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Chapter 13

The Strategy of International Business

True / False Questions

1. A firm's strategy can be defined as the actions that managers take to attain the

goals of the firm.

True False

2. The preeminent strategic goal for most firms is to maximize the value of the firm

for its owners.

True False

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

True False

4. The amount of value a firm creates is measured by the difference between its

costs of production and the price that it charges for its products.

True False
5. The customer is able to garner the benefit of the consumer surplus because one

firm is competing with other firms for the customer's business, so the firm must

charge a lower price than it could if it were a monopoly supplier.

True False

6. According to Porter, 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.

True False

7. Diminishing returns imply that when a firm already has significant value built into

its product offering, increasing value by a relatively small amount requires

significant additional costs.

True False

8. For a firm, all positions on the efficiency frontier are viable.

True False

9. The strategy, operations, and organization of a firm must all be consistent with

each other if the firm is to attain a competitive advantage and achieve superior

profitability.

True False
10. Support activities include the design, creation, and delivery of a product.

True False

11. R&D, production, marketing and sales, and customer service are all examples of

primary activities.

True False

12. Support activities are always less important than the primary activities in

achieving a competitive advantage.

True False

13. Top management should be viewed as part of the firm's infrastructure

True False

14. Global expansion offers companies the opportunity to generate greater profits

than companies that focus strictly on the domestic market.

True False
15. The success of many multinational corporations is based not just upon the goods

or services that they sell in foreign nations, but also upon the core competencies

that underlie the development, production, and marketing of those goods or

services.

True False

16. The skills within the firm that a competitor cannot easily match or imitate are

known as core competence.

True False

17. Core competencies 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.

True False

18. Economies that arise from performing a value creation activity in the optimal

location are known as location economies.

True False

19. Systematic increases in sales that have been observed to occur over the life of

the product are referred to as the experience curve.

True False
20. Cost savings that come from learning by doing are known as economies of scale.

True False

21. Learning effects tend to be more significant when a technologically simple task is

repeated.

True False

22. One of the sources of economies of scale is the ability to spread fixed costs over

a large volume.

True False

23. Moving up the experience curve allows a firm to reduce its cost of creating value

and increase its profitability.

True False

24. Once a firm has established a low-cost position, it can act as a barrier to new

competition.

True False
25. In a multinational enterprise, skills are always generated at the headquarters

location and are then dispersed to the rest of the organization.

True False

26. To leverage subsidiary skills, companies should establish incentive systems that

encourage local employees to acquire new skills.

True False

27. Two types of competitive pressure that affect the ability of multinational

enterprises to compete in the global marketplace are pressure for cost reductions

and pressure for local responsiveness.

True False

28. Because differentiation across countries can involve significant duplication and a

lack of product standardization, it may reduce costs.

True False

29. Universal needs exist when the tastes and preferences of consumers in different

nations are similar if not identical.

True False
30. Pressures for cost reduction are minimal in industries where major competitors

are based in low-cost locations, where there is persistent excess capacity, and

where consumers are powerful and face low switching costs.

True False

31. When consumer tastes and preferences differ significantly between countries,

there is low pressure for local responsiveness.

True False

32. A multinational firm may need to delegate marketing functions to national

subsidiaries to be responsive to local differences in distribution channels.

True False

33. Threats of protectionism, economic nationalism, and local content rules dictate

that international businesses manufacture locally.

True False

34. Pressures for local responsiveness imply that it may not be possible to leverage

skills and products associated with a firm's core competencies wholesale from

one nation to another.

True False
35. A global standardization strategy is appropriate when a firm is facing low

pressures for cost reduction but high pressure for local responsiveness.

True False

36. When a firm focuses on increasing profitability by customizing the product or

service so that they provide a good match to tastes and preferences in different

national markets, the firm is following a transnational strategy.

True False

37. When the firm simultaneously faces both strong cost pressures and strong

pressures for local responsiveness, the ideal strategy to follow is the transnational

strategy.

True False

38. A localization strategy makes most sense when demands for local

responsiveness are high, but cost pressures are moderate or low.

True False

39. The distinguishing feature of many firms that pursue an international strategy is

that they are selling a product that serves local needs, but they do not face

significant competitors.

True False
40. As competition intensifies, global standardization strategies and transnational

strategies tend to become less viable, and managers need to orientate their

companies toward either an international strategy or a localization strategy.

True False

Multiple Choice Questions

41. _____ can be defined as the rate of return that the firm makes on its invested

capital, which is calculated by dividing the net profits of the firm by total invested

capital.

A. Profitability

B. Performance

C. Cash flow

D. Efficiency
42. The percentage increase in net profits over time measures:

A. capital return.

B. profitability.

C. market growth.

D. profit growth.

43. Which of the following statements is NOT true?

A. The way to increase the profitability of a firm is to create more value.

B. 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.

C. The more value customers place on a firm's products, the higher the price the

firm is able to charge for those products.

D. The price a firm charges for a good or service is typically more than the value

the customer places on that good or service.


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:

A. the customer's disposable income is significantly higher than what the market

demands.

B. the customer captures some of that value in the form of a consumer surplus.

C. regulatory mechanisms ensure that the customer is not overcharged for

products/services.

D. marketers implement psychological pricing tactics to ensure that customers

perceive the prices to be low.

45. The value of a product to an average consumer is V; and the average price that

the firm can charge a consumer for that product is P. Here, V - P can be termed

as:

A. consumer surplus per unit.

B. producer surplus per unit.

C. profit growth.

D. profit per unit sold.


46. A consumer surplus can be best described as:

A. what the consumer has "left-over" after a purchase.

B. how much extra a consumer has to pay for a product.

C. value for the money.

D. the premium charged for a quality product.

47. A strategy that focuses on increasing the attractiveness of a product is referred to

as a(n):

A. differentiation strategy.

B. low cost strategy.

C. effectiveness strategy.

D. efficiency strategy.

48. The efficiency frontier has a convex shape because of:

A. consumer surplus.

B. diminishing returns.

C. profitability.

D. differentiation strategy.
49. _____ imply that when a firm already has significant value built into its product

offering, increasing value by a relatively small amount requires significant

additional costs.

