Strategic Management and Competitive Advantage, 4e (Barney) Chapter 1 What Is Strategy and the Strategic Management Process?

1) One of the central questions that all strategic managers must address, regardless of the industry they work in, is "What is our competition going to do next?" Answer !"#$ %iff 1 &age "ef ' O()ecti*e 1+1 ,) !here is complete consensus among strategic managers and academic researchers a(out what a "strategy" is+ Answer -A./$ %iff 1 &age "ef ' O()ecti*e 1+1 0) -or the purposes of this (ook, a firm1s strategy is defined as its theory a(out how to gain competiti*e ad*antages+ Answer !"#$ %iff 1 &age "ef ' O()ecti*e 1+1 ') A "good strategy" does not necessarily ha*e to create a competiti*e ad*antage+ Answer -A./$ %iff , &age "ef ' O()ecti*e 1+1 2) !he greater the extent to which a firm1s assumptions and hypotheses accurately descri(e how the competition in the industry is likely to e*ol*e, and how that e*olution can (e exploited to earn a profit, the more likely it is that a firm will gain a competiti*e ad*antage from implementing its strategies+ Answer !"#$ %iff 1 &age "ef ' O()ecti*e 1+1 3) 4t is usually possi(le to know for sure that a firm is choosing the right strategy+ Answer -A./$ %iff , &age "ef ' O()ecti*e 1+1 5) !he strategic management process is a sequential set of analyses and choices that can increase the likelihood that a firm will choose a good strategy that generates competiti*e ad*antages+ Answer !"#$ %iff 1 &age "ef ' O()ecti*e 1+,

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:) !he second step in the strategic management process is the definition of a firm1s mission+ Answer -A./$ %iff 1 &age "ef ' O()ecti*e 1+, ;) A firm1s mission defines (oth what it wants to (e in the long run and what it wants to a*oid in the meantime+ Answer !"#$ %iff 1 &age "ef 2 O()ecti*e 1+, 18) <ission statements often contain so many common elements that e*en if a firm1s mission statement does not influence (eha*ior throughout an organi=ation, it is likely to ha*e a significant impact on a firm1s actions+ Answer -A./$ %iff , &age "ef 2 O()ecti*e 1+, 11) -irms whose mission statement is central to all they do are known as missionary firms+ Answer -A./$ %iff 1 &age "ef 2 O()ecti*e 1+, 1,) >isionary firms earn su(stantially higher returns than a*erage firms (ecause they acknowledge that profit maximi=ing is their primary reason for existence+ Answer -A./$ %iff 0 &age "ef 2 O()ecti*e 1+, 10) <ission statements that are *ery inwardly focused and are defined only with reference to the personal *alues and priorities of its founders and top managers can hurt a firm1s performance+ Answer !"#$ %iff , &age "ef 5 O()ecti*e 1+, 1') O()ecti*es are the specific measura(le targets a firm can use to e*aluate the extent to which it is reali=ing its mission+ Answer !"#$ %iff 1 &age "ef : O()ecti*e 1+, 12) 9igh quality o()ecti*es are tightly connected to the elements of a firm1s mission (ut tend to (e relati*ely difficulty to measure and track o*er time+ Answer -A./$ %iff 0 &age "ef : O()ecti*e 1+,

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13) ?y conducting an external analysis, a firm identifies the critical threats and opportunities in the industry1s competiti*e en*ironment+ Answer !"#$ %iff , &age "ef : O()ecti*e 1+, 15) 6orporate le*el strategies are actions firms take to gain competiti*e ad*antages in a single market or industry+ Answer -A./$ %iff 1 &age "ef ; O()ecti*e 1+, 1:) ?usiness le*el strategies are actions firms take to gain competiti*e ad*antages (y operating in multiple markets or industries simultaneously+ Answer -A./$ %iff 1 &age "ef ; O()ecti*e 1+, 1;) /trategy implementation occurs when a firm adopts organi=ational policies and practices that are consistent with its strategy+ Answer !"#$ %iff 1 &age "ef 18 O()ecti*e 1+, ,8) 4n general, a firm has a competiti*e ad*antage when it is a(le to create more economic *alue than ri*al firms+ Answer !"#$ %iff 1 &age "ef 18 O()ecti*e 1+0 ,1) !he si=e of a firm1s competiti*e ad*antage is the sum of the economic *alue a firm is a(le to create and the economic *alue ri*als are a(le to create+ Answer -A./$ %iff , &age "ef 18 O()ecti*e 1+0 ,,) A sustained competiti*e ad*antage is *irtually permanent+ Answer -A./$ %iff , &age "ef 11 O()ecti*e 1+0 ,0) -irms that create the same economic *alue as their ri*als experience competiti*e parity+ Answer !"#$ %iff 1 &age "ef 11 O()ecti*e 1+0

