Exam #1

After trying on a dress, a consumer assesses it to be worth a maximum of $100 and is willing to pay that amount for the dress. However, the dress was priced at $80. What is the amount, $100, referred to as? A) The value (V) the consumer attaches to the dress B) The firm's cost (C) in manufacturing the dress. C) The producer surplus D) The consumer surplus

A Through the economic creation value model, the consumer's willingness to pay = consumer's perceived benefits = V.

Which of the following statements with regard to industry structures is true? A) A consolidated industry tends to be more profitable than a fragmented one. B) They are stable over time, not dynamic. C) Having a large number of competitors generally equates to higher industry profitability. D) Having few but large competitors increase the threat of strong competitive forces such as supplier or buyer power.

A. Consolidated, or saturated, industry creates high profit potential. Industry structures are also dynamic, so can't be B. Not C. Having large number of competitors means that the profit potential is low, because everyone is competing against each other for a higher profit. Not D. Having few large competitors DECREASE the threat of strong suppliers and buyers' bargaining power.

Which of the following features about a buyer indicates that the buyer has high bargaining power? A) When the buyer operates in an industry where products are undifferentiated B) When the buyer cannot purchase specific products from other sellers. C) When the buyer cannot credibly threaten to backwardly integrate into the industry D) When the buyer faces high switching costs

A. This means that since there are so many products in the industry, they have high bargaining power to request a lower price to buy the products.

How does causal ambiguity act as an isolating mechanism for organizations? A) it makes it difficult for the competitors to understand why a company has been so successful. B) It makes it difficult for competitors to imitate core competencies quickly due to time compression diseconomies. C) It makes it difficult for competitors to deploy their resources by creating ambiguity within their organizational structures. D) It creates a situation in which different social and business systems interact with one another.

A. Causal ambiguity is a barrier from isolating mechanism (resource-based view) that prevents rivals from competing away the advantage. Causal (cause) ambiguity (not sure). You're not sure what the cause of the success or failure of your company was.

Serena paid $900 for a camera that she thought was worth $1,100 for all the features included in it. For the consumer electronics firm selling the camera, however, the cost of producing the camera was only $350. What is the consumer surplus in this scenario?

A. $200 Consumer surplus from the economic value creation model is V - P (V is total consumer perceived benefits/willingness to pay, and P is price). Since the total perceived benefits from the consumer is $1,100 and the price she paid was $900, it would be $200.

Managers at Sandburg Real Estate are surprised to hear that interest rates are likely to remain low for the next six months. Which of the following is an implication of low interest rates? A) Consumer demand will increase B) Consumer demand will decrease C) Cost of capital for firms will be high D) Firms will invest less in future growth.

A. Consumer demand will increase Consumers want low interest rates, thus the demand from consumers will increase.

Economic value creation is best expressed as: A) Consumer surplus minus cost of production B) Consumer surplus plus firm profit C) Producer surplus plus firm profit D) Producer surplus minus consumer surplus.

A. Consumer surplus plus firm profit Economic value creation model: V - C, perceived benefits of consumers/consumer willingness to pay minus cost of production. To get V - C (economic value created) we must ADD consumer (V-P) which is consumer surplus, and (P - C), which is the firm's profit.

It is important for a firm to win over the early majority section of the market to ensure the commercial success of an innovation because they: A) Enter into the market in large numbers, creating a herding effect. B) Are driven by technology concerns rather than the practicality of a new product. C) Influence the purchase decisions of early adopters. D) Have the highest purchasing power when compared to other consumer segments.

A. Enter into market in large numbers, creating herding effect. Early majority is one of the biggest consumer segments in the market. Create a herding effect as they enter in large numbers.

Cloudlink is a file hosting service that allows users to store up to 5GB of data with no restrictions or charges. However, users have to pay a fee for advanced features on the cloud storage system and additional storage space. Which of the following business models does this best illustrate? A) Freemium B) Razor-razor-blade C) Subscription-based D) Pay as you go

A. Freemium Paying a fee for advanced features is a premium version.

DiscountHaven Inc. is a large chain of hypermarkets. It has cost benefits due to its extensive operation. The company's marketing and sales, logistics, administrative, and other such related costs get divided between a large number of product units stocked in its stores. This makes it difficult for smaller retail stores and supermarkets to compete against DiscountHaven's low prices. Thus, DiscountHaven has a competitive advantage due to its: A) Superior customer service B) Economies of scale C) diseconomies of scale D) learning-curve effects

B) economies of scale Low price competition is achieved through economies of scale.

In which of the following situations is the power of suppliers high in an industry? A) Suppliers depend heavily on the industry for their revenues B) Suppliers' industry is more concentrated than the industry it sells. C) Suppliers offer products that are undifferentiated. D) Suppliers can credibly threaten to backward integrate into the industry.