A. Efficiency matrixes

B. Diminishing returns

C. Cost plus curves

D. Strategy convex curves

50. The basic strategy paradigm suggests that to maximize its profitability, a firm

should do all of the following, EXCEPT:

A. choose, according to strategy, any position on the efficiency frontier as all

positions are viable.

B. pick a position on the efficiency frontier that is viable in the sense that there is

enough demand to support that choice.

C. configure its internal operations so that they support the position on the

efficiency frontier.

D. make sure that the right organization structure is in place to execute the

strategy.
51. _____ activities are basically concerned with creating the product, marketing and

delivering the product to buyers, and providing support and after-sales service.

A. Support

B. Subordinate

C. Ancillary

D. Primary

52. Which of the following is an example of a primary activity in a firm's value chain?

A. Information systems

B. Research and development

C. Logistics

D. Human relations

53. Which of the following is an example of a support activity in a firm's value chain?

A. R&D

B. Customer service

C. Human resources

D. Marketing and sales


54. _____ activities of the value chain provide inputs that allow the primary activities to

occur.

A. Complementary

B. Basic

C. Core

D. Support

55. A firm benefits by basing each value creation activity it performs at that location

where economic, political, and cultural conditions, including relative factor costs,

are most conducive to the performance of that activity. Firms that pursue such a

strategy can realize:

A. differentiation.

B. location economies.

C. vertical integration.

D. horizontal integration.
56. Economies that arise from performing a value creation activity in the optimal place

for that activity are referred to as:

A. factor economies.

B. production economies.

C. location economies.

D. value creation economies.

57. When companies disperse different stages of the value chain to those locations

around the world where perceived value is maximized or where the costs of value

creation are minimized, companies create:

A. a differentiated organization.

B. a location economy curve.

C. economies of scale.

D. a global web of value creation activities.


58. Lenovo's ThinkPad laptop computers is designed in the United States, the case,

keyboard, and hard drive are made in Thailand; the display screen and memory in

South Korea; the built-in wireless card in Malaysia; and the microprocessor in the

United States. In each case, these components are manufactured and sourced

from the optimal location given current factor costs. In this example, Lenovo has:

A. vertical integration advantages.

B. a global web of value creation activities.

C. learning effects.

D. high local responsiveness.

59. _____ refer(s) to systematic reductions in production costs that have been

observed to occur over the life of a product.

A. Experience curve

B. Economies of scale

C. Location economies

D. Production possibility
60. It has been observed that a product's production costs decline by some quantity

about each time, cumulative output:

A. increases by twenty five percent.

B. quadruples.

C. doubles.

D. triples.

61. It has been observed in the aircraft industry that, each time cumulative output of

airframes was doubled, unit costs typically declined to 80 percent of their previous

level. This is an example of:

A. the core performance curve.

B. the location curve.

C. the strategic curve.

D. the experience curve.

62. When individuals gain knowledge of the most efficient ways to perform particular

tasks, they are saving costs through:

A. location economies.

B. value creation effects.

C. experience curve effects.

D. learning effects.
63. Learning effects:

A. tend to be less significant when a technologically complex task is repeated.

B. will be less significant in an assembly process involving 1,000 complex steps

than in one of only 100 simple steps.

C. typically disappear after a while, in spite of the complexity of the task.

D. are more significant after two or three years of the introduction of a new

process.

64. It has been suggested that learning effects are important only during the start-up

period of a new process and that they cease after two or three years. Any decline

in the experience curve after such a point is due to:

A. reduction in fixed costs.

B. higher depreciation costs.

C. economies of scale.

D. obsolescence.

65. Economies of scale arise from all of the following sources, EXCEPT:

A. increasing fixed costs by limiting them to small volumes.

B. serving domestic and international markets from the same production facilities

C. serving global markets.

D. bargaining with suppliers to bring down the cost of key inputs.


66. Moving down the experience curve:

A. increases the cost of a firm's raw material.

B. allows a firm to reduce its cost of creating value.

C. decreases a firm's profitability.

D. increases the R & D expenditure of a firm.

67. Firms usually respond to pressures for cost reduction by trying to:

A. lower the costs of value creation.

B. be locally responsive.

C. undertaking product differentiation.

D. diversifying product lines.

68. Responding to pressure for _____ requires that a firm differentiate its product

offering and marketing strategy from country to country.

A. cost reductions

B. experience effects

C. lowering the costs of value creation

D. being locally responsive


69. _____ exists when the tastes and preferences of consumers in different nations

are similar if not identical.

A. Universal needs

B. Homogenous needs

C. Basic needs

D. Bundled needs

70. Which of the following is less likely to add to the pressure for a firm to be locally

responsive?

A. National differences in consumer tastes and preferences

B. Differences in infrastructure and traditional practices

C. Switching costs for consumers

D. Host-government demands

71. When a firm has a strategic goal of pursuing a low-cost strategy on a worldwide

scale, the firm should follow a(n) _____ strategy.

A. global standardization

B. localization

C. international

D. customization
72. Which of the following is NOT associated with firms following the global

standardization strategy?

A. Low pressures for local responsiveness

B. Use cost advantage to support aggressive pricing in world markets

C. High pressures for cost reductions

D. Customize product offering and marketing strategy to local conditions

73. _____ strategy 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.

A. Localization

B. Transnational

C. Global standardization

D. International
74. Which strategy focuses on increasing profitability by customizing the firm's goods

or services so they provide a good match to tastes and preferences in different

national markets?

A. Global standardization strategy

B. Transnational strategy

C. Localization strategy

D. International strategy

75. Which of the following is a disadvantage of the localization strategy?

A. Decrease in the value of the product in the local market

B. Duplication of functions

C. Inability to accommodate varying tastes and preferences in different markets

D. Reduced customization

76. A firm that is facing both strong cost pressures and strong pressures for local

responsiveness should follow a(n) _____ strategy.

