Business Strategy Exam 2 Study Guide
All of the following are generic business-level strategies except A) broad differentiation. B) focused cost-leadership. C) focused marketing strategy. D) broad cost-leadership.
C - Focused marketing strategy is not one of Porter's identified strategies.
A factor favoring the success of disruptive innovation is that A) incumbent firms are slow to change. B) new entrants have highly formal organizational structures and processes. C) the low end of the market is highly guarded. D) incumbent firms focus on radical innovation rather than incremental innovation.
A - A factor favoring the success of disruptive innovation is that incumbent firms often are slow to change. Incumbent firms tend to listen closely to their current customers and respond by continuing to invest in the existing technology and in incremental changes to the existing products.
Which of the following statements accurately brings out the distinction between the introduction and growth stages of the industry life cycle? A) There is more strategic variety in the growth stage when compared to the introduction stage. B) The number of competitors is more in the introduction stage than the growth stage. C) The market size for a new product or service is larger in the introduction stage when compared to the growth stage. D) While achieving market acceptance is the strategic objective during the introduction stage, the objective in the growth stage is to pursue a harvest strategy.
A - Since market demand is robust in the growth stage and more competitors have entered the market, there tends to be more strategic variety: Some competitors will continue to follow a differentiation strategy, emphasizing unique features, product functionality, and reliability. Other firms employ a cost-leadership strategy in order to offer an acceptable level of value but lower prices to consumers.
Which of the following scenarios would be characteristic of an entrepreneur? A) John implemented a new and more efficient way to produce pottery. B) Karen imitated a new, more efficient method of producing pottery. C) Hugo scaled back the production of pottery because it wasn't cost effective. D) Juliana used a proven marketing method to advertise her pottery.
A - 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, John is introducing a new production process and is therefore practicing entrepreneurship.
Whole Foods focuses on a small market segment, affluent consumers who want to buy high-end, organic groceries. What is the appropriate name for Whole Foods's scope of competition? A) focused B) broad C) specific D) general
A - In the generic business model, the two choices for scope of competition are broad and focused. Whole Foods has clearly defined its scope narrowly at wealthy individuals.
Lauren is the CEO of TimeEx Inc. and is competing in an industry that is shifting due to disruptive innovation. Which of the following strategies should she consider to most appropriately respond to this disruptive innovation? A) Lauren should guard against the disruptive innovation by protecting the low end of the market. B) Lauren should stop allocating her firm's resources towards continually trying to innovate. C) Lauren should exit the industry before her firm files for bankruptcy. D) Lauren should focus on procuring the "laggards" in her industry.
A - Lauren should guard against the low end of her market by introducing low-cost innovations to preempt stealth competitors.
The market capitalization of a public company is $5 billion. Each share of the company is traded at $200. What do you infer from this financial data? A) The firm's number of outstanding shares is 25 million. B) The firm pays an annual dividend of 10 percent. C) The firm's total return to shareholder is $5 billion. D) The firm's economic value created is $5 billion.
A - 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).
Which of the following provides an example of a firm in a red ocean? A) Cool Apparel offered clothing at a low price but failed to differentiate its product as being exclusive. B) Clothes 'R Us Apparel offered clothing at a price matching that of its competitors and, as a result, it had lower profit margins. C) Nadia Apparel offered clothing at a mid-range price but failed to differentiate its product as being of decent quality. D) XYZ Apparel offered clothing at a higher price than competitors and, as a result, failed to make a profit.
A - Red ocean is a term used when a blue ocean strategy fails. Such a strategy fails when a firm fails to combine differentiation and low cost.
Which of the following is a disadvantage of measuring firm performance through total return to shareholders and firm market capitalization? A) Market volatility makes it difficult to assess firm performance through these measures, particularly in the short term. B) These tools fail to indicate how the stock market views all available public information about a firm's expected future performance. C) These tools measure competitive advantage in absolute terms rather than relative terms. D) Only the book value of the share prices is taken into account when applying these measures, and not the market value.
A - 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.
A high percentage of R&D/Revenue ratio indicates a(n) A) strong focus on innovation to improve current products and services. B) inefficiency in the management to focus on new products. C) strong focus on marketing and sales to promote products and services. D) negligent investment toward research and development.
A - The R&D/Revenue ratio indicates how much of each dollar that a firm earns in sales is invested to conduct research and development. A higher percentage is generally an indicator of a stronger focus on innovation to improve current products and services, and to come up with new ones.
The balanced-scorecard framework is a tool for strategy ________, not ________. A) implementation; formulation B) analysis; sustainability C) formulation, implementation D) sustainability, economic value creation
A - The balanced scorecard is a tool for strategy implementation, not for strategy formulation. It is up to a firm's managers to formulate a strategy that will enhance the chances of gaining and sustaining a competitive advantage.
Power Juice is the owner of a firm that produces sports drinks. Since there are a number of firms in the industry competing on cost, Power Juice has decided to pursue a differentiation strategy. In this case, she should A) focus on adding unique features to her product that customers will value. B) concentrate on improving process technologies to achieve economies of scale. C) enforce strict budget controls at all levels of the organization. D) devote all resources to reducing the value gap.
