Strategic Management and Business Policy - Chapter 8

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Strategy Formulation: Functional Strategy and Strategic Choice
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1

The orientation of the functional strategy is dictated by its parent business unit's strategy.

TRUE

2

Each business unit has its own set of departments, each with its own functional strategy.

FALSE

3

A product development strategy deals with pricing, selling, and distributing a product.

FALSE

4

Using a market development strategy, a company can capture a larger share of an existing market for current products or develop new markets for current products.

TRUE

5

When Colgate-Palmolive and Unilever take a successful product that they marketed in one part of the world and market it elsewhere, they are following a market development strategy.

TRUE

6

Church & Dwight uses the line extension strategy when they put the Arm & Hammer name on various new food products.

TRUE

7

When the Kellogg Company changed to a push strategy, they spent more money on consumer advertising designed to build brand awareness so that shoppers will ask for the products.

FALSE

8

Penetration pricing attempts to hasten market development and offers the pioneer the opportunity to use the experience curve to gain market share with a low price and dominate the industry.

TRUE

9

The use of the Internet to market goods directly to the customer allows a company to use dynamic pricing.

TRUE

10

A financial strategy examines the financial implications of corporate and business-level strategic options and identifies the best financial course of action.

TRUE

11

Equity financing is preferred for unrelated diversification while debt financing is preferred for related diversification.

FALSE

12

In a leveraged buyout, the acquired company, in effect, pays for its own acquisition.

TRUE

13

An example of the use of the leader R&D functional strategy to achieve a differentiation competitive advantage is Nike Inc.

TRUE

14

An operations strategy determines how and where a product or service is to be manufactured, the level of vertical integration in the production process, the deployment of physical resources, and relationships with suppliers.

TRUE

15

The continuous improvement system was developed by Deming.

TRUE

16

The automobile industry is currently experimenting with the strategy of mass customization in which pre-assembled sub-assemblies are delivered as they are needed to a company's assembly line workers.

FALSE

17

The importance of sole sourcing was supported by Deming to obtain high supplier quality.

TRUE

18

Two suppliers are the sole suppliers of two different parts, but they are also backup suppliers for each other's parts in parallel sourcing.

TRUE

19

Logistics strategy deals with the flow of products into and out of the manufacturing process.

TRUE

20

Research indicates that the use of work teams leads to decreased quality and productivity as well as lower employee satisfaction and commitment as a result of less accountability.

FALSE

21

The follow-the-moon management philosophy allows project team members living in one country to pass their work to team members in another country in which the workday is just beginning.

FALSE

22

Outsourcing is the alternative to vertical integration.

TRUE

23

The key to outsourcing is to purchase from outside only those activities that are not key to the company's distinctive competencies.

TRUE

24

Fujitsu demonstrated a strategy to avoid when it imitated IBM's strategy focused on mainframes in 1990.

TRUE

25

Corporate scenarios are pro forma balance sheets and income statements that forecast the effect each alternative strategy and its various programs will likely have on division and corporate return on investment.

TRUE

26

Risk in strategic management is only the probability that the strategy will be effective.

FALSE

27

The real-options approach is used by Chevron for bidding on petroleum reserves.

TRUE

28

The attractiveness of a strategic alternative is affected by its perceived compatibility with the key stakeholders in a corporation's task environment.

TRUE

29

A strategy's compatibility with the corporate culture has little likelihood of impacting its success.

FALSE

30

Even the most attractive strategic alternative might not be selected if it is contrary to the needs and desires of important top managers.

TRUE

31

Some executives show a self-serving tendency to attribute the firm's problems not to their own poor decisions, but to environmental events out of their control such as government policies or a poor economic climate.

TRUE

32

There is mounting evidence that when an organization is facing a dynamic environment, the best strategic decisions are arrived at through consensus when everyone agrees on one alternative.

FALSE

33

"The customer is always right" is an example of a policy in Nordstrom's.

TRUE

34

Which strategy is developed to pull together the various activities and competencies of each department so that corporate and business unit performance improves and resource productivity is maximized?

A) business strategy

B) competitive strategy

C) generic strategy

D) enterprise strategy

E) functional strategy

Answer: E

35

The pricing, selling, and distributing of a product is referred to as a(n) ________ strategy.