A. localization

B. global standardization

C. international

D. transnational
77. A firm that is pursuing a(n) _____ strategy is simultaneously trying to achieve low

costs through location economies, economies of scale, and learning effects, and

trying to differentiate its product offering across geographic markets.

A. global customization

B. international

C. localization

D. transnational

78. A firm facing low pressures for cost reductions and low pressures for local

responsiveness, is most likely to follow a(n) _____ strategy.

A. global standardization

B. localization

C. international

D. transnational

79. For firms that are selling a product that serves universal needs, and that do not

face significant competition, a(n) _____ strategy makes sense.

A. localization

B. international

C. transnational

D. global standardization
80. Which of the following is true of the international strategy?

A. Product development tends to be highly decentralized.

B. Manufacturing and marketing are typically located in the headquarters location.

C. Extensive production customization is common.

D. The strategy is not viable in the long-run.

Essay Questions

81. What is strategy? How does strategy relate to a firm's profitability?


82. What is the difference between profitability and profit growth?

83. How can a firm increase its profitability?

84. Discuss Michael Porter's interpretation of value creation and competitive

advantage.
85. Discuss efficiency frontier. How does strategic positioning relate to the efficiency

frontier?

86. Consider the firm in terms of a value chain. What is the difference between

primary activities and support activities? Provide examples of each.


87. How can the marketing and sales functions of a firm create value?

88. Describe the benefits of global expansion for firms.

89. What is a core competence? Why is it essential to the success of the firm?
90. Explain the concept of location economies.

91. Discuss the creation of a global web of value creation activities.

92. What is an experience curve?


93. What are learning effects? When are learning effects most significant?

94. How can firms successfully leverage the skills developed at the subsidiary level?

95. What are the two types of competitive pressures that firms competing in the

global marketplace face? How do firms respond to these pressures?


96. Discuss the factors that lead to pressure for local responsiveness.

97. What are the four basic strategies that firms use to compete in international

markets?

98. Describe localization strategy.


99. Consider a transnational strategy. Why would a firm choose this strategic

alternative? What are the disadvantages of this strategy?

100.Discuss the evolution of strategy. How does cost become important in the long

term?
Chapter 13 The Strategy of International Business Answer Key

True / False Questions

1. A firm's strategy can be defined as the actions that managers take to attain the

goals of the firm.

TRUE

A firm's strategy can be defined as the actions that managers take to attain the

goals of the firm.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
2. The preeminent strategic goal for most firms is to maximize the value of the

firm for its owners.

TRUE

A firm's strategy can be defined as the actions that managers take to attain the

goals of the firm. For most firms, the preeminent goal is to maximize the value

of the firm for its owners, its shareholders.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm

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

TRUE

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

In general, higher profitability and a higher rate of profit growth will increase the

value of an enterprise and thus the returns garnered by its owners, the

shareholders.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
4. The amount of value a firm creates is measured by the difference between its

costs of production and the price that it charges for its products.

FALSE

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.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm

5. The customer is able to garner the benefit of the consumer surplus because

one firm is competing with other firms for the customer's business, so the firm

must charge a lower price than it could if it were a monopoly supplier.

TRUE

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 customer

captures some of that value in the form of what economists call a consumer

surplus. The customer is able to do this because the firm is competing with

other firms for the customer's business, so the firm must charge a lower price

than it could, were it a monopoly supplier.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm

6. According to Porter, 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.

TRUE

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.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
7. Diminishing returns imply that when a firm already has significant value built

into its product offering, increasing value by a relatively small amount requires

significant additional costs.

TRUE

Diminishing returns imply that when a firm already has significant value built

into its product offering, increasing value by a relatively small amount requires

significant additional costs.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm

8. For a firm, all positions on the efficiency frontier are viable.

FALSE

Not all positions on the efficiency frontier are viable. In the international hotel

industry, for example, there might not be enough demand to support a chain

that emphasizes very low cost and strips all the value out of its product offering.

International travelers are relatively affluent and expect a degree of comfort

(value) when they travel away from home.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm

9. The strategy, operations, and organization of a firm must all be consistent with

each other if the firm is to attain a competitive advantage and achieve superior

profitability.

TRUE

The strategy, operations, and organization of the firm must all be consistent

with each other if it is to attain a competitive advantage and garner superior

profitability.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm

10. Support activities include the design, creation, and delivery of a product.

FALSE

Primary activities have to do with the design, creation, and delivery of the

product; its marketing; and its support and after-sale service.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
11. R&D, production, marketing and sales, and customer service are all examples

of primary activities.

TRUE

Primary activities have to do with the design, creation, and delivery of the

product; its marketing; and its support and after-sale service. The primary

activities include research and development, production, marketing and sales,

and customer service.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm

12. Support activities are always less important than the primary activities in

achieving a competitive advantage.

FALSE

The support activities of the value chain provide inputs that allow the primary

activities to occur. In terms of attaining a competitive advantage, support

activities can be as important as, if not more important than, the "primary"

activities of the firm.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm

13. Top management should be viewed as part of the firm's infrastructure

TRUE

The final support activity is the company infrastructure, or the context within

which all the other value creation activities occur. Because top management

can exert considerable influence in shaping these aspects of a firm, top

management should also be viewed as part of the firm's infrastructure.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm

14. Global expansion offers companies the opportunity to generate greater profits

than companies that focus strictly on the domestic market.

TRUE

Expanding globally allows firms to increase their profitability and rate of profit

growth in ways not available to purely domestic enterprises.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
15. The success of many multinational corporations is based not just upon the

goods or services that they sell in foreign nations, but also upon the core

competencies that underlie the development, production, and marketing of

those goods or services.

TRUE

The success of many multinational companies that expand in this manner is

based not just upon the goods or services that they sell in foreign nations, but

also upon the core competencies that underlie the development, production,

and marketing of those goods or services.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth

16. The skills within the firm that a competitor cannot easily match or imitate are

known as core competence.

TRUE

The term core competence refers to skills within the firm that competitors

cannot easily match or imitate.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth

17. Core competencies 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.

TRUE

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.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth

18. Economies that arise from performing a value creation activity in the optimal

location are known as location economies.

