CH-5-6 Business-Level Strategy: Creating and Sustaining Competitive Advantages – Strategic Management: Text and Cases : Exam Guide

This Document Contains Chapters 5 to 6 Chapter 05 Business-Level Strategy: Creating and Sustaining Competitive Advantages True/False Questions 1. The three generic strategies presented by Michael Porter can be shown on two dimensions: competitive advantage and product life cycle. Answer: False Rationale: Michael Porter presented three generic strategies that a firm can use to achieve competitive advantage. They can be illustrated on two dimensions: competitive advantage and strategic target. 2. The three generic strategies that Michael Porter believes a firm can use to overcome the five forces and achieve competitive advantage include overall price leadership. Answer: False Rationale: Michael Porter presented three generic strategies that a firm can use to overcome the five forces and achieve competitive advantage. The strategies are: overall cost leadership, differentiation, and focus. 3. Concentrating solely on one form of competitive advantage generally leads to the highest possible level of profitability. Answer: False Rationale: Observation and research support the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not. One study found that businesses combining forms of competitive advantage (differentiation and overall cost leadership) outperformed those using a single form. 4. A firm striving for cost leadership will typically spend relatively more on product related R&D than on process related R&D. Answer: False Rationale: Overall cost leadership requires a tight set of interrelated tactics that include aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, and cost minimization in all activities in the value chain. 5. To generate above average returns, a firm following an overall cost leadership position should NOT be concerned with attaining parity or proximity on the basis of differentiation relative to its peers. Answer: False Rationale: To generate above-average performance, a firm following an overall cost leadership position must attain competitive parity on the basis of differentiation relative to competitors. In other words, a firm achieving parity is similar to its competitors, or on par, with respect to differentiated products. 6. The experience curve concept suggests that production costs tend to decrease as production increases. Answer: True Rationale: The experience curve refers to how business learns to lower costs as it gains experience with production processes. With experience, unit costs of production decline as output increases in most industries. 7. A firm can attain an overall cost leadership position by increasing the management layers in order to reduce overhead costs. Answer: False Rationale: In order for a firm to attain a cost leadership position using its infrastructure, it should decrease the number of management layers in order to reduce overhead costs. 8. A firm can attain an overall cost leadership position by using automated technology to reduce scrappage rates. Answer: True Rationale: In order for a firm to attain a cost leadership position using its technology development support activity, it should use automated technology effectively to reduce scrappage rates. 9. A firm can attain an overall cost leadership position by purchasing media in large blocks and maximizing sales force utilization through territory management. Answer: True Rationale: In order for a firm to attain a cost leadership position using its marketing and sales activities it can purchase media in large blocks and maximize the utilization of its sales force through territory management. 10. The French automobile maker, Renault, attains competitive advantage by revamping cars to be more cost efficient. Answer: True Rationale: In these difficult conditions, Renault has been able to carve out a profitable market for itself, selling low-cost, no-frills cars. Renault responded to this shift by creating an entry-level car group that was charged with designing and producing cars for these more cost conscious consumers. Carlos Ghosn, CEO of Renault, stated that they are working on a new platform that will be ultra-low-cost. 11. Firms that compete on overall cost leadership are vulnerable if there is an increase in the cost of the inputs on which the advantage is based. Answer: True Rationale: Firms can be vulnerable to price increases in the factors of production. For example, consider manufacturing firms based in China which rely on low labor costs. Due to demographic factors, the supply of workers 16 to 24 years old has peaked and will drop by a third in the next 12 years, thanks to stringent family-planning policies that have sharply reduced population growth in China. This is leading to upward pressure on labor costs in Chinese factories, undercutting the cost advantage of firms producing there. 12. Too much focus on one or a few value-chain activities can be a pitfall of the overall cost leadership strategy. Answer: True Rationale: Managers should explore all value-chain activities, including relationships among them, as candidates for cost reductions. 13. A cost leadership strategy can be at risk of obsolescence of the basis of the cost advantage. Answer: True Rationale: Other firms may develop new ways of cutting costs, leaving the old cost leaders at a significant disadvantage. The older cost leaders are often locked into their way of competing and are unable to respond to the newer, lower-cost means of competing. This is what happened to the U.S. auto industry in the 1970s. 14. A cost leadership strategy is not susceptible to the risk of reduced flexibility. Answer: False Rationale: Building up a low-cost advantage often requires significant investments in plant and equipment, distribution systems, and large, economically scaled operations. As a result, firms often find that these investments limit their flexibility. As a result, they have great difficulty responding to changes in the environment. 15. The example of Lexus automobiles in the text points out that a firm can strengthen its differentiation strategy by achieving integration at multiple points along the value chain. Answer: True Rationale: Lexus provides an example of how a firm can strengthen its differentiation strategy by achieving integration at multiple points along the value chain. By the early 1990s it soared to the top of J. D. Power customer satisfaction ratings. It found that quality perceptions (design, engineering, and manufacturing) can be strongly influenced by downstream activities in the value chain (marketing and sales, service). 16. A successful differentiation strategy lowers entry barriers because of customer loyalty and the ability of the firm to provide uniqueness in its products and services. Answer: False Rationale: Differentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price. By increasing margins of the firm, differentiation also avoids the need for a low-cost position. Higher entry barriers result because of customer loyalty and the ability to provide uniqueness in its products or services. 17. A successful differentiation strategy increases rivalry since buyers become more price-sensitive. Answer: False Rationale: Differentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs. 18. If a firm has a successful differentiation strategy, it is necessary to attain parity on cost. Answer: False Rationale: Differentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs. By increasing company margins, differentiation also avoids the need for a low-cost position. Higher entry barriers result because of customer loyalty and the company's ability to provide uniqueness in its products or services. Differentiation also provides higher margins that enable a firm to deal with supplier power. And it reduces buyer power, because buyers lack comparable alternatives and are therefore less price sensitive. Supplier power is also decreased because there is a certain amount of prestige associated with being the supplier to a producer of highly differentiated products and services. Last, differentiation enhances customer loyalty, thus reducing the threat from substitutes. 19. One potential pitfall of a differentiation strategy is that identification of the brand in the marketplace may become diluted through excessive product line extensions. Answer: True Rationale: Potential pitfalls of a differentiation strategy include dilution of brand identification through product-line extensions. Firms may erode their quality brand image by adding products or services with lower prices and less quality. Although this can increase short-term revenues, it may be detrimental in the long run. 20. Focus, by itself, often constitutes a competitive advantage. Answer: False Rationale: A focus strategy is based on the choice of a narrow competitive scope within an industry. A firm following this strategy selects a segment or group of segments and tailors its strategy to serve them. The essence of focus is the exploitation of a particular market niche. As you might expect, narrow focus itself (like merely being different as a differentiator) is simply not sufficient for above-average performance. 21. A potential pitfall of a focus strategy is that focusers can become too focused to satisfy buyer needs. Answer: True Rationale: Potential pitfalls of focus strategies include focusers that become too focused to satisfy buyer needs. Some firms attempting to attain advantages through a focus strategy may have too narrow a product or service. 22. A disadvantage of firms that successfully integrate overall cost leadership and a differentiation strategy is that they are relatively easy for competitors to imitate. Answer: False Rationale: Perhaps the primary benefit to firms that integrate low-cost and differentiation strategies is the difficulty for rivals to duplicate or imitate. This strategy enables a firm to provide two types of value to customers: differentiated attributes (e.g., high quality, brand identification, reputation) and lower prices (because of the lower costs for the firm in value-creating activities). 23. A potential pitfall of a focus strategy is that over time the cost advantages in a narrow market niche can erode, leaving the company with little profit. Answer: True Rationale: The advantages of a cost focus strategy may be fleeting if the cost advantages are eroded over time. For example, the Dell pioneering direct-selling model in the personal computer industry has been eroded by rivals such as Hewlett-Packard as they gain experience with the Dell distribution method. 24. Mass customization enables manufacturers to be more responsive to customer demands for high quality products. Answer: True Rationale: Advances in manufacturing technologies such as CAD/CAM (computer aided design and computer aided manufacturing) and information technologies allow firms to manufacture unique products in relatively small quantities at lower costs, a concept known as mass customization. Andersen Windows uses this to lower costs, enhance quality and variety, and improve response time to customers. 25. An important idea behind the profit pool concept is that there is always a strong relationship between the generation of revenues and the capturing of profits. Answer: False Rationale: A profit pool is defined as the total profits in an industry at all points along the industry value chain. The pattern of profit concentration in an industry is very often different from the pattern of revenue generation. 26. An important potential pitfall of an integrated overall cost leadership and differentiation strategy is that firms may fail to implement either one and become stuck-in-the-middle. Answer: True Rationale: A key issue in strategic management is the creation of competitive advantages that enable a firm to enjoy above-average returns. Some firms may become stuck in the middle, if they try to attain both cost and differentiation advantages. 27. In technology intensive industries, the duration of competitive advantages is declining. Answer: True Rationale: Nothing is forever, when it comes to competitive advantages. Rapid changes in technology, globalization, and actions by rivals from within and outside of the industry can quickly erode company advantages. It is becoming increasingly important to recognize that the duration of competitive advantages is declining, especially in technology intensive industries. 28. Competitive advantage is not affected by actions by rivals from within and outside of the industry. Answer: False Rationale: Nothing is forever, when it comes to competitive advantages. Rapid changes in technology, globalization, and actions by rivals from within and outside of the industry can quickly erode company advantages. It is becoming increasingly important to recognize that the duration of competitive advantages is declining, especially in technology intensive industries. 29. Most analysts agree that use of the Internet will lower transaction costs. Answer: True Rationale: Managing costs, and even changing the cost structures of certain industries, is a key feature of the digital economy. Most analysts agree that the ability of the Internet to lower transaction costs has transformed business. Broadly speaking, transaction costs refer to all the various expenses associated with conducting business. 30. One way the Internet and digital technologies are creating opportunities for firms with differentiation strategies is by enabling mass customization. Answer: True Rationale: For many companies, Internet and digital technologies have enhanced their ability to build brand, offer quality products and services, and achieve other differentiation advantages. Among the most striking trends are new ways to interact with consumers. In particular, the Internet has created new ways of differentiating by enabling mass customization, which improves the response to customer wishes. 31. The Internet offers few advantages for focusers because niche players and small companies cannot implement capabilities as effectively as their larger competitors. Answer: False Rationale: With focus strategies, the Internet offers new avenues in which to compete because they can access markets less expensively (low cost) and provide more services and features (differentiation). Some claim that the Internet has opened up a new world of opportunities for niche players who seek to access small markets in a highly specialized fashion. 