Question: 1

Which of the following is least likely to be an example of synergy?

A. A shopping mall with several businesses providing different products and performing
different services.
B. A car dealership providing warranties on automobile parts to maximize customer value.
Answer (B) is correct.
Synergy occurs when the combination of formerly separate elements has a greater
effect than the sum of their individual effects. However, a car dealership’s provision of
warranties reflects an operational strategy designed to provide post-purchase services
to gain a competitive advantage and maximize customer value. It does not reflect the
complementary sharing of resources, technology, or competencies. In contrast,
synergy arises from selling a line of cars that share some components or a brand
identification.
C. A manufacturing company hiring a new manager with technological experience lacking
in the company.
D. Military Humvees being converted into sports utility vehicles for sale to civilians.

Question: 2 Which of the following best describes a market synergy?

A. Technology transfer from one product to another.
B. Bundling of products distributed through the same channels.
Answer (B) is correct.
Market synergy arises when products or services have positive
complementary effects. Shopping malls reflect this type of synergy.
Also, bundling of products, distribution through the same distribution
channels, and use of the same sales force are other examples of
market synergies.
C. Production of multiple products at one facility.
D. Use of complementary management skills to achieve entry into a new
market.

Question: 3 Which of the following is a market-oriented definition of a business versus a product-

oriented definition of a business?
A. Making air conditioners and furnaces.
B. Supplying energy.
Answer (B) is correct.
Businesses should be defined in market terms, that is, in terms of
needs and customer groups. Moreover, a distinction should be made
between a target market definition and a strategic market definition.
For example, a target market for a railroad might be freight hauling,
 but a strategic market might be transportation of any goods and
people. Accordingly, stating that a business supplies energy is a
market-oriented definition as opposed to the product-oriented
definition. Moreover, it is also a strategic market definition.
C. Producing movies.
D. Selling men’s shirts and pants.

Question: 4 Which one of the following is a social trend affecting the organization?
A. Changes in labor markets.
Answer (A) is correct.
Social trends, such as changes in labor markets, reflect social,
cultural, and demographic factors in the organization’s
macroenvironment that may constitute opportunities or threats
(identified in a SWOT analysis). The attributes of people (age,
education, income, ethnicity, family status, etc.) and their beliefs,
attitudes, and values shape and are shaped by social trends that in
turn affect the organization. Thus, changes in the characteristics,
sources, locations, and costs of labor resources supplied (a basic
factor of production) have great effects on an organization’s strategic
position.
B. Tougher legislation to protect the environment.
C. Rising inflation.
D. Replacements for steel in cars and appliances.

Question: 5 Strategic management includes developing the organization’s grand strategy. This
strategy is based on
A. Existing strategic business units (SBUs).
B. A SWOT analysis.
Answer (B) is correct.
Strategic management is a process that includes development of a
grand strategy that describes how the organization’s mission is to be
achieved. This strategy is based on a situational analysis that
considers organizational strengths and weaknesses (a capability
profile) and their interactions with environmental opportunities and
threats. Such an evaluation is also called a SWOT analysis. Strengths
and weaknesses (the internal environment) are usually identified by
considering the firm’s capabilities and resources. What the firm does
particularly well or has in greater abundance are known as core
competencies. Opportunities and threats (the external environment)
 are identified by considering macroenvironment factors (economic,
demographic, political, legal, social, cultural, and technical) and
microenvironment factors (suppliers, customers, distributors,
competitors, and other competitive factors in the industry).
C. Portfolio management of the organization’s businesses.
D. Strategic planning.

Question: 6 Business strategies may be characterized by their effects on operations. The distinction
between a compact car and a luxury car reflects which operational strategy?
A. Cost.
B. Flexibility.
C. Service.
D. Quality.
Answer (D) is correct.
A quality strategy involves competition based on product quality or
process quality. Product quality relates to design, for example, the
difference between a luxury car and a subcompact car. Process
quality concerns the degree of freedom from defects

Question: 7 Which of the following best describes a cost synergy?

A. Recycling of by-products.
Answer (A) is correct.
Cost synergy results in cost reduction. It occurs in many ways, for
example, in recycling of by-products or in the design, production,
marketing, and sales of a line of products by the same enterprise.
B. Selling one product strengthens sales of another product.
C. Transferring knowledge to new uses.
D. Acquiring new management skills.