A) functional

B) marketing

C) operations

D) financial

E) human resource management

Answer: B

36

The type of marketing strategy in which a company captures a larger share of an existing market for current products through market saturation or market penetration or develops new markets for current products is called

A) market development.

B) push strategy.

C) product development.

D) pull strategy.

E) skimming the cream.

Answer: A

37

When Smith & Wesson puts its name on others' products like men's cologne, it is using which marketing strategy?

A) demand pricing

B) brand pricing

C) brand extension

D) penetration extension

E) demand extension

Answer: C

38

A company may use which of the following trade promotions to "pull" their products through the distribution system?

A) discounts

B) in-store special offers

C) advertising allowances

D) coupons

E) consumer advertising

Answer: E

39

When a company spends a large amount of money on trade promotion in order to gain or hold shelf space in retail outlets, a company is using a ________ strategy.

A) pull

B) push

C) financial

D) dedicated line

E) dynamic pricing

Answer: B

40

Which type of pricing takes advantage of the demand curve while the product is still novel and competitors are few to increase profits?

A) demand pricing

B) skim pricing

C) competitive pricing

D) penetration pricing

E) loss-leader pricing

Answer: B

41

Which type of pricing attempts to hasten market development and offers the pioneer the opportunity to utilize the experience curve to gain market share with a low price and dominate the industry?

A) demand pricing

B) competitive pricing

C) skim pricing

D) penetration pricing

E) loss-leader pricing

Answer: D

42

Which of the following is NOT a goal of financial strategies?

A) Examine the financial implication of corporate and business level strategic options and identify the best financial course of action.

B) Provide the corporation with the appropriate financial structure and funds to achieve its overall objectives.

C) Institute a new product development plan to generate profit gain market share.

D) Provide competitive advantage through a lower cost of funds and a flexible ability to raise capital to support a business strategy.

E) Attempt to maximize the financial value of the firm.

Answer: C

43

All of the following are benefits for a company to raising its debt levels EXCEPT

A) deterrent to takeover by other firms.

B) improvement in productivity.

C) improvement in cash flows.

D) force management to focus on core businesses.

E) improvement in strategic options.

Answer: E

44

A popular financial strategy in which a company is acquired in a transaction financed largely by debt and eventually paid with money generated from the acquired company's operations or by sale of its assets is

A) illegal in most countries.

B) a good way to build a core competency.

C) an application of the capital asset pricing model.

D) the leveraged buyout.

E) an example of internal financing.

Answer: D

45

Leveraged buyouts are also sometimes referred to as

A) leveraged bargains.

B) management buyouts.

C) management bargains.

D) coordinated buyouts.

E) debt buyouts.

Answer: B

46

When a company exchanges 200 shares of stock worth $20 each for 100 shares worth $40 each, they are using

  1. A) tracking stock.
  2. B) holding stock.
  3. C) an LBO.
  4. D) reverse stock split.
  5. E) split stock.

Answer: D

47

The strategy that deals with product and process innovation and improvement is known as a(n) ________ strategy.

A) marketing

B) R&D

C) operations

D) financial

E) human resource management

Answer: B

48

A company which pioneers an innovation is called a

A) technological follower.

B) technological opportunist.

C) technological leader.

D) technological manufacturer.

E) technological entrepreneur.

Answer: C

49

A company which imitates the products of competitors is referred to as a

A) technological follower.

B) technological opportunist.

C) technological leader.

D) technological manufacturer.

E) technological entrepreneur.

Answer: A

50

When Intel opened four small-scale research facilities adjacent to universities to promote the cross-pollination of ideas, they were using which approach to R&D?

A) open innovation

B) differentiation

C) technology scouts

D) continuous improvement

E) technological leadership

Answer: A

51

According to Porter, to achieve a cost advantage by following the functional strategy of technological followership, a business unit should

A) pioneer the lowest-cost product design.

B) innovate in other activities to increase buyer value.

C) avoid R&D costs through imitation.

D) create low-cost ways of performing value activities.

E) be the first firm down the learning curve.

Answer: C

52

According to Porter, to achieve a differentiation competitive strategy by following the functional strategy of technological leadership, a business unit should

A) pioneer the lowest-cost product design.