B, because the more concentrated the suppliers are, the less there are, and the industry has limited options. Suppliers have bargaining power. Not A) because if suppliers rely heavily on the industry for money, they won't have bargaining power. Not C) because if the products are undifferentiated, the industry can go to any other supplier. Not D) because only BUYERS backward integrate; suppliers FORWARD integrate. suppliers --> industry --> buyers

To be successful and to survive the shakeout stage of the industry life cycle, a firm should: A) shift from price to non-price competition B) gain economies of scale C) focus on product innovation rather than process innovation. D) charge higher prices than its competitors

B, gain economies of scale. The shakeout stage is where demand is largely satisfied and competitive intensity increases, where firms compete for market share and weaker firms are forced out. Biggest competitive weapon is: low price. Low price means that a firm needs to gain economies of scale to mass produce to produce a lower per-unit cost.

A blue ocean strategy differs from a low-cost strategy in that A) A blue ocean's research and development focus is on process technologies, and cost-leader's focus is on product technologies. B) The intent of a blue ocean strategy is not be the absolute lowest-cost provider because a blue ocean must also increase perceived value. C) Economies of scale are more important to a blue ocean strategy, while economies of scope are more important to a cost-leader. D) The focus of a blue ocean strategy is on lowering the economic value created, whereas a cost-leader focuses on increasing the economic value created.

B. Blue ocean strategy focuses on being both achieving perceived value and cost leadership. Doesn't have to be the lowest cost provider.

Which of the following is an accurate statement about learning effects? A) Learning effects are captured at one point in time. B) Learning effect occur over time as output accumulates. C) Learning effects can produce diseconomies. D) Learning effects are significant in all production processes.

B. Learning occurs over time, but ECONOMIES OF SCALE occurs ONE POINT IN TIME.

Which of the following statements accurately brings out the difference between tangible and intangible resources? A) Tangible resources contribute to a company's competitive advantage, whereas intangible resources have little effect on competitive advantage. B) Tangible assets can be bought on the open market by anyone with the necessary cash, whereas intangible assets cannot be easily purchased. C) Tangible assets are difficult for competitors to imitate, whereas intangible assets can be easily replicated. D) Tangible resources take a longer time to build, whereas intangible assets can be built comparatively easy,

B. Pretty obvious. Tangible assets including infrastructure, labor skill, supply. Intangible assets are customer service, organizational culture, brand image, etc. You can't "purchase" intangible assets.

In the context of industrial growth, which of the following statements is true of standards? A) Standards emerge exclusively from bottom-up through competition in the marketplace. B) As the size of a market expands, a standard signals the market's common set of engineering features and design choices. C) After a standard is established in an industry, the basis of competition tends to move away from process innovations toward product innovations. D) Standards are exclusively imposed top-down by government or other standard-setting agencies such as the Institute of Electrical and Electronics Engineers.

B. A standard in an industry is defined as a common set of engineering features and design choices that all products must hold. For example, all phones now have the standard of having a touch screen and camera features.

AccuroDisk Inc. manufactures external hard disks for $32 per unit, and the maximum price customers are willing to pay is $47 per unit. TD Storage Inc. is a competitor of AccuroDisk Inc. that produces external hard disks for $37 per unit, and customers are willing to pay a maximum price of $50 per unit. What does this imply? A) TD Storage has a competitive advantage over AccuroDisk in terms of perceived value. B) AccuroDisk creates a greater economic value than TD storage. C) TD Storage is a cost-leader when compared to AccuroDisk. D) AccuroDisk and TD Storage share differentiation parity.

B. AccuroDisk has a $15 difference, while TD Storage only has $13. This means that with a lower production cost, the consumer perceived value is greater in terms of economic value created between the two firms. AccuroDisk makes higher profit.

In a focused cost-leadership strategy, a firm A) provides high-priced products for many different segments of the mass market. B) delivers low-cost products and services to a specific, narrow part of the mass market. C) focuses on reducing the economic value created to drive down costs. D) caters to the segment of the market that is least cost-sensitive.

B. When a firm has FOCUSED cost-leadership strategy, it delivers to a narrow and specific part of the mass market with low-cost products. READ THE QUESTION CAREFULLY!

Canon was able to redesign the copying machine so that it didn't need professional service—reliability was built directly into the machine, and the user could replace parts, such as the cartridge. What Xerox had not envisioned was the possibility that the components of the copying machine could be put together in an altogether different way that was more user-friendly. This example describes A) incremental innovation. B) architectural innovation. C) disruptive innovation. D) radical innovation.