TRUE

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 (transportation costs and trade barriers permitting).

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
19. Systematic increases in sales that have been observed to occur over the life of

the product are referred to as the experience curve.

FALSE

The experience curve refers to systematic reductions in production costs that

have been observed to occur over the life of a product.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth

20. Cost savings that come from learning by doing are known as economies of

scale.

FALSE

Learning effects refer to cost savings that come from learning by doing. Labor,

for example, learns by repetition how to carry out a task, such as assembling

airframes, most efficiently.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
21. Learning effects tend to be more significant when a technologically simple task

is repeated.

FALSE

Learning effects tend to be more significant when a technologically complex

task is repeated, because there is more that can be learned about the task.

Thus, learning effects will be more significant in an assembly process involving

1,000 complex steps than in one of only 100 simple steps.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth

22. One of the sources of economies of scale is the ability to spread fixed costs

over a large volume.

TRUE

Economies of scale refer to the reductions in unit cost achieved by producing a

large volume of a product. Attaining economies of scale lowers a firm's unit

costs and increases its profitability.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
23. Moving up the experience curve allows a firm to reduce its cost of creating

value and increase its profitability.

FALSE

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 vis-à-vis its competitors.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth

24. Once a firm has established a low-cost position, it can act as a barrier to new

competition.

TRUE

Once a firm has established a low-cost position, it can act as a barrier to new

competition. Specifically, an established firm that is well down the experience

curve can price so that it is still making a profit while new entrants, which are

farther up the curve, are suffering losses.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth

25. In a multinational enterprise, skills are always generated at the headquarters

location and are then dispersed to the rest of the organization.

FALSE

Skills can be created anywhere within a multinational's global network of

operations, wherever people have the opportunity and incentive to try new

ways of doing things. The creation of skills that help to lower the costs of

production, or to enhance perceived value and support higher product pricing,

is not the monopoly of the corporate center.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth

26. To leverage subsidiary skills, companies should establish incentive systems

that encourage local employees to acquire new skills.

TRUE

Managers of the multinational enterprise must establish an incentive system

that encourages local employees to acquire new skills. This is not as easy as it

sounds. Creating new skills involves a degree of risk.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth

27. Two types of competitive pressure that affect the ability of multinational

enterprises to compete in the global marketplace are pressure for cost

reductions and pressure for local responsiveness.

TRUE

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.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-03 Understand how pressures for cost reductions and pressures for local responsiveness influence
strategic choice.
Topic: Cost Pressures and Pressures for Local Responsiveness
28. Because differentiation across countries can involve significant duplication and

a lack of product standardization, it may reduce costs.

FALSE

Firms that compete in the global marketplace face pressures for cost

reductions and pressures to be locally responsive. Because differentiation

across countries can involve significant duplication and a lack of product

standardization, it may raise costs.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-03 Understand how pressures for cost reductions and pressures for local responsiveness influence
strategic choice.
Topic: Cost Pressures and Pressures for Local Responsiveness

29. Universal needs exist when the tastes and preferences of consumers in

different nations are similar if not identical.

TRUE

Universal needs exist when the tastes and preferences of consumers in

different nations are similar if not identical. This is the case for conventional

commodity products such as bulk chemicals, petroleum, steel, sugar, and the

like.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-03 Understand how pressures for cost reductions and pressures for local responsiveness influence
strategic choice.
Topic: Cost Pressures and Pressures for Local Responsiveness

30. Pressures for cost reduction are minimal in industries where major competitors

are based in low-cost locations, where there is persistent excess capacity, and

where consumers are powerful and face low switching costs.

FALSE

Pressures for cost reductions are intense in industries where major competitors

are based in low-cost locations, where there is persistent excess capacity, and

where consumers are powerful and face low switching costs.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-03 Understand how pressures for cost reductions and pressures for local responsiveness influence
strategic choice.
Topic: Cost Pressures and Pressures for Local Responsiveness
31. When consumer tastes and preferences differ significantly between countries,

there is low pressure for local responsiveness.

FALSE

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.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-03 Understand how pressures for cost reductions and pressures for local responsiveness influence
strategic choice.
Topic: Cost Pressures and Pressures for Local Responsiveness

32. A multinational firm may need to delegate marketing functions to national

subsidiaries to be responsive to local differences in distribution channels.

TRUE

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.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-03 Understand how pressures for cost reductions and pressures for local responsiveness influence
strategic choice.
Topic: Cost Pressures and Pressures for Local Responsiveness
33. Threats of protectionism, economic nationalism, and local content rules dictate

that international businesses manufacture locally.

TRUE

Economic and political demands imposed by host-country governments may

require local responsiveness. Threats of protectionism, economic nationalism,

and local content rules (which require that a certain percentage of a product

should be manufactured locally) dictate that international businesses

manufacture locally.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-03 Understand how pressures for cost reductions and pressures for local responsiveness influence
strategic choice.
Topic: Cost Pressures and Pressures for Local Responsiveness
34. Pressures for local responsiveness imply that it may not be possible to

leverage skills and products associated with a firm's core competencies

wholesale from one nation to another.

TRUE

Pressures for local responsiveness imply that it may not be possible to

leverage skills and products associated with a firm's core competencies

wholesale from one nation to another. Concessions often have to be made to

local conditions.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy
35. A global standardization strategy is appropriate when a firm is facing low

pressures for cost reduction but high pressure for local responsiveness.

FALSE

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. This strategy

makes most sense when there are strong pressures for cost reductions and

demands for local responsiveness are minimal.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy

36. When a firm focuses on increasing profitability by customizing the product or

service so that they provide a good match to tastes and preferences in different

national markets, the firm is following a transnational strategy.

FALSE

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.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy

37. When the firm simultaneously faces both strong cost pressures and strong

pressures for local responsiveness, the ideal strategy to follow is the

transnational strategy.

TRUE

Sometimes a firm simultaneously faces both strong cost pressures and strong

pressures for local responsiveness. How can managers balance the competing

and inconsistent demands such divergent pressures place on the firm?

