Strategic Management and Business Policy - Chapter 6

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Strategy Formulation: Situation Analysis and Business Strategy
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1

SWOT is an acronym that stands for Strategy, Weaknesses, Opportunities, and Threats.

FALSE

2

SWOT analysis by itself is not a panacea for strategy.

TRUE

3

The goal is to find a propitious niche so well suited to the firm's internal and external environment that other corporations are not likely to challenge or dislodge it.

TRUE

4

The first firm through a strategic window can occupy a propitious niche and discourage competition (if the firm has the required internal strengths).

TRUE

5

One company that has successfully found a propitious niche is Frank J. Zamboni & Company, the manufacturer of the machines that smooth the ice at ice skating rinks.

TRUE

6

Niches can grow and change over time.

TRUE

7

If a mission does not provide a common thread for a corporation's businesses, managers might be unclear about where the company is heading.

TRUE

8

The TOWS Matrix illustrates how the external opportunities and threats facing a particular corporation can be matched with that company's internal strengths and weaknesses to result in four sets of possible strategic alternatives.

TRUE

9

SO strategies attempt to take advantage of opportunities by overcoming weaknesses.

FALSE

10

Business strategy focuses on improving the competitive position of a company's or business unit's products or services within the specific industry or market segment that the company or business unit serves.

TRUE

11

Cost leadership is the ability of a company or business unit to design, produce, and market a comparable product more efficiently than its competitors.

TRUE

12

A cost leader's lower costs allow it to continue to earn profits during times of heavy competition.

TRUE

13

An example of a company following a cost focus strategy is Potlach Corporation, who makes house brands of toilet paper for Safeway and other grocery store chains.

TRUE

14

One risk of a cost leadership strategy is that the technology for production or of products may change.

TRUE

15

An example of a company that was "stuck in the middle" is K-Mart as they tried to imitate both Walmart's low-cost strategy and Target's differentiation strategy.

TRUE

16

Based on the eight dimensions of quality discussed in the text, serviceability is defined as the product's ease of repair.

TRUE

17

Most entrepreneurial ventures follow focus strategies.

TRUE

18

The strategic rollup was developed in the mid-1990s as an efficient way to quickly consolidate a fragmented industry with the resulting large firm creating economies of scale.

TRUE

19

Rollups are not synonymous with traditional mergers and acquisitions.

TRUE

20

One danger of D'Aveni's concept of hypercompetition is that it may lead to an overemphasis on short-term tactics over long-term strategy.One danger of D'Aveni's concept of hypercompetition is that it may lead to an overemphasis on short-term tactics over long-term strategy.

TRUE

21

One skill required of the cost leadership strategy is a strong marketing ability.

FALSE

22

Tight cost control is an organizational requirement for a cost leadership strategy.

TRUE

23

The only way to gain competitive advantage within an industry is to use a competitive strategy.

FALSE

24

Alliances take more financial resources and involve more risk than do acquisitions and going it alone.

FALSE

25

Those companies using cooperative strategies are generally not able to gain a competitive advantage.

FALSE

26

The two general types of cooperative strategies are collusion and strategic alliances.

TRUE

27

In tacit collusion, there is no direct communication among competing firms.

TRUE

28

Collusion is the active cooperation of firms within an industry to reduce output and raise prices in order to get around the normal economic law of supply and demand.

TRUE

29

Too much partnering experience with the same strategic partners generates diminishing returns over time and leads to reduced performance.

TRUE

30

A licensing arrangement is an agreement in which the licensing firm grants rights to another firm in another country or market to produce and/or sell a product.

TRUE

31

A value chain partnership is a loose alliance with several distributors for the short term.

FALSE

32

One success factor to a strategic alliance is the ability to identify likely partnering risks and deal with them when the alliance is formed.

TRUE

33

The concept that advocates management's attempt to find a strategic fit between external opportunities and internal strengths while working around external threats and internal weaknesses is called

A) environmental analysis.

B) position analysis.

C) strategic evaluation.

D) objective analysis.

E) situation analysis.

Answer: E

34

The particular capabilities and resources a firm possesses and the superior way in which they are used is called

A) differentiating capabilities.

B) distinctive competencies.

