MGT449 Exam 2
________ is best described as a situation in which one party is more informed than another, because of the possession of private information. Information piracy Information governance Information asymmetry Information deregulation
Information asymmetry Frequently, sellers have better information about products and services than buyers, which in turn creates information asymmetries, situations in which one party is more informed than another, because of the possession of private information.
Which of the following expressions accurately describes market cap? -It is the difference between the book value and the market value of a firm's assets. -It is the product of the number of outstanding shares and the share price. -It is the difference between a firm's account receivables and account payables. -It is the ratio of a firm's equity finance and its debt finance.
It is the product of the number of outstanding shares and the share price. Market capitalization (or market cap) captures the total dollar market value of a company's outstanding shares at any given point in time (Market cap = Number of outstanding shares × Share price).
________ is best described as the output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale. Break-even output Maximum output capacity Minimum efficient scale Optimum sustainable yield
Minimum efficient scale Minimum efficient scale (MES) is the output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale.
________ are best described as the value of the best forgone alternative use of the resources employed. Social costs Switching costs Opportunity costs Variable costs
Opportunity costs Opportunity costs capture the value of the best forgone alternative use of the resources employed.
Which of the following scenarios would be characteristic of an entrepreneur? -Ursula used a proven marketing method to advertise her pottery. -Rachel implemented a new and more efficient way to produce pottery. -Mary imitated a new, more efficient method of producing pottery. -Alissa scaled back the production of pottery because it wasn't cost effective.
Rachel implemented a new and more efficient way to produce pottery. Entrepreneurs are the agents that introduce change into the competitive system. They do this not only by figuring out how to use inventions but also by introducing new products or services, new production processes, and new forms of organization. Entrepreneurs innovate by commercializing ideas and inventions. By implementing a new and more efficient way to produce pottery, Rachel is introducing a new production process and is therefore practicing entrepreneurship.
Which of the following is a drawback of using the industry life cycle as a framework to guide strategic choice? -The framework is based on the tenet that industries can be rejuvenated even in the declining stage. -The framework believes that the number and size of competitors remain constant throughout the life cycle. -The framework does not explain everything about changes in industries. -The framework believes that the life cycle of industries is unpredictable.
The framework does not explain everything about changes in industries. Although the industry life cycle is a useful tool, it does not explain everything about changes in industries. Some industries may never go through the entire life cycle, while others are continually renewed through innovation.
Argus Inc. is a large multinational company owned by two partners, is active in the petroleum, capital market, chemicals, steel, beverages, hospitality, airlines, education, automobiles, and consumer electronics industries. The company has multiple brands and a large product portfolio under its banner. Which of the following terms would best describe this company? a conglomerate a single-business firm a flagship brand a dominant-business firm
a conglomerate Argus Inc. is a conglomerate. A company that combines two or more strategic business units under one overarching corporation and follows an unrelated diversification strategy is called a conglomerate.
Mega Media sells books by having salespeople set up appointments with potential customers and give them a sales pitch for the product. When a salesperson sells a book, he or she gets a predetermined percentage commission. This type of business model is called wholesale. bundling. an agency. a freemium.
an agency. In the agency business model, the producer relies on an agent or retailer to sell the product at a predetermined percentage commission.
When wireless service providers offer free or discounted mobile phones for subscriptions to their wireless voice and data service, the perceived value of the service offering increases. In this case, the value driver would be availability of complements. learning-curve effects. experience-curve effects. economies of scale.
availability of complements. Complements add value to a product or service when they are consumed in tandem. Finding complements, therefore, is an important task for managers in their quest to enhance the value of their offerings.
The translation of strategy into action primarily takes place in a firm's business model. mission statement. executive summary. code of conduct.
business model. The translation of strategy into action takes place in the firm's business model, which details the firm's competitive tactics and initiatives.
The managers at Camphor Plastics decided that their firm needed to diversify because of overall falling sales and lower performance in one sector. How does diversifying compensate for the lackluster performance in this sector? by having higher performance in another sector by motivating managers by increasing the firm's risk in another sector by sharing their market power
by having higher performance in another sector Firms often attempt to reduce risk by diversifying their product and service portfolio through competing in a number of different industries. The rationale behind these diversification moves is that falling sales and lower performance in one sector might be compensated by higher performance in another.
Economic value creation is best expressed as -producer surplus plus firm profit. -producer surplus minus consumer surplus. -consumer surplus plus firm profit. -consumer surplus minus cost of production.
consumer surplus plus firm profit. Economic value creation equals consumer surplus plus firm profit, or the sum of consumer and producer surplus.