B) innovate in other activities to increase buyer value.

C) avoid R&D costs through imitation.

D) create low-cost ways of performing value activities.

E) be the first firm down the learning curve.

Answer: B

53

If a company wishes to be a technological leader and also maintain a cost advantage, the appropriate R&D strategy would be to

A) increase the cost of the product.

B) lower the cost of the product or value activities by learning from the leader's experience.

C) avoid R&D costs through imitation.

D) create low-cost ways of performing value activities.

E) innovate in other activities to increase buyer value.

Answer: D

54

If a company wishes to be a technological follower and also pursue a differentiation strategy, the appropriate R&D strategy would be to

A) adapt the product or delivery system more closely to buyer needs by learning from the leader's experience.

B) value activities by learning from the leader's experience.

C) avoid R&D costs through imitation.

D) create low-cost ways of performing value activities.

E) innovate in other activities to increase buyer value.

Answer: A

55

When a company determines how and where a product or service is to be manufactured, the level of vertical integration in the production process, the deployment of physical resources, and relationships with suppliers, the company is developing its ________ strategy.

A) marketing

B) operations

C) R&D

D) financial

E) human resource management

Answer: B

56

A flexible manufacturing system is

A) one-of-a-kind production using skilled labor.

B) highly automated assembly lines making one mass-produced product using little human labor.

C) a grouping of parts into manufacturing families to produce a wide variety of mass-produced items.

D) a process utilizing the just-in-time (JIT) method of manufacturing.

E) standardization of components with each machine functioning like a job shop, but is positioned in the same order as the parts are processed.

Answer: C

57

When components are standardized and each machine functions like a job shop but is positioned in the same order as the parts are processed, this setup is known as

A) mass customization.

B) connected line batch flow.

C) connected job flow.

D) mass batch flow.

E) mass job flow.

Answer: B

58

When there are highly automated assembly lines making one mass-produced product using little human labor, this setup is called

A) dedicated transfer lines.

B) connected line batch flow.

C) connected job flow.

D) mass batch lines.

E) mass job flow.

Answer: A

59

As it relates to operations, AMT stands for

A) Automated Manufacturing Technology.

B) Advanced Manufacturing Technology.

C) Asymptotic Manufacturing Technology.

D) Advanced Monotone Technology.

E) Automated Manufacturing Technician.

Answer: B

60

Continuous improvement is an operations concept developed by Deming and perfected by firms in

  1. A) the United States.
  2. B) Sweden.
  3. C) Japan.
  4. D) Germany.
  5. E) Canada.

Answer: C

61

When Dell Computer's customers use the Internet to design their own computers, this demonstrates which manufacturing strategy?

A) continuous improvement

B) mass production

C) job shop

D) mass customization

E) just-in-time

Answer: D

62

When a company deals with obtaining raw materials, parts, and supplies needed to perform the operations function, the company is developing its ________ strategy.

A) operations

B) purchasing

C) R&D

D) financial

E) human resource management

Answer: B

63

The purchasing strategy used by an automobile manufacturer when it orders seats for a specific car model from several vendors is

A) sole sourcing.

B) multiple sourcing.

C) just-in-time sourcing.

D) backup sourcing.

E) parallel sourcing.

Answer: B

64

The concept of ________ was taken one step further in JITII, in which vendor sales representatives usually have desks next to the purchasing company's factory floor, attend production status meetings, visit the R&D lab, and analyze the purchasing company's sales forecasts.

A) multiple sourcing

B) outsourcing

C) sole sourcing

D) parallel sourcing

E) all of the above

Answer: C

65

The purchasing strategy in which two suppliers are the sole suppliers of different parts, but are also the backup suppliers for each other's parts is

A) sole sourcing.

B) multiple sourcing.

C) just-in-time sourcing.

D) backup sourcing.

E) parallel sourcing.

Answer: E

66

Three trends are evident in logistics: outsourcing, the use of the Internet, and

A) centralization.

B) downsizing.

C) logistical partnerships.

D) computerization.

E) containerized shipping.

Answer: A

67

The flow of products into and out of the manufacturing process is a factor when developing a(n) ________ strategy.

