Strategic Management and Competitive Advantage, 4/E solutions manual and test bank jay barney
Strategic Management and Competitive
Advantage, 4e (Barney)
Chapter 2 Evaluating a Firm's External Environment
1)
A firm's general environment consists of broad trends in the context within
which the firm operates that can have an impact on the firm's strategic
choices.
Answer: TRUE
Diff:
1 Page Ref: 30
Objective: 2.1
2)
In general, technological change creates opportunities, but not threats.
Answer: FALSE
Diff:
2 Page Ref: 31
Objective: 2.1
3)
The aging of the "baby boomer" generation in American society is an
example of a demographic trend.
Answer: TRUE
Diff:
2 Page Ref: 31
Objective: 2.1
4)
Culture is the values, beliefs and norms that guide a behavior in a society,
and culture is largely the same across the world.
Answer: FALSE
Diff:
2 Page Ref: 32
Objective: 2.1
5)
A severe recession that lasts for several years is known as a depression.
Answer: TRUE
Diff:
1 Page Ref: 32
Objective: 2.1
6)
In the structure-conduct-performance model, the term "structure"
refers to industry structure, measured by such factors as the number of
competitors in an industry.
Answer: TRUE
Diff:
2 Page Ref: 34
Objective: 2.2
7)
In the structure-conduct-performance model, the term "performance"
refers solely to the performance of individual firms.
Answer: FALSE
Diff:
2 Page Ref: 34
Objective: 2.2
8)
In a perfectly competitive industry, a large number of firms have products and
services that are similar to each other and it is not very costly for firms to
enter into or exit these markets.
Answer: TRUE
Diff:
2 Page Ref: 37
Objective: 2.2
9)
The S-C-P model assumes that any competitive advantages a firm has in an
industry must benefit society.
Answer: FALSE
Diff:
3 Page Ref: 37
Objective: 2.2
10)
According to the S-C-P model, attributes of the industry structure within which
a firm operates define the range of options and constraints facing a firm.
Answer: TRUE
Diff:
2 Page Ref: 37
Objective: 2.2
11)
The five forces framework is based on the S-C-P model and identifies the five
most common threats facing firms from their local competitive environment and
the conditions under which these threats are more or less likely to be present.
Answer: TRUE
Diff:
1 Page Ref: 35
Objective: 2.3
12)
Within the five forces framework, when all five threats are very high
competition in the industry begins to approach a monopoly.
Answer: FALSE
Diff:
2 Page Ref: 37
Objective: 2.3
13)
Monopolistically competitive industries consist of only a single firm.
Answer: FALSE
Diff:
3 Page Ref: 37
Objective: 2.3
14)
To a firm seeking competitive advantage, an environmental threat is any
individual, group, or organization outside a firm that seeks to reduce the
level of that firm's performance.
Answer: TRUE
Diff:
2 Page Ref: 36
Objective: 2.3
15)
The threat of entry in an industry depends on the cost of entry, and the cost
of entry, in turn, depends upon the existence and "height" of
barriers to entry.
Answer: TRUE
Diff:
1 Page Ref: 38
Objective: 2.3
16)
Diseconomies of scale exist in an industry when a firm's costs fall as a
function of that firm's volume of production.
Answer: FALSE
Diff:
2 Page Ref: 38
Objective: 2.3
17)
Brand identification and customer loyalty serve as entry barriers because new
entrants not only have to absorb the standard costs associated with starting
production in a new industry, but also have to absorb the costs associated with
overcoming an incumbent firm's differentiation advantages.
Answer: TRUE
Diff:
2 Page Ref: 40
Objective: 2.3
18)
Proprietary technology is more important as a barrier to entry than is managerial
know-how.
Answer: FALSE
Diff:
3 Page Ref: 40
Objective: 2.3
19)
Learning-curve cost advantages are present when the cost of production falls
with the cumulative volume of production.
Answer: TRUE
Diff:
1 Page Ref: 42
Objective: 2.3
20)
The threat of rivalry tends to be high in an industry when firms are able to
meaningfully differentiate their products.