A - The focus of competition in a differentiation strategy tends to be on unique product features, service, and new product launches, or on marketing and promotion rather than price. A differentiator would focus research and development on product features or packaging in order to add uniqueness.
Peloton Interactive is a manufacturer of high-definition televisions. The industry has gone through a period of rapid growth and expansion and has started to experience a decline in the rate of growth. Several smaller firms have been bought out by larger competitors, and competition for market share is intensifying. Which of the following strategies is most likely to give Peloton Interactive a competitive advantage? A) Implement process innovations that lower per-unit costs. B) Introduce product innovations that differentiate Potomac televisions from the competition. C) Imitate the features of the highest-selling television on the market. D) Increase spending on marketing and attempt to acquire a high-profile celebrity spokesperson.
A - The high-definition television industry has entered the shakeout stage of the industry life cycle. The winners in this increasingly competitive environment are often firms that stake out a strong position as cost leaders. Key success factors at this stage are the manufacturing and process engineering capabilities that can be used to drive costs down. The importance of process innovation further increases (albeit at diminishing marginal returns), while the importance of product innovation further declines.
The strategy canvas for movie theaters includes factors such as prices, comfort, customer service, concessions variety, and hours of operation. Which of the following value curves is most likely to represent a theater that successfully positions itself as a differentiator? A) high price, high comfort, high customer service, high concessions variety, low hours of operation B) low price, high comfort, high customer service, high concessions variety, low hours of operation C) high price, low comfort, low customer service, high concessions variety, low hours of operation D) low price, low comfort, low customer service, low concessions variety, low hours of operation
A - The value curve is the basic component of the strategy canvas. It graphically depicts a company's relative performance across its industry's factors of competition. When pursuing a generic differentiation strategy, all these scores along the different competitive elements in an industry go along with a relative higher cost structure. A theater pursuing differentiation, then, would have higher prices to go along with higher levels of comfort, service, and concessions variety, but may score lower in hours of operation to reflect its position as a more exclusive destination for moviegoers.
During the process of formulating an effective business model, a firm's managers should first A) transform their strategy of how to compete into a blueprint of actions and initiatives. B) implement their strategy at corporate, strategic business unit, and functional levels. C) implement their blueprint of actions and initiatives through structures, processes, culture, and procedures. D) evaluate the firm's strategy already in effect and take corrective actions if necessary.
A - To come up with an effective business model, a firm's managers first need to transform their strategy of how to compete into a blueprint of actions and initiatives that support the overarching goals. In a second step, managers implement this blueprint through structures, processes, culture, and procedures.
Fresher Corp. produces electric bathroom fragrance diffusers and sells the electric outer device at a market rate price. However, they lock their clients into a two-year agreement to purchase the perfume refills solely from them on a monthly basis. Which of the following business models does this best illustrate? A) subscription-based B) peer-to-peer C) crowdsourcing D) freemium
A - Users pay for access to a product or service whether they use the product or service during the payment term or not.
In order for a firm to formulate an effective business-level strategy, it is important to remember that competitive advantage is determined by A) the characteristics of both the industry and the firm. B) the characteristics of the firm alone. C) the characteristics of the industry in which a firm competes. D) the amount of market share a firm can gain.
A - While the majority of performance can be explained by the firm, the industry in which that firm competes also plays a significant role. It is also important to note that industry and firm effects are not independent, but rather they are interdependent.
A disruptive innovation leverages ________ technologies, while architectural innovations are based on ________ technologies. A) new; existing B) existing; novel C) drastic; new D) required; established
A- A disruptive innovation leverages new technologies, while architectural innovations are based on existing ones.
Benny's Closet Inc. is an apparel company that caters to highly price-conscious customers. Through its simple apparel designs, acceptable quality levels, and minimal customer service, the company has been able to sell its merchandise at the lowest prices in the industry. Which of the following generic business strategies is Benny's Closet applying? A) cost-leadership B) differentiation C) niche marketing D) product diversification
A- Benny's Closet is applying the cost-leadership strategy. 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.
As a research scholar, Linda had built a helicam as part of her project. The helicam could capture aerial images. Realizing the potential use of this product in movie production and military and rescue operations, she started a new venture where she could customize these helicams to fit the specific needs of the buyers and sell them. Linda can be best described as a(n) A) entrepreneur. B) category captain. C) franchisor. D) early adopter.
A- In the context of this scenario, Linda can be best described as an entrepreneur. Entrepreneurs are the agents who 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 can introduce change by starting new ventures.
After the creation of social networking websites were introduced, their value increased exponentially as the number of users increased. This is the positive effect of a(n) A) network effect. B) confirmation effect. C) impression management effect. D) user effect.
A- Network effects occur when the value of a product or service increases, often exponentially, with the number of users, as evidenced by social networking sites.
Customer service and ________ are two of the value drivers that managers can utilize when trying to improve a firm's differentiation strategic position. A) product uniqueness B) experience curve C) cost of input factors D) economies of scale
A- The most salient value drivers that managers have at their disposal when executing a differentiation strategy are product features, customer service, customization, and complements.
Connell Inc. has been successful at differentiating itself from competitors by claiming a premium price for its digital cameras based on superior image quality and advanced technology. In this scenario, which of the following is the key value driver? A) product features B) economies of scale C) low-cost input factors D) customer service
A- The value drivers that support a differentiation strategy are product features, customer service, customization, and complements.