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,') A firm1s accounting performance is a measure of its competiti*e ad*antage calculated using information from a firm1s pu(lished profit and loss and (alance sheet statements+ Answer !"#$ %iff 1 &age "ef 10 O()ecti*e 1+' ,2) Applying accounting measures of competiti*e ad*antage for firms that are headquartered in different countries is not complicated (y issues such as differences in accounting practices and exchange rates+ Answer -A./$ %iff , &age "ef 12 O()ecti*e 1+' ,3) Acti*ity ratios are ratios with some measure of profit in the numerator and some measure of firm si=e or assets in the denominator+ Answer -A./$ %iff 1 &age "ef 12 O()ecti*e 1+' ,5) .iquidity ratios are ratios that focus on the firm1s a(ility to meet its short@term financial o(ligations+ Answer !"#$ %iff 1 &age "ef 12 O()ecti*e 1+' ,:) When a firm earns a(o*e a*erage accounting performance, it is said to en)oy competiti*e parity+ Answer -A./$ %iff , &age "ef 12 O()ecti*e 1+' ,;) A firm that earns (elow a*erage accounting performance, performance that is less than the industry a*erage, generally experiences a competiti*e disad*antage+ Answer !"#$ %iff , &age "ef 12 O()ecti*e 1+' 08) !he greatest disad*antage of accounting measures of competiti*e performance is that they are relati*ely difficult to compute+ Answer -A./$ %iff 1 &age "ef 15 O()ecti*e 1+'

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01) $conomic measures of competiti*e ad*antage compare a firm1s le*el of return to its costs of capital instead of to the a*erage le*el of return to the industry+ Answer !"#$ %iff 1 &age "ef 15 O()ecti*e 1+' 0,) !he cost of equity is equal to the interest a firm must pay its de(t holders in order to induce those de(t holders to lend money to the firm+ Answer -A./$ %iff 1 &age "ef 15 O()ecti*e 1+' 00) !he residual claimants1 *iew of equity holders argues that the interests of equity holders and a firm1s other stakeholders often collide+ Answer -A./$ %iff 0 &age "ef 1; O()ecti*e 1+' 0') !he correlation (etween economic and accounting measures of competiti*e ad*antage is generally low+ Answer -A./$ %iff , &age "ef 1; O()ecti*e 1+' 02) $mergent strategies are theories of how to gain competiti*e ad*antage in an industry that emerge o*er time or that ha*e (een radically reshaped once they are initially implemented+ Answer !"#$ %iff , &age "ef ,8 O()ecti*e 1+2 03) Aohnson B Aohnson1s introduction of "Aohnson1s !oilet and ?a(y &owder" as a result of customers asking to purchase the talcum powder is an example of a planned strategy+ Answer -A./$ %iff , &age "ef ,8 O()ecti*e 1+2 05) $mergent strategies are only important when a firm fails to implement the strategic management process effecti*ely+ Answer -A./$ %iff , &age "ef ,0 O()ecti*e 1+2 0:) -irms with strategies that are unlikely to (e a source of competiti*e ad*antage will rarely pro*ide the same career opportunities as firms with strategies that do generate such ad*antages+ Answer !"#$ %iff 1 &age "ef ,0 O()ecti*e 1+3
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0;) /trategic choices are generally limited to *ery experienced senior managers in large corporationsC in smaller and entrepreneurial firms, many employees end up (eing in*ol*ed in the strategic management process+ Answer !"#$ %iff 1 &age "ef ,0 O()ecti*e 1+3 '8) All firms ha*e almost entirely emergent strategies+ Answer -A./$ %iff , &age "ef ,, O()ecti*e 1+2 '1) A firm1s DDDDDDDD is defined as its theory a(out how to gain competiti*e ad*antages+ A) o()ecti*es ?) mission 6) *ision %) strategy Answer % %iff 1 &age "ef ' O()ecti*e 1+1 ',) !he sequential set of analyses and choices that can increase the likelihood that a firm will choose a strategy that generates competiti*e ad*antages is the A) organi=ational change process+ ?) strategic management process+ 6) mission statement process+ %) goal setting process+ Answer ? %iff , &age "ef ' O()ecti*e 1+, '0) A firm1s DDDDDDDD is its long@term purpose that defines (oth what it aspires to (e in the long run and what it wants to a*oid in the meantime+ A) mission ?) *ision 6) o()ecti*e %) goal Answer A %iff 1 &age "ef ' O()ecti*e 1+,

