Chapter 8 Strategy in the Global Environment

TRUEFALSE

1. The globalization of production has been decreasing as companies have been facing lower
barriers to international trade and location economies.

(A) True

(B) False

Answer : (B)

2. Despite the globalization of production and markets, many of the most successful companies in
certain industries are still clustered in a small number of countries.

(A) True

(B) False

Answer : (A)

3. Factor endowments, the cost and quality of factors of production, are a prime determinant of the
competitive advantage that certain countries have in certain industries.

(A) True

(B) False

Answer : (A)

4. Starbucks, Sony, and Coca-Cola conduct business in two or more countries. These companies can
be referred to as multinational companies.

(A) True

(B) False

Answer : (A)

5. A company can increase its growth rate by taking goods or services developed at home and
selling them internationally.

(A) True

(B) False

Answer : (A)
6. Location economies refer to the economic benefits that arise from performing a value creation
activity at an optimal location.

(A) True

(B) False

Answer : (A)

7. A company may create value if it can leverage the competencies created within subsidiaries and
apply them to other operations within the firm's global network.

(A) True

(B) False

Answer : (A)

8. By offering a standardized product to the global marketplace and manufacturing that product in
each nation in which it does business irrespective of production costs, a multinational company can
realize substantial scale economies.

(A) True

(B) False

Answer : (B)

9. Local responsiveness may be driven by economic and political demands placed on companies by
host country governments.

(A) True

(B) False

Answer : (A)

10. An international strategy may not be viable in the long term, but companies that can pursue it
need to shift toward a global standardization strategy to survive.

(A) True

(B) False

Answer : (A)

11. A transnational strategy makes the most sense when demand for local responsiveness is
minimal.
(A) True

(B) False

Answer : (B)

12. A localization strategy is most appropriate when there are substantial differences across nations
with regard to consumer tastes and preferences and when cost pressures are not too intense.

(A) True

(B) False

Answer : (A)

13. Global standardization strategy emphasizes customization and product differentiation.

(A) True

(B) False

Answer : (B)

14. Company leaders that pursue a global standardization strategy are trying to develop a business
model that simultaneously achieves low costs and differentiates the product offering across
geographic markets.

(A) True

(B) False

Answer : (B)

15. Most manufacturing companies begin their global expansion by exporting.

(A) True

(B) False

Answer : (A)

16. When a company licenses its technology it can quickly lose control over it.

(A) True

(B) False

Answer : (A)
17. One advantage of a joint venture is that a company may benefit from a local partner's knowledge
of the many dimensions of a host country.

(A) True

(B) False

Answer : (A)

18. If a company's competitive advantage derives from its control of proprietary technological know-
how, it should either license its technology to others or pursue a joint venture.

(A) True

(B) False

Answer : (B)

19. Companies should form strategic alliances with firms that have a reputation for being
opportunistic.

(A) True

(B) False

Answer : (B)

20. Strategic alliances can be designed to make it difficult (if not impossible) to transfer technology
that is not meant to be transferred.

(A) True

(B) False

Answer : (A)

MULTICHOICE

21. Which of the following has occurred in international trade over the past half-century?

(A) There has been a dramatic increase in the barriers to international trade.

(B) Tariff rates on manufactured goods traded by advanced nations have fallen.

(C) Regulations prohibiting foreign companies from entering domestic markets and establishing
production facilities have increased.

(D) The volume of world trade has decreased dramatically.

(E) There has been a decline in the value of foreign direct investment.

Answer : (B)

22. Which of the following is not an attribute of a national or country-specific environment that has
an impact on global competitiveness of companies located in that nation?

(A) Factor endowments

(B) Local demand conditions

(C) Related and supporting industries

(D) Strategy, structure, and rivalry of firms within the nation

(E) Advertising expenses

Answer : (E)

23. Global economies of scale can be realized by:

(A) restricting the expansion of overseas sales.

(B) limiting the utilization of production facilities.

(C) curbing bargaining power with suppliers.

(D) decreasing cost savings through learning effects.

(E) spreading the fixed costs associated with developing.

Answer : (E)

24. Which of the following statements is true in the context of local demand conditions?

(A) Companies are typically least sensitive to the needs of their closest customers.

(B) Home demand plays little role in helping companies upgrade their national competitive
advantage.

(C) A nation's companies gain competitive advantage if their domestic customers are sophisticated
and demanding.

