MGMT Principles of Managements Canadian 3rd Edition by Williams – Test Bank

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Chapter 5 Organizational Strategy
MULTICHOICE
1. What is an organization said to have if it has the assets, capabilities, processes,
information, and knowledge used to improve its effectiveness and efficiency, to create and
sustain competitive advantage, and to fulfill a need or solve a problem?
(A) grand strategies
(B) distinctive competencies
(C) competitive advantages
(D) resources
Answer : (D)
2. A sustainable competitive advantage exists for an organization when other companies
have tried unsuccessfully to duplicate the advantage and when which of the following
happens?
(A) the other companies have been prohibited from duplicating the advantage by federal law
(B) the other companies have, for the moment, stopped trying to duplicate the advantage
(C) the organization is able to implement exclusive distribution
(D) the organization operates in the international marketplace
Answer : (B)
3. Which condition must be met if a firm’s resources are to be used to achieve a sustainable
competitive advantage?
(A) differentiation
(B) imperfectly imitable resources
(C) related diversification
(D) unrelated diversification
Answer : (B)
4. When making travel plans, many tourists select Thomas Cook because they perceive the
tour company as being superior to all others. No other tour service can duplicate the
customer service and satisfaction that Thomas Cook has provided over its years of
operation. What type of resources has Thomas Cook apparently used to create a sustainable
competitive advantage?
(A) synergistic
(B) valuable
(C) tangible
(D) nonsubstitutable
Answer : (D)
5. Royal Bank of Canada is the largest bank in Canada. Would this position give it a
sustainable competitive advantage, and why?
(A) Yes, because size would make its operations synergistic.
(B) No, because size is not a criterion for sustainable competitive advantage.
(C) Yes, because large institutions make more effective use of resources.
(D) No, because large organizations are always targeted for anti-trust activities.
Answer : (B)
6. Which type of resource is NOT controlled or possessed by many competing firms?
(A) rare resources
(B) imperfectly imitable resources
(C) nonsubstitutable resources
(D) strategically dissonant resources
Answer : (A)
7. Wagyu beef sold in Canada is often a crossbreed with the Wagyu breed from Japan. Brant
Lake Wagyu raises their Wagyu crossbreed cattle on a mix of pasture feeding and barley.
What kind of resource is the Wagyu crossbreed cattle?
(A) rare resource
(B) imperfectly imitable resource
(C) nonsubstitutable resource
(D) strategically dissonant resource
Answer : (B)
8. To differentiate its products from other similar brands, Aveda beauty products focuses on
educating its customers on general skin and hair care. Its salespeople are trained to answer
questions and help customers find solutions. What has Aveda achieved with customer
education and employee training?
(A) synergy through relationship marketing
(B) prevention of product duplication
(C) efficient use of imitative resources
(D) a competitive advantage
Answer : (D)
9. According to the text, valuable, rare, imperfectly imitable resources can produce a
sustainable competitive advantage. What kind of resources must they also be to do so?
(A) nonsubstitutable resources
(B) substitutable resources
(C) reliable resources
(D) expensive resources
Answer : (A)
10. What is the first step in the strategy-making process?
(A) assess the need for strategic change
(B) conduct a situational analysis
(C) choose strategic alternatives
(D) evaluate the impact of changes on the internal environment
Answer : (A)
11. In 2015, Target Canada filed for bankruptcy. Its parent corporation, the US-based
Target Corporation, identified the need for strategic change in its Canadian operations.
What is the next step Target Corporation should take in this strategy-making process?
(A) finding the optimal strategic solution
(B) brainstorming
(C) assessing the need for strategic change
(D) conducting a situational analysis
Answer : (D)
12. UBC student Ann Makosinski has developed a coffee mug that generates electricity to
charge a cell phone. She has filed a patent for the device. What does she have from the
patent on the coffee mug?
(A) sustainable competitive advantage
(B) aggregate marketing strategy
(C) reliable differentiation
(D) strategic stance
Answer : (A)
13. What does an organization experience when it is reluctant to change strategies or
competitive practices that have been successful in the past?
(A) strategic dissonance
(B) strategic inertia
(C) competitive dissonance
(D) competitive inertia
Answer : (D)
14. BlackBerry struggled to adapt its once world-leading smartphones to respond to a more
dynamic smartphone market dominated by Android and iOS operating systems. What is this
an example of?
(A) competitive apathy
(B) strategic apathy
(C) competitive inertia
(D) strategic inertia
Answer : (C)
15. What is an organization said to be experiencing when there is a discrepancy between
upper management’s intended strategy and the strategy implemented by the lower levels of
management?
(A) horizontal conflict
(B) character of the rivalry
(C) strategic dissonance
(D) competitive inertia
Answer : (C)
16. Which of the following is a problem strongly associated with top managers?
(A) competitive dissonance
(B) differentiation discrepancy
(C) strategic inertia
(D) competitive inertia
Answer : (D)
17. What is another term for SWOT analysis?
(A) market audit analysis
(B) firm-level strategy analysis
(C) competitive advantage analysis
(D) situational analysis
Answer : (D)
18. Companies in the chemical industry are struggling to attract the most talented college
and university graduates. One big challenge facing these companies is attracting new talent
to organizations with an old-economy image. In a situational analysis, what term would be
associated with this challenge?
(A) internal threat
(B) external opportunity
(C) internal weakness
(D) internal opportunity
Answer : (C)
19. Specialized Bicycle Components introduced the first major-production mountain bike in
1980. Two-thirds of its profits come from the sale of mountain bikes. It is recognized
worldwide for its ability to design and produce superior mountain bikes. Which of the
following terms best defines this ability?
(A) customer sustainability
(B) organizational advantage
(C) relative competence
(D) distinctive competence
Answer : (D)
20. Which of the following is intangible?
(A) core capabilities
(B) competitive advantages
(C) strengths and weaknesses
(D) distinctive competencies
Answer : (A)
21. What is the term for the less visible, internal decision-making routines, problem-solving
processes, and organizational cultures that determine how efficiently inputs can be turned
into outputs in any organization?
(A) imperfectly imitable resources
(B) valuable resources
(C) distinctive competencies
(D) core capabilities
Answer : (D)
22. What mechanism is used to examine external threats and opportunities facing a firm as
well as its internal strengths and weaknesses?
(A) organizational scanning
(B) internal marketing
(C) corporate strategy
(D) a situational analysis
Answer : (D)
23. Specialized Bicycle Components introduced the first major-production mountain bike in
1980. Since then, the company has maintained a technological leadership in the production
of bikes and bike accessories and an organizational culture that encourages innovation.
Which one of the following refers to the company’s technological leadership and its
organizational culture?
(A) customer sustainabilities
(B) organizational advantages
(C) relative competencies
(D) core capabilities
Answer : (D)
24. Which of the following might an internal situational analysis for a pet food manufacturer
reveal?