C) situational proficiency.

D) core competencies.

E) distinctive characteristics.

Answer: B

35

An acronym for the assessment of the external and internal environments of the business corporation in the process of strategy formulation/strategic planning is

A) PET.

B) MBO.

C) SWOT.

D) SBU.

E) ROI.

Answer: C

36

The T in SWOT represents

A) threat.

B) tactic.

C) tautology.

D) task.

E) time.

Answer: A

37

The text authors note that the essence of strategy is

A) opportunity divided by strengths minus weaknesses.

B) strength divided by opportunity.

C) threat divided by capacity.

D) threat divided by opportunity.

E) opportunity divided by threat.

Answer: A

38

All of the following reflect criticisms of the SWOT analysis EXCEPT

A) it uses no weights to reflect priorities.

B) it only requires a single level of analysis.

C) it provides a rational link to strategy implementation.

D) it uses ambiguity in words and phrases.

E) it generates lengthy lists.

Answer: C

39

In the development of a SFAS matrix, the first step is to

A) enter the ratings of how the company's management is responding to each of the strategic factors.

B) calculate the weighted scores.

C) list the most important EFAS and IFAS items.

D) indicate short-term goals for the duration.

E) enter the weights for all of the internal factors.

Answer: C

40

A corporation's specific competitive role which is so well-suited to the firm's internal and external environment that other corporations are NOT likely to challenge or dislodge it.

A) strategic fit

B) propitious niche

C) common thread

D) business screen

E) implicit strategy

Answer: B

41

According to the text, unique market opportunities that are available for only a particular time are called

A) situational occasions.

B) critical openings.

C) strategy implementation.

D) strategic windows.

E) trigger points.

Answer: D

42

One company that has successfully found a propitious niche is

A) Coca-Cola.

B) PepsiCo.

C) Frank J. Zamboni & Company.

D) Walmart.

E) Disney.

Answer: C

43

The technique that illustrates how management can match the external opportunities and threats with its strengths and weaknesses to yield four sets of strategic alternatives is called a(n)

A) IFAS Table.

B) EFAS Table.

C) SFAS Table.

D) TOWS Matrix.

E) Issues Priority Matrix.

Answer: D

44

In a TOWS Matrix, SO Strategies

A) are generated by thinking of ways in which a company or business unit could use its strengths to take advantage of opportunities.

B) attempt to take advantage of opportunities by overcoming weaknesses.

C) are basically defensive and primarily act to minimize weaknesses and avoid threats.

D) consider a company's or unit's strengths as a way to avoid threats.

E) are ways to get strategists to think "out of the box."

Answer: A

45

In a TOWS Matrix, ST Strategies

A) are generated by thinking of ways in which a company or business unit could use its strengths to take advantage of opportunities.

B) attempt to take advantage of opportunities by overcoming weaknesses.

C) are basically defensive and primarily act to minimize weaknesses and avoid threats.

D) consider a company's or unit's strengths as a way to avoid threats.

E) are ways to get strategists to think "out of the box."

Answer: D

46

In a TOWS Matrix, WT Strategies

A) are generated by thinking of ways in which a company or business unit could use its strengths to take advantage of opportunities.

B) attempt to take advantage of opportunities by overcoming weaknesses.

C) are basically defensive and primarily act to minimize weaknesses and avoid threats.

D) consider a company's or unit's strengths as a way to avoid threats.

E) are ways to get strategists to think "out of the box."

Answer: C

47

Business strategy focuses on

A) ensuring that the company maintains the existing market share that it has historically enjoyed.

B) improving the competitive position of a corporation's products or services within the industry or market segment served.

C) providing adequate shareholders' return on investment.

D) preventing the competition from gaining a competitive edge by undermining their marketing plan.

E) recovering the competitive lead by using all available resources that the company can provide.

Answer: B

48

Business strategy is composed of

A) corporate and competitive strategy.

B) functional and divisional strategy.

C) competitive and cooperative strategy.

D) corporate and cooperative strategy.

E) divisional and competitive strategy.

Answer: C

49

Which of the following is NOT one of the questions that development of a competitive strategy should raise?

A) Should we compete on the basis of lower cost?

B) Should we compete head-to-head with major competitors?