A) marketing

B) logistics

C) operations

D) financial

E) human resource management

Answer: B

68

Many companies have found that outsourcing logistics

A) helps centralize logistics.

B) reduces costs and improves delivery time.

C) is an effective business-level strategy.

D) helps the companies differentiate themselves.

E) all of the above

Answer: B

69

Avon is an example of a company that demonstrated having a diverse workforce

A) can be a competitive advantage.

B) can lower productivity.

C) can be an effective IT strategy.

D) can hinder quality.

E) hinders growth.

Answer: A

70

A recent trend in information systems strategy used by multinational corporations is

A) computerizing accounting.

B) automating customer service.

C) practicing follow-the-sun management.

D) replacing Fortran with Cobol in order to boost productivity.

E) replacing mainframe computers with robots.

Answer: C

71

Purchasing a product or service from an outside contractor that had been previously provided internally is called

A) vertical integration.

B) horizontal integration.

C) transaction costing.

D) outsourcing.

E) geographic integration.

Answer: D

72

A study of 30 firms revealed that outsourcing can lead to a ________ percent reduction in costs.

A) 3

B) 9

C) 20

D) 30

E) 50

Answer: B

73

According to a 2012 survey by Deloitte Consulting, the most popular outsourced activity was

A) marketing.

B) sales.

C) finance.

D) R&D.

E) information technology.

Answer: E

74

Which of the following is NOT one of the major outsourcing errors that should be avoided?

A) failure to keep core activities inhouse

B) selecting the wrong vendor

C) writing a poor contract

D) micromanaging the outsourced activity to maintain control

E) overlooking personnel issues

Answer: D

75

The key to outsourcing is to purchase from the outside only those activities that

A) are not key to the company's distinctive competence.

B) are very expensive.

C) provide the company competitive advantage.

D) are provided by an important supplier.

E) are not very expensive.

Answer: A

76

A company which has previously found great success pioneering an extremely successful product that is presently trying to turn another "long-shot" into a success would be an example of which strategy to avoid?

A) follow the leader

B) hit another home run

C) arms race

D) do everything

E) losing hand

Answer: B

77

A company which keeps up by imitating a leading company's strategy while ignoring its own strengths and weaknesses is an example of which strategy to avoid?

A) follow the leader

B) hit another home run

C) arms race

D) do everything

E) losing hand

Answer: A

78

Since the deregulation of the airline industry, major airlines have entered into a spirited battle for market share by cutting prices and offering special deals. This is an example of which strategy to avoid?

A) follow the leader

B) hit another home run

C) arms race

D) do everything

E) losing hand

Answer: C

79

A company which has invested so heavily in a particular strategy that it will not consider a change in this strategy even if it is not successful, would be an example of which strategy to avoid?

A) follow the leader

B) hit another home run

C) arms race

D) do everything

E) losing hand

Answer: E

80

When considering acceptable alternative strategies, the most important criterion is the capability of the proposed strategy to deal with

A) the prospects of ensuring profitable return on investment.

B) the specific strategic factors developed in the SWOT analysis.

C) defining the competitive environment in which the firm is competing.

D) the future long-term prospects of the industry.

E) governmental regulations and requirements placed on the industry.

Answer: B

81

The technique used to help strategic managers choose among alternative choices by defining the task environment, developing a set of various forecasts, and using pro forma financial statements is called

A) decision trees.

B) SWOT analysis.

C) industry scenarios.

D) corporate scenarios.

E) Capital Asset Pricing Model.

Answer: D

82

The first step in constructing a corporate scenario is to

A) develop a common-sized financial statement.

B) construct detailed pro forma financial statements.

C) decide upon how much risk management is willing to accept.

D) analyze the societal environment.

E) use industry scenarios to develop a set of assumptions about the task environment.

Answer: E

83

Which one of the following is NOT true of risk?

A) It includes the length of time the asset will be unavailable for other uses.

B) It includes the probability that the strategy will be effective.

C) Managers who own a significant amount of stock in their firms are less likely to engage in risk-taking actions.

D) It includes the amount of assets the corporation must allocate to that strategy.

E) The greater the assets involved, the more likely top management is to demand a high probability of success.

Answer: C

84

According to the text, which one of the following is NOT one of the reasons why innovations seem to occur more often in small firms rather than in large, established corporations?

