hospitals in the Miami area by reducing its: A. market similarity B. competitive direction C. resource similarity D. customer autonomy E. related diversification Answer: C Resource similarity is the extent to which a competitor has similar capabilities, processes, information, and knowledge. See Exhibit 6.12. 113. From a competitive standpoint, _____________ means that the strategic actions that your company takes can probably be matched by your direct competitors. A. market commonality B. resource similarity C. character of the rivalry D. competitive inertia E. competitive autonomy Answer: B 114. Resource similarity and _____________ are factors that determine the extent to which firms will be in direct competition with each other. A. market commonality B. resource similarity C. related diversification D. product differentiation E. customer autonomy Answer: A 115. Players in the cosmetics industry include Procter & Gamble, which owns Cover Girl and Max Factor brands, L'Oreal, which owns L'Oreal and Maybelline brands, Revlon, which owns Revlon and Almay brands, and Estée Lauder. These manufacturers have: A. high market commonality B. high competitive autonomy C. high cultural similarity D. low resource similarity E. low market commonality Answer: A These companies market overlapping products to similar target markets. 116. Which of the following statements about market commonality and resource similarity is true? A. Market commonality has no influence on the likelihood of an attack. B. Response similarity largely affects response capabilities. C. Resource similarity has no influence on the likelihood of an attack. D. When resource similarity is strong, the responding firm cannot match the strategic moves of the attacking firm. E. A firm is more likely to attack firms with similar levels of resources. Answer: B 117. As direct competitors, Verizon and Cingular would have: A. a low degree of resource variability B. a high degree of market commonality C. a low degree of competitive inertia D. a low degree of market commonality E. a high degree of resource synergy Answer: B A high degree of market commonality means the two companies have overlapping products. 118. Under conditions of _____________, a competitive attack by the stronger rival is more likely to produce sustained competitive advantage. A. high market commonality B. high competitive autonomy C. high resource similarity D. low resource similarity E. low market commonality Answer: D Resource similarity refers to the extent to which competitors rely on similar amounts and kinds of resources. 119. In many urban areas, the hospital industry is very competitive. But some hospitals are using a(n) _____________ strategy to distance themselves from their competition. One such hospital is Cooper University Hospital in Camden, New Jersey. Its new addition has well-lit private rooms and a staff trained in customer service by the Ritz-Carlton Hotel organization to attract aging baby boomers. A. prospector B. defender C. reactor D. attack E. analyzer Answer: D An attack strategy is a competitive move designed to reduce a rival's market share or profits. 120. Refer to “What Would You Do?” After the technology crash of 2001, Cisco laid off 10,000 employees. This is an example of A. adaptive strategy B. retrenchment strategy C. positioning strategy D. firm-level strategy Answer: B 121. Refer to “What Would You Do?” The fact that Cisco is aggressively seeking and developing new products and services suggests the company is using which of the following adaptive strategies? A. analyzer B. defender C. prospector D. reactor Answer: C 122. For decades, Cisco has been (and still is) the market leader in Internet routers and switches. With 76% of Cisco’s revenue coming from the sale of these established products, the routers and switches division of the company could best be described as a: A. question mark B. star C. dog D. cash cow Answer: D SHORT ANSWER 1. In 2004, Battlestar Galactica was the highest-rated science fiction television series. Many people believe it is the best drama show currently being produced. SciFi (the network, which produces the show) provided greater perceived value for its viewers than its competitors. Did this give the television network a competitive advantage or a sustainable competitive advantage? In your answer explain the meanings of both of these terms. Answer: The term competitive advantage refers to providing greater value for customers than competitors can. Since companies are constantly competing for market share, the actions of competitors may undermine a company's competitive advantage over time. A competitive advantage becomes a sustainable competitive advantage when other companies cannot duplicate the value a firm is providing to customers. Importantly, sustainable competitive advantage is not the same as a long-lasting competitive advantage, though companies obviously want a competitive advantage to last a long time. Instead, a competitive advantage is sustained if that advantage still exists after competitors have tried unsuccessfully to duplicate the advantage and have, for the moment, stopped trying to duplicate it. Students should see the network as having only a competitive advantage and give as evidence the number of similar programs that were created as a result of the success of this show. In fact, this show was simply another addition in a long line of science fiction shows. 2. Briefly identify the four conditions that must be met if a firm's resources are to be used to achieve a sustainable competitive advantage. Answer: To provide a sustainable competitive advantage, the firm's resources must be valuable (capable of improving efficiency and effectiveness), rare (not possessed by many competing firms), imperfectly imitable (extremely costly or difficult to duplicate), and non-substitutable (competitors cannot substitute other resources to produce similar value). 