Question: 8 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. Quality strategy.
C. Service strategy.
D. Cost strategy.
Answer (D) is correct.
 An operations strategy formulates a long-term plan for using
resources to reach strategic objectives. A cost strategy is successful
when the enterprise 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

Question: 9 In a SWOT analysis, a firm considers macroeconomic factors when it identifies

A. The capability profile.
B. Opportunities and threats.
Answer (B) is correct.
Opportunities and threats (the external environment) are identified by
considering macroenvironmental factors (economic, demographic,
political, legal, social, cultural, and technical) and
microenvironmental factors (suppliers, customers, distributors,
competitors, and other competitive factors in the industry).
C. Core competencies.
D. Strengths and weaknesses.

Question: 10 A firm should state its primary competitive scopes when it

A. Defines its strategic business units (SBUs).
B. Establishes strategic control points.
C. Formulates its mission.
Answer (C) is correct.
At the highest level, a firm’s strategic planning function involves
formulating its mission (ultimate firm purposes and directions),
determining its strategic business units (SBUs), allocating resources
to SBUs, planning to start new businesses, and downsizing or
divesting old businesses. A mission statement should address
reasonably limited objectives, define the firm’s major policies and
values, and state the firm’s primary competitive scopes (e.g.,
industries, products and services, applications, core competencies,
market segments, degree of vertical integration, and geographic
markets).
D. Makes investment and divestment decisions.

Question: 11 Strategic control measurements that relate to external effectiveness concern customer
satisfaction at the
 A. Departmental level.
B. Business-operating-system level.
Answer (B) is correct.
Strategic controls should be established to monitor progress, isolate
problems, identify invalid assumptions, and take prompt corrective
action. As plans are executed at each organizational level, control
measurements are made to determine whether objectives have been
achieved. Thus, objectives flow down the organizational hierarchy,
and control measures flow up. One category of strategic control
measures relates to external effectiveness. At the business-operating-
system level, these measures concern satisfaction and flexibility.
C. Business-unit level.
D. Work-center level.

Question: 12 Strategic control measurements of financial results relate to

A. Internal efficiency at the business-unit level.
Answer (A) is correct.
Strategic controls should be established to monitor progress, isolate
problems, identify invalid assumptions, and take prompt corrective
action. As plans are executed at each organizational level, control
measurements are made to determine whether objectives have been
achieved. Thus, objectives flow down the organizational hierarchy,
and control measures flow up. One category of strategic control
measures relates to external effectiveness. A second category of
strategic control measures relates to internal efficiency. At the
business-unit level, the latter measures concern financial results.
B. Internal efficiency at the departmental level.
C. External effectiveness at the business-unit level.
D. External effectiveness at the business-operating-system level.

Question: 13 Strategic management includes establishment of appropriate controls. Control

measurements are made to determine whether organizational objectives are being
achieved. One category of strategic control measures concerns external effectiveness.
A measurement relating to external effectiveness is
A. Cycle time.
B. Waste.
C. Flexibility.
Answer (C) is correct.
Strategic control measures may be categorized as concerning either
 external effectiveness or internal efficiency. Flexibility overlaps
these categories. It relates to effectiveness and efficiency. Thus, an
organization must be externally flexible in responding to changing
customer needs and internally flexible in reordering its structural
arrangements, retraining employees, etc.
D. Productivity.

Question: 14 Strategic management is a five-step process. In what order should the five steps be
accomplished?
A. SWOT analysis, mission and goals, strategy, controls and feedback,
implementation.
B. Mission and goals, SWOT analysis, strategy, implementation, controls
and feedback.
Answer (B) is correct.
Strategic management is a five-step process:

1. The board of directors drafts the organization’s

mission statement, a general statement of what the
organization intends to accomplish and its reason for existing.
The statement may be accompanied by one or more goals,
which are concrete targets for measuring the organization’s
success.
2. The organization performs a situational analysis, also
called a SWOT analysis, involving identification of its
strengths, weaknesses, opportunities, and threats.
3. Based on the results of the situational analysis, upper
management develops a group of strategies describing how
the mission statement will be fulfilled.
4. Strategic plans are implemented through the execution
of component plans at each level of the entity.
5. Strategic controls and feedback are used to monitor
progress, isolate problems, and take corrective action. Over
the long term, feedback can be used to adjust the original
mission and goals.