When a firm pursues a maintain strategy, it -continues to support marketing efforts even if the demand for the product is declining. -chooses to consolidate the industry by buying rival firms, those who plan to exit. -exits a declining industry to maintain the goodwill of its overall brand name. -reduces investments in product support and allocates only a minimum of human and other resources.
continues to support marketing efforts even if the demand for the product is declining. If a firm has been following a maintain strategy, it will continue to support marketing efforts at a given level despite the fact that the industry has been declining.
Lillypad Toys is a manufacturer of educational toys for children. Six months ago, the company's research and development division came up with an idea for a unique touchscreen device that can be used to introduce children to a number of foreign languages. Three months ago, the company produced a working prototype, and last month the company successfully launched its new device on the commercial market. What should Lillypad's managers prepare for next? a sharp decline in demand for the product increased competition from imitators a difficult struggle to move from invention to innovation a prolonged period of uncontested success
increased competition from imitators The innovation process begins with an idea, followed by an invention, then innovation, and finally imitation. Lillypad's product has already moved through the first three stages of the innovation process and is entering the fourth and final stage. The company's managers should prepare for increased competition from competitors offering imitation products.
Which of the following lists the stages of the industry life cycle in the correct order? introduction, shakeout, growth, maturity, and decline introduction, growth, shakeout, maturity, and decline introduction, shakeout, maturity, growth, and decline introduction, growth, maturity, shakeout, and decline
introduction, growth, shakeout, maturity, and decline As an industry evolves over time, five distinct stages occur in the following order: introduction, growth, shakeout, maturity, and decline.
Quick Clean Chemicals outsources its production to contract manufacturers located in underdeveloped nations where unskilled labor is available in plenty for very low wages. This has helped the company become a price leader in the chemicals industry. Which of the following is the key driver behind Quick Clean's strategic position? low-cost input factors superior customer service availability of complements network effects
low-cost input factors The key driver behind Quick Clean's strategic position is low-cost input factors. One of the most basic advantages a firm can have over its rivals is access to lower-cost input factors such as raw materials, capital, labor, and IT services.
When ReGen Pharmaceuticals released a new drug to treat insomnia, its chemical composition was disclosed at the back of the drug's cover. However, any attempts by competitors to copy the chemical composition would result in infringement of ReGen Pharmaceuticals intellectual property rights. Thus, the drug is protected by a franchise. patent. royalty. promissory bill.
patent. In the given scenario, ReGen Pharmaceuticals' drug is protected by a patent. A patent is a form of intellectual property, and gives the inventor exclusive rights to benefit from commercializing a technology for a specified time period in exchange for public disclosure of the underlying idea.
Incumbent firms favor incremental innovation over radical innovation because -radical innovation will disturb the existing power distribution within the firms. -their business decisions are independent of the other parties in their innovation ecosystem. -incumbent firms do not have formal organizational structures and processes like the way new entrants do. -incremental innovations help firms sustain a permanent competitive advantage, whereas radical innovations only help gain a temporary advantage.
radical innovation will disturb the existing power distribution within the firms. Incumbent firms tend to favor incremental innovations that reinforce the existing organizational structure and power distribution while avoiding radical innovation that could disturb the existing power distribution (e.g., between different functional areas, such as R&D and marketing).
From an investors' or shareholders' perspective, the measure of competitive advantage that matters most is the consumer surplus. inventory turnover. economic value created. return on risk capital.
return on risk capital. From the shareholders' perspective, the measure of competitive advantage that matters most is the return on their risk capital, which is the money they provide in return for an equity share, money that they cannot recover if the firm goes bankrupt.
When a firm makes choices between a cost or value position to achieve competitive advantage, it is primarily involved in collective bargaining. mediation. strategic trade-offs. arbitration.
strategic trade-offs. To achieve a desired strategic position, managers must make strategic trade-offs—choices between a cost or value position.
Which of the following is an example of an external transaction cost? the cost of recruiting and retaining employees the cost of setting up a production unit the cost of searching for a contract manufacturer the cost of maintaining plant and machinery
the cost of searching for a contract manufacturer When companies transact in the open market, they incur external transaction costs: the costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract.
How does availability of complements act as a value driver? -Complements add value to a product when they imitate it. -Complements add value to a product when they are consumed in tandem with it. -Complements add value to a product by offering an inferior substitute to it. -Complements add value to a product by competing with it.
-Complements add value to a product when they are consumed in tandem with it. Complements add value to a product or service when they are consumed in tandem. Finding complements, therefore, is an important task for managers in their quest to enhance the value of their offerings.
Which of the following best explains why a blue ocean strategy is difficult to implement? -It requires the reconciliation of fundamentally different strategic positions—differentiation and strategic innovation. -It combines the benefits of similar strategic positions—differentiation and low cost. -It requires the combination of fundamentally similar strategic positions—differentiation and strategic innovation. -It requires the reconciliation of fundamentally different strategic positions—differentiation and low cost.
