CHAPTER 6:

TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false.
1) A good plan specifies not only which goals and strategies an organization is committed to but
is also accountable for putting the strategies into action to attain the goals.
⊚ true
⊚ false

2) The corporate-level plan outlines the specific methods a division, a business unit, or an
organization will use to compete effectively against its rivals in an industry.
⊚ true
⊚ false

3) An intermediate-term plan has a time horizon between five and ten years.
⊚ true
⊚ false

4) Strategy formulation begins with managers systematically analyzing the factors inside an
organization and outside in the global environment that affect the organization's ability to
meet its goals now and in the future.
⊚ true
⊚ false

5) According to Michael Porter's theory, it is optimal for managers to pursue both a low-cost
strategy and a differentiation strategy together.
⊚ true
⊚ false

6) Managers pursuing a focused differentiation strategy serve just one or a few segments of the
market and aim to make their organization the most differentiated company serving that
segment.
⊚ true
⊚ false

7) Synergy is obtained by apportioning financial resources among divisions to increase financial

returns or spread risks among different businesses.
⊚ true
⊚ false
8) Company A and Company B decided to exchange resources and created a written contract
detailing the exchange. This is not a strategic alliance because it did not result in the creation
of a new organization.
⊚ true
⊚ false

9) An organization's level of involvement abroad decreases in a joint venture because the

alliance rarely involves capital investment to produce goods or services outside the home
country.
⊚ true
⊚ false

10) The plan for implementing a new strategy requires the development of new functional
strategies.
⊚ true
⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or
answers the question.
11) The cluster of decisions that managers make to assist an organization to achieve its goals is
known as
A) strategy.
B) planning.
C) organizing.
D) needs assessment.

12) A CEA developed a broad declaration of the organization's overriding purpose. Her intention
was to identify the organization's products and customer base, as well as to differentiate the
organization from its competitors. The CEO developed a
A) business plan.
B) mission statement.
C) strategic plan.
D) position statement.

13) When only one central, guiding plan is put into operation to achieve an organizational goal,
the organizational plan is said to have
A) accuracy.
B) flexibility.
C) unity.
D) continuity.
14) A business has disseminated its plan among the managers and now the managers are giving
input into the plan, building on it, and refining it as needed so that they create a broad
framework for the company as a whole. This best illustrates which quality of an effective
plan?
A) continuity
B) flexibility
C) accuracy
D) unity

15) Managers should attempt to collect and use all available information in the organization's
planning process. This emphasizes the ________ aspect of planning.
A) unity
B) flexibility
C) continuity
D) accuracy

16) Another name for the business level of the organization is the ________ level.
A) functional
B) department
C) corporate
D) division

17) The level of an organization that contains the organization's marketing department, R&D
department, and human resources department is the ________ level.
A) functional
B) first-line
C) corporate
D) business

18) The plan of an organization that contains top management's decisions about the
organization's mission, goals, strategy, and structure is the definition of a ________-level
plan.
A) corporate
B) divisional
C) functional
D) business
19) A company's ________-level strategy details the industries and national markets an
organization intends to compete in and the reasons why it is pursuing those markets.
A) divisional
B) departmental
C) functional
D) corporate

20) A firm sets a goal that every product line of the company should be either first or second in
its industry in market share. This would be an example of a ________-level strategy.
A) corporate
B) divisional
C) functional
D) business

21) A firm is number two in market share in the local sports equipment manufacturing industry.
As part of its business-level strategy, this company would most likely
A) invest in new production facilities to enable it to take over the number one spot.
B) devise a plan of action for managers to help it take over the number one spot.
C) state that it plans to take over the number one spot.
D) determine methods to take over the number one spot.

22) The strategy that explains the methods that a division or an organization will use to compete
against its rivals in the industry is a ________-level strategy.
A) functional
B) departmental
C) corporate
D) business

23) The marketing department of an organization has finalized its plans to promote a new
product. This planning process takes place at the ______ level.
A) functional
B) business
C) corporate
D) divisional
24) A plan that is updated and changed every year to take into consideration how the
organization's external environment has changed is known as a ________ plan.
A) standing
B) short-term
C) rolling
D) single-use

25) A company has noticed that the competitive environment for its products has changed with
the entry of a new competitor. It updates its business-level plan to take this into account, and
repeats the process every year to stay on top of the competition. Which term best explains
this action?
A) standing plan
B) short-term plan
C) rolling plan
D) single-use plan

26) The tool that is used in situations when programmed decision making is appropriate is a
________ plan.
A) standing
B) scenario
C) rolling
D) single-use

27) An Oklahoma company has a rule that when a tornado siren goes off, all employees must
stop their work and head to a shelter. This represents a ________ plan.
A) standing
B) scenario
C) rolling
D) single-use

28) A general guide to action for the managers of an organization is known as a

A) rolling plan.
B) rule.
C) policy.
D) standard operating procedure.
29) A chemical manufacturing company has a written guide that requires all employees to
shower before leaving the building. This formal, written guide to action is known as a
A) policy.
B) rule.
C) standard operating procedure.
D) rolling plan.

30) A written set of instructions that describes the series of actions that a manager should take in
a specific situation is known as a
A) policy.
B) standing operating procedure.
C) scenario plan.
D) rolling plan.

31) A company has a written requirement that any manager who receives a gift from any of the
company's customers worth more than $25 must report this gift to the company's human
resources department. This is an example of a
A) tactical plan.
B) rolling plan.
C) policy.
D) rule.