3. Differentiate between competitive inertia and strategic dissonance. Answer: Competitive inertia refers to a reluctance to change strategies or competitive practices that have been successful in the past. It may be manifested by top managers at successful companies who are focusing on the strategies that have allowed them to create and sustain competitive advantage over time. Strategic dissonance is a discrepancy between a company's intended strategy and the strategy actually implemented by management. While strategic dissonance can indicate that managers are not doing what they should to carry out company strategy, it can also mean that the intended strategy is out of date and needs to be changed. 4. How do companies use situational analyses? What are the basic components of a situational analysis? Answer: A situational analysis can help managers determine the need for strategic change. A situational analysis, also called a SWOT analysis for strengths, weaknesses, opportunities, and threats, is an assessment of the strengths and weaknesses in an organization's internal environment and the opportunities and threats in its external environment. An analysis of an organization's internal environment (a company's strengths and weaknesses) begins with an assessment of distinctive competencies and core capabilities. Once these are identified, managers look outside the company to assess the opportunities and threats in the external environment. Environmental scanning, strategic groups, and shadow-strategy task forces are useful tools in this regard. 5. Explain how the concept of strategic group (and its three sub-types) is used in a situational analysis as part of an environmental scanning activity to identify specific opportunities and threats that can either improve or harm the company's ability to sustain its competitive advantage. Answer: Strategic groups are not "actual" groups, but are selected for study by managers. A strategic group is a group of other companies within an industry that top managers choose for comparing, evaluating, and benchmarking their company's strategic threats and opportunities. Typically, managers include companies as part of their strategic group if they compete directly with those companies for customers or if those companies use strategies similar to theirs. In fact, when scanning the environment for strategic threats and opportunities, managers tend to categorize the different companies in their industries into core, secondary, and transient firms. Core firms are the central companies in a strategic group. Secondary firms are firms that use related but somewhat different strategies than core firms. Transient firms are companies whose strategies are changing from one strategic position to another. 6. Briefly describe the BCG matrix and how it is used. Include in your description the types of recommendations that result from the use of the BCG matrix. Answer: The BCG matrix is a portfolio strategy, developed by the Boston Consulting Group, that managers use to categorize the corporation's businesses by growth rate and relative market share, helping them decide how to invest corporate funds. The matrix separates businesses into four categories, based on how fast the market is growing (high-growth or low-growth) and the size of the business's share of that market (high or low). It thus identifies each business as either a star (high growth, high market share), cash cow (low growth, high market share), question mark (high growth, low market share), or dog (low growth, low market share). Since the idea is to redirect investment from slow-growing to fast-growing companies, the Boston Consulting Group matrix starts by recommending that, while they last, the substantial cash flows from cash cows should be reinvested in stars to help them grow even faster and obtain even more market share. Cash flows should also be directed to those question marks that are most likely to turn into stars. It recommends that dogs be sold to other companies, or be closed down and liquidated for their assets. 7. Explain what is meant by a grand strategy. List and define the three types of grand strategies. Answer: A grand strategy is a broad strategic plan used to help an organization achieve its strategic goals. Grand strategies guide the strategic alternatives that managers of individual businesses or subunits may use. There are three kinds of grand strategies: growth (where the purpose is to increase profits, revenues, market share, or the number of places—store, offices, locations—in which the company does business), stability (where the purpose is to continue doing what the company has been doing, but just do it better), and retrenchment/recovery (where the purpose is to turn around very poor company performance by shrinking the size or scope of the business, and then taking strategic actions to return to a growth strategy). 8. List the five industry forces that determine overall levels of competition in an industry. Identify what happens to competition as these forces increase in strength. Answer: The five industry forces that determine an industry's overall attractiveness and potential for long-term profitability are (1) character of rivalry, (2) threat of new entrants, (3) threat of substitute products or services, (4) bargaining power of suppliers, and (5) bargaining power of buyers. The stronger these forces, the greater the competition, and thus the less attractive the industry becomes to corporate investors, because it is more difficult for companies to be profitable. 9. Identify and differentiate between the positioning strategies and the adaptive strategies that may be used at the industry level. Answer: Positioning strategies include cost leadership, differentiation, and focus. They are designed to effectively protect a company from the effects of industry-wide competition, and to create sustainable competitive advantage. The purpose of adaptive strategies is different. It is to choose an industry-level strategy that is best suited to changes in the organization's external environment. The four kinds of adaptive strategies are defenders, analyzers, prospectors, and reactors. 