(A) a growing dog and cat population in Canada
(B) an indication that dogs need less calcium in their diet
(C) a less expensive, more nutritious imported brand of pet food
(D) a need for management that understands the trends in pet care
Answer : (D)
25. Which term refers to the overall organizational strategy that addresses the question
“What business or businesses are we in or should we be in”?
(A) firm-level strategy
(B) corporate-level strategy
(C) industry-level strategy
(D) portfolio strategy
Answer : (B)
26. What are the two major approaches to corporate-level strategy?
(A) portfolio strategy and secondary strategy
(B) grand strategy and temporal strategy
(C) grand strategy and portfolio strategy
(D) temporal strategy and secondary strategy
Answer : (C)
27. Which of the following is an example of a common approach to corporate-level strategy?
(A) positioning strategies
(B) adaptive strategies
(C) ROI strategies
(D) grand strategies
Answer : (D)
28. How can the portfolio strategy be used to help managers acquire companies that fit well
with the rest of their corporate portfolio?
(A) The fewer businesses in which a corporation competes, the smaller its overall chances of
failing.
(B) Risk can be reduced through related diversification-creating or acquiring companies
with related core capabilities.
(C) Invest the profits and cash from mature, slow-growth businesses into newer, faster
growing businesses.
(D) The most significant advantage of the portfolio strategy is the ability to categorize
businesses as stars, exclamation points, question marks, and dogs.
Answer : (B)
29. Besides selling coffee, Starbucks markets a line of compilation CDs under the brand
name Hear Music. Which term best describes this making and marketing of CDs?
(A) related differentiation
(B) related diversification
(C) integrated acquisition
(D) unrelated diversification
Answer : (D)
30. Clorox Corporation, the manufacturer of bleach and bleach-based cleaning products,
acquired Kingsford Charcoal and Prime Choice brand steak sauce. What is this action an
example of?
(A) related differentiation
(B) related diversification
(C) integrated acquisition
(D) unrelated diversification
Answer : (D)
31. What is the term for a portfolio strategy that managers use to categorize their
corporation’s businesses by growth rate and relative market share to help them decide how
to invest corporate funds?
(A) investment matrix
(B) SWOT matrix
(C) BCG matrix
(D) portfolio management matrix
Answer : (C)
32. Specialized Bicycle Components introduced the first major-production mountain bike in
1980. Specialized bikes have a large share of a fast-growing market. According to the BCG
matrix, what would the company Specialized Bicycle Components be classified as?
(A) problem child
(B) cash cow
(C) exclamation point
(D) star
Answer : (D)
33. TD Canada Trust was formed through the merger of the Toronto-Dominion Bank and
Canada Trust, both national banking entities. Considering both banking companies had
similar core capabilities, what is this an example of?
(A) related differentiation
(B) related diversification
(C) integrated acquisition
(D) competency acquisition
Answer : (B)
34. Hector wanted to grow his business beyond the food industry and started investing in
clothing, toys, and travel companies. Hector’s vice president did not agree with these
investments and predicted a decline in profit. Predicting this decline in profit is contrary to
which strategy?
(A) BCG strategy
(B) portfolio strategy
(C) related diversification strategy
(D) acquisition strategy
Answer : (B)
35. Which of the following is probably the best approach to diversification in portfolio
management?
(A) related differentiation
(B) related diversification
(C) unrelated diversification
(D) unrelated differentiation
Answer : (B)
36. Which type of strategy, manifested in three ways, is a broad corporate-level strategic
plan used to achieve strategic goals and guide the strategic alternatives that managers of
individual businesses or subunits may use?
(A) grand strategy
(B) growth strategy
(C) stability strategy
(D) retrenchment/recovery strategy
Answer : (A)
37. In an attempt to minimize its expenses, Toyota Canada discontinued the Scion brand in
2016. Which type of grand strategy was Toyota using?
(A) retrenchment
(B) stability
(C) growth
(D) maturity
Answer : (A)
38. What type of grand strategy is McDonald’s using when it increases its profits in Canada
by offering uniquely Canadian products, such as poutine?
(A) growth
(B) decline
(C) retrenchment/recovery
(D) repositioning
Answer : (A)
39. What term could be used to describe Coca-Cola’s acquisition of a water-treatment and
bottling plant so it could produce and market Dasani brand bottled water?
(A) a repositioning strategy
(B) growth
(C) niche marketing
(D) a retrenchment strategy
Answer : (B)
40. Clorox Corporation, the manufacturer of bleach and bleach-based cleaning products,
acquired Kingsford Charcoal and Prime Choice brand steak sauce. What is this action an
example of?
(A) internal growth
(B) a stability strategy
(C) a pioneering strategy
(D) external growth
Answer : (D)
41. By which of the following actions can companies achieve growth?
(A) by shrinking the scope of their business
(B) through direct expansion of their operations
(C) by deleting all cash cows from their portfolios
(D) by maintaining only stars in their portfolios
Answer : (B)
42. What type of strategy are companies most likely following when they are trying to
improve the way in which they sell the same goods or services to the same customers?
(A) growth
(B) pioneering
(C) retrenchment/recovery
(D) stability
Answer : (D)
43. Which type of strategy do companies often choose when their external environment
doesn’t change much or when they have struggled with periods of explosive growth?
(A) stability
(B) growth
(C) pioneering
(D) portfolio
Answer : (A)
44. What strategy is used to turn around very poor company performance by shrinking the
size or scope of the business?
(A) growth strategy
(B) stability strategy
(C) retrenchment strategy
(D) repositioning strategy
Answer : (C)
45. Which of the following strategies is analogous to pruning roses?
(A) growth strategy
(B) stability strategy
(C) retrenchment/recovery strategy
(D) portfolio strategy
Answer : (C)
46. What strategy is characterized by significant cost reductions, the layoffs of employees,
the closing of poorly performing stores, offices, or manufacturing plants, or the closing or
selling of entire lines of products or services?
(A) portfolio
(B) retrenchment
(C) stability
(D) firm-level
Answer : (B)
47. In an attempt to minimize its expenses, Toyota Canada discontinued the Scion brand in
2016. Which type of strategy will Toyota Canada more than likely implement in the near
term as it continues to integrate the Scion brand into its Canadian operations?
(A) harvesting
(B) revitalization
(C) revival
(D) recovery
Answer : (D)
48. Which strategy, if successful, is often followed by a growth strategy?
(A) retrenchment
(B) portfolio
(C) focus
(D) differentiation
Answer : (A)
49. Which corporate strategy addresses the question “How should we compete in this
industry”?
(A) corporate-level
(B) industry-level
(C) firm-level
(D) niche-specific
Answer : (B)
50. Which of the following is one of the five forces Michael Porter identified as being the
ones to determine an industry’s overall attractiveness and potential for long-term
profitability?