Which of the following is an accurate statement about learning effects? A) Learning effects are captured at one point in time. B) Learning effects occur over time as output accumulates. C) Learning effects are significant in all production processes. D) Learning effects can produce diseconomies
B - Learning effects occur over time as output accumulates. There are no diseconomies to learning. In some production processes, learning effects are minimal.
Which of the following statements correctly compares Apple and Microsoft in 2016? A) Apple had a higher return on revenue than Microsoft. B) Apple had a higher return on invested capital than Microsoft. C) Microsoft had higher total sales than Apple. D) Microsoft had a lower cost structure than Apple.
B - Apple's ROIC was 18.3 percent in 2016, while Microsoft's was 13.7 percent.
Managers can justify using the balanced-scorecard framework because research show that both ________ and ________ performance dimensions are important when examining the effectiveness of a firm's strategy. A) economic, stock price B) quantitative, qualitative C) customer survey, peer evaluation D) financial, accounting
B - Both quantitative and qualitative performance dimensions matter in judging the effectiveness of a firm's strategy. Those who focus on only one metric will risk being blindsided by poor performance on another. Rather, strategic leaders need to rely on a more holistic perspective when assessing firm performance, measuring different dimensions over different time periods.
Jack and Jill both love hot coffee. Jack likes to keep his coffee hot during the day while Jill doesn't mind drinking room temperature coffee. Jack is willing to spend more money on a thermos than Jill is willing to spend. This example illustrates the following major limitation of employing the Economic Value Creation framework because A) overall macroeconomic factors such as the unemployment rate, and interest and exchange rates all have a direct bearing on stock prices. B) determining the value of a good/service through the perspective of a consumers is not a simple task because consumers have different spending habits. C) accounting data focus mainly on tangible assets, which are no longer the most important. D) accounting data are historical and thus backward-looking.
B - Determining the value of a good in the eyes of consumers is not a simple task. Jack is willing to spend more money on a thermos than Jill; we must examine their purchasing habits to reveal their preferences, which should indicate how much each consumer is willing to pay for a product/service.
By selling a tablet at $1,000 for which consumers are willing to pay up to $1,200, a consumer electronics firm makes a profit of $400 per unit. In this scenario, the amount $600, that is ($1200 - $1000) + $400, is the A) opportunity cost. B) economic value created. C) reservation price. D) consumer surplus.
B - Economic value creation equals consumer surplus plus firm profit, or the sum of consumer and producer surplus.
When Monopar Therapeutics 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 Monopar Therapeutics' intellectual property rights. Thus, the drug is protected by a A) promissory bill. B) patent. C) franchise. D) royalty.
B - In the given scenario, Monopar Therapeutics' 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.
Nam-zim sells its e-book readers at the cost price of $15 each. However, the company makes its profits when users have to download or buy books online. Which of the following business models is Nam-zim implementing? A) subscription-based B) razor-razor-blade C) pay-as-you-go D) direct sales
B - Nam-zim is implementing the razor-razor-blade business model. In the razor-razor-blade business model, the initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. The company makes its money on the replacement part or consumable when needed.
Which of the following is an advantage of applying the economic value creation perspective to assess a firm's performance? A) When the need for "hard numbers" arises, managers and analysts rely on economic value creation perspective to measure competitive advantage. B) In economic value perspective, analysts not only consider historical costs, but also opportunity costs. C) Arriving at the economic value created is easy because determining the value of a good in the eyes of consumers is a simple task. D) It is the most efficient tool for assessing corporate-level competitive advantage of highly diversified companies with large product portfolios.
B - Rather than merely relying on historical costs, as done when taking the perspective of accounting profitability, in the economic value creation perspective, all costs, including opportunity costs, must be considered.
Which of the following is an advantage of the balanced-scorecard? A) It is a tool for both strategic formulation and strategic implementation. B) It allows managers to translate a firm's vision into measurable operational goals. C) The balanced-scorecard is independent of the skills of the managers responsible for its implementation. D) Its implementation is a one-time effort and does not require continuous tracking of metrics or updating of strategic objectives.
B - The balanced-scorecard approach is popular in managerial practice because it has several advantages. In particular, the balanced-scorecard allows managers to translate the vision into measureable operational goals.
How does a firm capture its producer surplus for a good or service? A) as cost per unit sold B) as profit per unit sold C) as earnings per share D) as market price per share
B - The difference between the price charged for a product (P), and the cost to produce it (C), is the producer surplus. Firms capture this amount as profit per unit sold.
Fulcrum Feet is a manufacturer of athletic shoes. It has released an improved version of its premier running shoe in markets in which the company already operates. Which of the following types of innovations does this scenario best illustrate? A) radical innovation B) incremental innovation C) architectural innovation D) disruptive innovation
B - The scenario best illustrates an incremental innovation. An incremental innovation squarely builds on an established knowledge base and steadily improves an existing product or service offering. It targets existing markets using existing technology.