C) Should we differentiate our products or services on some basis other than cost?

D) Should we compete by garnering political support of influential leaders?

E) Should we compete in a niche market that we can satisfy which is superior to that of the competition?

Answer: D

50

According to Porter, the generic competitive strategy that reflects the ability of the corporation or its business unit to design, produce, and market a comparable product more efficiently than its competitors is called

A) competitive scope.

B) differentiation.

C) cost leadership.

D) diversification.

E) focus.

Answer: C

51

What are the three generic competitive strategies that Porter promotes as the means for outperforming other corporations in a particular industry?

A) competitive scope, differentiation, and focus

B) diversification, concentration, and competitive scope

C) cost, competitive scope, and focus

D) concentration, cost leadership, and differentiation

E) cost leadership, differentiation, and focus

Answer: E

52

According to Porter, the generic competitive strategy that reflects the ability to provide unique and superior value to the buyer in terms of product quality, special features, or after-sale service is called

A) competitive scope.

B) differentiation.

C) focus.

D) diversification.

E) cost leadership.

Answer: B

53

According to Porter, the term that applies to the breadth of a company's or business unit's target market is called

A) competitive scope.

B) differentiation.

C) focus.

D) diversification.

E) cost leadership.

Answer: A

54

Walmart, as a discount retailer, is an example of a company following which of Porter's competitive strategies?

A) differentiation

B) cost leadership

C) differentiation focus

D) competitive advantage

E) cost focus

Answer: B

55

Apple is an example of a company following which of Porter's generic competitive strategies?

A) cost leadership

B) differentiation

C) cost focus

D) competitive scope

E) diversification

Answer: B

56

Which of Porter's competitive strategies recommends that a company emphasize a particular buyer group or geographic market and attempts to seek a cost advantage in its targeted segment?

A) differentiation

B) cost leadership

C) differentiation focus

D) competitive advantage

E) cost focus

Answer: E

57

In manufacturing toilet paper for grocery store chains (and avoiding competing directly against Charmin), Potlach has followed which of Porter's generic competitive strategies?

A) differentiation

B) cost leadership

C) differentiation focus

D) competitive advantage

E) cost focus

Answer: E

58

Orphagenix, a small biotech firm, avoids head-to-head competition with large pharmaceutical companies by developing orphan drugs to target diseases that affect fewer than 200,000 people. This is an example of which of Porter's generic strategies?

A) differentiation

B) cost leadership

C) differentiation focus

D) competitive advantage

E) cost focus

Answer: C

59

Which of Porter's competitive strategies concentrates on seeking differentiation in a particular buyer group, product line segment, or geographic market?

A) differentiation

B) cost leadership

C) differentiation focus

D) competitive advantage

E) cost focus

Answer: C

60

When a company following a differentiation strategy ensures that the higher price it charges for its higher quality is not priced too far above the price of the competition, the company is using the process of

A) low-cost differentiation.

B) cost leadership.

C) cost proximity.

D) basic differentiation.

E) price fixing.

Answer: C

61

Which of the following is NOT one of the risks of a cost leadership strategy?

A) The technology that the organization has been using changes.

B) Achieving excessive success causes jealousy amongst competitors.

C) Competitors can achieve viable imitations.

D) Other bases for cost leadership erode.

E) Proximity in differentiation is lost.

Answer: B

62

Which of the following is NOT one of the risks of the focus strategy?

A) The target segment's structure erodes.

B) The segment's differences from other segments narrow.

C) The advantages of a broad line increase.

D) Focusers exit the industry.

E) Demand disappears for the product in the target segment.

Answer: D

63

According to Porter, a business unit in a competitive marketplace with no generic competitive strategy is

A) achieving synergy.

B) practicing innovative leadership.

C) stuck in the middle.

D) not goal directed.

E) last in line.

Answer: C

64

Most entrepreneurial ventures follow

A) differentiation strategies.

B) focus strategies.

C) no strategies.

D) cost leadership strategies.

E) all of the above

Answer: B

65

Which of the following is NOT one of the eight dimensions of quality?

A) serviceability

B) durability

C) performance

D) value

E) features

Answer: D

66

A car's cruise control, known as a "bell and whistle," is an example of which of the eight dimensions of quality?

