SU 7

A firm in a declining industry that adopts a harvest strategy assumes that A. Intense competition is absent. B. Pockets of stable demand still exist. C. The highest recovery is attainable by early sale. D. Aggressive marketing will drive out competition.

A. Intense competition is absent. A harvest strategy is in effect a controlled, gradual liquidation. It maximizes cash flow by minimizing new investment, R&D, advertising service, maintenance, etc., and by exploiting the firm's remaining strengths (e.g., goodwill) to increase prices or maintain sales volume. To be successful, the strategy assumes that the firm has certain strengths and intense competition is absent. The strengths permit the firm to maintain sales for a time in the face of price increases, reduced advertising, etc. Absence of intense competition means that other firms will be less likely to seize market share or lower prices. Moreover, a firm must be capable of cost reductions that do not cause immediate failure.

According to Porter, the evolutionary processes that move an industry to its potential structure include A. More sophisticated buyers. B. Industry contraction. C. Increased uncertainty about market size. D. Inexperienced personnel.

A. More sophisticated buyers. More sophisticated and better informed buyers tend to demand better quality and service, causing the industry to evolve to meet the customer's demands.

High exit barriers may restrain firms from leaving an industry even though returns are poor. Which of the following is not an exit barrier? A. Specialized assets. B. Avoidance of environmental safeguard requirements. C. Participation in a group executing an overall strategy. D. Cost of labor settlements.

B. Avoidance of environmental safeguard requirements. Net liquidation value is reduced when the fixed costs of exit are high, e.g., the cost of labor settlements, payments to professionals involved in the divestiture (CPAs, attorneys, etc.), cancellation of contracts (with distributors, suppliers, managers, etc.), and resettlement or retraining. Moreover, announcement of exit may have such effects as reduced employee productivity, loss of customers, and a decline in supplier reliability. However, some required investments, such as in environmental safeguards, may be avoided. Thus, avoiding the capital investment in environmental safeguards may be a reason to exit an industry if the investment exceeds the expected profits. This is an example of a fixed cost that is not an exit barrier.

When local management, close control, and personal service are critical success factors, the appropriate strategy for coping with fragmentation might be A. Decentralization without oversight. B. Decentralization with tightly managed oversight. C. Centralization without oversight. D. Centralization with tightly managed oversight.

B. Decentralization with tightly managed oversight. When local management, close control, and personal service are critical success factors, the appropriate strategy for coping with fragmentation is decentralization with tightly managed oversight.

When an industry is in the declining phase, unit sales are A. Increasing. B. Decreasing. C. Stagnant. D. Nonexistent.

B. Decreasing. Unit sales are decreasing when an industry is in the declining phase.

While auditing a marketing department, the internal auditor discovered that the product life cycle model was used to structure the marketing mix. Under such a philosophy, the opportunity for cost reductions would be greatest in which stage of the life cycle? A. Introduction stage. B. Growth stage. C. Maturity stage. D. Decline stage.

B. Growth stage. During the growth stage, the opportunity for cost reductions is at its maximum because production volume is increasing at a high rate. Thus, fixed costs are being spread over more units of production, and the benefits of the learning curve are being realized.

Which factor signals a favorable structure in the remaining pockets of demand in a declining industry? A. Innovation. B. High switching costs. C. Changes in the needs or tastes of customers. D. Reduction in the size of a customer group.

B. High switching costs. The structure of the remaining pockets of demand determines whether the surviving firms can be profitable. Prospects are favorable if the pockets include price-insensitive buyers of highly differentiated products. Prospects also are favorable if buyers have little bargaining power because of high switching costs or other factors, such as the need to replace the equipment of the suppliers that have withdrawn from the industry. Furthermore, firms operating in remaining pockets may thrive if mobility barriers are high (preventing firms in other segments from competing) and if substitute products or strong suppliers are not threats. High switching costs mean that buyers are less likely to purchase substitutes. Thus, future demand is more certain, and the structure is more favorable.

For an industry to be genuinely global, it must be involved in which of the following significant activities? I. Licensing II. Export III. Direct Investment A. I. and II. B. II. or III. C. I. and III. D. III. only.

B. II. or III. A genuinely global industry requires a firm to compete globally. Participation in foreign markets is usually by licensing; export; or, after the firm has obtained experience, direct investment. A genuinely global industry will have significant export activity or direct investment. Nevertheless, direct investment does not necessarily signal the existence of global competition. Direct investment also may occur when purely national factors determine a subsidiary's competitive position.