(D) The characteristics of international demand alone shape the attributes of a company's products;
not local demand.

(E) Local demand characteristics have little role to play in creating pressure for innovation and
quality.

Answer : (C)
25. Which of the following is not a factor of production?

(A) Land

(B) Labor

(C) Raw materials

(D) Competitive forces

(E) Managerial sophistication

Answer : (D)

26. Black and Decker, Capitol One, Gillette, and Unilever are all companies that conduct business in
two or more national markets. These companies are known as:

(A) bimarket companies.

(B) national companies.

(C) domestic companies.

(D) multinational companies.

(E) localized companies.

Answer : (D)

27. Which of the following statements is true in the context of attributes of national competitive
advantage?

(A) Factor endowments do not encompass aspects such as managerial sophistication.

(B) Companies are typically least sensitive to the needs of their closest customers.

(C) The benefits of investments in advanced factors of production by related and supporting
industries are confined to those industries.

(D) Domestic rivalry creates pressures to increase costs and avoid investing in upgrading advanced
factors.

(E) The nature of home demand shapes the attributes of domestically made products .

Answer : (E)

28. Swedish strength in fabricated steel products (such as ball bearings and cutting tools) has
drawn on strengths in Sweden's specialty steel industry. This is an example of which of the following
attributes that impact national competitive advantage?

(A) Local demand conditions

(B) Competitiveness of related and supporting industries

(C) Intensity of rivalry in an industry

(D) Factor endowments

(E) Differences in distribution channels

Answer : (B)

29. The globalization of production has caused firms to:

(A) lower their market share.

(B) lower their cost structure.

(C) centralize their production process.

(D) curb international competition.

(E) limit the number of market segments.

Answer : (B)

30. Which of the following statements is true in the context of globalization of production and
markets?

(A) Globalization of production has significantly increased the costs for many industries.

(B) The globalization of markets and production has failed to threaten companies' home markets.

(C) Consolidated oligopolies continue to be dominated by a small number of companies despite

globalization.

(D) The shift from national to global markets has curbed competitive rivalry in many industries.

(E) Globalization has significantly increased the threat of entry.

Answer : (E)

31. ​Strong pressures for convergence due to a shared history and culture, or the establishment of a
trading block where there are deliberate attempts to harmonize trade policies, infrastructure, and
regulations have contributed to the rise in what trend?

(A) ​Regionalism

(B) ​Globalization

(C) ​Monopolies

(D) ​Nationalism
(E) ​Traditional Practices

Answer : (A)

32. When a company grows its sales volume through international expansion, it can realize cost
savings from economies of scale through all of the following except:

(A) spreading fixed costs over its global sales volume.

(B) utilizing its production facilities more intensely.

(C) increased bargaining power with its suppliers.

(D) learning effects associated with higher volume.

(E) adopting high cost structures.

Answer : (E)

33. When a company performs a value creation activity in a region that is optimal for that activity,
wherever in the world that might be, it is trying to capitalize on:

(A) negative feedback loops.

(B) economies of scope.

(C) the transnational strategy.

(D) location economies.

(E) its localization strategy.

Answer : (D)

34. Which of the following is not a necessity for leveraging the competencies of global subsidiaries?

(A) Incentives for local managers to share knowledge and ideas

(B) Awareness among managers that competencies can develop anywhere

(C) Assertion of monopoly of the corporate center over subsidiaries

(D) Transfer of competencies around the company

(E) Incentives that encourage employees to take necessary risks

Answer : (C)

35. Global expansion:

(A) is feasible only for non-technology based companies.

(B) can enable companies to increase their profitability and grow their profits more rapidly.

(C) has significantly decreased in the recent years as the industry barriers are now higher.

(D) does not involve selling existing products to new markets in different countries.

(E) is not feasible for service-based firms.

Answer : (B)

36. Which of the following factors increases pressures for cost reductions?

(A) Meaningful differentiation between products

(B) Reduced international competition

(C) Competitors that are based in high-cost locations

(D) High switching costs

(E) Persistent excess capacity

Answer : (E)

37. Which of the following factors increases pressures for local responsiveness?

(A) Powerful buyers

(B) Uniformity in distribution channels

(C) Host government demands

(D) Similarities in customer tastes and preferences

(E) Competitors that are based in high-cost locations

Answer : (C)

38. Differences in tastes and preferences:

(A) increase pressures for cost reductions.

