ch12

Student: ___________________________________________________________________________

1.

The actions that managers take to attain the goals of the firm are referred to as a firm's strategy.
True False

2.

Profit growth is measured by the percentage increase in net profits over time.
True False

3.

The amount of value a firm creates is measured by the difference between its costs of production and the
value that consumers perceive in its products.
True False

4.

The price a firm charges for a good or service is typically more than the value placed on that good or
service by the customer.
True False

5.

Consumer surplus captures some of the value of a product thereby reducing the price a firm can charges
for it.
True False

6.

The greater the consumer surplus, the lower the value for the money the consumer gets.
True False

7.

The higher the firms profit per unit sold is, the greater its profitability will be, all else being equal.
True False

8.

A strategy that focuses primarily on increasing the attractiveness of a product is referred to as a low-cost
strategy.
True False

9.

Superior value creation relative to rivals requires that the gap between the value and cost of production
achieved by a company be lesser than the gap attained by its competitors.
True False

10. Diminishing returns imply that when a firm already has significant value built into its product offering,
increasing value by a relatively small amount requires only minimal additional costs.
True False
11. According to Michael Porter, all positions on the efficiency frontier are viable.
True False
12. The various value creation activities that a firm undertakes are referred to as operations.
True False
13. For services such as banking or health care, production typically occurs when the service is being
designed by in-house professionals.
True False
14. In terms of attaining a competitive advantage, support activities can be as important as the primary
activities of the firm.
True False
15. The human resource function controls the transmission of physical materials through the value chain.
True False

16. Maintaining the company infrastructure is a support activity.

True False
17. The term organizational structure refers to the totality of a firm's organization, including organization
architecture, control systems and incentives, organizational culture, processes, and people.
True False
18. Processes are the manner in which decisions are made and work is performed within the organization.
True False
19. Firms that operate internationally are able to realize location economies by dispersing individual value
creation activities to locations where they are performed most efficiently and effectively.
True False
20. Successful global expansion requires the transfer of core competencies to foreign markets where
indigenous competitors lack them.
True False
21. Location economies are the economies that arise from performing a value creation activity in the optimal
location for that activity, wherever in the world that might be.
True False
22. The experience curve refers to systematic increase in production costs that have been observed to occur
over the life of a product.
True False
23. Learning effects will be more significant in an assembly process which involves 100 simple steps than in
an assembly process which involves 1,000 complex steps.
True False
24. The ability to spread fixed costs over a large volume is one of the sources of economies of scale.
True False
25. The firm that moves up the experience curve most rapidly will have a cost advantage vis--vis its
competitors.
True False
26. One key to progressing downward on the experience curve is to decrease the volume produced by a single
plant.
True False
27. Strategies that increase profitability can also expand a firm's business and thus enable it to attain a higher
rate of profit growth.
True False
28. Responding to pressures for cost reduction requires a firm to try to lower the costs of value creation.
True False
29. Universal needs exist when the tastes and preferences of consumers in different nations are different.
True False
30. Pressures for local responsiveness imply that it may not be possible to leverage skills and products
associated with a firms core competencies wholesale from one nation to another.
True False
31. Firms that pursue an international strategy focus on increasing profitability by reaping the cost reductions
that come from economies of scale, learning effects, and location economies.
True False

32. A global standardization strategy makes most sense when there are strong pressures for cost reductions
and demands for local responsiveness are minimal.
True False
33. A localization strategy involves some duplication of functions and smaller production runs.
True False
34. According to researchers, firms facing strong pressures for local responsiveness should pursue a global
standardization strategy.
True False
35. An international strategy involves taking products first produced for their domestic market and selling
them internationally with only minimal local customization.
True False
36. Strategic alliances allow firms to share the fixed costs of developing new products or processes.
True False
37. _____ is a support activity.
A. Research and development
B. Production
C. Marketing and sales
D. Logistics
E. Customer service
38. The rate of return that a firm makes on its invested capital is referred to as _____.
A. stakeholder return
B. profitability
C. profit growth
D. process value
E. strategic fit
39. Profit growth is measured by:
A. dividing the net profits of the firm by total invested capital.
B. subtracting the previous years gross profit from the current year's gross profit.
C. calculating the difference between the previous year's profitability and the current year's profitability.
D. the percentage increase in net profits over time.
E. adding the profitability of the last two fiscal years.
40. Managers are most likely to increase the profitability of their firm by pursuing strategies that:
A. add value to the firm's products.
B. increase costs.
C. enable the firm to reduce the depth of its product line.
D. allow the firm to sell less products in existing markets.
E. allow the firm to exit from relatively new markets.
41. The amount of value a firm creates is measured by:
A. the difference between the previous year's profitability and the current year's profitability.
B. dividing the market price of its products by the price that customers are actually willing to pay.
C. the difference between its costs of production and the value that consumers perceive in its products.
D. dividing the net profits of the firm by total invested capital.
E. the sum of the profitability of the last two fiscal years.
42. In general, the more value customers place on a firm's products:
A. the lesser the profitability of the firm.
B. the higher the competitive pressure from other firms.
C. the lesser the quality of the product.
D. the lesser the consumer surplus for those products.
E. the higher the price the firm can charge for those products.