32. The Internet has provided a small subset of companies with greater tools for managing costs. Answer: False Rationale: The Internet has provided all companies with greater tools for managing costs. So it may be that cost management and control will become more important management tools. 33. Incumbent firms that thought a niche market was too small to enter in the past may use Internet technologies to enter that segment with focusers. Answer: True Rationale: An incumbent firm that previously thought a niche market was not worth the effort may use Internet technologies to enter that segment for a lower cost than in the past. The larger firm can then bring its market power and resources to bear in a way that a smaller competitor cannot match. 34. The market life cycle should be used as a short-run forecasting device because it provides a conceptual framework for understanding what changes typically occur. Answer: False Rationale: The industry life cycle refers to the stages of introduction, growth, maturity, and decline that occur over the life of an industry. In considering the industry life cycle, it is useful to think in terms of broad product lines such as personal computers, photocopiers, or long-distance telephone service. Changes tend to be slower than what is needed for forecasting. 35. An important advantage of first movers in a market is that they may establish brand recognition that may later serve as an important switching cost. Answer: True Rationale: There is an advantage to being the first mover in a market. It led to the success of Coca Cola in becoming the first soft-drink company to build a recognizable global brand and enabled Caterpillar to get a lock on overseas sales channels and service capabilities. 36. During the growth stage of the market life cycle, customers are very likely to establish brand loyalty. Answer: False Rationale: In the growth stage, the primary key to success is to build consumer preferences for specific brands. This requires strong brand recognition, differentiated products, and the financial resources to support a variety of value-chain activities such as marketing and sales, and research and development. 37. Given the attractiveness of premium pricing during the growth stage of the market life cycle, managers should emphasize short-term results to increase profits. Answer: False Rationale: In the growth stage, revenues increase at an accelerating rate because new consumers are trying the product and a growing proportion of satisfied consumers are making repeat purchases. Since repeat purchases are necessary, a long-term strategy is desirable. 38. As markets mature, competition on the basis of differentiation is preferable to price competition. Answer: True Rationale: In the mature stage, rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. Advantages based on efficient manufacturing operations and process engineering become more important for keeping costs low as customers become more price sensitive. 39. As markets mature the magnitude of differentiation and cost leadership advantages among competitors decrease. Answer: True Rationale: In the mature stage, rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. It also becomes more difficult for firms to differentiate their offerings, because users have a greater understanding of products and services. 40. With reverse positioning, a strategy to be used during the mature stage of the industry life cycle, a product escapes its category by deliberately associating with a different one. Answer: False Rationale: Two positioning strategies that managers can use to affect consumer mental shifts are reverse positioning, which strips away sacred product attributes while adding new ones, and breakaway positioning, which associates the product with a radically different category. 41. Businesses that compete in markets that are in decline should simply be harvested or divested since they are no longer profitable. Answer: False Rationale: Four basic strategies are available in the decline phase: maintaining, harvesting, exiting, or consolidating. Managers must carefully monitor the actions and intentions of competitors before deciding on a course of action. 42. During the decline stage of the product life cycle, a harvesting strategy means that a firm keeps a product going without significantly reducing marketing support, technological development, or other investments, while hoping that competitors will exit the market. Answer: False Rationale: Harvesting involves obtaining as much profit as possible and requires that costs be reduced quickly. Maintaining refers to keeping a product going without significantly reducing marketing support, technological development, or other investments, in the hope that competitors will eventually exit the market. 43. The decline stage of the industry life cycle stage is inevitably followed by death. Answer: False Rationale: Old technologies that are in decline do not always quickly fade away. Research shows that in a number of cases, old technologies actually enjoy a very profitable last gasp, and can become resilient survivors in some circumstances. 44. Many firms facing a turnaround situation try to reduce their costs by outsourcing the production of many inputs. Answer: True Rationale: Firms in turnaround situations try to aggressively cut administrative expenses and inventories and speed up collection of receivables. Costs also can be reduced by outsourcing production of various inputs for which market prices may be cheaper than in-house production costs. 45. A need for turnaround occurs only during the maturity or declining stage of the life cycle. Answer: False Rationale: A need for turnaround may occur at any stage in the life cycle but is more likely to occur during maturity or decline. 46. The software maker, Intuit, successfully implemented a turnaround strategy by discontinuing product lines and focusing all resources on a few core profitable areas. Answer: True Rationale: Software maker Intuit is a case of a quick but well-implemented turnaround strategy. After stagnating and stumbling during the dot-com boom, the company discontinued its offers in online finance, insurance, and bill-paying operations that were losing money and focused on software for small businesses that employ less than 250 people. The company also instituted a performance-based reward system that greatly improved employee productivity. Multiple Choice Questions 47. The primary aim of strategic management at the business level is __________________. A. maximizing risk-return trade offs through diversification B. achieving a low cost position C. maximizing differentiation of products and/or services D. achieving competitive advantage Answer: D. achieving competitive advantage Rationale: How firms compete with each other and how they attain and sustain competitive advantages goes to the heart of strategic management. In short, the key issue becomes to identify why some firms outperform others and enjoy such advantages over time. 48. Primary value chain activities that involve the effective layout of receiving dock operations (inbound logistics) and support value chain activities that include expertise in process engineering (technology development) characterize what generic strategy? A. differentiation B. differentiation focus C. overall cost leadership D. stuck-in-the-middle Answer: C. overall cost leadership Rationale: Examples of overall cost leadership within primary value chain activities may involve the effective layout of receiving dock operations (inbound logistics) and support value chain activities may include expertise in process engineering (technology development). 49. A manufacturing business pursuing cost leadership is likely to _______. A. focus on a narrow market segment B. use advertising to build brand image C. rely on experience effects to raise efficiency D. put heavy emphasis on product engineering Answer: C. rely on experience effects to raise efficiency Rationale: Key to an overall cost leadership strategy is the experience curve, which refers to how business learns to lower costs as it gains experience with production processes. With experience, unit costs of production decline as output increases in most industries. 50. One aspect of using a cost leadership strategy is that experience effects may lead to lower costs. Experience effects are achieved by ____________. A. repeating a process until a task becomes easier B. hiring more experienced personnel C. spreading out a given expense or investment over a greater volume D. competing in an industry for a long time Answer: A. repeating a process until a task becomes easier Rationale: Key to an overall cost leadership strategy is the experience curve, which refers to how business learns to lower costs as it gains experience with production processes. With experience, unit costs of production decline as output increases in most industries. 51. With experience, unit costs of production decline as _________ increases in most industries. A. costs B. output C. price D. volume Answer: B. output Rationale: With experience, unit costs of production decline as output increases in most industries. The experience curve, developed by the Boston Consulting Group in 1968, is a way of looking at efficiency gains that come with experience. For a range of products, as cumulative experience doubles, costs and labor hours needed to produce a unit of product decline by 10 to 30 percent. 52. Research has consistently shown that firms that achieve both cost leadership and differentiation advantages tend to perform ______________. A. at about the same level as firms that achieve either cost or differentiation advantages B. about the same as firms that are stuck-in-the-middle C. higher than firms that achieve either a cost or a differentiation advantage D. lower than firms that achieve differentiation advantages but higher than firms that achieve cost advantages Answer: C. higher than firms that achieve either a cost or a differentiation advantage Rationale: Research supports the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not. There has been a rich history of strategic management research addressing this topic. One study found that businesses combining multiple forms of competitive advantage (differentiation and overall cost leadership) outperformed businesses that used only a single form. 53. Convincing rivals not to enter a price war, protection from customer pressure to lower prices, and the ability to better withstand cost increases from suppliers characterize which type of competitive strategy? A. differentiation B. overall cost leadership C. differentiation focus D. cost leadership focus Answer: C. differentiation focus Rationale: An overall low-cost position enables a firm to achieve above-average returns despite strong competition. It protects a firm against rivalry from competitors, because lower costs allow a firm to earn returns even if its competitors eroded their profits through intense rivalry. It protects firms against powerful buyers, who can only drive down prices to the level of the next most efficient producer. A low-cost position provides more flexibility to cope with supplier demands for input cost increases. 54. Which of the following is a risk (or potential pitfall) of cost leadership? A. Cost cutting may lead to the loss of desirable features. B. Attempts to stay ahead of the competition may lead to gold plating. C. Cost differences increase as the market matures. D. Producers are more able to withstand increases in supplier costs. Answer: A. Cost cutting may lead to the loss of desirable features. Rationale: Potential pitfalls of overall cost leadership strategy include too much focus on one or a few value-chain activities; all rivals share a common input or raw material; the strategy is imitated too easily; a lack of parity on differentiation; and erosion of cost advantages when the pricing information available to customers increases. 55. A firm can achieve differentiation through all of the following means EXCEPT ________. A. improving brand image B. better customer service C. adding additional product features D. offering lower prices to frequent customers Answer: D. offering lower prices to frequent customers Rationale: A differentiation strategy consists of creating differences in the product or service offering of the firm by creating something that is perceived industrywide as unique and valued by customers. Differentiation can take many forms, including prestige or brand image, technology, innovation, features, customer service, or a dealer network. 56. Support value chain activities that involve excellent applications engineering support (technology development) and facilities that promote a positive firm image (firm infrastructure) characterize what generic strategy? A. overall cost leadership B. differentiation C. differentiation focus D. stuck-in-the middle Answer: B. differentiation Rationale: Examples of value chain activities for differentiation include support value chain activities like excellent applications engineering support (technology development) and facilities that promote a positive firm image (firm infrastructure). 57. High product differentiation is generally accompanied by __________. A. higher market share B. higher profit margins and lower costs C. decreased emphasis on competition based on price D. significant economies of scale Answer: C. decreased emphasis on competition based on price Rationale: Differentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs. By increasing company margins, differentiation also avoids the need for a low-cost position. 58. Which of the following is FALSE regarding how a differentiation strategy can help a firm to improve its competitive position relative to the Porter five forces model? A. By increasing firm margins, it avoids the need for a low cost position. B. It reduces buyer power because buyers lack comparable alternatives. C. Supplier power is increased, because suppliers will be able to charge higher prices for their inputs. D. Firms will enjoy high customer loyalty. Answer: C. Supplier power is increased, because suppliers will be able to charge higher prices for their inputs. Rationale: Supplier power is also decreased, because there is a certain amount of prestige associated with being the supplier to a producer of highly differentiated products and services. 