(B) do not affect service-based firms.

(C) increase pressures for local responsiveness.

(D) reduce pressures from the host government.

(E) significantly decrease R&D costs of a company.

Answer : (C)
39. Host government demands generally:

(A) increase pressures for local responsiveness.

(B) decrease pressures for cost reductions.

(C) do not encompass local content rules.

(D) compel companies to abandon localization strategies.

(E) impede a company's ability to differentiate its product offering across national borders.

Answer : (A)

40. In the wireless telecommunications industry, different technical standards are found in different
parts of the world. A technical standard known as GSM is common in Europe, and an alternative
standard, CDMA, is more common in the United States and parts of Asia. Equipment designed for
GSM will not work on a CDMA network and vice versa. Which of the following pressures for local
responsiveness does this represent?

(A) Global environmental demands

(B) Host government demands

(C) Differences in distribution channels

(D) Differences in customer tastes and preferences

(E) Differences in infrastructure

Answer : (E)

41. Cost reduction pressures can be particularly intense in industries producing:

(A) commodity-type products.

(B) highly differential products.

(C) highly customized services.

(D) goods that have no close substitutes.

(E) goods that need minimal advertising.

Answer : (A)

42. Nutrimax, a sports foods manufacturer, has recently expanded its operations to different
countries. The company has realized that customers in different countries have different tastes and
preferences. So, the company customizes its products based on the country where it's selling. In this
scenario, Nutrimax is most likely to be using _____ strategy.
(A) global standardization

(B) localization

(C) Achilles heel

(D) centralization

(E) transnational

Answer : (B)

43. Companies that pursue a _____ strategy are trying to develop a business model that
simultaneously achieves low costs, differentiates the product offering across geographic markets,
and fosters a flow of skills between different subsidiaries in the company's global network of
operations.

(A) transnational

(B) downsizing

(C) centralization

(D) localization

(E) global standardization

Answer : (A)

44. Which of the following ideas is a localization strategy is based on?

(A) There is a convergence in the tastes of consumers in different nations of the world.

(B) There are substantial economies of scale to be realized from centralizing global production.

(C) Consumer tastes and preferences differ among national markets.

(D) There are cost advantages associated with manufacturing a standard product for global
consumption.

(E) Competitive strategy should be centralized at the world head office.

Answer : (C)

45. The Achilles heel of international strategy is that:

(A) economies of scale cannot be achieved.

(B) customization of products makes the company lose its credibility.

(C) competitors inevitably emerge.

(D) non-price differences among products hold little importance.

(E) customer preferences eventually become identical.

Answer : (C)

46. Which of the following statements is true about global standardization strategy?

(A) It emphasizes product customization to specifically meet customer needs.

(B) It involves the spreading of production, marketing, and research and development activities of
companies to all the location it operates in.

(C) It makes most sense when there are strong pressures for cost reductions.

(D) It makes most sense when the pressures for local responsiveness are maximum.

(E) It fails to focus on achieving location and scale economies.

Answer : (C)

47. Which of the following statements is true about localization strategy?

(A) It focuses on marketing a standardized product worldwide to achieve cost reductions.

(B) It makes most sense when cost pressures are extremely intense.

(C) It is most appropriate when there are similarities across nations with regard to consumer tastes
and preferences.

(D) It involves some duplication of functions and smaller production runs.

(E) It usually relieves companies of the task of closely monitoring their costs.

Answer : (D)

48. Which of the following statements is true about transnational strategy?

(A) It gives little emphasis to cost reduction and achieving scale economies.

(B) It makes little sense when the pressures for local responsiveness are intense.

(C) It is an easy one to pursue because it places minimal demands on the company.

(D) It fosters a flow of competencies between different subsidiaries in the company's global network
of operations.

(E) It is adopted by companies that produce standardized goods that do not require product
differentiation.

Answer : (D)
49. Relish is a large fast food chain that operates in many countries. As there are several
competitors in the fast food sector, the company has been facing intense pressures for achieving low
cost structures. The company also faces the task of customizing its product line as there are
significant differences in tastes and preferences among customers in different geographic locations.
In order to achieve both low costs and product differentiation, the company should aim to pursue a
_____ strategy.