43. Typically, the price a firm charges for a good or service is:
A. less than the value placed on that good or service by the customer.
B. more than what customers assume it would be.
C. more than the market price for similar goods or services.
D. the same as the value placed on that good or service by the customer.
E. less than the lowest priced similar good or service in the market.
44. The price a firm charges for a good or service is typically less than the value placed on that good or
service by the customer. This is because the consumer captures some of that value in the form of what
economists call a _____.
A. firm value
B. consumer surplus
C. customer loyalty
D. firm deficit
E. profit growth
45. As a result of consumer surplus, a firm typically charges less price for a good or service than the value
placed on it by customers because:
A. the value creation results in a corresponding reduction in costs of production.
B. it is highly unlikely that the same good or service will be available to the customers from other firms.
C. the firm is competing with other firms for the customer's business.
D. the firm charges a price that reveals a consumer's assessment of the product's value.
E. the firm creates value for the customer by producing a wide range of products
46. One of the reasons why a firm typically charges for a good or service less than the value placed on that
good or service by the customer is because:
A. the firm attempts to create value for the consumers by providing them a wide range of products
B. it is normally impossible to segment a market based on each customer's reservation price.
C. the value creation results in a corresponding reduction in costs of production.
D. the firm frequently modifies its products to compete with the products introduced by other firms.
E. it is highly unlikely that the same good or service will be available to the customers from other firms.
47. The price that reflects an individual's assessment of the value of a product is referred to as:
A. the market price.
B. the customer's negotiated price.
C. the base value of the product.
D. the customer's reservation price.
E. the profit growth price.
48. The value of a product to an average consumer is V, the average price that the firm can charge a
consumer for that product is P, and the average unit cost of producing that product is C. For this scenario,
which of the following is true?
A. The firm makes a profit so long as C is greater than P.
B. The higher C is relative to P, greater will be the profit.
C. The consumer surplus per unit is equal to V - P.
D. The higher the intensity of competitive pressure, the higher the price charged relative to V.
E. The lower the consumer surplus the greater the value for the money the consumer gets.
49. The _____ of a firm is measured by the difference between the value of a product to an average consumer
and the average unit cost of producing that product.
A. customer surplus
B. value creation
C. cost curve
D. value efficiency
E. customer reservation

50. A company can create more value for a product by:

A. charging a higher price for the product.
B. raising production costs.
C. generating more profits.
D. making the product more attractive.
E. increasing the profitability of the product.
51. A strategy that focuses primarily on increasing the attractiveness of a product is referred to as a _____
strategy.
A. standardization
B. differentiation
C. target-identification
D. low-cost
E. profitability
52. According to Michael Porter, _____ and _____ are the two basic strategies for improving creating value
and attaining a competitive advantage in an industry.
A. differentiation; low-cost
B. value creation; generalization
C. one-size-fits-all; zero-sum
D. comparison; standardization
E. profitability; strategic fit
53. According to Michael Porter, superior portability goes to a firm that:
A. creates similar products as their competitors.
B. keeps the gap between value and cost of production smaller than the gap attained by competitors.
C. drives down the cost structure of its business.
D. has the highest cost structure in the industry.
E. has the least valuable product in the industry.
54. Superior value creation relative to rivals requires that the firm:
A. creates similar products as its competitors so that consumers do not have to pay a premium price.
B. has the highest cost structure in the industry.
C. creates the least valuable product in the eyes of consumers.
D. ensures that the gap between value and cost of production is greater than the gap attained by
competitors.
E. drives up the cost structure of its business.
55. The _____ shows all of the different positions that a firm can adopt with regard to value creation and low
cost assuming that its internal operations are configured adequately to support a particular position.
A. demand-value model
B. experience curve
C. efficiency frontier
D. optimal output model
E. surplus curve
56. The efficiency frontier has a convex shape because of:
A. a high-cost structure.
B. diminishing returns.
C. a significantly low product value.
D. low production costs.
E. high profit growth.
57. Which of the following statements is true of the efficiency frontier?
A. To maximize its profitability, a firm should avoid a position that lies on the efficiency frontier.
B. Not all positions on the efficiency frontier are viable.
C. The efficiency frontier is a function of the cost and revenue of a product.
D. Positions inside the frontier are more efficient than the positions that are located on the frontier.
E. It is always concave in shape because of diminishing returns.

