Chapter 6 Formulating Strategy

Multiple Choice Questions

1. The process by which a firms managers evaluate the future prospects of the firm and decide on appropriate strategies to achieve long-term objectives is called ____________. a. strategic planning (moderate, page 220) b. internal resource analysis c. environmental scanning d. product planning The basic means by which a company competesits choice of business in which to operate and the ways in which it differentiates itself from its competitorsis called its ____________. a. policy b. procedure c. strategy (easy, page 220) d. process Europe is currently attracting much new investment capital because of ______________. a. low labor costs in Europe b. the opening of new markets in Eastern Europe (difficult, page 221) c. lack of new investment opportunities in Asia d. lack of new investment opportunities in North America Which of the following is NOT a reactive reason that prompts a company to go overseas? a. to get around restrictive trade barriers b. to respond to new emerging consumer demands c. to respond to the moves of its foreign competitors d. to seek economies of scale (difficult, page 221) ______________ and ______________ are two reactive reasons for a firms going international. a. International competition; trade barriers (difficult, page 221) b. Trade barriers; economies of scale c. Customer demands; cost savings d. Economies of scale; cost savings The U.S. pharmaceutical maker SmithKline and Britains Beecham merged for what primary reason? a. to pursue new customer demands b. for economy of scale reasons c. because of limited domestic expansion opportunities d. to avoid regulations and restrictions on the home front (difficult, page 221) ______________ and ______________ are two proactive reasons for a firms going international. a. International competition; trade barriers b. Trade barriers; economies of scale c. Customer demands; cost savings d. Economies of scale; cost savings (difficult, page 222) According to an executive of Philips from Holland, only with a global market can a company afford the large development costs necessary to keep up with ______________. a. domestic competition b. joint ventures c. advancing technology (difficult, page 222) d. government regulation 255

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What is perhaps the most likely reason why McDonalds has aggressively expanded internationally? a. to cut costs b. to find new sources of financing c. to overcome limited expansion opportunities at home (moderate, page 222) d. to establish economies of scale The first phase of the strategic management process starts with the company ______________. a. determining what its mission and overall objectives are (moderate, page 224) b. doing a SWOT analysis c. conducting an environmental assessment d. completing environmental scanning All of the following statements about strategic planning are true EXCEPT: a. companies define or clarify missions before they assess the external environment. b. control systems are developed concurrent with the choice of strategy. (difficult, page 224) c. internal strengths are assessed prior to the generation of strategic alternatives. d. threats and opportunities are usually assessed before strengths and weaknesses. The planning phase of the strategic process consists of all of the following EXCEPT: a. clarifying mission. b. establishing an organizational structure. (moderate, page 224) c. assessing the external environment. d. performing a SWOT analysis. ______________ charts the direction of the company and provides a basis for strategic decision making. a. Environmental assessment b. External analysis c. The mission (moderate, page 225) d. SWOT analysis Which category is not typically included among global corporate objectives? a. research and development b. entrepreneurship (moderate, page 225) c. profitability d. production After clarification of corporate mission and objectives, the first major step in weighing international strategic options is ______________. a. political instability analysis b. SWOT analysis c. environmental assessment (moderate, page 226) d. mission assessment ______________ and ______________ are examples of financial global corporate objectives. a. Taxation; capital structure (difficult, page 225) b. Level of profits; financing of foreign affiliates c. Level of profits; growth in sales d. Growth in sales; market share

