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This Document Contains Chapters 7 to 8 Chapter 07 International Strategy: Creating Value in Global Markets True/False Questions 1. The trend towards worldwide markets makes it easier to predict where competitors will spring up. Answer: False Rationale: The rise of globalization, meaning the rise of market capitalism around the world, means competitors can now come from just about anywhere. 2. Because many countries are investing in countries other than their own, each country is becoming more autonomous and independent. Answer: False Rationale: Globalization, which is on the rise, has two meanings. One is the increase in international exchange, including trade in goods and services as well as exchange of money, ideas, and information. The second is the growing similarity of laws, rules, norms, values, and ideas across countries. 3. Increasing international exchange in goods and services can run into the difficulty of having one offer that meets the needs of customers at differing income levels. Answer: True Rationale: One of the challenges with globalization is determining how to meet the needs of customers at very different income levels. In many developing economies, distributions of income remain much wider than they do in the developed world, leaving many impoverished even as the economies grow. 4. By 2015, it is predicted that trade within nations will exceed trade across nations. Answer: False Rationale: The trade among nations has increased dramatically in recent years and it is estimated that by 2015, the trade across nations will exceed the trade within nations. 5. There are risks associated with the Bottom of the Pyramid strategy. One of them is that the new low-cost products that are developed may cannibalize the sales of the core products of the company using the strategy. Answer: True Rationale: Firms need to actively manage the risks that accompany BOP strategies. These include concerns about the image of the firm if they are perceived as exploiting underprivileged customers by providing them with substandard products or selling them something they do not need or cannot afford. Second, there is a risk that a low-end version of a brand may detract from the overall attractiveness of the brand. Third, the new low-cost products they develop may cannibalize the sales of their core products. Finally, firms employing a BOP strategy need to be aware of the entrenched competitors they may face. 6. Emerging markets are growing slower than developed markets, thus shifting the structure of the global economy. Answer: False Rationale: The growth experienced by developed economies in the first decade of the 2000s was anemic, while the growth in developing economies was robust. This trend is continuing, with emerging markets growing 4 percent faster than developed markets in 2011 and 2012. This has resulted in a dramatic shift in the structure of the global economy. As of 2013, over half the world output will come from emerging markets. 7. The Michael Porter Diamond of National Advantage is a framework that explains why countries foster successful multinational corporations based on factor endowments and demand conditions only. Answer: False Rationale: The Porter Diamond of National Advantage is a framework for explaining why countries foster successful multinational corporations, consisting of four factors: factor endowments; demand conditions; related and supporting industries; and firm strategy, structure, and rivalry. 8. The factor endowments of a country are inherited and cannot be created. Answer: False Rationale: Classical economics suggests that factors of production such as land, labor, and capital are the building blocks that create usable consumer goods and services. However, companies in advanced nations seeking competitive advantage over firms in other nations create many of the factors of production, such as skilled human resources. 9. With regard to factor conditions, the pool of resources that a firm (or nation) has is much more important than the speed and efficiency with which these resources are deployed. Answer: False Rationale: The pool of resources is less important than the speed and efficiency with which these resources are deployed. Thus, firm-specific knowledge and skills created within a country that are rare, valuable, difficult to imitate, and rapidly and efficiently deployed are the factors of production that ultimately lead to competitive advantage for the nation. 10. Demanding domestic consumers tend to push firms to move ahead of companies in other countries where consumers are less demanding and more complacent. Answer: True Rationale: Countries with demanding consumers drive firms in that country to meet high standards, upgrade existing products and services, and create innovative products and services. Denmark is known for its environmental awareness. Demand from consumers for environmentally safe products has spurred Danish manufacturers to become leaders in water pollution control equipment which it exports successfully. 11. High levels of environmental awareness in Denmark have led to a decline in Danish industrial competitiveness in the international marketplace. Answer: False Rationale: Countries with demanding consumers drive firms in that country to meet high standards, upgrade existing products and services, and create innovative products and services. Denmark is known for its environmental awareness. Demand from consumers for environmentally safe products has spurred Danish manufacturers to become leaders in water pollution control equipment which it exports successfully. 12. Countries with a strong supplier base benefit by adding efficiency to downstream activities. Answer: True Rationale: Related and supporting industries enable firms to manage inputs more effectively. Countries with a strong supplier base benefit by adding efficiency to downstream activities. A competitive supplier base helps a firm obtain inputs using cost-effective, timely methods, thus reducing manufacturing costs. 13. Typically, intense rivalry in domestic markets does not force firms to look outside their national boundaries for new markets. Answer: False Rationale: Domestic rivalry provides a strong impetus for firms to innovate and find new sources of competitive advantage. This intense rivalry forces firms to look outside their national boundaries for new markets, setting up the conditions necessary for global competitiveness. 14. Many international firms are increasing their efforts to market their products and services to countries such as India and China as the ranks of their middle class continue to increase. Answer: True Rationale: Many multinational firms are intensifying their efforts to market their products and services to countries such as India and China as the ranks of their middle class have increased over the past decade. An OECD study predicts that consumption by middle-class consumers in Asian markets will grow from $4.9 trillion in 2009 to over $30 trillion by 2020. At that point, Asia will make up 60 percent of global middle-class consumption, up from 20 percent in 2009. 15. Expanding the global presence of a firm does not automatically increase its scale of operations. Answer: False Rationale: Expanding company global presence also automatically increases its scale of operations, providing it with a larger revenue and asset base. Such an increase in revenues and asset base potentially enables a firm to attain economies of scale. This provides multiple benefits including the spreading of fixed costs such as Research and Development over a larger volume of production. Examples include the sale of Boeing commercial aircraft and Microsoft operating systems in many foreign countries. 16. Arbitrage opportunities are more than simple trading opportunities and account for a large part of the success Walmart experiences. Answer: True Rationale: In its simplest form, arbitrage involves buying something from where it is cheap and selling it somewhere where it commands a higher price. A big part of the Walmart success can be attributed to its expertise in arbitrage. The possibilities for arbitrage are not necessarily confined to simple trading opportunities. It can be applied to virtually any factor of production and every stage of the value chain. 17. Arbitrage opportunities in global financial markets are more attractive to local companies than global corporations, because they enable them to buy in huge volume and therefore increase their bargaining power with suppliers. Answer: False Rationale: In the current integrated global financial markets, a firm can borrow anywhere in the world where capital is cheap and use it to fund a project in a country where capital is expensive. Such arbitrage opportunities are even more attractive to global corporations because their larger size enables them to buy in huge volume, thus increasing their bargaining power with suppliers. 18. International expansion can extend the life cycle of a product that is in its maturity stage in the company home country. Answer: True Rationale: Extending the life cycle of a product that is in its maturity stage in a firms home country but that has greater demand potential elsewhere is a benefit of international expansion. In recent decades, U.S. soft-drink producers such as Coca-Cola and PepsiCo have aggressively pursued international markets to attain levels of growth that simply would not be available in the United States. 19. An advantage of international expansion is that it can enable a firm to optimize the location of every activity in its value chain. Answer: True Rationale: Optimizing the physical location for every activity in its value chain is another benefit of international expansion. Optimizing the location for every activity in the value chain can yield one or more of three strategic advantages: performance enhancement, cost reduction, and risk reduction. 20. The laws and the enforcement of laws associated with the protection of intellectual property rights, represent a significant currency and management risk to multinational firms. Answer: False Rationale: There are four main types of risk: political risk, economic risk, currency risk, and management risk. The laws and the enforcement of laws associated with the protection of intellectual property rights can be a major potential economic risk (rather than currency or management risk) in entering new countries. 21. Reverse innovation occurs when a company develops a product that meets the needs of a developed country and then adapts it to the needs of the developing country. Answer: False Rationale: Many leading companies are discovering that developing products specifically for emerging markets can pay off in a big way. In the past, multinational companies typically developed products for their rich home markets and then tried to sell them in developing countries with minor adaptations. However, as growth slows in rich nations and demand grows rapidly in developing countries such as India and China, this approach becomes increasingly inadequate. Instead, companies like GE have committed significant resources to developing products that meet the needs of developing nations, products that deliver adequate functionality at a fraction of the cost. These products have subsequently found considerable success in value segments in wealthy countries as well. Hence, this process is referred to as reverse innovation, a new motivation for international expansion. 22. The World Bank publishes the Euromoney magazine Country Risk Rating semi annual report. In the text, the January 2013 sampling of these ratings indicates that Norway is the best country in which to invest in terms of its expected level of risk based on the evaluation of its political, economic and structural risks and debt indicators and access to capital. Answer: True Rationale: Euromoney magazine publishes a semi annual Country Risk Rating that evaluates political, economic, and other risks that entrants potentially face. Exhibit 7.3 presents a sample of country risk ratings, published by the World Bank, from the 178 countries that Euromoney evaluates. Note that the lower the score, the higher the expected level of risk for new entrants into the market. The overall risk rating score for Norway is 89.97. 23. Firms can eliminate political instability and adverse government actions risks by: competing in a range of geographic markets, developing stakeholder coalitions, cultivating relationships with key influences, and including key public/private stakeholders in their boards. Answer: False Rationale: Firms can lessen political instability and adverse government actions risks by: competing in a range of geographic markets, developing stakeholder coalitions, cultivating relationships with key influences, and including key public/private stakeholders in their boards. 24. When U.S. currency appreciates against other currencies, U. S. goods can be less expensive to consumers in foreign countries. Answer: False Rationale: Even a small change in the exchange rate can result in a significant difference in the cost of production or net profit when doing business overseas. When the U.S. dollar appreciates against other currencies, for example, U.S. goods can be more expensive to consumers in foreign countries. 25. When the U.S. currency appreciates against other currencies, it becomes more expensive for American companies that have branch operations overseas, when they declare foreign profits in the United States. Answer: True Rationale: Appreciation of the U.S. dollar can have negative implications for American companies that have branch operations overseas. The reason for this is that profits from abroad must be exchanged for dollars at a more expensive rate of exchange, reducing the amount of profit when measured in dollars. 26. Differences in foreign markets such as culture, language, and customs can represent significant management risks when firms enter foreign markets. Answer: True Rationale: Management risks may be considered the challenges and risks that managers face when they must respond to the inevitable differences that they encounter in foreign markets. These take a variety of forms: culture, customs, language, income levels, customer preferences, distribution systems, and so on. 27. Offshoring takes place when a firm decides to shift an activity that they were previously performing in a domestic location to a foreign location. Answer: True Rationale: Offshoring takes place when a firm decides to shift an activity that they were performing in a domestic location to a foreign location. For example, both Microsoft and Intel now have Research and Development facilities in India, employing a large number of Indian scientists and engineers. 