58. For a firm to maximize its profitability, it is necessary that it:

A. creates products similar to the products of its competitors.
B. does not configure its internal operations to reduce costs.
C. minimizes the value of the consumer surplus
D. picks a position on the efficiency frontier that is viable.
E. strips all the value out of its product offering.
59. A firm maximizes its profitability when it:
A. creates products similar to the products of its competitors.
B. minimizes the value provided by its products.
C. picks a position on the efficiency frontier that is not viable.
D. strips all the value out of its product offering.
E. configures its internal operations to support the position selected by it on the efficiency frontier.
60. A firm's profitability maximizes when it:
A. creates products similar to the products of its competitors.
B. strips all the value out of its product offering.
C. ensures that it has the right organization structure in place to execute its strategy.
D. picks a position on the efficiency frontier that is not viable.
E. does not configure its internal operations to reduce costs.
61. The value creation activities of a firm are categorized as _____ and _____.
A. primary activities; support activities
B. strategic activities; functional activities
C. ancillary functions; tertiary functions
D. primary activities; core activities
E. goal-oriented activities; organizational activities
62. The _____ activities of a firm have to do with the design, creation, and delivery of the product; its
marketing; and its support and after-sale service.
A. support
B. tertiary
C. ancillary
D. primary
E. secondary
63. Which of the following is a primary activity in the operations of a firm?
A. Logistics function
B. Research and development
C. Information systems
D. Human resource function
E. Company infrastructure
64. Which of the following operations of a firm is concerned with the design of products and production
processes?
A. Human resources
B. Research and development
C. Marketing and
sales
D. Materials management
E. Company infrastructure
65. For services such as banking or health care, "production" typically occurs when:
A. the customer specifies the service requirements.
B. the service is paid for by the customer.
C. the service is designed in-house.
D. the service is delivered to the customer.
E. the customer gives a feedback.

66. Which of the following is a support activity in the operations of a firm?

A. Research and development
B. Customer service
C. Marketing and sales
D. Creation and maintenance of information systems
E. Production
67. Of all the value creation activities in a firm, _____ create(s) value by discovering consumer needs and
communicating them back to the R&D function of the company, which can then design products that
better match those needs.
A. production
B. marketing and sales
C. human resources
D. logistics
E. information systems
68. Which of the following functions creates a perception of superior value in the minds of consumers by
solving consumer problems and by supporting them after they have purchased the product?
A. Production
B. Marketing and sales
C. Human resources
D. Customer service
E. Logistics
69. The _____ of a value chain provide inputs that allow the primary activities to occur.
A. lateral functions
B. support activities
C. core activities
D. central activities
E. secondary activities
70. _____ is a value creation activity which falls into the category of primary activities.
A. Creation and maintenance of information systems
B. Customer service
C. Human resources
D. Logistics
E. Company infrastructure maintenance
71. The _____ function of a value chain controls the transmission of physical materials through the value
chain, from procurement through production and into distribution.
A. human resource
B. finance
C. marketing
D. logistics
E. research and development
72. The _____ function of a value chain ensures that the company has the right mix of skilled people to
perform its value creation activities effectively.
A. finance
B. marketing
C. human resource
D. logistics
E. marketing and sales

73. Which of the following support functions is most likely to involve dealing with the organizational
structure, control systems, and culture of the firm?
A. Human resource function
B. Logistics
C. Information systems
D. Company infrastructure
E. Inventory management
74. Who among the following should be viewed as part of a firms infrastructure?
A. Procurement manager
B. Top management
C. Production manager
D. Research and development scientist
E. Marketing personnel
75. The term _____ refers to the totality of a firm's organization, including its organizational structure,
control systems, incentives, processes, and people.
A. primary structure
B. organization architecture
C. organizational hierarchy
D. organizational model
E. management structure
76. Which of the following is a part of the organization architecture that consists of the metrics used to
measure the performance of subunits and make judgments about how well managers are running those
subunits?
A. Reports
B. Controls
C. Rewards
D. Knowledge flows
E. Dominions
77. _____ are considered a part of an organization architecture and are used to reward appropriate managerial
behavior.
A. Knowledge flows
B. Reports
C. Processes
D. Incentives
E. Controls
78. Processes are:
A. the manner in which decisions are made and work is performed within the organization.
B. the metrics used to measure the performance of subunits.
C. the devices used to reward appropriate managerial behavior.
D. the metrics used to make judgments about how well managers are running the subunits.
E. the norms and value systems that are shared among the employees of an organization.
79. Which of the following terms best represents the norms and value systems that are shared among the
employees of an organization?
A. Process scenario
B. Organizational structure
C. Business structure
D. Organizational culture
E. Management structure