According to some researchers, the answer is to pursue what has been called

a transnational strategy.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy
38. A localization strategy makes most sense when demands for local

responsiveness are high, but cost pressures are moderate or low.

TRUE

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.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy

39. The distinguishing feature of many firms that pursue an international strategy is

that they are selling a product that serves local needs, but they do not face

significant competitors.

FALSE

Many enterprises have pursued 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.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy

40. As competition intensifies, global standardization strategies and transnational

strategies tend to become less viable, and managers need to orientate their

companies toward either an international strategy or a localization strategy.

FALSE

International strategy may not be viable in the long term, and to survive, firms

need to shift toward a global standardization strategy or a transnational

strategy in advance of competitors. The same can be said about a localization

strategy.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy

Multiple Choice Questions


41. _____ can be defined as the rate of return that the firm makes on its invested

capital, which is calculated by dividing the net profits of the firm by total

invested capital.

A. Profitability

B. Performance

C. Cash flow

D. Efficiency

Profitability can be defined as the rate of return that the firm makes on its

invested capital (ROIC), which is calculated by dividing the net profits of the

firm by total invested capital. To maximize the value of a firm, managers must

pursue strategies that increase the profitability of the enterprise and its rate of

profit growth over time.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
42. The percentage increase in net profits over time measures:

A. capital return.

B. profitability.

C. market growth.

D. profit growth.

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

In general, higher profitability and a higher rate of profit growth will increase the

value of an enterprise and thus the returns garnered by its owners, the

shareholders.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
43. Which of the following statements is NOT true?

A. The way to increase the profitability of a firm is to create more value.

B. 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.

C. The more value customers place on a firm's products, the higher the price

the firm is able to charge for those products.

D. The price a firm charges for a good or service is typically more than the
value the customer places on that good or service.

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 customer

captures some of that value in the form of what economists call a consumer

surplus.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
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:

A. the customer's disposable income is significantly higher than what the

market demands.

B. the customer captures some of that value in the form of a consumer surplus.

C. regulatory mechanisms ensure that the customer is not overcharged for

products/services.

D. marketers implement psychological pricing tactics to ensure that customers

perceive the prices to be low.

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 customer

captures some of that value in the form of what economists call a consumer

surplus.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
45. The value of a product to an average consumer is V; and the average price that

the firm can charge a consumer for that product is P. Here, V - P can be

termed as:

A. consumer surplus per unit.

B. producer surplus per unit.

C. profit growth.

D. profit per unit sold.

The value of a product to an average consumer is V; the average price that the

firm can charge a consumer for that product given competitive pressures and

its ability to segment the market is P; and the average unit cost of producing

that product is C. The firm's profit per unit sold (π) is equal to P - C, while the

consumer surplus per unit is equal to V - P.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
46. A consumer surplus can be best described as:

A. what the consumer has "left-over" after a purchase.

B. how much extra a consumer has to pay for a product.

C. value for the money.

D. the premium charged for a quality product.

The value of a product to an average consumer is V; the average price that the

firm can charge a consumer for that product given competitive pressures and

its ability to segment the market is P. The consumer surplus per unit is equal to

V — P (another way of thinking of the consumer surplus is as "value for the

money"; the greater the consumer surplus, the greater the value for the money

the consumer gets).

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
47. A strategy that focuses on increasing the attractiveness of a product is referred

to as a(n):

A. differentiation strategy.

B. low cost strategy.

C. effectiveness strategy.

D. efficiency strategy.

A strategy that focuses primarily on increasing the attractiveness of a product is

known as a differentiation strategy. Michael Porter has argued that low cost

and differentiation are two basic strategies for creating value and attaining a

competitive advantage in an industry.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
48. The efficiency frontier has a convex shape because of:

A. consumer surplus.

B. diminishing returns.

C. profitability.

D. differentiation strategy.

The efficiency frontier shows all of the different positions that a firm can adopt

with regard to adding value to the product (V) and low cost (C) assuming that

its internal operations are configured efficiently to support a particular position.

The efficiency frontier has a convex shape because of diminishing returns.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
49. _____ imply that when a firm already has significant value built into its product

offering, increasing value by a relatively small amount requires significant

additional costs.

A. Efficiency matrixes

B. Diminishing returns

C. Cost plus curves

D. Strategy convex curves

The efficiency frontier has a convex shape because of diminishing returns.

Diminishing returns imply that when a firm already has significant value built

into its product offering, increasing value by a relatively small amount requires

significant additional costs.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
50. The basic strategy paradigm suggests that to maximize its profitability, a firm

should do all of the following, EXCEPT:

A. choose, according to strategy, any position on the efficiency frontier as all

positions are viable.

B. pick a position on the efficiency frontier that is viable in the sense that there

is enough demand to support that choice.

C. configure its internal operations so that they support the position on the

efficiency frontier.

D. make sure that the right organization structure is in place to execute the

strategy.

Porter emphasizes that it is very important for management to decide where

the company wants to be positioned with regard to value (V) and cost (C), to

configure operations accordingly, and to manage them efficiently to make sure

the firm is operating on the efficiency frontier. However, not all positions on the

efficiency frontier are viable.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
51. _____ activities are basically concerned with creating the product, marketing

and delivering the product to buyers, and providing support and after-sales

service.

A. Support

B. Subordinate

C. Ancillary

D. Primary

Primary activities have to do with the design, creation, and delivery of the

product; its marketing; and its support and after-sale service.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
52. Which of the following is an example of a primary activity in a firm's value

chain?

A. Information systems

B. Research and development

C. Logistics

D. Human relations

Research and development (R&D) is concerned with the design of products

and production processes. Although we think of R&D as being associated with

the design of physical products and production processes in manufacturing

enterprises, many service companies also undertake R&D.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
53. Which of the following is an example of a support activity in a firm's value

chain?

A. R&D

B. Customer service

C. Human resources

D. Marketing and sales

The support activities of the value chain provide inputs that allow the primary

activities to occur. The human resource functions ensure that people are

adequately trained, motivated and compensated to perform their value creation

tasks.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
54. _____ activities of the value chain provide inputs that allow the primary activities

to occur.