(A) existence of complementary products
(B) organizational structure
(C) existing benchmarks
(D) bargaining power of suppliers
Answer : (D)
51. Which of the following is determined by Michael Porter’s five industry forces?
(A) potential for long-term change
(B) potential for short-term profitability
(C) potential for short-term change
(D) potential for long-term profitability
Answer : (D)
52. Apple and Samsung lead the cellphone industry and usually one or the other company
leads the industry in phone sales. Which of Porter’s five industry forces is this an example
of?
(A) character of the culture
(B) competitive barrier
(C) character of the rivalry
(D) benchmarked rivalries
Answer : (C)
53. Which of the following is one of the five industry forces that determine an industry’s
overall attractiveness and potential for long-term profitability?
(A) character of management
(B) existing complementary products
(C) level of government subsidies
(D) threat of substitute products
Answer : (D)
54. Ads for the Hudson’s Bay Company are highlighting the company’s longevity and
symbiotic relationship with Canada’s history. Which type of positioning strategy is Hudson’s
Bay more than likely using?
(A) differentiation
(B) retrenchment
(C) diversification
(D) focus
Answer : (A)
55. Clorox Corporation controls 60 percent of the bleach market. Imagine you are an
entrepreneur who is considering developing and marketing a new brand of bleach. Which
one of Michael Porter’s five industry forces should you be most concerned about?
(A) bargaining power of buyers
(B) threat of substitute products or services
(C) threat of new entrants
(D) character of the rivalry
Answer : (D)
56. Calgary-based recruiting firm S.i. Systems specializes in information technology staffing
in key markets across Canada. Which type of positioning strategy does S.i. use?
(A) adaptive
(B) growth
(C) diversification
(D) focus
Answer : (D)
57. Which of the following will most likely be characteristic of companies when the
bargaining power of suppliers and buyers is high?
(A) Companies will find it more difficult to be profitable.
(B) Companies will most likely use a growth strategy.
(C) Companies will divest themselves of all of their cash cows.
(D) Companies will engage in organizational restructuring.
Answer : (A)
58. Cost leadership, differentiation, and focus are discussed in the text. Which of the
following defines these three types of strategies?
(A) grand
(B) niche
(C) positioning
(D) restructuring
Answer : (C)
59. What are the positioning strategies identified by Michael Porter?
(A) entrepreneurial, growth, and stability
(B) diversification, acquisition, and divestment
(C) defender strategy, diversification, and cost leadership
(D) focus, cost leadership, and differentiation
Answer : (D)
60. When The Home Depot opened stores in Canada, it ran a series of ads featuring an
animated hammer that was busily reducing prices to show the U.S.-based home
improvement store had the lowest prices. According to Michael Porter’s ideas, which
positioning strategy did The Home Depot adopt to deal with existing Canadian stores that
sold similar products?
(A) cost leadership
(B) diversification
(C) focus
(D) differentiation
Answer : (A)
61. Infinity Inc. makes a paperweight with real flowers preserved within a solid clear crystal
polymer. Independent gift stores sell Infinity’s paperweights to collectors of nature-related
keepsakes. The larger gift companies find this market too niche for them. What kind of
strategy has Infinity adopted?
(A) focus
(B) differentiation
(C) cost leadership
(D) diversification
Answer : (A)
62. Resource similarity determines the extent to which firms will be in direct competition
with one another. What other factor does the same?
(A) market commonality
(B) resource quality
(C) related diversification
(D) product differentiation
Answer : (A)
63. Which of the following organizations are most directly in competition with each other?
(A) Walmart and Gap
(B) a local flower shop and Sobeys
(C) FedEx and UPS
(D) an independent bookstore and a library
Answer : (C)
64. Which statement best describes the status of Tim Hortons and Second Cup as direct
competitors?
(A) They have a low degree of resource variability.
(B) They have a high degree of market commonality.
(C) They have a low degree of competitive inertia.
(D) They have a low degree of market commonality.
Answer : (B)
65. What is it called when the strategic actions that your company takes can probably be
matched by your direct competitors, from a competitive standpoint?
(A) market commonality
(B) resource similarity
(C) character of the rivalry
(D) competitive inertia
Answer : (B)
66. Under which of the following conditions is a competitive attack by the stronger of two
rivals more likely to produce sustained competitive advantage for that rival?
(A) high market commonality
(B) high competitive autonomy
(C) high resource similarity
(D) low resource similarity
Answer : (D)
67. Which course of action is most appropriate for top managers when their firm has
achieved a sustainable competitive advantage?
(A) adjusting or changing strategic reference points
(B) taking advantage of opportunities
(C) developing a “red ocean” strategy
(D) developing a retrenchment strategy
Answer : (A)
68. What has been Canadian Tire’s strategic response to Walmart’s entry into the retail
landscape?
(A) to aggressively reduce costs
(B) to develop multiple approaches to retail presence
(C) to develop a “red ocean” strategy
(D) to reinforce its focus on tire and automotive sales
Answer : (B)
69. Firms in direct competition can take which of the following actions?
(A) grand strategies and corporate-level strategies
(B) strategic choices and tactical choices
(C) attacks and responses
(D) divestment and investment
Answer : (C)
70. In which circumstance is an attack on a rival more likely?
(A) market commonality is strong
(B) market commonality is weak
(C) resource similarity is strong
(D) resource similarity is weak
Answer : (B)
71. In which circumstance is a company more likely to respond to an attack?
(A) market commonality is strong
(B) market commonality is weak
(C) resource similarity is strong
(D) resource similarity is weak
Answer : (A)
72. Under situations of low resource similarity, which of the following is the most probable
outcome of an attack?
(A) market commonality is likely to be strengthened
(B) market commonality is likely to be weakened
(C) sustained competitive advantage is not likely to be achieved
(D) sustained competitive advantage is likely to be achieved
Answer : (D)
73. Which tools are most useful to implement a strategy?
(A) balanced scorecards, early responses, and Gantt charts
(B) Gantt charts, retaliation, and early responses
(C) retaliation, PERT diagrams, and balanced scorecards
(D) Gantt charts, balanced scorecards, and PERT diagrams
Answer : (D)
74. Narrative 5-1
The Rolling Stones are the most successful act in the music industry largely because they
run the band as a business-Rolling Stones Inc. Since 1989, the band has generated more
than $1.5 billion in gross revenues. That total includes sales of records, song rights,
merchandising, sponsorship money, and touring. Unlike some other groups, the Stones
carry no antibusiness baggage. The company licenses over 50 products from underwear to
formalwear. Its record earnings from one tour came from the Voodoo Lounge tour in 1994,
which grossed $121.2 million. Over the past decade, the group’s song writing has made
about $56 million. The next time you see Mick Jagger, think of him as the highly successful
CEO of a mid-sized corporation. The goal of the corporation is to continue providing
products that differ from its competitors’ offerings so that fans will continue to pay a
premium price for what it sells.