59. A differentiation strategy enables a business to address the five competitive forces by ______. A. having brand-loyal customers become more sensitive to prices B. lessening competitive rivalry by distinguishing itself C. increasing economies of scale D. serving a broader market segment Answer: B. lessening competitive rivalry by distinguishing itself Rationale: Differentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs. 60. Which of the following is not a potential pitfall of a differentiation strategy? A. Uniqueness that is not valuable. B. All rivals share a common input or raw material. C. The price premium is too high. D. Perceptions of differentiation may vary between buyers and sellers. Answer: B. All rivals share a common input or raw material. Rationale: Potential pitfalls of a differentiation strategy include uniqueness that is not valuable; too much differentiation; too high a price premium; differentiation that is easily imitated; dilution of brand identification through product-line extensions; or perceptions of differentiation may vary between buyers and sellers. 61. Which statement regarding competitive advantages is true? A. With an overall cost leadership strategy, firms need not be concerned with parity on differentiation. B. If several competitors pursue similar differentiation tactics, they may all be perceived as equals in the mind of the consumer. C. In the long run, a business with one or more competitive advantages is probably destined to earn normal profits. D. Attaining multiple types of competitive advantage is a recipe for failure. Answer: B. If several competitors pursue similar differentiation tactics, they may all be perceived as equals in the mind of the consumer. Rationale: Potential pitfalls of a differentiation strategy include the idea that perceptions of differentiation may vary between buyers and sellers. The issue here is that beauty is in the eye of the beholder. Companies must realize that although they may perceive their products and services as differentiated, their customers may view them as commodities. 62. A narrow market focus is to a differentiation-based strategy as a __________________. A. growth market is to a differentiation-based strategy B. broadly-defined target market is to a cost leadership strategy C. growth market is to a cost-based strategy D. technological innovation is to a cost-based strategy Answer: B. broadly-defined target market is to a cost leadership strategy Rationale: A narrow market focus is to a differentiation-based strategy as a broadly-defined target market is to a cost leadership strategy. 63. A firm following a focus strategy must focus on _____________. A. governmental regulations B. the rising cost of inputs C. a market segment or group of segments D. avoiding entering international markets Answer: C. a market segment or group of segments Rationale: A focus strategy is based on the choice of a narrow competitive scope within an industry. A firm following this strategy selects a segment or a group of segments and tailors its strategy to serve them. The essence of focus is the exploitation of a particular market niche. 64. Which of the following is not a potential pitfall of a focus strategy? A. Erosion of cost advantages can arise within the narrow segment. B. Product/service offerings that are highly focused are subject to competition from new entrants. C. All rivals share a common input or raw material. D. Focusers can become too focused to satisfy buyer needs. Answer: C. All rivals share a common input or raw material. Rationale: Potential pitfalls of focus strategies include: erosion of cost advantages within the narrow segment; the idea that even product and service offerings that are highly focused are subject to competition from new entrants; and focusers that become too focused to satisfy buyer needs. 65. The text discusses three approaches to combining overall cost leadership and differentiation competitive advantages. Which of the following is not one of these three approaches? A. automated and flexible manufacturing systems B. exploiting the profit pool concept for competitive advantage C. deriving benefits from highly focused and high technology markets D. coordinating the extended value chain by way of information technology Answer: C. deriving benefits from highly focused and high technology markets Rationale: Three approaches to combining overall low cost and differentiation include: automated and flexible manufacturing systems, exploiting the profit pool concept for competitive advantage, and coordinating the extended value chain by way of information technology. 66. A __________ can be defined as the total profits in an industry at all points along the industry value chain. A. profit maximizer B. profit pool C. revenue enhancer D. profit outsourcing Answer: B. profit pool Rationale: A profit pool is defined as the total profits in an industry at all points along the industry value chain. 67. Which of the following is not a potential pitfall of an integrated overall low cost and differentiation strategy? A. Firms that fail to attain both strategies may end up with neither and become stuck-in-the-middle. B. Firms that underestimate the challenges and expenses associated with coordinating value-creating activities in the extended value chain. C. Firms that target too large a market that causes unit costs to increase. D. Firms that miscalculate sources of revenue and profit pools in the company industry. Answer: C. Firms that target too large a market that causes unit costs to increase. Rationale: The pitfalls of integrated overall cost leadership and differentiation include: firms that fail to attain both strategies may end up with neither and become stuck-in-the-middle; underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain; and miscalculating sources of revenue and profit pools in the company industry. 68. Which of the following is not a reason for the possible erosion of company competitive advantage? A. rapid change in technology B. globalization C. actions by rivals from within and outside of the industry D. company commitment to innovation Answer: D. company commitment to innovation Rationale: Nothing is forever, when it comes to competitive advantages. Rapid changes in technology, globalization, and actions by rivals from within and outside of the industry can quickly erode company advantages. It is becoming increasingly important to recognize that the duration of competitive advantages is declining, especially in technology intensive industries. 69. Atlas Door created competitive advantage by reducing the time to receive and process and order and through installing a just in time logistics operation. Which of the following is not a reason for their favorable position relative to the five forces of industry competition? A. It exerted power over its customers. B. It created high entry barriers for new entrants. C. The integration of many value-chain activities in the firm provided causal ambiguity and path dependency. D. The product was easily imitable. Answer: D. The product was easily imitable. Rationale: When Atlas began operations, distributors had little interest in its product. The established distributors already carried the door line of a much larger competitor and saw little to no reason to switch suppliers except, perhaps, for a major price concession. But as a startup, Atlas was too small to compete on price alone. Instead, it positioned itself as the door supplier of last resort, that is, the company people came to if the established supplier could not deliver or missed a key date. With an average industry order fulfillment time of almost four months, some calls inevitably came to Atlas. And when it did get the call, Atlas commanded a higher price because of its faster delivery. Atlas not only got a higher price, but its effective integration of value-creating activities saved time and lowered costs. Thus, it enjoyed the best of both worlds. 70. Which of the following is NOT one of the ways the Internet is lowering transaction costs? A. eliminating supply chain intermediaries B. minimizing office expenses C. evaluating employee performance D. reducing business travel Answer: C. evaluating employee performance Rationale: Hiring new employees, meeting with customers, ordering supplies, and addressing government regulations; all have some costs associated with them that can be lowered with the use of the Internet. Removing intermediaries also lowers transaction costs, and Internet search reduces the need for travel. 71. Dell Computer has an online ordering system that allows consumers to configure their own computers before Dell builds them. This capability is an example of _____________. A. electronic data interchange B. mass customization C. knowledge management D. collaborative design Answer: B. mass customization Rationale: Among the most striking differentiation trends are new ways to interact with consumers. In particular, the Internet has created new ways of differentiating by enabling mass customization, which improves the response to customer wishes. 72. Which of the following methods of implementing a differentiation strategy has been greatly enhanced because of Internet technologies? A. celebrity endorsements B. prestige packaging C. mass customization D. exceptional service Answer: C. mass customization Rationale: Among the most striking differentiation trends are new ways to interact with consumers. In particular, the Internet has created new ways of differentiating by enabling mass customization, which improves the response to customer wishes. 73. Due to the Internet, firms that use a focus strategy have new opportunities to _________. A. respond quickly to customer requests B. provide more services and features C. access niche markets in a highly specialized fashion D. access markets less expensively Answer: C. access niche markets in a highly specialized fashion Rationale: With focus strategies, the Internet offers new avenues in which to compete because they can access markets less expensively (low cost) and provide more services and features (differentiation). Some claim that the Internet has opened up a new world of opportunities for niche players who seek to access small markets in a highly specialized fashion. 74. One of the main reasons the Internet is eroding sustainable competitive advantages is that _______. A. incumbent firms are entering market segments that they previously considered to be too small B. nearly all competitors will have greater access to tools for managing costs C. differentiators have been able to preserve their unique advantages D. firms are ignoring opportunities to offer high-end services in niche markets Answer: B. nearly all competitors will have greater access to tools for managing costs Rationale: Many experts agree that the net effect of the digital economy is fewer rather than more opportunities for sustainable advantages. This means strategic thinking becomes more important. More specifically, the Internet has provided all companies with greater tools for managing costs. 75. Which of these statements regarding the industry life cycle is correct? A. Part of the power of the market life cycle is its ability to serve as a short-run forecasting device. B. Trends suggested by the market life cycle model are generally not reversible or repeatable. C. It points out the need to maintain a differentiation advantage and a low cost advantage simultaneously. D. It has important implications for company generic strategies, functional areas, value-creating activities, and overall objectives. Answer: D. It has important implications for company generic strategies, functional areas, value-creating activities, and overall objectives. Rationale: Industry life cycles are important because the emphasis on various generic strategies, functional areas, value-creating activities, and overall objectives varies over the course of an industry life cycle. 76. Which of the following statements about the introduction stage of the market life cycle is TRUE? A. It produces relatively large, positive cash flows. B. Strong brand recognition seldom serves as an important switching cost. C. Market share gains by pioneers are usually easily sustained for many years. D. Products or services offered by pioneers may be perceived as differentiated because they are new. Answer: D. Products or services offered by pioneers may be perceived as differentiated because they are new. Rationale: In the introduction stage, products are unfamiliar to consumers. Market segments are not well defined, and product features are not clearly specified. 77. In the __________ stage of the industry life cycle, the emphasis on product design is very high, the intensity of competition is low, and the market growth rate is low. A. growth B. maturity C. introduction D. decline Answer: C. introduction Rationale: In the introduction stage, products are unfamiliar to consumers. Market segments are not well defined, and product features are not clearly specified. The early development of an industry typically involves low sales growth, rapid technological change, operating losses, and the need for strong sources of cash to finance operations. Since there are few players and not much growth, competition tends to be limited. 78. The growth stage of the industry life cycle is characterized by A. in-kind competition (from the same type of product) B. premium pricing C. a growing trend to compete on the basis of price D. retaliation by competitors whose customers are stolen Answer: A. in-kind competition (from the same type of product) Rationale: The growth stage is the second stage of the product life cycle, characterized by strong increases in sales and growing competition. 79. In the __________ stage of the industry life cycle, there are many segments, competition is very intense, and the emphasis on process design is high. A. introduction B. growth C. maturity D. decline Answer: C. maturity Rationale: In the maturity stage of the industry life cycle, there are many segments, competition is very intense, and the emphasis on process design is high. 80. In a given market, key technology no longer has patent protection, experience is not an advantage, and there is a growing need to compete on price. What stage of its life cycle is the market in? A. introduction B. growth C. maturity D. decline Answer: C. maturity Rationale: In the maturity stage of the industry life cycle, rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. Advantages based on efficient manufacturing operations and process engineering become more important for keeping costs low as customers become more price sensitive. It also becomes more difficult for firms to differentiate their offerings, because users have a greater understanding of products and services. 