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'') <issions are often written in the form of A) *ision statements+ ?) mission statements+ 6) corporate o()ecti*es+ %) organi=ational goals+ Answer ? %iff 1 &age "ef 2 O()ecti*e 1+, '2) -irms whose mission is central to all they do are known as DDDDDDDD firms+ A) missionary ?) legendary 6) parity %) *isionary Answer % %iff , &age "ef 2 O()ecti*e 1+, '3) -rom 1;,3 to 1;;2, *isionary firms earned DDDDDDDD returns compared to firms that were not *isionary firms+ A) su(stantially lower ?) su(stantially higher 6) marginally lower %) su(stantially equi*alent Answer ? %iff , &age "ef 2 O()ecti*e 1+, '5) !he mission statements of *isionary firms A) suggest that profit maximi=ing, while an important corporate o()ecti*e, is not their primary reason for existence+ ?) suggest that profit maximi=ing is neither an important corporate o()ecti*e nor their primary reason for existence+ 6) suggest that profit maximi=ing is their primary reason for existence+ %) suggest that profit maximi=ing is an important corporate o()ecti*e and is their primary reason of existence+ Answer A %iff , &age "ef 2 O()ecti*e 1+,

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':) Which of the following statements regarding firm mission is accurate? A) While some firms ha*e used their missions to de*elop strategies that create significant competiti*e ad*antages, firm missions can hurt a firm1s performance as well+ ?) >irtually all firms ha*e used missions to de*elop strategies that create significant competiti*e ad*antages, while *ery few firms ha*e used missions that can hurt their performance+ 6) 4t is *ery rare for firms to (e a(le to use their missions to de*elop strategies that create significant competiti*e ad*antages, and most firm missions actually hurt their performance+ %) <issions tend to ha*e *ery little impact on a firm1s a(ility to create significant competiti*e ad*antages+ Answer A %iff , &age "ef 5 O()ecti*e 1+, ';) DDDDDDDD are specific measura(le targets a firm can use to e*aluate the extent to which it is reali=ing its mission+ A) >isions ?) <issions 6) 6ompetiti*e ad*antages %) O()ecti*es Answer % %iff 1 &age "ef : O()ecti*e 1+, 28) 9igh quality o()ecti*es are those that are A) tightly connected to elements of a firm1s mission+ ?) difficult to measure+ 6) difficult to track o*er time+ %) not quantitati*e+ Answer A %iff , &age "ef : O()ecti*e 1+, 21) ?y conducting aEn) DDDDDDDD, a firm identifies the critical threats and opportunities in its competiti*e en*ironment+ A) internal analysis ?) competiti*e analysis 6) external analysis %) economic analysis Answer 6 %iff 1 &age "ef : O()ecti*e 1+,