28. Two opposing pressures that managers face when they compete in foreign markets are cost reduction and adaptation to local markets. Answer: True Rationale: There are two opposing forces that firms face when they expand into global markets: cost reduction and adaptation to local markets. 29. Theodore Levitt, a marketing strategist, argued that people around the world are willing to sacrifice preferences in product features, functions, and design for lower prices and high quality. Answer: True Rationale: Levitt advocated global product and brand strategies based on three assumptions: customer needs and interests are becoming increasingly homogeneous worldwide; people around the world are willing to sacrifice preferences in features, design, and the like for lower prices at high quality; substantial economies of scale in production and marketing can be achieved through supplying global markets. 30. Among Theodore Levitt's assumptions that would favor a global strategy is that consumers around the world are becoming less price-sensitive. Answer: False Rationale: Levitt advocated global product and brand strategies based on three assumptions: customer needs and interests are becoming increasingly homogeneous worldwide; people around the world are willing to sacrifice preferences in features, design, and the like for lower prices at high quality; substantial economies of scale in production and marketing can be achieved through supplying global markets. 31. Within a worldwide market, the most effective strategies are neither purely multidomestic nor purely global. Answer: True Rationale: All firms must balance the need to lower costs (where highly standardized products are preferred) with the need to be responsive to local pressures (where differentiating offerings is required). Most strategies incorporate some elements of both. 32. Industries in which proportionally more value is added in upstream activities are more likely to benefit from a global strategy than those in which more value is added downstream (closer to the customer). Answer: True Rationale: Typically, primary activities that are downstream (e.g., marketing or service), or closer to the customer, require more decentralization to adapt to local market conditions (a multidomestic strategy). Upstream primary activities (e.g., logistics and operations) tend to be centralized (a global strategy) because there is less need for adapting them to local markets and the firm benefits from economies of scale. 33. In a global strategy a firm operates all of its businesses under a single common strategy, regardless of location. Answer: True Rationale: With a global strategy, competitive strategy is centralized and controlled to a large extent by the corporate office. 34. A multidomestic strategy is the most appropriate strategy for international operations, because it drives economies of scale as far as possible and provides a middle-of-the-road product that appeals to the largest number of consumers in every market. Answer: False Rationale: A firm whose emphasis is on differentiating its product and service offerings to adapt to local markets follows a multidomestic strategy. Decisions evolving from a multidomestic strategy tend to be decentralized to permit the firm to tailor its products and respond rapidly to changes in demand. 35. The need to attain economies of scale encourages multinational firms to operate under a multidomestic strategy. Answer: False Rationale: A firm whose emphasis is on differentiating its product and service offerings to adapt to local markets follows a multidomestic strategy. This typically results in lower ability to leverage economies of scale and higher cost structures. 36. Corporations with multiple foreign operations that act very independently of one another are following a multidomestic strategy. Answer: True Rationale: A firm whose emphasis is on differentiating its product and service offerings to adapt to local markets follows a multidomestic strategy. Decisions evolving from a multidomestic strategy tend to be decentralized to permit the firm to tailor its products and respond rapidly to changes in demand. 37. A multidomestic strategy would likely include the use of high volume, centralized production facilities to maximize economies of scale. Answer: False Rationale: A firm whose emphasis is on differentiating its product and service offerings to adapt to local markets follows a multidomestic strategy. This typically results in lower ability to leverage economies of scale and higher cost structures. 38. A limitation of a multidomestic strategy is that it may lead to over adaptation as conditions change. Answer: True Rationale: While the multidomestic strategy is based on adaptation to local conditions, the optimal degree of local adaptation evolves over time. Firms must recalibrate the need for local adaptation on an ongoing basis; excessive adaptation extracts a price as surely as under adaptation. 39. Multinational firms following a transnational strategy strive to optimize the trade-offs associated with efficiency, local adaptation, and learning. Answer: True Rationale: A transnational strategy strives to optimize the trade-offs associated with efficiency, local adaptation, and learning. It seeks efficiency not for its own sake, but as a means to achieve global competitiveness. It recognizes the importance of local responsiveness but as a tool for flexibility in international operations. 40. A key tenet of a transnational strategy is improved adaptation to all competitive situations as well as flexibility by capitalizing on communication and knowledge flows throughout the organization. Answer: True Rationale: A central philosophy of the transnational organization is enhanced adaptation to all competitive situations as well as flexibility by capitalizing on communication and knowledge flows throughout the firm. A principal characteristic is the integration of unique contributions of all units into worldwide operations. 41. According to studies by Rugman and Verbeke, most of the 500 largest companies in the world are global. Answer: False Rationale: Extensive analysis of the distribution data of sales across different countries and regions led Alan Rugman and Alain Verbeke to conclude that there is a strong case to be made that most companies today are regional or bi regional, not global. 42. Trading blocs and free trade zones promote the rise of international expansion. Answer: False Rationale: Another reason for regional expansion is the rise of the trading blocs and free trade zones. A number of regional agreements have been created that facilitate the growth of business within these regions by easing trade restrictions, and taxes and tariffs. 43. A franchise generally expires after a few years, whereas a license is designed to last into perpetuity. Answer: False Rationale: Licensing enables a company to receive a royalty or fee in exchange for the right to use its trademark, patent, trade secret, or other valuable items of intellectual property. Franchising contracts generally include a broader range of factors in an operation and have a longer time period during which the agreement is in effect. 44. Typically, joint ventures involve less control and risk than franchising. Answer: False Rationale: A joint venture has a higher degree of ownership (both investment and risk) and control than does franchising. 45. Typically, the least risky method of entry into a foreign market is through the establishment of a wholly owned foreign subsidiary so that the parent organization can maintain a high level of control. Answer: False Rationale: Establishing a wholly owned subsidiary is the most expensive and risky of the various entry modes. However, it can also yield the highest returns. In addition, it provides the multinational company with the greatest degree of control of all activities, including manufacturing, marketing, distribution, and technology development. Wholly owned subsidiaries are most appropriate where a firm already has the appropriate knowledge and capabilities that it can leverage rather easily through multiple locations. 46. Exporting is an expensive way to enter foreign markets. Answer: False Rationale: Exporting is a relatively inexpensive way to enter foreign markets, but it is not without significant downsides. 47. When considering the exporting decision, companies should consider that the ability to tailor their products to meet local market needs typically is very limited. Answer: True Rationale: Exporting is a relatively inexpensive way to enter foreign markets, but it is not without significant downsides. The ability to tailor company products to meet local market needs typically is very limited. 48. When considering the export decision, firms should not partner with local distributors because many foreign markets are nationally regulated. Answer: False Rationale: Exporting consists of producing goods in one country to sell in another. The entry strategy enables a firm to invest the least amount of resources in terms of its product, its organization, and its overall corporate strategy. Because many foreign markets are nationally regulated and dominated by networks of local intermediaries, firms need to partner with local distributors to benefit from their valuable expertise and knowledge of their own markets. 49. PepsiCo successfully captured the Indian market by using a joint venture strategy. Answer: True Rationale: What explains Pepsi's success in India? Coke pulled out of the market in 1977 after new government regulations forced it to partner with an Indian company and share its secret formula. In contrast, Pepsi formed a joint venture in 1988 with two Indian companies and introduced products under the Lehar brand. (Lehar Pepsi was introduced in 1990.) With no real international competition, Pepsi became the catch-all for anything that was bottled, fizzy, and from abroad. Multiple Choice Questions 50. Which of the following is not a risk normally associated with Bottom of the Pyramid strategies? A. A low-end version of a brand may detract from the overall brand attractiveness. B. The new low-cost products they develop may cannibalize the sales of their core products. C. Entrenched competitors can impact the ability of the new firm to enter the market successfully. D. New products may be perceived as exploiting the privileged customer with substandard products. Answer: D. New products may be perceived as exploiting the privileged customer with substandard products. Rationale: Multinational firms are constantly faced with the dilemma of choosing between local adaptation (in product offerings, locations, advertising, and pricing) and global integration. 51. Multinational firms are constantly faced with the dilemma of choosing between _________ and __________. A. local adaptation; global integration B. local adaptation; local integration C. global adaptation; local integration D. global adaptation; global integration Answer: A. local adaptation; global integration Rationale: Some governments make better use of inflows of foreign investment and know-how than others. Explanations include the need of governments to have track records of business-friendly policies to attract multinationals and local entrepreneurs to train workers, invest in modern technology, and nurture local suppliers and managers. Also, it means carefully managing the broader economic factors in an economy, such as interest rates, inflation, and unemployment. 52. In the Porter Diamond of National Advantage framework which of the following factors does not affect nation competitiveness? A. The position of the nation in factors of production necessary to compete in a given industry. B. The presence or absence in the nation of supplier industries that are internationally competitive. C. The conditions in the nation governing the nature of foreign rivalry. D. The nature of home-market demand of the products or services of the industry. Answer: C. The conditions in the nation governing the nature of foreign rivalry. Rationale: Porter concluded that there are four broad attributes of nations that individually, and as a system, constitute what is termed the Diamond of National Advantage. In effect, these attributes jointly determine the playing field that each nation establishes and operates for its industries. These factors are: factor endowments, demand condition, related and supporting industries, and firm strategy, structure, and rivalry. 53. Rivalry is intense in nations with conditions of __________ consumer demand, __________ supplier bases, and __________ new entrant potential from related industries. A. weak; weak; high B. strong; strong; low C. weak; weak; low D. strong; strong; high Answer: D. strong; strong; high Rationale: Rivalry is particularly intense in nations with conditions of strong consumer demand, strong supplier bases, and high new entrant potential from related industries. This competitive rivalry increases the efficiency with which firms develop, market, and distribute products and services within the home country. 54. According to Michael Porter, firms that have experienced intense domestic competition are _________________________________. A. unlikely to have the time or resources to compete abroad B. more likely to demand protection from their governments C. most likely to design strategies aimed primarily at the domestic market D. more likely to design strategies and structures that allow them to successfully compete abroad Answer: D. more likely to design strategies and structures that allow them to successfully compete abroad Rationale: Competitive rivalry increases the efficiency with which firms develop, market, and distribute products and services within the home country. This intense rivalry forces firms to look outside their national boundaries for new markets, setting up the conditions necessary for global competitiveness. 55. Which of the factors below has not made the software services industry in India extremely competitive on a global scale? A. large pool of skilled workers B. large network of public and private educational institutions C. tax and antitrust legislation that protects the dominant players in the industry D. large, growing market and sophisticated customers Answer: C. tax and antitrust legislation that protects the dominant players in the industry Rationale: In India, the Diamond of National Advantage framework for software shows a large pool of skilled workers, a large network of public and private educational institutions, a large, growing market, and sophisticated customers. 