Refer to Narrative 5-1. Which of the following can the Rolling Stones be said to have, since
other music groups cannot duplicate the value the band is providing to customers?
(A) contingency management style
(B) sustainable competitive advantage
(C) resource diversity
(D) resource munificence
Answer : (B)
75. Narrative 5-1
The Rolling Stones are the most successful act in the music industry largely because they
run the band as a business-Rolling Stones Inc. Since 1989, the band has generated more
than $1.5 billion in gross revenues. That total includes sales of records, song rights,
merchandising, sponsorship money, and touring. Unlike some other groups, the Stones
carry no antibusiness baggage. The company licenses over 50 products from underwear to
formalwear. Its record earnings from one tour came from the Voodoo Lounge tour in 1994,
which grossed $121.2 million. Over the past decade, the group’s song writing has made
about $56 million. The next time you see Mick Jagger, think of him as the highly successful
CEO of a mid-sized corporation. The goal of the corporation is to continue providing
products that differ from its competitors’ offerings so that fans will continue to pay a
premium price for what it sells.
Refer to Narrative 5-1. Before 1989, the Stones and all other touring bands would hire a
tour director who would cut individual deals with local promoters in each city to set up the
shows. In 1989, the Stones were the first group to book their tours themselves, dealing with
the venues directly and eliminating the local promoters. The band’s income increased from
about $400,000 per show to $1 million per show. If the Stones had instead remained with
the same strategy, what would they have been guilty of?
(A) competitive autonomy
(B) resource substitution
(C) resource lethargy
(D) competitive inertia
Answer : (D)
76. Narrative 5-1
The Rolling Stones are the most successful act in the music industry largely because they
run the band as a business-Rolling Stones Inc. Since 1989, the band has generated more
than $1.5 billion in gross revenues. That total includes sales of records, song rights,
merchandising, sponsorship money, and touring. Unlike some other groups, the Stones
carry no antibusiness baggage. The company licenses over 50 products from underwear to
formalwear. Its record earnings from one tour came from the Voodoo Lounge tour in 1994,
which grossed $121.2 million. Over the past decade, the group’s song writing has made
about $56 million. The next time you see Mick Jagger, think of him as the highly successful
CEO of a mid-sized corporation. The goal of the corporation is to continue providing
products that differ from its competitors’ offerings so that fans will continue to pay a
premium price for what it sells.
Refer to Narrative 5-1. When it comes to operating as a business, what characteristics have
the Rolling Stones demonstrated compared to other musicians?
(A) distinctive competence
(B) marginal advantage
(C) contingency style
(D) synergistic hierarchy
Answer : (A)
77. Narrative 5-1
The Rolling Stones are the most successful act in the music industry largely because they
run the band as a business-Rolling Stones Inc. Since 1989, the band has generated more
than $1.5 billion in gross revenues. That total includes sales of records, song rights,
merchandising, sponsorship money, and touring. Unlike some other groups, the Stones
carry no antibusiness baggage. The company licenses over 50 products from underwear to
formalwear. Its record earnings from one tour came from the Voodoo Lounge tour in 1994,
which grossed $121.2 million. Over the past decade, the group’s song writing has made
about $56 million. The next time you see Mick Jagger, think of him as the highly successful
CEO of a mid-sized corporation. The goal of the corporation is to continue providing
products that differ from its competitors’ offerings so that fans will continue to pay a
premium price for what it sells.
Refer to Narrative 5-1. Which kind of diversification have the Rolling Stones used to grow
their business?
(A) unrelated
(B) investment-specific
(C) autonomous
(D) relative
Answer : (A)
78. Narrative 5-1
The Rolling Stones are the most successful act in the music industry largely because they
run the band as a business-Rolling Stones Inc. Since 1989, the band has generated more
than $1.5 billion in gross revenues. That total includes sales of records, song rights,
merchandising, sponsorship money, and touring. Unlike some other groups, the Stones
carry no antibusiness baggage. The company licenses over 50 products from underwear to
formalwear. Its record earnings from one tour came from the Voodoo Lounge tour in 1994,
which grossed $121.2 million. Over the past decade, the group’s song writing has made
about $56 million. The next time you see Mick Jagger, think of him as the highly successful
CEO of a mid-sized corporation. The goal of the corporation is to continue providing
products that differ from its competitors’ offerings so that fans will continue to pay a
premium price for what it sells.
Refer to Narrative 5-1. What kind of grand strategy has Rolling Stones Inc. been using in
recent years?
(A) retrenchment
(B) accommodative
(C) participative
(D) stability
Answer : (D)
79. Narrative 5-1
The Rolling Stones are the most successful act in the music industry largely because they
run the band as a business-Rolling Stones Inc. Since 1989, the band has generated more
than $1.5 billion in gross revenues. That total includes sales of records, song rights,
merchandising, sponsorship money, and touring. Unlike some other groups, the Stones
carry no antibusiness baggage. The company licenses over 50 products from underwear to
formalwear. Its record earnings from one tour came from the Voodoo Lounge tour in 1994,
which grossed $121.2 million. Over the past decade, the group’s song writing has made
about $56 million. The next time you see Mick Jagger, think of him as the highly successful
CEO of a mid-sized corporation. The goal of the corporation is to continue providing
products that differ from its competitors’ offerings so that fans will continue to pay a
premium price for what it sells.
Refer to Narrative 5-1. Which kind of positioning strategy does Rolling Stones Inc. use?
(A) accommodation
(B) consultation
(C) differentiation
(D) prospector
Answer : (C)
80. Narrative 5-2
The traditional image of a public library is one that is full of books on shelves, librarians
shushing patrons, and is dark, cut off from the light outside. The Calgary Public Library’s
CEO, Bill Ptacek, would like to change this image. He’s cut back on the book collection by
13 percent, eliminated the $12 annual membership fee, and reconceptualized the library as
a place for social gathering. He’s done all this despite the Calgary Public Library circulating
more items than any other library in Canada except Toronto’s. The library is largely funded
by the City of Calgary with some grants from senior levels of government. Under Ptacek’s
tenure, many staff have shifted to working out of more than one branch. Calgary’s new
downtown library is designed with semi-private nooks, more gathering spaces, and is
focused on a community hub. On any given night, you’re as likely to find a rock concert as
you are a community group in a meeting room or children playing in their new play areas.
Some patrons and staff miss their “quiet library,” though, and have complained.
Refer to Narrative 5-2. Use the VRIO framework to determine which component Ptacek felt
was lacking in the library’s value proposition.
(A) Is it valuable?
(B) Is it rare?
(C) Is it costly or difficult to imitate?
(D) Is the firm organized to capture the value of the resources?