Dontechi is a file hosting service that allows users to store up to 5GB of data with no restrictions or charges. However, users have to pay a fee for advanced features on the cloud storage system and additional storage space. Which of the following business models does thisbest illustrate? A) subscription-based B) freemium C) pay-as-you-go D) razor-razor-blade
B - This scenario best illustrates the freemium business model. The freemium (= free + premium) business model is a model in which the basic features of a product or service are provided free of charge, but the user must pay for premium services such as advanced features or add-ons.
When a differentiator charges a similar price as its competitors in the same strategic group but offers more perceived value, it A) loses its competitive advantage. B) gains market share from other firms. C) lowers the economic value created. D) results in diseconomies of scale.
B - When a firm is able to offer a differentiated product or service and can control its costs at the same time, it is able to gain market share from other firms by charging a similar price but offering more perceived value.
Generally, as the level of ________ innovation declines, the level of ________ innovation increases. A) process; product B) product; process C) process; incremental D) product; radical
B - When product innovation declines, the level of process innovation increases, with a focus more on cost savings.
Facebook has become one of the largest media companies in the world, valued at nearly 50 billion in 2019, but hasn't produced a single piece of content. Facebook is an example of a A) pipeline business. B) platform business. C) strategic business unit. D) a typical value chain driven business.
B- A platform business is an enterprise that creates value by matching external producers and consumers in a way that creates value for all participants.
One of the reasons that big box retailers like Home Depot are able to achieve economies of scale is that A) they have both broad and narrow economies of scope. B) they are able to take advantage of physical properties and maximize their scale efficiencies by stocking more merchandise and handling inventory more efficiently. C) they are able to take advantage of market size and spread investment losses over many locations. D) they have been able to protect themselves from the threat of buyer power by increasing input prices.
B- Big box retailers like Home Depot are able to reap economies of scale by taking advantage of physical size ("big box"), stock more inventory, and manage it more efficiently.
Jimmy can be categorized under the late majority customer segment. Which of the following behaviors is he most likely to exhibit? A) He will be confident in her ability to master any new technology. B) He will prefer to buy from well-established brands rather than unknown new ventures. C) He will not rely on endorsements by the early majority or early adopters. D) He will buy beta versions of new products and technology.
B- Jimmy is most likely to buy from well-established brands rather than unknown new ventures. The late majority prefers to buy from well-established firms with a strong brand image rather than from unknown new ventures.
Feran is the founder of an innovative "impromptu catering" business that provides elegant, healthy party food and decorations on less than 24 hours' notice. The company has grown by over 150 percent in the past year. Feran credits some of the company's success to studying the strategies of prominent social entrepreneurs, such as Wikipedia's Jimmy Wales. What can Feran do to exemplify the social entrepreneurship model? A) Launch a social media platform for food lovers. B) Provide free weekly catered meals for the homeless. C) Seek investments from venture capitalists. D) Buy out his closest competitors to ensure a competitive advantage.
B- Social entrepreneurship describes the pursuit of social goals while creating profitable businesses. Social entrepreneurs evaluate the performance of their ventures not only by financial metrics but also by ecological and social contribution (profits, planet, and people). They use a triple-bottom-line approach to assess performance. Feran can pursue social entrepreneurship by donating some of the company's time and resources to helping homeless individuals in the community.
Which of the following most accurately describes a difference between incremental innovation and radical innovation? A) Incremental innovation researches new materials; radical innovation researches new processes. B) Incremental innovation targets new markets and technologies; radical innovation reinvents markets and technologies. C) Incremental innovation builds on an established knowledge base; radical innovation uses an entirely different knowledge base. D) Incremental innovation draws on novel methods; radical innovation draws on proven methods.
C - An incremental innovation squarely builds on an established knowledge base and steadily improves an existing product or service offering. It targets existing markets using existing technology. On the other hand, radical innovation draws on novel methods or materials, is derived either from an entirely different knowledge base or from a recombination of existing knowledge bases with a new stream of knowledge, or targets new markets by using new technologies.
The type of customers vital to a firm introducing a new innovation are the ________, who are willing to pay higher prices and like to tinker with new products. A) laggards B) early majority C) early adopters D) late majority
C - Early adopters are important to a firm introducing a new innovation because they are willing to pay higher prices and like to tinker with new products.
In order to achieve a competitive advantage, the Heavenly Hotels, a chain of luxury beach resorts, wants to increase its market share. Which of the following strategies is most likely to do so? A) Maintain prices but significantly increase spending on customer service and other amenities. B) Lower prices but eliminate several of the features that have come to define Heavenly Hotels properties for consumers, such as complimentary meals and in-room massages. C) Take advantage of economies of scale and scope by opening a chain of lower-priced economy hotels that leverage the Heavenly Hotels brand image. D) Raise prices without increasing spending on customer service or resort features.
C - Economies of scale denote decreases in cost per unit as output increases. Economies of scope describe the savings that come from producing two (or more) outputs at less cost than producing each output individually, even though using the same resources and technology. By opening another chain of hotels that leverage the Heavenly Hotels brand image, the company can increase the perceived value of its products and improve market share while controlling costs.
Food Tiger Inc. is a large chain of hypermarkets. It has cost benefits due to its extensive operation. The company's marketing and sales, logistics, administrative, and other such related costs get divided between a large number of product units stocked in its stores. This makes it difficult for smaller retail stores and supermarkets to compete against Food Tiger's low prices. Thus, Food Tiger has a competitive advantage due to its A) superior customer service. B) time compression economies. C) economies of scale. D) learning-curve effects.