A firm is most likely to leave a declining industry because A. The remaining pockets of demand include price-insensitive buyers. B. It is the only part of a vertically integrated business that is affected. C. Buyers have high switching costs. D. Mobility barriers are high.

B. It is the only part of a vertically integrated business that is affected. Vertical integration of a business may require exit of the entire chain when the reasons for decline affect all its parts. However, when only one part of the vertically integrated business is in a declining industry, integration is an argument for exit of the affected part. Divestiture prevents the weak link from harming the entire chain.

While auditing a marketing department, the internal auditor discovered that the product life cycle model was used to structure the marketing mix. Under such a philosophy, the price charged on a consistent basis for a specific product would probably be lowest during which life cycle stage? A. Introduction stage. B. Growth stage. C. Maturity stage. D. Decline stage.

C. Maturity stage. During the maturity stage, competition is at its greatest and costs are at their lowest. Moreover, firms are engaged in competitive price-cutting measures, resulting in some of the lowest prices seen during a product's life cycle.

In the <List A> stage of the product life cycle, <List B> tend to be highest. List A | List B A. Introduction | Sales B. Growth | Profits C. Maturity | Profits D. Decline | Cash flows

C. Maturity | Profits The product life cycle has five stages: product development, introduction, growth, maturity, and decline. In the maturity stage, profits level off or begin to decline.

The opportunity for franchising comes from the ability to A. Develop products. B. Differentiate products. C. Standardize products. D. Diversify products.

C. Standardize products. Standardizing products means to maintain the same product or to standardize the production, operations, and facilities in different locations or markets. Franchises all use standardized products to reduce costs.

An emerging industry results from A. New customer needs. B. Innovation. C. Changes in cost structure. D. All of the answers are correct.

D. All of the answers are correct. An emerging industry results from new customer needs, innovation, and changes in cost structure.

What is the last step in Porter's framework for developing a competitive strategy in a fragmented industry? A. Create a full list of reasons for fragmentation. B. Select the best strategy for operating in a fragmented environment. C. Evaluate whether a new structure will yield acceptable returns and what position the firm should occupy. D. Determine the industry's structure.

B. Select the best strategy for operating in a fragmented environment. The framework's initial steps determine the causes of fragmentation, analyze whether the causes can be overcome, and determine the best strategy if fragmentation can be overcome. The last step is determining the best strategy if fragmentation cannot be overcome.

Which of the following is not characteristic of a mature industry environment? A. Consolidation. B. Competitive interdependence. C. Falling demand. D. Strategic focus on deterring entry of new competitors into the marketplace.

C. Falling demand. Falling demand is characteristic of declining industries. These industries have sustained a permanent decrease in unit sales over the long run.

The number of competing firms is highest at which stage in the product life cycle? A. Introduction. B. Growth. C. Maturity. D. Decline.

C. Maturity.

Which strategy in a global industry is most likely to rely on domestic content rules or high tariffs? A. A protected niche strategy. B. A national focus strategy. C. A national segment strategy. D. A global focus strategy.

A. A protected niche strategy. A protected niche strategy is applied in nations where global competitors are discouraged by governmental impediments, such as domestic content rules or tariffs. The strategy is designed to be effective in markets with governmental constraints and requires close attention to the national government.

Globalization assists in achieving economies of scale, which is a(n) A. Cost benefit. B. Timing benefit. C. Learning benefit. D. Arbitrage benefit.

A. Cost benefit. Cost benefits are obtained from economies of scale as a firm expands its operations. Average costs of output decline because of standardization of products or processes, and increased bargaining power versus suppliers of raw materials, components, and services. Moreover, economies of scale may arise from centralized production or from marketing, logistical, or purchasing factors.

All of the following are impediments to global competition except A. Economies of scale. B. Rapid changes in technology. C. Differing marketing tasks. D. Sensitivity to lead times.

A. Economies of scale. Economies of scale are sources of global competitive advantage. Economies of scale in centralized production, logistics, purchasing, or marketing facilitate entry into the global market.

A firm is best able to shape the industry structure when the industry is A. Emerging. B. Mature. C. Declining. D. Coordinated.

A. Emerging. A firm is best able to shape the industry structure when the industry is emerging.

At the introduction stage of an innovative product, the profit growth is normally slow due to A. Expensive sales promotion. B. High competition. C. A mass market. D. Available alternatives.