Answer : (D)
81. Narrative 5-2
The traditional image of a public library is one that is full of books on shelves, librarians
shushing patrons, and is dark, cut off from the light outside. The Calgary Public Library’s
CEO, Bill Ptacek, would like to change this image. He’s cut back on the book collection by
13 percent, eliminated the $12 annual membership fee, and reconceptualized the library as
a place for social gathering. He’s done all this despite the Calgary Public Library circulating
more items than any other library in Canada except Toronto’s. The library is largely funded
by the City of Calgary with some grants from senior levels of government. Under Ptacek’s
tenure, many staff have shifted to working out of more than one branch. Calgary’s new
downtown library is designed with semi-private nooks, more gathering spaces, and is
focused on a community hub. On any given night, you’re as likely to find a rock concert as
you are a community group in a meeting room or children playing in their new play areas.
Some patrons and staff miss their “quiet library,” though, and have complained.
Refer to Narrative 5-2. Calgary’s library system, on a per-capita basis, was already busier
than Toronto’s. Why did Ptacek believe change was needed?
(A) He needed to reduce staff to be successful
(B) He had conducted a distinctive competence-seeking exercise.
(C) He believed competitive inertia had set in.
(D) He responded to the demands of a shadow-strategy task force.
Answer : (C)
82. Narrative 5-2
The traditional image of a public library is one that is full of books on shelves, librarians
shushing patrons, and is dark, cut off from the light outside. The Calgary Public Library’s
CEO, Bill Ptacek, would like to change this image. He’s cut back on the book collection by
13 percent, eliminated the $12 annual membership fee, and reconceptualized the library as
a place for social gathering. He’s done all this despite the Calgary Public Library circulating
more items than any other library in Canada except Toronto’s. The library is largely funded
by the City of Calgary with some grants from senior levels of government. Under Ptacek’s
tenure, many staff have shifted to working out of more than one branch. Calgary’s new
downtown library is designed with semi-private nooks, more gathering spaces, and is
focused on a community hub. On any given night, you’re as likely to find a rock concert as
you are a community group in a meeting room or children playing in their new play areas.
Some patrons and staff miss their “quiet library,” though, and have complained.
Refer to Narrative 5-2. What was Ptacek trying to change about the library?
(A) He needed to change the library’s core capabilities.
(B) He needed to conduct a PESTEEL analysis.
(C) He needed to increase the number of valuable resources (books) available to patrons.
(D) He responded to the demands of patrons and staff by creating a quieter library.
Answer : (A)
83. Narrative 5-2
The traditional image of a public library is one that is full of books on shelves, librarians
shushing patrons, and is dark, cut off from the light outside. The Calgary Public Library’s
CEO, Bill Ptacek, would like to change this image. He’s cut back on the book collection by
13 percent, eliminated the $12 annual membership fee, and reconceptualized the library as
a place for social gathering. He’s done all this despite the Calgary Public Library circulating
more items than any other library in Canada except Toronto’s. The library is largely funded
by the City of Calgary with some grants from senior levels of government. Under Ptacek’s
tenure, many staff have shifted to working out of more than one branch. Calgary’s new
downtown library is designed with semi-private nooks, more gathering spaces, and is
focused on a community hub. On any given night, you’re as likely to find a rock concert as
you are a community group in a meeting room or children playing in their new play areas.
Some patrons and staff miss their “quiet library,” though, and have complained.
Refer to Narrative 5-2. Which of the following strategies was Ptacek pursuing for the
library?
(A) a portfolio strategy
(B) a stability strategy
(C) an industry strategy
(D) a retrenchment strategy
Answer : (D)
84. Narrative 5-2
The traditional image of a public library is one that is full of books on shelves, librarians
shushing patrons, and is dark, cut off from the light outside. The Calgary Public Library’s
CEO, Bill Ptacek, would like to change this image. He’s cut back on the book collection by
13 percent, eliminated the $12 annual membership fee, and reconceptualized the library as
a place for social gathering. He’s done all this despite the Calgary Public Library circulating
more items than any other library in Canada except Toronto’s. The library is largely funded
by the City of Calgary with some grants from senior levels of government. Under Ptacek’s
tenure, many staff have shifted to working out of more than one branch. Calgary’s new
downtown library is designed with semi-private nooks, more gathering spaces, and is
focused on a community hub. On any given night, you’re as likely to find a rock concert as
you are a community group in a meeting room or children playing in their new play areas.
Some patrons and staff miss their “quiet library,” though, and have complained.
Refer to Narrative 5-2. Which direct competition example best describes how Ptacek might
view Amazon.ca?
(A) McDonald’s vs. Burger King (Quadrant I)
(B) McDonald’s vs. Wendy’s (Quadrant II)
(C) McDonald’s vs. Boston Pizza (Quadrant III)
(D) McDonald’s vs. Subway (Quadrant IV)
Answer : (C)
TRUEFALSE
85. Companies use their resources to improve organizational efficiency and effectiveness.
(A) True
(B) False
Answer : (A)
86. There are four conditions that must be met if a firm’s resources are to be used to
achieve a sustainable competitive advantage. The resources must be valuable, rare,
imperfectly imitable, and the firm must be organized appropriately.
(A) True
(B) False
Answer : (A)
87. The three steps of the strategy-making process are (1) to assess the need for strategic
change, (2) to conduct a situational analysis, and (3) to choose the strategic alternatives.
(A) True
(B) False
Answer : (A)
88. Companies face little uncertainty in their strategic business environments.
(A) True
(B) False
Answer : (B)
89. Companies that succeed are often constantly re-examining strategies or competitive
practices that have been successful in the past in order to ascertain their probable future
success.
(A) True
(B) False
Answer : (B)
90. Strategic dissonance is a discrepancy between upper management’s intended strategy
and the strategy actually implemented by the lower levels of management.
(A) True
(B) False
Answer : (A)
91. An analysis of an organization’s external environment begins with an assessment of the
company’s distinctive competencies and core capabilities.
(A) True
(B) False
Answer : (B)
92. A core capability is something that a company can make, do, or perform better than its
competitors.
(A) True
(B) False
Answer : (B)
93. A PESTEEL analysis includes both economic and external-employee factors.
(A) True
(B) False
Answer : (A)
94. Companies that achieve a sustainable competitive advantage should develop new core
competencies for the future.
(A) True
(B) False
Answer : (A)
95. Companies define their competition when they’re setting their corporate level strategies.
(A) True
(B) False
Answer : (A)
96. Corporate-level strategy is the overall organizational strategy that addresses the
question “What business or businesses are we in or should we be in?”
(A) True
(B) False
Answer : (A)
97. Portfolio strategy is a corporate-level strategy that minimizes risk by diversifying
investment among various businesses or product lines.
(A) True
(B) False
Answer : (A)
98. Based upon the research evidence, related diversification appears to be a better strategy
for portfolio management than unrelated diversification.
(A) True
(B) False
Answer : (A)
99. Companies can grow either externally or internally.
(A) True
(B) False
Answer : (A)
100. Companies often choose a stability strategy when their external environment doesn’t
change much, or after they have struggled with periods of explosive growth.