32) To determine an organization's mission, managers must first define its

A) vision.
B) strategy.
C) tactics.
D) business.

33) The ability of the CEO and top managers to convey to their subordinates a compelling vision
of what they want the organization to achieve is known as ________ leadership.
A) calculated
B) strategic
C) planned
D) tactical
34) Top managers at a firm formulated an effective strategy, which most likely determined that
the company has
A) three managers who exceeded expectations and two managers who did not reach
quarterly expectations.
B) a strength in R&D, a weakness in product range, and an increasing threat from
companies in East Asia.
C) an overall strong business rating in the United States and Canada.
D) a profit margin that steadily increased between 1990 and 2000.

35) A group of managers analyzed both the internal strengths and weaknesses of their
organization as well as the opportunities and threats of the external environment. Which
planning exercise does this indicate?
A) mission analysis
B) SWOT analysis
C) functional analysis
D) divisional analysis

36) While managers were conducting a SWOT analysis, they concluded that their product line is
obsolete and narrow. Their product line would be categorized as a(n)
A) strength.
B) weakness.
C) opportunity.
D) threat.

37) A manufacturing company conducted a SWOT analysis, which determined a major threat by
A) identifying how defects in a product have hurt customer trust.
B) predicting a rise in the cost of manufacturing products using tungsten.
C) identifying a loss in brand name recognition in the eastern United States.
D) predicting low trading volumes and increasing cost of raw materials in the stock
market.

38) Industries that are characterized by permanent, ongoing, intense competition brought about
by advancing technology or changing customer tastes, fads, and fashions are an example of
A) global competition.
B) differentiated competition.
C) focused competition.
D) hypercompetition.
39) Why is planning considered an important process for managers?
A) It gives a sense of direction and purpose.
B) It ensures only top-level managers make decisions.
C) It creates a time horizon for different planning levels.
D) It identifies which markets to enter or avoid.

40) Which quality of an effective plan allows for alterations if the situation changes?
A) continuity
B) unity
C) flexibility
D) accuracy

41) The planning and strategy making necessary to increase the efficiency and effectiveness of a
particular division are the responsibility of a
A) divisional manager.
B) CEO.
C) corporate office.
D) functional manager.

42) The decision of a company to use European production facilities to get through the busy
season is an example of a ________-level strategy.
A) division
B) business
C) corporate
D) functional

43) Which activity is most likely to require a short-term plan?

A) corporate mission statement
B) business strategy formulation
C) functional-level goals
D) divisional structure decisions
44) Hachiro has just completed a study for his company, AllElectronics, Incorporated, which
produces wireless earbuds. This study focuses on the major threats to AllElectronics.
Hachiro’s company uses a specific type of metal that only a few suppliers offer. However,
AllElectronics's earbuds would still be affordable for many customers. Furthermore, Hachiro
does not see any products that can be used in place of AllElectronics earbuds. Based on what
you know about Michael Porter's five forces model, what is the greatest threat to
AllElectronics?
A) the low prices of earbuds as a result of fierce competition
B) the high price of the metal used to make the earbuds
C) the ease with which his company could enter the earbud market
D) customers bargaining to drive down the prices of earbuds

45) Healthy Ways produces nutritional fruit bars, but is having trouble gaining market share and
making a profit. Considering Michael Porter's five force model, what is most likely the
greatest threat for this company?
A) many suppliers that provide its ingredients
B) the existence of one other major competitor
C) the introduction of a new granola bar to the market by a competitor
D) an increase in the use of indoor exercise equipment

46) Thomas Manufacturing attempts to gain a competitive advantage by driving down its
production costs per unit below those of its competitors. Thomas is pursuing a(n) ________
strategy.
A) focused differentiation
B) low-cost
C) related diversification
D) unrelated diversification

47) Write On pursues a low-cost strategy by

A) concentrating on its advertising department to make its pens more desirable than its
rivals.
B) focusing on its design department to make its pens more attractive than its rivals.
C) concentrating on R&D to make its pens more reliable than its rivals.
D) focusing on using cheaper resources to make its pens less expensive than its rivals.
48) An organization attempts to succeed by distinguishing its products from those of the
competition; this is a(n) ________ strategy.
A) differentiation
B) low-cost
C) related diversification
D) unrelated diversification

49) An advantage of the differentiation strategy is

A) less expensive new products.
B) a higher level of employee skills.
C) reduced turnover of employees.
D) greater barriers to entry.

50) Coca-Cola spends an enormous amount of money on advertising to distinguish and create a
unique image for its products. Coca-Cola is pursuing a ________ strategy.
A) diversification
B) focused low-cost
C) differentiation
D) low-cost

51) Porsche produces cars exclusively for high-income customers. Porsche is pursuing a
________ strategy.
A) focused differentiation
B) focused low-cost
C) diversification
D) low-cost

52) What is the plan of action for a business-level strategy based on SWOT analysis?
A) to maximize an organization's ability to create value
B) to take advantage of favorable opportunities
C) to choose industries and countries to invest in
D) to improve task-specific activities within the organization

53) What happens when there are only a few large customers in the market?
A) They keep changing their tastes, fads, and fashions.
B) They drive down the price of the output through bargaining.
C) They tend to be referred to as "stuck in the middle."
D) They start concentrating on a single industry.
54) A company that is serving only a few market segments has most likely adopted a ________
strategy.
A) focused differentiation
B) differentiation
C) horizontal integration
D) vertical integration