A. Expensive sales promotion. The introduction stage is characterized by slow sales growth and lack of profits because of the high expenses of promotion and selective distribution to generate awareness of the product and encourage customers to try it. Thus, the per-customer cost is high. Competitors are few, basic versions of the product are produced, and higher-income customers (innovators) are usually targeted. Cost-plus prices are charged. They may initially be high to permit cost recovery when unit sales are low. The strategy is to infiltrate the market, plan for financing to cope with losses, build supplier relations, increase production and marketing efforts, and plan for competition.

Of the major processes affecting the evolution of an industry, which one affects rivalry, entry, expansion, and supply? A. Long-run changes in the industry growth rate. B. Changes in input costs. C. Structural changes in suppliers' and customers' industries. D. Government policies.

A. Long-run changes in the industry growth rate. Long-run changes in the industry growth rate affect rivalry, entry, expansion, and supply. These changes occur because of changes in five external factors: demographic traits (such as consumer ages and income levels), trends in needs of buyers (caused by changes in regulation, tastes, and lifestyles), relative positions of substitute products, relative positions of complementary products, and sales to new customers (market penetration). Product innovation, an internal factor, alters the industry's position regarding the external factors.

A firm in a fragmented industry must position itself by adopting a competitive strategy appropriate to the industry. Which of the following is most clearly a focus strategy? A. Specialization by product type. B. Backward integration. C. An emphasis on low overhead and low payroll. D. Development of formula facilities.

A. Specialization by product type. A focus strategy is directed at a buyer group, segment of the product line, or geographic area. Thus, the strategic target is narrow compared with an industry wide strategy designed to achieve cost leadership or product differentiation. Specialization by product type or segment is a focus strategy. This focus may enhance bargaining power with suppliers. It may also increase differentiation because of the perceived expertise and image. The downside is reduced growth opportunities.

A structural characteristic of an emerging industry is A. Strategic uncertainty. B. Customers are sophisticated. C. Technological uncertainty has been overcome. D. Industry development is unlimited.

A. Strategic uncertainty. Strategic uncertainty arises because effective strategies have not yet been identified. Hence, firms are experimenting with product features, production methods, marketing approaches, etc. Moreover, competitive intelligence is necessarily poor because competitors have not been identified and industry sales and other data are not available.

Timing of entry into an emerging industry is a critical choice. Pioneering firms face high risk but low barriers. Which of the following is not a factor that favors early entry? A. The bases of competition and market segments will change. B. The learning curve advantage will persist. C. Customer loyalty will be high. D. Cost advantages can be secured.

A. The bases of competition and market segments will change. If the bases of competition and market segments will change significantly, an early entrant may lose the advantage obtained by being an early entrant. Other factors not favoring early entry include the following: (1) costs of opening the market are high and the benefits cannot be retained by the firm, (2) early competition will be expensive and larger and stronger competitors will emerge later, and (3) early products and processes will become obsolete.

Price wars are most likely in a(n) A. Emerging industry. B. Mature industry. C. Declining industry. D. Fragmented industry.

C. Declining industry. Price wars are more likely in the decline phase. Rivalry is more intense when the product is viewed as a commodity, fixed costs and exit barriers are high, firms have strategic reasons for remaining and the resources to do so, and firms are relatively equally strong. In this environment, firms are tempted to take ill-advised competitive actions because of uncertainty about their positions.

Regulatory approval is most likely to be hardest to obtain in A. Mature industries. B. Fragmented industries. C. Emerging industries. D. Declining industries.

C. Emerging industries. Regulatory approval for an emerging industry may be hard to obtain, especially if customer needs are already served by an established regulated industry. However, favorable government policy may jump-start an industry, for example, when use of a safety product becomes mandatory. Moreover, further growth of an industry may be stunted when it attracts first-time regulation.

According to Michael E. Porter's analysis of the evolution of global industries, the factor that is always necessary for an industry to become global is A. The existence of environmental triggers to begin globalization. B. A strategic innovation. C. Marketing economies of scale. D. Changes in the costs of the factors of production.