C. Mission and goals, strategy, implementation, SWOT analysis, controls

and feedback.
D. Strategy, SWOT analysis, mission and goals, controls and feedback,
implementation.
Question: 15 Which of the following steps in the strategic planning 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.

Question: 16 A 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.
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.
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.

Question: 17 Which of the following cycles does not have accounting information recorded into the
general ledger reporting system?
A. Expenditure.
B. Production.
C. Planning.
Answer (C) 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 and
successfully perform to move the organization from where it is to
where it wants to be. No transactions that require recording in the
general ledger take place during the planning cycle.
D. Revenue.

Question: 18 What is strategic planning?

A. It establishes the general direction of the organization.
Answer (A) is correct.
Strategic planning establishes the general direction of an
organization. It embodies the concerns of senior management and is
based specifically on (1) identifying and specifying organizational
objectives; (2) evaluating the organization’s strengths and
weaknesses; (3) assessing risk levels; (4) identifying and forecasting
the effect of external (environmental) factors relevant to the
organization; (5) deriving the best strategy for reaching the
objectives, given the organization’s strengths and weaknesses and the
relevant future trends; and (6) analyzing and reviewing the capital
budgeting process and capacity planning.
B. It establishes the resources that the plan will require.
C. It establishes the budget for the organization.
D. It consists of decisions to use parts of the organization’s resources in
specified ways.

Question: 19 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.
Answer (C) 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.
D. Is that forecasting is a management activity whereas planning is a
technical activity.
Question: 20 Which of the following is an example of an outcome of strategic planning?
A. A formal statement of the organization’s definition of the fundamental
truths that guide its actions.
B. A broad statement of concepts that emphasizes the implementation of
organizational objectives over the long term.
Answer (B) is correct.
The strategic plan states the means by which an entity expects to
achieve its stated mission. Achieving the mission is predicated on
implementing long-term objectives.
C. A set of general guides for action that channel thinking and allow a
certain amount of discretion in execution.
D. A document specifying a sequence of steps detailing the exact manner
in which a certain activity must be accomplished.

Question: 21 Which one of the following management considerations is usually addressed first in
strategic planning?
A. Outsourcing.
B. Overall objectives of the firm.
Answer (B) is correct.
Strategic planning is the process of setting overall organizational
objectives and drafting strategic plans. Setting ultimate objectives for
the firm is a necessary prelude to developing strategies for achieving
those objectives. Plans and budgets are then needed to implement
those strategies.
C. Organizational structure.
D. Recent annual budgets.

Question: 22 All of the following are characteristics of the strategic planning process except the
A. Emphasis on long run.
B. Analysis of external economic factors.
C. Review of the attributes and behavior of the organization’s
competition.
D. Analysis and review of departmental budgets.
Answer (D) is correct.
Strategic planning is the process of setting the overall organizational
objectives and involves the drafting of strategic plans. Analysis and
review of departmental budgets is an aspect of operational
management
Question: 23 Strategic planning, as practiced by most modern organizations, includes all of the
following except
A. Top-level management participation.
B. A long-term focus.
C. Strategies that will help in achieving long-range goals.
D. Analysis of the current month’s actual variances from budget.
Answer (D) is correct.
Strategic planning is the process of setting overall organizational
objectives. It is a long-term process aimed at determining the future
course of the organization. Analysis of the current month’s budget
variances is a short-term activity.

Question: 24 Which of the following factors is least typical of an industry that faces intense
competitive rivalry?
A. Price cutting.
B. Large advertising budgets.
C. Frequent introduction of new products.
D. A high threat of substitutes.
Answer (D) is correct.
A high threat of substitutes reduces the attractiveness of an industry.
It tends to increase the price elasticity of demand and therefore limits
price increases and profit margins. If other factors are constant,
fewer entrants result in less intense competition

Question: 25 Intensity 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.
D. Neither I nor II.

Question: 26 The prospect for the long-term profitability of an existing firm is greater when
A. The firm operates in an industry in which learning curve effects are
significant.
Answer (A) is correct.
The prospects of long-term profitability depend upon the industry’s
entry barriers. The entry of new firms in a market decreases the
prospect for long-term profitability. When economies of scale (and
learning curve effects) in an industry are significant, it is more
difficult for new firms to enter. Thus, the prospects of long-term
profitability are greater for an existing firm.
B. The costs of switching suppliers are low.
C. New entrants are encouraged by government policy.
D. Distribution channels are willing to accept new products.