C - Food Tiger has a competitive advantage due to its economies of scale. Economies of scale allow firms to spread their fixed costs over a larger output, employ specialized systems and equipment, and take advantage of certain physical properties.
Amber is the manager of gardening supplies wholesaler DigIt Inc. The company's vision is to become the leading supplier of gardening materials in the northeast. In assessing the firm's current state, Amber has determined that the firm could differentiate itself from competitors with an easy-to-use online ordering system and a two-day delivery guarantee. To accomplish this, Amber has determined that DigIt must spend the next two quarters honing its capabilities for sourcing materials quickly and improving its web development competencies. According to the balanced-scorecard approach, what is wrong with Amber's thinking? A) She has not considered the opportunity costs associated with launching an online ordering system. B) She has not addressed the question of which core competencies the firm needs. C) She has failed to account for external factors such as customer perceptions and shareholder perceptions. D) She has not addressed the question of how DigIt will create value.
C - In the balanced-scorecard approach, the four questions asked by managers are (1) "How do customers view us?" (2) "How do we create value" (3) "What core competencies do we need?" and (4) "How do shareholders view us?" Amber has determined that DigIt will create value through its online ordering system and needs core competencies related to sourcing supplies and web development. But she has not addressed how customers and shareholders view the company's products or services and where they should be improved (e.g., quality, speed...) and how customers and shareholders might perceive and value this new service.
When the market for standalone Global Positioning System (GPS) devices declined with the arrival of GPS-enabled mobile phones, InMode Ltd., a manufacturer of GPS devices, bought out most of its rivals that were planning to exit. This allowed the company to get rid of all the excess capacity and acquire a monopolistic market power in the declining industry. Which of the following strategies has InMode Ltd. adopted in this scenario? A) harvest strategy B) maintain strategy C) consolidation strategy D) differentiation strategy
C - In the scenario, InMode Ltd. has adopted the consolidation strategy. Although market size shrinks in a declining industry, some firms may choose to consolidate the industry by buying rivals (those who choose to exit). This allows the consolidating firm to stake out a strong position—possibly approaching monopolistic market power, albeit in a declining industry.
The top management at Konex Vitamins, through rigorous testing, ensures that the company develops and sells vitamins that are free of harmful side effects. Also, the company ensures that the chemical waste generated in the manufacturing process is kept to a bare minimum and is disposed of according to the regulations of the Environmental Protection Agency. The management assesses its overall performance based on these dimensions. Thus, the managers at Konex Vitamins are applying the ________ approach to measure firm performance. A) economic value creation B) shareholder value creation C) triple-bottom-line D) accounting profitability
C - In this scenario, the managers at Konex Vitamins are applying the triple-bottom-line approach to measure firm performance. Using a triple-bottom-line approach, managers audit their company's fulfillment of its social and ecological obligations to stakeholders such as employees, customers, suppliers, and communities as conscientiously as they track its financial performance.
While the personal computer industry is flooded and growing with laptops and tablets, Javier recently bought a desktop, his first personal computer. He realized that a computer at home would be helpful for his children for their school projects, and he could use it to maintain the simple accounts of his plumbing business. Which of the following customer segments does Javier best represent? A) early adopters B) category captains C) laggards D) early majority
C - Javier best represents the laggards segment. Laggards are customers who adopt a new product only if it is absolutely necessary. They tend to enter the market after it is completely mature and frequently during the decline stage.
One of the risks of pursuing a blue ocean strategy is that a firm can find itself A) losing sight of its mission and vision. B) competing with only a differentiation strategy. C) "stuck in the middle." D) ineffective when competing on an international scale.
C - Many firms fail at achieving a blue ocean strategy because they end up getting stuck in the middle and are not able to differentiate or establish a cost-leadership position.
Which of the following scenarios exemplifies a sustainable strategy under the triple-bottom-line approach? A) Rather than complying with the restrictive recycling laws in the United States, Gogozoom outsourced its manufacturing to a country that has fewer environmental restrictions. B) Gogozoom developed a chemical additive that doubled the life of its plastics. The additive was currently legal, but environmental groups argued that it harmed the environment. C) Gogozoom reformulated its products to eliminate chemicals that were widely used in the industry but were being investigated for their potential negative effects on the environment. D) Gogozoom's nearest competitor increased the salaries of its production workers by 30 percent, but Impervious kept its wages the same to gain a cost advantage over its competitor.
C - Rather than emphasizing sustaining a competitive advantage over time, sustainable strategy means a strategy that can be pursued over time without detrimental effects on people or the planet. By voluntarily eliminating the harmful chemicals, Impervious not only achieved a positive result in the people and planet dimensions of the triple bottom line, but potentially gave itself a profit advantage by avoiding a shutdown if the government ultimately decided to ban the chemicals.
A wearable technology company has priced one of its wristwatches at $210. Most of its competitors sell similar watches at $180. Selling anything less than $150 would result in a loss for the company. However, the absolute maximum a customer is willing to pay for it is $170. In this scenario, what is the reservation price of the wristwatch? A) $150 B) $180 C) $170 D) $210
C - The absolute maximum a customer would be willing to pay for a product is referred to as its reservation price, which in this case is $170.