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2,) DDDDDDDD helps a firm understand which of its resources and capa(ilities are likely to (e sources of competiti*e ad*antage+ A) 6ompetiti*e analysis ?) 4nternal analysis 6) 6omparati*e analysis %) $xternal analysis Answer ? %iff , &age "ef : O()ecti*e 1+, 20) Actions firms take to gain competiti*e ad*antages in a single market or industry are known as A) (usiness le*el strategies+ ?) corporate le*el strategies+ 6) functional le*el strategies+ %) sustaina(le strategies+ Answer A %iff , &age "ef ; O()ecti*e 1+, 2') Actions firms take to gain competiti*e ad*antages (y operating in multiple markets or industries simultaneously are known as A) corporate le*el strategies+ ?) functional strategies+ 6) (usiness le*el strategies+ %) macro le*el strategies+ Answer A %iff , &age "ef ; O()ecti*e 1+, 22) DDDDDDDD occurs when a firm adopts organi=ational policies and practices that are consistent with its strategy+ A) /trategy formulation ?) Organi=ational change 6) /trategy implementation %) /trategic control Answer 6 %iff 1 &age "ef 18 O()ecti*e 1+,

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23) When a firm is a(le to create more economic *alue than ri*al firms it is said to ha*e aEn) A) comparati*e ad*antage+ ?) competiti*e ad*antage+ 6) strategic choice+ %) economic ad*antage+ Answer ? %iff , &age "ef 18 O()ecti*e 1+0 25) !he difference (etween the percei*ed (enefits gained (y a customer who purchases a firm1s products or ser*ices and the full economic costs of these products or ser*ices is known as A) accounting *alue+ ?) comparati*e *alue+ 6) economic *alue+ %) sustaina(le *alue+ Answer 6 %iff 1 &age "ef 18 O()ecti*e 1+0 2:) 4f !echnoFeek and >arsity?lue compete in the same market for the same customer and !echnoFeek generates G;88 of economic *alue each time it sells a product or ser*ice while >arsity?lue generates G'88 of economic *alue each time it sells a product or ser*ice, !echnoFeek has a competiti*e ad*antage of A) G1,088+ ?) G0,388+ 6) G038,888+ %) G288+ Answer % %iff 0 &age "ef 11 O()ecti*e 1+0 2;) A competiti*e ad*antage that lasts a *ery short period of time is known as a DDDDDDDD competiti*e ad*antage+ A) temporary ?) sustained 6) transient %) perpetual Answer A %iff , &age "ef 11 O()ecti*e 1+0

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38) -irms that create the same economic *alue as their ri*als experience competiti*e A) disad*antage+ ?) parity+ 6) superiority+ %) ad*antage+ Answer ? %iff 1 &age "ef 11 O()ecti*e 1+0 31) -irms that generate less economic *alue than their ri*als experience a competiti*e A) ad*antage+ ?) parity+ 6) disad*antage+ %) preference+ Answer 6 %iff , &age "ef 11 O()ecti*e 1+0 3,) 4n many ways, the difference (etween traditional economics research and strategic management research is that the former attempts to explain why DDDDDDDD, while the latter attempts to explain DDDDDDDD A) competiti*e ad*antages should not persistC when they can+ ?) competiti*e ad*antages should persistC when they can+ 6) competiti*e ad*antages should persistC why they should not+ %) competiti*e parity should not persistC why they should+ Answer A %iff 0 &age "ef 1, O()ecti*e 1+0 30) !he two types of measures of competiti*e ad*antage include A) accounting measures and strategic measures+ ?) strategic measures and economic measures+ 6) accounting measures and economic measures+ %) qualitati*e measures and quantitati*e measures+ Answer 6 %iff , &age "ef 10 O()ecti*e 1+' 3') A firm1s DDDDDDDD is a measure of its competiti*e ad*antage calculated using information from a firm1s pu(lished profit and loss and (alance sheet statements+ A) economic performance ?) accounting performance 6) strategic performance %) sustaina(le performance Answer ? %iff , &age "ef 10 O()ecti*e 1+'
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32) DDDDDDDD are ratios with some measure of profit in the numerator and some measure of firms1 si=e or assets in the denominator+ A) .iquidity ratios ?) .e*erage ratios 6) Acti*ity ratios %) &rofita(ility ratios Answer % %iff 1 &age "ef 12 O()ecti*e 1+' 33) "atios that focus on the le*el of a firm1s financial flexi(ility, including its a(ility to o(tain more de(t, are known as A) le*erage ratios+ ?) liquidity ratios+ 6) acti*ity ratios+ %) profita(ility ratios+ Answer A %iff 1 &age "ef 12 O()ecti*e 1+' 35) #sing ratio analysis, a firm earns DDDDDDDD when its performance is greater than the industry a*erage+ A) a(o*e a*erage economic performance ?) (elow a*erage accounting performance 6) a(o*e a*erage accounting performance %) (elow a*erage economic performance Answer 6 %iff 0 &age "ef 12 O()ecti*e 1+' 3:) !he DDDDDDDD is the rate of return that a firm promises to pay its suppliers of capital to induce them to in*est in the firm+ A) cost of de(t ?) cost of ad*antage 6) cost of parity %) cost of capital Answer % %iff , &age "ef 15 O()ecti*e 1+'

