STUDY UNIT FIFTEEN STRATEGIC PLANNING AND BUDGETING CONCEPTS

Question 1

The concurrent action of basic competitive forces as defined by Porter’s model determines the

A. Entrance barriers that potential players must face to get into the industry.
B. Rivalry inside the industry.
C. Long-term profitability and the competitive intensity of the industry.
D. Nonvalue-adding activities that should be eliminated.

Answer 1

C. Long-term profitability and the competitive intensity of the industry.
Answer (C) 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.
(15.1.8)

Question 2

Customer lifetime value for a particular customer is the

A. Net present value of the cash flows related to a particular customer.
B. Undiscounted amount of the net cash flows related to a particular customer.
C. Customer equity.
D. Sum of the customer’s purchases from the firm.

Answer 2

A. Net present value of the cash flows related to a particular customer.
Answer (A) is correct.
A firm should estimate customer lifetime value, the net present value of the cash flows (purchases – costs of acquiring, selling to, and serving the customer) related to a particular customer. This amount indicates whether a given investment in a customer is justified.
(15.1.21)

Question 3

While auditing a marketing department, the internal auditor discovered that the product life cycle model was used to structure the marketing mix. Under such a philosophy, the opportunity for cost reductions would be greatest in which stage of the life cycle?

A. Maturity stage.
B. Growth stage.
C. Introduction stage.
D. Decline stage.

Answer 3

B. Growth stage.
Answer (B) is correct.
During the growth stage, the opportunity for cost reductions is at its maximum because production volume is increasing at a high rate. Thus, fixed costs are being spread over more units of production, and the benefits of the learning curve are being realized.
(15.1.19)

Question 4

Which factor increases the threat of entry into an industry?

A. Economies of scale are significant.
B. Exit barriers are low.
C. Capital requirements are high.
D. An industry leader may retaliate against a new entrant.

Answer 4

B. Exit barriers are low.
Answer (B) 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.
(15.1.12)

Question 5

Which of the following pricing policies results in establishment of a price to external customers higher than the competitive price for a given industry?

A. Transfer pricing.
B. Dual pricing.
C. Collusive pricing.
D. Predatory pricing.

Answer 5

C. Collusive pricing.
Answer (C) is correct.
Collusion involves competitive businesses working together to gain advantage in the market. Inflating the price of a good or service higher than the competitive price to realize higher profits is indicative of collusive behavior.
(15.1.26)

Question 6

In developing the budget for the next year, which approach is most likely to produce positive motivation and consistency of objectives?

A. Have senior management develop overall objectives and permit the subunit manager to determine how they will be met.
B. Have the subunit manager and senior management jointly develop objectives and the subunit manager develop operational plans.
C. Permit the subunit manager to develop the objectives for the subunit that, in the manager’s view, will generate the greatest profit.
D. Have the subunit manager and senior management jointly develop objectives and operational plans.

Answer 6

B. Have the subunit manager and senior management jointly develop objectives and the subunit manager develop operational plans.
Answer (B) is correct.
Participative development of objectives has a positive effect on motivation because lower-level managers are more likely to accept and be committed to the result.
(15.4.62)

Question 7

Structural considerations affecting the threat of substitutes include all of the following except

A. Customers’ inclination to use a substitute.
B. Brand identity.
C. Cost of switching to substitutes.
D. Relative prices.

Answer 7

B. Brand identity.
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.
(15.1.4)

Question 8

Customer satisfaction is related to the degree of customer loyalty. High customer loyalty

A. Requires a high degree of satisfaction of other stakeholders.
B. Results when quality, service, and price increase.
C. Depends on the effectiveness of the firm’s core business processes.
D. Is directly proportional to customer expectations.

Answer 8

C. Depends on the effectiveness of the firm’s core business processes.
Answer (C) is correct.
High customer loyalty is an emotional as well as a rational bond that develops when a firm provides high customer value. To obtain such loyalty, the firm needs to develop a value proposition that has superior competitiveness in the target market segment.
(15.1.24)

Question 9

Customer relationship management is best defined as

A. Maximizing short-term sales to customers.
B. Market sensing.
C. Maximizing customer loyalty by managing customer “touchpoints.”
D. Coordination with members of the firm’s supply chain.

Answer 9

C. Maximizing customer loyalty by managing customer “touchpoints.”
Answer (C) is correct.
Customer relationship management can be defined as “the process of managing detailed information about individual customers and carefully managing all the customer ‘touchpoints’ with the aim of maximizing customer loyalty.” Its purpose is to create optimal customer equity. Thus, the process involves more than merely attracting customers (through media advertising, direct mail, etc.) and satisfying them (something competitors also may do).
(15.1.23)

Question 10

A 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. Buyers view the product as differentiated.
B. Buying firms enjoy large profit margins on their end products.
C. The fixed costs are high in relation to variable costs in the truck rental industry.
D. The market is dominated by a small consortium of buyers.

Answer 10

D. The market is dominated by a small consortium of buyers.
Answer (D) 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.
(15.1.5)

Question 11

What 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. Service strategy.
C. Quality strategy.
D. Cost strategy.

Answer 11

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.
(15.1.14)

Question 12

During the introduction stage, prices are typically set low to establish a dominant market position.
True.
False.