56. Which of the following is not a motivation for a company to pursue international expansion? A. It wishes to increase the size of the potential markets for its products and services. B. It wishes to take advantage of arbitrage opportunities in order to increase profit. C. It wishes to optimize value-chain activities to enhance performance, reduce costs, and reduce risk. D. It wishes to increase foreign market penetration by developing products for the home market. Answer: D. It wishes to increase foreign market penetration by developing products for the home market. Rationale: There are many motivations for a company to pursue international expansion. The most obvious one is to increase the size of potential markets for its products and services. A second reason is that the company can take advantage of arbitrage opportunities. A third reason is that a company wishes to enhance the growth rate of a product that is in its maturity state in the home country. A fourth reason is that the company wishes to benefit from optimizing the physical location for every activity in its value chain. A fifth reason is that possibilities exist for reverse innovation, whereby a company develops new products for emerging markets that have adequate functionality at a low cost and then often are introduced to the home country after successfully penetrating the emerging market. 57. If a company is considering optimizing the physical location for every activity in the value chain, which of the following is not a possible strategic advantage for that decision? A. Performance enhancement B. Cost reduction C. Political risk reduction D. Life-cycle enhancement Answer: D. Life-cycle enhancement Rationale: Optimizing the location for every activity in the value chain can yield one or more of three strategic advantages: performance enhancement, cost reduction, and risk reduction. 58. The sale of Boeing commercial aircraft and Microsoft operating systems in many countries enables these companies to benefit from ____________. A. higher prices in their domestic markets B. reducing their exposure to currency risks C. economies of scale D. optimizing the location for many activities in their value chain Answer: C. economies of scale Rationale: Expanding the global presence of a company automatically increases its scale of operations, providing it with a larger revenue and asset base, which potentially enables a firm to attain economies of scale. One advantage is the spreading of fixed costs such as research and development over a larger volume of production. Examples include the sale in many foreign countries of commercial aircraft by Boeing and operating systems by Microsoft. 59. If the U.S. dollar appreciates relative to foreign currency, what is likely to be the result for the U.S. company that has company branches abroad? A. Profits will increase, when measured in U.S. dollars. B. Profits will decrease, when measured in U.S. dollars. C. Foreign exports to the United States will decrease. D. Foreign demand for U.S. goods and services will decrease. Answer: B. Profits will decrease, when measured in U.S. dollars. Rationale: When the U.S. dollar appreciates against other currencies, U.S. goods can be more expensive to consumers in foreign countries. Appreciation of the U.S. dollar can have negative implications for American companies that have branch operations overseas. The reason for this is that profits from abroad must be exchanged for dollars at a more expensive rate of exchange, reducing the amount of profit when measured in dollars. 60. __________ occurs when a firm decides to utilize other firms to perform value-creating activities that were previously performed in-house. A. Offshoring B. A global strategy C. Outsourcing D. A transnational strategy Answer: C. Outsourcing Rationale: Outsourcing occurs when a firm decides to utilize other firms to perform value-creating activities that were previously performed in-house. It may be a new activity that the firm is perfectly capable of doing but chooses to have someone else perform for cost or quality reasons. Outsourcing can be to either a domestic or foreign firm. 61. In considering the decision to offshore, which of the following generally is not one of the hidden costs? A. Total wage costs and indirect costs B. Increased inventory and coordination costs C. Reduced market responsiveness and intellectual property rights D. Wage deflation Answer: D. Wage deflation Rationale: Common savings from offshoring, such as lower wages, benefits, energy costs, regulatory costs, and taxes, are all easily visible and immediate. In contrast, there are a host of hidden costs that arise over time and often overwhelm the cost savings of offshoring. These hidden costs include: total wage costs, indirect costs, increased inventory, reduced market responsiveness, coordination costs, intellectual property rights, and wage inflation. 62. Which one of the following is one of the Theodore Levitt assumptions supporting a pure global strategy? A. Consumers are willing to pay more for specific product features. B. Customer needs and interests are becoming more dissimilar. C. MNCs can successfully compete globally by aggressively pricing products at the sacrifice of product features. D. If the world markets are treated as heterogeneous, substantial economies of scale are easily achieved. Answer: C. MNCs can successfully compete globally by aggressively pricing products at the sacrifice of product features. Rationale: Levitt advocated strategies that favored global products and brands. This approach rested on three key assumptions: customer needs and interests are becoming increasingly homogeneous worldwide; people around the world are willing to sacrifice preferences in product features, functions, design, and the like for lower prices at high quality; substantial economies of scale in production and marketing can be achieved through supplying global markets. 63. When firms expand into global markets, they are faced with the choice of reducing costs and/or adapting to the local market. When high pressures exist to lower costs, companies should choose a __________ or __________ in order to compete in the global marketplace. A. global strategy; transnational strategy B. global strategy: multidomestic strategy C. international strategy; multidomestic strategy D. international strategy; transnational strategy Answer: A. global strategy; transnational strategy Rationale: The two opposing pressures result in four different basic strategies that companies can use to compete in the global marketplace: international, global, multidomestic, and transnational. The strategy that a firm selects depends on the degree of pressure that it is facing for cost reductions and the importance of adapting to local markets. When firms are faced with high pressures to lower costs, the international strategy and the multidomestic strategy would be most appropriate. 64. When firms expand into global markets, they are faced with the choice of reducing costs and/or adapting to the local market. When high pressures exist to adapt locally, companies should choose a __________ or __________ in order to compete in the global marketplace. A. global strategy; transnational strategy B. global strategy: multidomestic strategy C. international strategy; global strategy D. transnational strategy; multidomestic strategy Answer: D. transnational strategy; multidomestic strategy Rationale: The two opposing pressures result in four different basic strategies that companies can use to compete in the global marketplace: international, global, multidomestic, and transnational. The strategy that a firm selects depends on the degree of pressure that it is facing for cost reductions and the importance of adapting to local markets. When firms are faced with high pressures to adapt locally, the transnational strategy and the multidomestic strategy would be most appropriate. 65. Which would be the appropriate strategy for companies to use to compete in the global marketplace if the marketplace pressure is for lower costs with little pressure for local adaptation? A. international strategy B. global strategy C. multidomestic strategy D. transnational strategy Answer: A. international strategy Rationale: An international strategy would be the best pure choice for a company to make in its quest to compete in the global marketplace, if both the pressures to lower costs and adapt locally are low. 66. High pressure for local adaptation combined with low pressure for lower costs would suggest what type of international strategy? A. global strategy B. multidomestic strategy C. transnational strategy D. overall cost leadership strategy Answer: B. multidomestic strategy Rationale: A multidomestic strategy is used in industries where the pressure for local adaptation is high and the pressure for lowering costs is low. 67. Software Tech, Inc., a company in the computer software industry, invests heavily in Research and Development, and product design. Thus, most of its value is added ________. A. upstream B. in its infrastructure C. downstream D. midstream Answer: A. upstream Rationale: Research and development, and product design are primary activities in the value-chain that are far from the customer, and are therefore considered upstream activities. Such activities are often centralized in transnational organizations. 68. Industries in which proportionally more value is added in __________ activities are more likely to benefit from a global strategy. A. downstream B. upstream C. marketing D. sales Answer: B. upstream Rationale: Primary activities that are downstream (e.g., marketing and sales, and service), or closer to the customer, tend to require more decentralization in order to adapt to local market conditions (a multidomestic strategy). Primary activities that are upstream (e.g., logistics and operations), or further away from the customer, tend to be centralized (a global strategy). This is because there is less need for adapting these activities to local markets and the firm can benefit from economies of scale. 69. Which of the following types of international firms are most likely to benefit from a global strategy as opposed to a multidomestic strategy? A. firms that compete in industries in which consumer preferences vary substantially in each country B. firms in industries that are expanding very rapidly C. firms in industries that have value added by sales and marketing departments D. firms in industries that have much value added in research and design or manufacturing Answer: D. firms in industries that have much value added in research and design or manufacturing Rationale: Primary activities that are downstream (e.g., marketing and sales, and service), or closer to the customer, tend to require more decentralization in order to adapt to local market conditions (a multidomestic strategy). Primary activities that are upstream (e.g., Research and Development, design, or manufacturing), or further away from the customer, tend to be centralized (a global strategy). This is because there is less need for adapting these activities to local markets and the firm can benefit from economies of scale. 70. Recent trends that might lead managers of multinational corporations (MNCs) to adopt a more decentralized strategy for their operations would include all of the following EXCEPT _________. A. customer needs, interests, and tastes becoming increasingly homogenized B. consumers around the world increasingly willing to tradeoff idiosyncratic preferences in product features for lower price C. flexible manufacturing trends allowing a decline in the minimum volume required to reach acceptable levels of production efficiency D. fluctuating exchange rates Answer: A. customer needs, interests, and tastes becoming increasingly homogenized Rationale: A decentralized strategy such as that seen within the multidomestic organization, allows for greater adaptation at the local level, which would not be necessary if customers were becoming more homogenous. 71. Firms following a global strategy strive to offer __________ products and services as well as locate manufacturing, Research and Development, and marketing activities in a limited number of locations. A. widely differentiated B. more expensive local C. internationally differentiated D. standardized Answer: D. standardized Rationale: Firms following a global strategy strive to offer standardized products and services as well as to locate manufacturing, Research and Development, and marketing activities in only a few locations. 72. As in the case of Siebel Systems (now part of Oracle), elements of a global strategy may facilitate the competitive advantage of differentiation by _______. A. increased freedom of individual business units to adapt to local tastes B. the creation of a worldwide network to achieve consistent service regardless of location C. flexibility in applying Research and Development to meet country-specific needs D. tailoring products to meet country-specific needs Answer: B. the creation of a worldwide network to achieve consistent service regardless of location Rationale: One advantage of a global strategy is that it can enable a firm to create a standard level of quality throughout the world. Tom Siebel, former chairman of Siebel Systems (now part of Oracle), e-business application software developer, says that his customers, global companies like IBM, Zurich Financial Services, and Citicorp, expect the same high level of service and quality, and the same licensing policies, no matter where they do business with them around the world. 73. Which of the following is not a risk associated with a global strategy? A. A firm with only one manufacturing location must export its product, sometimes at great distance from the operation. B. The geographic concentration of any activity may also tend to isolate that activity from the targeted markets. C. Concentrating an activity in a single location makes the rest of the firm dependent on that location. D. The pressures for local adaptation may elevate the cost structure of the firm. Answer: D. The pressures for local adaptation may elevate the cost structure of the firm. Rationale: Some risks associated with a global strategy include: if a firm has only one manufacturing facility, it must export its output to other markets, some of which may be a great distance from the operation; the geographic concentration of any activity may also tend to isolate that activity from the targeted markets; concentrating an activity in a single location also makes the rest of the firm dependent on that location. 74. Which one of the following is not a limitation of a global strategy? A. limited ability to adapt to local markets B. the ability to locate activities in optimal locations C. the concentration of activities may increase dependence on a single facility D. single locations may lead to higher tariffs and transportation costs Answer: B. the ability to locate activities in optimal locations Rationale: Limitations of global strategies include: a limited ability to adapt to local markets, a concentration of activities that may increase dependence on a single facility, and single locations that may lead to higher tariffs and transportation costs. 