TBChap 007

Chapter 07
Business Strategy: Innovation and Entrepreneurship
Multiple Choice Questions
1. How was Wikipedia able to outperform both Encyclopedia Britannica and Microsoft Encarta?
A. By lowering its network effects

B. By launching an electronic encyclopedia that included a variety of entries
C. By leveraging first-mover advantages
D. By allowing any person, expert or novice, to generate and edit content
2. Which of the following is a drawback of Wikipedia's business model?
A. The company's superior differentiated appeal is highly correlated to its cost.

B. The user-generated content may be unreliable and unauthoritative.
C. The company relies on the wisdom of the experts rather than the public.
D. The chances of falling in the competitive chasm, between the early adopters and early majority, are
high.
3. The typical four-step innovation process begins with:
A. the modification and recombination of an existing product or process.

B. the presentation of an idea as findings derived from basic research.
C. the commercialization of an invention by entrepreneurs.
D. a competitor's attempt to imitate an innovation.
4. A _____ is best described as a form of intellectual property that gives the inventor exclusive rights to
benefit from commercializing a technology for a specified time period in exchange for public disclosure of
the underlying idea.
A. patent
B. promissory note
C. franchise
D. royalty
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
5. When TrueHeal Pharma Inc. released a new drug to treat insomnia, its chemical composition was disclosed
at the back of the drug's cover. However, any attempts by competitors to copy the chemical composition
would result in infringement of TrueHeal Pharma's intellectual property rights. Thus, the drug is protected
by a _____.
A. promissory bill
B. patent
C. franchise
D. royalty
6. In the U.S., the time period for the right to exclude others from the use of a patented technology is _____
from the filing date of a patent application.
A. 20 years
B. 25 months
C. 15 months
D. 25 years
7. _____ is best described as the commercialization of any new product, process, or the modification and
recombination of existing ones.
A. Direct imitation
B. Mass customization
C. Innovation
D. Headhunting
8. As a research scholar, Richard had built a helicam as part of his project. The helicam could capture aerial
images. Realizing the potential use of this product in movie production and military and rescue operations,
he started a new venture where he could customize these helicams to fit the specific needs of the buyers and
sell them. Richard can be best described as a(n) _____.
A. entrepreneur
B. category captain
C. franchisor
D. early adopter
9. An intrapreneur is described as a person who:
A. restricts changes within an organization.

B. innovates within existing companies.
C. introduces new products or services by starting his or her own ventures.
D. invests funds in the ideas of another person in the same organization.
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10. A. G. Lafley at Procter & Gamble (P&G), had implemented an open-innovation model, which had greatly
benefitted the company. In the light of this information, we can conclude that A. G. Lafley is a(n):
A. venture capitalist.
B. category captain.
C. intrapreneur.
D. early adopter.
11. Which of the following statements is NOT true about innovation?
A. Innovation as a competitive weapon can simultaneously create and destroy value.

B. Successful innovation allows a firm to extract temporary monopoly profits.
C. Innovation has to be high-tech in order to be a potent competitive weapon.
D. Process innovations are made possible through advances such as the Internet.
12. How has Apple been able to sustain its competitive advantage in the smartphone industry?
A. By reducing its network effects

B. By targeting its new products and services toward laggards
C. By driving the price for the end user to zero
D. By regularly introducing incremental improvements in its products
13. Which of the following is a competitive benefit experienced by the first mover firm in an industry?
A. The first mover will be able to achieve a less steeper learning curve.
B. The first mover will be able to reduce the switching costs.
C. The first mover will not have to patent its products or technology.
D. The first mover will be able to reduce costs through economies of scale.
14. The four-step innovation process ends with:
A. idea generation.
B. invention.
C. idea testing.
D. imitation.
15. As the inventor of hypertension medication, OneSure Pharmaceuticals (OSP) Inc. was able to reap the
benefits of economies of scale due to a large consumer demand for the drug. Even when competitors later
developed similar drugs after the expiry of OSP's patents, regular users did not want to switch because they
were concerned about possible side-effects. Which of the following benefits does this scenario best
illustrate?
A. First-mover advantages
B. Social benefits
C. Network externalities
D. Fringe benefits
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16. Which of the following statements accurately describes social entrepreneurs?
A. Social entrepreneurs are individuals who invest in start-up businesses in order to earn huge returns.
B. Social entrepreneurs are individuals who rely primarily on social networking sites to generate revenues.
C. Social entrepreneurs are employees within organizations who are responsible for carrying out lean
production.
D. Social entrepreneurs are those who consider financial, ecological, and social metrics to evaluate their
firm's performance.
17. Georgia Ray is the founder of the departmental stores chain, Ether Inc. She ensures that the products in her
stores are ethically and responsibly sourced. Most products are therefore 100 percent organic and
manufactured from recycled material. Also, her company purchases handicrafts from non-profit
organizations supporting the aged. Georgia's belief is that her company should be able to support the
community at large. Which of the following terms best describes Georgia Ray?
A. Headhunter
B. Category captain
C. Social entrepreneur
D. Trade creditor
18. After Jeff Bezos read about how the Internet was growing by 2,000 percent a month, he set out to use the
Internet as a new distribution channel and founded Amazon, which is now the world's largest online
retailer. This is clearly an example of a(n):
A. firm that uses closed innovation.

