Sec B Strategic Management Flashcards
1Which of the following steps in the strategic management process should be completed first?
A. Translate objectives into goals.
B. Determine actions to achieve goals.
C. Develop performance measures.
D. Create a mission statement.
Answer (D) is correct.
A mission statement is a formal, written document that defines an organization’s ultimate purposes in
society in general terms. After a situational analysis is performed, the entity develops a group of
strategies for achieving the mission.
2A firm’s statement of broad objectives or mission statement should accomplish all of the
following except
A. Outlining strategies for technological development, market expansion, and product differentiation.
B. Defining the purpose of the company.
C. Providing an overall guide to those in high-level, decision-making positions.
D. Stating the moral and ethical principles that guide the actions of the firm.
Answer (A) is correct.
The determination of organizational objectives is the first step in the planning process. A mission
statement is a formal, written document that defines the organization’s purpose in society, for example,
to produce and distribute certain goods of high quality in a manner beneficial to the public, employees,
shareholders, and other constituencies. Thus, a mission statement does not announce specific operating
plans. It does not describe strategies for technological development, market expansion, or product
differentiation because these are tasks for operating management.
3Intensity of rivalry among existing firms in an industry increases when
I. Products are relatively undifferentiated
II. Consumer switching costs are low
A. I only.
B. II only.
C. Both I and II.
Answer (C) is correct.
The degree of product differentiation and the costs of switching from one competitor’s product to
another increase the intensity of rivalry and competition in an industry. Less differentiation tends to
heighten competition based on price, with price cutting leading to lower profits. Low costs of
switching products also increase competition.
4Structural considerations affecting the threat of substitutes include all of the following except
A. Relative prices.
B. Brand identity.
C. Cost of switching to substitutes.
D. Customers’ inclination to use a substitute.
Answer (B) is correct.
Substitutes are types of goods and services that serve the same purpose. All products that can replace a
good or service should be considered substitutes. For example, bicycles and cars are substitutes for
public transportation. Structural considerations determine the effect substitutes have on one another.
However, because substitutes are types (not brands) of goods and services that have the same purposes,
brand identity is not a structural consideration affecting the threat of substitutes.
5A corporation is performing research to determine the feasibility of entering the truck rental industry.
The decision to enter the market is most likely to be deterred if
A. The fixed costs are high in relation to variable costs in the truck rental industry.
B. Buyers view the product as differentiated.
C. The market is dominated by a small consortium of buyers.
D. Buying firms enjoy large profit margins on their end products.
Answer (C) is correct.
When purchasing power is concentrated in a few buyers or when buyers are well organized, their
bargaining power is greater. This effect is reinforced when sellers are in a capital-intensive industry,
such as trucking.
6Which industry factor does not contribute to competitive rivalry?
A. Price-cutting, large advertising budgets, and frequent introduction of new products.
B. A firm’s growth must come from winning other firms’ customers.
C. High costs of customers switching suppliers.
D. High fixed costs relative to variable costs.
Answer (C) is correct.
If it is expensive to switch suppliers, customers will be less motivated to respond to competitor
advances.
7Which condition does not increase the threat of new competitor entry into the industry?
A. Strong brand identity.
B. Existing firms do not enjoy the cost advantages of vertical integration.
C. Few proprietary product differences.
D. Low capital requirements
Answer (A) is correct.
Strong brand identity decreases the threat that new competitors will enter an industry. New competitors
have difficulty because potential customers are loyal to established firms in the industry.
8The concurrent action of basic competitive forces as defined by Porter’s model determines the
A. Long-term profitability and the competitive intensity of the industry.
B. Entrance barriers that potential players must face to get into the industry.
C. Rivalry inside the industry.
D. Nonvalue-adding activities that should be eliminated.
Answer (A) is correct.
Porter developed a model of the structure of industries and competition. It includes an analysis of the
five competitive forces that determine long-term profitability measured by long-term return on
investment. This analysis results in an evaluation of the attractiveness of an industry.
9Which factor most likely encourages entry into an existing market?
A. Governmental subsidies for new investors.
B. High product differentiation, principally produced by trademarks.
C. Knowledge of the industry, with high investments in development.
D. Low fixed exit costs.
Answer (A) is correct.
Subsidies for new firms lower entry barriers. Thus, new firms may enter the industry and intensify
competition. Government policy also may affect competition by means of regulations that encourage
or discourage substitutes or affect costs, that govern competitive behavior, or that limit growth.
Government also may be a buyer or supplier.
10Which of the following is a favorable condition for a firm competing in a profitable, expanding
industry?
A. The firm does not have a strong customer base.
B. A few suppliers who can restrict supply.
C. Competitors find it difficult to acquire the firm’s customers
D. The firm has high costs relative to other firms in the industry.
Answer (C) is correct.