B. A strategic innovation. The triggers of the evolution of global industries establish or exploit the sources of global competitive advantage. They also may negate the impediments to global competition. However, negating impediments will not result in globalization unless the firm has sufficient strategic advantages. Moreover, a strategic innovation is always necessary for an industry to become global. Environmental triggers include an increase in any of the types of economies of scale, lower transportation or storage costs, changes in distribution channels that facilitate access by foreign firms, changes in the costs of the factors of production, increased similarity of economic and social conditions in other nations, and reduction in governmental constraints. However, strategic innovations may begin globalization even if environmental triggers are not present. These innovations include, for example, product redefinition, reducing the costs of adapting a product for sale in different nations, design changes, and elimination of constraints.

Firms in a fragmented industry have insignificant market shares and little influence on such matters as market price and total output. A likely economic cause of this fragmentation is the existence of A. A learning curve effect. B. Diseconomies of scale. C. High entry barriers. D. Low exit barriers.

B. Diseconomies of scale. Important diseconomies of scale may favor fragmentation. For example, small, flexible firms have an advantage when the following needs are important: quick responses to style changes, the maintenance of low overhead, customization of a diverse product line to the special requirements of particular customers, substantial creative content in the product, individualized personal service, and local contacts and image.

A firm considering entry into a fragmented industry may be able to eliminate the factors preventing concentration in which ways? I. Recognizing that the industry is "stuck" for noneconomic reasons. II. Adding value to products that cannot be significantly differentiated. III. Specialization by customer type. IV. Acquisitions of local firms. A. I and II only. B. I and IV only. C. II, III, and IV only. D. I, II, III, and IV.

B. I and IV only. Overcoming fragmentation has significant strategic payoffs given that entry is not costly and competitors are weak. If the factor(s) preventing consolidation can be eliminated, industry structure will change. For example, industries may be "stuck" in a fragmented state for reasons other than underlying economic factors. Firms in the industry lack the resources, skills, awareness, or ambition to make the strategic moves needed for consolidation. Outside firms do not recognize the opportunity offered by an industry "stuck" in a fragmented state, for example, because it is new, small, or obscure. Also, acquisitions may enable a firm to expand when competing with local firms is difficult because of their contacts or image. However, adding value to products that cannot be significantly differentiated and specialization by customer type are methods of coping with, not overcoming, fragmentation.

A firm in a declining industry ordinarily adopts one of four strategies. A firm that follows a A. Quick divestment strategy should have divested during the maturity phase. B. Leadership strategy may assume that success will enable the firm to subsequently pursue a harvest strategy. C. Harvest strategy seeks a pocket of stable demand. D. Niche strategy is engaged in a gradual liquidation.

B. Leadership strategy may assume that success will enable the firm to subsequently pursue a harvest strategy. A leadership strategy is pursued by a firm that believes it can achieve market share gains to become the dominant firm. An assumption is that additional investment can be recovered. A second assumption is that success will put the firm in a better position to hold its ground or subsequently to follow a harvest strategy. This strategy may entail aggressive pricing, marketing, or other investments that raise the stakes for competitors; reducing competitors' exit barriers by acquisitions of their capacity or products, assuming their contracts, and producing spare parts and generic versions of goods for them; demonstrations of strength and resolve to remain in the industry; and publicizing accurate data about the reality of future decline so as to dispel competitors' uncertainty.

During the growth stage of a product's life cycle, A. The quality of products is poor. B. New product models and features are introduced. C. There is little difference between competing products. D. The quality of the products becomes more variable and products are less differentiated.

B. New product models and features are introduced. In the growth stage, sales and profits increase rapidly, cost per customer decreases, customers are early adopters, new competitors enter an expanding market, new product models and features are introduced, and promotion spending declines or remains stable. The firm enters new market segments and distribution channels and attempts to build brand loyalty and achieve the maximum share of the market. Thus, prices are set to penetrate the market, distribution channels are extended, and the mass market is targeted through advertising. The strategy is to advance by these means and by achieving economies of productive scale.

Long-run changes in the industry growth rate occur because of changes in five external factors. Which of the following is not an external factor affecting the long-run industry growth rate? A. Demographic traits. B. Product innovation. C. Trends in the needs of buyers. D. Relative position of substitute products.

B. Product innovation. Product innovation is an internal factor that alters an industry's position regarding the external factors.

In a product's life cycle, the first symptom of the decline stage is a decline in the A. Firm's inventory levels. B. Product's sales. C. Product's production cost. D. Product's prices.