Question: 27 Structural considerations affecting the threat of substitutes include all of the
following except
A. Relative prices.
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.
C. Cost of switching to substitutes.
D. Customers’ inclination to use a substitute.

Question: 28 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. Buyer switching costs are high.
B. Buyers view the product as differentiated.
C. The market is dominated by a small consortium of buyers.
 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.
D. Buyers enjoy large profit margins.

Question: 29 Which 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.
Answer (C) is correct.
If it is expensive to switch suppliers, customers will be less
motivated to respond to competitor advances.
D. High fixed costs relative to variable costs.

Question: 30 Which condition does not increase the threat of new competitor entry into the industry?
A. Strong brand identity.
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.
B. Existing firms do not enjoy the cost advantages of vertical integration.
C. Few proprietary product differences.
D. Low capital requirements.

Question: 31 The 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.
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.
B. Entrance barriers that potential players must face to get into the
 industry.
C. Rivalry inside the industry.
D. Strategy that a firm should follow to achieve its objectives.

Question: 32 Which factor most likely encourages entry into an existing market?
A. Governmental subsidies for new investors.
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.
B. High product differentiation, principally produced by trademarks.
C. Knowledge of the industry, with high investments in development.
D. Low fixed exit costs.

Question: 33 Which 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.
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.
D. The firm has high costs relative to other firms in the industry.

Question: 34 Which basic force(s) drive(s) industry competition and the ultimate profit potential of the
industry?

I. Threat of new entrants

 II. Bargaining power of suppliers
III. Favorable access to raw materials and labor
IV. Product differentiation

A. I only.
B. I and II only.
Answer (B) is correct.
Threat of new entrants and bargaining power of suppliers are among
the five basic forces that drive industry competition and the ultimate
profit potential in the industry. This potential is measured in terms of
long-term return on invested capital. The other three forces are
rivalry among existing firms, threat of substitutes, and threat of
buyers’ bargaining power.
C. III and IV.
D. I, II, III, and IV.

Question: 35 X and Y are substitute products. If the price of product Y increases, the immediate
impact on product X is that its
A. Price will increase.
B. Quantity demanded will increase.
Answer (B) is correct.
By definition, if two goods are substitutes, the price of one and the
demand for the other are directly related. For example, if the price of
Y increases, the quantity demanded of X will increase.
C. Quantity supplied will increase.
D. Price, quantity demanded, and supplies will increase

Question: 36 Michael 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.
D. I, II, III, and IV.

Question: 37 Which 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.

Question: 38 Rivalry among existing firms in an industry is more likely to be strong when
A. The industry is in the rapid growth stage.
B. Investment intensity is low.
C. A few firms are dominant.
D. Capacity must be expanded in large increments.
Answer (D) is correct.
The intensity of rivalry and the threat of entry may vary with the
extent of capacity expansion dictated by the need to achieve
economies of scale. If the size of the expansion must be large to
achieve economies of scale, competition will be more intense. The
need for large-scale expansion to achieve production efficiency may
result in an excess of industry capacity over demand. However, if
capacity may be expanded in small increments, industry capacity is
 less likely to be excessive, the supply-demand balance is less likely
to be upset, and price cutting is less likely to be necessary.

Question: 39 If the demand for a product is inelastic,

A. A price decrease causes total revenue to increase.
B. A price increase causes total revenue to increase.
Answer (B) is correct.
If the demand for a product is inelastic (the ratio is less than 1.0), the
price effect on total revenue is greater than the quantity effect. Thus,
a firm could increase total revenue by raising its prices.
C. A price decrease leaves total revenue unchanged.
D. A price increase leaves total revenue unchanged.

Question: 40 If the price elasticity of demand for a normal good is estimated to be 2.5, a 5%
reduction in its price causes
A. Total revenue to fall by 5%.
B. Total revenue to fall by 12.5%.
C. Quantity demanded to rise by 12.5%.
Answer (C) is correct.
Price elasticity is the percentage change in quantity demanded
divided by the percentage change in price. An elasticity of 2.5 means
that the change in demand will increase by 250% of any change in
price measured in absolute terms (the minus sign is ignored). Hence,
a 5% price reduction increases demand by 12.5% (2.5 × 5%).
D. Quantity demanded to decrease by 5%.