-It requires the reconciliation of fundamentally different strategic positions—differentiation and low cost. Blue ocean strategy requires the reconciliation of fundamentally different strategic positions—differentiation and low cost.
Which of the following is a disadvantage of measuring firm performance through total return to shareholders and firm market capitalization? -Only the book value of the share prices is taken into account when applying these measures, and not the market value. -Market volatility makes it difficult to assess firm performance through these measures, particularly in the short-term. -These tools measure competitive advantage in absolute terms rather than relative terms. -These tools fail to indicate how the stock market views all available public information about a firm's expected future performance.
-Market volatility makes it difficult to assess firm performance through these measures, particularly in the short-term. Stock prices can be highly volatile, making it difficult to assess firm performance, particularly in the short-term. This volatility implies that total return to shareholders is a better measure over the long-term due to the "noise" introduced by market volatility, external factors, and investor sentiment.
Thomas is the owner of a landscaping company that caters to a very wealthy clientele. His company has struggled to differentiate itself from the other high-end landscapers in the area, but because he has hired several expensive but highly-qualified team members, Thomas is unable to shift to a cost leadership strategy. Which strategy is most likely to achieve a competitive advantage? -Offer similar services as competitors but raise prices to increase profits. -Lower prices but continue employing high-paid expert gardeners. -Maintain prices but replace all the expert employees with less-skilled workers to control costs. -Narrow the scope of competition and focus on unique features such as the use of organic materials.
-Narrow the scope of competition and focus on unique features such as the use of organic materials. When considering different business strategies, managers also must define the scope of competition—whether to pursue a specific, narrow part of the market or go after the broader market. To achieve a competitive advantage in the crowded high-end landscaping industry, Thomas should focus on a smaller market segment, such as environmentally-conscious homeowners who are willing to pay a premium price for organic landscaping.
Airbase is a consumer electronics company known for its affordable mobile devices that follows a cost-leadership strategy. In this scenario, Airbase should ideally compare its strategic position with -a consumer electronics company popular among price-conscious customers. -an online company that sells customized electronics accessories. -a company that sells small kitchen appliances at affordable prices. -a consumer electronics company that sells high-end devices.
-a consumer electronics company popular among price-conscious customers. In this scenario, Airbase should ideally compare its strategic position with a consumer electronics popular company among price-conscious customers. A cost-leadership strategy seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers. The idea is to compare Airbase's strategic position with another cost-leader. In this case, it will be an electronics company popular among price-conscious customers.
T/F: A sustainable strategy is one that produces a competitive advantage that can be maintained over time.
false A sustainable strategy is a strategy along the social, economic, and ecological dimensions that can be pursued over time without detrimental effects on people or the planet.
T/F: Corporate strategy is focused solely on determining the geographic locations in which the firm should compete.
false Although corporate strategy provides answers to the key question of where to compete, strategic leaders must answer three related questions: In what stages of the industry value chain should the company participate? What range of products and services should the company offer? Where should the company compete geographically in terms of regional, national, or international markets?
T/F: The pace of innovation has slowed in the 21st century.
false As the adage goes, change is the only constant—and the rate of technological change has accelerated dramatically over the past hundred years. One determinant is that initial innovations such as the car, airplane, telephone, and the use of electricity provided the necessary infrastructure for newer innovations to diffuse more rapidly. Another reason is the emergence of new business models that make innovations more accessible. The speed of technology diffusion has accelerated further with the emergence of the internet, social networking sites, and viral messaging.
T/F: Pipeline businesses are typically better than platform businesses at incorporating user feedback and taking advantage of network effects.
false Platform businesses help facilitate exchanges between producers and consumers, and this position allows them to gather data from both sides of the interaction. In contrast, pipelines tend to be inefficient in managing the flow of information from producer to consumer. Feedback loops from consumers back to the producers allow platforms to fine-tune their offerings and to benefit from big data analytics. These feedback loops also facilitate network effects, in which improved products or services based on user feedback lead to more customers, allowing the firm to continue improving its offerings.
T/F: A manager's only responsibility is to monitor and assess the performance of his or her firm.
false Since competitive advantage is defined as superior performance relative to other competitors in the same industry or the industry average, a firm's managers must be able to accurately assess the performance of their firm and compare and benchmark their firm's performance to other competitors in the same industry or against the industry average.
T/F: Managers have exactly two choices when determining the boundaries of the firm: produce goods and services in-house ("make") or purchase them externally ("buy").
false The "make" and "buy" choices anchor each end of a continuum from markets to firms. Several alternative hybrid arrangements are available between these two extremes. Moving from transacting in the market ("buy") to full integration ("make"), alternatives include short-term contracts as well as various forms of strategic alliances (long-term contracts, equity alliances, and joint ventures) and parent-subsidiary relationships.