B. Product's sales. The sales of most product types and brands eventually decrease permanently. This decline may be slow or rapid. This first symptom of the decline stage of a product's life cycle triggers such other effects as price cutting, narrowing of the product line, and reduction in promotion budgets.

Which of the following is a source of global competitive advantage? A. Low fixed costs. B. Production economies of scale. C. Weak copyright protection. D. Intensive local service requirements.

B. Production economies of scale. Production economies of scale exist when a firm can produce and sell the output at which the average total cost of production is minimized. (The archetypal example is oil refining.) In other words, economies of scale in centralized production may yield a cost advantage achievable only when output exceeds the demand in one country, and exports are feasible.

When uncertainty about an industry's future is greatest and other markets for the firm's assets are favorable, it should most likely follow a A. Harvest strategy. B. Quick divestment strategy. C. Leadership strategy. D. Niche strategy.

B. Quick divestment strategy. A quick divestment strategy assumes that the highest net recovery is obtained by sale early in the decline phase. It is then that uncertainty about the industry's future is greatest and other markets for the assets are most favorable. Indeed, divestiture may be indicated during the maturity phase prior to decline. But the firm risks being wrong about the onset of the decline phase. Quick divestment should be chosen when the industry structure is unfavorable, and the firm lacks strengths in the remaining pockets of demand.

Which of the following is not a limit on emerging industry development? A. Raw materials and components. B. Subsidies. C. Product quality. D. Regulatory approval.

B. Subsidies. Subsidies are a structural characteristic of an emerging market. If a subsidy is given by the government or other party, it usually assists the growth of the new industry instead of hindering it. Subsidies tend to focus on radically new technology or technology in which societal concern is strong.

Globalization and localization are shaping the competitive structure of industries. The scenario contributing to the most competitive environment is when A. Global forces dominate. B. Local forces dominate. C. A mix of global and local forces dominate. D. Neither global nor local forces dominate.

C. A mix of global and local forces dominate. Competitiveness of firms is greatest, and the competitive environment is most intense, when the benefits of global integration and coordination and the benefits of localization (flexibility, proximity, and quick response time) are achieved.

A firm in a fragmented industry should most likely take what action to avoid a strategic trap? A. Seek dominance to overcome fragmentation. B. Assume that competitors have similar costs. C. Avoid centralization of the organizational structure. D. Invest heavily to respond quickly to new product demand.

C. Avoid centralization of the organizational structure. Overcentralization of the organizational structure is often a mistake. In the intense competition of a fragmented industry, quick response times, local contacts, personal service, and tight operating control are essential.

Patents are granted to encourage firms to invest in the research and development of new products. Patents are an example of A. Vertical integration. B. Market concentration. C. Entry barriers. D. Collusion.

C. Entry barriers. Entry barriers exist in all market structures other than perfect competition. The fewer the firms in an industry, the greater the barriers tend to be. Entry barriers include the existence of substantial economies of scale (low unit costs can be achieved only by large producers). They also include barriers created by existing firms. For example, large advertising expenditures may be necessary to compete. Control of raw materials or technology is another barrier. Consequently, patents held by existing firms may serve as an entry barrier because they prevent potential competitors from using certain technology. Patents are rights granted by the federal government to inventors to allow them the exclusive use of their inventions for a specific period.

In which of the following industry environments would an internal auditor be most likely to recommend strategies such as franchising and horizontal mergers? A. Emerging industries. B. Declining industries. C. Fragmented industries. D. Mature industries.

C. Fragmented industries. Strategies such as franchising and horizontal mergers are commonly used in fragmented industries. Overcoming fragmentation has significant strategic payoffs given that entry is not costly and competitors are weak. If the factor(s) preventing consolidation can be eliminated, industry structure will change. Isolating factors responsible for fragmentation has been achieved in, for example, the fast food industry. The need to have numerous local operations under tight control and near customers has been isolated or neutralized by franchising to local owners. The franchisor provides national advertising, centralized purchasing, and other services, which result in economies of scale and industry consolidation. In effect, the service or production function is separated from the rest of the business. Also, acquisitions (horizontal mergers) that enable a firm to expand when competing with local firms might be difficult because of their contacts and image.

A global industry is one that A. Contains competitors that are multinationals. B. Has secured a competitive advantage based on economies of scale in centralized production. C. Has a strategic advantage by establishing coordinated competition in many national markets. D. Has made large direct investments abroad.

