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Chapter 5: Business-Level Strategies

Chapter 5 Business-Level Strategies TRUE/FALSE QUESTIONS 1.

A business-level strategy consists of the competitive approach of a single line-of-business instead of the entire corporation. Answer: T

2.

Competitive tactics are concerned with how the firm intends to position itself to create value for its customers. Answer: F

3.

In general, firms create competitive advantage by offering a basic product at a premium price and/or a preferred product at a low price. Answer: F

4.

Only one firm at a time can pursue a particular business-level strategy. Answer: F

5.

Economies of scale can contribute to reduced costs per unit. Answer: T

6.

In differentiation strategies, the emphasis is on creating value through uniqueness. Answer: T

7.

A best cost strategy combines the elements of low-cost leadership and differentiation. Answer: T

8.

The industry life cycle portrays how sales volume for a class of products changes over its lifetime. Answer: T

9.

A competitive shakeout usually occurs at the beginning of the growth stage of the product life cycle. Answer: F

10.

At the maturity stage of the life cycle, revenue growth accelerates rapidly. Answer: F

11.

Exporting, licensing, and franchising are international expansion tactics. Answer: T

Chapter 5: Business-Level Strategies

MULTIPLE CHOICE QUESTIONS

12.

Strategy formulation responsibilities at the business level include all of the following except: A. Establishment and communication of goals B. Identification of strengths and weaknesses C. Identification of opportunities and threats D. Management of the corporate portfolio E. Establishment of a strategic posture Answer: D

13.

Generic strategies are concerned with: A. The competitive tactics firms use to protect their competitive positions B. How the firm intends to position itself to create value for its customers C. Selection of the business areas in which the firm will compete D. Functional strategies the firm will pursue E. None of the above Answer: B

14.

For a differentiation strategy to be considered successful: A. The organization that is pursuing the differentiation must be highly innovative B. Customers must be willing to pay more for the uniqueness of a product or service than the firm paid to create that uniqueness C. Loss of sales cannot reduce the benefits from economies of scale D. The organization must invest heavily in differentiating its products E. The organization that is pursuing differentiation must charge approximately the same price as its competitors but make a higher profit Answer: B

15.

A firm that pursues a cost leadership strategy: A. Seeks cost efficiency in a broad market setting B. Is too interested in lowering costs to bother with technological advances C. Rarely learns from experience D. Always has the lowest price E. Uses differentiation to attract customers Answer: A

16.

A strategy that is a combination of low cost leadership and differentiation is: A. Unlikely to be successful because of limited resources B. Very rare in today’s business climate

Chapter 5: Business-Level Strategies

C. Best cost D. Cost focus E. None of the above Answer: C 17.

Which of the following is an accurate statement about economies of scale? A. Production costs per unit are less in a large facility than in a small facility B. The more product a company makes, the lower its variable production costs C. Economies of scale are identical to throughput D. Doubling factory size typically doubles fixed costs E. Companies with economies of scale have high capacity utilization Answer: A

18.

Experience effects mean: A. An employee can easily learn to do several different jobs within a firm B. Employees learn to do jobs more efficiently with repetition C. Employees who are slow to learn new tasks will require additional training time D. The time required to complete a task will decrease as a predictable function of the number of times the task is repeated E. Both B and D are correct Answer: E

19.

Which of the following is an advantage of pursuing cost leadership? A. Sales always increase with increasing amounts of output B. Loss of sales does not reduce scale benefits C. The strategy easily accommodates changes in the market D. Firms invest heavily in differentiating their products E. A firm may charge the same price as its competitors but make a higher profit Answer: E

20.

All of the following are ways that firms pursue a cost leadership strategy except: A. Giving their product the most desirable and highest quality features B. Using technology to cut costs C. Fully utilizing firm production capacity D. Experience effects E. Economies of scale Answer: A

21.

The risks associated with pursuing a cost leadership strategy include all of the following except: A. Preoccupation with costs may lead a firm not to detect required product changes B. The firm’s products are likely to become targets for imitators

Chapter 5: Business-Level Strategies

C. Efforts to cut costs could lead to unsafe products D. Cost cutting could lead to products of very poor quality E. Large investments could cause reluctance to change Answer: B 22.

A best cost strategy is most like which of the other generic business strategies? A. Differentiation B. Differentiation focus C. Cost leadership D. Cost focus E. Differentiation combined with cost leadership Answer: E

23.

A firm that caters to a very specific segment of its market is pursuing which generic strategy? A. Differentiation B. Focus C. Cost leadership D. Best cost E. None of the above Answer: B

24.

The most important elements in a business model include all of the following except: A. Selecting a growth strategy B. Verifying that sufficient demand exists for a given product at a given price in a particular market C. Selecting unique features and technologies to be imbedded into the products or services D. Determining how to capture a portion of the value created in terms of revenues and profits E. Identifying market segments to be targeted Answer: A

25.