A) performance

B) features

C) reliability

D) durability

E) aesthetics

Answer: B

67

The focus strategies will likely predominate when many small and medium sized local companies compete for relatively small shares of the total market in a(n)

A) united industry.

B) fragmented industry.

C) consolidated industry.

D) isolated industry.

E) integrated industry.

Answer: B

68

As an industry matures while overcoming fragmentation and becomes dominated by a small number of large companies, it tends to become a(n)

A) united industry.

B) fragmented industry.

C) consolidated industry.

D) isolated industry.

E) integrated industry.

Answer: C

69

A method developed in the mid-1990s as an efficient means to quickly consolidate a fragmented industry can be referred to as a

A) merger.

B) strategic rollup.

C) cost strategy.

D) differentiation strategy.

E) focus strategy.

Answer: B

70

As an industry becomes hypercompetitive, firms initially respond by

A) raising entry barriers.

B) moving into untapped markets.

C) attacking the strongholds of other firms.

D) competing on cost and quality.

E) working their way to a situation of perfect competition.

Answer: D

71

The book Hypercompetition was written by

A) Porter.

B) D'Aveni.

C) Mintzberg.

D) Maslow.

E) Drucker.

Answer: B

72

The last stage of a hypercompetitive industry is reached when the remaining large global competitors

A) raise entry barriers.

B) move into untapped markets.

C) attack the strongholds of other firms.

D) compete on cost and quality.

E) work their way to a situation of perfect competition in which no one has any advantage and profits are minimal.

Answer: E

73

According to D'Aveni

A) except for a few stable industries, strategy initiatives do not provide sustainable competitive advantage.

B) hypercompetition is rare.

C) it is enough to gain competitive advantage by being the lowest cost competitor.

D) the theory of hypercompetition is not supported by any research.

E) the American home appliance industry was immune to hypercompetition.

Answer: A

74

Porter recommends that a division with tight cost control, frequent detailed control reports, a well structured organization, and quantitatively based incentives is required for which of the following generic competitive strategies?

A) focus

B) differentiation

C) cost leadership

D) focus differentiation

E) concentration

Answer: C

75

If it is to be successful, Porter advises that a division possess strong marketing abilities, product engineering, a creative flair, strong capability in basic research and a corporate reputation for quality or technological leadership, for which one of the following generic competitive strategies?

A) focus

B) differentiation

C) overall cost leadership

D) vertical growth

E) concentration

Answer: B

76

Product engineering, creative flair, and strong cooperation from channels are commonly required skills and resources for which of Porter's generic strategies?

A) cost leadership

B) differentiation

C) cost leadership focus

D) differentiation focus

E) collusion

Answer: B

77

Answer: E

Intense supervision of labor, sustained capital investment and access to capital are commonly required skills and resources for which of Porter's generic competitive strategies?

A) cost leadership

B) differentiation

C) cost leadership focus

D) differentiation focus

E) collusion

Answer: A

78

Amenities to attract highly skilled labor, scientists, or creative people is a common organizational requirement for which of Porter's generic competitive strategies?

A) cost leadership

B) differentiation

C) cost leadership focus

D) differentiation focus

E) collusion

Answer: B

79

Incentives based on meeting strict quantitative targets is a common organizational requirement for which of Porter's generic competitive strategies?

A) cost leadership

B) differentiation

C) cost leadership focus

D) differentiation focus

E) collusion

Answer: A

80

According to Barney, under which condition would tacit collusion most likely be successful?

A) There is a large number of identifiable competitors.

B) Costs are not similar among firms.

C) One firm tends to act as the price leader.

D) Sales are characterized by a high frequency of large orders.

E) There are low barriers to entry in the industry.

Answer: C

81

When firms follow each other's lead to reduce the level of competition such as GE and Westinghouse did in steam turbines, it is referred to as

A) explicit collusion.

B) a strategic alliance.

C) a mutual service consortium.

D) conscious parallelism.

E) partnering.

Answer: D

82

A secret salary cap was the contention in a 2012 collusion lawsuit filed against

A) KFC.

B) the National Football League.

C) GE.

D) Major League Baseball.

E) ESPN.