Question: 41 When a market leader attempts to increase demand in the market through the attraction
of new customers, there are three strategies from which to choose. The focus of a
market-penetration strategy is to
A. Target customers in new locations where the product or service has not
previously been offered.
B. Pursue customers who have never before used the product or service
although it was available for purchase in their locality.
C. Respond to a competitive move through effective retaliation.
D. Focus on customers who might use the product or service.
Answer (D) is correct.
The dominant firm in a market pursues a market-leader strategy. The
 leader should attempt to increase total demand in the market because
the market leader will gain the most. Demand will increase if the
firm attracts new users, encourages new uses of the product or
service, or promotes increased use of the product or service. Three
strategies may be used to attract new users. A market-penetration
strategy focuses on customers who might use the product or service.
A new-market segment strategy pursues customers who have never
used the product or service. A geographical expansion strategy
targets users in previously unserved localities.

Question: 42 Firm X is considering entry into an industry. To analyze competition within the industry,
Firm X evaluated its strategic groups. According to Michael E. Porter,
A. The members of a strategic group pursue different competitive
strategies.
B. Intergroup competition is increased by market interdependence.
Answer (B) is correct.
Intergroup competition is increased by market interdependence,
which is the extent to which groups pursue the same customers. The
greater the interdependence, the stronger the competition among
groups.
C. Low barriers to mobility among strategic groups promote profitability.
D. High substitutability of products reduces competition among groups.

Question: 43 A 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.
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 cost-
focus strategy is that the narrower market can be better served
because the firm knows it well.
C. Differentiation strategy.
D. Containment strategy.

Question: 44 In accordance with Michael E. Porter’s generic strategies model, a firm with a broad
competitive scope that has high sales volume, low margins, and efficient supply and
distribution channels will most likely choose a
 A. Cost leadership strategy.
Answer (A) is correct.
Cost leadership is the generic strategy of a firm that seeks
competitive advantage through lower costs. It has a broad
competitive scope. Such a firm can earn higher profits than its
competitors at the industry average price or charge a lower price to
increase market share. The typical firm that follows a cost leadership
strategy has low profit margins, a high volume of sales, and a
substantial market share. Such a firm has efficient supply and
distribution channels, is capable of large capital investment, has
strengths in product design and process engineering, if it is a
manufacturer, and closely supervises its labor force.
B. Cost focus strategy.
C. Differentiation strategy.
D. Focused differentiation strategy.

Question: 45 According to Michael E. Porter’s generic strategies model, a firm that successfully
adopts a differentiation strategy is most likely to
A. Tend to disregard cost control.
B. Risk overlooking product changes.
C. Closely supervise its labor force.
D. Be able to pass supplier cost increases on to its customers.
Answer (D) is correct.
Differentiation is the generic strategy of a firm that seeks
competitive advantage through providing a unique product or
service. This strategy has a broad competitive scope. A successful
differentiation strategy creates a consumer perception that few, if
any, substitutes are available. Thus, a firm that adopts this strategy
may have the additional advantage of being able to pass supplier cost
increases to buyers.

Question: 46 According to Michael E. Porter’s generic strategies model, a firm that successfully
adopts a cost focus strategy is most likely to
A. Have weak customer loyalty.
B. Have a strong R&D function.
C. Know its market well.
Answer (C) is correct.
Cost focus is the generic strategy of a firm 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 cost focus strategy is that the narrower market can be better served
because the firm knows it well.
D. Enjoy economies of scale.

Question: 47 Michael E. Porter’s generic strategies are responses to the five competitive forces. How
do focus strategies respond to the threat of buyers’ bargaining power?
A. A cost leader may be able to pass along suppliers’ price increases.
B. Substitute products may not be able to compete on quality.
Answer (B) is correct.
Differentiation may reduce the power enjoyed by strong buyers
because of the uniqueness of the product and the resulting lack of
close substitutes. Focus strategies also may reduce buyers’ ability to
negotiate in a narrow market. Substitutes may not be able to compete
on price, quality, etc.
C. Core competencies in a broad market may not be matched by new
entrants.
D. Brand loyalty may not be matched by new entrants.

Question: 48 Logistics Corp. 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. Buyer switching costs are high.
B. Buyers view the product as differentiated.
C. The market is dominated by a small consortium of buyers.
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.
D. Buyers enjoy large profit margins.