B. Architectural Innovation Architectural innovation is when known components of a product are used in a novel way. It can't be incremental because it wasn't a product that had established knowledge in the industry, can't be disruptive because it wasn't a low-cost solution, and it can't be radical because it's not a new product.

Combining economies of learning with the existing production technology allows a firm to: A) Jump to a less steeper learning curve B) Move down a given learning curve C) Move up a given experience curve D) Jump to a flatter experience curve

B. Move DOWN a given learning curve Technology allows movement to a STEEPER curve, not a less steeper learning curve. It is still down a learning curve, so you must move down a given learning curve.

Clear Calls Inc., a telephone service provider, has a large user base mainly because phone calls and messages between all Clear Calls users are free. When a person switches to a Clear Calls network, his or her entire network of family and friends is likely to switch to the same network to receive the benefit of free calls and messages. In addition, an existing user who gets a new user to register with Clear Calls Inc. is given a free wireless connection. This has helped to keep competition away from Clear Calls. In this scenario, which of the following factors is acting as an entry barrier for Clear Calls Inc.? A) High fixed costs B) Network effects C) Economies of scale D) High capital requirements

B. Network effects Literally the word network is in it.

Which of the following most accurately describes a difference between incremental innovation and radical innovation? A) Incremental innovation researches new materials; radical innovation researches new processes. B) Incremental innovation draws on novel methods; radical innovation draws on proven methods. C) Incremental innovation builds on an established knowledge base; radical innovation uses an entirely different knowledge base. D) Incremental innovation targets new markets and technologies; radical innovation reinvents markets and technologies.

C Know the definitions for incremental and radical innovation. Pretty straight forward. It's in the name. Incremental builds off of pre-existing ideas, radical is something new.

Due to resource immobility, a critical assumption in the resource-based model of a firm, the: A) competitive advantage of a firm exists for a short period of time. B) resource bundles of a firm can be easily imitated by competitors. C) resource differences between firms last for a long time. D) competencies and capabilities of all firms in an industry are similar.

C. There are 2 assumptions in resource0based view: 1. Resource immobility: resources tend to be "sticky" and don't move easily from firm to firm--different values for different firms that last for a long time. 2. Resource heterogeneity: firm is a bundle of resources and capabilities which differ across firms. Hetero means various/different.

In an economic context, strategy for producers is primarily about A) distributing the economic value created equally between consumers and themselves. B) reducing the difference between consumer's willingness to pay for a product and the cost to produce it. C) capturing the economic value created as much as possible. D) lowering producer surplus and increasing consumer surplus.

C. Based off of the economic value created model.

Which of the following is primarily a value driver? A) Experience-curve effects B) Economies of scope C) Complements D) Cost of input factors

C. Complements When it says "value driver", it is asking for the economic values from the economic values creation model. The major drivers are product features (turns commodity products into differentiated products), customer service, and complements.

Bargain Styles Inc. is an apparel company that caters to the highly price-conscious customers. Through its simple apparel designs, acceptable quality levels, and minimal customer service, the company has been able to sell its merchandise at the lowest prices in the industry. Which of the following generic business strategies is Bargain Styles applying? A) Blue ocean B) Competitive disadvantage C) Cost-leadership D) Differentiation

C. Cost-leadership The company focuses on selling its merchandise at the lowest prices in the industry. That is cost-leadership.

Which of the following is a macroeconomic factor that can affect a firm's strategy? A) Threat of substitutes B) Power of buyers C) Levels of employment D) Power of suppliers

C. Levels of employment Macroeconomic factors so this is from the PESTEL framework. Economic = employment.

Both Bison Autos and Sparrow Inc. incur a cost of $9000 to manufacture a vehicle. However, the economic value created by Sparrow Inc. is more than that created by Bison Autos. What does this indicate? A) Bison Autos has created a higher value gap than Sparrow Inc. B) Both Bison Autos and Sparrow Inc. have achieved competitive parity. C) Sparrow Inc. can charge a premium price on its automobiles. D) Bison Autos has a competitive advantage over Sparrow Inc.

C. Sparrow Inc. can charge a premium price. SPARROW has COMPETITIVE ADVANTAGE over BISON. Since they BOTH incur a cost of $9,000 but Sparrow has more economic value, then Sparrow can charge a premium price (higher price). V (consumer's willingness to pay/total perceived consumer benefits) - C (fir's costs incurred) = Economic Value Created.

Companies in the same strategic group are __________ to each other. A) indirect competitors B) different competitive forces C) direct competitors D) irrelevant

C. direct competitors Strategic group mapping

Which of the following is the best characterization of sociocultural forces? A) A strategic group's culture, norms, and values B) A competitor's culture, norms, and values C) A society's culture, norms, and values D) A firm's culture, norms, and values

C: A society's culture, norms, and values Sociocultural forces come from the PESTEL framework which highlights society's macroeconomic factors.