C. Has a strategic advantage by establishing coordinated competition in many national markets. Analysis of the competition in an industry requires consideration of the economics of the industry and the characteristics of competitors. However, in a global industry, the analysis is not limited to one market, but extends to all markets (geographic or national) taken together. Michael E. Porter defines a global industry as "one in which the strategic positions of competitors in major geographic or national markets are fundamentally affected by their overall global positions." Thus, an industry becomes global because it perceives a net strategic advantage to competing, as Porter says, "in a coordinated way in many national markets."

Which of the following correctly represents trends occurring in global competition? I. New large-scale markets have emerged II. Economic differences among developed and newly developed countries have widened III. The freer flow of technology has allowed firms in developing countries to invest in world-class facilities A. I only. B. I and II only. C. I and III only. D. I, II, and III.

C. I and III only. These are both trends in global competition. New large-scale markets, such as China, Russia, and India, have emerged. The flow of technology has become freer, which has allowed many firms, including those in developing countries, to invest in world-class facilities.

The Windinger is a new product that was released 6 months ago. There are only two firms producing this product, and distribution is limited. Sales are low, and growth is relatively slow. Both firms have reported little to no profit and have incurred high promotion expenses. The Windinger is most likely in what stage of the product life cycle? A. Precommercialization. B. Maturity. C. Introduction. D. Growth.

C. Introduction. The Windinger is in the introduction stage of the product life cycle. This stage is characterized by slow sales growth, lack of profits, high expenses of promotion, selective distribution, and few competitors. The per-customer cost is high at this stage.

The strategy pursued by a firm that believes it can achieve market share gains to become the dominant firm is A. Consumer strategy. B. Employee strategy. C. Leadership strategy. D. Exit strategy.

C. Leadership strategy. A firm that believes it can achieve market share gains to become the dominant firm pursues a leadership strategy.

In what stage of the product life cycle is a firm's strategy focused on defending market share? A. Decline stage. B. Growth stage. C. Maturity stage. D. Introduction stage.

C. Maturity stage.

While auditing a marketing department, the internal auditor discovered that the product life cycle model was used to structure the marketing mix. The manager has asked the auditor for advice about increasing advertising of various products. During which stage of the life cycle would it be appropriate to advertise that the company's product is the lowest price and best quality of all competitors? A. Introduction stage. B. Growth stage. C. Maturity stage. D. Decline stage.

C. Maturity stage. The maturity stage is the ideal time for advertising lower prices and superior quality because this is the period during a product's life when competition is greatest. Due to the availability of many substitutes, a firm has reasons to set itself apart. Because price and quality are both concerns of customers during the maturity stage, it is an ideal time for the firm to differentiate its product by advertising low prices and higher quality.

Strategic choices in an emerging industry are inherently subject to great uncertainty and risk with regard to competitors, industry structure, and competitive rules. Accordingly, a firm considering entry into an emerging industry A. Has little need to be concerned with industry cooperation. B. Is least likely to be able to shape the industry structure at this stage. C. May enjoy such benefits of pioneering as experience advantages and early commitment to suppliers. D. Must be prepared for responding vigorously to competitors' moves.

C. May enjoy such benefits of pioneering as experience advantages and early commitment to suppliers. Timing of entry is a critical choice. Pioneering firms face high risk but low barriers and may earn high returns. The following are factors favoring early entry: pioneering improves the firm's reputation, the learning curve (experience) advantage is important and will persist, customer loyalty will be high, and cost advantages (through early commitment to suppliers or distributors) can be secured.

Coping with fragmentation requires strategic positioning. Which strategic position is a focus strategy that enhances bargaining power with suppliers and increases differentiation? A. Backward integration. B. Tightly managed decentralization. C. Specialization by product type or segment. D. Developing formula facilities.

C. Specialization by product type or segment. Specialization by product type or segment is a focus strategy that is used to cope with fragmentation. This focus may enhance bargaining power with suppliers and increase differentiation because of perceived expertise and image. The downside is reduced growth opportunities.

Which of the following is a reason for a firm to remain in an industry despite poor profits? A. Lack of vertical integration. B. Economies of scale are not significant. C. The firm's assets have a low liquidation value. D. Distribution channels are willing to accept new products.