55) Pita is the CEO for Just Like Gems, which makes costume jewelry designed by a Spanish
artist named Alejandro. As a result, this jewelry has strong appeal in areas of the United
States with a large Latino population. However, the U.S. market already has two companies
that make high-quality costume jewelry that is popular with people who have a mid-to-high
range income. Considering all of these elements, how could Pita use a focused low-cost
strategy to ensure Just Like Gems gains market share and is profitable?
A) He should make sure every department, including production and marketing, is
focused on highlighting how Alejandro’s designs are different from those of the
competition.
B) He should focus the efforts of all departments on showing U.S. customers why Just
Like Gems’ costume jewelry is better quality than fine jewelry.
C) He should ensure that every department, from production to marketing to shipping,
focuses on reducing their costs below those of their competitors.
D) He should narrow the company’s target market to just the Latino market in the United
States and ensure that Just Like Gems’ prices are the lowest.

56) Concentration on a single industry, vertical integration, diversification, and international

expansion are principal strategies at the ________ level of an organization.
A) functional
B) department
C) corporate
D) business

57) The corporate-level strategy that involves a company reinvesting its profits to strengthen its
competitive position in its current industry is
A) vertical integration.
B) international expansion.
C) market development.
D) concentration on a single industry.
58) Crazy Coffee wants to pursue a backward vertical integration corporate level strategy. To
accomplish this, it
A) develops new products, including an expresso machine.
B) purchases the supplier in Brazil that provides its coffee beans.
C) starts a cookie company to complement its production of coffee.
D) buys an electronics company that specializes in GPS devices.

59) Firestone Tire and Rubber Company purchases rubber plantations in Africa so that it will
have a source of supply for its tire manufacturing plants in Akron, Ohio. This is an example
of a ________ strategy.
A) forward vertical integration
B) global
C) diversification
D) backward vertical integration

60) Firestone Tire and Rubber Company set up a chain of Firestone retail stores to sell its tires to
American consumers. This is an example of
A) forward vertical integration.
B) global strategy.
C) focused differentiation strategy.
D) multidomestic strategy.

61) PepsiCo purchased KFC so that it could replace Coke products with Pepsi products in KFC
restaurants. This is an example of a _________ strategy.
A) horizontal integration
B) vertical integration
C) low-cost
D) global

62) When Gallo purchased a company that distributes its wine, it was involved in ______
integration.
A) horizontal
B) backward vertical
C) forward vertical
D) upward
63) When PepsiCo purchased Frito-Lay and expanded its operations into the snack-food
business, it was pursuing a ________ strategy.
A) vertical integration
B) market penetration
C) diversification
D) market development

64) Solar Systems produces solar heating devices and solar panels. The company decides to
pursue an unrelated diversification corporate-level strategy when it buys
A) the retail stores that sell its solar panels.
B) the metal supplier for its solar panels.
C) a company that produces athletic gear.
D) a company that produces heating equipment, including furnaces.

65) Two divisions of a company decide to use the same manufacturing facilities to capitalize on
the organization's excess capacity and to reduce the fixed costs assigned by corporate
headquarters. This is an example of
A) diversification.
B) merger.
C) consolidation.
D) synergy.

66) A company decides to enter a new type of business in order to create a competitive advantage
in one of its existing businesses. The company is engaging in
A) concentration on a single business.
B) related diversification.
C) vertical integration.
D) international expansion.

67) Procter & Gamble uses a joint sales force to sell both its laundry detergent products and its
bath soap products to the same supermarket chains. This is an example of
A) a focused differentiation strategy.
B) a low-cost strategy.
C) a differentiation strategy.
D) synergy.
68) When Procter & Gamble uses the same distribution system to deliver its oral care products
and its hair care products to drugstore chains, this is an example of
A) synergy.
B) differentiation.
C) diversification.
D) merger.

69) When an organization enters a new type of industry that is not similar in any way to the
current businesses of the organization, it is engaged in
A) concentration on a single business.
B) unrelated diversification.
C) international expansion.
D) related diversification.

70) Missy is one of the top managers at an electronics company She wants her company to use a
global strategy by
A) buying the company in Mexico that sells its TVs and DVD players.
B) buying the company in Mexico that supplies the metal for its TVs and DVD players.
C) selling its TVs and DVD players in France using the same marketing approach that is
used in the United States.
D) selling its TVs and DVD players in France using a marketing approach that is tailored
toward French culture.

71) What is the major disadvantage of pursuing a global strategy?

A) Local competitors may differentiate their products to suit local tastes.
B) Customization raises production costs.
C) Improving quality is not consistent from place to place.
D) It puts the multidomestic company at a price disadvantage.

72) Luggage 2001 sells different products using a different marketing approach in England than
it uses when marketing these products in the United States. This is an example of a ________
strategy.
A) vertical integration
B) focused low-cost
C) global
D) multidomestic
73) Which of these is the least complex global operation?
A) a joint venture
B) exporting
C) licensing
D) franchising

74) A company allows a foreign organization to take charge of both manufacturing and
distributing one or more of its products in India in return for a negotiated fee. This is an
example of
A) exporting.
B) licensing.
C) a strategic alliance.
D) a joint venture.

