MGMT451 Exam 1
When a product's unique attributes provide value to customers, the firm is implementing:
*a. a differentiation strategy. b. a cost leadership strategy. c. an integrated cost leadership/differentiation strategy. d. a single-product strategy.
To have the potential to become sources of competitive advantage, resources and capabilities must be valuable, _____________, and _____________.
a. common, easy to imitate. b. easy to imitate, difficult to implement. *c. rare, costly to imitate. d. easy to implement, costly to imitate.
Value chain support activities include:
a. converting inputs into product. b. developing advertising and promotional campaigns. c. distributing the product to customers. *d. recruiting, hiring, and training personnel.
A firm successfully implementing a differentiation strategy would expect:
a. customers to be sensitive to price increases. *b. to charge premium prices. c. customers to perceive the product as standard. d. to automatically have high levels of power over suppliers.
The four generic business-level strategies a firm can implement include all of the following EXCEPT:
a. focused cost leadership. b. cost leadership. c. differentiation. *d. leadership.
Competitive advantage typically comes from:
a. individual resources. b. one very outstanding resource. c. several outstanding resources acting independently. *d. the unique bundling of several resources.
Primary activities are:
a. involved with the support of the organization. *b. involved in a product's physical creation, its distribution, and its service after the sale. c. the most important activities in the firm. d. the activities that the top management team most values.
Buyers are powerful when:
a. there is not a threat of backward integration. b. they are not a significant purchaser of the supplier's output. *c. there are no switching costs. d. the buyers' industry is fragmented.
The firm's reputation for quality is:
a. an example of a tangible resource. b. not an issue of principal concern for a firm. *c. an example of an intangible resource that can provide a competitive advantage. d. a resource for the firm on which funds can easily be borrowed.
When rivalrous firms compete aggressively by trying to attract competitors' customers, this might be an indication of:
a. an industry with low exit barriers. b. strong economies of scale. *c. slow industry growth. d. high bargaining power among buyers.
The differentiation strategy calls for a firm to provide products that:
a. are at the lowest cost possible. b. have acceptable features. *c. incorporate features for which the customer will pay a premium. d. solve the problem of being "stuck in the middle."
Tangible resources include:
a. assets that are people dependent such as know-how. *b. assets that can be seen and quantified. c. organizational culture. d. a firm's reputation.
The differentiation strategy can be effective in controlling the power of rivalry in an industry because:
a. customers will seek out the lowest cost product. b. customers have no loyalty. *c. customers are loyal to brands that satisfy their differentiated needs. d. the differentiation strategy benefits from rivalry.
Cost disadvantages independent of size are illustrated by all of the following EXCEPT:
a. favorable locations. b. proprietary product technology. c. favorable access to raw materials. *d. economies of scale.
The risks of a cost leadership strategy include all of the following EXCEPT:
a. investments in manufacturing equipment can become obsolete due to technological changes. b. firms may fail to detect changes in customer preferences. c. competitors may learn how to successfully imitate their strategy. *d. firms may fail to include enough unique features in the product.
Developing, carrying, and exchanging information and knowledge through human capital:
a. is not important in the current highly mechanized world. b. has been shown to be constant across organizations. *c. is critical to the pursuit of competitive advantage and strategic competitiveness. d. is far lower in the United States than in other countries.
A firm has above-average returns if it earns:
a. more profits than in the last year. b. more profits than the industry average. c. profits in excess of what an investor expects to earn from a historical pattern of performance of the firm. *d. profits in excess of what an investor expects to earn from other investments with a similar level of risk.
The forces that create high rivalry within an industry include all of the following EXCEPT:
a. numerous or equally balanced competitors. b. high fixed costs. *c. fast industry growth. d. high storage costs.
Compared to tangible resources, intangible resources are:
a. of less value to the firm. b. not the focus of strategic analysis. *c. relatively more difficult for competitors to imitate. d. more likely to be reflected on the firm's balance sheet.
A focus strategy seeks to exploit core competencies:
a. on an industry-wide basis. *b. by serving the needs of a certain industry segment. c. by servicing one particular corporation within a given industry. d. by servicing several professions.
Primary activities include all of the following EXCEPT:
a. outbound logistics. b. operations. c. marketing. *d. procurement.
Value creating primary activities include:
a. purchasing raw materials and supplies. b. developing an appropriate corporate structure. c. selecting appropriate distribution channels. d. planning corporate strategy and setting goals. *Both A and C seem like legitimate answers. The choices are a little unfortunate, a situation which I will try to avoid on the actual exam.