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3;) DDDDDDDD measures of competiti*e ad*antage compare a firm1s le*el of return to its cost of capital instead of to the a*erage le*el of return in the industry+ A) $conomic ?) Accounting 6) /trategic %) /ustaina(le Answer A %iff , &age "ef 15 O()ecti*e 1+' 58) !he percentage of a firm1s total capital that is de(t times the cost of de(t plus the percentage of a firm1s total capital that is equity times the cost of equity is the A) weighted cost of capital+ ?) weighted a*erage cost of capital+ 6) unweighted a*erage cost of capital+ %) a*erage cost of capital+ Answer ? %iff 0 &age "ef 15 O()ecti*e 1+' 51) 4f the risk free rate of return is 'H, the market rate of return is ;H, and a firm1s (eta is ,+8, what is the firm1s cost of equity? A) 08 ?) 3 6) 1: %) 1' Answer % %iff 0 &age "ef 1: O()ecti*e 1+' 5,) 4f a firm has total assets of G18 million, stockholder1s equity of G3 million, a cost of equity of 18, and an after tax cost of de(t of 2H, what is the firm1s weighted a*erage cost of capital? A) : ?) 1: 6) 5 %) 1 Answer A %iff 0 &age "ef 1: O()ecti*e 1+'

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50) A firm that earns its cost of capital is said to (e earning A) a(o*e normal economic performance+ ?) normal economic performance+ 6) (elow normal economic performance+ %) normal accounting performance+ Answer ? %iff 1 &age "ef 1; O()ecti*e 1+' 5') !he *iew that equity holders only recei*e payment on their in*estment in a firm after all legitimate claims (y a firm1s other stakeholders are satisfied is known as the DDDDDDDD *iew of equity holders+ A) stakeholder ?) residual claimants 6) legitimate claimants %) extraordinary claims Answer ? %iff , &age "ef ,1 O()ecti*e 1+' 52) !heories of how to gain competiti*e ad*antage in an industry that emerge o*er time or that ha*e (een radically reshaped once they are initially implemented are known as A) emergent strategies+ ?) o()ecti*e strategies+ 6) planned strategies+ %) ad hoc strategies+ Answer A %iff 1 &age "ef ,8 O()ecti*e 1+2 53) !he reali=ed strategy of most firms tends to (e A) almost exclusi*ely a reflection of their intended strategy+ ?) almost exclusi*ely a reflection of their emergent strategy+ 6) a com(ination of (oth intended and emergent strategies+ %) reflecti*e of neither the firms1 intended nor emergent strategy+ Answer 6 %iff , &age "ef ,8 O()ecti*e 1+2