75) Howard Hotels sold a French citizen the right to use its brand name and operating know-how
in France in return for a lump-sum payment and a share of the profits. This is an example of
A) franchising.
B) licensing.
C) a strategic alliance.
D) a joint venture.

76) The form of international expansion that gives an organization high potential return because
the organization does not have to share its profits with a foreign organization and reduces the
level of risk because the organization's managers have full control over all aspects of their
foreign company's operations, is a
A) joint venture.
B) partial venture.
C) partially owned foreign subsidiary.
D) wholly owned foreign subsidiary.

77) When managers pool or share their organization's resources and know-how with those of a
foreign company, and the two organizations share the rewards or risks of starting a firm in a
foreign country, the two organizations are involved in
A) exporting.
B) a strategic alliance.
C) differentiation.
D) licensing.
78) The reason managers pursue vertical integration is that it
A) provides stable environmental conditions.
B) improves flexibility in operations.
C) increases sales overall.
D) strengthens competitive advantage.

79) Apportioning financial resources among divisions to increase financial returns or spread risks
among different businesses is called a ________ strategy.
A) global
B) divisional
C) functional
D) portfolio

80) Backward vertical integration occurs when a company expands into a new industry that
A) helps create a competitive advantage.
B) produces inputs for the company's products.
C) is not related to the current business in any way.
D) uses or distributes the company's products.

81) What is the major advantage of a multidomestic strategy?

A) the ability to gain market share or charge higher prices for product offerings by
adjusting marketing approaches to local conditions
B) the significant cost savings associated with not having to customize products and
marketing approaches to different national conditions
C) the high-quality skills of foreign manufacturers and the specialized knowledge of
foreign managers about the needs of local customers
D) the reduced level of risk owing to the managers' full control over all aspects of their
foreign subsidiary's operations

82) What is a downside of franchising?

A) The franchiser has to bear the cost of the expansion.
B) The franchisee gets the know-how to run the business.
C) Product quality may improve, jeopardizing the company.
D) The franchise may lose control over how the franchisee operates.
83) Executive Office Supply has decided to expand its line of ergonomic office cubicles and
chairs into a foreign market. The CIO, however, was worried about the loss of control that
comes with exporting, licensing, and franchising. What would be the best option for this
company?
A) domestic partnership
B) strategic alliance
C) foreign partnership
D) not expanding at all

84) A strategic alliance among two or more companies that agree to jointly establish and share
the ownership of a new business is called a
A) joint venture.
B) franchise.
C) portfolio management.
D) wholly owned foreign subsidiary.

85) Wembley’s is a major book publisher in the United States. However, the future of book sales
is unpredictable, thereby making Wembley’s position precarious. What should the CEO of
Wembley’s do in order to provide the greatest stability for the company?
A) purchase a publishing company specializing in children's books
B) invest in a small chain of bookstores and change their names to Wembley’s
C) acquire companies in other industries
D) sign a licensing agreement with a ballpoint pen company

86) Digital Productions has just produced an historical epic film that appeals to the U.S. male
audience because of its realistic battle scenes. However, Digital Productions knows that
audiences in other countries will be drawn to the film for different reasons, such as its
romance or its struggle between classes. Considering this, Digital Productions should give
the film an international release using a ______ strategy.
A) multidomestic
B) global
C) low-cost
D) differentiation
87) To avoid development costs, a U.S. tennis racquet company forms a licensing agreement
with a German company, which allows the
A) U.S. company and the South African company to merge.
B) U.S. company to manufacture the racquets in South Africa.
C) South African company to have access to the technology used to make the racquets.
D) U.S. company and the South African company to combine their resources to make the
racquets.

88) Elizabeth is a manager at a company that makes amusement park rides. She has decided that
she would like to create value by purchasing one of the companies that produces the
materials the company needs to make its rides. She has already chosen a team of people and
assigned them the responsibility to making sure the purchase happens. Using the five-step
strategy implementation process, what should the team do next?
A) Establish a timetable for buying a manufacturer.
B) Devise a plan on how to approach and purchase the supplier.
C) Allocate the resources for the purchase.
D) Give a work team the authority needed to buy the distributor of the company’s rides.

89) To implement the fifth step of the strategic implementation process, a manager would
A) review an action plan on expanding a company into Europe.
B) establish a deadline for purchasing a chain of retail stores.
C) give a work team the budget needed to license a product.
D) ask those responsible for attaining the goals what the result was.

90) A company researched its options for moving into a foreign market with its products and
decided to operate alone without any direct involvement from foreign companies. What is
most likely to happen in this scenario?
A) The company will reduce its risk.
B) The company will increase its opportunity for rewards.
C) The company will reduce its costs.
D) It increases the risk of sharing proprietary technology.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.

91) In general, business planning involves three distinct steps. Discuss these three steps.

In most organizations, planning is a three-step activity.

The first step is determining the organization's mission and goals. A mission statement is
a broad declaration of an organization's overriding purpose, what it is seeking to achieve
from its activities; this statement also identifies what is unique or important about its
products to its employees and customers; finally, it distinguishes or differentiates the
organization in some ways from its competitors.
The second step is formulating strategy. Managers analyze the organization's current
situation and then conceive and develop the strategies necessary to attain the
organization's mission and goals.
The third step is implementing strategy. Managers decide how to allocate the resources
and responsibilities required to implement the strategies among people and groups within
the organization.

92) Give the four major reasons why planning is important.