Economies of scale refer to the fact that as the:
a. quantity of product produced in a given time period increases, the cost of manufacturing each unit increases. b. quantity of product produced in a given time period increases, the cost of manufacturing each unit remains constant. *c. quantity of product produced in a given time period increases, the cost of manufacturing each unit decreases. d. physical size of the product gets larger, the costs of production become lower.
Suppliers are powerful when:
a. satisfactory substitutes are available. b. they sell a commodity product. *c. they have credible threat of forward integration. d. they are in a highly fragmented industry.
Resources of the firm would NOT include:
a. skills of individual employees. b. capital equipment. *c. industry structure. d. talented managers.
The threat from substitutes is high when:
a. switching costs are high. *b. the substitute product's price is lower than the industry product's price. c. the quality of the substitute product is lower than the quality of the industry's product. d. the substitute product stimulates new process innovations within the industry.
Examples of support activities include all of the following EXCEPT:
a. technology development. b. infrastructure. *c. service after the sale. d. procurement.
A sustained or sustainable competitive advantage requires that:
a. the value creating strategy be in a formulation stage. b. competitors be simultaneously implementing the strategy. *c. other companies not be able to duplicate the strategy. d. average returns be earned by the company.
When implementing a focus strategy, the firm seeks:
a. to be the lowest cost producer in an industry. b. to offer products with unique features for which customers will pay a premium. c. to avoid being stuck in the middle. *d. to serve the specialized needs of a particular market segment.
Organizational culture is:
a. usually quick to form. *b. a potential source of competitive advantage. c. so difficult to analyze that most firms should choose to ignore it. d. rarely unique to a single firm.
A stable business generating a free cash flow of $200,000 annually and having the weighted cost of capital 12.5% has the net present value:
a. $800,000. *b. $1,600,000. c. $2,500,000. d. $750,000. Note that the first payment is not discounted as it happens in the current year.
A declining business XYZ is expected to generate a free cash flow of $200,000 in the current year. The generated free cash flow is expected to decline steadily by 5% annually, generating $190,000 next year, $180,500 in the following year, $171,475 in the third year, etc. Assuming a discount rate of 12.5%, this stream of future cash flows has the net present value:
a. $800,000. b. $1,285,714. c. $2,533,333. d. $750,000. NPV=$200,000∙( 1+ 0.95/1.125+ 〖0.95〗^2/〖1.125〗^2 +⋯)=$200,000∙1/(1-0.95/1.125)=$1,285,714
Network externalities are a phenomenon defined as:
(a) The effects related to the network organizational structure, where many firms are connected through efficient linkages, as is the case of Wal-Mart's suppliers. *(b) The notion that the value of a product or service to a customer increases with the number of other customers or users. (c) The benefits that accrue to a firm if its employees (engineers, scientists, and others) are connected to their professional, neighborhood, and other networks. (d) The set of events, facts, and trends taking place in a firm's environment and that may impact its strategy.
When fashion magazines face competition from fashion blogs on the web, which of the following forces in Michael Porter's five forces model primarily gets stronger?
(a) The emergence of entry barriers. (b) The bargaining power of suppliers. (c) The availability of complements. *(d) The threat of substitutes.
Which one of the following is considered to be the missing 6th force in Porter's framework?
(a) The threat of substitutes. (b) Government regulation. *(c) Presence of complements. (d) Globalization.
Which event marks a critical juncture in an industry's evolution?
(a) When market penetration reaches 50%. *(b) The emergence of a dominant design. (c) The establishment of strong brands. (d) Reaching the point beyond which no firm can find additional economies of scale.
The learning (or experience) curve is:
(a) a graph showing the effect of the annual production volume on the total annual production cost. (b) one of the more recent innovations in the field of business strategy. *(c) a concept a business consultant might use to convince a client that building market share early on is important, especially when competing in new industries or when launching a new product. (d) a key to understanding how companies pursue economies of scale and scope.
The most important goal of strategy is to:
(a) achieve the highest possible growth and diversification of the enterprise. (b) conquer the biggest market share. *(c) maximize shareholder wealth and returns. (d) give acceptable returns to the shareholders while establishing a dominant position in one's industry.
The balanced scorecard is:
(a) an accounting tool to asses a company's annual performance. *(b) a managerial tool that harnesses multiple qualitative measures of firm performance from a broad stakeholder perspective. (c) a combination of financial measures of performance used by stock analysts. (d) a tool that the Environmental Protection Agency (EPA) uses to evaluate the impact of a company on the environment.