80. A firm's ability to increase its profitability and profit growth by expanding globally is constrained:
A. by the imperative of localization.
B. by the economies of scale.
C. due to customer surplus.
D. due to the leveraging of skills developed in foreign operations.
E. due to the dispersion of individual value creation activities.
81. A company can increase its growth rate by taking goods or services developed at home and selling them
internationally. The returns from such a strategy are likely to be greater if:
A. the product is already being offered by local companies in the nations that the company enters.
B. the product is a generic product that requires little differentiation.
C. indigenous competitors in the nations that the company enters lack comparable products.
D. there is a high inflation in the nations that the company enters.
E. the product is perceived to be very costly in the home country of the company.
82. Skills within a firm that competitors cannot easily match or imitate are referred to as _____.
A. core competencies
B. barriers to entry
C. internalities
D. externalities
E. premium skills
83. How does possessing a core competence help a firm?
A. It helps a firm to create value in such a way that premium pricing is impossible.
B. It reduces a firm's dependence on its logistics function.
C. It enables a firm to reduce the costs of value creation.
D. It reduces the scope of transfer of skills to foreign markets.
E. It reduces the need to replicate a business model in a foreign market.
84. If a value creation activity of a firm can take place in Mexico most effectively, then that activity of the
firm must be based in Mexico. Firms that pursue such a strategy are most likely to realize:
A. a position inside the efficiency frontier.
B. the experience curve.
C. economies of scale.
D. location economies.
E. demographic advantages.
85. _____ are the economies that arise from performing a value creation activity in the optimal place for that
activity, wherever in the world that might be.
A. Diversification economies
B. Value-building economies
C. Location economies
D. Support economies
E. Core economies
86. Which of the following is most likely to be the advantage of locating a value creation activity in the
optimal location for that activity?
A. It increases the costs of value creation.
B. It decreases consumer surplus.
C. It helps the firm to achieve a high-cost position.
D. It nullifies all trade barriers.
E. It enable a firm to differentiate its product offering from those of competitors.

87. A firm creates a(n) _____ by dispersing different stages of its value chain to those locations around the
world where the value added is maximized or where the costs of value creation are minimized.
A. integral circle
B. dispersal chain
C. global web
D. international mesh
E. worldwide circle
88. In theory, which of the following advantages can be realized by a firm by implementing a global web of
operations?
A. It will be able to raise the perceived value of its goods and services.
B. It will be able to decrease consumers' reservation price for its products.
C. It will be able to decrease consumer surplus.
D. It will be able to increase the cost of value creation.
E. It will be able to sell its products at a price which is below its cost price in its home country.
89. Which of the following caveats is most likely to discourage global expansion of businesses?
A. Economies of scale
B. High consumers' reservation prices
C. Trade barriers
D. Mass customization
E. Low transportation costs
90. The _____ refer(s) to systematic reductions in production costs that have been observed to occur over the
life of a product.
A. experience curve
B. learning effects
C. location economies
D. efficiency slope
E. economies of scale
91. A number of studies have observed that a product's production costs decline by some quantity about each
time _____ doubles.
A. annual output
B. cumulative output
C. workforce
D. fixed investment
E. foreign domestic investment
92. The two phenomena that help explain the experience curve are:
A. learning effects and economies of scale.
B. technology inputs and wealth transfer.
C. leveraging subsidiary and local responsiveness.
D. standardized manufacturing and global web.
E. efficiency frontier and location economies
93. _____ refer to cost savings that come from acquiring knowledge from doing a task.
A. Learning effects
B. Exponential effects
C. Ancillary effects
D. Economies of scale
E. Location economies

94. Labor productivity increases over time as individuals understand the most efficient ways to perform
particular tasks. This is as a result of _____.
A. diminishing returns
B. location economies
C. economies of time
D. learning effects
E. an efficiency frontier.
95. In which of the following tasks will the learning effects be most significant?
A. Pizza delivery for a fast-food major
B. Data entry for a loan recovery center
C. Assembly process involving 1,000 complex steps
D. Sewing buttons onto shirts in a garment factory
E. Delivering letters to different recipients
96. Which of the following is true about learning effects?
A. They tend to be more significant in non-repetitive tasks.
B. They tend to be less significant when a task is technologically complex.
C. They typically last a lifetime.
D. They are important only during the start-up period of a new process.
E. They do not have any effect on the cost of production.
97. Learning effects tend to be more significant when:
A. a task involves a few simple steps.
B. a task is repeated for a period of over five years.
C. the workforce consists of unskilled labor.
D. the cumulative output becomes half of what it was originally.
E. a technologically complex task is repeated.
98. _____ refer to the reductions in unit cost achieved by producing a large volume of a product.
A. Location economies
B. Learning effects
C. Standardization economies
D. Core economies
E. Economies of scale
99. Spreading fixed costs over a large volume results in a cost-savings phenomenon which is referred to
as:
A. volume synergies.
B. economies of scale.
C. captured savings.
D. size effects.
E. location economies.
100.Which of the following statements is true about economies of scale?
A. Economies of scale lead to an increase in the average unit cost of a product.
B. Attaining economies of scale increases a firm's profitability.
C. The ability to spread variable costs over a large volume is a source of economies of scale.
D. Economies of scale result due to the increase in the perceived value of a product.
E. Economies of scale refer to cost savings that come from learning by doing.
101.Which of the following terms best represents the systematic reductions in production costs that have been
observed to occur over the life of a product?
A. Global web
B. Dispersion linkage
C. Economies of scale
D. Experience curve
E. Efficiency frontier

102.Serving a global market from a single location is consistent with:

A. establishing a high-cost position.
B. taking advantage of location economies.
C. moving down the experience curve.
D. operating from a position which falls inside the efficiency frontier.
E. going up the global web.
103.Firms that compete in the global marketplace typically face two types of competitive pressure: pressures
for _____ and pressures to _____.
A. increasing investment; minimize consumer surplus
B. labor skill enhancement; minimize economies of scale
C. cost reductions; be locally responsive
D. global promotions; move down the efficiency frontier
E. product standardization; move up the experience curve
104.Why do companies find dealing with high pressures for both, cost reductions and local responsiveness, a
difficult strategic challenge?
A. Cost reductions are inversely proportional to standardization.
B. Being locally responsive tends to raise costs.
C. Cost reductions negatively impact maximization of single-plant utilization.
D. As the quantity produced goes on increasing, it becomes more difficult for a company to achieve
economies of scale.
E. Customer tastes are usually identical across global markets.
105.Cost reduction pressures tend to be particularly intense in industries that:
A. create products that serve universal needs.
B. create customized products.
C. are not involved in international business.
D. produce products that have inelastic demand.
E. serve different customers with different needs.
106.Which of the following terms best represents the requirements that are the same all over the world, such
as steel, bulk chemicals, and industrial electronics?
A. Universal needs
B. Efficiency frontier
C. Global web
D. Lateral requirements
E. Supreme needs
107.Pressures for cost reduction are intense in:
A. firms which produce products that are well differentiated.
B. firms whose major competitors are based in high-cost locations.
C. firms with persistent low capacity.
D. firms in which consumers face low switching costs.
E. firms with no international competition.
108.The liberalization of the world trade and investment environment in recent decades, by facilitating greater
international competition, has generally:
A. increased cost pressures.
B. decreased the demand for local responsiveness.
C. decreased pressures for cost reduction.
D. increased consumer surplus.
E. reduced the production of conventional commodity products.

109.Which of the following conditions is most favorable to reap gains from global scale economies?
A. Low demand for local responsiveness
B. High pressures for cost reduction
C. Lack of universal needs
D. National differences in accepted business practices
E. High pressure to delegate production to domestic subsidiaries
110.Which of the following supports the argument that customer demands for local customization are on the
decline worldwide?
A. Local and indigenous industries are increasingly filling up available demand.
B. High costs of local customization are deterring companies from doing so.
C. Governments across the world are standardizing their legal procedures.
D. Customer tastes have converged worldwide.
E. Managers worldwide ignore the differences in consumer tastes and preferences.
111.Which of the following is most likely to necessitate the delegation of marketing functions to national
subsidiaries?
A. Differences in distribution channels
B. Pressures for decreasing consumer surplus
C. Lack of product customization
D. Pressures for increasing economies of scale
E. Pressures for increasing consumers' reservation price
112.Which of the following is most likely to require a firm to be locally responsive in a host-country?
A. Similarity in distribution channels
B. Identical traditional practices among countries
C. Standard consumer tastes and preferences worldwide
D. Declining demand for local customization
E. Host-government demands
113.For an international business, which of the following is most likely to be an outcome of protectionism and
nationalism in a host-country?
A. Increase in the attractiveness of location economies
B. Pressure for localization of production
C. Requirement of standardization of products or services
D. Pressure for cost reduction
E. Decrease in the significance of local responsiveness
114.The appropriateness of the strategy that a firm chooses to use in an international market varies with the
extent of pressures for _____ and _____.
A. quality improvement; product standardization
B. customer surplus; quality improvements
C. customer surplus; product standardization
D. cost reductions; local responsiveness
E. product standardization; cost reductions
115.Firms that pursue a(n) _____ strategy focus on increasing profitability and profit growth by reaping the
cost reductions that come from economies of scale, learning effects, and location economies.
A. international
B. transnational
C. localization
D. global standardization
E. nationalization

116.Which of the following is true of a firm that pursues a global standardization strategy?
A. It ensures that it pursues a high-cost strategy on a global scale.
B. It has its production, marketing, and R & D activities in only one optimum location.
C. It tries to customize its products to local conditions.
D. It has shorter production runs.
E. It reaps maximum benefits from economies of scale and learning effects.
117.A firm is most likely to pursue a global standardization strategy when:
A. it wants to implement a high-cost strategy on a global scale.
B. it wants to reduce consumer surplus.
C. there are no universal needs to be served.
D. there are strong demands for local responsiveness.
E. there are strong pressures for cost reduction.
118.Which of the following strategies is most likely to pursued by a firm when there are strong pressures for
cost reductions and demands for local responsiveness are minimal?
A. Domestic strategy
B. Global standardization strategy
C. International strategy
D. Transnational strategy
E. Nationalization strategy
119.Which of the following strategies focuses on increasing profitability by customizing the firm's goods or
services so that they provide a good match to tastes and preferences in different national markets?
A. International strategy
B. Global standardization strategy
C. Localization strategy
D. Transnational strategy
E. Nationalization strategy
120.Which of the following is true of a localization strategy?
A. It allows a firm to capture the cost reductions of mass-producing a standardized product.
B. It reduces duplication of functions.
C. It involves longer production runs.
D. It makes sense if the value added by customization supports higher pricing.
E. It substantially reduces local demand.
121.A global car manufacturer wants to start production in China. While catering to local responsiveness,
what can the firm do to get scale economies?
A. Increase costs whenever possible
B. Use common vehicle platforms and components across many different models
C. Shorten the production runs for each component
D. Increase the duplication of functions required for each operation
E. Manufacture only one type of car and sell it in all the international markets
122.Which of the following strategies is a firm most likely to pursue when it simultaneously faces both strong
cost pressures and strong pressures for local responsiveness?
A. Global standardization strategy
B. Localization strategy
C. International strategy
D. Transnational strategy
E. Nationalization strategy