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55) Which of the following is a reason why it is important for students to study strategy and the strategic management process? A) /tudying strategy and the strategic management process can gi*e students tools to e*aluate the strategies of firms that may employ them+ ?) 4t can (e *ery important to a new hire1s career success to understand the strategies of the firm that hired them and their place in implementing these strategies+ 6) While strategic choices are generally limited to *ery experienced senior managers in large organi=ations, in smaller and entrepreneurial firms many employees end up (eing in*ol*ed in the strategic management process+ %) All of the a(o*e+ Answer % %iff , &age "ef ,0 O()ecti*e 1+3 5:) DDDDDDDD strategies are theories of how to gain competiti*e ad*antage in an industry that emerge o*er time or that ha*e (een radically reshaped once they are initially implemented+ A) 4ntended ?) "eali=ed 6) $mergent %) >isionary Answer 6 %iff , &age "ef ,8 O()ecti*e 1+2 5;) Which type of ratios focus on the a(ility of a firm to meet its short@term financial o(ligations? A) Acti*ity ratios ?) .iquidity ratios 6) .e*erage ratios %) &rofita(ility ratios Answer ? %iff 1 &age "ef 12 O()ecti*e 1+' :8) One of the first scholars to examine the longe*ity of competiti*e ad*antage was A) %ennis <ueller+ ?) Feoffrey Waring+ 6) &eter "o(erts+ %) "ich 9ouston+ Answer A %iff 0 &age "ef 1, O()ecti*e 1+0

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:1) !hermacorp is in the heating and cooling industry and has total assets of G,8 million, with stockholders1 equity of G12 million, an "O$ of 15+0H, and a firm ?eta of 1+3+ 4f the risk free rate of return is ' and the market rate of return is 18, what is the cost of equity? A) 1;+3 ?) 5+52 6) 10+3 %) ,2+,: Answer 6 %iff , &age "ef 1: O()ecti*e 1+' :,) !hermacorp1s cost of equity is 10+3+ 4f the after tax cost of de(t is '+3, what is the weighted a*erage cost of capital? A) 12+:2 ?) 11+02 6) 11+, %) 10+, Answer ? %iff 0 &age "ef 1: O()ecti*e 1+' :0) !hermacorp1s weighted a*erage cost of capital is 11+02+ 4f the a*erage WA66 in the heating and cooling industry is 1;, !hermacorp can (e said to (e earning A) a(o*e normal economic performance+ ?) a(o*e normal accounting performance+ 6) (elow normal economic performance+ %) (elow normal accounting performance+ Answer 6 %iff , &age "ef 1; O()ecti*e 1+' :') !hermacorp1s 15+0H "O$ is an example of aEn) DDDDDDDD ratio+ A) liquidity ?) profita(ility 6) acti*ity %) le*erage Answer ? %iff 1 &age "ef 12 O()ecti*e 1+'

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:2) 4f the a*erage "O$ in the heating and cooling industry is 18+1H, and !hermacorp1s "O$ is 15+0H, !hermacorp is said to ha*e A) (elow a*erage accounting performance+ ?) a(o*e a*erage economic performance+ 6) a(o*e a*erage accounting performance+ %) (elow a*erage economic performance+ Answer 6 %iff , &age "ef 12 O()ecti*e 1+' :3) Freen -rog is an en*ironmentally friendly firm in the cosmetics industry that has decided to undertake a strategic planning pro)ect+ 4t wants to ensure that it performs the process correctly and so intends to start the process with the first step of the strategic planning process, which is A) crafting a mission statement+ ?) setting o()ecti*es+ 6) measuring performance+ %) defining its (usiness le*el strategy+ Answer A %iff 1 &age "ef 2 O()ecti*e 1+, :5) Freen -rog is an en*ironmentally friendly firm in the cosmetics industry+ $*en though Freen -rog is en*ironmentally friendly, the strategic planning team had decided that financial performance is one of the company1s top priorities+ Which of the following is the (est example of an o()ecti*e the company might use to help it achie*e its goal of superior financial performance? A) 4ncreasing profita(ility+ ?) Frowing market share annually+ 6) 4mpro*ing product quality e*ery quarter+ %) Frowth in earnings per share a*eraging 12H or (etter annually for the next fi*e years Answer % %iff , &age "ef : O()ecti*e 1+, ::) Freen -rog is an en*ironmentally friendly firm in the cosmetics industry+ 4f during the strategic planning process Freen -rog tried to determine the critical threats and opportunities in its competiti*e en*ironment, it would (e performing aEn) A) internal analysis+ ?) external analysis+ 6) WA66 analysis+ %) economic analysis+ Answer ? %iff , &age "ef : O()ecti*e 1+,