A. Complementary

B. Basic

C. Core

D. Support

The support activities of the value chain provide inputs that allow the primary

activities to occur.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
55. A firm benefits by basing each value creation activity it performs at that location

where economic, political, and cultural conditions, including relative factor

costs, are most conducive to the performance of that activity. Firms that pursue

such a strategy can realize:

A. differentiation.

B. location economies.

C. vertical integration.

D. horizontal integration.

For a firm that is trying to survive in a competitive global market, this implies

that trade barriers and transportation costs permitting, the firm will benefit by

basing each value creation activity it performs at that location where economic,

political, and cultural conditions, including relative factor costs, are most

conducive to the performance of that activity.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
56. Economies that arise from performing a value creation activity in the optimal

place for that activity are referred to as:

A. factor economies.

B. production economies.

C. location economies.

D. value creation economies.

Locating a value creation activity in the optimal location for that activity can

have one of two effects. It can lower the costs of value creation and help the

firm to achieve a low-cost position, and/or it can enable a firm to differentiate its

product offering from those of competitors.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
57. When companies disperse different stages of the value chain to those locations

around the world where perceived value is maximized or where the costs of

value creation are minimized, companies create:

A. a differentiated organization.

B. a location economy curve.

C. economies of scale.

D. a global web of value creation activities.

The creation of a global web of value creation activities results with different

stages of the value chain being dispersed to those locations around the globe

where perceived value is maximized or where the costs of value creation are

minimized.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
58. Lenovo's ThinkPad laptop computers is designed in the United States, the

case, keyboard, and hard drive are made in Thailand; the display screen and

memory in South Korea; the built-in wireless card in Malaysia; and the

microprocessor in the United States. In each case, these components are

manufactured and sourced from the optimal location given current factor costs.

In this example, Lenovo has:

A. vertical integration advantages.

B. a global web of value creation activities.

C. learning effects.

D. high local responsiveness.

Locating a value creation activity in the optimal location for that activity can

have one of two effects. It can lower the costs of value creation and help the

firm to achieve a low-cost position, and/or it can enable a firm to differentiate its

product offering from those of competitors. One result of this kind of thinking is

the creation of a global web of value creation activities, with different stages of

the value chain being dispersed to those locations around the globe where

perceived value is maximized or where the costs of value creation are

minimized.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
59. _____ refer(s) to systematic reductions in production costs that have been

observed to occur over the life of a product.

A. Experience curve

B. Economies of scale

C. Location economies

D. Production possibility

The experience curve refers to systematic reductions in production costs that

have been observed to occur over the life of a product.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
60. It has been observed that a product's production costs decline by some

quantity about each time, cumulative output:

A. increases by twenty five percent.

B. quadruples.

C. doubles.

D. triples.

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 product's production costs decline by some quantity

about each time cumulative output doubles.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
61. It has been observed in the aircraft industry that, each time cumulative output

of airframes was doubled, unit costs typically declined to 80 percent of their

previous level. This is an example of:

A. the core performance curve.

B. the location curve.

C. the strategic curve.

D. the experience curve.

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 product's production costs decline by some quantity

about each time cumulative output doubles.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
62. When individuals gain knowledge of the most efficient ways to perform

particular tasks, they are saving costs through:

A. location economies.

B. value creation effects.

C. experience curve effects.

D. learning effects.

Learning effects refer to cost savings that come from learning by doing. Labor,

for example, learns by repetition how to carry out a task, such as assembling

airframes, most efficiently.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
63. Learning effects:

A. tend to be less significant when a technologically complex task is repeated.

B. will be less significant in an assembly process involving 1,000 complex

steps than in one of only 100 simple steps.

C. typically disappear after a while, in spite of the complexity of the task.

D. are more significant after two or three years of the introduction of a new

process.

Learning effects tend to be more significant when a technologically complex

task is repeated, because there is more that can be learned about the task. No

matter how complex the task, however, learning effects typically disappear

after a while.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
64. It has been suggested that learning effects are important only during the start-

up period of a new process and that they cease after two or three years. Any

decline in the experience curve after such a point is due to:

A. reduction in fixed costs.

B. higher depreciation costs.

C. economies of scale.

D. obsolescence.

No matter how complex the task, learning effects typically disappear after a

while. It has been suggested that they are important only during the start-up

period of a new process and that they cease after two or three years. Any

decline in the experience curve after such a point is due to economies of scale.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
65. Economies of scale arise from all of the following sources, EXCEPT:

A. increasing fixed costs by limiting them to small volumes.

B. serving domestic and international markets from the same production

facilities

C. serving global markets.

D. bargaining with suppliers to bring down the cost of key inputs.

Economies of scale refer to the reductions in unit cost achieved by producing a

large volume of a product. Attaining economies of scale lowers a firm's unit

costs and increases its profitability.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
66. Moving down the experience curve:

A. increases the cost of a firm's raw material.

B. allows a firm to reduce its cost of creating value.

C. decreases a firm's profitability.

D. increases the R & D expenditure of a firm.

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 vis-à-vis its competitors.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
67. Firms usually respond to pressures for cost reduction by trying to:

A. lower the costs of value creation.

B. be locally responsive.

C. undertaking product differentiation.

D. diversifying product lines.

In competitive global markets, international businesses often face pressures for

cost reductions. Responding to pressures for cost reduction requires a firm to

try to lower the costs of value creation.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Understand how pressures for cost reductions and pressures for local responsiveness influence
strategic choice.
Topic: Cost Pressures and Pressures for Local Responsiveness
68. Responding to pressure for _____ requires that a firm differentiate its product

offering and marketing strategy from country to country.

A. cost reductions

B. experience effects

C. lowering the costs of value creation

D. being locally responsive

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.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Understand how pressures for cost reductions and pressures for local responsiveness influence
strategic choice.
Topic: Cost Pressures and Pressures for Local Responsiveness
69. _____ exists when the tastes and preferences of consumers in different nations

are similar if not identical.