Answer: B

83

Jet airplane manufacturers often enter into strategic alliances to

A) obtain new capabilities.

B) obtain access to specific markets.

C) reduce financial risk.

D) reduce political risk.

E) preserve autonomy.

Answer: C

84

The "cell" chip created by IBM, Sony Electronics, and Toshiba was a result of pooling their resources in a

A) joint venture.

B) licensing arrangement.

C) value-chain partnership.

D) mutual service consortium.

E) competitive advantage.

Answer: D

85

Disadvantages of joint ventures include all of the following EXCEPT

A) loss of control.

B) lower profits.

C) probability of conflicts with partners.

D) likely transfer of technological advantage to the partner.

E) mutual dependence.

Answer: E

86

When P&G (the maker of Folgers and Millstone coffee) worked with Mr. Coffee, Krups, and Hamilton Beach to market Home Café, they engaged in a

A) joint venture.

B) licensing arrangement.

C) value-chain partnership.

D) mutual service consortium.

E) competitive advantage.

Answer: C

87

In licensing arrangements

A) the licensee can gain technical expertise.

B) companies can be aided in entering new countries directly.

C) the licensee might become a competitor to the licensing firm.

D) companies should never license their distinctive competencies.

E) all of the above

Answer: E

88

Tacit collusion

A) involves direct communication among competing firms.

B) is most likely to be successful if there are many competitors.

C) is seen with conscious parallelism as practiced by GE and Westinghouse.

D) is not illegal.

E) is most effective when the industry does not have a firm that acts as a price leader.

Answer: C

89

Collusion

A) may be explicit.

B) may be tacit.

C) is illegal when explicit.

D) can be illegal even when tacit.

E) all of the above

Answer: E

90

The active cooperation of firms within an industry to reduce output and raise prices to get around the normal law of supply and demand is referred to as

A) a strategic alliance.

B) collusion.

C) a strategic roll up.

D) a merger.

E) licensing.

Answer: B

91

The two general types of cooperative strategies are

A) competitive and functional.

B) collusion and competitive.

C) strategic alliances and collusion.

D) strategic alliances and competitive.

E) competitive and collusive alliances.

Answer: C

92

Which of the following is NOT a reason companies or business units may form a strategic alliance?

A) to obtain access to specific markets

B) to reduce financial risk

C) to reduce political risk

D) to set prices in the industry

E) to learn new capabilities

Answer: D

93

The kind of strategic alliance in which there is a partnership of similar companies in similar industries who pool their resources to gain a benefit that is too expensive to develop alone is the

A) joint venture.

B) licensing agreement.

C) value-chain partnership.

D) mutual service consortia.

E) holding company.

Answer: D

94

Which strategy has been used successfully by Yum! Brands to establish KFC and Pizza Hut restaurants across the globe?

A) joint venture

B) licensing arrangement

C) strategic alliance

D) marketing strategy

E) value-chain partnership

Answer: B

95

The kind of strategic alliance in which a company forms a strong and close long-term relationship for mutual advantage with a key supplier or distributor is the

A) joint venture.

B) licensing agreement.

C) value-chain partnership.

D) mutual service consortia.

E) holding company.

Answer: C

96

Which of the following is NOT considered a strategic alliance success factor?

A) Have a clear strategic purpose.

B) Operate with short-term time horizon.

C) Agree on an exit strategy for when the partners' objectives are achieved or the partnership fails.

D) Minimize conflicts among the partners by clarifying the objectives.

E) Identify likely partnering risks and deal with them when the alliance is formed.

Answer: B

97

What is a propitious niche? Provide an example of a firm that has been able to successfully occupy a propitious niche.

Answer: A propitious niche is an extremely favorable niche that is so well suited to the firm's internal and external environment that other corporations are not likely to challenge or dislodge it. A niche is propitious to the extent that it currently is just large enough for one firm to satisfy its demand. After a firm has found and filled that niche, it is not worth a potential competitor's time or money to also go after the same niche.

One company that has successfully found a propitious niche is Frank J. Zamboni & Company, the manufacturer of the machines that smooth the ice at ice skating rinks. Before the machine was invented, people had to clean and scrape the ice by hand to prepare the surface for skating. So long as Zamboni's company is able to produce the machines in the quantity and quality desired at a reasonable price, it's not worth another company's effort to go after Frank J. Zamboni's propitious niche.