A) An entrepreneur in a small firm is more willing to accept greater risk than would a larger firm of diversified ownership.

B) Small firms are completely ignorant of risk management.

C) The greater the assets involved and the longer they are tied up, the more likely top management in large firms is to demand a high probability of success.

D) Companies operating in global industries must deal with a greater amount of risk than firms operating only in one country.

E) If the corporation's stock is widely held as in the case of large firms and experiences stock price declines due to some external assessment, it places the firm in jeopardy of being acquired.

Answer: B

85

A new approach to evaluating alternatives under conditions of high environmental uncertainty that proposes it pays to have a broad range of options open is the

A) net present value.

B) real options approach.

C) stakeholder priority matrix.

D) risk assessment approach.

E) hurdle rate approach.

Answer: B

86

The most commonly used political strategies include which of the following?

A) constituency building

B) political action committee contributions

C) advocacy advertising

D) lobbying

E) all of the above

Answer: E

87

Which one of the following is NOT one of the questions that management should raise in their attempt to assess the importance to the corporation of stakeholders' concerns?

A) Which stakeholder group should be represented on the board of directors?

B) How will this decision affect each stakeholder?

C) How much of what the stakeholders want are they likely to get under a certain alternative?

D) What are the stakeholders likely to do if they don't get what they want?

E) What is the probability that the stakeholders will follow through on their demand?

Answer: A

88

The type of strategy used to influence a corporation's key stakeholders in order to increase their support of corporate activities is

A) cooperative strategy.

B) political strategy.

C) competitive strategy.

D) marketing strategy.

E) profit strategy.

Answer: B

89

If there is little fit between a strategic alternative under consideration and the corporate culture, which of the following is one of management's options to consider?

A) Take a chance on ignoring the culture by implementing the strategic alternative.

B) Manage around the culture and change the implementation plan.

C) Try to change the culture to fit the strategy.

D) Change the strategy to fit the culture.

E) all of the above

Answer: E

90

Which of the following reflects the impact of industry backgrounds on strategic choices?

A) Executives from other industries tend to make riskier decisions.

B) Executives with strong ties within an industry tend to choose strategies commonly used in that industry.

C) Executives from other industries tend to downsize as a first choice.

D) Executives with strong ties within an industry tend to make riskier decisions.

E) Executives from other industries tend to emphasize ROI.

Answer: B

91

The evaluation of alternative strategies and selection of the best alternative is referred to as

A) alternative generation.

B) strategic implementation.

C) strategic choice.

D) strategic selection.

E) evaluation.

Answer: C

92

To avoid the consensus trap, which technique assigns a group or individual to identify potential pitfalls and problems with a proposed alternative strategy in a formal presentation?

A) devil's advocate

B) Sloan's judgment

C) sales presentation

D) dialectical inquiry

E) scenario construction

Answer: A

93

To avoid the consensus trap, which technique involving presenting two conflicting views (the thesis and the antithesis) presented in a debate format can be traced back to Plato and Aristotle?

A) devil's advocate

B) Sloan's judgment

C) sales presentation

D) dialectical inquiry

E) scenario construction

Answer: D

94

Once the best strategic alternative is selected, the broad guidelines for its implementation are then defined by

A) trade-offs.

B) policies.

C) procedures.

D) resource allocation.

E) strategic options.

Answer: B

95

According to Paul Nutt, a decision-making authority, what percent of decisions made by managers are failures?

A) 10

B) 25

C) 50

D) 75

E) 90

Answer: C

96

What is a functional strategy?

Answer: Functional strategy is the approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity. It is concerned with developing and nurturing a distinctive competence to provide a company or business unit with a competitive advantage.

97

Distinguish between a market development and a product development strategy.

Answer: Using a market development strategy, a company or business unit can (1) capture a larger share of an existing market for current products through market saturation and market penetration or (2) develop new markets for current products.

Using the product development strategy, a company or unit can (1) develop new products for existing markets or (2) develop new products for new markets.

98

What does a financial strategy examine?

Answer: A financial strategy examines the financial implications of corporate and business-level strategic options and identifies the best financial course of action. It can also provide competitive advantage through a lower cost of funds and a flexible ability to raise capital to support a business strategy. Financial strategy usually attempts to maximize the financial value of the firm.