A. Universal needs

B. Homogenous needs

C. Basic needs

D. Bundled needs

Universal needs exist when the tastes and preferences of consumers in

different nations are similar if not identical. This is the case for conventional

commodity products such as bulk chemicals, petroleum, steel, sugar, and the

like.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-03 Understand how pressures for cost reductions and pressures for local responsiveness influence
strategic choice.
Topic: Cost Pressures and Pressures for Local Responsiveness
70. Which of the following is less likely to add to the pressure for a firm to be locally

responsive?

A. National differences in consumer tastes and preferences

B. Differences in infrastructure and traditional practices

C. Switching costs for consumers

D. Host-government demands

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. Responding to

pressures to be locally responsive requires a firm to differentiate its products

and marketing strategy from country to country to accommodate these factors,

all of which tends to raise the firm's cost structure.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Understand how pressures for cost reductions and pressures for local responsiveness influence
strategic choice.
Topic: Cost Pressures and Pressures for Local Responsiveness
71. When a firm has a strategic goal of pursuing a low-cost strategy on a worldwide

scale, the firm should follow a(n) _____ strategy.

A. global standardization

B. localization

C. international

D. customization

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.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy
72. Which of the following is NOT associated with firms following the global

standardization strategy?

A. Low pressures for local responsiveness

B. Use cost advantage to support aggressive pricing in world markets

C. High pressures for cost reductions

D. Customize product offering and marketing strategy to local conditions

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.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy
73. _____ strategy 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.

A. Localization

B. Transnational

C. Global standardization

D. International

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.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy
74. Which strategy focuses on increasing profitability by customizing the firm's

goods or services so they provide a good match to tastes and preferences in

different national markets?

A. Global standardization strategy

B. Transnational strategy

C. Localization strategy

D. International strategy

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.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy
75. Which of the following is a disadvantage of the localization strategy?

A. Decrease in the value of the product in the local market

B. Duplication of functions

C. Inability to accommodate varying tastes and preferences in different markets

D. Reduced customization

On the downside, because the localization strategy 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.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy
76. A firm that is facing both strong cost pressures and strong pressures for local

responsiveness should follow a(n) _____ strategy.

A. localization

B. global standardization

C. international

D. transnational

Firms that pursue a transnational strategy are trying to simultaneously achieve

low costs through location economies, economies of scale, and learning

effects; differentiate their product offering across geographic markets to

account for local differences; and foster a multidirectional flow of skills between

different subsidiaries in the firm's global network of operations.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy
77. A firm that is pursuing a(n) _____ strategy is simultaneously trying to achieve

low costs through location economies, economies of scale, and learning

effects, and trying to differentiate its product offering across geographic

markets.

A. global customization

B. international

C. localization

D. transnational

Firms that pursue a transnational strategy are trying to simultaneously achieve

low costs through location economies, economies of scale, and learning

effects; differentiate their product offering across geographic markets to

account for local differences; and foster a multidirectional flow of skills between

different subsidiaries in the firm's global network of operations.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy
78. A firm facing low pressures for cost reductions and low pressures for local

responsiveness, is most likely to follow a(n) _____ strategy.

A. global standardization

B. localization

C. international

D. transnational

There are multinational firms that find themselves in the fortunate position of

being confronted with low cost pressures and low pressures for local

responsiveness. Many of these enterprises have pursued an international

strategy, taking products first produced for their domestic market and selling

them internationally with only minimal local customization.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy
79. For firms that are selling a product that serves universal needs, and that do not

face significant competition, a(n) _____ strategy makes sense.

A. localization

B. international

C. transnational

D. global standardization

Many enterprises have pursued 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.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy
80. Which of the following is true of the international strategy?

A. Product development tends to be highly decentralized.

B. Manufacturing and marketing are typically located in the headquarters

location.

C. Extensive production customization is common.

D. The strategy is not viable in the long-run.

An international strategy may not be viable in the long term, and to survive,

firms need to shift toward a global standardization strategy or a transnational

strategy in advance of competitors.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy

Essay Questions
81. What is strategy? How does strategy relate to a firm's profitability?

A firm's strategy can be defined as the actions that managers take to attain the

goals of the firm. For most firms, the key goal is to maximize the value of the

firm for its owners. To maximize the value of the firm, managers must pursue

strategies that increase profitability, or rate of return the firm makes on its

invested capital. Managers can increase profitability by pursuing strategies that

lower costs and strategies that add value to the firm's products.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm

82. What is the difference between profitability and profit growth?

Profitability can be defined as the rate of return that the firm makes on its

invested capital which is calculated by dividing the net profits of the firm by total

invested capital. The percentage increase in net profits over time is profit

growth. In general, the value of the firm will increase when both profitability and

profit growth are high.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm

83. How can a firm increase its profitability?

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. In general,

the more value customers place on a firm's products, the higher the price the

firm can charge for those products.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
84. Discuss Michael Porter's interpretation of value creation and competitive

advantage.

According to Michael Porter, low cost and differentiation are two basic

strategies for creating value and attaining a competitive advantage in an

industry.

Porter argues that those firms that create superior value will achieve superior

profitability. Porter notes that it is not necessary for a firm to have the lowest

cost structure or create the most valuable product; rather it is only important

that the gap between value and the cost of production be greater than that of

competitors.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
85. Discuss efficiency frontier. How does strategic positioning relate to the

efficiency frontier?

The efficiency frontier shows all of the different positions that a firm can adopt

with regard to adding value to the product and low cost assuming that its

internal operations are configured efficiently to support a particular position. It is

important that managers decide where a firm should be positioned with regard

to value and cost, configure operations accordingly, and manage them

efficiently to ensure the firm is operating on the efficiency frontier. A central

tenet of the basic strategy paradigm is that to maximize its profitability, a firm

must do three things: (a) pick a position on the efficiency frontier that is viable

in the sense that there is enough demand to support that choice; (b) configure

its internal operations, such as manufacturing, marketing, logistics, information

systems, human resources, and so on, so that they support that position; and

(c) make sure that the firm has the right organization structure in place to

execute its strategy.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
86. Consider the firm in terms of a value chain. What is the difference between

primary activities and support activities? Provide examples of each.