Answer 12

False.
Your answer is correct.
During the introduction stage, higher-income customers are usually targeted, and prices are typically high to permit cost recovery when unit sales are low.

Question 13

In the maturity stage, the strategy is to defend by cost-cutting, emphasizing customer service, and entering new market segments.
True.
False.

Answer 13

True.
Your answer is correct.
In the maturity stage, sales growth declines, and competitors are most numerous. Profits fall because of competitive price-cutting and increased R&D spending to develop improved versions of the product.

Question 14

Value is a combination of quality, service, and price. Value increases as quality and service increase and price decreases.
True.
False.

Answer 14

True.
Your answer is correct.
Value is a combination of the elements of the customer value triad: quality, service, and price. Value increases as quality and service increase and price decreases.

Question 15

Management by objectives allows the subordinate to understand how his/her job is the means by which the superior’s job is accomplished.
True.
False.

Answer 15

True.
Your answer is correct.
Management by objectives (MBO) identifies relationships between an individual’s job objectives (ends) and the immediate superior’s objectives (ends). Thus, the subordinate can understand how his/her job is the means by which the superior’s job is accomplished.

Question 16

Capacity planning is a process for choosing and financing long-term projects and programs.
True.
False.

Answer 16

False.
Your answer is correct.
Capital budgeting is a planning process for choosing and financing long-term projects and programs. Capacity planning is the potential for business combinations or divestitures.

Question 17

Effectiveness is maximizing the output for a given quantity of input.
True.
False.

Answer 17

Your answer is correct.
Efficiency is maximizing the output for a given quantity of input. Effectiveness is the degree to which the objective or goal is accomplished.

Question 18

Managers sometimes deliberately hold themselves to a low standard during the budget process.
True
False

Answer 18

True
Your answer is correct.
Budgetary slack (overestimation of expenses) must be avoided if a budget is to have its desired effects. The natural tendency of a manager is to negotiate for a less stringent measure of performance so as to avoid unfavorable variances from expectations.

Question 19

Which factor most likely encourages entry into an existing market?
A Low fixed exit costs.
B Knowledge of the industry, with high investments in development.
C Governmental subsidies for new investors.
D High product differentiation, principally produced by trademarks.

Answer 19

C Governmental subsidies for new investors.

This answer 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.

Question 20

A distinction between forecasting and planning
A Is not valid because they are synonyms.
B Arises because forecasting covers the short-term and planning does not.
C Is that forecasts are used in planning.
D Is that forecasting is a management activity whereas planning is a technical activity.

Answer 20

C Is that forecasts are used in planning.
This answer is correct.
Planning is the determination of what is to be done, and of how, when, where, and by whom it is to be done. Plans serve to direct the activities that all organizational members must undertake to move the organization from where it is to where it wants to be. Forecasting is the basis of planning because it projects the future. A variety of quantitative methods are used in forecasting.

Question 21

At the introduction stage of an innovative product, the profit growth is normally slow due to
A High competition.
B Available alternatives.
C A mass market.
D Expensive sales promotion.

Answer 21

D Expensive sales promotion.

This answer is correct.
The introduction stage is characterized by slow sales growth and lack of profits because of the high expenses of promotion and selective distribution to generate awareness of the product and encourage customers to try it.
View Subunit 15.1 Outline

Question 22

One of the primary advantages of budgeting is that it
A Is continually adapted to fit changing circumstances.
B Bases the profit plan on estimates.
C Requires departmental managers to make plans in conjunction with the plans of other interdependent departments.
D Does not take the place of management and administration.

Answer 22

C Requires departmental managers to make plans in conjunction with the plans of other interdependent departments.
This answer is correct.
A budget is a quantitative model of a plan of action developed by management. A budget functions as an aid to planning, coordination, and control. Thus, a budget helps management to allocate resources efficiently and to ensure that subunit objectives are consistent with those of other subunits and of the organization.
View Subunit 15.3 Outline

Question 23

Which industry factor does not contribute to competitive rivalry?
A High costs of customers switching suppliers.
B Price-cutting, large advertising budgets, and frequent introduction of new products.
C A firm’s growth must come from winning other firms’ customers.
D High fixed costs relative to variable costs.

Answer 23

A High costs of customers switching suppliers.
This answer is correct.
If it is expensive to switch suppliers, customers will be less motivated to respond to competitor advances.
View Subunit 15.1 Outline

Question 24

Which one of the following scenarios related to Music For You, Inc., who manufactures headphones, is not considered an illegal pricing practice?

A. The company recently began selling its headphones overseas at extremely low prices to give international buyers a price reduction.
B. The company works with Beats For You, Inc., to set prices together, causing all customers who purchase their headphones to pay higher prices.
C. The company sells the same model of headphones at two different prices. A lower price is set for customers who live near low-priced retailers who sell other types of headphones. A higher price is set for customers who live in smaller towns.
D. The company allows customers who spend over a hundred dollars to purchase another set of headphones for half the price. The price for other customers who don’t spend over a hundred dollars remains the same.

Answer 24

D. The company allows customers who spend over a hundred dollars to purchase another set of headphones for half the price. The price for other customers who don’t spend over a hundred dollars remains the same.
Answer (D) is correct.
This is a legal pricing practice. This rewards customers for spending more money at Music For You locations. This also is not lessening competition, so this would not be considered a price discrimination practice.
(15.1.30)