98

Explain the four combination strategies that may be generated from the TOWS Matrix.

Answer: The TOWS Matrix results in four combination strategies as follows:

SO Strategies are generated by thinking of ways in which a company or business unit could use its strengths to take advantage of opportunities.

ST Strategies consider a company's or unit's strengths as a way to avoid threats.

WO Strategies attempt to take advantage of opportunities by overcoming weaknesses.

WT Strategies are basically defensive and primarily act to minimize weaknesses and avoid threats.

99

What are Porter's four generic strategies?

Answer: Cost leadership is a lower-cost competitive strategy that aims at the broad mass market and requires "aggressive construction of efficient facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on." Because of its lower costs, the cost leader is able to charge a lower price for its products than its competitors and still make a satisfactory profit.

Differentiation is aimed at the broad mass market and involves the creation of a product or service that is perceived throughout its industry as unique. The company or business unit may then charge a premium for its product.

Cost focus is a low-cost competitive strategy that focuses on a particular buyer group or geographic market and attempts to serve only this niche, to the exclusion of others. In using cost focus, the company or business unit seeks a cost advantage in its target segment.

Differentiation focus concentrates on a particular buyer group, product line segment, or geographic market. In using differentiation focus, the company or business unit seeks differentiation in a targeted market segment.

100

Discuss competitive strategy differences between a fragmented and a consolidated industry.

Answer: In a fragmented industry, there are many small- and medium-sized local companies that compete for relatively small shares of the total market. Focus strategies will likely predominate in a fragmented industry. Fragmented industries are typical for products in the early stages of their life cycle. If few economies are to be gained through size, no large firms will emerge and entry barriers will be low — allowing a stream of new entrants into the industry.

As an industry matures, fragmentation is overcome and the industry tends to become a consolidated industry dominated by a few large companies. Although many industries begin fragmented, battles for market share and creative attempts to overcome local or niche market boundaries often increase the market share of a few companies. After product standards become established for minimum quality and features, competition shifts to a greater emphasis on cost and service. Slower growth, overcapacity, and knowledgeable buyers combine to put a premium on a firm's ability to achieve cost leadership or differentiation along the dimensions most desired by the market. Research and development shifts from product to process improvements. Overall product quality improves, and costs are reduced significantly.

101

What is the impact of hypercompetition on competitive advantage?

Answer: Hypercompetition reflects the increasing difficulty of sustaining a competitive advantage over time. As a result of this erosion of competitive advantage, companies must constantly work to improve their advantage. Firms must constantly seek new ways to lower costs and add value to their products and services.

102

Discuss the reasons a firm may form a strategic alliance.

Answer: A firm may form a strategic alliance to obtain or learn new capabilities, to obtain access to specific markets, to reduce financial risk, or to reduce political risk.

103

What are cooperative strategies?

Answer: Cooperative strategies are used to gain competitive advantage within an industry by working with other firms. The two general types of cooperative strategies are collusion and strategic alliances. Collusion is the active cooperation of firms within an industry to reduce output and raise prices in order to get around the normal economic law of supply and demand. A strategic alliance is a partnership of two or more corporations or business units to achieve strategically significant objectives that are mutually beneficial.

104

What are the types of alliances that businesses can engage in?

Answer: The types of alliances that businesses can engage in include a mutual service consortia, a joint venture, a licensing arrangement, and a value-chain partnership. A mutual service consortium is a partnership of similar companies in similar industries that pool their resources to gain a benefit that is too expensive to develop alone. A joint venture is a "cooperative business activity, formed by two or more separate organizations for strategic purposes, that creates an independent business entity and allocates ownership, operational responsibilities, and financial risks and rewards to each member, while preserving their separate identity/autonomy." A licensing arrangement is an agreement in which the licensing firm grants rights to another firm in another country or market to produce and/or sell a product. The licensee pays compensation to the licensing firm in return for technical expertise. A value-chain partnership is a strong and close alliance in which one company or unit forms a long-term arrangement with a key supplier or distributor for mutual advantage.