The resource based approach to strategy argues that:
(a) any firm can pursue any strategy as long as it does it in a very coherent and disciplined manner as argued by Michael Porter. *(b) a firm may or may not be a good candidate to pursue a particular strategy depending on the resources that the firm has or has access to. (c) a firm should diversify its resources as much as possible in order to generate more stable cash flows. (d) a firm should conserve its resources and invest as little as possible in pursuing a strategy because it can never predict what it might need in the future.
A major reason for outsourcing is that:
(a) coordinating with external suppliers is often faster and easier than doing it in-house. *(b) a firm may be able to make the suppliers work really hard by making them compete with each other. (c) suppliers are typically eager to make specific investments to serve a large customer. (d) it allows a firm to completely bypass or eliminate the cost of performing some activities.
If the average unit production cost increases with output, we have:
(a) economies of scale. *(b) diseconomies of scale. (c) a mix of the two. (d) diseconomies of scope
The fact that there is so much advertising of beer in the most watched TV programs such as the Super Bowl and other sporting events tells us that:
(a) firms in the beer industry are trying to hurt each other's profits by paying all those expensive TV commercials and making this industry fiercely competitive in the process. (b) CEOs of beer companies are not always working in the best interest of their shareholders. *(c) rivalry in this industry is not that great because firms can establish brand loyalty. (d) firms in the beer industry should diversify into industries where there are fewer promotions and advertising.
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) forward integration. (b) product differentiation. (c) crowdsourcing. *(d) backward integration.
The rise of Wal-Mart as a dominant firm in the distribution of many consumer goods has:
(a) generally helped manufacturers because of the large-scale efficiency that Wal-Mart brings to the table. *(b) generally hurt manufacturers because Wal-Mart has used bargaining power. (c) neither hurt nor helped manufacturers because they typically compete on quality of these products. (d) hurt only differentiators because of their lack of fit with the Wal-Mart concept.
When rivals aggressively try to attract competitors' customers through price wars and deep discounting, this can be an indication of:
(a) high barriers to entry. (b) the importance of differentiation and strong brands. *(c) high fixed and low variable costs as in the case of airlines. (d) the presence of complementary products.
____________ describes how far up and down the value chain a firm integrates activities and performs them in-house, instead of relying on independent suppliers and buyers.
(a) horizontal integration. (b) diversification. (c) business expansion. *(d) vertical integration.
Considering the profitability of different industries, we find that:
(a) it is virtually identical across industries in the long run, even though some industries may be more profitable than others in the short run. *(b) some industries are persistently more profitable than others. (c) industries that tend to be profitable in the United States are seldom profitable in Europe and Asia and vice versa. (d) it is difficult to draw definite conclusions because the picture is still unclear.
Green Curry is a restaurant that caters to the needs of a small percentage of highly health-conscious consumers. It has an all-organic, vegan menu. Since there are very few restaurants that offer the same unique services, customers are willing to pay a premium price for its products and services. Green Curry is following a:
(a) product diversification strategy. (b) liquidation strategy. (c) mass market strategy. *(d) focused differentiation strategy.
A benefit of being a second mover is:
(a) the absence of the need to be the largest firm in the industry. *(b) that the firm may be able to respond to the first mover's actions without the risks and development costs experienced by the first mover. (c) the ease of establishing a strong brand after the first mover has created the new market. (d) the ability to easily gain market share by introducing new product features.
Two firms are said to be in equilibrium when:
(a) their size, cost, and product quality are similar. (b) when their products and production technology are stable over time. *(c) when none of them wants to change its price, output, and strategy given the choice of price, output, and strategy of the other firm. (d) When the employee turnover is low.
Which one of the following is least likely to give a firm a sustained competitive advantage?
*(a) Hiring a consulting firm to introduce a high-end IT system in one's operations. (b) Creating a corporate culture that promotes replication of tacit knowledge through team work, job-rotation, and other learning-by-doing practices. (c) Establishing a patent for one's product or production process. (d) Advancing quickly and far down a steep experience curve.
Which one of the following tends to increase industry rivalry?
*(a) The inability to differentiate products and establish strong brands. (b) High economies of scale. (c) The presence of an industry leader with a large market share. (d) Industry consolidation.
When a product innovation is not patent protected and does not require complex, firm-specific resources and capabilities, it is unlikely to offer a sustainable competitive advantage.
*(a) True because other firms will likely imitate. (b) False because other firms will likely pursue their own innovations. (c) True or false, depending on Porter's 5 forces. (d) True or false, depending on the generic strategy that the firm is pursuing.