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Import controls, equity requirements, and local content requirements are all examples of _____________. a. currency instability b. political instability c. nationalism (moderate, page 226) d. protective barriers against domestic firms Which of the following environmental scanning variables represents the home governments goals for independence and economic improvement and often influences foreign companies? a. political instability b. currency instability c. nationalism (moderate, page 226) d. international competition Environmental scanning should cover all of the following major variables EXCEPT: a. political instability. b. currency instability. c. international competition. d. strengths and weaknesses. (moderate, page 226) ______________ is the most important area for environmental assessment and strategy formulation. a. SWOT analysis b. Cost benefit analysis c. Industry analysis (the diamond model) d. Global competitor analysis (moderate, page 227) Firms should perform environmental scanning at which three levels? a. product, industry, market b. multinational, regional, and local (moderate, page 227) c. bargaining power of buyers, suppliers, and rivals d. factor conditions, demand conditions, and industry structure The first broad scan of all potential world markets should result in the firm being able to ____________. a. determine where it will operate b. eliminate markets that are closed or insignificant (difficult, page 228) c. identify its most serious competitors d. identify the strengths and weaknesses of its competitors Mitsubishi Trading Company employs over 60,000 people whose job is to ______________. a. develop new technology b. form joint ventures abroad c. gather and analyze market information (moderate, page 228) d. find ways to develop new technology in new markets Internal sources of information help eliminate unreliable information from secondary sources, particularly in ______________. a. developing countries (easy, page 228) b. technologically advanced countries c. countries participating in joint ventures d. countries that have governmentally-controlled economies

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The internal analysis focuses on the companys ______________. a. mission b. past strategy c. future strategy d. resources and operations (moderate, page 230) The third stage of the strategic planning process is ______________. a. SWOT analysis (easy, page 230) b. environmental analysis c. formulation of core competencies d. industry analysis The core competencies of a company involve its ______________. a. key weaknesses and threats b. mission and purpose c. key customer groups d. key strengths (moderate, page 231) The core competency of the Philips Corporation is ______________. a. electronics b. optical-media expertise (difficult, page 231) c. miniaturization d. new product development The fourth major step in the strategic planning process is ______________. a. SWOT analysis b. industry analysis c. analysis of strategic alternatives (easy, page 231) d. strategy implementation ______________ is a term that refers to the establishment of worldwide operations and the development of standardized products and marketing. a. Customization b. Globalization (easy, page 232) c. Nationalization d. Internationalization All of the following are examples of pressures to globalize EXCEPT: a. increasing competitive clout resulting from regional trading blocs. b. declining tariffs, which encourage trading across borders and open up new markets. c. the information technology explosion, which increases the commonality of consumer tastes. d. All of the selections are correct. (difficult, page 232) One of the quickest and cheapest ways to develop a global strategy is through _____________. a. exporting b. wholly owned subsidiaries c. strategic alliances (easy, page 232) d. importing

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Regional strategies are more appropriate than global strategies for firms which operate in what kind of situation? a. multidomestic industries (moderate, page 232) b. high-tech industries c. newly emerging industries d. mature industries, which have been in existence for several decades Research by Morrison found that ______________ was often a more manageable and less risky strategy than globalization. a. joint ventures b. regionalization (moderate, page 232) c. exporting d. importing Entry strategy alternatives apply at what level of strategy analysis? a. financial b. operations c. conglomerate d. country (moderate, page 238) Under which of the following conditions is the e-local approach preferable? a. when production and consumption are regional rather than global in scope b. when customer behavior and market structures differ across regions but are relatively similar within a region c. when supply-chain management is very important to success d. All of the selections are correct. (difficult, page 238) Which of the following is generally the least risky strategy? a. franchising b. joint ventures c. exporting (easy, page 239) d. fully owned subsidiaries Small firms seldom go beyond what stage of strategy? a. contract manufacturing b. turnkey projects c. joint ventures d. exporting (easy, page 239) The licensing strategy is especially suitable for what situation? a. newly emerging industries b. high-tech products c. services d. the mature phase of the product life cycle (moderate, page 239) Under which condition is the licensing strategy generally NOT appropriate? a. for firms with diverse product lines b. for firms with many financial and managerial resources (moderate, page 239) c. when competition is intense d. for firms with rapidly changing technology