Planning is important for four main reasons:

1. Planning is necessary to give the organization a sense of direction and purpose. A plan
states what goals an organization is trying to achieve and what strategies it intends to use
to achieve them. A plan keeps managers on track so they use the resources under their
control efficiently and effectively.
2. Planning is a useful way of getting managers to participate in decision making about the
appropriate goals and strategies for an organization. Effective planning gives all
managers the opportunity to participate in decision making.
3. A plan helps coordinate managers concerning the different functions and divisions of an
organization to ensure that they all pull in the same direction and work to achieve its
desired future state.
4. A plan can be used as a device for controlling managers within an organization. A good
plan specifies not only which goals and strategies the organization is committed to, but
also who bears the responsibility for putting the strategies into action to attain the goals.
When managers know they will be held accountable for attaining a goal, they are
motivated to do their best to make sure the goal is achieved.
5.
93) Explain briefly the three levels in the planning and strategy-making process and give an
example for each. Also mention how they are linked with each other.
Student examples will vary. The following is a sample answer. In large organizations planning
usually takes place at three levels of management: corporate, business or division, and
department or functional.
The corporate-level plan contains top management's decisions concerning the
organization's mission and goals, overall strategy, and structure. Corporate-level strategy
specifies in which industries and national markets an organization intends to compete and
why. Corporate-level planning and strategy are the primary responsibility of top or
corporate managers. The corporate-level plan provides the framework within which
divisional managers create their business-level plans. For example, the CEO and top
managers can decide that a corporation will be involved in food and beverages, health
care, restaurants, and agriculture. Also, they can decide the national markets, such as the
United States, Japan, China, and so forth.
At the business level, the managers of each division create a business-level plan that
details (1) the long-term divisional goals that will allow the division to meet corporate
goals and (2) the division's business-level strategy and structure necessary to achieve
divisional goals. Business-level strategy outlines the specific methods a division, a
business unit, or an organization will use to compete effectively against its rivals in an
industry. For example, managers can decide the goals for the Food & Beverages division
and the strategy and structure needed to achieve these goals.
A functional-level plan states the goals that the managers of each function will pursue to
help their division attain its business-level goals, which, in turn, will allow the entire
company to achieve its corporate goals. Functional-level strategy is a plan of action that
managers of individual functions can follow to improve the ability of each function to
perform its task-specific activities in ways that add value to an organization's goods and
services and thereby increase the value customers receive. At the functional level, the
business-level plan provides the framework within which functional managers devise
their plans. For example, in a Food & Beverages division, managers can decide on
improving the sales campaigns for these particular goods, such as sports drinks and
nutritional snacks.
In the planning process, it is important to ensure that planning across the three different
levels is consistent. Functional goals and strategies should be consistent with divisional goals
and strategies, which, in turn, should be consistent with corporate goals and strategies, and
vice versa. When consistency is achieved, the whole company operates in harmony; activities
at one level reinforce and strengthen those at the other levels, increasing efficiency and
effectiveness. To help accomplish this, each function's plan is linked to its division's
business-level plan, which, in turn, is linked to the corporate plan.
94) Business plans differ in the time horizons that they cover. Discuss the three major types
of business plans in terms of their intended duration and explain why all three of these
types of plans are important to a business.
Plans differ in their time horizons, the periods of time over which they are intended to apply or
endure. Managers usually distinguish among the following:
Long-term plans have a time horizon of five years or more. Typically corporate and
business-level goals and strategies require long-term plans.
Intermediate-term plans have a time horizon between one and five years. Corporate and
business level goals require intermediate-term plans. Functional-level goals and strategies
also require intermediate-term plans.
Short-term plans have a time horizon of one year or less. Functional-level goals and
strategies require short-term plans.

95) Distinguish between a policy, a rule, and a standard operating procedure of an

organization and give one example of each of these types of standing plans that would
be used in a business.

Student examples will vary. The following is a sample answer. Standing plans are used in
situations in which programmed decision making is appropriate. When the same situations occur
repeatedly, managers develop policies, rules, and standard operating procedures (SOPs) to
control the way employees perform their tasks. A policy is a general guide to action, a rule is a
formal written guide to action, and an SOP is a written instruction describing an exact series of
actions that should be followed in particular circumstances. For example, an organization may
have a standing plan about ethical behavior by employees. This plan includes a policy that all
employees are expected to behave ethically in their dealings with suppliers and customers; a rule
that requires any employee who receives from a supplier or customer a gift worth more than $50
to report the gift; and an SOP that obliges the recipient of the gift to make the disclosure in
writing within 30 days.

96) Explain a SWOT analysis. Describe briefly the steps involved in a SWOT analysis and
give an example for each.

