Practice Test 1 Answers PDF

EXTERNAL ANALYSIS To use Porter’s Five Force model to assess an industry, we must look at a number of industry characteristics. Below are each of the five forces, and a list of characteristics of a particular industry. For each characteristic, indicate (by circling) whether or not the charact...

EXTERNAL ANALYSIS To use Porter’s Five Force model to assess an industry, we must look at a number of industry characteristics. Below are each of the five forces, and a list of characteristics of a particular industry. For each characteristic, indicate (by circling) whether or not the characteristic increases or decreases the force for Company A (Company A is a competitor in the industry being evaluated). For example, in the sample question about bargaining power of suppliers below, you would circle “increase”, because if Company A faces high switching costs, this will increase the power of its suppliers (20 points total). Bargaining power  Company A faces high switching Increase of suppliers costs in purchasing supplies Decrease Industry force Characteristics Increase or decrease? Existing rivalry  The industry growth rate is high Increase Decrease  There are several competitors of Increase Decrease equal size and market power Threat of entry  The industry is highly profitable Increase Decrease  The industry requires high fixed Increase Decrease capital investments Bargaining power  There are few suppliers Increase Decrease of suppliers  Company A can integrate backward Increase Decrease easily Bargaining power  Buyers face low switching costs Increase Decrease of buyers  Buyers are well informed Increase Decrease Threat of  Substitutes are much more expensive Increase Decrease substitutes  Substitutes come with an attractive Increase Decrease price/performance ratio. Points ______________(20) RATIO ANALYSIS The following are the fundamental ratios of two companies. Ratio Company A Company B QUICK RATIO 0.78 0.87 CURRENT RATIO 1.45 1.63 SG&A / SALES 0.15 0.36 RECEIVABLES TURNOVER 13.01 9.87 INVENTORIES TURNOVER 6.16 5.32 NET SALES / WORKING CAPITAL 3.56 2.89 NET SALES / TOTAL ASSETS 0.12 0.08 NET SALES / EMPLOYEES 121,453 102,345 TIMES INTEREST EARNED 3.25 2.63 TOTAL ASSETS / EQUITY 2.14 3.69 NET INCOME / NET SALES 0.08 0.06 NET INCOME / TOTAL ASSETS 0.04 0.03 Please answer the following questions by circling the corresponding company (10 points total): Which company:  Uses its labor more productively? Company A Company B  Manages its inventories more efficiently? Company A Company B  Is more leveraged? Company A Company B  Is more liquid? Company A Company B  Is most likely to be a low cost competitor? Company A Company B Points ______________(10) 2 MULTIPLE CHOICE (40 points total) 1. Which of the following is not a major activity of the strategic management process: a) analysis of the external and internal environment b) establishment of strategic direction (goals) c) formulation of strategies d) production scheduling e) implementation of strategies 2. We say that a company has achieved a sustainable competitive advantage, when: a) its productivity has exceeded the industry average over a long period of time b) its profitability has exceeded the industry average over a long period of time c) its efficiency has exceeded the industry average over a long period of time d) its growth rate has exceeded the industry average over a long period of time e) its stock price performance has exceeded the industry average over a long period of time 3. Visionary companies are able to outperform their competitors because: a) they provide more aspirational visions b) their vision statements are more product-oriented c) their vision statements are exclusively financial d) they isolate internal stakeholders in defining their visions e) they isolate external stakeholders in defining their visions 4. Which of the following makes suppliers a lower threat: a) the suppliers’ industry is dominated by a small number of firms b) the product or service provided by suppliers is highly differentiated c) suppliers are threatened by substitutes d) suppliers can threaten forward vertical integration e) suppliers earn average profits 5. The risk of a price war is greatest in which of the following circumstances: a) a high-growth industry b) an industry characterized by falling demand, high exit barriers, and excess productive capacity c) an industry characterized by a “commodity-type” product, strong demand, and low exit barriers d) an industry characterized by highly differentiated products e) an industry characterized by tacit (gentlemen’s) price agreements 6. _______________ exist when a firm’s costs decrease as a function of that firm’s output: a) economies of scale b) economies of scope c) diseconomies of scale d) absolute cost economies e) experience curve economies 3 7. The CEO of True West Products Inc. (TWC) is a company that sells a wide range of products. It has decided to enter the markets of emerging nations like China and Brazil. This means that the cars, consumer electronics, and services such as hotels included under the TWC banner would be made available in these nations. Which of the following strategies does this scenario best illustrate? a) corporate strategy b) competitive (business-level) strategy c) global strategy d) divisional strategy e) functional strategy 8. Threat of substitute products comes from: a) other companies in the same industry b) foreign companies which can use cheap labor in their countries c) firms in other industries that produce products or services that satisfy the same customer need d) new entrants in the industry which offer a differentiated product e) all of the above 9. If a resource or capability is valuable and rare, but not costly to imitate, it will generate a: a) competitive disadvantage b) competitive parity c) temporary competitive advantage d) sustained competitive advantage e) perfectly competitive environment. 