75. Elements of a multidomestic strategy may facilitate the competitive advantage of cost leadership by __________. A. flexibility in adjusting to local laws and customs B. decreased duplication of inventories which are often involved in having multiple plants producing similar products C. decreased shipping and transportation costs inherent in local production D. economies of scale gained through centralized production of standardized products Answer: C. decreased shipping and transportation costs inherent in local production Rationale: A multidomestic strategy is one of decentralization, meaning more likelihood of local production. One benefit of this is reduced shipping and transportation costs. 76. Which of the following is not a limitation of a multidomestic strategy? A. less ability to realize cost savings through scale economies B. greater difficulty in transferring knowledge across countries C. single locations may lead to higher tariffs and transportation costs D. may lead to over adaptation as conditions change Answer: C. single locations may lead to higher tariffs and transportation costs Rationale: Limitations of multidomestic strategies include: a decreased ability to realize cost savings through scale economies, a greater difficulty in transferring knowledge across countries, and it may lead to over adaptation as conditions change. 77. High pressure for local adaptation combined with high pressure for lower costs would suggest what type of international strategy? A. global strategy B. multidomestic strategy C. transnational strategy D. differentiation strategy Answer: C. transnational strategy Rationale: A transnational strategy is used in industries where the pressures for both local adaptation and lowering costs are high. 78. Units coordinate their activities with headquarters and with one another. Units adapt to special circumstances only they face. The entire organization draws upon relevant corporate resources. These are all attributes of which type of strategy? A. global strategy B. transnational strategy C. international strategy D. multidomestic strategy Answer: B. transnational strategy Rationale: A principal characteristic of the transnational organization is the integration of unique contributions of all units into worldwide operations. Thus, a joint innovation by headquarters and by one of the overseas units can lead potentially to the development of relatively standardized and yet flexible products and services that are suitable for multiple markets. 79. Which of the following is a disadvantage of a transnational strategy? A. less ability to realize cost savings through scale economies B. limited ability to adapt to local markets C. unique managerial challenges in fostering knowledge transfer D. single locations may lead to higher tariffs and transportation costs Answer: C. unique managerial challenges in fostering knowledge transfer Rationale: Limitations of transnational strategies include unique challenges in determining optimal locations of activities to ensure cost and quality and unique managerial challenges in fostering knowledge transfer. 80. In order to realize the strongest competitive advantage, firms engaged in worldwide competition must ___________. A. require that all of their various business units follow the same strategy regardless of location B. ensure that all business units follow a strategy strictly tailored to their respective locations C. pursue a strategy that combines the uniformity of a global strategy and the specificity of a multidomestic strategy in order to achieve optimal results D. attempt to use the strategy that was most successful in their home country Answer: C. pursue a strategy that combines the uniformity of a global strategy and the specificity of a multidomestic strategy in order to achieve optimal results Rationale: A transnational strategy strives to optimize the trade-offs associated with efficiency, local adaptation, and learning. A core tenet of the transnational model is that the assets and capabilities of the firm are dispersed according to the most beneficial location for each activity. Thus, managers avoid the tendency to either concentrate activities in a central location (a global strategy) or disperse them across many locations to enhance adaptation (a multidomestic strategy). 81. Which of the following is a reason for the rise in regional expansion? A. increase in the number of trading blocs and free trade zones B. decrease in the number of trading blocs and free trade zones C. increasing national trade restrictions D. increasing local taxes and tariffs Answer: A. increase in the number of trading blocs and free trade zones Rationale: Another reason for regional expansion is the rise of the trading blocs and free trade zones. A number of regional agreements have been created that facilitate the growth of business within these regions by easing trade restrictions and taxes and tariffs. 82. Which one of the following explains why so few firms are global? A. Culture, language, and religion are similar between countries. B. Legal and political systems are similar between countries. C. Governments are increasing trade restrictions in general. D. Geographic distance is multiplied by distance in culture, language, religion, and legal and political systems. Answer: D. Geographic distance is multiplied by distance in culture, language, religion, and legal and political systems. Rationale: Distance, in the final analysis, may be viewed as a concept with many dimensions, not just a measure of geographical distance. When the effects of geographic distance are multiplied by distance in terms of culture, language, religion, and legal and political systems between two countries, companies will choose to remain regional or, at best, bi regional. 83. Which of the following describes the most typical order of entry into foreign markets? A. franchising, licensing, exporting, joint venture, and wholly owned subsidiary B. exporting, licensing, franchising, joint venture, and wholly owned subsidiary C. licensing, exporting, franchising, joint venture, and wholly owned subsidiary D. exporting, franchising, licensing, joint venture, and wholly owned subsidiary Answer: B. exporting, licensing, franchising, joint venture, and wholly owned subsidiary Rationale: The various types of entry form a continuum ranging from exporting (low investment and risk, low control), followed by licensing, franchising, joint venture and finally to a wholly owned subsidiary (high investment and risk, high control). 84. A domestic corporation considering international expansion for the first time typically will follow which of these paths? A. It will start off by implementing a wholly owned foreign subsidiary in order to maintain standards identical to those at home. B. It will license or franchise its operations. C. It will implement a low risk-low control strategy such as exporting. D. It will form a joint venture with a reputable foreign producer. Answer: C. It will implement a low risk-low control strategy such as exporting. Rationale: Exporting consists of producing goods in one country to sell in another. This entry strategy enables a firm to invest the least amount of resources in terms of its product, its organization, and its overall corporate strategy. Multinationals often stumble onto a stepwise strategy for penetrating markets, beginning with the exporting of products. 85. The form of entry strategy into international operations that offers the lowest level of control for the domestic corporation would be _________. A. franchising B. licensing C. joint venture D. exporting Answer: D. exporting Rationale: The various types of entry form a continuum ranging from exporting (low investment and risk, low control) to a wholly owned subsidiary (high investment and risk, high control). 86. Fees that a multinational receives from a foreign licensee in return for its use of intellectual property (trademark, patent, trade secret, technology) are usually called _____________. A. transfer prices B. dividends C. royalties D. intra-corporate inflows Answer: C. royalties Rationale: Licensing enables a company to receive a royalty or fee in exchange for the right to use its trademark, patent, trade secret, or other valuable item of intellectual property. 87. The difference between a franchise contract and a licensing contract is that ___________. A. a franchise contract is more specific and usually longer in duration B. a franchise contract must include a foreign government C. a licensing contract covers more aspects of operations D. a franchise contract involves less control and less risk Answer: A. a franchise contract is more specific and usually longer in duration Rationale: Licensing enables a company to receive a royalty or a fee in exchange for the right to use its trademark, patent, trade secret, or other valuable item of intellectual property. Franchising contracts generally include a broader range of factors in an operation and have a longer time period during which the agreement is in effect. 88. __________ entail the creation of a third-party legal entity, whereas __________ do not. A. Licensing agreements; joint ventures B. Joint ventures; strategic alliances C. Strategic alliances; joint ventures D. Franchising agreements; strategic alliances Answer: B. Joint ventures; strategic alliances Rationale: Joint ventures and strategic alliances differ in that joint ventures entail the creation of a third-party legal entity, whereas strategic alliances do not. In addition, strategic alliances generally focus on initiatives that are smaller in scope than joint ventures. 89. A __________ is a business in which a multinational company owns 100 percent of the stock. A. joint venture B. strategic alliance C. wholly owned subsidiary D. franchising operation Answer: C. wholly owned subsidiary Rationale: A wholly owned subsidiary is a business in which a multinational company owns 100 percent of the stock. Two ways a firm can establish a wholly owned subsidiary are: acquire an existing company in the home country or develop a totally new operation (often referred to as a greenfield venture). 90. __________ are most appropriate when a firm already has the appropriate knowledge and capabilities that it can leverage rather easily through multiple locations in many countries. A. Joint ventures B. Strategic alliances C. Licensing agreements D. Wholly owned subsidiaries Answer: D. Wholly owned subsidiaries Rationale: Wholly owned subsidiaries are most appropriate when a firm already has the appropriate knowledge and capabilities that it can leverage rather easily through multiple locations. 91. PepsiCo leads Coca-Cola in the Indian market. Why? A. PepsiCo entered the market before Coca-Cola. B. PepsiCo formed a joint venture with two Indian companies to introduce its products under their label. C. Coca-Cola promoted too many products. D. Coca-Cola created too much direct employment in the beginning of its operation. Answer: B. PepsiCo formed a joint venture with two Indian companies to introduce its products under their label. Rationale: Coca-Cola entered the Indian market first, but pulled out of the market after new government regulations forced it to partner with an Indian company. PepsiCo, on the other hand, formed a joint venture with two Indian companies and introduced products under the Lehar brand. By the time Coca-Cola re-entered the market, since PepsiCo had had no international competition for a number of years, it had become the catch-all for anything that was bottled, fizzy, and from abroad. Essay Questions 92. Explain the Porter Diamond of National Advantage framework and provide an example to illustrate your discussion. Answer: The Porter Diamond of National Advantage framework outlines factors influencing a nation's competitive advantage in industries. These include factor conditions (e.g., labor, infrastructure), demand conditions (e.g., local market size, sophistication), related and supporting industries, and firm strategy, structure, and rivalry. For example, Germany's automotive industry benefits from strong domestic supplier networks (related and supporting industries) and a skilled workforce (factor conditions), contributing to its global competitiveness. 93. Summarize the most important benefits and risks associated with diversification into global markets. Answer: Diversification into global markets offers benefits like access to new revenue streams, economies of scale, reduced dependence on domestic markets, and potential for innovation and learning. Risks include political instability, currency fluctuations, cultural differences impacting consumer behavior, regulatory challenges, and operational complexities in managing global operations. 94. What are the main benefits of offshoring and outsourcing? Answer: Offshoring and outsourcing benefits include cost savings through labor arbitrage, access to specialized skills and technologies, flexibility in scaling operations, and focus on core competencies. However, risks involve quality control issues, loss of control over processes, dependency on external suppliers, and potential backlash over job losses in home countries. 95. Explain how the two opposing forces facing MNC managers (cost reduction and local adaptation) create pressures to operate with a global or multidomestic strategy, respectively. Answer: MNC managers face pressures for cost reduction (global strategy) to achieve economies of scale, streamline operations, and standardize products/services globally. Conversely, pressures for local adaptation (multidomestic strategy) arise from varying customer preferences, regulatory requirements, and cultural nuances, necessitating customized strategies, products, and marketing approaches tailored to local markets. Balancing these forces requires strategic flexibility and responsiveness to optimize global competitiveness while meeting local market demands. 96. According to Theodore Levitt, what are the three assumptions that favor the pursuit of a pure global strategy? Briefly provide counterarguments to each assumption. Answer: Theodore Levitt's assumptions favoring a pure global strategy include: • Global customers: Assumes customers worldwide desire standardized products/services. • Economies of scale: Suggests standardization leads to cost efficiencies. • Technology and knowledge sharing: Assumes global operations facilitate sharing innovations and best practices. Counterarguments: • Local preferences: Many markets have distinct preferences and cultural nuances, requiring adaptation. • Cost structure: Achieving economies of scale globally may not offset increased costs of adaptation and distribution. • Competitive dynamics: Global markets may differ significantly in regulatory environments, competitive landscapes, and customer expectations, necessitating local responsiveness. 