When does a firm fall into the large competitive chasm between early adopters and early majority? A) when it cannot attract technological enthusiasts to try the beta versions of its products B) when it creates strong network effects during the growth stage C) when it fails to successfully launch a mass-market version of its product D) when the early majority create herding effects for its products
C - The significant differences in the attitudes toward technology of the early majority when compared to the early adopters signify the wide competitive gulf—the chasm—between these two consumer segments. Without adequate demand from the early majority, most innovative products wither away.
Which of the following best describes a strategic tradeoff? A) the tension between innovation and keeping manufacturing costs down B) the tension between maintaining both high-quality products and service C) the tension between value creation and the pressure to keep costs in check D) the tension between raising prices and keeping a loyal clientele
C - To achieve a desired strategic position, managers must make strategic tradeoffs—choices between a cost or value position. Managers must address the tension between value creation (which tends to generate higher cost) and the pressure to keep cost in check so as not to erode the firm's economic value creation and profit margin.
Trader Joe's differentiates itself from competitors by offering top-quality foods obtained through sustainable agriculture. This business strategy implies that Trader Joe's focuses on A) decreasing the existing value gap by providing luxury goods to customers. B) maintaining a less steeper learning curve as compared to its competitors. C) increasing the perceived value created for customers, which allows it to charge a premium price. D) lowering its costs compared to its competitors, while offering adequate value for its products and services.
C - Trader Joe's differentiates itself from competitors by offering top-quality foods obtained through sustainable agriculture. This business strategy implies that Trader Joe's focuses on increasing the perceived value created for customers, which allows it to charge a premium price.
The management team for Forever Power came up with the following vision statement: "Forever Power 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 A) accounting profitability approach. B) economic value creation approach. C) triple-bottom-line approach. D) balanced-scorecard approach.
C - 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 Forever Power.
Assume that the market for print book publishing has entered the maturity stage. Which of the following would most likely exist during this stage? A) a few start-up publishers B) many small to midsized publishers C) a few large publishers D) one large publisher
C- During the fourth stage of the industry life cycle, the industry structure morphs into an oligopoly with only a few large firms.
While the domestic airline industry is in the maturity stage of the industry life cycle, the internet-enabled appliance industry is in its growth stage. Which of the following can be inferred from the given data? A) The number of competitors will be greater in the domestic airline industry than the internet-enabled appliance industry. B) The internet-enabled appliance industry is ahead of the domestic airline industry in the industry life cycle. C) While the domestic airline industry is mostly free from excess capacity, the internet-enabled appliance industry will have new entrants. D) The mode of competition will be price-based in the internet-enabled appliance industry and will be nonprice-based in the domestic airline industry.
C- Generally, the larger firms enjoying economies of scale are the ones that survived the shakeout phase. After the shakeout is completed and a few firms remain, the industry enters the maturity stage. The numbers of competitors are fewer at this stage when compared to the growth stage.
Tablette Corp. is a consumer electronics company known for its affordable mobile devices that follows a cost-leadership strategy. In this scenario, Tablette Corp. should ideally compare its strategic position with A) a company that sells small kitchen appliances at affordable prices. B) a consumer electronics company that sells high-end devices. C) a consumer electronics company popular among price-conscious customers. D) an online company that sells customized electronics accessories
C- In this scenario, Tablette Corp. 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 Tablette Corp.'s strategic position with another cost-leader. In this case, it will be an electronics company popular among price-conscious customers.
Karat Packaging has entered a stage in which the demand for their innovative fax machines has declined. Now most customers are buying replacement parts or buying their second fax machine from the firm. What stage in the industry life cycle does this scenario describe? A) growth stage B) maturity stage C) shakeout stage D) decline stage
C- Karat Packaging has entered the maturity stage. Demand was largely satisfied in the prior shakeout stage. Demand now consists of replacement or repeat purchases only.
Tough Guy's Inc. is a chain of gyms. It offers a fitness package that allows its members to use the gym facilities for 12 months by paying only for 10 months. Included in the package are two health check-ups and a gym kit. These add-ons by themselves are not very valuable, but as a package they can enhance the perceived value of the service offerings. In this case, Tough Guy's primary value driver is A) economies of scale. B) learning-curve effects. C) availability of complements. D) experience-curve effects.
C- Tough Guy's primary value driver is 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.
Jonathan 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, Jonathan is unable to shift to a cost-leadership strategy. Which strategy is most likely to achieve a competitive advantage? A) Offer similar services as competitors but raise prices to increase profits. B) Lower prices but continue employing high-paid expert gardeners. C) Narrow the scope of competition and focus on unique features such as the use of organic materials. D) Maintain prices but replace all the expert employees with less-skilled workers to control costs.
C- 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, Jonathan should focus on a smaller market segment, such as environmentally conscious homeowners who are willing to pay a premium price for organic landscaping.