Answer: FALSE
Diff:
2 Page Ref: 42
Objective: 2.4
21)
In an industry, the products or services provided by a firm's rivals meet
approximately the same customer needs in the same way as the products or
services provided by the firm itself, whereas substitutes meet approximately
the same customer needs but do so in different ways.
Answer: TRUE
Diff:
3 Page Ref: 43
Objective: 2.4
22)
A firm's supplier poses a greater threat if the supplier's industry has a large
number of firms, none of which dominate the supplying industry, than if the
supplier's industry is dominated by a small number of firms.
Answer: FALSE
Diff:
3 Page Ref: 44
Objective: 2.3
23)
Suppliers are a greater threat to firms in an industry when suppliers are
threatened by substitutes.
Answer: FALSE
Diff:
2 Page Ref: 44
Objective: 2.4
24)
The threat of buyers is greater if the products or services that are being sold
to buyers are standard and not differentiated than if the products sold to
buyers are highly differentiated.
Answer: TRUE
Diff:
2 Page Ref: 46
Objective: 2.3
25)
If the owner of a jewelry store who normally purchased diamonds from a diamond
brokerage firm were to open its own diamond brokerage firm, this would be an
example of forward vertical integration.
Answer: FALSE
Diff:
2 Page Ref: 47
Objective: 2.3
26)
In general, it is rarely the case that all five forces in the five forces
framework will be equally threatening at the same time.
Answer: TRUE
Diff:
1 Page Ref: 47
Objective: 2.3
27)
Sophisticated software can enhance the value that customers receive from a
personal computer. Therefore, software can be said to be a complementor of a
personal computer.
Answer: TRUE
Diff:
2 Page Ref: 48
Objective: 2.5
28)
According to Bradenburger and Nalebluff, a firm's competitors help increase the
size of a firm's markets while complementors divide this market among a set of
firms.
Answer: FALSE
Diff:
2 Page Ref: 48
Objective: 2.5
29)
It is possible for a single firm to be a complementor of one firm and a
competitor of another.
Answer: TRUE
Diff:
2 Page Ref: 48
Objective: 2.5
30)
An emerging industry is an industry in which a large number of small or
medium-sized firms operate and no small set of firms has a dominant market
share or creates dominant technologies.
Answer: FALSE
Diff:
2 Page Ref: 51
Objective: 2.6
31)
The major opportunity facing firms in fragmented industries is the
implementation of strategies that begin to consolidate the industry into a
smaller number of firms.
Answer: TRUE
Diff:
1 Page Ref: 51
Objective: 2.6
32)
First movers that invest only in technology usually obtain sustained
competitive advantages, even if they do not tie up strategically valuable
resources in an industry before their full value is widely understood.
Answer: FALSE
Diff:
2 Page Ref: 51
Objective: 2.6
33)
If you were to purchase a new Apple iPod and were unable to use your previously
downloaded library of digital music with your new iPod, this would be an
example of a customer-switching cost you would incur to use Apple's product.
Answer: TRUE
Diff:
3 Page Ref: 52
Objective: 2.6
34)
Mature industries are characterized by elements such as slowing growth in total
industry demand, a slowdown in increases in product capacity, and an overall
increase in the profitability of firms in the industry.
Answer: FALSE
Diff:
3 Page Ref: 54
Objective: 2.6
35)
Product innovation is an effort to refine and improve a firm's current
processes.
Answer: FALSE
Diff:
2 Page Ref: 56
Objective: 2.6
36)
A fragmented industry is an industry that has experienced an absolute decline
in unit sales over a sustained period of time.
Answer: FALSE
Diff:
2 Page Ref: 57
Objective: 2.6
37)
A firm following a niche strategy in a declining industry reduces its scope of
operations and focuses on narrow segments of the declining industry.
Answer: TRUE
Diff:
1 Page Ref: 57
Objective: 2.6
38)
Firms pursuing a harvest strategy in a declining industry do not expect to
remain in the industry over the long term.