97. What are some of the primary benefits and risks of transnational strategies? Answer: Transnational strategies benefit from global integration and local responsiveness, allowing firms to achieve efficiency and adaptation simultaneously. Risks include complexity in coordination, cultural clashes, and potential conflicts between global and local priorities. 98. What are the key arguments that Rugman and Verbeke make in favor of regional strategies as opposed to global strategies? Answer: Rugman and Verbeke argue regional strategies offer advantages in leveraging proximity advantages, such as shared culture and regulatory environments, reducing costs and risks associated with global dispersion. They emphasize regional strategies foster deeper local knowledge and responsiveness, enhancing competitive advantage over purely global approaches. 99. What are the major advantages and disadvantages of the four types of entry strategies for international expansion? Answer: Entry strategies include exporting (low initial investment, limited control), licensing (access to local knowledge, limited control), joint ventures (shared resources and risks, shared control), and wholly owned subsidiaries (full control, high investment). Each has advantages like market access and disadvantages such as operational complexity and political risks. 100. Explain the differences between strategic alliances and joint ventures, providing an example of each. Answer: Strategic alliances involve cooperative agreements between firms without forming a new entity, sharing risks and resources (e.g., Starbucks and PepsiCo partnership). Joint ventures are partnerships where firms create a new entity, pooling resources and risks (e.g., Sony Ericsson in mobile phones). 101. Explain the difficulties a small company faces when making the decision to internalize. Answer: Small companies face challenges in internalizing operations due to limited resources, expertise, and capital, which may restrict their ability to manage global operations effectively. They risk overextension, lack of economies of scale, and vulnerability to market volatility without sufficient infrastructure and market knowledge. Chapter 08 Entrepreneurial Strategy and Competitive Dynamics True/False Questions 1. Small businesses create the majority of new jobs in the U. S. economy. Answer: True Rationale: Small businesses, those defined as having 500 employees or fewer, create about 65 percent of all new jobs in the United States and also generate 13 times as many new patents per employee as larger firms. 2. Entrepreneurship refers to new value creation and can include activities in major corporations. Answer: True Rationale: Even though entrepreneurial activity is usually associated with start-up companies, new value can be created in many different contexts including: start-up ventures, major corporations, family-owned businesses, non-profit organizations, and established institutions. 3. Opportunity recognition is the process of identifying, selecting, and developing entrepreneurial opportunities. Answer: True Rationale: To determine which ideas are strong enough to become new ventures, entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities. This is the process of opportunity recognition. 4. Opportunity recognition involves two phases of activity: discovery and execution. Answer: True Rationale: Opportunity recognition refers to more than just the Eureka feeling that people sometimes experience at the moment they identify a new idea. Although such insights are often very important, the opportunity recognition process involves two phases of activity (discovery and evaluation) that lead to viable new venture opportunities. 5. The evaluation phase of opportunity recognition occurs when an entrepreneur has an insight about a new business venture, often based on prior knowledge. Answer: False Rationale: The discovery phase refers to the process of becoming aware of a new business concept. Many entrepreneurs report that their idea for a new venture occurred to them in an instant in which they had some insight or epiphany, often based on their prior knowledge, and that gave them an idea for a new business. 6. The majority of entrepreneurial start-ups are financed with personal savings and the contributions of family and friends. Answer: True Rationale: The funding available to young and small firms tends to be quite limited. In fact, the majority of new firms are low-budget start-ups launched with personal savings and the contributions of family and friends. 7. The majority of entrepreneurial firms are started with financing from venture capitalists and banks. Answer: False Rationale: The funding available to young and small firms tends to be quite limited. In fact, the majority of new firms are low-budget start-ups launched with personal savings and the contributions of family and friends. 8. Angel investors are private individuals who provide equity investments for seed capital during the later stages of a new venture. Answer: False Rationale: Although bank financing, public financing, and venture capital are important sources of small business finance, these types of financial support are typically available only after a company has started to conduct business and generate sales. Even angel investors, private individuals who provide equity investments for seed capital during the early stages of a new venture, favor companies that already have a winning business model and dominance in a market niche. 9. As investors, venture capitalists rarely provide any help or services to entrepreneurial firms other than financing. Answer: False Rationale: Venture capitalists nearly always have high performance expectations from the companies they invest in, but they also provide important managerial advice and links to key contacts in an industry. 10. Venture capital funding for entrepreneurial ventures is usually available only after the start-up has become a going concern and established a track record. Answer: True Rationale: Although bank financing, public financing, and venture capital are important sources of small business finance, these types of financial support are typically available only after a company has started to conduct business and generate sales. Once a venture has established itself as a going concern, other sources of financing become readily available. Banks, for example, are more likely to provide later-stage financing to companies with a track record of sales or other cash-generating activity. Start-ups that involve large capital investments or extensive development costs or those on the brink of rapid growth often seek venture capital. 11. The term, angel investors, refers to private individuals who provide seed capital to young ventures. Answer: True Rationale: Angel investors are private individuals who provide equity investments for seed capital during the early stages of a new venture. They favor companies that already have a winning business model and dominance in a market niche. 12. Venture capital is a form of public equity financing used to help young firms grow rapidly. Answer: False Rationale: Venture capital is a form of private equity financing through which entrepreneurs raise money by selling shares in the new venture. 13. To obtain venture capital financing, business founders often have to give up some ownership and control of their business. Answer: True Rationale: Venture capital is a form of private equity financing through which entrepreneurs raise money by selling shares in the new venture. 14. Venture capitalists and angel investors regard the management team as the most important asset of an entrepreneurial venture. Answer: True Rationale: Bankers, venture capitalists, and angel investors agree that the most important asset an entrepreneurial firm can have is strong and skilled management. 15. Because of the Small Business Administration and government regulations, small businesses are rarely allowed to bid on government contracts. Answer: False Rationale: A key area of support for small business is in government contracting. Programs sponsored by the SBA and other government agencies ensure that small businesses have the opportunity to bid on contracts to provide goods and services to the government. 16. An entry wedge, according to the text, is a type of entrepreneurial strategy firms can use to enter into business. Answer: True Rationale: One of the most challenging aspects of launching a new venture is finding a way to begin doing business that quickly generates cash flow, builds credibility, attracts good employees, and overcomes the liability of newness. The idea of an entry strategy or entry wedge describes several approaches that firms may take to get a foothold in a market. 17. Founders using a pioneering new entry strategy look for opportunities to capitalize on proven market successes. Answer: False Rationale: An imitative new entry strategy is used by entrepreneurs when they look for opportunities to capitalize on proven market successes. New entrants with a radical new product or highly innovative service may change the way business is conducted in an industry. This kind of breakthrough, creating new ways to solve old problems or meeting customer needs in a unique new way, is referred to as a pioneering new entry. 18. Adaptive new entry involves offering a radical new product or highly innovative service. Answer: False Rationale: New entrants with a radical new product or highly innovative service may change the way business is conducted in an industry. This kind of breakthrough, creating new ways to solve old problems or meeting customer needs in a unique new way, is referred to as a pioneering new entry. An adaptive new entry approach does not involve reinventing the wheel nor is it merely imitative either. It involves taking an existing idea and adapting it to a particular situation. 19. Choosing which new entry strategy is best depends on competitive financial and marketplace considerations with the greatest opportunities most likely to be in existing markets, rather than in new markets. Answer: False Rationale: Considering these choices, an entrepreneur or entrepreneurial team might wonder which new entry strategy is best. The choice depends on many competitive, financial, and marketplace considerations and may stem from being willing to enter new markets rather than seeking growth only in existing markets. 20. Spandex, founded in 2000, created footless pantyhose and other undergarments for women. This is an example of an imitative new entry strategy. Answer: False Rationale: An adaptive new entry approach does not involve reinventing the wheel nor is it merely imitative either. It involves taking an existing idea and adapting it to a particular situation. Spandex is an example of a young company that successfully modified or adapted existing products to create new value. 21. Smell-O-Vision created an invention that would pump odors into movie theatres. It did not make it to market. This was an attempt to be an adaptive entry strategy. Answer: False Rationale: An adaptive new entry approach does not involve reinventing the wheel nor is it merely imitative either. It involves taking an existing idea and adapting it to a particular situation. Smell-O-Vision created a new invention to meet customer needs and therefore was an attempted pioneering new entry strategy. 22. Pandora, launched in 2000, radically changes the radio business with its Music Genome Project system that analyzes music for its underlying traits. This is an example of a pioneering new entry strategy. Answer: True Rationale: New entrants with a radical new product or highly innovative service may change the way business is conducted in an industry. This kind of breakthrough of creating new ways to solve old problems or meeting customer needs in a unique new way is referred to as a pioneering new entry. If the product or service is unique enough, a pioneering new entrant may actually have little direct competition. 23. The success of an adaptive new entrant can be limited, if the value proposition is perceived as being unique. Answer: False Rationale: There are several pitfalls that might limit the success of an adaptive new entrant. First, the value proposition must be perceived as unique. Unless potential customers believe a new product or service does a superior job of meeting their needs, they will have little motivation to try it. 24. Once an adaptive entrant has achieved initial success, the company is safe from copycat competition. Answer: False Rationale: Once an adaptive entrant achieves initial success, the challenge is to keep the idea fresh. If the attractive features of the new business are copied, the entrepreneurial firm must find ways to adapt and improve the product or service offering. 25. Because new ventures typically are small, they usually do not have high economies of scale relative to competitors. Answer: True Rationale: Because new ventures typically are small, they usually do not have high economies of scale relative to competitors. This means that new firms must seek a different approach, if they wish to pursue a cost-leadership strategy. 26. Entrepreneurial firms are often in a strong position to use combination strategies, because they have the flexibility to approach situations uniquely. Answer: True Rationale: Entrepreneurial firms are often in a strong position to offer a combination strategy, because they have the flexibility to approach situations uniquely. For example, holding down expenses can be difficult for big firms, because each layer of bureaucracy adds to the cost of doing business across the boundaries of a large organization. 27. Entrepreneurial competitive dynamics refers to a cycle of actions and responses between firms competing for the same customers. Answer: True Rationale: Competitive dynamics is intense rivalry, involving actions and responses, among similar competitors vying for the same customers in a marketplace. 28. Warby Parker makes eyeglasses. It keeps costs low through several means and has a social mission. This is an example of a firm that uses a combination strategy. Answer: True Rationale: Entrepreneurial firms, by contrast, can often create high-value products and services through their unique differentiating efforts. In the case of Warby Parker, two entrepreneurs found a recipe to sell fashionable eyeglasses to demanding customers while also cutting costs and serving a social mission. 