Market penetration entails: A. Vertical integration combined with horizontal integration B. Modification of existing products to create new market segments C. Acquisition of an organization in the same line of business D. Forming a strategic alliance with a firm in a new business E. Increasing market share in the current business through advertising, promotions, or a stepped-up sales effort Answer: E

26.

Market development entails:

Chapter 5: Business-Level Strategies

A. Seeking new market segments or new applications for existing products B. Modification of existing products to create new market segments C. Acquisition of an organization in the same line of business D. Forming a strategic alliance with a firm in a new business E. Investments in resources that may increase market share in the current business Answer: A 27.

Offensive competitive tactics include: A. Threat of retaliation B. Creating barriers to imitation C. Seeking first-mover advantages D. Collaborative tactics E. Avoiding direct competition Answer: C

28.

A firm pursuing a “blue ocean” strategy: A. Will collaborate with competitors to create a stronger market position B. Will utilize a best cost generic strategy, but in a completely unique way C. Will threaten to retaliate against competitive actions D. Will erect huge barriers to competition E. Will pursue political lobbying Answer: B

29.

An organization would like to expand overseas. Its managers have considered pursing the expansion through a joint venture, but they are concerned that using a joint venture would limit the amount of profits they can make and also limit their control of the venture. Which of the following global expansion tactics should you suggest to these managers? A. Exporting B. Transnational symbiotic venturing C. A greenfield venture D. Franchising E. Licensing Answer: C

30.

A multidomestic approach to international markets: A. Involves the production and marketing of one product design throughout the world B. Involves custom tailoring of products and services around individual market needs C. Is almost always preferable to a global strategy D. Is almost always less costly than a global strategy E. Is only appropriate when economic efficiencies are possible Answer: B

Chapter 5: Business-Level Strategies

31.

During the introduction stage of the industry life cycle: A. Demand for a product is fairly steady B. Research and development activities are less important than activities to gain market share C. Firms have an opportunity to create barriers to entry D. Producers are generally highly profitable E. First-mover advantages are unimportant Answer: C

32.

Toward the end of the growth stage of the industry life cycle: A. Demand for products falls B. A competitive shakeout usually occurs C. Entry barriers play no role D. Competition tends to focus on tight cost controls E. Differentiation is not possible Answer: B

33.

During the maturity stage of the industry life cycle: A. Product differentiation becomes easier to establish B. Customers focus on product quality and availability C. Firms have an opportunity to create entry barriers D. High-volume production tends to dominate manufacturing strategy E. First-mover advantages are commonly available Answer: D

34.

During the decline stage of the industry life cycle: A. Tight cost controls leading to efficiency are essential B. Products are highly differentiated C. Competition is no longer based on price D. New entrants are common E. Demand is increasing Answer: A

ESSAY QUESTIONS 35. How can a firm be successful by pursuing a differentiation strategy? What are some of the risks associated with a differentiation strategy? Answer: The only way a differentiation strategy will work is if buyers value the attributes that make a product unique enough to pay a higher price for it or choose to buy from that firm preferentially. A firm may charge the same price as competitors, but achieve a much larger share of the market, resulting in higher profits. The difference in value may be one of buyer perception

Chapter 5: Business-Level Strategies

rather than actual product or service attributes. One of the biggest risks associated with differentiation is that customers will sacrifice some of the uniqueness of the product or service for lower cost. A second key risk is that the distinguishing attribute that makes the product or service unique will no longer be perceived by the customer as differentiating; either it has been incorporated into competitors’ products or the customer no longer finds it important. 36. What is a cost leadership strategy? How might a firm pursue it? What are some of the risks associated with this strategy? Answer: Firms pursuing cost leadership set out to become the lowest cost providers of a good or service. Firms pursuing a low cost strategy will typically employ one or more of the following factors to create their low cost positions: (1) high capacity utilization, (2) economies of scale, (3) technological advances, or (4) learning/experience effects. There are several risks associated with too strong of a focus on a low cost strategy. First, firms pursuing cost leadership may not detect required product or marketing changes because of a preoccupation with cost reduction. Second, these firms run the risk of making large investments in plants or equipment only to see them become obsolete because of technological breakthroughs by competitors. Their large investments make them reluctant to keep up with changes that are not compatible with their technologies. Third, efforts to seek low costs may just go too far—with important elements of safety, quality, and service undermined. 37.

What are the key elements in defining a business model?

Answer: Some of the most important elements in a business model include: Identifying market segments to be targeted (broad market or a focus on one or more specific markets); determining the benefits customers might derive from the unique sources of value created by the products or services, whether it is from differentiating features, low cost, or best cost; selecting unique features and technologies that will be embedded into the products or services; determining how to capture a portion of the value created in terms of revenues and profits, which typically includes a pricing strategy; and verifying that sufficient demand is available in the targeted markets based on the conditions defined previously. Another helpful approach to defining a business model is to consider the types of assets a company sells and the rights it gives to consumers to use those assets. A firm may sell physical assets (products), human assets (services), financial assets (cash, securities), and/or intangible assets (patents, knowledge). In terms of the rights a company provides, a company may create and transfer the rights to entire assets such as products, distribute products made by others, sell the right to use assets for a specific time (a hotel room, intellectual property), or simply receive a fee for matching buying and sellers (a broker).