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:;) Freen -rog is an en*ironmentally friendly firm in the cosmetics industry+ 4f Freen -rog undertook an analysis to help it understand which of its resources and capa(ilities are likely to (e sources of competiti*e ad*antage and which are less likely to sources of such ad*antages it would (e performing aEn) A) internal analysis+ ?) external analysis+ 6) WA66 analysis+ %) economic analysis+ Answer A %iff , &age "ef : O()ecti*e 1+, ;8) Freen -rog is an en*ironmentally friendly firm in the cosmetics industry+ 4f Freen -rog were considering expanding (eyond the cosmetics industry into pharmaceuticals in order to gain competiti*e ad*antages (y operating in multiple markets and industries, this would (e an example of which type of strategy? A) ?usiness le*el strategy ?) -unctional le*el strategy 6) <arketing strategy %) 6orporate le*el strategy Answer % %iff , &age "ef ; O()ecti*e 1+, ;1) %efine the term "strategy," discuss the set of assumptions and hypotheses that a strategy is (ased on and discuss what makes a good strategy+ Answer A firm1s strategy is defined as its theory a(out how to gain competiti*e ad*antages+ !his theory is (ased on a set of assumptions and hypotheses a(out how competition in this industry is likely to e*ol*e and how that e*olution can (e exploited to earn a profit+ !o the extent that these assumptions and hypotheses accurately descri(e how competition in this industry actually e*ol*es, the more likely it is that a firm will gain a competiti*e ad*antage from implementing its strategies+ !hus, a "good strategy" is a strategy that actually generates such ad*antages+ %iff , &age "ef ' O()ecti*e 1+1

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;,) %efine the term "mission" and discuss how a firm1s mission can (oth positi*ely and negati*ely impact a firm1s performance+ Answer A firm1s mission is its long@term purpose and it defines (oth what a firm aspires to (e in the long run and what it wants to a*oid in the meantime+ 4f a mission statement does not influence firm (eha*ior, it is unlikely to ha*e an impact on a firm1s actions+ 9owe*er, *isionary firms, or firms whose mission is central to all they do, tend to earn su(stantially higher returns than a*erage o*er the long run e*en though their mission statements suggest that profit maximi=ation is not their primary reason for existence+ 9owe*er, missions that are inwardly focused and defined only with reference to the personal *alues and priorities of their founders or top managers, independent of whether or not those *alues and priorities are consistent with the economic realities facing a firm, are not likely to (e a source of competiti*e ad*antage+ %iff , &age "ef 2@3 O()ecti*e 1+, ;0) What are o()ecti*es, what role do they play in the strategic management process and what differentiates high quality o()ecti*es from low quality o()ecti*es? Answer O()ecti*es are specific measura(le targets a firm can use to e*aluate the extent to which it is reali=ing its mission+ 9igh quality o()ecti*es are tightly connected to elements of a firm1s mission and are relati*ely easy to measure and track o*er time+ .ow quality o()ecti*es either do not exist or are not connected to elements of a firm1s mission, are not quantitati*e, are difficult to measure or are difficult to track o*er time+ %iff , &age "ef : O()ecti*e 1+, ;') %ifferentiate (etween (usiness le*el and corporate le*el strategies and gi*e examples of each+ Answer ?usiness le*el strategies are actions firms take to gain competiti*e ad*antages in a single market or industry+ !he two most common (usiness le*el strategies are cost leadership, such as Wal@<art, and product differentiation, such as <acy1s+ 6orporate le*el strategies are actions firms take to gain competiti*e ad*antages in multiple markets or industries simultaneously+ 6ommon corporate le*el strategies include *ertical integration strategies, di*ersification strategies, strategic alliances strategies and merger and acquisition strategies+ %iff , &age "ef ; O()ecti*e 1+, ;2) %efine strategy implementation and discuss three specific organi=ational policies and practices that are particularly important in implementing a strategy+ Answer /trategy implementation occurs when a firm adopts organi=ational policies and practices that are consistent with its strategy+ !hree specific organi=ational policies and practices are particularly important in implementing a strategy a firm1s formal organi=ational structure, its formal and informal management control systems, and employee compensation policies+ %iff , &age "ef 18 O()ecti*e 1+,