29. A focus strategy must not include elements of differentiation and overall cost leadership in order to be successful. Answer: False Rationale: Focus strategies are often associated with small businesses because there is a natural fit between the narrow scope of the strategy and the small size of the firm. A focus strategy may include elements of differentiation and overall cost leadership, as well as combinations of these approaches. To be successful within a market niche, the key strategic requirement is to stay focused. 30. Running Press created a line of palm-sized mini books that were sold as point-of-sale impulse items. The company grew rapidly, even though it had a small fraction of the sales in the publishing industry. They used a pure overall cost leadership strategy to capture market share. Answer: False Rationale: Focus strategies are often associated with small businesses because there is a natural fit between the narrow scope of the strategy and the small size of the firm. A focus strategy may include elements of differentiation and overall cost leadership, as well as combinations of these approaches. To be successful within a market niche, the key strategic requirement is to stay focused. Even though these books represent just a tiny fraction of total sales in the $23 billion publishing industry, they have been a mainstay for Running Press. As the Running Press example indicates, many new ventures are successful even though their share of the market is quite small. 31. Entrepreneurial new entry is often perceived as a competitive threat because most market needs are being met, either directly or indirectly, by an existing firm. Answer: True Rationale: New entry into markets, whether by start-ups or by incumbent firms, nearly always threatens existing competitors. This is true in part because nearly every market need is already being met, either directly or indirectly, by existing firms. As a result, the competitive actions of a new entrant are very likely to provoke a competitive response from companies that feel threatened. This, in turn, is likely to evoke a reaction to the response. 32. Market commonality is the extent to which rivals draw from the same types of resources. Answer: False Rationale: Market commonality is whether or not competitors are vying for the same customers and how many markets they share in common. Resource similarity is the degree to which rivals draw on the same types of resources to compete. 33. Market commonality refers to the extent to which competitors are vying for the same customers in the same markets. Answer: True Rationale: Market commonality is whether or not competitors are vying for the same customers and how many markets they share in common. For example, aircraft manufacturers Boeing and Airbus have a high degree of market commonality because they make very similar products and have many buyers in common. 34. When attacked, older and larger firms tend to respond more quickly, but their responses are often more predictable. Answer: False Rationale: Older and larger firms may have more resources and a repertoire of competitive techniques they can use in a counterattack. Large firms, however, tend to be slower to respond. Older firms tend to be predictable in their responses because they often lose touch with the competitive environment and rely on strategies and actions that have worked in the past. 35. Cutting prices or increasing marketing efforts are examples of tactical competitive actions. Answer: True Rationale: Two broadly defined types of competitive action include strategic actions and tactical actions. Tactical actions include refinements or extensions of strategies. Examples of tactical actions include cutting prices, improving gaps in service, or strengthening marketing efforts. Such actions typically draw on general resources and can be implemented quickly. 36. In the context of competitive dynamics, tactical actions involve major commitments of distinctive and specific resources to strategic initiatives. Answer: False Rationale: Two broadly defined types of competitive action include strategic actions and tactical actions. Strategic actions represent major commitments of distinctive and specific resources. Such actions require significant planning and resources and, once initiated, are difficult to reverse. 37. Refinements or extensions of existing strategies are often referred to as tactical actions. Answer: True Rationale: Two broadly defined types of competitive action include strategic actions and tactical actions. Tactical actions include refinements or extensions of strategies. Examples of tactical actions include cutting prices, improving gaps in service, or strengthening marketing efforts. Such actions typically draw on general resources and can be implemented quickly. 38. Forbearance is a particularly aggressive type of competitive attack. Answer: False Rationale: There may be many circumstances in which the best reaction is no reaction at all. This is known as forbearance, refraining from reacting at all as well as holding back from initiating an attack. 39. Co-opetition, where competitors work together behind the scenes, is a form of illegal tacit collusion. Answer: False Rationale: Co-opetition is a term that was coined by Novell network software company founder and former CEO, Raymond Noorda, to suggest that companies often benefit most from a combination of competing and cooperating. Close competitors that differentiate themselves in the eyes of consumers may work together behind the scenes to achieve industrywide efficiencies. Multiple Choice Questions 40. According to the text, for an entrepreneurial start-up to be successful, three ingredients are critical. What are they? A. good ideas, a team of investors, and a business plan B. a viable opportunity, available resources, and a qualified and motivated founding team C. an opportunity, a marketing plan, and office space D. management, marketing, and money Answer: B. a viable opportunity, available resources, and a qualified and motivated founding team Rationale: Beyond merely identifying a venture concept, the opportunity recognition process also involves organizing the key people and resources that are needed to go forward. The three factors that are needed, therefore, to successfully proceed are opportunity, resources, and entrepreneur(s). 41. Which of the following is not a common source of new business opportunities? A. current or past work experiences B. suggestions by family or friends C. chance event D. future work Answer: D. future work Rationale: For new business start-ups, opportunities come from many sources including current or past work experiences, hobbies that grow into businesses or lead to inventions, suggestions by friends or family, or a chance event that makes an entrepreneur aware of an unmet need. 42. The process of identifying, selecting, and developing new venture opportunities is known as _____________. A. innovativeness B. bootstrapping C. opportunity recognition D. brainstorming Answer: C. opportunity recognition Rationale: To determine which ideas are strong enough to become new ventures, entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities. This is the process of opportunity recognition. 43. Generally speaking, the opportunity recognition process consists of two phases of activity. They are ______________ and _____________. A. global search; recycling profits B. value creation; affordability C. discovery; evaluation D. global search; valuation Answer: C. discovery; evaluation Rationale: Opportunity recognition refers to more than just the Eureka feeling that people sometimes experience at the moment they identify a new idea. Although such insights are often very important, the opportunity recognition process involves two phases of activity (discovery and evaluation), which lead to viable new venture opportunities. 44. Which of the following is NOT one of the characteristics of an entrepreneurial opportunity? A. attractive B. affordable C. achievable D. value creating Answer: B. affordable Rationale: For an opportunity to be viable, it needs to have four qualities: attractive, achievable, durable, and value creating. 45. When an opportunity is attractive long enough for it to be successfully developed and deployed, it is said to be _____________. A. value creating B. affordable C. achievable D. durable Answer: D. durable Rationale: For an opportunity to be viable, it needs to have four qualities, one of which is durable. This means the opportunity must be attractive long enough for the development and deployment to be successful; that is, the window of opportunity must be open long enough for it to be worthwhile. 46. Which of the following terms is used to refer to opportunities that are practical and physically possible? A. durable B. valuable C. achievable D. sustainable Answer: C. achievable Rationale: For an opportunity to be viable, it needs to have four qualities, one of which is achievable. This means the opportunity must be practical and physically possible. 47. Which of the following is not a primary source of financing for entrepreneurial start-ups? A. investments by family and friends B. personal savings C. private investors D. public equity Answer: D. public equity Rationale: The majority of new firms are low-budget start-ups launched with personal savings and the contributions of family and friends. Angel investors, private individuals who provide equity investments for seed capital during the early stages of a new venture, favor companies that already have a winning business model and dominance in a market niche. 48. According to a study by the Kaufmann Foundation, which of the following is the largest source of funding for businesses that have been operating at least five years? A. loans B. venture capital C. public financing D. angel financing Answer: A. loans Rationale: According to the Kauffman Foundation study, after five years of operation, the largest source of funding is from loans taken out by the business. 49. The majority of entrepreneurial start-ups are financed through monies from _____________. A. bank financing B. SBA loans C. venture-capital financing D. personal savings and the contributions of family and friends Answer: D. personal savings and the contributions of family and friends Rationale: The majority of new firms are low-budget start-ups launched with personal savings and the contributions of family and friends. 50. Private individuals who provide seed capital to young ventures are known as _____________. A. angels B. gazelles C. cash cows D. rising stars Answer: A. angels Rationale: Angel investors, private individuals who provide equity investments for seed capital during the early stages of a new venture, favor companies that already have a winning business model and dominance in a market niche. 51. Which of the following statements about venture capital is not true? A. Entrepreneurs raise venture capital by selling shares of ownership in their business. B. Venture capital is a form of public equity financing. C. Venture capital is used to finance rapid growth or large capital expenditures. D. Venture capital groups can often provide helpful management advice. Answer: B. Venture capital is a form of public equity financing. Rationale: Start-ups that involve large capital investments or extensive development costs may seek venture capital, a form of private equity financing through which entrepreneurs raise money by selling shares in the new venture. Venture capitalists nearly always have high performance expectations from the companies they invest in, but they also provide important managerial advice and links to key contacts in an industry. 52. Based on statistics reported in the text, which of the following statements is not true? A. Firms that obtain venture-capital funding receive an average of over $1 million each. B. Total investment in start-up firms averages about $80,000 in the first year of the activity of the firm. C. Among the 100 fastest-growing new businesses identified by Entrepreneur magazine, 61 percent obtained start-up funding from personal savings. D. Ninety percent of the companies financed with venture capital funds fail. Answer: D. Ninety percent of the companies financed with venture capital funds fail. Rationale: Among firms included in the Entrepreneur Magazine list of the 100 fastest-growing new businesses in a recent year, 61 percent reported that their start-up funds came from personal savings. When firms receive venture-capital investments, they receive a substantial level of investment, over $1 million on average in the Kaufmann Foundation survey. 53. According to the text, new ventures launched by entrepreneurial teams are more likely to be successful than ventures launched by _____________. A. established corporations B. bootstrappers C. lone wolf entrepreneurs D. individual investors Answer: C. lone wolf entrepreneurs Rationale: Managers need to have a strong base of experience, extensive domain knowledge, and an ability to make rapid decisions and change direction as needed. In the case of start-ups, more is better. New ventures that are started by teams of three, four, or five entrepreneurs are more likely to succeed in the long run than are ventures launched by lone wolf entrepreneurs. 54. Which of the following is the most important resource for a start-up activity? A. social recognition B. land C. personnel D. money Answer: D. money Rationale: Resources are an essential component of a successful entrepreneurial launch. For start-ups, the most important resource is usually money because a new firm typically has to expend substantial sums just to start the business. However, financial resources are not the only kind of resource a new venture needs. Human capital and social capital are also important. 55. ______________ provide(s) a key avenue for growth for many young and small firms through partnering to obtain resources and/or expand into new markets. A. Strategic alliances B. Bootstrappers C. Lone wolf entrepreneurs D. Research & development Answer: A. Strategic alliances Rationale: Strategic alliances provide a key avenue for growth by entrepreneurial firms. By partnering with other companies, young or small firms can expand or give the appearance of entering numerous markets and/or handling a range of operations. 56. The U.S. Small Business Administration supports small business through all of the following EXCEPT A. government contracting. B. underwriting loans. C. investing venture capital. D. training and counseling. Answer: C. investing venture capital. Rationale: In the U.S., the federal government provides support for entrepreneurial firms in two key arenas, financing and government contracting. The Small Business Administration (SBA) has several loan guarantee programs designed to support the growth and development of entrepreneurial firms. The government itself does not typically lend money but underwrites loans made by banks to small businesses. The SBA also offers training, counseling, and support services through its local offices and Small Business Development Centers. 