(A) True
(B) False
Answer : (A)
101. If retrenchment works, it is typically followed by a stability strategy.
(A) True
(B) False
Answer : (B)
102. Industry-level strategy is a corporate strategy that addresses the question “How should
we compete against a particular firm in our industry?”
(A) True
(B) False
Answer : (B)
103. Character of the rivalry is a measure of the intensity of competitive behaviour between
companies in an industry.
(A) True
(B) False
Answer : (A)
104. The threat of substitute products or services is a measure of the ease with which
customers can find substitutes for an industry’s goods or services.
(A) True
(B) False
Answer : (A)
105. Bargaining power of buyers tends to be higher when a company sells a popular product
to multiple buyers than when a company is dependent on just a few high-volume buyers.
(A) True
(B) False
Answer : (B)
106. The three positioning strategies are cost leadership, differentiation, and focus.
(A) True
(B) False
Answer : (A)
107. Differentiation is the positioning strategy of producing a product or service of
acceptable quality at consistently lower production costs than competitors can, so that the
firm can offer the product or service at the lowest price in the industry.
(A) True
(B) False
Answer : (B)
108. A focus strategy entails using either a cost leadership or a differentiation approach to
producing a good or service.
(A) True
(B) False
Answer : (A)
109. Most companies compete directly with all the firms in their industry.
(A) True
(B) False
Answer : (B)
110. The two factors that determine the extent to which firms will be in direct competition
with one another are market commonality and resource similarity.
(A) True
(B) False
Answer : (A)
111. The greater the market commonality, the less intense the direct competition between
two companies.
(A) True
(B) False
Answer : (B)
112. From a competitive standpoint, resource similarity means that the strategic actions
your company takes can probably be matched by your direct competitors.
(A) True
(B) False
Answer : (A)
113. PERT diagrams are helpful to determine strategic actions against direct competitors.
(A) True
(B) False
Answer : (B)
114. Gantt charts are helpful to determine strategic actions against direct competitors.
(A) True
(B) False
Answer : (B)
115. Blue ocean strategy suggests firms should exploit existing demand.
(A) True
(B) False
Answer : (B)
116. Red ocean strategy suggests firms should create uncontested market space.
(A) True
(B) False
Answer : (B)
117. A response is a competitive move designed to defend or improve a company’s market
share or profit.
(A) True
(B) False
Answer : (B)
118. A response is a competitive move designed to reduce a rival’s market share or profits.
(A) True
(B) False
Answer : (A)
119. A competitive advantage becomes a sustainable competitive advantage when other
companies have found it very expensive to duplicate the value a firm is providing to
customers.
(A) True
(B) False
Answer : (B)
ESSAY
120. Briefly identify the four conditions that must be met if a firm’s resources are to be used
to achieve a sustainable competitive advantage.
Graders Info :
To provide a sustainable competitive advantage, the firm’s resources must be valuable
(capable of improving efficiency and effectiveness), rare (not possessed by many competing
firms), imperfectly imitable (extremely costly or difficult to duplicate), and the firm must be
organized to capture that value.
121. Differentiate between competitive inertia and strategic dissonance.
Graders Info :
Competitive inertia refers to a reluctance to change strategies or competitive practices that
have been successful in the past, and may be manifest by top managers at successful
companies who are focusing on the strategies that have allowed them to create and sustain
competitive advantage over time. While competitive inertia tends to be manifest through the
actions of top managers, strategic dissonance tends to be manifest through the actions of
middle and lower-level managers. Strategic dissonance is a discrepancy between upper
management’s intended strategy and the strategy implemented by the lower levels of
management. Upper management sets overall company strategy, but middle and lower-level
managers must carry out the strategy. Middle and lower-level managers are held directly
responsible for meeting customers’ needs and responding to competitors’ actions. While
strategic dissonance can indicate that these managers are not doing what they should to
carry out company strategy, it can also mean that the intended strategy is out-of-date and
needs to be changed.
122. How do companies use situational analysis? What are the basic components of a
situational analysis?
Graders Info :
A situational analysis can help managers determine the need for strategic change. A
situational analysis, also called a SWOT analysis for strengths, weaknesses, opportunities,
and threats, is an assessment of the strengths and weaknesses in an organization’s internal
environment and the opportunities and threats in its external environment. An analysis of an
organization’s internal environment (a company’s strengths and weaknesses) begins with an
assessment of distinctive competencies and core capabilities. Once these are identified,
managers look outside the company to assess the opportunities and threats in the external
environment. Environmental scanning, strategic groups, and shadow-strategy task forces
are useful tools in this regard.
123. Briefly describe the BCG matrix and how it is used. Include in your description the
types of recommendations that result from the use of the BCG matrix.
Graders Info :
The BCG matrix is a portfolio strategy, developed by the Boston Consulting Group, that
managers use to categorize the corporation’s businesses by growth rate and relative market
share, helping them decide how to invest corporate funds. The matrix separates businesses
into four categories, based on how fast the market is growing (high-growth or low-growth)
and the size of the business’s share of that market (high or low). It thus identifies each
business as either a star (high growth, high market share), cash cow (low growth, high
market share), question mark (high growth, low market share), or dog (low growth, low
market share). Since the idea is to redirect investment from slow-growing to fast-growing
companies, the BCG matrix starts by recommending that, while they last, the substantial
cash flows from cash cows should be reinvested in stars to help them grow even faster and
obtain even more market share. Cash flows should also be directed to those question marks
that are most likely to turn into stars. It recommends that dogs be sold to other companies,
or be closed down and liquidated for their assets.
124. Explain what is meant by a grand strategy. List and define the three types of grand
strategies.
Graders Info :
A grand strategy is a broad strategic plan used to help an organization achieve its strategic
goals. Grand strategies guide the strategic alternatives that managers of individual
businesses or subunits may use. There are three kinds of grand strategies: growth (where
the purpose is to increase profits, revenues, market share, or the number of places (store,
offices, locations) in which the company does business), stability (where the purpose is to
continue doing what the company has been doing, but just do it better), and
retrenchment/recovery (where the purpose is to turn around poor company performance by
shrinking the size or scope of the business, and then taking strategic actions to return to a
growth strategy).
125. List the five industry forces that determine overall levels of competition in an industry.
Identify what happens to competition as these forces increase in strength.
Graders Info :
The five industry forces that determine an industry’s overall attractiveness and potential for
long-term profitability are (1) character of the rivalry, (2) threat of new entrants, (3) threat
of substitute products or services, (4) bargaining power of suppliers, and (5) bargaining
power of buyers. The stronger these forces, the greater the competition, and thus the less
attractive the industry becomes to corporate investors because it is more difficult for
companies to be profitable.
126. List the four positioning strategies and distinguish among them. Identify a company of
your choosing and describe its positioning strategy.