A firm that has successfully differentiated its products through developing a desirable image, better
services, cost leadership, the features of the product, or other means is in a favorable competitive
position. Competitors find it difficult to acquire the firm’s customers, for example, by price cutting.
The reason is that the firm’s products are perceived to have few substitutes, and brand loyalty is high.
Furthermore, barriers to entry are favorable to the firm. These barriers deter competitors from entering
the market. Existing firms can increase market share and emphasize cutting costs and increasing value.
11Michael E. Porter’s competitive strategies model includes an analysis of the competitive forces that
determine the attractiveness of an industry. These forces include
I. The stage of the industry life cycle
II. Threats of, and barriers to, entry
III. Threat of substitutes
IV. The threat of suppliers’ bargaining power
A. I and II only.
B. I and III only.
C. II, III, and IV only.
Answer (C) is correct.
Michael E. Porter has developed a model of the structure of industries and competition. It includes an
analysis of the five competitive forces that determine long-term profitability measured by long-term
return on investment. This analysis results in an evaluation of the attractiveness of an industry. The
five forces are (1) the degree of rivalry among existing firms; (2) threats of, and barriers to, entry; (3)
the threat of substitute products or services; (4) the threat of buyers’ bargaining power; and (5) the
threat of suppliers’ bargaining power.
12Which factor increases the threat of entry into an industry?
A. Economies of scale are significant.
B. Capital requirements are high.
C. An industry leader may retaliate against a new entrant.
D. Exit barriers are low.
Answer (D) is correct.
The most favorable condition for the attractiveness of an industry is the existence of high entry barriers
and low exit barriers. When the threat of new entrants is minimal and exit is not difficult, returns are
high, and risk is reduced in the event of poor performance. Low entry barriers keep long-term
profitability low because new firms can enter the industry, increasing competition and lowering prices
and the market shares of existing firms. Exit barriers are reasons for a firm to remain in an industry
despite poor (or negative) profits.
13A manufacturing company produces plastic utensils for a particular segment at the lowest possible
cost. The company is pursuing a cost
A. Leadership strategy.
B. Focus strategy.
C. Differentiation strategy.
D. Containment strategy.
Answer (B) is correct.
Cost focus is the generic strategy that seeks competitive advantage through lower costs but with a
narrow competitive scope (e.g., a regional market or a specialized product line). The reason for a costfocus
strategy is that the narrower market can be better served because the firm knows it well.
14What operations strategy is most likely to be adopted when the product sold by an organization is a
commodity and the market is very large?
A. Flexibility strategy.
B. Quality strategy.
C. Service strategy.
D. Cost strategy.
Answer (D) is correct.
An operations strategy formulates a long-term plan for using entity resources to reach strategic
objectives. A cost strategy is successful when the entity is the low-cost producer. However, the product
(e.g., a commodity) tends to be undifferentiated in these cases, the market is often very large, and the
competition tends to be intense because of the possibility of high-volume sales.
15A company is trying to decide which competitive strategy it should try to implement. Since the
company has recently started producing Halloween products and selling them in its Halloween stores a few months
prior, it is trying to focus on low costs. The company believes that this will give it a competitive advantage since
much of the competition across the nation is selling more expensive Halloween products. Which competitive
strategy should the company most likely try to implement?
A. Cost leadership.
B. Differentiation.
C. Cost focus.
D. Focused differentiation.
Answer (A) is correct.
Cost leadership seeks a competitive advantage through lower costs that have a broad competitive
scope. Since the company is selling its products at low costs and it has many competitors across the
nation, it has a broad competitive scope.
16A bowling alley has identified three revenue streams with the following income statements.
Bowling Equipment Rental Food Sales
Revenues $9,000,000 $300,000 $1,200,000
Variable costs 1,100,000 150,000 1,150,000
Direct employee salaries 250,000 40,000 120,000
Common costs 6,400,000 35,000 365,000
Income (loss) $1,250,000 $ 75,000 $ (435,000)
The most important consideration in determining whether to discontinue its food sales is
A. Employee morale.
B. Its interrelationships with other products.
C. The ability to increase food sales.
D. The ease of implementing activity-based costing to better assign costs.
Answer (B) is correct.
The service line food sales could impact the sales of both bowling and equipment rental. Discontinuing
the food sales line might negatively affect the other two service lines, and the bowling alley should
further investigate the matter.
17A strategic business unit (SBU) has a high relative market share (RMS) and a low market growth
rate (MGR). According to the growth-share matrix for competitive analysis created by the Boston Consulting Group,
such an SBU is considered a
A. Star.
B. Question mark.
C. Cash cow.
D. Dog.
Answer (C) is correct.
The annual MGR reflects the maturity and attractiveness of the market and the relative need for cash to
finance expansion. The RMS reflects an SBU’s competitive position in the market segment. A high
RMS signifies that the SBU has a strong competitive position. Cash cows have high RMS and low
MGR. They are strong competitors and cash generators in low-growth markets.