Student examples will vary. The following is a sample answer. SWOT analysis is a planning
exercise in which managers identify internal organizational strengths (S) and weaknesses (W)
and external environmental opportunities (O) and threats (T). Based on a SWOT analysis,
managers at the different levels of the organization select the corporate, business, and functional
strategies to best position the organization to achieve its mission and goals.
 The first step in SWOT analysis is to identify an organization's strengths and weaknesses.
The task facing managers is to identify the strengths and weaknesses that characterize the
present state of their organization. For example, a company could have a differentiated
strategy with its car radios. Its strength could be with advertising to potential consumers
the quality of these radios. However, it could also have a weakness in the products
themselves. These radios might not be noticeably better than their competitors' cheaper
radios. As a result, consumers might not want pay the higher price for them.
The second step in SWOT analysis begins when managers embark on a full-scale SWOT
planning exercise to identify potential opportunities and threats in the environment that
affect the organization now or may affect it in the future. For example, with the car radio
company, an opportunity could be an expanding market for high-end radios in China. A
threat could be the lower-priced radios of competitors, especially considering that the
quality of the competitors' radios seem to be as good. Scenario planning is often used to
strengthen this analysis.
With the SWOT analysis completed and strengths, weaknesses, opportunities, and threats
identified, managers can continue the planning process and determine specific strategies for
achieving the organization's mission and goals. The resulting strategies should enable the
organization to attain its goals by taking advantage of opportunities, countering threats,
building strengths, and correcting organizational weaknesses.

97) Discuss Michael Porter's five forces model and give an example for each force.

Student examples will vary. The following is a sample answer. A well-known model that helps
managers focus on the five most important competitive forces, or potential threats, in the external
environment is Michael Porter's five forces model. Porter identified these five factors as major
threats because they affect how much profit organizations competing within the same industry
can expect to make:
The level of rivalry among organizations in an industry: The more that companies
compete against one another for customers—for example, by lowering the prices of their
products or by increasing advertising—the lower is the level of industry profits (low
prices mean less profit). For example, five companies could produce yogurt. Because of
the fierce competition between these companies, the price of yogurt could lower. As a
result, each company would make less of a profit.
The potential for entry into an industry: The easier it is for companies to enter an
industry—because, for example, barriers to entry, such as brand loyalty, are low—the
more likely it is for industry prices and therefore industry profits to be low. For example,
an entrepreneur might want to open an organic chain restaurant. However, because there
are no established restaurants of this sort, brand loyalty is low. As a result, industry prices
and profits will tend to be low.
 The power of large suppliers: If there are only a few large suppliers of an important input,
then suppliers can drive up the price of that input, and expensive inputs result in lower
profits for companies in an industry. For example, say there are only a few suppliers of
oak wood. Because of this, these suppliers can raise the price for buying this material.
Companies that produce products made of oak, such as furniture, can thus expect lower
profits due to the high cost of buying this raw material.
The power of large customers: If only a few large customers are available to buy an
industry's output, they can bargain to drive down the price of that output. As a result,
industry producers make lower profits. For example, there may be only a few large
customers, such as national governments and a few wealthy people, who can buy
extremely powerful telescopes. As a result, these customers can bargain to drive down
the price of this product, thereby lowering the profits for companies that make these
telescopes.
The threat of substitute products: Often the output of one industry is a substitute for the
output of another industry. For example, sports drinks and bottled water are substitutes
for cola. When a substitute for their product exists, companies cannot demand high prices
for it, or customers will switch to the substitute. This constraint keeps profits low.

98) Michael Porter presented four ways in which the top management of an organization
could select a business-level strategy for their organization. Discuss any two of these
four ways of increasing the value of an organization's products and explain the
advantages and disadvantages of the strategies that you choose.

Managers can pursue one of four business-level strategies: a low-cost strategy, a differentiation
strategy, a focused low-cost strategy, or a focused differentiation strategy. Students can discuss
any two of the four strategies.
With a low-cost strategy, managers try to gain a competitive advantage by focusing the
energy of all the organization's departments or functions on driving the company's costs
down below the costs of its industry rivals. When existing companies have low costs and
can charge low prices, it is difficult for new companies to enter the industry because
entering is always an expensive process.
With a differentiation strategy, managers try to gain a competitive advantage by focusing
all the energies of the organization's functions on distinguishing the organization's
products from those of competitors on one or more important dimensions, such as
product design, quality, or after-sales service and support. Organizations that successfully
pursue a differentiation strategy may be able to charge a premium price for their
products. This allows organizations to recoup their higher costs. Differentiation makes
industry entry difficult because new companies have no brand name to help them
compete, and customers do not perceive other products to be close substitutes. This also
allows for premium pricing and results in high profits.
 Managers pursuing a focused low-cost strategy serve one or a few segments of the overall
market and aim to make their organization the lowest-cost company serving that segment.
Managers pursuing a focused differentiation strategy serve just one or a few segments of
the market and aim to make their organization the most differentiated company serving
that segment.

99) According to Porter, organizations cannot simultaneously pursue both a low-cost

strategy and a differentiation strategy. Illustrate why. Show how exceptions to this
"rule" can be found, and give an example to demonstrate the point.

Student examples will vary. The following is a sample answer. According to Porter's theory,
managers cannot simultaneously pursue both a low-cost strategy and a differentiation strategy.
With a low-cost strategy, managers try to gain a competitive advantage by focusing the energy of
all the organization's functions on driving the company's costs down below the costs of its
industry rivals. With a differentiation strategy, managers try to gain a competitive advantage by
focusing all the energies of the organization's functions on distinguishing the organization's
products from those of competitors on one or more important dimensions. Often the process of
making products unique and different is expensive. Porter identified a simple correlation:
Differentiation raises costs and thus necessitates premium pricing to recoup those high costs.
Organizations stuck in the middle tend to have lower levels of performance than do those that
pursue a low-cost or a differentiation strategy. To avoid being stuck in the middle, top managers
must instruct departmental managers to take actions that will result in either low cost or
differentiation. However, organizations with extremely efficient production systems have been
able to pursue both strategies simultaneously by keeping costs down while providing a superior
design and quality product. For example, a company's efficiency in producing DVD players
could be so high that it is able to produce high-quality players with low production costs. As a
result, it can charge low prices for these players.