B. entrepreneur who commercialized invention into an innovation.
C. business that entered the industry during its maturity stage.
D. exception to the long tail business model.
19. The market for 3D televisions is in the introduction stage of the industry life cycle. What does this imply?
A. There are only a few competitors in the 3D television market.

B. The number of buyers in the market is high.
C. The prices of 3D televisions will be lowest during this stage.
D. The barriers to entry are low in the industry.
20. The strategic objective of a first mover during the introduction stage of the industry life cycle is to:
A. pursue a harvest strategy.

B. survive by drawing on deep pockets.
C. achieve market acceptance.
D. lower entry barriers.
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21. FindFriend is an instant messaging application for smartphones. New smartphone users find it easier to
connect with friends and relatives through this mobile app when compared to other similar instant
messaging applications. Hence, it has the largest user base in the industry. Thus, FindFriend app's value has
increased primarily due to its _____.
A. learning curve effects

B. economies of scale
C. economies of scope
D. network effects
22. Which of the following has been a primary reason for increases in the Apple iPhone's installed base?
A. The decision to enter into the smartphone market during the maturity stage
B. The cost-leadership strategy pursued by Apple
C. The availability of apps that led to network effects
D. The decision to target laggards, the most profitable customer segment
23. In the context of industrial growth, which of the following statements is true of standards?
A. Standards emerge exclusively from bottom-up through competition in the marketplace.

B. As the size of a market expands, a standard signals the market's agreement on a common set of
engineering features and design choices.
C. Standards are exclusively imposed top-down by government or other standard-setting agencies such as
the Institute of Electrical and Electronics Engineers.
D. After a standard is established in an industry, the basis of competition tends to move away from process
innovations toward product innovations.
24. In which of the following stages of the industry life cycle is a standard first established?
A. Maturity stage
B. Growth stage
C. Shakeout stage
D. Introduction stage
25. Which of the following is a feature of the growth stage of the industry life cycle?
A. The consumer demand increases.

B. The prices of goods begin to rise.
C. The basis of competition moves away from process innovation.
D. The number of competitors decreases.
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26. Which of the following best illustrates a process innovation as opposed to product innovation?
A. A consumer electronics company developing a new generation of tablet computers

B. An automobile company using computer-aided design in its production
C. A consumer electronics company launching 3D televisions
D. An automobile company commercializing electric cars
27. Process innovation is more important than product innovation during the growth stage because:
A. companies produce very few products during the growth stage, often just prototypes or beta versions.
B. technological and commercial uncertainties about a new product still exist during this stage.
C. it is more crucial to adopt the integration strategy during this stage.
D. a standard, in terms of engineering features and design choices, has been set across the industry.
28. While cell phones with holographic keyboards are currently in the introduction stage of the industry life
cycle, tablet computers are in the growth stage. In the context of this scenario, which of the following
statements is true?
A. The industry for cell phones with holographic keyboards will face greater competition than the tablet
industry.
B. While the industry for cell phones with holographic keyboards will focus on product innovation, the
tablet industry will focus on process innovation.
C. While the industry for cell phones with holographic keyboards can reap the benefits of economies of
scale, the tablet industry will experience no such benefits.
D. The industry for cell phones with holographic keyboards will face price competition, whereas, in the
tablet industry, the mode of competition will be non-price.
29. Which of the following statements accurately brings out the distinction between the introduction and
growth stages of the industry life cycle?
A. There is more strategic variety in the growth stage when compared to the introduction stage.
B. The number of competitors is more in the introduction stage than the growth stage.
C. The market size for a new product or service is larger in the introduction stage when compared to the
growth stage.
D. While achieving market acceptance is the strategic objective during the introduction stage, the objective
in the growth stage is to pursue a harvest strategy.
30. The key objective for firms during the growth phase is to:
A. invest as many resources as possible in product innovations.