(A) global standardization

(B) transnational

(C) localization

(D) downsizing

(E) divestment

Answer : (B)

50. Aries Travels is a company that offers holiday and travel packages. The company realizes that
customer preferences vary and thus extensively customizes its packages. As there are not many
competitors in the market in which Aries Travels operates, there are minimal pressures to reduce
costs. Aries Travels is most likely to have adopted a _____ strategy.

(A) global standardization

(B) international

(C) localization

(D) transnational

(E) harvest

Answer : (C)

51. WKL Entertainment Inc. is a service-based firm with very few competitors. The company is
looking to sell its services in different nations with substantial differences in consumer preferences
and where cost pressures are not too intense. Which of the following strategies should WKL
Entertainment Inc. managers pursue?

(A) Global standardization

(B) Transnational

(C) Localization

(D) International

(E) Multinational

Answer : (C)
52. Which of the following statements is true about international strategy?

(A) It is usually adopted by companies that face intense cost pressures due to competition.

(B) It makes most sense when the pressures for local responsiveness are very intense.

(C) It often involves the head office retaining tight control over marketing and product strategy.

(D) It often involves decentralizing product development functions such as R&D to different
subsidiaries.

(E) It involves extensive scope for localization and product differentiation.

Answer : (C)

53. Which of the following is an advantage of international licensing?

(A) It enables the company realize scale economies and location economies through manufacturing
products in a centralized location.

(B) It allows the company to collect profits from one licensee and use it to support others.

(C) It eliminates the risk of losing control over a technology that the company owns.

(D) It enables the company to coordinate its strategy efficiently to achieve competitive advantage.

(E) It takes away the pressure of development costs and risks associated with opening up a foreign
market from the company.

Answer : (E)

54. A company, Pluto Inc., employs the franchising strategy to enter a new national market. Which
of the following statements is more likely to be true of Pluto?

(A) It is more likely to be a service company.

(B) It is more likely to have a greater control over the quality the products manufactured in the
foreign country.

(C) It is less likely to impose strict rules regarding how a franchisee does business.

(D) It is less likely to receive royalty payment from the franchisee.

(E) It is more likely to bear the development costs associated with opening a foreign market on its
own.

Answer : (A)

55. Which entry mode gives a multinational the tightest control over foreign operations?

(A) Exporting from the home country and letting a foreign agent organize local marketing
(B) Licensing

(C) Franchising

(D) Entering into a joint venture with a foreign company to set up overseas operations

(E) Setting up a wholly owned subsidiary

Answer : (E)

56. Which of the following is an advantage of franchising?

(A) It ensures tight control over quality.

(B) It enables companies to engage in global strategic coordination.

(C) It involves low development costs and risks.

(D) It enables the company to collect all the profits made by the franchisees.

(E) It frees companies from the task of monitoring and assisting operations at franchisees.

Answer : (C)

57. Which of the following entry modes allows a company to engage in global strategic
coordination?

(A) Exporting

(B) Licensing

(C) Joint ventures

(D) Wholly owned subsidiaries

(E) Franchising

Answer : (D)

58. Which of the following is disadvantage of strategic alliances?

(A) They give competitors a low-cost route to new technology and markets.

(B) They do not facilitate entry into a foreign market.

(C) They do not allow for sharing of risks and fixed costs.

(D) They mandate that the companies do not share complementary competencies and assets.

(E) They cause problems when it comes to establishing technological standards for the industry.

Answer : (A)
59. For a strategic alliance, firms should seek partners that are:

(A) different in terms of vision and agendas.

(B) known for being opportunistic.

(C) willing to share costs and risks of product development.

(D) radically different when it comes to strategic goals.

(E) similar when it comes to capabilities.

Answer : (C)

60. Most manufacturing companies begin their global expansion by:

(A) licensing.

(B) franchising.

(C) exporting.

(D) forming a joint venture.

(E) setting up a wholly owned subsidiary in the host country.

Answer : (C)

61. Which of the following is not a risk of exporting?

(A) Tariff barriers

(B) Transportation costs

(C) Location diseconomies

(D) High manufacturing costs

(E) Delegation of marketing activities to a local agent

Answer : (D)

62. Dietizza is a fast food network that makes low-calorie pizzas. As the firm wishes to expand its
operations in different locations, it has licensed a few entrepreneurs to open Dietizza outlets under
the company's trademark. The entrepreneurs will take up the responsibility of costs, while Dietizza
will assist them in running operations. The company will receive royalty payments and a percentage
of profits from the entrepreneurs. Which of the following concepts is illustrated here?