100) Managers can use four principal corporate-level strategies in order to help their
organization to increase its sales and profits. Discuss any two of these strategies and
explain the decisions that a manager would have to make in a business in order to
design a program that used these two strategies. Also, give an example for each strategy
you discuss.

Student examples will vary. Students can discuss any two of the four strategies. The following is
a sample answer. Managers can concentrate the organization on a single business, can use a
diversification strategy, can expand internationally, or can use either a backward or forward
vertical integration strategy.
Concentration on a single industry becomes an appropriate corporate-level strategy when
managers see the need to reduce the size of their organizations to increase performance.
Managers may decide to get out of certain industries when, for example, the business-
level strategy pursued by a particular division no longer works, and the division has lost
its competitive advantage. To improve performance, managers now sell off low-
performing divisions, concentrate remaining organizational resources in one industry, and
try to develop new products customers want to buy. For example, a company could have
three divisions: clothing, computer games, and sports equipment. However, the clothes
and sports equipment division are performing poorly. As a result, the company sells off
these two divisions and focus its attention on computer games. In contrast, when
organizations are performing effectively, they often decide to enter new industries in
which they can use their resources to create more valuable products.
When an organization is performing well in its industry, managers often see new
opportunities to create value by either producing the inputs it uses to make its products or
distributing and selling its products to customers. Vertical integration is a corporate-level
strategy in which a company expands its business operations either backward into a new
industry that produces inputs for the company's products (backward vertical integration)
or forward into a new industry that uses, distributes, or sells the company's products
(forward vertical integration). For example, a company that produces jewelry could
implement backward vertical integration by buying the supplier of the jewels, such as a
diamond mine. This same company could implement forward vertical integration by
buying a chain of retail stores that sells its jewelry. The reason managers pursue vertical
integration is that it allows them either to add value to their products by making them
special or unique, or to lower the costs of making and selling them. Although vertical
integration can strengthen an organization's competitive advantage and increase its
performance, it can also reduce an organization's flexibility to respond to changing
environmental conditions and create threats that must be countered by changing the
organization's strategy.
Diversification is the corporate-level strategy of expanding a company's business
operations into a new industry in order to produce new kinds of valuable goods or
services. There are two main kinds of diversification: related and unrelated. For example,
a company that produces shoes could expand its operation by producing shoe polish. This
type of diversification is related because the divisions of these two products can share
shipping costs to shoe stores. Also, a company that produces soft drinks could expand by
producing furniture. This type of diversification is unrelated because soft drinks and
furniture are not linked.
 If managers decide that their organization should sell the same standardized product in
each national market in which it competes, and use the same basic marketing approach,
they adopt a global strategy. For example, a company could produce copy machines and
sell them in the United States. If this company decides to sell these machines in Australia
using the same marketing approach as in the United States, then it is adopting a global
strategy. If managers decide to customize products and marketing strategies to specific
national conditions, they are adopting a multidomestic strategy.

101) Write a brief note explaining global strategies and multidomestic strategies. Also
mention one advantage and one disadvantage of each.

A global strategy is adopted by managers when they decide that their organization should sell the
same standardized product in each national market in which it competes, and use the same basic
marketing approach. A multidomestic strategy is adopted by managers when they decide to
customize products and marketing strategies to specific national conditions.
Both global and multidomestic strategies have advantages and disadvantages. The major
advantage of a global strategy is the significant cost savings associated with not having to
customize products and marketing approaches to different national conditions. The major
disadvantage of pursuing a global strategy is that by ignoring national differences, managers may
leave themselves vulnerable to local competitors that differentiate their products to suit local
tastes.
The advantages and disadvantages of a multidomestic strategy are the opposite of those of a
global strategy. The major advantage of a multidomestic strategy is that by customizing product
offerings and marketing approaches to local conditions, managers may be able to gain market
share or charge higher prices for their products. The major disadvantage is that customization
raises production costs and puts the multidomestic company at a price disadvantage because it
often has to charge prices higher than the prices charged by competitors pursuing a global
strategy.

102) Discuss the different modes of international expansion. Give an example for each.