Answer: TRUE
Diff:
2 Page Ref: 58
Objective: 2.6
39)
The objective of divestment is to extract a firm from a declining industry.
Answer: TRUE
Diff:
2 Page Ref: 58
Objective: 2.6
40)
All divestments are caused by industry decline.
Answer: FALSE
Diff:
2 Page Ref: 59
Objective: 2.6
41)
The ________ consists of broad trends in the context in which a firm operates
that can have an impact on a firm's strategic choices.
A)
micro-environment
B)
general environment
C)
task environment
D)
internal environment
Answer: B
Diff:
1 Page Ref: 30
Objective: 2.1
42)
All of the following are elements of the general environment except
A)
technological trends.
B)
demographic trends.
C)
industrial trends.
D)
cultural trends.
Answer: C
Diff:
2 Page Ref: 30
Objective: 2.1
43)
________ is/are the distribution of individuals in a society in terms of age,
sex, marital status, income, ethnicity, and other personal attributes that may
determine buying patterns.
A)
Demographics
B)
Economics
C)
Technological trends
D)
Culture
Answer: A
Diff:
1 Page Ref: 31
Objective: 2.1
44)
The values, beliefs and norms that guide behavior in society are known as
A)
climate.
B)
demographics.
C)
economics.
D)
culture.
Answer: D
Diff:
1 Page Ref: 32
Objective: 2.1
45)
When activity in an economy is relatively low for a short period of time, the
economy is said to be in a
A)
recession.
B)
depression.
C)
prosperous cycle.
D)
boom.
Answer: A
Diff:
2 Page Ref: 32
Objective: 2.1
46)
Civil wars, political coups, terrorism, wars between countries, famines, and
country or regional economic recessions are all examples of which element of
the general environment?
A)
Demographics
B)
Specific international events
C)
Economics
D)
Culture
Answer: B
Diff:
2 Page Ref: 33
Objective: 2.1
47)
In the S-C-P model, ________ refers to the strategies that firms in an industry
implement.
A)
structure
B)
strategy
C)
conduct
D)
performance
Answer: C
Diff:
2 Page Ref: 34
Objective: 2.2
2
Evaluating a Firm’s External Environment
WHY EXTERNAL ANALYSIS?
Students need to come away from this class
session with a sound understanding of 1) why external analysis is a critical
element of the strategic management process, 2) how to do an effective external
analysis, and 3) what to do in
response to external analysis. External
analysis, as presented in the text, is intended to help firms understand the
threats and opportunities that exist in the competitive environment in which a
firm operates. A good grasp of these
threats and opportunities tell a firm what it should do given what the firm faces. As such, external analysis is a necessary
precursor to strategic choices. It
wouldn’t make much sense for a firm to begin making strategic choices without
knowing what it faced in the external environment.
Firms
that fail to do appropriate external analysis face the risk of encountering
threats that were not anticipated in the strategic management process. Likewise such firms may also miss out on opportunities.
Of course, external analysis cannot identify every possible threat and
opportunity, but it can greatly increase the probability that a firm’s strategy
will be able to neutralize threats and exploit opportunities. Firms that take a disciplined approach to
external analysis will likely have an advantage over those firms that embark
upon strategies without taking the time to understand the external
environment.
A
good analysis of the external environment may allow a firm to face threats and
opportunities at a point in time when the firm does not have resources
committed to a particular strategy. For
example, a firm contemplating entry into a new business may discover a
significant threat through its external analysis before actually entering the
new business. Such a discovery would allow the firm to either abandon the idea
or adopt a strategy that would neutralize that particular threat.
The
following teaching points suggest an engaging way to begin this session and get
students to recognize the importance of external analysis.
1 Teaching Points
• Tell the students to assume they have just
been informed that they have won an all expenses-paid extreme adventure
vacation to one of the world’s most challenging destinations in a distant
country.