Question: 49 A differentiation strategy that creates brand loyalty is a response to which of

Michael E. Porter’s five competitive forces?
A. Threat of substitutes.
B. Rivalry among existing firms.
C. Buyers’ bargaining power.
D. Threats of, and barriers to, entry.
 Answer (D) is correct.
Differentiation is the generic strategy favored by a firm that seeks
competitive advantage through providing a unique product or
service. A successful differentiation strategy creates a buyer
perception that few, if any, substitutes are available. Uniqueness may
be based on, for example, massive promotion, excellence of design,
superior service, technical leadership, or brand identification. The
creation of brand loyalty responds to the competitive force of threats
of, and barriers to, entry, because new entrants may not be able to
overcome it in order to successfully break into the industry.

Question: 50 What strategy seeks to gain a larger share of a current market for a current product?
A. Market penetration.
Answer (A) is correct.
Market penetration is the percentage of potential users of a product in
a current market who buy the product. A firm’s market penetration
strategy may be to (1) convince its current customers to increase their
usage frequency, (2) convince other firms’ customers to switch, or
(3) convert nonusers in the target market.
B. Market development.
C. Product development.
D. Diversification.

Question: 51 The dominant firm in a market pursues a market-leader strategy. This strategy may
involve
A. Holding the market stable to avoid attracting new competitors.
B. A flank defense to strengthen the firm’s brand.
C. Sending market signals as a mobile defense.
D. Innovation as an offensive strategy.
Answer (D) is correct.
Constant innovation to improve products and services, control costs,
and increase distribution effectiveness is the basis for a good
offensive strategy. The leader must continuously improve the value
offered to customers.

Question: 52 A competitive marketing strategy in which a firm specializes in serving customers

overlooked or ignored by major competitors is called a
A. Market leader strategy.
 B. Market challenger strategy.
C. Market follower strategy.
D. Market niche strategy.
Answer (D) is correct.
Specializing in serving customers overlooked or ignored by major
competitors is a market niche strategy. This strategy specializes
along market, customer, product, or marketing mix lines.

Question: 53 Market-follower strategies are adopted by firms that do not wish to challenge the leader.
The market-follower strategy adopted in such industries as fertilizers and chemicals is
A. Conscious parallelism.
Answer (A) is correct.
Some industries are characterized by conscious parallelism. These
industries (e.g., fertilizers and chemicals) tend to have high fixed
costs and little product and image differentiation. Market followers
tend to imitate the leader because competing for a greater market
share provokes painful retaliation.
B. Product innovation.
C. Multiple niching.
D. Counterfeiting.

Question: 54 Which of the following is not a step in the establishment of a competitive intelligence
system?
A. Data analysis.
B. Data collection.
C. Information dissemination.
D. Classification of competitors.
Answer (D) is correct.
A competitive intelligence system is established to identify
competitor strategies, monitor their new-product introductions,
analyze markets for the firm’s own new-product introductions and
acquisitions, obtain information about nonpublic firms, evaluate
competitor R&D activity, learn about competitors’ senior executives,
and perform other necessary information gathering tasks. Its
establishment consists of setting up the system, collecting data,
analyzing the data, and disseminating the information. Classification
of competitors, however, is not a step in this process. Competitors
are classified and targeted by a firm based on that classification
following the results of a customer value analysis (CVA).
Question: 55 Which of the following are steps in a customer value analysis (CVA)?

I. Determining what customers value

II. Having customers rank the relative significance of the elements of customer
value
III. Evaluating how well the firm and its competitors perform relative to the
elements of customer value
IV. Focusing on performance with respect to each element of customer value

A. I, III, and IV only.

B. I, II, and III only.
C. I, II, and IV only.
D. I, II, III, and IV.
Answer (D) is correct.
The steps in a CVA are to

• Determine what customers value

• Assign quantitative amounts to the elements of customer
value and have customers rank their relative significance
• Evaluate how well the firm and its competitors perform
relative to each element
• Focus on performance with respect to each element,
compared with an important competitor in a given market
segment
• Repeat the foregoing steps as circumstances change