99

Give an example of a technological leader.

Answer: A technological leader is a company that pioneers an innovation. An example of a technological leader is Nike. They spend more than most in the industry on R&D to differentiate the performance of its athletic shoes from that of its competitors.

100

Discuss W. Edward Deming's position on sole sourcing.

Answer: W. Edward Deming strongly recommended sole sourcing as the only manageable way to obtain high supplier quality. Sole sourcing relies on only one supplier for a particular part. Deming argued that the buyer should work closely with the supplier at all stages. This reduces both cost and time spent on product design as well as improving quality. By using JIT, it can also simplify the production process.

101

What is outsourcing? What are the seven major outsourcing errors that should be avoided?

Answer: Outsourcing is purchasing from someone else a product or service that had been previously provided internally. It is the reverse of vertical integration. Outsourcing is becoming an increasingly important part of strategic decision making and an important way to increase efficiency and often quality.

The seven major outsourcing errors that should be avoided are as follows:

  1. Companies failed to keep core activities in house.
  2. Companies selected the wrong vendor — those that were not trustworthy or lacked state-of-the-art processes.
  3. Companies failed to write an effective contract establishing the balance of power in the relationship.
  4. Companies overlooked personnel issues, resulting in employees losing commitment to the firm.
  5. Management lost control over the outsourced activity.
  6. Companies overlooked the hidden costs of outsourcing.
  7. Companies failed to plan an exit strategy (such as reversibility clauses).
102

What are the strategies to avoid proposed by the authors?

Answer: The strategies to avoid are as follows:

  1. Follow the leader. Imitating a leading competitor's strategy might seem to be a good idea, but it ignores a firm's particular strengths and weaknesses and the possibility that the leader may be wrong.
  2. Hit another home run. If a company is successful because it pioneered an extremely successful product, it tends to search for another super product that will ensure growth and prosperity.
  3. Arms race. Entering into a spirited battle with another firm for increased market share might increase sales revenue, but that increase will probably be more than offset by increases in advertising, promotion, R&D, and manufacturing costs.
  4. Do everything. When faced with several interesting opportunities, management might tend to leap at all of them. At first, a corporation might have enough resources to develop each idea into a project, but money, time, and energy are soon exhausted as the many projects demand large infusions of resources.
  5. Losing hand. A corporation might have invested so much in a particular strategy that top management is unwilling to accept its failure. Believing that it has too much invested to quit, the corporation continues to throw "good money after bad."
103

What is a corporate scenario? What are the three steps in their construction?

Answer: Corporate scenarios are pro forma balance sheets and income statements that forecast the effect each alternative strategy and its various programs will likely have on division and corporate return on investment.

To construct a corporate scenario, the following three steps should be taken:

  1. Use industry scenarios to develop a set of assumptions about the task environment.
  2. Develop common-size financial statements for the company's or business unit's previous years, to serve as the basis for the trend projections of pro forma financial statements.
  3. Construct detailed pro forma financial statements for each strategic alternative.
104

In evaluating a strategic alternative, if there is little fit with the company's culture, what are management's options?

Answer: In evaluating a strategic alternative, management must consider corporate culture pressures and assess the strategy's compatibility with the corporate culture. If there is little fit, management must decide if it should take a chance on ignoring the culture, manage around the culture and change the implementation plan, try to change the culture to fit the strategy, or change the strategy to fit the culture.

105

In a dynamic environment, using consensus to arrive at a strategic decision is not recommended. Why? What two techniques can strategic managers use to avoid the consensus trap?

Answer: The best decisions actually involve a certain amount of heated disagreement, and even conflict. Many diverse opinions are presented, participants trust in one another's abilities and competencies, and conflict is task-oriented, not personal. Two techniques to help strategic managers avoid the consensus trap are the devil's advocate and dialectical inquiry. A devil's advocate is assigned to identify potential pitfalls and problems with a proposed alternative strategy in a formal presentation. The dialectical inquiry involves combining two conflicting views — the thesis and the antithesis — into a synthesis. It requires that two proposals using different assumptions be generated for each alternative strategy under consideration.