• Tell the students they have to be packed
and ready to depart by early the next morning.
• Ask the students what they will pack.
• Students will usually respond with
questions about where they will be going.
• Ask them what kinds of things they want to
know about the destination.
• Use your creativity in answering their
questions.
• Ask them why they wanted to know particular
things about the destination.
• Ask them how their vacation might have
turned out if they didn’t have the information you provided.
• Tell students they have just engaged in
external analysis.
• Inform students that you will first take
them through the “how” of doing an external analysis and then conclude the
session by discussing things that firms can “do” in response.
Slide
2-2
Use this slide to show students why external
analysis is important. Stress that
seeing threats and opportunities as part of an analysis may be a lot less
painless than seeing them after the firm has made its strategic choices.
TWO LEVELS OF EXTERNAL ENVIRONMENT
External analysis consists of looking at
two ‘levels’ of environment: the general
environment and the industry environment.
The general environment is the environment in which all firms in an
economy operate, regardless of a firm’s specific industry. Elements of the general environment have a
potential effect on every firm in an economy.
Slide
2-3
This slide will help you introduce external
analysis in an overview fashion. Begin
with the firm and move to the industry and the forces that influence industry
profitability. Then move to the general
environment and its six elements. A
little rehearsal with the slide animation will be helpful.
General Environment
|
Describe
the dimensions of the general environment facing a firm and how this
environment can affect a firm’s opportunities and threats.
Slide
2-4
Use this slide to take student through the general
external environment. Use the examples
below to help explain how elements of the general environment create threats
and opportunities.
Analysis of the general environment aims to
identify conditions or trends that may present opportunities and/or threats to
a firm. Six elements of the general
environment are:
• technological change
• demographic trends
• cultural trends
• economic climate
• legal and political conditions
• specific international events
An
effective analysis of the general environment will include a close look at each
of these elements to determine if there are conditions and/or trends that will
affect the focal firm.
L Important Point: A condition may present opportunity to one
type of firm and a threat to another type of firm. For example, a falling unemployment rate
(economic climate) presents opportunity to a manufacturer of home appliances
and a threat to fast food restaurants.
Falling unemployment means disposable incomes are likely to rise,
allowing people to spend on larger ticket items like washing machines. Falling unemployment also means that workers
have more and better options for employment, meaning that low paying fast food
restaurant jobs will be more difficult to fill.
The
following list provides an example of a trend or condition in each element of
the general environment and an opportunity and a threat that trend or condition
may present:
Technological Change
Convergence and integration of personal
digital assistants (PDA) and mobile telephones
Opportunity: Motorola can produce a
higher margin product packed with features of both PDAs and mobile phones. Existing users of both products will demand
the new technology
Threat: PDA producers
such as Palm will be forced to either:
1) compete directly with the likes of Motorola, or 2) cooperate with
mobile phone producers through licensing, joint venture, or outright sale.
Demographic Trends
Rapid expansion of the Hispanic population in
the United States
Opportunity: Large grocers like Wal-Mart
and Albertson’s can serve this market by offering large ethnic foods sections.
Threat: Small neighborhood grocers
that have served a localized Hispanic market must now compete with large
grocers.
Cultural Trends
Driving large, gas-guzzling SUV’s becomes
regarded as being environmentally insensitive
Opportunity: Producers of small,
fuel-efficient cars can exploit the cultural trends by promoting
environmentally friendly cars.
Threat: Producers of SUV’s are
beginning to see sales of their high margin SUV’s decline.
Economic Climate
Rising interest rates
Opportunity: Banks can earn higher
margins on their credit products and deposits will likely grow as higher
interest rates allow banks to compete more effectively for consumers’ savings.
Threats: Homebuilders can expect a
slow down as home construction loans and mortgages become more expensive for
consumers.
Legal and Political Conditions
The U.S. government changes its policy toward
oil exploration on public lands—allowing extraction of previously restricted
oil deposits
Opportunity: Small U.S. exploration
companies can sub-contract to large oil companies to find new oil deposits on
public lands.