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Which of the following is NOT an advantage of using a licensing agreement? a. Licensing avoids the tariffs and quota usually imposed on exports. b. A licensor has total control over the licensees performance. (moderate, page 239) c. Licensing is a relatively low-risk strategy because it requires little investment. d. Licensing is especially suitable for the mature phase of a products life cycle. The critical criterion in the use of a franchising strategy is ______________. a. the franchisors financial reserve b. the franchisors quality of management c. control of quality (moderate, page 240) d. whether or not the local market has sophisticated consumers The primary motive in the contract manufacturing strategy generally is ______________. a. utilizing cheaper labor overseas (difficult, page 240) b. obtaining rights to patented technology c. sharing managerial expertise d. sharing financial resources In a ____________, a company designs and constructs a facility abroad, trains local personnel, and then turns the key over to local management for a fee. a. franchise b. management contract c. turnkey operation (moderate, page 240) d. contract manufacturing agreement A _____________ gives a foreign company the rights to manage the daily operations of a business but not to make decisions regarding ownership, financing, or strategy and policy changes. a. franchise b. management contract (moderate, page 240) c. turnkey operation d. contract manufacturing agreement Which of the following strategies is more likely to be a short-term strategy only? a. joint venture b. management contract (moderate, page 240) c. contract manufacturing d. licensing Which of the following companies is recognized as using turnkey operations as an entry strategy alternative? a. McDonalds b. Fiat (moderate, page 240) c. KFC d. Disney Which of the following strategies would most likely be used by a non-European company wanting to gain quick entry inside the European community? a. joint venture (moderate, page 241) b. management contract c. turnkey operation d. franchising

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Which of the following is generally the most risky strategy? a. fully owned subsidiaries (easy, page 242) b. franchising c. joint ventures d. contract manufacturing ______________ and ______________ are examples of location factors in entry mode planning. a. Country risk; cultural distance (difficult, page 246) b. Size of planned venture; knowledge of local market c. Industry growth rate; potential of local market d. International experience; competition in local market

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Short Essay Questions

51. Define strategy and explain the strategic planning process. Strategy is the basic means by which a company competes, including the choice of business or businesses in which to operate and the ways to differentiate itself from competitors in those businesses. The strategic planning process involves establishing the mission and objectives of the firm, assessing environmental factors, conducting an internal audit, auditing the strength of competitors, and designing an implementation plan. (moderate, page 220) Identify the most common reactive reasons why companies go into international business. To respond to competitors; to get around restrictive trade barriers; to get around regulations and restrictions by a firms home government; and to respond to newly emerging customer demands in the international marketplace. (moderate, page 221) What are the most common proactive reasons for which firms enter into international business? To achieve economies of scale; to seek out new expansion opportunities when expansion is limited at home; to rejuvenate mature products or services; to gain greater access to resources and attain cost savings; to improve competitiveness at home. (moderate, page 222) Give three primary reasons why strategic planning is more complex on the global level than the domestic level. The difficulty in gaining accurate and timely information; the diversity of geographic locations; and differences in political, legal, cultural, market, and financial processes. (moderate, page 223) List the seven steps in the strategic management process. (1) Define the companys mission and objectives; (2) assess the environment for threats and opportunities; (3) assess the companys internal strengths and weaknesses; (4) consider alternative strategies using competitive analysis; (5) choose a strategy; (6) implement the strategy through complementary structure, systems, and operational processes; and (7) set up control and evaluation systems to ensure success and feedback to planning. (difficult, page 224) Discuss the concept of environmental scanning. The process of gathering information and forecasting relevant trends, competitive actions, and circumstances that will affect operations in geographic areas of potential interest is called environmental scanning. This activity should be conducted on three levels multinational, regional, and national. (moderate, page 226)