10. List the four different adaptive strategies. Explain the reason that one tends to have poorer performance than the others. Answer: The four kinds of adaptive strategies are defenders, analyzers, prospectors, and reactors. Defenders seek moderate, steady growth by offering a limited range of products and services to a well-defined set of customers. Prospectors seek fast growth by searching for new market opportunities, encouraging risk taking, and being the first to bring innovative new products to market. Analyzers are a blend of the defender and prospector strategies; they seek moderate, steady growth and limited opportunities for fast growth. Finally, unlike defenders, prospectors, or analyzers, reactors do not follow a consistent strategy. Furthermore, rather than anticipating and preparing for external opportunities and threats, reactors tend to "react" to changes in their external environment after they occur. Consequently, reactors tend to be poorer performers than defenders, prospectors, or analyzers. ESSAY 1. When videocassette recorders first became popular in the mid-1980s, a new form of "mom and pop" small business sprang up across the country: the video rental store. At the time, new videotapes of popular movies cost anywhere from $80 to $200. As the popularity of videocassette recorders grew, these small, independent video rental stores grew rapidly to meet the demand of consumers for inexpensive rentals of movies. There was considerable competition between them to be the first to have expensive, new movies available for rental. However, some stores disappointed customers by not having enough copies of new films when they were most in demand, upon their initial release on video. Within about 5 to 8 years of competition, most of these mom and pop video rental stores were ultimately put out of business by the large regional, and then national chains, such as Blockbuster. Using the concept of sustainable competitive advantage along with the four conditions required to produce it, explain how such a transition from hundreds of independent mom and pop video stores to a few national chains could have taken place so quickly. Answer: Firms can use their resources to create and sustain a competitive advantage, that is, to provide greater value for customers than competitors can. As the mom and pop video rental stores began to grow, they were meeting a strong and growing consumer demand with little competition. However, as more of them emerged, they began to compete with each other more aggressively. Unfortunately, the nature of their business was such that a sustainable competitive advantage would be very expensive to achieve. A competitive advantage becomes sustainable when other companies cannot duplicate the benefits it provides and have, for now, stopped trying. To provide a sustainable competitive advantage, the firm's resources must be valuable (capable of improving efficiency and effectiveness), rare (not possessed by many competing firms), imperfectly imitable (extremely costly or difficult to duplicate), and non-substitutable (competitors cannot substitute other resources to produce similar value). It very quickly became clear that the most successful video rental stores would have a very large inventory of a broad variety of videos for rent, including many copies of the latest releases, which were very expensive. When this was done, browsing customers could always find something satisfying to rent, and customers looking for the latest hit movie that was just released would be guaranteed a copy upon arrival at the store. Thus, sustainable competitive advantage required a large video inventory (valuable), which most mom and pop video rental stores did not possess (rare), which was extremely costly to duplicate (imperfectly imitable), and could not be satisfied by having more copies of cheaper, but less popular films on hand (i.e., non-substitutable). Since this advantage could only be achieved with a large infusion of capital, along with effective management, the large, national retailers such as Blockbuster emerged and beat out the smaller, less capable and less agile mom and pop competition. 2. Explain how the concepts of competitive inertia and strategic dissonance are related to the strategy-making process. Answer: The strategy-making process is the method by which companies create strategies that produce sustainable competitive advantage (a competitive advantage that other companies have, for the moment, stopped trying to duplicate). The strategy-making process consists of three steps: (1) assessing the need for strategic change, (2) conducting a situational analysis, and (3) choosing strategic alternatives. The concepts of competitive inertia and strategic dissonance both relate to the first step, that of assessing the need for strategic change. There is a great deal of turbulence and uncertainty in strategic business environments, and top-level managers are often slow to recognize the need for strategic change, especially at successful companies that have created and sustained competitive advantages. In such companies, top managers often focus on the strategies that made their companies successful, and continue to rely on them, even as the competition changes. Thus, success often leads to competitive inertia–a reluctance to change strategies or competitive practices that have been successful in the past. Obviously, such inertia can provide the time and opportunity for competitors to catch up and overtake a company's ongoing strategy and thereby destroy its competitive advantage. Managers need to be aware of the dangers of competitive inertia and need to take steps to improve the speed and accuracy with which they determine the need for strategic change. One way to do this is to actively look for signs of strategic dissonance. Strategic dissonance is a discrepancy between the company's intended strategy and the strategy actually implemented by management. While strategic dissonance can indicate that the managers are not doing what they should to carry out company strategy, it can also mean that the intended strategy is out of date and needs to be changed. Since middle and lower-level managers are in closer touch with both customers and the immediate, day-to-day actions of competitors, they may be more likely to see weaknesses in existing competitive strategy, especially if the requirements of that strategy hinder their ability to meet customer needs or respond to competitor's actions. Thus, while determining the need for strategic change is a difficult process, it can be improved by actively looking for signs of strategic dissonance, or a difference between the intended strategy and what managers are actually doing. 