81. A market that mainly competes on the basis of price and has stagnant growth is characteristic of what life cycle stage? A. introduction B. growth C. maturity D. decline Answer: C. maturity Rationale: In the maturity stage of the industry life cycle, aggregate industry demand softens. As markets become saturated, there are few new adopters. Rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. 82. As markets mature, ___________. A. costs continue to increase B. application for patents increase C. there is increasing emphasis on efficiency D. differentiation opportunities increase Answer: C. there is increasing emphasis on efficiency Rationale: In the maturity stage of the industry life cycle, advantages based on efficient manufacturing operations and process engineering become more important for keeping costs low as customers become more price sensitive. 83. The size of pricing and differentiation advantages between competitors decreases in which stage of the market life cycle? A. introduction B. growth C. maturity D. decline Answer: C. maturity Rationale: In the maturity stage of the industry life cycle, rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. It also becomes more difficult for firms to differentiate their offerings, because users have a greater understanding of products and services. 84. Which of the following is most often true of mature markets? A. Some competitors enjoy a significant operating advantage due to increasing experience effects. B. Advantages that cannot be duplicated by other competitors are difficult to achieve. C. The market supports premium pricing, which attracts additional competitors. D. The magnitude of pricing differences and product differentiation is larger than in the growth stage. Answer: B. Advantages that cannot be duplicated by other competitors are difficult to achieve. Rationale: In the maturity stage of the industry life cycle, rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. It also becomes more difficult for firms to differentiate their offerings, because users have a greater understanding of products and services. 85. In the __________ stage of the industry life cycle, there are few segments, the emphasis on process design is low, and the major functional areas of concern are general management and finance. A. introduction B. growth C. decline D. maturity Answer: C. decline Rationale: In the decline stage of the industry life cycle, there are few segments, the emphasis on process design is low, and the major functional areas of concern are general management and finance. 86. The most likely time to pursue a harvest strategy is in a situation of _______. A. high growth B. strong competitive advantage C. decline in the market life cycle D. mergers and acquisitions Answer: C. decline in the market life cycle Rationale: Four basic strategies are available in the decline phase: maintaining, harvesting, exiting, or consolidating. 87. During the decline stage of the industry life cycle, __________ refers to obtaining as much profit as possible and requires that costs be decreased quickly. A. maintaining B. exiting C. harvesting D. consolidating Answer: C. harvesting Rationale: Harvesting involves obtaining as much profit as possible and requires that costs be reduced quickly. 88. Research shows that which of the following is not a strategy used by firms engaged in successful turnarounds? A. asset and cost surgery B. global expansion C. selective product and market pruning D. piecemeal productivity improvements Answer: B. global expansion Rationale: A study of 260 mature businesses in need of a turnaround identified three strategies used by successful companies: asset and cost surgery, selective product and market pruning, and piecemeal productivity improvements. 89. Piecemeal productivity improvements during a turnaround typically do NOT involve _______. A. business process reengineering B. increased capacity utilization C. expansion of company product market scope D. benchmarking Answer: C. expansion of company product market scope Rationale: Piecemeal productivity improvements include improving business processes by reengineering them, benchmarking specific activities against industry leaders, encouraging employee input to identify excess costs, increasing capacity utilization, and improving employee productivity. 90. Which of the following is not a reason for the successful turnaround that Ford experienced in 2011 under CEO Mulally? A. downsizing through the sale of non-Ford brands B. focus on a narrower range of cars C. tightening of the product design across brands D. increasing its manpower across the company Answer: D. increasing its manpower across the company Rationale: First, a plan was executed to undertake a dramatic refinancing of the business by raising bank loans secured against company assets. Second, the firm concentrated resources on the Ford brand and sold off the Premier Automotive Group (PAG) businesses. Third, Ford narrowed the range of cars down to 36 from 97 different models. Fourth, emphasis was placed on quality and being the best in class. Fifth, more shared platforms for building cars economically were installed. Sixth, Ford cut half of its shop-floor workforce and a third of its office jobs. By 2011, 17 factories had been closed and employment was reduced to 75,000 from 128,000. Essay Questions 91. Use the value chain as a framework to explain how a firm can achieve a competitive advantage of overall cost leadership. Answer: A firm achieving competitive advantage in overall cost leadership through the value chain framework focuses on optimizing internal processes to reduce costs across all activities. This includes sourcing raw materials at lower costs, efficient production processes, minimizing overhead expenses, and streamlined distribution channels, ultimately offering products or services at a lower price than competitors. 92. Explain how a cost leadership strategy permits a firm to address the five forces in its competitive environment so that it can enjoy higher-than-normal profits. Answer: A cost leadership strategy allows a firm to address competitive forces by setting barriers for new entrants through economies of scale and cost advantages. Suppliers are pressured to reduce costs to maintain contracts, while buyers are attracted by lower prices, reducing their bargaining power. Rivalry among competitors is intensified as cost leaders maintain profitability despite price wars, and threats of substitutes are mitigated as low prices increase customer loyalty. 93. Discuss how a competitive advantage can be attained through differentiation using the value chain concept. Answer: Competitive advantage through differentiation using the value chain involves enhancing product or service uniqueness at each stage. For instance, investing in research and development for innovative products (primary activities) and providing exceptional customer service (support activities) create value that justifies higher prices and builds brand loyalty. 94. Explain how a differentiation strategy enables a business to address the five competitive forces in such a way that it can enjoy high levels of profitability. Answer: A differentiation strategy addresses competitive forces by reducing rivalry, as unique products or services create a distinct market position. Suppliers become partners in innovation, enhancing product uniqueness, and reducing bargaining power. Buyers' sensitivity to price decreases due to brand loyalty, while threats of substitutes diminish as customers perceive unique offerings as irreplaceable, allowing the firm to sustain higher profitability levels. 95. Discuss the risks associated with each of these forms of competitive advantage: overall cost leadership, differentiation, and focus. Answer: Risks associated with competitive advantages: • Overall cost leadership: Risk of competitors undercutting prices and eroding margins, difficulty in maintaining cost efficiency as economies of scale diminish. • Differentiation: Risks include imitation by competitors, customer preferences shifting away from unique features, and higher costs associated with innovation and maintaining uniqueness. • Focus: Risks involve market shifts that reduce the attractiveness of the niche, increased competition targeting the same segment, and potential neglect of broader market opportunities. 96. What are the benefits and risks associated with combining overall cost leadership and differentiation strategies? Answer: Benefits and risks of combining cost leadership and differentiation strategies: • Benefits: Enhanced market coverage catering to both price-sensitive and quality-conscious segments, potential for higher profitability. • Risks: Complexity in managing dual strategies, potential conflicts in resource allocation between cost reduction and value-added activities, and the risk of diluting the firm's strategic focus. 97. Discuss the uses and limitations associated with the industry life cycle concept as a framework for studying strategy formulation at the business level. Answer: Uses and limitations of industry life cycle concept: • Uses: Helps firms anticipate changes in demand, adjust strategies based on industry maturity (growth, maturity, decline), and identify opportunities for innovation and market positioning. • Limitations: Assumes predictable stages and timing, oversimplifies dynamics within industries, and may overlook unique factors influencing specific markets or businesses. 98. Explain what factors determine the sustainability of company competitive advantage and provide an example of this in action. Answer: Factors determining sustainability of competitive advantage include: • Resource uniqueness: Examples like Apple's proprietary software and hardware integration in iPhones. • Barriers to imitation: Strong brand loyalty and patents protect advantages. • Adaptability: Ability to innovate and respond to market changes, like Amazon's continuous expansion and technological innovations. • Organizational capabilities: Operational efficiency and employee expertise, such as Toyota's lean manufacturing and continuous improvement processes. 99. The Internet and digital technologies offer opportunities and pitfalls to companies using overall cost leadership, differentiation, and focus strategies. Discuss the statement and provide examples that support your argument. Answer: The Internet and digital technologies present opportunities and pitfalls for firms employing overall cost leadership, differentiation, and focus strategies. Companies leveraging cost leadership can benefit from online platforms for efficient procurement and distribution (e.g., Amazon). However, price transparency and competition from global markets can erode cost advantages. Differentiation strategies can use digital channels for personalized customer interactions (e.g., Netflix), but face risks from rapid imitation and changing consumer preferences. Focused strategies can target niche markets online (e.g., Etsy), yet risk intensified competition and market saturation. 100. Explain how firms can use reverse positioning and breakaway positioning when faced with the maturity phase of the industry life cycle. Answer: Reverse and breakaway positioning in the maturity phase involve strategic shifts to rejuvenate market presence. Reverse positioning redefines the product or service for new customer segments or uses (e.g., Apple's transition from computers to smartphones). Breakaway positioning involves introducing innovative products or services that redefine market expectations (e.g., Tesla's electric vehicles in the automotive industry). 101. Explain the advantages of the four alternative strategies of maintaining, harvesting, exiting, and consolidating that are associated with the decline stage of the market life cycle. Answer: In the decline stage, maintaining strategies focus on profitable segments (e.g., legacy products). Harvesting involves extracting maximum cash flow with minimal investment (e.g., discontinued product lines). Exiting entails withdrawing from unprofitable markets (e.g., closing underperforming stores). Consolidating strategies involve acquiring competitors or streamlining operations (e.g., merging with rivals) to strengthen market position before exiting. 102. Discuss some of the effective turnaround strategies. Answer: Effective turnaround strategies include restructuring operations to reduce costs (e.g., layoffs, operational efficiencies), divesting non-core assets, renegotiating debt obligations, and refocusing on core competencies (e.g., Ford's turnaround under Alan Mulally). Innovation and strategic partnerships can also revitalize product offerings and market competitiveness, such as IBM's shift towards cloud computing and AI solutions. Chapter 06 Corporate-Level Strategy: Creating Value through Diversification True/False Questions 1. Research shows that the vast majority of acquisitions results in value creation rather than value destruction. Answer: False Rationale: Research shows that the vast majority of acquisitions result in value destruction rather than value creation. 2. The Hewlett-Packard and Autonomy merger in 2011 is an example of a successful merger. Answer: False Rationale: In 2012, Hewlett-Packard wrote off $9 billion of the $11 billion it paid for Autonomy, a software company that it purchased one year earlier. After they purchased it, HP realized that the Autonomy accounting statements were not accurate resulting in a nearly 80 percent drop in the value of Autonomy once those accounting irregularities were corrected. 3. Many acquisitions ultimately result in divestiture. Answer: True Rationale: Many acquisitions ultimately result in divestiture, that is, an admission that things did not work out as planned. In fact, some years ago, a writer for Fortune magazine lamented that studies show that 33 percent to 50 percent of acquisitions are later divested, giving corporate marriages a divorce rate roughly comparable to that of men and women. 