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6opyright 7 ,81, &earson $ducation, 4nc+ pu(lishing as &rentice 9all

;3) %iscuss the nature of a sustaina(le competiti*e ad*antage+ 4n your answer, identify when a firm has a competiti*e ad*antage, define the term "economic *alue" and distinguish (etween a temporary competiti*e ad*antage and a sustaina(le competiti*e ad*antage+ Answer 4n general, a firm has a competiti*e ad*antage when it is a(le to generate more economic *alue than ri*al firms+ $conomic *alue is simply the difference (etween the percei*ed (enefits gained (y a customer who purchases a firm1s products or ser*ices and the full economic cost of these products and ser*ices+ A temporary competiti*e ad*antage is a competiti*e ad*antage that lasts a *ery short period of time while a sustained competiti*e ad*antage lasts much longer+ %iff , &age "ef 18@11 O()ecti*e 1+0 ;5) 4dentify two approaches to estimating a firm1s competiti*e ad*antages and discuss the strengths and weaknesses of each+ Answer !he two general approaches to estimating a firm1s competiti*e ad*antage are measuring accounting performance and measuring economic performance+ A firm1s accounting performance is a measure of its competiti*e ad*antage calculated using information from a firm1s pu(lished profit and loss and (alance sheets, and a firm1s accounting performance is determined (y comparing a firm1s accounting ratios with other firms in the industry+ !he greatest measure of accounting measures of competiti*e ad*antage is that they are relati*ely easy to compute+ !he most significant draw(ack to accounting measures is that they do not consider a firm1s cost of capital+ Additionally, accounting measures can (e difficult to compare across countries+ $conomic measures of competiti*e ad*antage compare a firm1s le*el of return to its cost of capital instead of to the a*erage le*el of return in the industry+ !he primary (enefit of economic measures is that if a firm earns at least its cost of capital, it is satisfying two of its important stakeholdersde(t holders and equity holders+ %isad*antages of economic measures include that it can (e difficult to calculate a firm1s cost of capital, especially for pri*ately held firms, and economic measures may o*erstate the importance of de(t and equity holders+ %iff , &age "ef 10@1; O()ecti*e 1+' ;:) %escri(e the difference (etween emergent and intended strategies+ Why might firms employ an emergent strategy? Answer 4ntended strategies can (est (e descri(ed as a firm1s theories of how to gain a competiti*e ad*antage that are de*eloped as a result of the strategic management process+ 4ntended strategies are de*eloped when firms choose and implement their strategies exactly as descri(ed (y the strategic management process+ Alternately, emergent strategies are theories of how to gain a competiti*e ad*antage in an industry that emerge o*er time or that ha*e (een radically reshaped once they are implemented+ -irms employ emergent strategies since some of the information needed to complete the strategic management process may not (e a*aila(le when firms are de*eloping their intended strategies+ %iff , &age "ef ,8@,1 O()ecti*e 1+2

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;;) Why is it important to understand a firm1s strategy, e*en if you are not a senior manager in a firm? Answer -irst, studying strategy and the strategic management process can gi*e indi*iduals the tools they need to e*aluate the strategies of the firms that may hire them+ /econd, once an indi*idual is working for a firm, understanding that firm1s strategy, and their place in it, can (e *ery important to their personal success since the expectations of how they perform their function will (e impacted (y the firm1s strategy+ -inally, while strategic choices are generally limited to *ery experienced managers in large organi=ations, in smaller and entrepreneurial firms, many employees end up (eing in*ol*ed in the strategic management process+ %iff , &age "ef ,0@,' O()ecti*e 1+3 188) What is the residual claimants *iew of equity holders? Answer !he residual claimants *iew is that equity holders only recei*e payment on their in*estment in a firm after all legitimate claims (y a firm1s other stakeholders are satisfied+ !his *iew posits that (y maximi=ing returns to its equity holders, a firm is ensuring that its other stakeholders are fully compensated for in*esting in a firm+ %iff , &age "ef ,1 O()ecti*e 1+2

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6opyright 7 ,81, &earson $ducation, 4nc+ pu(lishing as &rentice 9all