The operations of a firm can be thought of as a value chain composed of a

series of distinct value creation activities. Primary activities have to do with the

design, creation, and delivery of the product; its marketing; and its after-sale-

service. Normally, primary activities are divided into R&D, production,

marketing and sales, and customer service. The support activities of the value

chain provide inputs that allow the primary activities to occur. Support activities

include information systems, company infrastructure, logistics, and human

resources.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
87. How can the marketing and sales functions of a firm create value?

There are several ways the marketing and sales functions of a firm can help

create value. The marketing function can create value through brand

positioning and advertising. If the firm can create a favorable impression of the

firm's product in the minds of consumers, it can increase the price that can be

charged. Marketing and sales can also create value by identifying consumer

needs and passing that information along to the R&D department.

Resolving customer problems and supporting customers after they have

purchased the product can also create the perception of superior value.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Explain the concept of strategy.
Topic: Strategy and the Firm
88. Describe the benefits of global expansion for firms.

Expanding globally allows firms to increase their profitability and rate of profit

growth in ways not available to purely domestic enterprises. 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, thereby reducing the costs of

value creation.

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.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
89. What is a core competence? Why is it essential to the success of the firm?

The term core competence refers to skills within the firm that competitors

cannot easily match or imitate. These skills may exist in any of the firm's value

creation activities—production, marketing, R&D, human resources, logistics,

general management, and so on. Such skills are typically expressed in product

offerings that other firms find difficult to match or imitate. 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.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
90. Explain the concept of location economies.

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. For a firm that is trying to survive in a competitive global market,

basing each value creation activity it performs at that location where economic,

political, and cultural conditions are most conducive to the performance of that

activity will provide benefits to the firm. As firms pursue location economies,

they may also be in the process of creating a global web of value creation

activities, with different stages of the value chain being dispersed to those

locations around the globe where perceived value is maximized or the costs of

value creation are minimized.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
91. Discuss the creation of a global web of value creation activities.

The creation of a global web of value creation activities involves different

stages of the value chain being dispersed to those locations around the globe

where perceived value is maximized or where the costs of value creation are

minimized. In theory, a firm that realizes location economies by dispersing each

of its value creation activities to its optimal location should have a competitive

advantage vis-à-vis a firm that bases all of its value creation activities at a

single location.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth

92. What is an experience curve?

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 product's production costs decline by some quantity

about each time cumulative output doubles.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth

93. What are learning effects? When are learning effects most significant?

Learning effects refer to cost savings that come from learning by doing. Labor,

for example, learns by repetition how to carry out a task, such as assembling

airframes, most efficiently. Labor productivity increases over time as individuals

learn the most efficient ways to perform particular tasks. Learning effects tend

to be more significant when a technologically complex task is repeated,

because there is more that can be learned about the task.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
94. How can firms successfully leverage the skills developed at the subsidiary

level?

Firms can successfully leverage skills developed at the subsidiary level by

doing four things. First, managers must have the humility to recognize that

valuable skills that lead to competencies can arise anywhere within the firm's

global network, not just at the corporate center. Second, the firm must establish

an incentive system that encourages local employees to acquire new skills.

Third, managers must have a process for identifying when valuable new skills

have been created in a subsidiary. Finally, managers must act as facilitators

helping to transfer valuables skills within the firm.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Recognize how firms can profit by expanding globally.
Topic: Global Expansion, Profitability, and Profit Growth
95. What are the two types of competitive pressures that firms competing in the

global marketplace face? How do firms respond to these pressures?

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. 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.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Understand how pressures for cost reductions and pressures for local responsiveness influence
strategic choice.
Topic: Cost Pressures and Pressures for Local Responsiveness
96. Discuss the factors that lead to pressure for local responsiveness.

There are many factors that contribute to the need for local responsiveness.

When consumer tastes and preferences differ significantly between countries,

a firm's products and marketing message must be customized to the local

market. Differences in infrastructure and traditional practices among countries

may require the firm to delegate manufacturing and production facilities to

foreign subsidiaries. A firm's marketing strategies may have to be responsive to

differences in distribution channels among countries. Finally, economic and

political demands imposed by host country governments may require local

responsiveness.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Understand how pressures for cost reductions and pressures for local responsiveness influence
strategic choice.
Topic: Cost Pressures and Pressures for Local Responsiveness
97. What are the four basic strategies that firms use to compete in international

markets?

The four basic strategies that firms use to compete in international markets are

the international strategy, the global standardization strategy, the localization

strategy, and the transnational strategy.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy

98. Describe localization strategy.

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. This strategy is most appropriate

when there are substantial differences across nations with regard to consumer

tastes and preferences.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy
99. Consider a transnational strategy. Why would a firm choose this strategic

alternative? What are the disadvantages of this strategy?

Firms that are pursuing a transnational strategy are trying to simultaneously

achieve low costs through location economies, economies of scale, and

learning effects; differentiate their product offering across geographic markets

to account for local differences; and foster a multidirectional flow of skills

between different subsidiaries in the firm's global network of operations. In

essence, a transnational strategy requires a firm to simultaneously achieve

cost efficiencies, global learning, and local responsiveness. This strategy

makes sense when a firm faces high pressures for cost reductions and high

pressures for local responsiveness. Building an organization that is capable of

supporting a transnational strategic posture is complex and difficult. It is difficult

to pursue this strategy because it puts conflicting demands on the company.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy
100. Discuss the evolution of strategy. How does cost become important in the long

term?

An international strategy is typically not considered to be a sustainable long-

term strategy. Over time, more efficient competitors emerge, forcing firms to

make cost reductions or risk losing significant market share. To survive,

companies following an international strategy need to move toward a global

standardization strategy or a transnational strategy prior to the emergence of

competition. Similarly, a localization strategy is not considered a long-term

strategy. Instead, companies following a localization strategy need to reduce

their cost structures, and the only way to achieve that are to move toward a

transnational strategy.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Identify the different strategies for competing globally and their pros and cons.
Topic: Choosing a Strategy