Threats: Foreign oil interests may face increased world
supply and declining prices.
Specific International Events
A trade dispute results in a ban on importing
U.S. hormone-treated beef into the European Union
Threat: U.S. beef producers face a sudden
drop in demand and the resulting price decline.
Opportunity: Argentine beef producers,
who don’t typically use growth hormones, face a sudden increase in demand for
their product and the resulting price increase.
1 Teaching Points
• After offering a brief explanation of the
elements of the general environment, ask students for examples of conditions
and trends. Use the examples offered
above to help fill in the blanks.
• Encourage students to see how conditions
and trends lead to opportunities and/or threats.
• Stress that a good analysis of the general
environment will include a close look at each element, even though each element
may or may not yield any opportunity or threat.
• Point out that spotting trends before
competitors may lead to competitive advantage.
• Ask students if recent spikes in gas prices
could have been anticipated.
• Explain that elements of the general
environment may influence other elements.
Destruction of an oil port in the Persian Gulf may lead to higher
unemployment in the U.S. as the resulting spike in gas prices hurt sales of
SUV’s and trucks which may result in plant closures, etc.
Industry Environment
|
Describe how the structure-conduct-performance paradigm
suggests that industry structure can influence a firm’s competitive choices.
The industry environment consists of
elements or forces that the focal firm faces directly. Whereas interest rates in the general
environment may have an indirect effect on a firm, the firm’s customers have a
more direct effect.
Slides
2-5 and 2-6
Emphasize how the S-C-P was developed to try to
prevent anti-competitive industry behavior and now it’s used to try to
facilitate above normal returns, which would have been considered
anti-competitive. Help students
appreciate the underpinnings of the Five Forces Model.
Porter’s
Five Forces model is a very popular way of looking at the industry in which a
firm operates. An understanding of the
theoretical heritage of the Five Forces model will make it more meaningful to
students. The S-C-P (Structure, Conduct,
Performance) framework from industrial organization economics is the economic
tradition from which Porter developed the Five Forces. The S-C-P framework was originally developed
with the intent of helping economists and policy makers understand when an
industry was likely not to be competitive.
Competitive industries were the ideal—social welfare was maximized,
there were no monopoly profits being extracted from markets.
Management
scholars who were more interested in individual firms began to see that the
S-C-P framework was useful for identifying market imperfections that would
possibly allow firms to make above normal economic profits. In this tradition, Michael Porter developed
the Five Forces model. Thus, in a very
real sense, Porter’s Five Forces is a matter of standing the S-C-P on its
head—at least in terms of purpose.
L Important Point:
Industry analysis is based on well-established economic theory, even
though in strategic management it is used for a nearly opposite purpose than
that for which it was originally developed.
Students need to understand that the well-worn Five Forces tool is
deeply rooted in sound theory.
1 Teaching Points
• Emphasize that industry analysis is done
with the intent of identifying opportunities (market imperfections) that can be
exploited and/or threats that can be neutralized through some strategic action.
• Point out that an industry analysis that
reveals few, if any, imperfections suggests that firms in that industry are
most likely to achieve competitive parity—no one firm is likely to have an
advantage over other firms.
• Depending on the economics exposure your
students have had, it may be helpful to call attention to the fact that
industry analysis is the antithesis of economic models aimed at maximizing
social welfare.
• This is the set up for your coverage of the
Five Forces Model. After going through
the Five Forces, the questions posed in the Discussion & Activity box
usually lead to a good discussion of the ethics of strategy.
Five Forces Framework
|
Describe the ‘five forces model of
industry attractiveness’ and indicators of when each of these forces will
improve or reduce the attractiveness of an industry.
Slide
2-7
You can either use this graphic to handle your
whole discussion of the model or you can use it to simply introduce the model
and use the text slides that follow. In
either case, emphasize that the model tells us that if threats are high,
profits will tend to be lower. Emphasize
that Five Forces Analysis is always done from the point of view of the focal
firm. Suppliers are those that supply to
the focal firm, buyers buy from the focal firm.