Due to its large sales volume and low-cost structure, Bunny's Lo-Cost enjoys a cost-leadership position. Which of the following scenarios might threaten Bunny's competitive advantage? A) Existing competitors in the same industry lower their prices to match those of Bunny's. B) Industry suppliers raise their prices. C) Competitors engage in an all-out price war. D) A new competitor is perceived to provide similar value, but in addition offers innovative self-checkout that Bunny's doesn't offer.
D - Although a cost-leadership strategy provides some protection against the five forces, it also carries some risks. If a new entrant with new and relevant expertise enters the market, the low-cost leader's margins may erode due to loss in market share while it attempts to learn new capabilities.
What does it mean for a firm to have an 80 percent learning curve? A) Every time the cumulative output increases by 80 percent, the cost per unit will decline by 20 percent. B) Every time the cumulative output is doubled, the cost per unit will decline by 80 percent. C) Every time the cumulative output goes up by 20 percent, the cost per unit will decline by 80 percent. D) Every time the cumulative output is doubled, the cost per unit will decline by 20 percent.
D - An 80 percent learning curve indicates that every time the cumulative output is doubled, the cost per unit will decline by 20 percent. Similarly, a 90 percent learning curve indicates that per-unit cost drops 10 percent every time output is doubled. A 70 percent learning curve indicates a 30 percent drop every time output is doubled.
Tom is attempting to measure how his customers views his firm. To do this, he uses the balanced-scorecard framework because he knows that A) customer surveys will help him determine future industry attractiveness. B) this will guarantee his company a sustainable competitive advantage. C) the framework will help him increase his stock price. D) the customer perspective is directly linked to firm revenues and profits.
D - Customer perspective is directly linked to firm revenues and profits and this is why it is included in the balanced-scorecard framework.
FMC Corp., a chemical manufacturer, has over 5,000 employees spread across several SBUs which collectively generate over $3 billion in annual revenues. FMC's strategic leaders initially focused solely on financial metrics as their key performance measure but is failing to achieve competitive advantage in their industry. Which of the following questions below should their senior leadership not consider while implementing the balanced score card framework? A) How do we become the customer's most valued supplier, and how can my division create this value for the customer? B) What are my division's core competencies and contributions to the company goals? C) How do we become more externally focused? D) When should we decide to divest assets and prepare for an exit strategy?
D - Implementing a balanced scorecard should allow FMC's managers to align their different perspectives to create a more focused corporation overall; the four key questions senior leadership should ask themselves are: how do shareholders view us, what core competencies do we need, how do we create value, how do customers view us?
Diana is a recent fashion graduate. She started her own apparel store with an investment of $300,000. In the first year she made a profit of $60,000. If she had taken up a job as a fashion editor for a magazine, she would have earned $50,000 as salary per year. Also, she could have invested her capital, $300,000, in treasury bonds and earned an interest of $12,000. Thus, the amount $62,000 ($50,000 + $12,000) would be Diana's A) social cost. B) break-even price. C) reservation price. D) opportunity cost.
D - In the scenario, the amount $62,000 ($50,000 + $12,000) would be Diana's opportunity cost. An entrepreneur faces two types of opportunity costs: (1) forgone wages she could be earning if she were employed elsewhere, and (2) the cost of capital she invested in her business, which could instead be invested in, say, the stock market or U.S. Treasury bonds.
A firm incurs $400 to manufacture a computer. In the market, customers are willing to pay a maximum of $600 for the computer priced at $500. The difference of $200 ($600 minus $400) is the A) consumer surplus. B) total return to shareholders. C) customer lifetime value. D) economic value created.
D - In this scenario, the difference of $200 ($600 minus $400) is the economic value created. Economic value created is the difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it.In this scenario, the difference of $200 ($600 minus $400) is the economic value created. Economic value created is the difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it.
In the multiplex industry, Home Again Movies Inc. is an upscale multiplex that focuses on superior customer experience. The firm charges premium prices for its movie tickets and services. Movies-for-less Inc., in contrast, charges the lowest price in the industry with its no-frills approach. In between these two segments is Just Right Films Inc., which offers a customer experience comparable to that of Home Again Movies at a price almost as low as that of Movies-for-less. What strategy is Just Right Films pursuing in this scenario? A) liquidation strategy B) product diversification strategy C) market penetration strategy D) blue ocean strategy
D - Just Right Films is pursuing the blue ocean strategy. A successful blue ocean strategy requires that trade-offs between differentiation and low cost are reconciled. A blue ocean strategy allows a firm to offer a differentiated product or service at low cost.
How did Marriott use economies of scope to achieve greater economic value than its competitors? A) Marriott sees increases in cost per hotel unit as number of customers increases. B) Marriott sees decreases in cost per hotel unit as number of customers increases. C) Marriott lowered its cost structure by focusing its production assets on one type of hotel, which increased the diversity of its hotel line and thus its differentiated appeal. D) Marriott lowered its cost structure by sharing its production assets over several types of hotels, which increased the diversity of its hotel line and thus its differentiated appeal.
D - Marriott lowered its cost structure by sharing its production assets over several types of hotels, which increased its menu and thus its differentiated appeal. Economies of scope refers to the saving that come from producing two or more outputs at less cost than producing each output individually.