Chapter 5: Business-Level Strategies

38.

Describe the strategic flexibility tactic and how it is pursued.

Answer: Firms pursuing strategic flexibility can move their resources out of markets that are less-than-desirable in a minimum of time and with as little loss as possible. One way to remain strategically flexible is to avoid investments that have significant exit barriers. Significant exit barriers are frequently associated with large capital investments, such as construction of factories that have limited uses. Instead, companies subcontract as many of their activities as possible. 39. When does a global approach to an international product/market strategy make the most sense? Answer: A global strategy makes the most sense when (1) there is a global market for a product or service, (2) there are economic efficiencies associated with a global strategy, (3) there are no external constraints such as government regulations that will prevent a global strategy from being implemented, and (4) there are no absolute internal constraints either.

Chapter 4 Strategic Leadership and Strategic Direction TRUE/FALSE QUESTIONS 1.

The traditional view of leaders in organizations is that they set direction, make the important decisions, and rally the followers. Answer: T

2.

One important responsibility of boards of directors is to monitor and prevent the potential for agency problems. Answer: T

3.

Agency problems occur when an agent sacrifices his or her own interests for the benefit of the organization. Answer: F

4.

Government regulation can influence corporate governance practices. Answer: T

5.

Inertia facilitates change in organizations. Answer: F

Chapter 5: Business-Level Strategies

6.

Broad environmental forces influence strategic direction. Answer: T

7.

The labels a firm uses for its written statements of strategic direction are just as important as the elements they contain. Answer: F

8.

It has been suggested that the business definition question should include not only “What is our business?” but also “What was our business?” Answer: F

9.

A mission statement may contain a statement of vision. Answer: T

10.

The scope of an organization is the breadth of its activities across markets, functions, resource conversion processes, and products. Answer: T

11.

Sustainable development is defined as growth that is sustainable because there are so many available resources that they will virtually never run out. Answer: F

MULTIPLE CHOICE QUESTIONS 12.

The traditional view of leaders in organizations is that they: A. Are dictators to be followed without question B. Set direction, make the important decisions, and rally the followers C. Rise to the top of an organization just like cream on milk D. Are ineffective E. Delegate all important decisions to other managers Answer: B

13.

The primary responsibilities of CEOs include all of the following except: A. They make all the low-level operating decisions B. They design the organization’s purpose, vision, and core values C. They oversee the creation of policies, strategies, and structure D. They serve as stewards for their organizations E. They serve as a coach, teacher, and facilitator in order to facilitate organizational learning Answer: A

14.

In Collin’s (Good to Great) leadership skills hierarchy, the skill that comes right after becoming a capable individual is:

Chapter 5: Business-Level Strategies

A. Becoming an organizer B. Becoming an effective leader C. Becoming a team player D. Becoming a transformational leader E. Becoming a super star Answer: C 15.

A heterogeneous top management team: A. Is ineffective in most competitive settings B. Can lead to improved organizational decisions C. Makes implementing a strategy easier D. Is made up of managers with a wide variety of backgrounds, education, and experience. E. Both B and D are true. Answer: E

16.

Which of the following is the best example of an agency problem? A. A CEO makes a decision that maximizes his or her own self-interest at the expense of shareholders B. The CEO of one organization sits on the board of directors of another organization C. Both shareholders and managers express an interest in maximizing organizational profits D. A CEO decides to take a pay cut because the corporation is struggling E. A female CEO receives less salary than she should just because she is a woman Answer: A

17.

All of the following are ways to encourage top managers to act in the best interests of the shareholders except: A. Board independence might encourage it, although the evidence is inconclusive B. Including close personal friends of the CEO on the board of directors C. Incentive compensation D. Government regulation E. Threat of a hostile takeover Answer:

18.

B

The Sarbanes-Oxley Act of 2002: A. Provides requirements regarding independence of corporate auditors B. Requires that financial records be kept for at least five years C. Requires the CEO to personally certify the corporation’s financial reports D. Was partially a response to large corporate scandals

Chapter 5: Business-Level Strategies

E. All of the above Answer: E 19.

Strategic direction is reflected by: A. The organization’s purpose B. A definition of the organization’s business or businesses C. The organization’s vision D. The organizational mission E. All of the above Answer: E

20.

Factors that influence strategic direction include all of the following except: A. The firm’s history B. Social trends C. Economic influences D. Competitors E. All of these factors influence strategic direction; there is no exception. Answer: E

21.

The forces in a firm that work to maintain the status quo are called: A. Strategic direction B. Value impediments C. Strategic inertia D. ...