In
our experience, students have often seen the Five Forces framework in other
classes such as marketing and/or operations management. Their exposure is usually cursory or perhaps
even superficial. Don’t be discouraged
if students claim they’ve seen this all before.
You’ll be able to add significantly to their understanding.
L Important Point: A Five Forces analysis is done from the point
of view of the focal firm (e.g., your client, your employer, or your own
company). Students sometimes become
confused when they try to assess the threat of suppliers and buyers and begin
to question if their client is the buyer or the supplier. To be clear, the suppliers are those who
supply to the focal firm. The buyers are
those who buy from the focal firm.
The
five forces are:
• the threat of entry
• the threat of rivalry
• the threat of substitutes
• the threat of suppliers
• the threat of buyers
These
five forces are at work in both domestic and international contexts. Firms can and should apply the model in both
contexts. Increasingly, an effective
external analysis will include consideration of the fact that these forces may
be affected by international influences.
For example, an analysis of the textile industry in the U.S. would be
woefully incomplete without considering the effects of Pacific Rim influences
on each one of the forces.
L Important Point: The
Five Forces model is based on reasoning aimed at identifying market
imperfections that may be exploited by a firm.
An industry is considered to be attractive if there are imperfections
that can be exploited. An industry is
unattractive if there are relatively few imperfections. In other words, the closer the industry is to
perfectly competitive, the more unattractive it is.
Slide
2-8
Make sure that students understand why a high
threat of entry is an unattractive thing—above normal profits will be bid
away. Explain that if someone had a new
technology that was very valuable, they wouldn’t want to deploy it in an
industry where entry was easy because profits would be quickly competed away,
unless the technology was protectable in the presence of many competitors.
Threat of Entry. If
above normal profits exist in an industry:
1) firms
outside the industry will have incentive to enter the industry,
2) if firms
can easily enter the industry any above normal profits will be quickly
dissipated through competition—new firms will have incentive to lower prices
and costs of production
3) above
normal profits can be preserved if would-be entrants face a cost disadvantage
in entering.
|
Therefore,
a high threat of entry makes an industry unattractive because any above normal
profits will be quickly dissipated.
Barriers to entry help create the cost disadvantages necessary to
minimize the threat of new firms entering the industry. Foreign governments have an interest in
controlling entry into industries within their borders. Usually these interests take the form of
trying to protect domestic firms.
However, in the process of trying to protect domestic firms foreign governments
may actually help create more attractive industries by erecting barriers to
entry. Even though import policies may
impose higher costs on foreign firms wanting to enter a country, the industry
would be considered more attractive because the barriers. Higher profits can be expected for those
firms who are able to enter.
Four
barriers to entry are:
1)
economies
of scale
a.
the
minimum efficient scale of production may be so high that firms not already in
the industry could not afford the plant size needed to enter
b. the minimum efficient scale may be so high that the entry of another
firm of sufficient size to compete on cost would create excess capacity in the
industry and drive down prices—would be entrants recognize this and rationally
choose not to enter
2) product differentiation
a. product differentiation means that customers can recognize a
difference between products and therefore have a preference for the product of
one firm over another
b. new entrants face the prospect of having to both offer a newer,
better product and convince customers to try the new product—new entrants face
additional costs and rationally choose not to enter
3) cost advantages independent of scale
a. incumbent firms may enjoy cost advantages over would-be entrants due
to supplier relationships, experience (learning curve advantages), proprietary
technology, location advantages (close to rail terminals, harbors, etc.),
favorable access to raw materials, etc.—firms outside the industry recognize
these advantages and rationally choose not to enter
4) government policy
a. a government may decide to regulate an industry, like electricity,
and either explicitly forbid additional entry or make it so costly that entry
is not cost effective
5) governments may decide to protect domestic industries by not
allowing foreign firms to invest in certain industries or raising the cost of
entry so high that foreign firms find it difficult to compete
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