10. Which of the following is the best definition of corporate strategy: a) the formulation of the corporate mission and values b) the choice of businesses in which the company competes c) the product-market positioning for each business the company competes in d) the formulation of the company’s long-term growth objectives e) the implementation through structure and controls 11. For industry incumbents, the strongest threat coming from technological innovations is the: a) increased threat of new entrants b) increased threat of substitution c) increased rivalry d) increased bargaining power of suppliers e) increased bargaining power of buyers 12. Hotels and airlines create “loyalty programs”, such as “Delta SkyMiles” or “Hilton Honors”, in an effort to increase the ______________ for the customer: a) exit barriers b) entry barriers c) mobility barriers d) switching costs e) barriers to substitution 4 13. You observe a company that over a number of years has maintained a profit margin that is about average for its industry. Using the VRIO perspective, you conclude that the resources and capabilities the company has are: a) valuable, rare, difficult to imitate, difficult to substitute, and well used by the organization b) not particularly valuable c) valuable and well used by the company, but neither rare nor inimitable d) valuable, rare, and well used by the company, but easy to substitute e) valuable, rare, and difficult to imitate, but not well used by the company 14. The number of new product introductions per year is a measure of a company’s: a) human resources b) technological resources c) innovation resources d) organizational resources e) financial resources 15. The factors that deter the movement of firms from one strategic position to another are known as: a) barriers to imitation b) barriers to entry c) barriers to exit d) mobility barriers e) barriers to substitution 16. _____________________ is a secondary activity in Porter’s value chain model: a) inbound logistics b) marketing and sales c) customer service d) technology development e) outbound logistics 17. ______________ is best described as a rational process in which executives at a company’s headquarters take primary responsibility to program the future success of the company they lead: a) bottom-up strategic approach b) top-down strategic planning c) scenario planning d) emergent strategic planning e) reverse mentoring 18. _________ is best described as the difference between a buyer’s willingness to pay for a product or service and a firm’s total cost to produce it: a) economic value added b) break-even point c) consumer surplus d) cost of capital e) producer surplus 5 19. Which of the following examples demonstrates how successful organizations manage their primary activities? a) Apple implemented a sophisticated information system that resulted in reduced time-to- market of newly developed software applications b) Hewlett Packard has managed to decrease costs by analyzing and selecting alternative sources of inputs to minimize dependence on a single supplier c) Motorola has revised its compensation system to reward employees who learn a variety of skills d) National Steel improved its efficiency by consolidating, reducing the number of job classifications, and broadening worker responsibilities e) Walgreen Co. has used an information system to automate some operations and differentiate service 20. Many foreign companies have tried (but failed) to reproduce the Japanese “Quality Circles” in which employees get together regularly to discuss suggestions for the continuous improvement of a company’s production processes. The most likely reason for this lack of success is: a) physical uniqueness b) path dependency c) causal ambiguity d) social complexity e) prohibitive implementation costs 6 SHORT ANSWERS Please write legibly and do not exceed the space provided below each question (5 points for each answer for a total of 30 points). 1. What are the broader (general environment) forces and what influence do they have on firms? Provide one specific example in which a macroenvironmental factor influenced strategy formulation or implementation. _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ 2. Consider the case when the consumer’s willingness to pay (V) is high, while the cost to produce the good or service (C) is low. What pricing options (P) does the firm have? What will be the likely outcomes of each pricing option? _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ 3. You observe a company with a return on invested capital (ROIC) of 12.3% and a weighted average cost of capital (WACC) of 14.1%. What are your conclusions about the competitive performance of the company? _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ 7 4. As discussed in class, the U.S. carbonated soft drink (CSD) industry and the express mail industry both have duopoly structure (e.g. both are dominated by two large and equally powerful players). Yet, they differ substantially in terms of their profit potential. What are the major factors that account for this difference? Be specific. _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ 5. What types of resources are more likely to lead to sustainable competitive advantage, tangibles or intangibles? Why? Provide one example of a tangible resource that results in a sustainable competitive advantage, and one example of an intangible resource that results in a sustainable competitive advantage. _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ ____________________________________________________________________ 6. Consider Apple’s iPhone. Identify one rival product (explain what makes it a rival product), one substitute (explain what makes it a substitute), and one complementary product or service (explain what makes it a complementary product or service). Briefly discuss the opportunities and/or challenges to Apple’s profitability that each of the three (rival, substitute, complementor) presents. _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ THE END! 8