123.Which of the following is an observation made by researchers Bartlett and Ghoshal regarding modern
multinational enterprises?
A. Global logistics industry makes the concept of "location economies" redundant for international firms.
B. Core competencies and skills can develop in any of the firm's worldwide operations.
C. Flow of skills between a firm and its global subsidiaries should be unidirectional.
D. Differentiating across geographic markets helps a firm in reducing costs.
E. Customer demands for local customization are on the decline worldwide.
124.Firms that pursue a(n) _____ strategy differentiate their product offering across geographic markets to
account for local differences.
A. international
B. global standardization
C. transnational
D. multidomestic
E. nationalization
125.Which of the following is true of a transnational strategy?
A. It is easy to implement because it does not place any conflicting demands on a company.
B. It is used when the pressures for cost reductions are low.
C. It is usually used when the pressure for local responsiveness is relatively low.
D. It enables the one-way flow of core competencies.
E. It is used by firms that try to achieve low costs through location economies, economies of scale, and
learning effects.
126.Firms that pursue a(n) _____ strategy take products first produced for their domestic market and sell them
across various markets with only minimal local customization.
A. nationalization
B. transnational
C. global standardization
D. international
E. localization
127.Pursuing a(n) _____ strategy makes sense if a firm has a valuable core competence that indigenous
competitors in foreign markets lack.
A. global standardization
B. international
C. nationalization
D. transnational
E. nationalization
128.Xerox had a monopoly on photocopiers for several years as the technology underlying the photocopier
was protected by strong patents. As it served a universal need, this favorable position led Xerox to pursue
a(n) _____ strategy.
A. global standardization
B. localization
C. international
D. transnational
E. nationalization

129.Mayer Life Systems, a manufacturer of surgical and medical appliances, invented and patented a new
dialysis machine that radically reduced maintenance and operational issues. Responding to a global
demand, it decided to sell the machines manufactured at its plant in the U.S. to various markets across
the globe. Since the product features provided by Mayer were not provided by any other competitor,
Mayer did not feel any pressure for cost reductions. Which of the following strategies is most likely being
pursued by Mayer?
A. International strategy
B. Localization strategy
C. Global standardization strategy
D. Transnational strategy
E. Nationalization strategy
130.Which of the following statements is true about an international strategy?
A International strategy typically involves taking products first produced for foreign markets and then
. customizing them for domestic markets.
B. International strategy should be pursued by a firm if it manufactures a product that satisfies local,
rather than universal, needs.
C When a firm pursues an international strategy, the head office of the firm retains fairly tight control
. over marketing and product strategy.
D. Firms pursuing the international strategy tend to outsource their development functions such as R&D.
E. International strategy should be pursued by a firm only if it faces strong competition in foreign
markets.
131.The term _____ refers to cooperative agreements between potential or actual competitors.
A. tactical union
B. strategic alliance
C. political affiliation
D. economic association
E. nationalization
132.A _____ allows two or more firms to share the fixed costs (and associated risks) of developing new
products or processes.
A. franchising agreement
B. global web
C. free trade agreement
D. strategic alliance
E. dispersion linkage
133.Which of the following is a disadvantage of a strategic alliance?
A. Entering into a strategic alliance, makes it difficult for a firm to enter into a foreign market.
B. As a result of strategic alliance, fixed costs of developing new products tend to increase.
C. Strategic alliance gives competitors a low-cost route to new technology and markets.
D. Firms that enter into a strategic alliance with a foreign firm tend to face higher trade barriers.
E. Strategic alliance always leads to a loss to either of the firms involved.
134.One of the principal risks associated with a strategic alliance is that:
A. it brings together the complementary skills of alliance partners.
B. it makes it difficult for the partner firms to enter into a foreign market.
C. a firm can give away more than it receives.
D. it does not allow firms to share fixed costs.
E. it almost always fails.

135.Managing an alliance successfully requires building interpersonal relationships between the firms'
managers, or what is sometimes referred to as:
A. relational capital.
B. interorganizational synergy.
C. power equilibrium.
D. symbiotics.
E. intraorganizational coordination.
136.Discuss the significance of value creation. According to Michael Porter, what are the two primary
strategies for creating value?

137.What are operations of a firm? How can operations be categorized?

138.What constitutes an organizational structure?

139.What are the different ways in which a firm can benefit from global expansion?

140.What are core competencies? What are their advantages?

141.What is an experience curve? What is its strategic significance?

142.What are the sources of economies of scales?

143.What are the different types of competitive pressures that firms competing in a global marketplace face?
How can firms respond to such pressures?

144.What are the sources of pressures for local responsiveness?

145.Describe the global standardization strategy.