3. Identify the basic steps in the strategy-making process. Then explain the extent to which this process may be valuable to small firms as well as large firms. Answer: There are three basic steps in the strategy-making process: (1) assessing the need for strategic change, (2) conducting a situational analysis, and (3) choosing strategic alternatives. This relatively straightforward approach may be applied to either large or small businesses. This strategy-making process is the method by which companies create strategies that produce sustainable competitive advantage. For years, it had been thought that strategy making was something that only large firms could do well. It was believed that small firms did not have the time, knowledge, or staff to do a good job of strategy making. However, two meta-analyses indicate that strategy making can improve the profits, sales growth, and return on investment of both big and small firms. There is a 72 percent chance that big companies that engage in the strategy-making process will be more profitable than big companies that don't. Strategy making not only improves profits, but also helps companies grow. Specifically, there is a 75 percent chance that big companies that engage in the strategy-making process will have greater sales and earnings growth than big companies that don't. Thus, in practical terms, the strategy-making process can make a significant difference in a big company's profits and growth. However, strategy making can also improve the performance of small firms. There is a 61 percent chance that small firms that engage in the strategy-making process will have more sales growth than small firms that don't. Likewise, there is a 62 percent chance that small firms that engage in the strategy-making process will have a larger return on investment than small companies that don't. Thus, in practical terms, the strategy-making process can make a significant difference in a small company's profits and growth, too. In conclusion, while the probability of a payoff from strategy making is slightly greater for a larger firm (72-75%) than for a smaller firm, the probability of such a payoff for a smaller firm is indeed significant: 61-62%. Thus, in spite of the longstanding beliefs to the contrary, small-business owners should clearly embrace the strategy-making process. 4. Explain the basics of portfolio strategy. Identify the best approach to diversification using this strategy. Be sure to explain your rationale for arguing that the specified approach to diversification is the best. Answer: Portfolio strategy is a corporate-level strategy that minimizes risk by diversifying investment among various businesses or product lines. Portfolio strategy provides the following guidelines to help managers acquire companies that fit well with the rest of their corporate portfolio and sell those that don't. First, the more businesses in which a corporation competes, the smaller its overall chances of failing. Because the emphasis is on adding more businesses to support the overall corporation, managers who use portfolio strategy are often on the lookout for acquisitions, that is, other companies to buy. Second, beyond adding new businesses to the corporate portfolio, portfolio strategy can reduce risk even more through unrelated diversification--creating or acquiring companies in completely unrelated businesses. If the businesses are unrelated, then losses in one business or industry will have minimal effect on the performance of other companies in the corporate portfolio. Third, investing the profits and cash flows from mature, slow-growth businesses into newer, faster growing businesses can reduce long-term risk. Thus, portfolio strategy recommends the acquisition of more, unrelated businesses as an overall risk management strategy. However, the research that has been done in the 20 plus years since the introduction of portfolio strategy has demonstrated that one of its basic assumptions is incorrect. That is, portfolio strategy assumes that unrelated diversification will minimize risk. The research evidence shows that this is not the case. There is a U-shaped relationship between diversification and risk. Single businesses with no diversification (represented by the left side of the curve) are extremely risky; if the single business fails, the entire business fails. So, in part, the portfolio strategy of diversifying is correct–competing in a variety of different businesses can lower risk. However, portfolio strategy is partly wrong, too–the right side of the curve shows that conglomerates composed of completely unrelated businesses are even riskier than single, undiversified businesses. The U-shaped curve in Exhibit 6.9 indicates that the best approach is probably related diversification, in which the different business units share similar products, manufacturing, marketing, technology, or cultures. The key to related diversification is to acquire or create new companies with core capabilities that complement the core capabilities of businesses already in the corporate portfolio. In sum, in contrast to single, undiversified businesses or unrelated diversification, related diversification reduces risk, because the different businesses can work as a team, relying on each other for needed experience, expertise, and support. Related diversification thus represents the best approach to diversification. 