4. At times, the only other people who may have benefited from a merger-acquisition were the shareholders of the acquired firms. Answer: True Rationale: At times, the only other people who may have benefited were the shareholders of the acquired firms or the investment bankers who advise the acquiring firm, because they collect huge fees upfront regardless of what happens afterward. 5. Reasons for acquisition failure include: ineffective integration of the acquisition, too high of a premium paid for the common stock of the target company, or inability to understand how the assets of the acquired firm would fit with the lines of business of the existing company. Answer: True Rationale: Research shows that the vast majority of acquisitions result in value destruction rather than value creation. Many large multinational firms have also failed to effectively integrate their acquisitions, paid too high a premium for the common stock of the acquired firm, or were unable to understand how the assets of the acquired firm would fit with their own lines of business. 6. Corporate-level strategy focuses on gaining short-term revenue through managing operations in multiple businesses. Answer: False Rationale: Corporate-level strategy focuses on gaining long-term revenue, profits, and market value through managing operations in multiple businesses. 7. All diversification moves, including those involving mergers and acquisitions, erode performance. Answer: False Rationale: Not all diversification moves, including those involving mergers and acquisitions, erode performance. For example, acquisitions in the oil industry, such as the British Petroleum purchases of Amoco and Arco, are performing well as is the Exxon-Mobil merger. MetLife was able to dramatically expand its global footprint by acquiring Alico, a global player in the insurance business from AIG in 2010 when AIG was in financial distress. 8. Diversification initiatives must be justified by the creation of value for shareholders. Answer: True Rationale: Diversification initiatives, whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development, must be justified by the creation of value for shareholders. They typically are successful when they introduce synergy. 9. When firms diversify into unrelated businesses, the primary potential benefits are horizontal relationships, i.e., businesses sharing tangible and intangible resources. Answer: False Rationale: When a corporation diversifies into unrelated businesses, the primary potential benefits are derived largely from hierarchical relationships, which is value creation derived from the corporate office. Horizontal relationships are the primary benefit of diversification into related businesses. 10. When firms diversify into related businesses, the primary potential benefits come from horizontal relationships, which are businesses sharing intangible and tangible resources. Answer: True Rationale: A firm may diversify into related businesses. Here, the primary potential benefits to be derived come from horizontal relationships; that is, businesses sharing intangible resources (e.g., core competencies such as marketing) and tangible resources (e.g., production facilities, distribution channels). 11. Benefits derived from horizontal and hierarchical relationships are mutually exclusive. Answer: False Rationale: Benefits derived from horizontal (related diversification) and hierarchical (unrelated diversification) relationships are not mutually exclusive. Many firms that diversify into related areas benefit from information technology expertise in the corporate office. Similarly, unrelated diversifiers often benefit from the best practices of sister businesses even though their products, markets, and technologies may differ dramatically. 12. Economies of scope are cost savings from leveraging core competencies or sharing unrelated activities among businesses in a corporation. Answer: False Rationale: Economies of scope are cost savings from leveraging core competencies or sharing related activities among businesses in a corporation. 13. Cooper Industries has followed a successful strategy of related diversification. There are few similarities in the products it makes or the industries in which it competes. Answer: False Rationale: Cooper Industries has followed a successful strategy of unrelated diversification. There are few similarities in the products it makes or the industries in which it competes; however, the corporate office adds value through such activities as superb human resource practices and budgeting systems. 14. Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities. Answer: True Rationale: Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities (e.g., production and distribution facilities). This enables a corporation to benefit from economies of scope. 15. Economies of scope in a related diversification strategy result from the leveraging of core competencies and the sharing of activities such as production. Answer: True Rationale: Related diversification enables a firm to benefit from economies of scope, which are cost savings that are derived from leveraging core competencies or sharing related activities among businesses in a corporation. A firm can also enjoy greater revenues if two businesses attain higher levels of sales growth combined than either company could attain independently. 16. Core competencies do not create value in a business. Answer: False Rationale: Core competencies may also be viewed as the glue that binds existing businesses together or as the engine that fuels new business growth. They reflect the collective learning in organizations such as how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services. 17. For a core competency to create value and provide a viable basis for synergy among the businesses in a corporation it must at least create superior customer value and it must be difficult to imitate. Answer: True Rationale: For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it. 18. Gillette developed the Fusion and Mach 3 shaving systems that created superior customer value as a result of their core competency in research and development. Answer: True Rationale: For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it. Every value-chain activity has the potential to provide a viable basis for building on a core competence. At Gillette, scientists developed the Fusion and Mach 3 after the introduction of the tremendously successful Sensor System because of a thorough understanding of several phenomena that underlie shaving. These include the physiology of facial hair and skin, the metallurgy of blade strength and sharpness, the dynamics of a cartridge moving across skin, and the physics of a razor blade severing hair. Such innovations are possible only with an understanding of such phenomena and the ability to combine such technologies into innovative products. Customers are willing to pay more for such technologically differentiated products. 19. One of the criteria for a core competence is that the different businesses in the corporation must be similar in at least one important way related to the core competence. Answer: True Rationale: For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it. 20. It is not necessary for a core competence to be difficult to imitate or to be non substitutable. Answer: False Rationale: For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it. 21. IBM leverages its competencies in computing technology to provide health care services. This is an example of a core competence being used across dissimilar businesses within the same corporation. Answer: True Rationale: For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it. With Watson, the unique computer developed by IBM that processes natural language, they were able to leverage their computing expertise (core competence) to solve important medical problems and thus become medical experts. 22. Sharing activities across business units can provide two primary benefits: cost savings and revenue enhancements. Answer: True Rationale: Corporations also can achieve synergy by sharing activities across their business units. These include value-creating activities such as common manufacturing facilities, distribution channels, and sales forces. Sharing activities can provide two primary payoffs: cost savings and revenue enhancements. 23. When sharing activities across business units, a company can attain the highest cost savings when it acquires another from the same industry in the same country. Answer: True Rationale: Cost savings are generally highest when one company acquires another from the same industry in the same country. Cost savings come from many sources, including the elimination of jobs, facilities, and related expenses that are no longer needed when functions are consolidated, or from economies of scale in purchasing. 24. If a corporation is to achieve synergy by sharing activities across its business units, it is not important to compromise on the design or performance of an activity that is to be shared. Answer: False Rationale: Sharing activities inevitably involve costs that the benefits must outweigh such as the greater coordination required to manage a shared activity. Even more important is the need to compromise on the design or performance of an activity so that it can be shared. For example, a salesperson handling the products of two business units must operate in a way that is usually not what either unit would choose if it were independent. If the compromise erodes unit effectiveness, then sharing may reduce rather than enhance competitive advantage. 25. Shared activities among businesses in a corporation do not always have a positive effect on a differentiation strategy of a corporation. Answer: True Rationale: Sharing activities among businesses in a corporation can have a negative effect on a corporation. For example, when Ford owned Jaguar, they found that customers had lower perceived value of Jaguar automobiles when they found that the entry-level Jaguar shared its basic design with and was manufactured in the same production plant as the Ford Mondeo, a European midsize car. Perhaps, it is not too surprising that Jaguar was divested by Ford in 2008. 26. Starbucks acquired the baker chain, La Boulange, with the intention of selling the bakery products at its coffee cafes. The increased market exposure for La Boulange is an example of a revenue enhancing benefit that can arise from the differentiation strategy. Answer: True Rationale: Often an acquiring firm and its target may achieve a higher level of sales growth together than either company could on its own. For example, Starbucks recently acquired a small bakery chain, La Boulange, and intends to sell La Boulange products at Starbucks cafes nationally. In leveraging Starbucks national retail chain, La Boulange will be able to dramatically expand its market exposure and sales much beyond its current 19-store West Coast market. 27. Market power refers to cost savings from leveraging core competencies or sharing activities among the businesses in a corporation. Answer: False Rationale: Market power refers to the ability of the firm to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment. 28. The two principal means by which firms achieve synergy through market power are pooled negotiating power and corporate parenting. Answer: False Rationale: The two principal means by which firms achieve synergy through market power are pooled negotiating power (the improvement in bargaining position relative to suppliers and customers) and vertical integration (an expansion or extension of the firm by integrating preceding or successive production processes). 29. Similar businesses working together or the affiliation of a business with a strong parent can strengthen the bargaining position of a company relative to suppliers and customers. Answer: True Rationale: Similar businesses working together or the affiliation of a business with a strong parent can strengthen the bargaining position of an organization relative to suppliers and customers and enhance its position relative to its competitors. 30. Although acquiring related businesses can enhance the bargaining power of a corporation, there is a risk of retaliation by competitors that can result in a diminishing of the desired bargaining power. Answer: True Rationale: When PepsiCo diversified into the fast-food industry with its acquisitions of Kentucky Fried Chicken, Taco Bell, and Pizza Hut, it clearly benefited from its position over these units that served as a captive market for its soft-drink products. However, many competitors, such as McDonalds, refused to consider PepsiCo as a supplier of its own soft-drink needs because of competition with Pepsi divisions in the fast-food industry. McDonalds did not want to subsidize the enemy. Thus, although acquiring related businesses can enhance corporation bargaining power, the corporation must be aware of the potential for retaliation. 31. An oil refinery secures land leases and develops its own drilling capacity to ensure a constant supply of crude oil. This is an example of forward integration. Answer: False Rationale: This is an example of backward integration. Vertical integration occurs when a firm becomes its own supplier or distributor. The firm incorporates more processes toward the original source of raw materials (backward integration) or toward the ultimate consumer (forward integration). 32. A car manufacturer controls its own system of dealerships to ensure retail outlets for its products. This is an example of backward integration. Answer: False Rationale: This is an example of forward integration. Vertical integration occurs when a firm becomes its own supplier or distributor. The firm incorporates more processes toward the original source of raw materials (backward integration) or toward the ultimate consumer (forward integration). 33. One of the risks of vertical integration is that there may be problems associated with unbalanced capacities along the value chain of a firm. Answer: True Rationale: The risks of vertical integration include: the costs and expenses associated with increased overhead and capital expenditures; a loss of flexibility resulting from large investments; problems associated with unbalanced capacities along the value chain; and additional administrative costs associated with managing a more complex set of activities. 