Graders Info :
According to Michael Porter, there are four positioning strategies: cost leadership,
differentiation, cost focus, and differentiation focus. A cost leadership strategy involves
producing a product or service of comparable quality at consistently lower cost than
competitors (because of production ability, sourcing ability, distribution ability, special
processes, etc.) so that the firm can offer the product or service at the lowest price in the
industry. A differentiation strategy means making your product or service sufficiently
different from competitors’ offerings that customers are willing to pay a premium price for
the extra value or performance it provides. A focus strategy means that a company uses
either a cost focus or a differentiation focus to produce a specialized product or service for a
limited, specially targeted group of customers in a particular geographic region or market
segment. [Students’ answers will vary on the last portion of the question depending which
company they choose.]
127. Define direct competition and identify its constituent components. Then, identify under
which conditions a local espresso coffee shop would compete against McDonald’s and their
McCafe initiative.
Graders Info :
Direct competition is the rivalry between two companies offering similar products and
services that acknowledge each other as rivals and take offensive and defensive positions as
they act and react to each other’s strategic actions. One constituent component is market
commonality, or the degree to which two companies have overlapping products, services, or
customers in multiple markets. The more markets in which there is product, service, or
customer overlap, the more intense the direct competition will be between the two
companies. Resource similarity is the extent to which a competitor has similar amounts and
kinds of resources-that is, similar assets, capabilities, processes, information, and
knowledge for creating and sustaining an advantage over competitors. From a competitive
standpoint, resource similarity means that your direct competitors can probably match the
strategic actions that your company takes. McDonald’s has little market commonality with a
local espresso coffee shop, because the latter is likely geared toward coffee connoisseurs,
and McDonald’s has significantly more resources than a local shop, which means that the
local firm will not directly compete with McDonald’s, but rather with other alternatives.
128. Define attacks and responses in terms of competitive moves, and discuss under what
conditions each are most likely.
Graders Info :
Attacks are competitive moves designed to reduce a rival’s market share or profits.
Responses, by contrast, are competitive countermoves, prompted by a rival’s attack, to
defend or improve a company’s market share or profit. Attacks are primarily motivated by
market commonality; when it is strong, there is less motivation for firms to attack.
Responses are more likely to occur when resource similarity is high.
129. When videocassette recorders first became popular in the mid-1980s, a new form of
“mom and pop” small business sprang up across the country: the video rental store. At the
time, new videotapes of popular movies cost anywhere from $80 to $200. As the popularity
of videocassette players grew, these small, independent video rental stores grew rapidly to
meet the demand of consumers for inexpensive movie rentals. There was considerable
competition between stores to be the first to have new movies available for rental. However,
some stores disappointed customers by not having enough copies of new films when they
were most in demand. Within about five to eight years of competition, most of these mom
and pop video rental stores were ultimately put out of business by the large regional, and
then national, chains, such as Blockbuster. Using the concept of sustainable competitive
advantage along with the four conditions required to produce it, explain how such a
transition from hundreds of independent mom and pop video stores to a few national chains
could have taken place so quickly.
Graders Info :
Firms can use their resources to create and sustain a competitive advantage, that is, to
provide greater value for customers than competitors can. As the mom and pop video rental
stores began to grow, they were meeting a strong and growing consumer demand with little
competition. However, as more of them emerged, they began to compete with one another
more aggressively. Unfortunately, the nature of their business was such that a sustainable
competitive advantage would be very expensive to achieve. A competitive advantage
becomes sustainable when other companies cannot duplicate the benefits it provides and
have, for now, stopped trying. To provide a sustainable competitive advantage, the firm’s
resources must be valuable (capable of improving efficiency and effectiveness), rare (not
possessed by many competing firms), imperfectly imitable (extremely costly or difficult to
duplicate), and the firm must be organized to effectively capture this value.
It quickly became clear that the most successful video rental stores would have a very large
inventory of a broad variety of videos for rent, including many copies of the latest releases,
which were expensive. When this was done, browsing customers could always find
something satisfying to rent, and customers looking for the latest hit movie that was just
released would be guaranteed a copy upon arrival at the store. Thus, sustainable
competitive advantage required a large video inventory (valuable) that most mom and pop
video rental stores did not possess (rare), which was extremely costly to duplicate
(imperfectly imitable), and could not be satisfied by having more copies of cheaper, but less
popular films on hand (being organized to take advantage of resource value). Since this
advantage could be achieved only with a large infusion of capital, along with effective
management, the large, national retailers such as Blockbuster emerged and beat out the
smaller, less capable, and less agile mom and pop competition.
130. Explain how the concepts of competitive inertia and strategic dissonance are related to
the strategy-making process. Explain the importance of gathering input regarding strategic
plans from multiple levels of management.
Graders Info :
The strategy-making process is the method by which companies create strategies that
produce a sustainable competitive advantage (a competitive advantage that other
companies have, for the moment, stopped trying to duplicate). The strategy-making process
consists of three steps: (1) assessing the need for strategic change, (2) conducting a
situational analysis, and (3) choosing strategic alternatives. The concepts of competitive
inertia and strategic dissonance both relate to the first step, that of assessing the need for
strategic change. There is a great deal of turbulence and uncertainty in strategic business
environments, and top-level managers are often slow to recognize the need for strategic
change, especially at successful companies that have created and sustained competitive
advantages. In such companies, top managers often focus on the strategies that made their
companies successful and continue to rely on them, even as the competition changes. Thus,
success often leads to competitive inertia-a reluctance to change strategies or competitive
practices that have been successful in the past. Obviously, such inertia can provide the time
and opportunity for competitors to catch up and overtake a company’s ongoing strategy, and
thereby destroy their competitive advantage.
Managers need to be aware of the dangers of competitive inertia and need to take steps to
improve the speed and accuracy with which they determine the need for strategic change.
One way to do this is to actively look for signs of strategic dissonance. Strategic dissonance
is a discrepancy between upper management’s intended strategy and the strategy
implemented by the lower levels of management. Upper management sets overall company
strategy, but middle and lower-level managers must carry out the strategy. Middle and
lower-level managers are held directly responsible for meeting customers’ needs and
responding to competitors’ actions. While strategic dissonance can indicate that these
managers are not doing what they should to carry out company strategy, it can also mean
that the intended strategy is out-of-date and needs to be changed. Since middle and lower-
level managers are in closer touch with both customers and the immediate, day-to-day
actions of competitors, they may be more likely to see weaknesses in existing competitive
strategy, especially if the requirements of that strategy hinder their ability to meet customer
needs or respond to competitors’ actions. Thus, while determining the need for strategic
change is a difficult process, it can be improved by actively looking for signs of strategic
dissonance or a difference between the intended strategy and what managers are actually
doing.
131. Explain the basics of portfolio strategy. Identify the best approach to diversification
using this strategy. Be sure to explain your rationale for arguing that the specified approach
to diversification is the best.