The introduction of Wikipedia in 2001 (discussed in Chapter 7 of the textbook) was to Encyclopedia Britannica:
*(a) a competence-destroying innovation. (b) the introduction of a useful complement. (c) of little importance because the two companies focus on different market segments. (d) an example of how a new rival and increased rivalry can help an established company.
All activities in a firm's value chain:
*(a) should be carefully aligned with the overall strategy of the firm. (b) should be performed at the lowest possible cost or outsourced to the lowest-cost supplier. (c) have to be direct value-adding activities. (d) should target differentiation of the final product.
Diversity of customers and their preferences with respect to different product attributes:
*(a) tends to make focused differentiation a viable strategy. (b) allows economies of scale and scope and thus favors large firms. (c) tends to be good for firm profits because it makes it easier to build strong brands. (d) is something that companies pursuing low cost find highly advantageous because everybody likes to be able to satisfy their need at the lowest possible cost.
Which of the following results from the integration and coordination of a set of resources?
*a. A capability b. A core competence c. Sustainable competitive advantage d. Organizational assets
Which of the following is NOT considered a generic strategy?
*a. Product diversification b. Cost leadership c. Focused differentiation d. Integrated cost leadership/differentiation
Which of the following conditions does NOT cause a supplier group to be powerful?
*a. When satisfactory substitute products are available to buyers b. When the effectiveness of suppliers' products has created high switching costs for buyers c. Buyers are not a significant customer for the supplier group d. Suppliers are a credible threat to integrate forward
Business-level strategies are concerned specifically with:
*a. a firm's position within its industry, relative to competitors. b. the industries in which the firm will compete. c. how functional areas will be organized within the firm. d. how a business with multiple physical locations will operate one of those locations.
The threat of entry of new competitors is affected by _____________ and _____________.
*a. barriers to entry, expected retaliation of incumbents b. the power of suppliers, buyers c. the profitability of the industry, the market share of its leading firm *d. the demand for the product, the profitability of the competitors
Capabilities that other firms cannot develop easily are classified as:
*a. costly to imitate. b. rare. c. valuable. d. nonsubstitutable.
An attractive industry would have all of the following characteristics EXCEPT:
*a. low barriers to entry. b. suppliers with low bargaining power. c. a moderate degree of rivalry. d. low threats from substitute products.
A cost leadership strategy can be summarized as:
*a. providing products with features acceptable to customers at the lowest competitive price. b. providing products with features that are very inexpensive so that the price of the product is very low. c. providing products that are so unique that customers are willing to pay a premium. d. focusing on a few unique features for which customers are willing to pay a premium.
Value chain activities can be:
*a. segmented into primary and support activities. b. segmented into resources and capabilities. c. analyzed, but are of little use in building a competitive advantage for a firm. d. used only in for-profit companies.
Intangible assets include:
*a. the firm's reputation for its goods and services. b. a firm's borrowing capacity. c. depreciated capital assets. d. manufacturing facilities.
Xfinity and AT&T provide high-speed Internet services in Lafayette, IN. So far, the two companies have kept their prices steady and relatively high, but they are constantly tempted to lower them in order to increase market penetration and grab some customers from each other. The table below summarizes their annual profits (in millions of dollars). AT&T Lower Prices Hold Lower Prices 8, 6 18, 4 Xfinity Hold 6, 14 12, 8 (a) How many equilibria, if any, do you see in this problem and what are they? (b) If your answer above is CONSISTENT with the fact that the prices have been steady, what would you expect to happen with the prices if Duke Energy found a way to provide high-speed Internet through the electrical grid and outlets in homes and businesses in the area? If your answer above is NOT CONSISTENT with the fact that the prices have been steady, what might explain this discrepancy? In other words, are AT&T and Xfinity irrational and failing to maximize their respective profits or is there something else going on?
(a) 1 Equilibrium: they both lower their prices. (b) Not consistent, they are probably colluding. Taking a long view of the industry, they probably realize that they cannot outdo or eliminate each other, so they are choosing to tacitly cooperate and keep the prices high.
Which one of the following is NOT a good reason for firm X to buy rather than make?
(a) An independent supplier can achieve higher economies of scale than firm X. *(b) A supplier needs to make relationship-specific investments to serve firm X. (c) Firm X can make several suppliers compete for its business. (d) Transaction costs are very low.
Horizontal integration between 2 firms in an industry is likely to:
(a) Increase the threat of new entrants. (b) Increase industry rivalry. (c) Increase or decrease rivalry, depending on the other 4 forces. *(d) Reduce industry rivalry.