34. The main reason that automobile manufacturers have increased the amount of outsourced inputs is because of the importance of boom and bust cycles in the industry. Answer: True Rationale: With the high level of fixed costs in plant and equipment as well as operating costs that accompany endeavors toward vertical integration, widely fluctuating sales demand can either strain resources (in times of high demand) or result in unused capacity (in times of low demand). The cycles of boom and bust in the automobile industry are a key reason why the manufacturers have increased the amount of outsourced inputs. 35. According to the transaction cost perspective in analyzing vertical integration, every market transaction involves some transaction cost. Answer: True Rationale: One approach that has proved very useful in understanding vertical integration is the transaction cost perspective. According to this perspective, every market transaction involves some transaction costs. 36. Vertical integration is attractive when market transaction costs are higher than internal administrative costs. Answer: True Rationale: Decisions about vertical integration are based on a comparison of transaction costs and administrative costs. If transaction costs are higher than administrative costs, vertical integration becomes an attractive strategy. 37. With unrelated diversification, potential benefits can be gained from vertical or hierarchical relationships; that is, the creation of synergies from the interaction of the corporate office with outside stakeholders. Answer: False Rationale: With unrelated diversification, potential benefits can be gained from vertical or hierarchical relationships; that is, the creation of synergies from the interaction of the corporate office with the individual business units. 38. Restructuring requires the corporate office to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change. Answer: True Rationale: Restructuring is a means by which the corporate office can add value to a business. Here, the corporate office tries to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change. The parent intervenes, often selling off parts of the business; changing the management; reducing payroll and unnecessary sources of expenses; changing strategies; and infusing the company with new technologies, processes, reward systems, and so forth. 39. Portfolio management should be considered as the primary basis for formulating corporate-level strategies. Answer: False Rationale: Portfolio management helps achieve a better understanding of the competitive position of an overall portfolio of businesses, to suggest strategic alternatives for each of the businesses, and to identify priorities for the allocation of resources. 40. Portfolio management matrices generally consist of two axes that reflect industry or market growth and the market share of a business. Answer: True Rationale: The Boston Consulting Group (BCG) growth/share matrix is among the best known of the portfolio management tools. In the BCG approach, each of the strategic business units (SBUs) of the firm is plotted on a two-dimensional grid in which the axes are relative market share and industry growth rate. 41. The acquisition of two or more counter-cyclical businesses is an example of using diversification to reduce risk. Answer: True Rationale: One of the purposes of diversification is to reduce the risk that is inherent in the variability in revenues and profits of a firm over time. If a firm enters new products or markets that are affected differently by seasonal or economic cycles, its performance over time will be more stable. For example, a firm that manufactures lawn mowers may diversify into snow blowers in order to even out its annual sales. 42. An advantage of mergers and acquisitions is that they can enable a firm to rapidly enter new product markets. Answer: True Rationale: Growth through mergers and acquisitions has been critical to many corporations in a wide variety of high-technology and knowledge-intensive industries. Speed (speed to market, speed to positioning, and speed to becoming a viable company) is critical in such industries. For example, in 2010, Apple acquired Siri Inc. so that they could quickly fully integrate the Siri natural language voice recognition software into iOS, the Apple proprietary operating system. 43. Among the advantages of acquisitions are the expensive premiums that are frequently paid to acquire a business. Answer: False Rationale: There are many potential drawbacks or limitations to merger activity. For example, the takeover premium that is paid for an acquisition typically is very high. Two times out of three, the stock price of the acquiring company falls once the deal is made public. Since the acquiring firm often pays a 30 percent or higher premium for the target company, the acquirer must create synergies and scale economies that result in sales and market gains exceeding the premium price. 44. Through joint ventures, firms can directly acquire the assets and competencies of other firms. Answer: False Rationale: Joint ventures represent a special case of alliances, wherein two (or more) firms contribute equity to form a new legal entity. 45. The potential advantages of strategic alliances and joint ventures include entering new markets as well as developing and diffusing new technologies. Answer: True Rationale: Strategic alliances and joint ventures have many potential advantages. Among these are entering new markets, reducing manufacturing (or other) costs in the value chain, and developing and diffusing new technologies. 46. One of the obligatory aspects of strategic alliances is the dependence on written contracts to delimit responsibilities and enforce compliance. Answer: False Rationale: A strategic alliance is a cooperative relationship between two (or more) firms. Alliances may be either informal or formal, one involving a written contract. 47. An advantage of a firm entering into a strategic alliance is that it does not have to share the wealth with its partners. Answer: False Rationale: Firms that engage in internal development (like corporate entrepreneurship) capture the value created by their own innovative activities without having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures. 48. An advantage of internal development is that firms do not have to combine activities across the value chains of many companies and merge company cultures. Answer: True Rationale: Firms that engage in internal development (like corporate entrepreneurship) capture the value created by their own innovative activities without having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures. 49. In recent years, many high tech firms such as Priceline.com have suffered from the negative impact of uncontrolled growth. Answer: True Rationale: In recent years many high-tech firms have suffered from the negative impact of their uncontrolled growth. Consider, for example, Priceline.com made an ill-fated venture into an online service to offer groceries and gasoline. A myriad of problems, perhaps most importantly a lack of participation by manufacturers, caused the firm to lose more than $5 million a week prior to abandoning these ventures. 50. Greenmail is an offer by a company, threatened by takeover, to offer its stock at a reduced price to a third party. Answer: False Rationale: Greenmail is an effort by the target firm to prevent an impending takeover. When a hostile firm buys a large block of outstanding target company stock and the target company management feels that a tender offer is impending, they offer to buy the stock back from the hostile company at a higher price than the unfriendly company paid for it. 51. A golden parachute is a prearranged contract with managers specifying that, in the event of a hostile takeover, the target company managers will be paid a significant severance package. Answer: True Rationale: A golden parachute is a prearranged contract with managers specifying that, in the event of a hostile takeover, the target company managers will be paid a significant severance package. Although top managers lose their jobs, the golden parachute provisions protect their income. Multiple Choice Questions 52. The Cisco acquisition of Pure Digital Technologies, the parent of the Flip video camera, failed because __________________. A. Cisco had valuable competencies B. the Flip division of Cisco was slow and less responsive to market pressures C. consumers continued to purchase the camera D. Cisco had good vision of the market Answer: B. the Flip division of Cisco was slow and less responsive to market pressures Rationale: In large, widely diversified firms, decision making can become slow and remote to market conditions. Cisco competes in a wide range of markets and had nearly 60 decision making groups in its structure, with several layers separating John Chambers, the CEO of Cisco, from the individual markets. In such a large and diversified firm, the decision making in a small division with only $400 million in sales, 1 percent of the overall sales of Cisco, was not the top priority of corporate managers. Stephen Baker, an analyst with NPD Group, said that Cisco was never really committed to the product. As a result, Flip was slower and less responsive to market pressures than it was when it was an entrepreneurial firm. 53. Which of the following is not a reason for merger and acquisition failures? A. The acquiring company pays too high a premium for the common stock of the target company. B. Top executives act in their best interests rather than those of the shareholders. C. The acquired company assets are poorly integrated into the acquiring company business lines. D. The acquisition leads to value creation. Answer: D. The acquisition leads to value creation. Rationale: Research shows that the vast majority of acquisitions result in value destruction rather than value creation. Many large multinational firms have also failed to effectively integrate their acquisitions, paid too high a premium for the common stock of the target company, or were unable to understand how the assets of the acquired firm would fit with their own lines of business. At times, top executives may not have acted in the best interests of shareholders. The motive for the acquisition may have been to enhance the power and prestige of the executive rather than to improve shareholder returns. 54. Corporate-level strategy focuses on _____________. A. gaining long-term revenue B. gaining short-term profits C. decreasing business locations D. managing investment bankers and their interests Answer: A. gaining long-term revenue Rationale: Corporate-level strategy focuses on gaining long-term revenue, profits, and market value through managing operations in multiple businesses. 55. Diversification initiatives include all of the following except ___________________. A. mergers and acquisitions B. strategic alliances C. joint ventures D. shareholder development Answer: D. shareholder development Rationale: Diversification initiatives, whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development, must be justified by the creation of value for shareholders. 56. McKesson, a large distribution company, sells many product lines such as pharmaceuticals and liquor through its super warehouses. This is an example of ____________. A. using related diversification to achieve value by sharing activities to create economies of scope B. using related diversification to achieve value by leveraging core competencies to create market power C. using unrelated diversification to create value by managing its portfolio to create financial synergies D. using unrelated diversification to create value by managing its portfolio to create restructuring advantages Answer: A. using related diversification to achieve value by sharing activities to create economies of scope Rationale: In this case, McKesson uses related diversification to create value by sharing activities in order to create economies of scope. 57. Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input to its manufacturing process. This is an example of _______________. A. using related diversification to achieve value by pooling negotiating power to achieve market power B. using related diversification to achieve value by leveraging core competencies to achieve economies of scope C. using related diversification to achieve value by integrating vertically in order to acquire market power D. using related diversification to achieve value by integrating vertically in order to attain economies of scope Answer: C. using related diversification to achieve value by integrating vertically in order to acquire market power Rationale: In this case, Shaw Industries uses related diversification to achieve value by integrating vertically in order to acquire market power. 58. At Cooper Industries, there are few similarities in the products it makes or the industries in which it completes. The corporate office adds value through such activities as superb human resource practices and budgeting systems. This is an example of __________________. A. using related diversification to achieve value by leveraging core competencies to attain economies of scope B. using related diversification to achieve value by leveraging core competencies to acquire market power C. using unrelated diversification to achieve value through portfolio management in order to acquire financial synergies D. using unrelated diversification to achieve value through restructuring and parenting Answer: D. using unrelated diversification to achieve value through restructuring and parenting Rationale: In this case, the corporate office of Cooper Industries adds value to its acquired, unrelated businesses by performing such activities as auditing their manufacturing operations, improving their accounting activities, and centralizing union negotiations. The primary potential benefits of this unrelated diversification strategy are derived largely from hierarchical relationships; that is, value creation derived from the corporate office. 