C. The firm's assets have a low liquidation value. Specialized assets and inventory in a declining industry may have a low liquidation value. Few purchasers who wish to operate in the same industry may be available. Durable assets may have a carrying amount far greater than the liquidation value. Hence, liquidation may result in a loss that the firm may not wish to recognize. Furthermore, a low liquidation value means that the future discounted cash flows from remaining in the industry may exceed the opportunity cost of the capital invested in the declining industry. Thus, the returns from the proceeds of liquidation may be less than the returns from keeping those assets in the business.

Forecasting early and late markets is necessary to shape product development and marketing efforts and to predict structural evolution of an industry. Which factor is the most significant in obtaining customer acceptance of a new industry's product or service? A. High switching costs. B. Required regulatory approval. C. High cost of obsolescence. D. A performance rather than a cost advantage.

D. A performance rather than a cost advantage. The nature of the benefit is the most significant factor. At one extreme, the benefit may consist of a performance advantage unattainable by other methods. At the other extreme, the benefit may be a pure cost advantage. Ordinarily, early markets purchase a product because it offers a performance advantage. Early markets tend to be suspicious of a product offering a cost advantage.

A fragmented industry is most likely to A. Have substantial economies of scale. B. Have low transportation costs. C. Be characterized by suppliers with little bargaining power. D. Approximate pure competition.

D. Approximate pure competition. According to Michael E. Porter, individual firms in a fragmented industry have insignificant market shares and little influence on industry outcomes. Examples are retailing, agriculture, and creative enterprises. Thus, the situation approximates what economists call pure competition. Moreover, the industry has many small- or medium-sized firms with no market leader, products may or may not be significantly differentiated, and the technology may or may not be sophisticated.

Markets, market segments, and customers within a segment often vary in how quickly they accept a new product or service. All of the following are factors affecting acceptance except A. Regulatory, governmental, or union constraints. B. The nature of the benefit. C. Cost of product failure. D. Availability of raw materials.

D. Availability of raw materials. The availability of raw materials generally does not affect how quickly a product or service is accepted. However, if availability is scarce, it can limit the development of the industry.

Which strategy in a global industry is most likely to be facilitated by a transnational coalition? A. A protected niche strategy. B. A national focus strategy. C. A national segment strategy. D. Broad line global competition.

D. Broad line global competition. Broad line global competition is competition over the full product line of the firm based on differentiation or low cost. The firm needs large resources for this long-term strategy. Governmental relations should emphasize impediment reduction. Transnational coalitions may be created to help the firms overcome impediments to executing the broader strategies, for example, market access or technology barriers.

A company experiences a decrease in unit sales over the long run. It is in a(n) A. Emerging industry. B. Global industry. C. Mature industry. D. Declining industry.

D. Declining industry. A declining industry is not simply at a low point in the business cycle but has sustained a permanent decrease in unit sales over the long run. Michael E. Porter's view is that this phase of the industry life cycle does not correspond exactly to the decline stage in the product life cycle. Moreover, he argues that the nature of the competition and the range of strategic choices in the decline phase are diverse and vary widely from industry to industry. The result is that some industries may be able to negotiate decline without intense rivalry, long-term overcapacity, and ruinous losses.

According to Michael E. Porter, evolutionary processes involving both internal and external factors operate to move an industry from its initial structure to its potential structure. A likely structural effect of the major evolutionary processes is that A. Expansion of industry scale will discourage entry by large firms. B. Sellers' industries tend to become less concentrated as customers' industries become more concentrated. C. Learning by buyers who become more sophisticated increases product differentiation. D. Diffusion of proprietary knowledge will tend to reduce entry barriers.

D. Diffusion of proprietary knowledge will tend to reduce entry barriers. Diffusion of proprietary knowledge may result from reverse engineering (a form of imitation) or another form of competitive intelligence (e.g., that obtained from suppliers, distributors, or customers), expiration of patents, purchase, migration of personnel to new firms, and spinoffs of operating segments. Thus, because barriers created by proprietary knowledge and specialized personnel tend to disappear, new competitors may emerge, and vertical integration becomes more likely. However, if further technological advances are feasible, economies of scale in R&D may create a protective barrier against new competition. The problem of diffusion may be met by creation of a substantial capacity to develop new proprietary knowledge.

The reason(s) governments most likely restrict trade include I. To help foster new industries. II. To protect declining industries. III. To increase tax revenues. IV. To foster national security. A. I only. B. I and II only. C. II and III only. D. I, II, and IV only.