Question: 56 Usually, the cheapest way to gain market share is by targeting what class of
competitors?
A. Close competitors.
B. Distant competitors.
C. Weak competitors.
Answer (C) is correct.
Using the results of a customer value analysis, a firm may target a
given class of competitors in order to gain market share. Although
there are various methods, targeting weak competitors is usually the
cheapest way to gain market share because weak competitors
generally do not offer much resistance.
D. Bad competitors.
Question: 57 A starting point for developing competitive strategies is customer value analysis (CVA).
According to the CVA approach,
A. Customer value equals customer benefits.
B. Bad competitors rather than good competitors should be targeted.
Answer (B) is correct.
Bad competitors should be targeted because they disturb the
competitive equilibrium, e.g., by excessive expansion of capacity or
overly risky behavior. Good competitors make sound business
decisions that promote the long-term health of the industry, e.g.,
about prices, entry into new segments, and pursuit of market share.
C. Strong competitors should be avoided even when they have exploitable
weaknesses.
D. Distant competitors are the usual threats.

Question: 58 A company sells a diverse line of cookies. Its acquisition of another company, a maker
of cake mixes, is most likely an example of
A. Vertical integration.
B. Horizontal diversification.
Answer (B) is correct.
Horizontal diversification is the acquisition of businesses making
products unrelated to current offerings but that might appeal to the
firm’s current customers. Cookies and cake mixes are based on
different technologies but may be demanded by the same customers.
C. Concentric diversification.
D. Conglomerate diversification.

Question: 59 A 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.
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.
D. Dog.

Question: 60 In the Boston Consulting Group (BCG) growth-share matrix, which strategic business
units are strong competitors in high growth markets but usually have modest net cash
flow?
A. Cash cows.
B. Question marks.
C. Dogs.
D. Stars.
Answer (D) is correct.
A star is a strong competitor in a high growth industry. It is
profitable but needs large amounts of cash for expansion, R&D, and
meeting competitors’ attacks

Question: 61 A firm has a strategic business unit (SBU) that has a low market share in a high growth
market. To maintain even this low share of the market requires the firm to commit a
significant amount of cash. The firm might successfully adopt a build strategy for this
unit if the

I. SBU shows a strong potential to grow and obtains a significant share of the
market.
II. Firm can finance its growth.
III. Firm expects a short-term increase in cash flow.
IV. Firm is willing to forgo short-term earnings.

A. I only.
B. II and III only.
C. III and IV only.
D. I, II, and IV only.
Answer (D) is correct.
One of the two portfolio models most frequently used for
competitive analysis was created by the Boston Consulting Group
(BCG). This model, the growth-share matrix, has two variables. The
market growth rate (MGR) is on the vertical axis, and the firm’s
relative market share (RMS) is on the horizontal axis. The growth-
share matrix has four quadrants. The firm’s SBUs are commonly
represented in their appropriate quadrants by circles. The size of a
circle is directly proportional to the SBU’s sales volume. Question
 marks (low RMS, high MGR) are weak competitors in high-growth
markets. They need large amounts of cash not only to finance growth
and keep pace with the market but also to increase RMS, but do
poorly in cash generation. If RMS increases significantly, a question
mark may become a star. If not, it becomes a dog. A build strategy is
necessary for a question mark with the potential to be a star.
Consequently, a firm may adopt a build strategy for this type of SBU
if it shows a strong potential to grow, if the firm is willing to forgo
short-term earnings and cash flow, and if the firm is willing and has
the capacity to finance its growth. However, a firm that expects only
a short-term increase in cash flow may adopt either a divest or a
harvest strategy but not a build strategy. This type of SBU needs a
lot of cash flow to finance its growth.

Question: 62 A strategic business unit (SBU) has a low relative market share (RMS) and a high
market growth rate (MGR). According to the portfolio model for competitive analysis
(the growth-share matrix) created by the Boston Consulting Group, the SBU is
considered a
A. Star.
B. Question mark.
Answer (B) is correct.
Question marks (low RMS, high MGR) are weak competitors and
poor cash generators in high-growth markets. They need large
amounts of cash not only to finance growth and compete in the
market but also to increase RMS. If RMS increases significantly, a
question mark may become a star. If not, it becomes a dog.
C. Cash cow.
D. Dog.

Question: 63 According to the growth-share matrix approach developed by the Boston Consulting
Group, a harvest strategy is most likely to be used for SBUs that are
A. Question marks that may become stars.
B. Strong cash cows.
C. Weak cash cows.
Answer (C) is correct.
Each SBU should have objectives, a strategy should be formulated to
achieve those objectives, and a budget should be allocated. A harvest
strategy maximizes short-term net cash inflow. Harvesting means
zero-budgeting R&D, reducing marketing costs, not replacing
facilities, etc. This strategy is used for weak cash cows and possibly
 question marks and dogs.
D. Dogs that reduce the firm’s profits.