59. Casio, a giant electronic products producer, synthesizes it abilities in miniaturization, microprocessor design, material science, and ultrathin precision castings to produce digital watches. It uses the same skills to produce card calculators, digital cameras, and other small electronics. These collective skills are known as _________________. A. core competencies B. strategic resources C. shared activities D. economies of scope Answer: A. core competencies Rationale: Core competencies reflect the collective learning in organizations, which is how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services. In some circumstances, a core competence can create value and provide a viable basis for synergy among the businesses in a corporation. Casio, a giant electronic products producer, synthesizes its abilities in miniaturization, microprocessor design, material science, and ultrathin precision castings to produce digital watches. These are the same skills it applies to the design and production of its miniature card calculators, digital cameras, pocket electronic dictionaries, and other small electronics. 60. For a core competence to be a viable basis for the corporation strengthening a new business unit, there are three requirements. Which one of the following is not one of these requirements? A. The competence must help the business gain strength relative to its competition. B. The new business must be similar to existing businesses to benefit from a core competence. C. The collection of competencies should be unique, so that they cannot be easily imitated. D. The new business must have an established large market share. Answer: D. The new business must have an established large market share. Rationale: For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: the core competence must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and the core competencies must be difficult for competitors to imitate or find substitutes for. 61. Sharing core competencies is one of the primary potential advantages of diversification. In order for diversification to be most successful, it is important that _____________. A. the similarity required for sharing core competencies must be in the value chain, not in the product B. the products use similar distribution channels C. the target market is the same, even if the products are very different D. the methods of production are the same Answer: A. the similarity required for sharing core competencies must be in the value chain, not in the product Rationale: For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, different businesses in the corporation must be similar in at least one important way related to the core competence. It is not essential that the products or services themselves be similar, but at least one element in the value chain must require similar skills in creating competitive advantage. 62. When management uses common production facilities or purchasing procedures to distribute different but related products, they are ________________. A. building on core competencies B. achieving process gains C. sharing activities D. using portfolio analysis Answer: C. sharing activities Rationale: Corporations can achieve synergy by sharing activities across their business units. These include value-creating activities such as common manufacturing facilities, distribution channels, and sales forces. 63. Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input into its manufacturing process. This is an example of ______________. A. leveraging core competencies B. sharing activities C. pooled negotiating power D. vertical integration Answer: D. vertical integration Rationale: Shaw Industries, a carpet manufacturer, has attained a dominant position in the industry via a strategy of vertical integration. Shaw has successfully implemented strategies of both forward and backward integration. 64. The risks of vertical integration include all of the following EXCEPT: A. costs and expenses associated with increased overhead and capital expenditures. B. problems associated with unbalanced capacities along the value chain. C. lack of control over valuable assets. D. additional administrative costs associated with managing a more complex set of activities. Answer: C. lack of control over valuable assets. Rationale: The risks of vertical integration include costs and expenses associated with increased overhead and capital expenditures, loss of flexibility resulting from large investments, problems associated with unbalanced capacities along the value chain, and additional administrative costs associated with managing a more complex set of activities. 65. Unbalanced capacities that limit cost savings, difficulties in combining specializations, and reduced flexibility are disadvantages associated with ___________. A. strategic alliances B. divestment C. horizontal integration D. vertical integration Answer: D. vertical integration Rationale: The risks of vertical integration include costs and expenses associated with increased overhead and capital expenditures, loss of flexibility resulting from large investments, problems associated with unbalanced capacities along the value chain, and additional administrative costs associated with managing a more complex set of activities. 66. A firm should consider vertical integration when ___________. A. the competitive situation is highly volatile B. customer needs are evolving C. the suppliers of the firm willingly cooperate with the firm D. the suppliers of raw materials to the firm are often unable to maintain quality standards Answer: D. the suppliers of raw materials to the firm are often unable to maintain quality standards Rationale: A firm should consider vertical integration if the company is not satisfied with the quality of the value that its present suppliers and distributors are providing. 67. Transaction costs include all of the following costs EXCEPT A. search costs B. negotiating costs C. agency costs D. monitoring costs Answer: C. agency costs Rationale: Transaction costs are the sum of search costs, negotiation costs, contracting costs, monitoring costs, and enforcement costs. These transaction costs can be avoided by internalizing the activity, in other words, by producing the input in-house. 68. Vertical integration is attractive when ____________. A. internal administrative costs are higher than transaction costs B. transaction costs are higher than internal administrative costs C. transaction costs and internal administrative costs are equal D. search costs are higher than monitoring costs Answer: B. transaction costs are higher than internal administrative costs Rationale: If transaction costs are higher than administrative costs, that is, those costs incurred when coordinating the activities elsewhere in the value chain, vertical integration becomes an attractive strategy. 69. Creating value within business units can happen when the corporate office helps subsidiaries make wise choices in their own acquisitions, divestures, and new ventures. This is known as ________. A. restructuring B. parenting C. leveraging core competencies D. increasing market power Answer: B. parenting Rationale: Parent companies create value through management expertise. They improve plans and budgets and provide especially competent central functions such as legal, financial, human resource management, and procurement. They also help subsidiaries make wise choices in their own acquisitions, divestitures, and new internal development decisions. 70. Creating value within business units can happen when a firm tries to find and acquire either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change. This is action is known as ______. A. parenting B. leveraging core competencies C. restructuring D. sharing activities Answer: C. restructuring Rationale: In restructuring, the corporate office tries to find poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change. The parent intervenes, often selling off parts of the business; changing the management; reducing payroll and unnecessary sources of expenses; changing strategies; and infusing the company with new technologies, processes, or reward systems. 71. According to the text, corporate restructuring includes A. capital restructuring, asset restructuring, and technology restructuring B. global diversification, capital restructuring, and asset restructuring C. management restructuring, financial restructuring, and procurement restructuring D. capital restructuring, asset restructuring, and management restructuring Answer: D. capital restructuring, asset restructuring, and management restructuring Rationale: Restructuring can involve changes in assets, capital structure, or management. 72. Portfolio management matrices are applied to what level of strategy? A. departmental level B. business level C. international level D. corporate level Answer: D. corporate level Rationale: Corporate-level strategy addresses two related issues: what businesses should a corporation compete in and how can these businesses be managed so they create synergy. Portfolio management matrices can be used to improve understanding of the competitive position of a portfolio (or family) of businesses, to suggest strategic alternatives, and to identify priorities for the allocation of resources. 73. When using a BCG matrix, a business that currently holds a large market share in a rapidly growing market and has minimal or negative cash flow would be known as a __________. A. Cash Cow B. Dog C. Star D. Question Mark Answer: C. Star Rationale: Each of the four quadrants of the BCG Portfolio grid has different implications for the SBUs that fall into that category. Stars are SBUs competing in high-growth industries with relatively high market shares. These firms have long-term growth potential and should continue to receive substantial investment funding. 74. In the BCG Matrix, a business that has a low market share in an industry characterized by high market growth is termed a ____________. A. Star B. Cash Cow C. Question Mark D. Dog Answer: C. Question Mark Rationale: Each of the four quadrants of the BCG Portfolio grid has different implications for the SBUs that fall into that category. Question Marks are SBUs competing in high-growth industries but having relatively weak market shares. Resources should be invested in them to enhance their competitive positions. 75. Portfolio management frameworks, such as the BCG matrix, share which of the following characteristics? A. Businesses are plotted on a 3-dimensional grid. B. Grid dimensions are based on external environments and internal capabilities/market positions. C. Position in the matrix suggests a need for sharing synergies. D. They are most helpful in helping businesses develop types of competitive advantage. Answer: B. Grid dimensions are based on external environments and internal capabilities/market positions. Rationale: Portfolio models are overly simplistic, consisting of only two dimensions (growth and market share). They view each business as separate, ignoring potential synergies across businesses. 76. A Cash Cow, in the BCG framework, refers to a business that has _______________. A. high market growth and relatively high market share B. relatively low market share and low market growth C. relatively low market share and high market growth D. low market growth and relatively high market share Answer: D. low market growth and relatively high market share Rationale: Each of the four quadrants of the BCG Portfolio grid has different implications for the SBUs that fall into that category. Cash Cows are SBUs with high market shares in low-growth industries. These units have limited long-run potential but represent a source of current cash flows to fund investments in Stars and Question Marks. 77. In managing the corporate portfolio, the BCG matrix would suggest that __________. A. Dogs should be invested in to increase market share and become Cash Cows B. Stars are in low growth markets and can provide excess cash to fund other opportunities C. Cash Cows require substantial cash outlays to maintain market share D. Question Marks can represent future Stars if their market share is increased Answer: D. Question Marks can represent future Stars if their market share is increased Rationale: Each of the four quadrants of the BCG Portfolio grid has different implications for the SBUs that fall into that category. Question Marks are SBUs competing in high-growth industries but having relatively weak market shares. Resources should be invested in them to enhance their competitive positions, potentially making them Stars. 78. In the BCG Growth Share Matrix, the suggested strategy for Stars is to ________. A. milk them to finance other businesses B. invest large sums to gain a good market share C. maintain position and after the market growth slows use the business to provide cash flow D. not invest in them and to shift cash flow to other businesses Answer: C. maintain position and after the market growth slows use the business to provide cash flow Rationale: Stars are SBUs competing in high-growth industries with relatively high market shares. These firms have long-term growth potential and should continue to receive substantial investment funding. When growth slows, they may become Cash Cows themselves. 79. All of the following are limitations (or downsides) of the BCG (Boston Consulting Group) matrix EXCEPT: A. Every business cannot be accurately measured and compared on the two dimensions. B. It takes a dynamic view of competition which can lead to overly complex analyses. C. It views each business as a stand-alone entity and ignores the potential for synergies across businesses. D. While easy to comprehend, the BCG matrix can lead to some troublesome and overly simplistic prescriptions. Answer: B. It takes a dynamic view of competition which can lead to overly complex analyses. Rationale: There are some notable downsides to portfolio models. They compare SBUs on only two dimensions, making the erroneous assumption that those are the only factors that really matter and that every unit can be accurately compared on that basis. The approach views each SBU as a stand-alone entity, ignoring the promise for synergies across business units. The process can become mechanical, substituting an oversimplified graphical model for the important contributions of management judgment. Reliance on strict rules regarding resource allocation across SBUs can be detrimental to long-term viability for the firm. While easy to comprehend, the imagery of the BCG matrix can lead to some troublesome, overly simplistic prescriptions. 