146.Describe the localization strategy.

147.How do firms respond to low cost pressures and low pressures for local responsiveness?

148.What are strategic alliances?

149.What are the advantages of strategic alliances?

150.What are the disadvantages of strategic alliances?

ch12 Key
1. TRUE
2. TRUE
3. TRUE
4. FALSE
5. TRUE
6. FALSE
7. TRUE
8. FALSE
9. FALSE
10. FALSE
11. FALSE
12. TRUE
13. FALSE
14. TRUE
15. FALSE
16. TRUE
17. FALSE
18. TRUE
19. TRUE
20. TRUE
21. TRUE
22. FALSE
23. FALSE
24. TRUE
25. FALSE
26. FALSE
27. TRUE
28. TRUE
29. FALSE
30. TRUE
31. FALSE
32. TRUE
33. TRUE
34. FALSE
35. TRUE
36. TRUE

37. D
38. B
39. D
40. A
41. C
42. E
43. A
44. B
45. C
46. B
47. D
48. C
49. B
50. D
51. B
52. A
53. C
54. D
55. C
56. B
57. B
58. D
59. E
60. C
61. A
62. D
63. B
64. B
65. D
66. D
67. (p. 386) B
68. (p. 386) D
69. B
70. B
71. D
72. C
73. D
74. B

75. B
76. B
77. D
78. A
79. D
80. A
81. C
82. A
83. C
84. D
85. C
86. E
87. C
88. A
89. C
90. A
91. B
92. A
93. A
94. D
95. C
96. D
97. E
98. E
99. B
100. B
101. D
102. C
103. (p. 397) C
104. B
105. A
106. A
107. D
108. A
109. A
110. D
111. A
112. E

113. B
114. D
115. D
116. E
117. E
118. B
119. C
120. D
121. B
122. D
123. B
124. C
125. E
126. D
127. B
128. C
129. A
130. C
131. B
132. D
133. C
134. C
135. A
136. The way to increase the profitability of a firm is to create more value. The amount of value a firm creates is measured by the difference
between its costs of production and the value that consumers perceive in its products. Michael Porter has argued that low cost and differentiation
are two basic strategies for creating value and attaining a competitive advantage in an industry. According to Porter, superior profitability goes
to those firms that can create superior value, and the way to create superior value is to drive down the cost structure of the business and/or
differentiate the product in some way so that consumers value it more and are prepared to pay a premium price.
137. The operations of a firm can be thought of as a value chain composed of a series of distinct value creation activities, including production,
marketing and sales, materials management, R&D, human resources, information systems, and the firm infrastructure. These value creation
activities or operations can be categorized as primary activities and support activities. Primary activities have to do with the design, creation, and
delivery of the product; its marketing; and its support and after-sale service. The support activities of the value chain provide inputs that allow the
primary activities to occur.
138. Organizational structure consists of three components: first, the formal division of the organization into subunits such as product divisions,
national operations, and functions (most organizational charts display this aspect of structure); second, the location of decision-making
responsibilities within that structure (e.g., centralized or decentralized); and third, the establishment of integrating mechanisms to coordinate the
activities of subunits including cross functional teams and or pan-regional committees.
139. Firms that operate internationally are able to: (1) Expand the market for their domestic product offerings by selling those products in
international markets. (2) Realize location economies by dispersing individual value creation activities to those locations around the globe where
they can be performed most efficiently and effectively. (3) Realize greater cost economies from experience effects by serving an expanded global
market from a central location. (4) Earn a greater return by leveraging any valuable skills developed in foreign operations and transferring them to
other entities within the firm's global network of operations.
140. The term core competence refers to skills within a firm that competitors cannot easily match or imitate. These skills may exist in any of the
firm's value creation activities (manufacturing, marketing, sales, materials management, etc.). These skills typically enable a firm to produce a
product or service that competitors find difficult to duplicate. Core competencies are the bedrock of a firm's competitive advantage. They enable a
firm to reduce the costs of value creation and/or to create perceived value in such a way that premium pricing is possible.

Moving down the experience curve allows a firm to reduce its cost of creating value and increase its profitability. The firm that moves down the
experience curve most rapidly will have a cost advantage as compared to its competitors.
141. The experience curve refers to systematic reductions in production costs that have been observed to occur over the life of a product. A
number of studies have observed that a products production costs decline by some quantity about each time cumulative output doubles. Two
things explain this: learning effects and economies of scale. Learning effects refer to cost savings that come from learning by doing. Economies of
scale refer to the reductions in unit cost achieved by producing a large volume of a product.