T/F: Differentiation and cost leadership strategies are only effective in manufacturing industries.
false These two business strategies are called generic strategies because they can be used by any organization—manufacturing or service, large or small, for-profit or nonprofit, public or private, domestic or foreign—in the quest for competitive advantage, independent of industry context.
Mondo Tacos, a fast food restaurant, operates through a business model in which individuals can buy the rights to set up Mondo Taco stores and sell the company's food in return for a lump sum fee at the beginning of the contract and a percentage of revenues every month. The owners of the stores have to offer a menu approved by the company's headquarters and also maintain consistent customer service as expected in its flagship store. Which of the following alternatives to integration does this best illustrate? credit rationing crowdsourcing bootstrapping franchising
franchising This scenario best illustrates franchising. Franchising is a long-term contract in which a franchisor grants a franchisee the right to use the franchisor's trademark and business processes to offer goods and services that carry the franchisor's brand name; the franchisee in turn pays an up-front buy-in lump sum and a percentage of revenues.
The leading producer of cell phone backup batteries, Jumpstart, has achieved great success because they produce high-quality battery backups that are not too expensive. Even so, another company that produces lower-quality batteries at the same price has also achieved some success, but not as much as Jumpstart. Also, in general, the price of backup batteries has declined because of economies of scale and learning. In addition, Jumpstart has added complementary assets, such as a carrying case. Considering all of these factors, the backup battery industry is most likely in the growth stage. maturity stage. shakeout stage. introduction stage
growth stage. The backup battery industry is most likely in the growth stage. Since demand is strong during the growth phase, both efficient and inefficient firms thrive; the rising tide lifts all boats. Moreover, prices begin to fall, often rapidly, as standard business processes are put in place and firms begin to reap economies of scale and learning. Distribution channels are expanded, and complementary assets in the form of products and services become widely available.
Amazon.com has decided to enter the college bookstore market. The goal of "Amazon Campus" is to offer co-branded university-specific web sites that offer textbooks and paraphernalia, such as logo sweaters and baseball hats. This development shows Amazon's relentless pursuit of product diversification. geographic diversification. horizontal integration. vertical integration.
product diversification. In Chapter Case 8, it was discussed how Amazon.com, lead by Jeff Bezos, has developed from an online bookseller into an online company that sells a wide variety of goods and services. Recently, Amazon has announced plans to enter the college bookstore market, which is an example of how the company has relentlessly pursued product diversification.
The management team for Volcanic Batteries came up with the following vision statement: "Volcanic Batteries will conscientiously track its financial performance to ensure profits for its investors, enhance its community through employment and supporting charities, and dispose of waste in a manner that will not harm the environment." This vision statement is most likely based on the accounting profitability approach. balanced-scorecard approach. triple-bottom-line approach. economic value creation approach.
triple-bottom-line approach. Triple-bottom-line stresses a combination of economic, social, and ecological concerns that can lead to a sustainable strategy, which are reflected in the vision statement for Volcanic Batteries.
T/F: A cost leader is the firm most likely to survive a price war.
true A cost-leadership strategy is defined by obtaining the lowest-cost position in the industry while offering acceptable value. The cost leader, therefore, is protected from other competitors because of having the lowest cost. If a price war ensues, the low-cost leader will be the last firm standing; all other firms will be driven out as margins evaporate.
Gold Leaf Computers sources the components for its laptops from various suppliers on the market. The firm pays $100 for processors, $35 for disk drives, $50 for screens, $10 for memory, and $40 for graphics and wireless internet cards. Gold Leaf has determined that it would cost $200 per unit to produce all of the necessary components in its in-house manufacturing facility. In this scenario, Gold Leaf should vertically integrate. continue to outsource production. exit the laptop industry. diversify its activities.
vertically integrate. When the costs of pursuing an activity in-house are less than the costs of transacting for that activity in the market, then the firm should vertically integrate by owning production of the needed inputs or the channels for the distribution of outputs. In other words, when firms are more efficient in organizing economic activity than are markets, which rely on contracts among many independent actors, firms should vertically integrate.
Anita has been named CEO of a popular sports apparel company. As CEO, she is tasked with setting the firm's corporate strategy. Which of the following decisions is Anita most likely to make? whether to pursue a differentiation or cost leadership strategy what range of products the firm should offer how to achieve the highest levels of customer satisfaction which customer segments to target
what range of products the firm should offer Strategic leaders must determine corporate strategy along three dimensions: vertical integration (in what stages of the industry value chain should the company participate?), diversification (what range of products and services should the company offer?), and geographic scope (where should the company compete geographically in terms of regional, national, or international markets?).