The ability of an innovator to benefit from the innovation is significantly helped by all of the following EXCEPT:
(a) Long lead times involved in launching similar copycat products. (b) The ability of the innovator to rapidly build reputation and manufacturing skills. *(c) The ability of the innovator to find good suppliers. (d) The ability of the innovator to patent the product design.
Which one of the following is the most likely to result in a sustained competitive advantage?
(a) Signing a promotion deal with a major Hollywood celebrity who just won an Oscar. (b) Launching an aggressive marketing and promotion campaign. (c) Listing of the company stock on the New York Stock Exchange. *(d) Aggressively building market share after an innovation in order to advance far down a steep experience curve.
Which of the following is NOT an activity in Porter's Value Chain of the firm?
(a) Technology development. (b) Outbound Logistics. (c) Inbound Logistics. *(d) Forward Integration.
A differentiation strategy provides products that customers perceive as having:
a. acceptable features. b. features of little value relative to the value provided by the low-cost leader's product. c. features for which the customer will pay a low price. *d. features that are non-standardized but appealing and desirable.
The threat of new entrants is increased if:
a. access to distribution channels is hard to gain. b. economies of scale in the industry are high. *c. product differentiation in the industry is low. d. capital requirements in the industry are high.
Café Principal has a location in downtown Lafayette. A new Starbucks has just opened down the street. Principal's managers think that Starbucks may want to open another store just a block away. They are trying to decide whether to act quickly and open another store before Starbucks does. They estimate the payoffs in the downtown coffee business as follows. Starbucks 1 store 2 stores Café 1 store 50, 50 30, 90 Principal 2 stores 80, 35 20, 30 Should Café Principal go ahead and publicly commit to opening another store, for example, by signing a long term lease or purchasing real estate for the new shop?
It seems like a good idea if Starbucks is a rational player trying to maximize its profits, because Starbucks is then deterred from opening another store. This is the standard answer. However, if one believes that Starbucks is irrational or willing to fight a prolonged price war in order to force Principal to close its second store, the answer is otherwise. This answer, if articulated precisely, gets full credit as well.
A property owner is considering renting out a warehouse space for 12 years. The owner would receive $200,000 immediately and the following 11 payments would each be due at the beginning of the respective year and higher by 2% over the previous year. Assuming a discount rate of 10%, what is the net present value of this stream of future payments?
NPV = 200,000 ∙ (1+ 1.02/1.1 + 1.022/1.12 + ... + 1.0211/1.111 ) = 200,000 ∙ (1 - 1.0212/1.112 ) / ( 1- 1.02/1.1) = $1.639M
The five forces model does NOT include which of the following?
a. Buyers b. Competitive rivalry c. Suppliers *d. Replacements
Which of the following is NOT a tangible resource?
a. Capital b. Plant facilities *c. Managerial capabilities d. Inventory
Which of the following is NOT an entry barrier to an industry?
a. Expected competitor retaliations b. Economies of scale c. Brand loyalty *d. Bargaining power of suppliers
Which of the following conditions does NOT contribute to intense rivalry among competing firms?
a. Slow industry growth b. An equal balance among competing firms c. When fixed costs account for a large part of a firm's total costs *d. When firms have been able to establish differentiated products
Which of the following is NOT true about value chain analysis?
a. The value chain is a template the firm can use to understand its cost position. *b. This analysis helps to identify the single most important means that will facilitate strategy implementation. c. Both primary and support activities should be analyzed. d. It can be used to guide the implementation of business-level strategies.
Which of the following is NOT an intangible asset?
a. Trademarks b. Organizational culture *c. Production equipment d. Brand name
Which of the following is NOT a criterion that managers can use to decide which of their firm's capabilities have the potential to create a sustained competitive advantage?
a. Valuable b. Nonsubstitutable c. Rare *d. Easy to imitate
Under which of the following conditions will a buyer group NOT be powerful?
a. When they purchase a large portion of an industry's output *b. When switching costs are high c. When suppliers sell a commodity product d. When they have a credible threat of backward integration
When a resource or capability is valuable, rare, costly to imitate, and nonsubstitutable firms may obtain:
a. a temporary competitive advantage. b. a complex competitive advantage. c. competitive parity. *d. a sustainable competitive advantage.
Product differentiation refers to the:
a. ability of the buyers of a product to negotiate a lower price. b. response of incumbent firms to new entrants. *c. belief by customers that an existing product is unique. d. fact that as more of a product is produced the cheaper it becomes per unit.