D. I, II, and IV only. Governmental impediments to global competition are generally imposed for the announced purpose of protecting local firms and jobs, developing new industries, and fostering national security. They also may have the effect of raising revenue in the short run. In the long run, tax and revenues will decline because of reduced trade. Examples of governmental impediments are tariffs; duties; quotas; domestic content rules; preferences for local firms regarding procurement, taxes, R&D, labor regulations, and other operating rules; and laws (e.g., anti-bribery or tax) enacted by a national government that impede national firms from competing globally. These impediments are most likely when industries are viewed as crucial.

In a declining industry with a favorable structure, a firm may have the ability to recover additional investment or to earn above-average returns in the remaining pockets of demand. Such a firm is most likely to follow a A. Quick divestment strategy. B. Harvest strategy or quick divestment strategy. C. Leadership strategy or harvest strategy. D. Leadership strategy or niche strategy.

D. Leadership strategy or niche strategy. A leadership strategy is pursued by a firm that believes it can achieve market share gains to become the dominant firm. An assumption is that additional investment can be recovered. A second assumption is that success will put the firm in a better position to hold its ground or subsequently to follow a harvest strategy. A niche strategy seeks a market segment (pocket of demand) with stable or slowly decreasing demand with the potential for above-average returns. Some of the moves undertaken when following a leadership strategy may be appropriate. The firm may eventually change to a harvest or divest strategy.

Impediments to global competition may increase direct costs, make management more difficult, be imposed by governments or other institutions, or consist of resource limitations. Which of the following is most likely to be an impediment to global competition? A. A certain nation has a competitive advantage regarding the cost of producing a product. B. Proprietary technology provides a competitive advantage regarding the quality of a product. C. The product is highly differentiated. D. Product needs vary from country to country.

D. Product needs vary from country to country. Product needs may differ from country to country because of culture, climate, degree of economic development, income, legal requirements, technical standards, and other factors. This barrier inhibits global procurement and achievement of economies of scale and experience. The height of the barrier depends on the costs of product modifications. Complex segmentation within geographic markets has similar effects.

Industry structure and competition during the decline phase may result in intense and destructive competition. Which factor is most likely to contribute to this condition? A. Firms do not expect demand to rebound. B. The decline is rapid. C. Attractive substitutes are not available. D. Specialized assets used in the industry have low liquidation values.

D. Specialized assets used in the industry have low liquidation values. High exit barriers may restrain firms from leaving the industry even though their returns are poor. For example, specialized assets and inventory in a declining industry may have a low liquidation value. Few purchasers who wish to operate in the same industry may be available. Durable assets may have a carrying amount far greater than the liquidation value. Hence, liquidation may result in a loss that the firm may not wish to recognize. Furthermore, a low liquidation value means that the future discounted cash flows from remaining in the industry may exceed the opportunity cost of the capital invested in the declining industry. Thus, the returns from the proceeds of liquidation may be less than the returns from keeping those assets in the business.

A firm considering entry into an emerging industry must be aware of many strategic factors. Thus, the firm must anticipate that A. Early mobility barriers are likely to persist. B. Early commitment to suppliers is a strategic trap. C. The high cost of opening the market favors early entry. D. The nature of entrants may change.

D. The nature of entrants may change. The nature of entrants may change to include larger firms attracted by the proven and less risky industry. Firms must predict when such entry is likely given existing and probable future barriers and the costs of surmounting them. Firms also need to predict how new entrants will compete, e.g., on the basis of marketing power or economies of scale. Furthermore, new entrants may emerge through vertical integration.

An emerging industry is new or newly formed and is small in size initially. An emerging industry results from innovation, changes in cost structures, new customer needs, or another factor that creates an attractive opportunity for selling a product or service. Which of the following is a structural characteristic of an emerging industry? A. A long time horizon for product development. B. Low initial costs and a shallow learning curve. C. Mobility barriers include economies of scale and brand identification. D. The presence of embryonic companies and spin-offs.

D. The presence of embryonic companies and spin-offs. Embryonic companies (firms newly formed and not new units of established entities) are numerous in the emerging phase of industry evolution. Entry is not discouraged by the presence of economies of scale or strategic certainty. Spin-offs from existing firms also are common. Given the strategic uncertainties and the lure of equity interests, employees of these firms may have the incentive, and be well-placed, to create new firms. Their motive is to exploit ideas that may not have received a favorable reception by their former employers.