57. Which of the following is NOT one of the three characteristics of entrepreneurial leadership mentioned by the text? A. vision B. dedication and drive C. commitment to excellence D. clarifying job responsibilities Answer: D. clarifying job responsibilities Rationale: Entrepreneurs put themselves to the test and get their satisfaction from acting independently, overcoming obstacles, and thriving financially. To do so, they must embody three characteristics of leadership: vision, dedication and drive, and commitment to excellence. 58. Vision is an important element of entrepreneurial leadership because _____________. A. the entrepreneur has to envision realities that do not yet exist B. a vision statement must be part of the documentation used to obtain venture financing C. organizations cannot function without a detailed and operational vision D. banking institutions require it Answer: A. the entrepreneur has to envision realities that do not yet exist Rationale: Vision may be the most important asset of an entrepreneur. Entrepreneurs envision realities that do not yet exist. Without a vision, most entrepreneurs would never even get their venture off the ground. 59. Which of the following is NOT a common new entry strategy according to the text? A. imitative new entry B. adaptive new entry C. proactive new entry D. pioneering new entry Answer: C. proactive new entry Rationale: For a new venture, the entry strategy will vary depending on how risky and innovative the new business concept is. New entry strategies typically fall into one of three categories: pioneering new entry, imitative new entry, or adaptive new entry. 60. Seeking products or services that have been successful in one market and introducing the same basic product or service in another segment of the market is referred to as _____________. A. imitative new entry B. adaptive new entry C. proactive new entry D. pioneering new entry Answer: A. imitative new entry Rationale: Imitators look for opportunities to capitalize on proven market successes. An imitative new entry strategy is used by entrepreneurs who see products or business concepts that have been successful in one market niche or physical locale and introduce the same basic product or service in another segment of the market. 61. When launching a new venture, finding a way to begin doing business must ______________ generate cash flow, build credibility, attract good employees, and overcome the liability of newness. A. slowly B. quickly C. steadily D. painlessly Answer: B. quickly Rationale: One of the most challenging aspects of launching a new venture is finding a way to begin doing business that quickly generates cash flow, builds credibility, attracts good employees, and overcomes the liability of newness. The idea of an entry strategy or entry wedge describes several approaches that firms may take to get a foothold in a market. 62. Pandora entered the radio business in 2000 using the Music Genome Project system that analyzes music for its underlying traits as a means to distinguish itself. It was using ______________ entry strategy. A. a pioneering B. an imitative C. an adaptive D. a creative Answer: A. a pioneering Rationale: Pandora pioneered a new way to broadcast music. This kind of breakthrough of creating new ways to solve old problems or meeting customer needs in a unique new way is referred to as a pioneering new entry. 63. The new entry strategy that a firm choses is dependent upon the ______________ and the ______________ of the new business concept. A. riskiness; cost B. riskiness; potential sales C. idea; innovativeness D. riskiness; innovativeness Answer: D. riskiness; innovativeness Rationale: In some respects, any type of entry into a market for the first time may be considered entrepreneurial. But the entry strategy will vary depending on how risky and innovative the new business concept is. 64. Smell-O-Vision designed an invention to pump odors into movie theatres. It flopped, in spite of its innovativeness. What kind of new entry strategy was the company using to penetrate the market? A. imitative B. pioneering C. adaptive D. differentiated Answer: B. pioneering Rationale: Smell-O-Vision, an invention designed to pump odors into movie theatres from the projection room at pre-established moments in a film. It was tried only once (for the film Scent of a Mystery) before it was declared a major flop. It definitely was innovation, but it was hardly a good idea at the time. New entrants with a radical new product or highly innovative service may change the way business is conducted in an industry. This kind of breakthrough of creating new ways to solve old problems or meeting customer needs in a unique new way is referred to as a pioneering new entry. 65. Square provides a means for small businesses to process credit and debit card sales without signing up for a traditional credit card arrangement of monthly fees and minimum charges. It used which new entry strategy to enter the market initially? A. imitative B. pioneering C. adaptive D. differentiated Answer: A. imitative Rationale: Whereas pioneers are often inventors or tinkerers with new technology, imitators usually have a strong marketing orientation. They look for opportunities to capitalize on proven market successes. An imitative new entry strategy is used by entrepreneurs who see products or business concepts that have been successful in one market niche or physical locale and introduce the same basic product or service in another segment of the market. While Square has quickly established itself in the market, it now faces strong competition from major competitors, including Intuit and PayPal. 66. Tom Monahan, a business creativity coach, says that every new idea is merely a spin of an old idea. A company that enters the market by offering a product or service that is somewhat new and sufficiently different in order to create value for customers by capitalizing on current trends is using which new entry strategy? A. imitative B. pioneering C. adaptive D. differentiated Answer: C. adaptive Rationale: Most new entrants use a strategy somewhere between pure imitation and pure pioneering. That is, they offer a product or service that is somewhat new and sufficiently different to create new value for customers and capture market share. Such firms are adaptive in the sense that they are aware of marketplace conditions and conceive entry strategies to capitalize on current trends. 67. In 2005, Plum Organics entered the market with organic baby food and snack foods for children. It now has over 20 products and is listed at number 63 on the Inc 500 list of fastest growing private companies. It used which new entry strategy in 2005? A. imitative B. pioneering C. adaptive D. differentiated Answer: C. adaptive Rationale: Most new entrants use a strategy somewhere between pure imitation and pure pioneering. That is, they offer a product or service that is somewhat new and sufficiently different to create new value for customers and capture market share. Such firms are adaptive in the sense that they are aware of marketplace conditions and conceive entry strategies to capitalize on current trends. 68. Which of the following is not a factor that makes it more difficult for new ventures to be successful as differentiators? A. The strategy is thought to be expensive to put into action. B. Establishing a brand, important to a differentiation strategy, is thought to be expensive. C. Superior innovation is often very costly. D. Customer service is often costly, but it does not affect a differentiation strategy. Answer: D. Customer service is often costly, but it does not affect a differentiation strategy. Rationale: There are several factors that make it more difficult for new ventures to be successful as differentiators. For one thing, the strategy is generally thought to be expensive to enact. Differentiation is often associated with strong brand identity, and establishing a brand is usually considered to be expensive because of the cost of advertising and promotion, paid endorsements, exceptional customer service, etc. Differentiation successes are sometimes built on superior innovation or use of technology. These are also factors where it may be challenging for young firms to excel relative to established competitors. 69. Amazon is an example of a company that used the differentiation strategy to enter the market. The differentiation features included _____________. A. minimal customer service B. traditional back office logistics C. exceptional customer service D. traditional delivery logistics Answer: C. exceptional customer service Rationale: Amazon set out to use Internet technology to revolutionize the way books are sold. As a bookseller, Amazon founder Jeff Bezos set out to use Internet technology to revolutionize the way books are sold. Bezos was not doing anything that had not been done before. But the two key differentiating features of doing it on the Internet and offering extraordinary customer service have made Amazon a differentiated success. 70. One of the ways entrepreneurs achieve success is by using resources more efficiently. This is an example of how entrepreneurs use ______________ strategy. A. an imitative B. a low-cost leader C. a differentiation D. a combination Answer: B. a low-cost leader Rationale: One of the ways entrepreneurial firms achieve success is by doing more with less. By holding down costs or making more efficient use of resources than larger competitors, new ventures are often able to offer lower prices and still be profitable. Thus, under the right circumstances, a low-cost leader strategy is a viable alternative for some new ventures. 71. Entrepreneurial firms that pursue a low-cost leadership strategy use all of the following to achieve lower costs except _____________. A. cost-saving technology such as the Internet B. simple organizational structures C. rapid decision making D. extensive investment in order to achieve economies of scale Answer: D. extensive investment in order to achieve economies of scale Rationale: Compared to large firms, new ventures often have simple organizational structures that make decision making both easier and faster. The smaller size also helps young firms change more quickly when upgrades in technology or feedback from the marketplace indicate that improvements are needed. 72. When an industry is mature, a ______________ strategy is considered to be one of the most effective approaches for a new entrant. A. focus B. differentiation C. overall low-cost D. small business Answer: A. focus Rationale: Most start-ups enter industries that are mature, where growth in demand tends to be slow and there are often many competitors. If a start-up wants to get a piece of the action, it often has to take business away from an existing competitor. If a start-up enters a market with a broad or aggressive strategy, it is likely to evoke retaliation from a more powerful competitor. Young firms can often succeed best by finding a market niche where they can get a foothold. 73. According to the text, which of the following might does not make it difficult for entrepreneurial firms to effectively pursue a strategy of differentiation? A. Incumbent firms are constantly seeking opportunities to specialize in market niches. B. Differentiation strategies are often expensive to enact. C. It may be difficult for a young firm to establish a strong brand identity. D. Implementing superior new technologies may be challenging for entrepreneurial firms. Answer: A. Incumbent firms are constantly seeking opportunities to specialize in market niches. Rationale: There are several factors that make it more difficult for new ventures to be successful as differentiators. For one thing, the strategy is generally thought to be expensive to enact. Differentiation is often associated with strong brand identity, and establishing a brand is usually considered to be expensive because of the cost of advertising and promotion, paid endorsements, exceptional customer service, etc. Differentiation successes are sometimes built on superior innovation or use of technology. 74. Intense rivalry involving actions and responses among similar competitors vying for the same customers in a marketplace is known as _____________. A. competitive dynamics B. resource similarity C. threat of substitutes D. pioneering new entry Answer: A. competitive dynamics Rationale: Competitive dynamics is the term for an intense rivalry, involving actions and responses, among similar competitors vying for the same customers in a marketplace. 75. Which of the following is not one of the reasons a company might launch new competitive actions? A. to obtain first mover advantages B. to improve market position C. to capitalize on growing demand D. to find new sources of raw materials Answer: D. to find new sources of raw materials Rationale: There are several reasons why companies launch new competitive actions, including to improve market position, capitalize on growing demand, expand production capacity, provide an innovative new solution, or obtain first mover advantages. 76. BCG authors Stalk and Lachenauer published a book in which they listed competitive strategy for winning against incumbent rivals. Which of the following is not one of their suggested strategies? A. devastate profit sanctuaries of rivals B. plagiarize with pride and deceive the competition C. unleash massive and overwhelming force D. lower competitor costs Answer: D. lower competitor costs Rationale: But competitive attacks come from many sources besides new entrants. Some of the most intense competition is among incumbent rivals intent on gaining strategic advantages. Winners in business play rough and don't apologize for it, according to Boston Consulting Group authors George Stalk, Jr. and Rob Lachenauer in their book Hardball: Are You Playing to Play or Playing to Win? Their five strategies are: devastate profit sanctuaries of rivals, plagiarize with pride, deceive the competition, unleash massive and overwhelming force, and raise costs of competitors. 77. Aircraft makers Boeing and Airbus have a high degree of ______________ because they make very similar products and have many buyers in common. A. dynamic capabilities B. market commonality C. first mover advantages D. equity funding Answer: B. market commonality Rationale: Market commonality is whether or not competitors are vying for the same customers and how many markets they share in common. For example, aircraft manufacturers Boeing and Airbus have a high degree of market commonality because they make very similar products and have many buyers in common. 