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What are the four factors most commonly evaluated in environmental assessment? Analysis of political instability; analysis of currency instability; analysis of nationalism; and analysis of international competition. (moderate, page 226) What are the components of scanning at the multinational level? Companies should assess the multinational level for significant worldwide trends through identification, monitoring, and forecasting activities. This would include issues in the political, economic, sociocultural, or technological environment. (moderate, page 227) Compare scanning at the multinational level with regional level scanning. Companies should assess the multinational level for significant worldwide trends; at the regional level, the analysis should focus more on the critical environmental factors that would generate threats or opportunities for the companys products, services, or technologies. (moderate, page 227) Ideally, companies should conduct global environmental analysis on which different levels? Companies should assess the environment at the multinational level, the regional level, and the national level. (moderate, page 227) What kinds of factors have to be considered in assessing the companys strengths and weaknesses? What is a SWOT analysis? Corporate strengths and weaknesses are best assessed through an analysis of distinctive competencies (unique capabilities and resources possessed by the firm) and through analysis of core competencies, which represent the collective learning in the organization. A SWOT analysis is a summary of the external issues (opportunities and threats) and internal resources (strengths and weaknesses) that are most likely to influence the future or intended direction of the firm. It helps a firm identify the potential for fit between its resources and the environment. (moderate, page 230) What do we mean by core competencies, or strategic success factors? Give some examples of these and their role as competitive strategic advantage factors in the planning process. Core competencies consist of key strengths that companies build their strategies around. They are internal strengths that can benefit or serve a wide range of products or services. For example, Sony has the capacity to miniaturize and Philips has competency in optical-media expertise. Canon has its core competence in optics and microelectronics. (moderate, page 231) What does each letter in SWOT stand for? How is it used in strategic planning? Strengths, weaknesses, opportunities, and threats. SWOT analysis is used after assessing the external and internal environments to help firms determine their strategic direction. (easy, page 230) Identify the two levels of strategic alternatives that a firm must consider when competing internationally. The first level, global strategic alternatives, determines what overall approach to the global marketplace a firm wishes to take. The second level, entry strategy alternatives, applies to firms of any size; these alternatives determine what specific entry strategy is appropriate for each country in which the firm plans to operate. (moderate, page 231)

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Compare and contrast globalization and regionalization. Globalization is the strategy of treating the world as one undifferentiated marketplace, while regionalization strategy focuses more on certain regions of the world only and their distinctiveness. Globalization affords economies of scale; regionalization requires flexibility and adaptability. (moderate, page 232) Identify the 8 most common entry strategy alternatives. Exporting, licensing, franchising, contract manufacturing, turnkey operations, management contracts, joint ventures, wholly-owned subsidiaries. (moderate, page 238) Identify some examples of location factors that influence the choice of international market entry mode. Six factors identified by the text are: extent of scale and location economies, country risk, cultural distance, knowledge of the local market, potential of the local market, and competition in the local market. (moderate, page 246) Upon what three factors does the choice of an entry strategy depend? Evaluation of the advantages and disadvantages of each relative to the firms capabilities; analysis of critical environmental factors; and the contribution each alternative would make to the overall mission and objectives of the company. (moderate, page 245)

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Comprehensive Essay Questions

69. Must a firm be proactive in internationalizing its operations in order to be successful? The text does not make this assertion. Clearly, the motives for being proactive relate to profitability (economies of scale, new market opportunities, resource access, and cost savings). It appears a firm can be profitable without being proactive. It seems they would be more profitable if they were proactive. (moderate, page 222) Exhibit 6-2 identifies a full range of global corporate objectives. In what ways might the functional objectives (marketing, finance, etc.) conflict with each other? How might these conflicts be resolved? There are a number of potential conflicts between objectives. For example, the marketing objective growth in market share might conflict with a number of profitability goals. The venture could buy market share by lowering its price and therefore its profits, or it could spend excessive amounts on advertising. Similarly in production, the ratio of foreign to domestic production might change the economies of scale at either location and adversely impact profit. To resolve these conflicts, the company needs to agree on its time horizon, e.g., is it interested in market share today or the growth in market share over ten years? Second, it needs to consider the conflict in goals during the planning stage so that it can prioritize its objectives over time. (moderate, page 225) List five conditions under which alliance-based entry modes are more suitable. The five conditions include: (1) physical, linguistic, and cultural distance between home and host countries is high; (2) the subsidiary would have low operational integration with the rest of the multinational operations; (3) the risk of asymmetric learning by the partner is low; (4) the company is short of capital; and (5) government regulations require local equity participation. (moderate, page 247)

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