142. Economies of scale have a number of sources. One is the ability to spread fixed costs over a large volume. Second, a firm may not be able
to attain an efficient scale of production unless it serves global markets. Finally, as global sales increase the size of the enterprise, its bargaining
power with suppliers increases as well, which may allow it to attain economies of scale in purchasing, bargaining down the cost of key inputs and
boosting profitability that way.
143. Firms that compete in the global marketplace typically face two types of competitive pressure that affect their ability to realize location
economies and experience effects, to leverage products and transfer competencies and skills within the enterprise. They face pressures for cost
reductions and pressures to be locally responsive. These competitive pressures place conflicting demands on a firm. Responding to pressures
for cost reductions requires that a firm try to minimize its unit costs. But responding to pressures to be locally responsive requires that a firm
differentiate its product offering and marketing strategy from country to country in an effort to accommodate the diverse demands arising from
national differences in consumer tastes and preferences, business practices, distribution channels, competitive conditions, and government policies.
4. Host Government Demands: Economic and political demands imposed by host-country governments may require local responsiveness.
3. Differences in Distribution Channels: A firm's marketing strategies may have to be responsive to differences in distribution channels among
countries, which may necessitate the delegation of marketing functions to national subsidiaries.
2. Differences in Infrastructure and Traditional Practices: Pressures for local responsiveness arise from differences in infrastructure or traditional
practices among countries, creating a need to customize products accordingly. Fulfilling this need may require the delegation of manufacturing and
production functions to foreign subsidiaries.
1. Differences in Customer Tastes and Preferences: Strong pressures for local responsiveness emerge when customer tastes and preferences differ
significantly between countries, as they often do for deeply embedded historic or cultural reasons. In such cases, a multinational's products and
marketing message have to be customized to appeal to the tastes and preferences of local customers.
144. Pressures for local responsiveness arise from national differences in consumer tastes and preferences, infrastructure, accepted business
practices, and distribution channels, and from host-government demands.

145. Firms that pursue a global standardization strategy focus on increasing profitability and profit growth by reaping the cost reductions that
come from economies of scale, learning effects, and location economies; that is, their strategic goal is to pursue a low-cost strategy on a global
scale. The production, marketing, and R & D activities of firms pursuing a global standardization strategy are concentrated in a few favorable
locations. Firms pursuing a global standardization strategy try not to customize their product offering and marketing strategy to local conditions
because customization involves shorter production runs and the duplication of functions, which tends to raise costs. Instead, they prefer to market
a standardized product worldwide so that they can reap the maximum benefits from economies of scale and learning effects. They also tend to use
their cost advantage to support aggressive pricing in world markets.
146. A localization strategy focuses on increasing profitability by customizing the firm's goods or services so that they provide a good match to
tastes and preferences in different national markets. Localization is most appropriate when there are substantial differences across nations with
regard to consumer tastes and preferences, and where cost pressures are not too intense. By customizing the product offering to local demands,
the firm increases the value of that product in the local market. On the downside, because it involves some duplication of functions and smaller
production runs, customization limits the ability of the firm to capture the cost reductions associated with mass-producing a standardized product
for global consumption. The strategy may make sense, however, if the added value associated with local customization supports higher pricing,
which enables the firm to recoup its higher costs, or if it leads to substantially greater local demand, enabling the firm to reduce costs through the
attainment of some scale economies in the local market. At the same time, firms still have to keep an eye on costs. Firms pursuing a localization
strategy still need to be efficient and, whenever possible, to capture some scale economies from their global reach.
147. Sometimes, multinational firms find themselves in the fortunate position of being confronted with low cost pressures and low pressures for
local responsiveness. Many of these enterprises pursue an international strategy, taking products first produced for their domestic market and
selling them internationally with only minimal local customization. The distinguishing feature of many such firms is that they are selling a product
that serves universal needs, but they do not face significant competitors, and thus unlike firms pursuing a global standardization strategy, they are
not confronted with pressures to reduce their cost structure.
148. Strategic alliances are cooperative agreements between potential or actual competitors. Strategic alliances run the range from formal joint
ventures, in which two or more firms have equity stakes, to short-term contractual agreements, in which two companies agree to cooperate on a
particular task.
4. It can make sense to form an alliance that will help the firm establish technological standards for the industry that will benefit the firm.
3. An alliance is a way to bring together complementary skills and assets that neither company could easily develop on its own.
2. Strategic alliances also allow firms to share the fixed costs (and associated risks) of developing new products or processes.
1. Strategic alliances may facilitate entry into a foreign market.
149. The advantages of strategic alliances are as follows:

150. Some commentators have criticized strategic alliances on the grounds that they give competitors a low-cost route to new technology and
markets. The failure rate for international strategic alliances seems to be high. One study of 49 international strategic alliances found that twothirds run into serious managerial and financial troubles within two years of their formation, and that although many of these problems are solved,
33 percent are ultimately rated as failures by the parties involved.

ch12 Summary
Category
AACSB: Analytic
AACSB: Reflective Thinking
Blooms: Apply
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Difficulty: Hard
Difficulty: Medium
Hill - Chapter 12
LO: 12-01
LO: 12-02
LO: 12-03
LO: 12-04
LO: 12-05
Topic: Choosing a Strategy
Topic: Cost Pressures and Pressures for Local Responsiveness
Topic: Global Expansion, Profitability, and Profit Growth
Topic: Strategic Alliances
Topic: Strategy and the Firm

# of Questions
144
6
3
79
68
79
3
68
150
63
36
15
26
9
26
15
36
9
64