Student examples will vary. The following is a sample answer. There are four basic ways to
operate in the global environment: importing and exporting, licensing and franchising, strategic
alliances, and wholly owned foreign subsidiaries.
The least complex global operations are exporting and importing. A company engaged in
exporting makes products at home and sells them abroad. For example, a company could
produce clocks in the United States and sell them in Japan. A company engaged in
importing sells products at home that are made abroad. For example, a U.S. company
could sell clocks made in Switzerland.
 In licensing, a company (the licenser) allows a foreign organization (the licensee) to take
charge of both manufacturing and distributing one or more of its products in the
licensee's country or world region in return for a negotiated fee. For example, a company
could produce automobiles in Japan. This company (the licenser) could allow a U.S.
company (the licensee) to manufacture and distribute these automobiles in the United
States in return for a negotiated fee. In franchising, a company (the franchiser) sells to a
foreign organization (the franchisee) the rights to use its brand name and operating know-
how in return for a lump-sum payment and share of the franchiser's profits. For example,
a U.S. chain restaurant (the franchiser) could sell to a Chinese organization (the
franchisee) the rights to use its brand name and operating know-how in return for a lump-
sum payment and share of the franchiser's profits.
In a strategic alliance, managers pool or share their organization's resources and know-
how with those of a foreign company, and the two organizations share the rewards or
risks of starting a new venture in a foreign country. A strategic alliance can take the form
of a written contract between two or more companies to exchange resources, or it can
result in the creation of a new organization. A joint venture is a strategic alliance among
two or more companies that agree to jointly establish and share the ownership of a new
business. For example, say a U.S. recording company called Starlight, Incorporated,
wants to expand into Germany. This company has many years of experience in producing
music for a U.S. audience, but not for a German audience. However, a German company
called Liebestraum has years of experience marketing music to a German audience, but
not a U.S. audience. These two companies could form a joint venture by combining into
one company StarLiebe, Incorporated, which would combine the expertise of both
companies allowing them to distribute music to both the U.S. and German markets.
When managers decide to establish a wholly owned foreign subsidiary, they invest in
establishing production operations in a foreign country independent of any local direct
involvement. For example, a British automobile company could establish a wholly owned
foreign subsidiary in the United States. By doing this, the British company operates alone
without a direct involvement by the United States. The British company, therefore,
receives all of the rewards and bears all of the risks of operating abroad.
103) Distinguish related diversification from unrelated diversification. Provide suitable
examples.
Related diversification is the strategy of entering a new business or industry to create a
competitive advantage in one or more of an organization's existing divisions or businesses.
Related diversification can add value to an organization's products if managers can find ways for
its various divisions or business units to share their valuable skills or resources so that synergy is
created. Synergy is obtained when the value created by two divisions cooperating is greater than
the value that would be created if the two divisions operated separately and independently.
The way Procter & Gamble's disposable diaper and paper towel divisions cooperate is a good
example of the successful production of synergies. These divisions share the costs of procuring
inputs such as paper and packaging; a joint sales force sells both products to retail outlets; and
both products are shipped using the same distribution system. This resource sharing has enabled
both divisions to reduce their costs, and as a result, they can charge lower prices than their
competitors and so attract more customers. In addition, the divisions can share the research costs
of developing new and improved products, such as finding more absorbent material, that increase
both products' differentiated appeal.
Managers pursue unrelated diversification when they establish divisions or buy companies in
new industries that are not linked in any way to their current businesses or industries. One main
reason for pursuing unrelated diversification is that sometimes managers can buy a poorly
performing company, transfer their management skills to that company, turn around its business,
and increase its performance—all of which create value. Another reason for pursuing unrelated
diversification is that purchasing businesses in different industries lets managers engage in
portfolio strategy, which is apportioning financial resources among divisions to increase
financial returns or spread risks among different businesses, much as individual investors do with
their own portfolios.
In 2014, Honeywell International announced it would divest its brake pad and braking system
components business to better focus its corporate objectives on the company's core technologies.
Before the announcement, Honeywell's 2014 outlook was lukewarm at best. After the
announcement, the company said it expected earnings growth of between 8 percent and 12
percent.

104) Describe the four ways to expand internationally.

In general, the four basic ways to operate in the global environment are importing and exporting,
licensing and franchising, strategic alliances, and wholly owned foreign subsidiaries.
1. Importing and exporting: The least complex global operations are exporting and
importing. A company engaged in exporting makes products at home and sells them
abroad. A company engaged in importing sells products at home that are made abroad
(products it makes itself or buys from other companies).
 2. Licensing and franchising: In licensing, a company (the licenser) allows a foreign
organization (the licensee) to take charge of both manufacturing and distributing one or
more of its products in the licensee's country or world region in return for a negotiated
fee. In franchising, a company (the franchiser) sells to a foreign organization (the
franchisee) the rights to use its brand name and operating know-how in return for a lump-
sum payment and share of the franchiser's profits.
3. Strategic alliances: In a strategic alliance, managers pool or share their organization's
resources and know-how with those of a foreign company, and the two organizations
share the rewards or risks of starting a new venture in a foreign country. A joint venture
is a strategic alliance among two or more companies that agree to jointly establish and
share the ownership of a new business.
4. Wholly owned foreign subsidiaries: When managers decide to establish a wholly owned
foreign subsidiary, they invest in establishing production operations in a foreign country
independent of any local direct involvement. Operating alone, without any direct
involvement from foreign companies, an organization receives all of the rewards and
bears all of the risks associated with operating abroad. This method of international
expansion is much more expensive than the others because it requires a higher level of
foreign investment and presents managers with many more threats. However, investment
in a foreign subsidiary or division offers significant advantages: It gives an organization
high potential returns because the organization does not have to share its profits with a
foreign organization, and it reduces the level of risk because the organization's managers
have full control over all aspects of their foreign subsidiary's operations. Moreover, this
type of investment allows managers to protect their technology and know-how from
foreign organizations.

105) What are the five steps in the process of strategy implementation?

Strategy implementation is a five-step process:

1. Allocating responsibility for implementation to the appropriate individuals or groups
2. Drafting detailed action plans that specify how a strategy is to be implemented
3. Establishing a timetable for implementation that includes precise, measurable goals
linked to the attainment of the action plan
4. Allocating appropriate resources to the responsible individuals or groups
5. Holding specific individuals or groups responsible for the attainment of corporate,
divisional, and functional goals