(A) Exporting

(B) Franchising
(C) Setting up of a wholly owned subsidiary

(D) Strategic alliance

(E) Joint venture

Answer : (B)

ESSAY

63. What is meant by the term national competitive advantage, and what are the attributes of a
nation that affect the global competitiveness of companies located within that nation?

Graders Info :

National competitive advantage refers to the fact that the nation within which a company is based
may have an important bearing on the competitive position of that company in the global
marketplace. There are four attributes of a country-specific environment that have an important
impact on the global competitiveness of companies based within that country. Factor endowments
encompass a nation's position in factors of production and include factors such as skilled labor and
the infrastructure necessary to compete in a given industry. Demand conditions refer to the nature
of demand for a product or service in the home country. Relating and supporting industries refer to
the presence or absence of supplier industries and related industries that are internationally
competitive. Finally, firm strategy, structure, and rivalry refers to the conditions in the nation
governing how companies are created, organized, and managed and the nature of domestic rivalry.

64. Identify and discuss the general ways in which companies can increase their profitability and
profit growth through global expansion.

Graders Info :

Companies can increase their profitability and profit growth from global expansion in several ways.
First, companies can take goods or services developed at home and sell them internationally. In so
doing, a company instantly expands its market, often by using the same business model. It should be
noted that benefits may come from the fact that products are superior, but it is also important that
companies use existing competencies in foreign markets as well. Second, companies that expand
their sales volume through international expansion can expect to realize savings from economies of
scale, thereby increasing profitability through the ability to lower their cost structure. Third,
companies can realize location economies by performing value creation activities in the optimal
location for that activity, wherever in the world that may be. Different counties offer opportunities to
both lower costs and increase differentiation. Finally, a company can leverage the competencies of
global subsidiaries by applying best practices and good ideas that may come from anywhere in the
organization.

65. Whirlpool, a leading U.S. maker of household appliances, has a wholly owned subsidiary that is
responsible for research and development (R&D), manufacturing, and sales in over two dozen
European countries, from Norway to Greece. What are some of the potential advantages that
Whirlpool may gain from its use of a wholly owned subsidiary for global expansion? What are some
of the potential disadvantages?

Graders Info :

Whirlpool stands to make high profits from its wholly owned subsidiary because it doesn't have to
share profits with a partner, franchisee, or licensee. Also, the firm maintains control over
proprietary technology and know-how. Tight quality control is also possible, which can protect the
firm's brand-name reputation. In addition, Whirlpool will likely realize economies of scale and will be
able to use profits from U.S. operations to fund further expansion into Europe. Finally, the company
will benefit from learning that takes place at its subsidiary.
On the downside, Whirlpool has invested its own capital in the subsidiary and therefore faces a large
risk of financial loss.

66. What are the potential benefits and risks of global strategic alliances? What actions can a firm
take to minimize the risks and maximize the benefits?

Graders Info :

Global strategic alliances share the risk of global expansion, bring together complementary
competencies, facilitate entry into a new market, and can set technological standards. However, the
partners risk loss of control over proprietary know-how, they must learn to work together in a
cooperative fashion, and they must share any profits they earn. ​
To maximize the benefits and minimize the risks, firms should choose a partner wisely, ensuring that
the partner is trustworthy, has a common vision, and has complementary competencies. To reduce
the potential for loss of control, the company should consider walling off the technology, writing
contractual safeguards, use cross-licensing agreements to exchange competencies, and ask for a
credible commitment in advance. Finally, bringing the two firms together is a significant challenge
and can be eased if managers are sensitive to cultural differences, if they build interpersonal
relationships across company boundaries, and if they look for opportunities for mutual learning and
benefit.

67. List and briefly describe each of the four basic global strategies.

Graders Info :

Companies that pursue a global standardization strategy focus on increasing profitability by reaping
the cost reductions that come from economies of scale and location economies. A localization
strategy focuses on increasing profitability by customizing the company's goods or services so that
the goods provide a favorable match to tastes and preferences in national markets. Companies that
pursue a transnational strategy are trying to develop a business model that simultaneously achieves
low costs, differentiates the product offering across geographic markets, and fosters a flow of
competencies between different subsidiaries in the company's global network of operations. Lastly,
an international strategy is pursued when companies are confronted with low cost pressures and low
pressures for local responsiveness.