80. The primary means by which a firm can diversify are __________, _________, and ________. A. mergers and acquisitions; differentiation; overall cost leadership B. mergers and acquisitions; joint ventures and strategic alliances; internal development C. joint ventures and strategic alliances; integration of value chain activities; acquiring human capital D. mergers and acquisitions; internal development; differentiation Answer: B. mergers and acquisitions; joint ventures and strategic alliances; internal development Rationale: There are three basic means of diversification: First, through acquisitions or mergers, corporations can directly acquire company assets and competencies. Second, corporations may agree to pool the resources of other companies with their resource base, commonly known as a joint venture or strategic alliance. Third, corporations may diversify into new products, markets, and technologies through internal development. 81. The downsides or limitations of mergers and acquisitions include all of the following EXCEPT: A. Premiums that are frequently paid to acquire a business are expensive. B. Difficulties exist in integrating the activities and resources of the acquired firm into on-going operations. C. There can be many cultural issues that can doom an otherwise promising acquisition. D. It is a slow means to enter new markets and acquire skills and competences. Answer: D. It is a slow means to enter new markets and acquire skills and competences. Rationale: There are several limitations of mergers and acquisitions including that takeover premiums paid for acquisitions are typically very high, competing firms often can imitate any advantages or copy synergies that result from the merger or acquisition, manager egos sometimes get in the way of sound business decisions, and cultural issues may doom the intended benefits from M and A endeavors. 82. Divesting of businesses can accomplish many different objectives, except _______. A. enabling managers to focus their efforts more directly on the core businesses of the firm B. providing the firm with more resources to spend on more attractive alternatives C. dispersing manager focus D. raising cash to help fund existing businesses Answer: C. dispersing manager focus Rationale: Divesting a business can accomplish many different objectives including: enabling managers to focus their efforts more directly on the core businesses of the firm, providing the firm with more resources to spend on more attractive alternatives, and raising cash to help fund existing businesses. 83. Verizon Wireless and ILS Technology have a _________ whereby Verizon integrates technology developed by ILS to improve its machine-to machine (M2M) data transmission systems. M2M systems allow firms to securely transmit data to and from various devices. A. joint diversification B. divestment C. strategic alliance D. global integration Answer: C. strategic alliance Rationale: Strategic alliances may be used to build jointly on the technological expertise of two or more companies. This may enable them to develop products technologically beyond the capability of the companies acting independently. 84. Cooperative relationships such as __________ have potential advantages such as entering new markets, reducing manufacturing (or other) costs in the value chain, and developing and diffusing new technologies. A. joint ventures B. mergers C. acquisitions D. joint ventures and strategic alliances Answer: D. joint ventures and strategic alliances Rationale: Strategic alliances and joint ventures have many potential advantages. Among these are entering new markets, reducing manufacturing (or other) costs in the value chain, and developing and diffusing new technologies. 85. Which of the following is not part of a good guideline list for managing strategic alliances? A. establishing a clear understanding between partners B. not short changing your partner C. relying primarily on a contract to make the joint venture work D. working hard to ensure a collaborative relationship between partners Answer: C. relying primarily on a contract to make the joint venture work Rationale: Strategic alliances and joint ventures should ensure the strengths contributed by the partners are unique; thus synergies created can be more easily sustained over the longer term. The goal is to develop synergies between partner contributions, resulting in a win-win situation. Moreover, the partners must be compatible and willing to trust each other. These partnerships may be undertaken with or without a contract. 86. Which of the following statements regarding internal development as a means of diversification is FALSE? A. Many companies use internal development to extend their product or service offers. B. An advantage of internal development is that it is generally faster than other means of diversification and firms can benefit from speed in developing new products and services. C. The firm is able to capture wealth created without having to share the wealth with alliance partners. D. Firms can often develop products or services at a lower cost, if they rely on their own resources instead of external funding. Answer: B. An advantage of internal development is that it is generally faster than other means of diversification and firms can benefit from speed in developing new products and services. Rationale: Potential disadvantages to internal development include that it may be time consuming and that firms may forfeit the benefits of speed that growth through mergers can provide. This may be important to high-tech or knowledge-based organizations in fast-paced environments in which being an early mover is critical. 87. Internal development may be time consuming and, therefore, firms may forfeit the benefits of speed that growth through __________ and __________ can provide. A. strategic alliances; joint ventures B. strategic alliances; mergers C. mergers; acquisitions D. mergers; strategic alliances Answer: C. mergers; acquisitions Rationale: There are potential disadvantages to internal development. It may be time consuming; firms may forfeit the benefits of speed that growth through mergers can provide. This may be important among high-tech or a knowledge-based organization in fast-paced environments, where being an early mover is critical. 88. According to Michael Porter, there is a tremendous allure to _________. It is the big play, the dramatic gesture. With one stroke of the pen you can add billions to size, get a front-page story, and create excitement in markets. A. strategic alliances and joint ventures B. internal development C. mergers and acquisitions D. differentiation strategies Answer: C. mergers and acquisitions Rationale: There is an excitement and associated recognition of making a major acquisition. Michael Porter of Harvard University noted that there is a tremendous allure to mergers and acquisitions. It is the big play, the dramatic gesture. With one stroke of the pen you can add billions to size, get a front-page story, and create excitement in markets. 89. The antitakeover tactic, _______, is when a firm offers to buy shares of their stock from a company (or individual) planning to acquire their firm at a higher price than the unfriendly company paid for it. A. golden parachute B. poison pill C. greenmail D. scorched earth Answer: C. greenmail Rationale: Greenmail is an effort by the target firm to prevent an impending takeover. When a hostile firm buys a large block of outstanding target company stock and the target company management feels that a tender offer is impending, they offer to buy the stock back from the hostile company at a higher price than the unfriendly company paid for it. 90. An antitakeover tactic in which existing shareholders have the option to buy additional shares of stock at a discount to the current market price is called ______. A. greenmail B. a golden parachute C. a poison pill D. scorched earth Answer: C. a poison pill Rationale: Poison pills are an antitakeover tactic used by a company to give shareholders certain rights in the event of a takeover by another firm. They are also known as shareholder rights plans. 91. The term golden parachute refers to _________. A. a clause requiring that huge dividend payments be made upon takeover B. pay given to executives fired because of a takeover C. financial inducements offered by a threatened firm to stop a hostile suitor from acquiring it D. managers of a firm in a hostile takeover approaching a third party about making the acquisition Answer: B. pay given to executives fired because of a takeover Rationale: A golden parachute is a prearranged contract with managers specifying that, in the event of a hostile takeover, the target company managers will be paid a significant severance package. 92. Antitakeover tactics include all of the following EXCEPT _________. A. greenmail B. poison pills C. golden parachutes D. golden handcuffs Answer: D. golden handcuffs Rationale: Antitakeover tactics are common, including greenmail, golden parachutes, and poison pills. Essay Questions 93. What are the primary benefits and risks associated with related diversification? Answer: Related diversification offers benefits such as leveraging existing capabilities and sharing resources across businesses, leading to economies of scope and risk reduction through portfolio diversification. Risks include managerial complexity, potential for resource allocation conflicts, and the challenge of integrating disparate businesses under a unified strategy. 94. Briefly explain the advantages and disadvantages of vertical integration. Answer: Vertical integration advantages include cost savings, improved control over quality and delivery schedules, and securing critical supplies. Disadvantages include increased capital investment, reduced flexibility, and potential antitrust scrutiny. 95. What are some of the key issues to take into account when considering whether or not to vertically integrate? Answer: Key considerations for vertical integration include assessing market power gains versus efficiency improvements, evaluating potential risks of supplier dependency versus costs of internal operations, and anticipating regulatory implications and competitive responses. 96. Explain how transaction cost analysis can provide insights into vertical integration decisions. Answer: Transaction cost analysis helps in vertical integration decisions by comparing costs of internal production versus market transactions. It assesses transaction-specific investments, uncertainty, and asset specificity, guiding firms to choose the governance structure (integration or market exchange) that minimizes overall transaction costs and maximizes efficiency. 97. What are the primary benefits and risks associated with unrelated diversification? Answer: Unrelated diversification benefits include risk reduction through portfolio diversification, potential for high returns from successful ventures, and reduced dependency on specific industries or markets. Risks include lack of synergies between businesses, managerial complexities in overseeing diverse operations, and challenges in integrating unrelated businesses under a unified strategy. 98. Explain the uses and limitations of portfolio management matrices such as the growth-share matrix developed by the Boston Consulting Group (BCG). Answer: Portfolio management matrices like the BCG growth-share matrix aid in strategic planning by categorizing business units based on market growth rate and relative market share. They guide resource allocation decisions, but their limitations include oversimplification of business dynamics, neglect of qualitative factors, and inability to capture industry complexity and competitive dynamics comprehensively. 99. Summarize the advantages and disadvantages of mergers and acquisitions as a means of diversification. Answer: Mergers and acquisitions (M&A) for diversification offer advantages such as rapid market entry, access to new technologies or markets, and potential synergies in operations or distribution. Disadvantages include high acquisition costs, cultural integration challenges, regulatory hurdles, and the risk of overpaying or underestimating integration complexities. Divestment benefits include refocusing resources on core businesses, improving financial performance by shedding underperforming assets, reducing debt, and enhancing shareholder value through increased profitability and strategic focus. 100. Discuss some of the potential benefits of divestment. Answer: Potential benefits of divestment include refocusing resources on core competencies, improving financial performance by shedding underperforming assets, reducing debt burdens, enhancing operational efficiency, and increasing shareholder value through strategic realignment and portfolio optimization. 101. Strategic alliances are arrangements in which two firms join forces and form a cooperative partnership. Discuss the advantages and disadvantages of strategic alliances as well as guidelines for reducing conflict between the partners. Answer: Strategic alliances offer advantages such as access to new markets or technologies, risk-sharing, cost-sharing benefits, and synergies in product development or distribution. Disadvantages include potential conflicts over decision-making, differences in organizational cultures, dependency risks, and the challenge of maintaining partner trust. Guidelines for reducing conflict include clear communication, defining roles and responsibilities, establishing mutual goals, and creating effective conflict resolution mechanisms. 102. Discuss how the potential benefits of diversification may be adversely affected by conflicts between manager interests and stockholder interests. Hint: Egotism, growth for the sake of growth, antitakeover tactics. Answer: Conflicts between manager interests and stockholder interests can undermine the benefits of diversification by leading to decisions driven by personal ambitions (egotism), pursuing growth at the expense of profitability (growth for the sake of growth), and implementing antitakeover tactics that prioritize job security over shareholder value. Aligning managerial incentives with long-term shareholder value through transparent governance structures and performance-based compensation can mitigate these conflicts and enhance diversification strategies. Test Bank for Strategic Management: Text and Cases Gregory Dess, G.T. (Tom) Lumpkin, Alan Eisner, Gerry Mcnamara 9780077862527, 9781259278211, 9781259813955