Graders Info :
Portfolio strategy is a corporate-level strategy that minimizes risk by diversifying investment
among various businesses or product lines. Portfolio strategy provides the following
guidelines to help managers acquire companies that fit well with the rest of their corporate
portfolio and sell those that don’t.
First, the more businesses in which a corporation competes, the smaller its overall chances
of failing. Because the emphasis is on adding more businesses to support the overall
corporation, managers who use portfolio strategy are often on the lookout for acquisitions,
that is, other companies to buy. Second, beyond adding new businesses to the corporate
portfolio, portfolio strategy can reduce risk even more through unrelated diversification-
creating or acquiring companies in completely unrelated businesses. If the businesses are
unrelated, then losses in one business or industry will have minimal effect on the
performance of other companies in the corporate portfolio. Third, investing the profits and
cash flows from mature, slow-growth businesses into newer, faster-growing businesses can
reduce long-term risk.
Thus, portfolio strategy recommends the acquisition of more, unrelated businesses as an
overall risk management strategy. However, the research that has been done in the 20 plus
years since the introduction of portfolio strategy has demonstrated that one of its basic
assumptions is incorrect-portfolio strategy assumes that unrelated diversification will
minimize risk. The research evidence (as summarized graphically in Exhibit 5.6) shows that
this is not the case. There is a U-shaped relationship between diversification and risk. Single
businesses with no diversification (represented by the left side of the curve) are extremely
risky; if the single business fails, the entire business fails. So, in part, the portfolio strategy
of diversifying is correct-competing in a variety of different businesses can lower risk.
However, portfolio strategy is partly wrong, too-the right side of the curve shows that
conglomerates composed of completely unrelated businesses are even riskier than single,
undiversified businesses. The U-shaped curve in Exhibit 5.6 indicates that the best approach
is probably related diversification, in which the different business units share similar
products, manufacturing, marketing, technology, or cultures. The key to related
diversification is to acquire or create new companies with core capabilities that complement
the core capabilities of businesses already in the corporate portfolio. In sum, in contrast to
single, undiversified businesses or unrelated diversification, related diversification reduces
risk because the different businesses can work as a team, relying on one another for needed
experience, expertise, and support. Related diversification thus represents the best
approach to diversification.
132. Identify Porter’s five industry forces and their role in industry-level strategy. Identify
which one among these five forces could be considered the central one, with its value
impacted by the relative values of the four other forces.
Graders Info :
Industry-level strategy is a corporate strategy that addresses the question “How should we
compete in this industry?” According to Harvard professor Michael Porter, the five industry
forces that determine an industry’s overall attractiveness and potential for long-term
profitability are (1) character of the rivalry, (2) threat of new entrants, (3) threat of
substitute products or services, (4) bargaining power of suppliers, and (5) bargaining power
of buyers. The stronger these forces, the greater the competition, and thus the less
attractive the industry becomes to corporate investors because it is more difficult for
companies to be profitable.
The central force among these five, as identified in Exhibit 5.7, is character of the rivalry.
Character of the rivalry is a measure of the intensity of competitive behaviour between
companies in an industry. Is the competition among firms aggressive and cutthroat, or do
competitors focus more on serving customers than on attacking each other? Both industry
attractiveness and profitability decrease when rivalry is cutthroat.
The threat of new entrants is a measure of the degree to which barriers to entry make it
easy or difficult for new companies to get started in an industry. If it is easy for new
companies to get started in the industry, then competition will increase and prices and
profits will fall. However, if there are sufficient barriers to entry, such as large capital
requirements to buy expensive equipment or plant facilities or the need for specialized
knowledge, then competition will be weaker and prices and profits will generally be higher.
The threat of substitute products or services is a measure of the ease with which customers
can find substitutes for an industry’s products or services. If customers can easily find
substitute products or services, the competition will be greater and profits will be lower. If
there are few or no substitutes, competition will be weaker and profits will be higher.
Bargaining power of suppliers is a measure of the influence that suppliers of parts,
materials, and services to firms in an industry have on the prices of these inputs. If an
industry has numerous suppliers from whom to buy parts, materials, and services,
companies will be able to bargain with suppliers to keep prices low. On the other hand, if
there are few suppliers, or if a company is dependent on a supplier with specialized skills
and knowledge, then suppliers will have the bargaining power to dictate price levels.
Bargaining power of buyers is a measure of the influence that customers have on the firm’s
prices. If a company is dependent on just a few high-volume buyers, those buyers will
typically have enough bargaining power to dictate prices. By contrast, if a company sells a
popular product or service to multiple buyers, then the company has more power to set
prices.
As the threat of new entrants, threat of substitute products or services, bargaining power of
suppliers, and bargaining power of buyers increase, the overall competitive environment in
an industry similarly increases. In a more competitive environment, cutthroat competition is
more likely to pay off. Thus, these four factors in combination tend to influence the overall
character of the rivalry, which could thus be conceived as the central force among them
impacting upon industry strategy.
133. Explain what is meant by direct competition. Identify the factors that determine it, and
specify the basic strategic moves involved in such competition. If you were heading a
company engaged in direct competition with other firms, explain the circumstances under
which you would prefer to engage in direct competition in order to develop a sustained
competitive advantage.
Graders Info :
Most companies do not compete directly with all the firms in their industry. Instead of
“competing” with the industry, most firms compete directly with just a few companies.
Direct competition is the rivalry between two companies offering similar products and
services that acknowledge each other as rivals and take offensive and defensive positions as
they act and react to each other’s strategic actions. Two factors determine the extent to
which firms will be in direct competition with each other: market commonality and resource
similarity. Market commonality is the degree to which two companies have overlapping
products, services, or customers in multiple markets. The more markets in which there is
product, service, or customer overlap, the more intense the direct competition between the
two companies. Resource similarity is the extent to which a competitor has similar amounts
and kinds of resources, that is, similar assets, capabilities, processes, information, and
knowledge used to create and sustain an advantage over competitors. From a competitive
standpoint, resource similarity means that the strategic actions that your company takes
can probably be matched by your direct competitors.
There are two basic strategic moves in direct competition between firms: attacks and
responses. An attack is a competitive move designed to reduce a rival’s market share or
profits. A response is a countermove, prompted by a rival’s attack, designed to defend or
improve a company’s market share or profit. Attacks and responses can include smaller,
more tactical moves, like price cuts, or resource-intensive strategic moves, such as
introducing new products or services within the firm’s existing business.
From the standpoint of developing a sustained competitive advantage, it would be
preferable to compete in an environment of high market commonality and low resource
similarity, where your company is the stronger one. In this context, since you are stronger,
your competitors will be less likely to attack you. This context also means that any attacks
initiated by your firm on your competitors probably will not be effectively countered, and
you will win. The high market commonality ensures that there is plenty of market share to
be gained by defeating your competitors. In this context, you would be most likely to
develop a sustained competitive advantage, as long as you did not allow competitive inertia
to set in over time after you have taken over the market.

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