From an investors' or shareholders' perspective, the measure of competitive advantage that matters most is the A) consumer surplus B) economic value created C) return on risk capital D) returns on revenue

C: return on risk capital. Risk capital is the measure of competitive advantage that matters most to investors and shareholders. It is the money provided by shareholders in exchange for an equity share in a company. It cannot be recovered if the firm goest bankrupt.

Invoro is a market leader in consumer electronics. If Finolo and Ethver, companies that manufacture televisions, develop the same customer knowledge base and create products with the same customer appeal as Invoro, then A) Invoro will have a resource that is rare but no longer valuable. B) Finolo and Ethver will have a VRIO resource. C) Invoro will have a sustainable competitive advantage in the industry. D) Invoro will have a resource that is valuable but no longer rare.

D. It is the VRIO Framework. The resources that Invoro was easy to imitate that other firms were able to possess, so it is not rare. The resource is still VALUABLE because it still has perceived value

Which of the following is a primary feature of the five forces model? A) It takes into account a firm's internal resources, capabilities, and core competencies. B) It helps managers determine the changing speed of an industry or the rate of innovation. C) It is concerned exclusively about the intensity of rivalry among direct competitors. D) It views competition within an industry broadly to includes forces such as suppliers, and the threat of substitutes.

D. Easy one too. Porter's Five Forces Model looks into the different types of competition (suppliers, buyers, substitutes, etc.), Can't be A: this is VRIO Framework (resources) Can't be B: this is the industry lifecycle. Can't be C: Strategic Group Framework I think

Soapsuds Inc., a manufacturer of cleaning agents, supplies its products to All Needs Inc., a supermarket chain. It demands that All Needs create more shelf space in its stores for Soapsuds' products. However, All Needs Inc. refuses to do this. Instead, it decides to produce its own range of cleaning agents with its own label "All Wash." In this scenario, All Needs Inc. has exercised its bargaining power as a buyer through _____________. A) social complexity B) Backward integration C) causal ambiguity D) Forward integration

D. Backward integration Suppliers --> industry --> buyers All Needs created its own supply, therefore went back as a buyer.

A _____________ primarily details the goal-directed actions manager take in their quest for competitive advantage when competing in a single product market. A) Corporate-level strategy B) Causal Ambiguity C) Path dependence D) Business-level strategy

D. Business Level Strategy This is from Chapter 6, where we discuss business level strategies that are goal-directed. To formulate appropriate business-level strategy, managers must answer... - Who are we serving? - What customer needs, wishes, and desires will we satisfy? - Why do we want to satisfy them? - How will we satisfy our customers needs? - WE DON'T ASK WHERE; that's only in corporate strategy and not business level strategy.

The internet service provider industry in the country of Megalopolis is characterized by the presence of strong network effects, high brand loyalty, high economies of scale, and proprietary technology among incumbent firms. Thus, in the internet service provider industry, the: A) entry barriers are most likely nonexistent B) threat of substitutes is most likely high C) bargaining power of buyers is most likely low D) threat of new entrants is most likely low.

D. Threat of new entrants is most likely low. There's high strong network effects, brand loyalty, and proprietary technology; profit potential is high and there's a low threat of new entrants, high entry barriers, and bargaining power of buyers is high.

T/F: One of Rolex's tangible resources is its well-known brand name and reputation for quality timepieces.

FALSE Brand name and reputation are NOT tangible resources. They are intangible.

T/F: A differentiator will always benefit when products have become commoditized.

False Commodities are products you cannot differentiate as much: bananas, eggs, milk, etc. Commodity and differentiation are contradicting terms.

T/F: Firms within the same industry automatically belong to the same strategic group.

False Delta and Spirit are in different strategic groups, despite being in different industries because of the price difference.

T/F: Competitive advantage goes to the firm that maximizes the difference between of producing a good and the retail price that consumers pay.

False. You don't want to maximize the difference, you want to minimize it as much as possible. You want a low cost production with a high value.

T/F: When smartphone manufacturers began including camera and voice recorders in their products, that was an example of industry convergence.

TRUE: 2 unrelated industries (smartphone and camera/voice recorders) came together to satisfy consumer needs.

T/F: A cost leader is the firm most likely to survive price war.

TRUE: Cost leaders have more economic value created than costs incurred. So, V-C is GREATER than C. Therefore, they would win in a price war where firms compete for lower/higher prices.

T/F: A firm operating on a 70% learning curve will achieve lower per-unit costs after doubling its output than operating an 80% learning curve will.

TRUE: a 70% learning curve will produce a 30% drop in per-unit cost is cumulative total is doubled, and 80% will produce 20%. This means that 70% LC will have a lower per-unit cost.