Question: 64 According to the Boston Consulting Group’s portfolio model for competitive analysis, the
strategy for a strong cash cow should be
A. Harvest.
B. Divest.
C. Hold.
Answer (C) is correct.
A hold strategy is used for strong cash cows. It is necessary if the
business is to continue to generate large net cash inflows. Harvesting
might impair a strong cash cow’s ability to generate long-term
positive net cash inflows.
D. Build.

Question: 65 Which of the following is a method of firm diversification?

A. Acquiring competitors.
Answer (A) is correct.
Firms diversify by acquiring units with their own supply chain and
may also acquire competitors and related businesses.
B. Selling unrelated businesses.
C. Competitive analysis.
D. Creating new divisions.

Question: 66 When firms compete in different geographical locations or have multiple product lines
that do not necessarily overlap, the most effective way of responding to an aggressive
move by a competitor without directly triggering destructive moves and countermoves is
to
A. Mislead the competitor into taking or not taking an action.
B. Make a prior announcement of intended moves.
C. Initiate a move in the market where the competitor is strong.
Answer (C) is correct.
Initiating a move in the market where the competitor is strong is a
cross-parry. A cross-parry is an effective way to signal displeasure
and raise the threat of more serious retribution without directly
triggering destructive moves and countermoves.
D. Initiate direct aggressive moves.
Question: 67 A firm discounts never-before-discounted items. This action is an example of a
A. Divergence from industry precedent.
Answer (A) is correct.
The discounting of never-before-discounted items implies aggressive
intent. It is an example of a divergence from industry precedent.
B. Cross-parry.
C. Divergence from prior strategic objectives.
D. Bluff.

Question: 68 Firm A mostly does business in markets in the southern part of the country. Firm B
mostly does business in markets in the western part of the country. However, Firm A
has recently moved to compete with Firm B in the western part of the country by
introducing its existing products there. Accordingly, Firm B has entered Firm A’s primary
markets. What kind of market signal did Firm B send?
A. A cross-parry.
Answer (A) is correct.
The cross-parry is a response to a competitor’s move in one area with
a move in another. For example, Firm X, which is well entrenched in
region A, may move to compete with Firm Y in its stronghold in
region B. Firm Y’s cross-parry is to enter the market in region A. A
cross-parry is an indirect response by the defending firm that
potentially avoids destructive conflict in the newly penetrated
market. However, it also signals the possibility of retaliation,
especially if it occurs in one of the initiating firm’s key markets. For
example, price cutting as a cross-parry may be very effective against
a firm with a large share of the market where the parry is made. This
firm has more to lose in a price war in that market. Consequently,
maintenance of a presence in a cross market deters the large-share
firm from attacking elsewhere.
B. A bluff.
C. An introduction of a fighting brand.
D. A direct response.

Question: 69 A true market signal

A. Is a direct market communication indicating intent.
B. May involve a threat not intended to be carried out.
C. May be an attempt to minimize a future provocative move.
 Answer (C) is correct.
Prior announcements of moves may minimize the provocation
caused by a future strategic adjustment, e.g., a price cut. Such a move
may be a genuine attempt to realign prices with changes in costs, not
an aggressive grab for market share. However, the move may also be
an attempt to mislead.
D. Announces a move that will occur.

Question: 70 Prior announcements of moves have value as market signals in part because an
announced move need not actually occur. Which of the following is true regarding the
effects of prior announcements of moves on the market?

I. The effects may preempt competition.

II. The effects may express pleasure or displeasure with a competitor’s action.
III. The effects may be a means of ending all external debate.
IV. The effects may test competitor sentiment.

A. I, II, and III only.

B. I, II, and IV only.
Answer (B) is correct.
Among other things, prior announcements of moves may preempt
competition, threaten action, test competitor sentiment, express
pleasure or displeasure with a competitor’s action, and act as a means
of ending internal debate. Moreover, prior announcements of moves
may be a means of ending some external debate (i.e., if the
announcement was aimed at the financial community in order to
answer questions about the firm’s liquidity). However, all external
debate would be impossible to end, even by means of prior
announcements of moves.
C. II, III, and IV only.
D. I, II, III, and IV.