78. The Wall Street Journal and the New York Times have seen the intensity of their rivalry increase. One factor driving this is that the Wall Street Journal has moved from financial news reporting to general national and global news reporting and finally, to adding local New York news. The rivalry of these two news providers has increased due to _____________. A. increased dynamic capabilities B. increased market commonality C. erosion of first mover advantages D. the choice of tactical over strategic actions Answer: B. increased market commonality Rationale: Market commonality is whether or not competitors are vying for the same customers and how many markets they share in common. Here, the changes to Wall Street Journal reporting means the two newspapers are now competing for the same customers. 79. When any two firms have both a high degree of market commonality and highly similar resources, a ______________ threat is present. A. weaker competitive B. stronger competitive C. successful marketing D. stronger marketing Answer: B. stronger competitive Rationale: When any two firms have both a high degree of market commonality and highly similar resource bases, a stronger competitive threat is present. Such a threat, however, may not lead to competitive action. On the one hand, a market rival may be hesitant to attack a company that it shares a high degree of market commonality with because it could lead to an intense battle. On the other hand, once attacked, rivals with high market commonality will be much more motivated to launch a competitive response. 80. Which of the below best describes the competitive tendencies of small firms? A. Small firms tend to signal their competitive actions long before they launch those actions, because they lack legitimacy in the marketplace B. Small firms typically have more resources available as they undertake competitive attacks than do large firms. C. Small firms are more nimble and can respond quickly to competitive attacks. D. Small firms are more nimble and cannot respond quickly to competitive attacks. Answer: C. Small firms are more nimble and can respond quickly to competitive attacks. Rationale: Consider the role of firm age and size in calculating a company's ability to respond. Most entrepreneurial new ventures start out small. The smaller size makes them more nimble compared to large firms so they can respond quickly to competitive attacks. 81. Southwest Airlines began its no frills, no meals strategy in the late 1960s as a direct assault on the major carriers of the day. What type of competitive action does this represent? A. A tactical action because it is a refinement of an existing strategy. B. A strategic action because is includes a refinement of an existing strategy. C. A strategic action because it was a breakthrough innovative offer. D. A guerilla offensive because it is fast and will surprise its rivals. Answer: A. A tactical action because it is a refinement of an existing strategy. Rationale: This is a tactical action because it was a refinement of an existing strategy. Some competitive actions take the form of frontal assaults, that is, actions aimed directly at taking business from another company or capitalizing on industry weaknesses. This can be especially effective when firms use a low-cost strategy. The airline industry provides a good example of this head-on approach. When Southwest Airlines began its no-frills, no meals strategy in the late 1960s, it represented a direct assault on the major carriers of the day. 82. All of the following are examples of strategic actions a firm might take EXCEPT _____________. A. partner with competitors to reduce competition B. expand into neglected markets C. change product packaging D. tie up raw materials sources Answer: C. change product packaging Rationale: Strategic actions represent major commitments of distinctive and specific resources. Examples include launching a breakthrough innovation, building a new production facility, or merging with another company. Such actions require significant planning and resources and, once initiated, are difficult to reverse. 83. The best example of a tactical action that a company might use in response to a competitive attack is to _____________. A. acquire the competitor B. target the markets of the rival C. expand into new geographical areas D. offer price discounts and rebates Answer: D. offer price discounts and rebates Rationale: Tactical actions include refinements or extensions of strategies. Examples of tactical actions include cutting prices, improving gaps in service, or strengthening marketing efforts. Such actions typically draw on general resources and can be implemented quickly. 84. Which of the following is not a factor that affects how a competitor will respond to a competitive attack? A. how dependent the competitor is on that industry or particular market segment B. the degree of market power and reputation of the company that initiated the attack C. the resources which are available for a firm to respond D. the stock market reaction to the initial competitive attack Answer: D. the stock market reaction to the initial competitive attack Rationale: How a competitor is likely to respond will depend on three factors: market dependence, competitor resources, and the reputation of the firm that initiates the action (actor reputation). 85. Which of the following refers to a situation where a company has a high concentration of its business in a particular industry market? A. competitor resources B. market dependence C. resource similarity D. actor's reputation Answer: B. market dependence Rationale: If a company has a high concentration of its business in a particular industry, it has more at stake because it must depend on that industry market for its sales, which is known as market dependence. Single-industry businesses or those where one industry dominates are more likely to mount a competitive response. 86. A firm is considering a large price cut on its leading product as a way to gain market share. One executive strongly disagrees with the price cut. He observes that they are in the same marketplace as their rivals and do not have any competitive advantages in their cost structure. If they cut prices, their competitors will likely do the same. The end result is that everyone will make less money. These arguments are an example of ________________. A. a strategy of forbearance B. a strategy of co-opetition C. a hardball strategy whereby competitive actions are not undertaken without a clear advantage D. a weakness strategy that leads a company into constant decline Answer: A. a strategy of forbearance Rationale: There may be many circumstances (such as this potential price war) in which the best reaction is no reaction at all. This is known as forbearance, refraining from reacting at all as well as holding back from initiating an attack. Essay Questions 87. What is the role of opportunity recognition in the new venture development process? Answer: Opportunity recognition is crucial in new venture development as it involves identifying gaps in the market, solving customer problems, or capitalizing on emerging trends. It guides entrepreneurs in focusing resources and efforts on viable business ideas, shaping the foundation for innovation and growth. 88. Discuss the four characteristics of an entrepreneurial opportunity. Explain why each is important for the opportunity to be viable. Answer: Characteristics of an entrepreneurial opportunity include uniqueness (novelty in products or services), value creation (meeting customer needs or desires), scalability (potential for growth and expansion), and sustainability (long-term viability and profitability). Each characteristic is essential as uniqueness fosters competitive advantage, value creation ensures market relevance, scalability supports growth potential, and sustainability ensures long-term success and profitability. 89. Discuss the role of informal investments versus venture-capital financing as it is used by entrepreneurial ventures. What are the advantages and disadvantages of each type? Answer: Informal investments (e.g., personal savings, family and friends' contributions) provide flexibility and autonomy but may lack expertise and sufficient capital for scaling. Venture capital offers substantial funding, industry expertise, and networking opportunities but involves equity dilution and pressure for rapid growth, with strict exit expectations. 90. What are the advantages and disadvantages of using venture capital to finance new ventures? Answer: Venture capital advantages include access to substantial funding, strategic guidance, and industry connections, accelerating growth and market entry. Disadvantages include loss of control, high equity stakes, and pressure for rapid returns, potentially compromising long-term strategic decisions and autonomy. 91. In what ways are human capital and social capital valuable to an entrepreneurial start-up? Provide examples of each. Answer: Human capital in start-ups refers to the skills, knowledge, and experience of founders and team members, critical for innovation, operational efficiency, and adaptability (e.g., Elon Musk's technical expertise at SpaceX). Social capital involves networks, relationships, and social connections (e.g., Steve Jobs' influential network in Silicon Valley), valuable for access to resources, partnerships, and market opportunities, enhancing credibility and growth prospects. 92. Compare and contrast the three most common new venture entry strategies: pioneering, imitative, and adaptive. Answer: New venture entry strategies vary in risk and timing: • Pioneering: First-mover advantage with high risk and potential reward (e.g., Amazon in e-commerce). • Imitative: Mimicking successful models with lower risk but competitive pressures (e.g., Chinese tech firms replicating Western platforms). • Adaptive: Modifying existing ideas for new markets or applications, balancing risk and innovation (e.g., Apple adapting consumer electronics). 93. Explain the pitfalls that are associated with a pioneering new entry and the implications these have for new entrants with high technology offers. Answer: Pioneering new entry into markets with high technology offers risks include: • High initial costs: Investment in research, development, and infrastructure. • Uncertain demand: Market acceptance and consumer education. • Technological obsolescence: Rapid innovation and evolving standards. • Competitive response: Established firms may replicate or surpass innovations, challenging market position. 94. Explain how the overall cost leadership strategy is used by new ventures to achieve competitive advantage. Provide an example. Answer: Overall cost leadership strategy for new ventures involves minimizing costs across operations to offer products/services at lower prices than competitors. For instance, Dollar Shave Club achieved competitive advantage by delivering affordable razors directly to consumers, undercutting traditional razor manufacturers. 95. Explain how differentiation strategy is used by new ventures to achieve competitive advantage. Provide an example. Answer: Differentiation strategy for new ventures focuses on unique features or benefits to attract customers willing to pay premium prices. Example: Tesla differentiated itself in the electric vehicle market with sleek designs, advanced technology, and environmental sustainability, appealing to eco-conscious consumers seeking innovation and luxury. 96. Define the term competitive dynamics. Then, describe the cycle of actions and responses that are characteristic of a competitive dynamics process. Answer: Competitive dynamics refers to interactions among competitors influencing market behavior. The cycle involves: • Actions: Strategic moves like price cuts or new product launches. • Responses: Competitors react with counterstrategies, such as price matching or innovation. • Outcome: Market shifts in pricing, market share, and competitive positions. • Feedback: Continuous adjustments based on competitive reactions, driving ongoing competitive dynamics. 97. Compare and contrast market commonality and resource similarity. Answer: Market commonality assesses the overlap in product offerings and target markets between competitors, influencing competitive intensity. Resource similarity evaluates the equivalence in strategic assets and capabilities, impacting how firms compete in terms of cost, differentiation, or innovation. 98. According to competitive dynamics, competitors are more likely to respond when attacked in a market where the competitor relies on that market for a large portion of its sales. Why is this so? That is, what dynamic is at work in this situation that would cause that response? Answer: Competitors are more likely to respond aggressively when attacked in a market crucial for their sales due to the strategic importance of defending core revenue streams. This dynamic, rooted in competitive intensity, drives firms to protect market share and profitability, influencing rapid and robust responses to threats that could impact financial stability and competitive position. 99. What are the differences between strategic actions and tactical actions? What are the implications of each approach to the competitive dynamics process? Answer: Strategic actions are broad, long-term decisions that shape a firm's competitive position (e.g., market entry, mergers). Tactical actions are specific, short-term maneuvers aimed at immediate gains (e.g., pricing promotions, advertising campaigns). Strategic actions set the course for long-term success or failure, while tactical actions adjust tactics to current market conditions, impacting short-term performance within the broader strategic framework. 100. In the context of competitive dynamics, what factors determine the likelihood of a competitive response? Answer: Factors influencing competitive response include: • Market dependence: Reliance on specific markets for revenue. • Strategic importance: Significance of the market segment to overall business goals. • Market commonality: Degree of overlap in product offerings and customer base. • Resource similarity: Equivalence in strategic assets and capabilities. • Past interactions: History of competitive actions and responses shaping expectations and behaviors. Test Bank for Strategic Management: Text and Cases Gregory Dess, G.T. (Tom) Lumpkin, Alan Eisner, Gerry Mcnamara 9780077862527, 9781259278211, 9781259813955

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