5. Identify Porter's five industry forces and their role in industry-level strategy. Identify which one among these five forces could be considered the central one, with its value impacted by the relative values of the four other forces. Answer: Industry-level strategy is a corporate strategy that addresses the question "How should we compete in this industry?" According to Harvard professor Michael Porter, the five industry forces that determine an industry's overall attractiveness and potential for long-term profitability are (1) character of rivalry, (2) threat of new entrants, (3) threat of substitute products or services, (4) bargaining power of suppliers, and (5) bargaining power of buyers. The stronger these forces, the greater the competition, and thus the less attractive the industry becomes to corporate investors, because it is more difficult for companies to be profitable. The central force among these five, as identified in Exhibit 6.12 page 187, is character of the rivalry. Character of the rivalry is a measure of the intensity of competitive behavior between companies in an industry. Is the competition among firms aggressive and cutthroat, or do competitors focus more on serving customers than attacking each other? Both industry attractiveness and profitability decrease when rivalry is cutthroat. The threat of new entrants is a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry. If it is easy for new companies to get started in the industry, then competition will increase and prices and profits will fall. However, if there are sufficient barriers to entry, such as large capital requirements to buy expensive equipment or plant facilities or the need for specialized knowledge, then competition will be weaker and prices and profits will generally be higher. The threat of substitute products or services is a measure of the ease with which customers can find substitutes for an industry's products or services. If customers can easily find substitute products or services, the competition will be greater and profits will be lower. If there are few or no substitutes, competition will be weaker and profits will be higher. Bargaining power of suppliers is a measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs. If an industry has numerous suppliers from whom to buy parts, materials, and services, companies will be able to bargain with suppliers to keep prices low. On the other hand, if there are few suppliers, or if a company is dependent on a supplier with specialized skills and knowledge, then suppliers will have the bargaining power to dictate price levels. Bargaining power of buyers is a measure of the influence that customers have on the firm's prices. If a company is dependent on just a few high-volume buyers, those buyers will typically have enough bargaining power to dictate prices. By contrast, if a company sells a popular product or service to multiple buyers, then the company has more power to set prices. As the threat of new entrants, threat of substitute products or services, bargaining power of suppliers, and bargaining power of buyers increase, the overall competitive environment in an industry similarly increases. In a more competitive environment, cutthroat competition is more likely to pay off. Thus, these four factors in combination tend to influence the overall character of the rivalry, which could thus be conceived as the central force among them impacting upon industry strategy. 6. Explain what is meant by direct competition. Identify the factors that determine it, and specify the basic strategic moves involved in such competition. If you were heading an Internet service provider like Earthlink engaged in direct competition with AOL and other Internet providers, explain the circumstances under which you would prefer to compete in order to develop a sustained competitive advantage. Answer: Most companies do not compete directly with all the firms in their industry. Instead of "competing" with the industry, most firms compete directly with just a few companies. Direct competition is the rivalry between two companies offering similar products and services that acknowledge each other as rivals and take offensive and defensive positions as they act and react to each other's strategic actions. Two factors determine the extent to which firms will be in direct competition with each other: market commonality and resource similarity. Market commonality is the degree to which two companies have overlapping products, services, or customers in multiple markets. The more markets in which there is product, service, or customer overlap, the more intense the direct competition between the two companies. Resource similarity is the extent to which a competitor has similar amounts and kinds of resources, that is, similar assets, capabilities, processes, information, and knowledge used to create and sustain an advantage over competitors. From a competitive standpoint, resource similarity means that the strategic actions that your company takes can probably be matched by your direct competitors. There are two basic strategic moves in direct competition between firms: attacks and responses. An attack is a competitive move designed to reduce a rival's market share or profits. A response is a countermove, prompted by a rival's attack, designed to defend or improve a company's market share or profit. Attacks and responses can include smaller, more tactical moves, like price cuts, or resource-intensive strategic moves, such as introducing new products or services within the firm's existing business. From the standpoint of developing a sustained competitive advantage, it would be preferable to compete in an environment of high market commonality and low resource similarity, where your company is the stronger one. In this context, since you are stronger, your competitors will be less likely to attack you. This context also means that any attacks initiated by your firm on your competitors probably will not be effectively countered, and you will win. The high market commonality ensures that there is plenty of market share to be gained by defeating your competitors. In this context, you would be most likely to develop a sustained competitive advantage, as long as you did not allow competitive inertia to set in over time after you have taken over the market. Test Bank for Effective Management Chuck Williams 9781285866246