When examining all the generic strategies, which of the following below is inherently superior in every industry? A) broad differentiation B) focused differentiation C) blue ocean D) There is no single superior business-level strategy
D - None of the business-level strategies are inherently superior. The success of each depends on context and relies on two factors: (1) how well the strategy leverages the firm's internal strengths while mitigating its weaknesses and (2) how well it helps the firm exploit external opportunities while avoiding external threats. There is no single correct business strategy for a specific industry.
Which of the following business models in the landscaping industry is likely to scale most efficiently? A) a company that offers three different bundles of services at a low, medium, and high price point depending on the level of care required by the customer B) a company that deploys a team of both skilled and unskilled landscapers to each customer's location regardless of their needs C) a company that charges the same hourly rate for landscaping services no matter what the situation requires D) a company that allows users of its website to schedule appointments with landscapers who specialize in the exact service required
D - Platform businesses leveraging digital technology can grow much faster—that is, they scale efficiently—because platforms create value by orchestrating resources that reside in the ecosystem. The platform business does not own or control these resources, facilitating rapid and often exponential growth.
When a firm uses the tools and concepts learned from strategic management in order to achieve competitive advantage by pursuing innovation, it is said to be engaging in A) a short-term strategy. B) strategic invention. C) a strategic venture. D) strategic entrepreneurship.
D - Strategic entrepreneurship is the pursuit of competitive advantage through innovation by employing the tools and concepts from strategic management.
The types of assets that are the primary focus of accounting data but are no longer most important to competitive advantage are A) market brand value. B) organizational culture. C) intangible. D) tangible.
D - Tangible assets are the primary focus of accounting data even though intangibles are most important to competitive advantage.
Which of the following businesses is most susceptible to negative network effects? A) Lite Shoes produces a line of lightweight running shoes that are endorsed by an Olympic gold medalist. B) Chips & Boards Technologies produces computer processing chips and sells them to a variety of manufacturers for use in smartphones and other devices. C) ECO Tools manufactures solar powered gardening implements and sells them online. D) Rite Pics is a social media platform where users upload photos to the site and are matched with other users who have taken similar photos.
D - The ability of a platform to evince and manage positive network effects is critical to producing value for each participant, and it allows it to gain and sustain a competitive advantage. In contrast, negative network effects describe the situation where more and more users exit a platform and the value that each remaining user receives from the platform declines. Because Rite Pics relies on having a high number of users to create value for its customers, it stands to suffer the most from negative network effects if users abandon the platform.
Which of the following scenarios best illustrates bundling? A) Yearin Inc. sells its electric toothbrushes for a low cost, but charges a high price for replacement brushes. B) CondaxMedia Inc. sells its cloud computing network by having customers pay for the service as they use it. C) Isdom Inc. sells its basic TV channels for free but charges high prices for any channels that customers add on later. D) Warephase Inc. sells seed packages, in which a person can buy a package of three types of seeds at a discounted price compared to buying the seeds individually.
D - The bundling business model sells products or services for which demand is negatively correlated at a discount. For example, in the Microsoft Office Suite, a user might value Word more than Excel and vice versa. Instead of selling both products for $120 dollars each, Microsoft bundles them in a suite and sells them combined at a discount, say $180.
Adaptive Biotechnologies Inc. is a company that builds diagnostic devices. It was the first company to develop a compact MRI scanner by reconfiguring the components of the MRI technology. This smaller and user-friendly version of the huge MRI scanner created demand from small hospitals, nursing homes, and private practice doctors who were earlier dependent on the scanning machines in large hospitals. Which of the following types of innovations does this scenario best illustrate? A) disruptive innovation B) incremental innovation C) radical innovation D) architectural innovation
D - This scenario best illustrates architectural innovation. Firms can innovate by leveraging existing technologies into new markets. An architectural innovation is a new product in which known components, based on existing technologies, are reconfigured in a novel way to create new markets.
Bath & Chill is a spa that caters to the needs of a small percentage of highly health-conscious consumers. It offers state-of-the-art treatments in a luxurious setting. Since there are very few spas that offer the same unique services, customers are willing to pay a premium price for its products and services. In this scenario, Bath & Chill is following a A) product diversification strategy. B) liquidation strategy. C) broad differentiation strategy. D) focused differentiation strategy.
D- Bath & Chill is following a focused differentiation strategy. The focused differentiation strategy is the same as the differentiation strategy except with a narrow focus on a niche market, in this case highly health-conscious consumers. A differentiation strategy seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels.
Susan wants to create a networking site that would connect local artists to homeowners who are looking for unique and original art. She knows that network effects will play a big role in her success and doesn't want to build her business using a linear value chain. Susan would best be served by employing a(n) A) pipeline business model. B) innovative social networking website. C) razor-razor blade business model. D) platform business model.
D- Susan needs to focus on a platform business model because she needs value-creating interactions between external producers and consumers.
Which of the following is a firm effect that has an impact on the competitive advantage of a firm? A) the exit barriers within the industry in which the firm operates B) the number of companies operating in the industry in which the firm operates C) the intensity of rivalry among existing companies in the firm's chosen industry D) the value and the cost position of the firm relative to its competitors
D- To formulate an effective business strategy, managers need to keep in mind that competitive advantage is determined jointly by industry and firm effects. At the firm level, performance is determined by value and cost positions relative to competitors. This is the firm's strategic position.