B. stake out a strong strategic position not easily imitated by rivals.
C. pursue a harvest strategy.
D. reduce their network effects.
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31. Which of the following is a feature of the shakeout phase of the industry life cycle?
A. There is rapid industry growth during this stage.

B. Market demand in this stage primarily consists of first-time adopters.
C. Competitive intensity within the industry increases.
D. The mode of competition shifts from price to non-price in this stage.
32. To be successful and to survive the shakeout stage of the industry life cycle, a firm should:
A. charge higher prices than its competitors.

B. focus on product innovation rather than process innovation.
C. gain economies of scale.
D. shift from price to non-price competition.
33. In emerging economies, the LCD television industry is in that phase of the industry life cycle in which the
previously increasing market demand becomes limited. The competitive intensity within the industry is
high, and inefficient firms have begun to exit the industry. This has allowed only a few major companies to
come out as cost leaders and hold the shrinking market. Which of the following stages of the industry life
cycle is the LCD television industry currently in?
A. Growth stage
B. Introduction stage
C. Shakeout stage
D. Decline stage
34. In developed economies, the electric car industry is in the introduction stage, and the industry for MP3
players is in the shakeout phase. What does this imply?
A. The mode of competition in the electric car industry will be based on price, whereas in the MP3 player
industry, the mode of competition will be non-price based.
B. The industry for electric cars will focus more on product innovation, whereas in the MP3 player
industry, the focus will be on process innovation.
C. The electric car industry will move to the maturity stage, whereas the industry for MP3 players will
enter the growth stage next.
D. The industry for electric cars will primarily pursue an integration strategy, whereas in the MP3 players
industry, the focus will be on differentiation.
35. The strategic objective of businesses during the shakeout phase of the industry life cycle will primarily be
to:
A. move toward product innovations and away from process innovations.

B. survive by drawing on "deep pockets."
D. reduce the barriers to entry in the industry.
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36. Why is the phase after the growth stage of the industry life cycle referred to as the shakeout stage?
A. The barriers to entry increase during this stage.

B. The firms in the industry yield the highest profits during this phase.
C. Rivalry among competitors decreases in this stage.
D. The weaker firms are forced out of the industry in this stage.
37. A few efficient and strong firms in the laptop industry have remained and emerged successful from the
shakeout stage. Which of the following stages of the industry life cycle will they move to next?
A. Growth stage
C. Maturity stage
D. Decline stage
38. Which of the following is a feature of the maturity stage of the industry life cycle?
A. The competitive intensity within the industry is at its peak.

B. The market reaches its maximum size.
C. The industry structure is more monopolistically competitive.
D. The focus on product innovation is higher than that on process innovation.
39. The compact disk (CD) industry is in the maturity phase of its industry life cycle. What conditions prevail
for an industry in this stage?
A. The type of buyers at this stage will be early adopters.

B. The mode of competition at this stage will be based on non-price factors.
C. The market growth is positive or high at this stage.
D. The industry structure is an oligopoly with only a few large firms.
40. While the domestic airline industry is in the maturity stage of the industry life cycle, the pet clothing
industry is in its growth stage. Which of the following can be inferred from the given data?
A. Competitive intensity will be higher in the domestic airline industry than the pet clothing industry.
B. The pet clothing industry is ahead of the domestic airline industry in the industry life cycle.
C. While the domestic airline industry is free from excess capacity, the pet clothing industry will have new
entrants.
D. The mode of competition will be price-based in the pet clothing industry and will be non-price based in
the domestic airline industry.
41. Which of the conditions prevail when an industry is at the end of its life cycle?
A. The level of process innovation reaches its maximum as firms attempt to lower cost.
B. The industry structure is perfectly competitive with a large number of buyers and sellers.
C. The strategic objectives of businesses will involve gaining market acceptance.
D. The market reaches its maximum size at this stage.
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42. The demand for video recorders has drastically reduced, and there are only a few consumer electronics
companies selling them at extremely low prices. Also, the current buyers of video recorders are mainly
categorized under laggards. Which of the following stages of the industry life cycle is the video recorder
industry in currently?
A. Growth stage
B. Maturity stage
C. Decline stage
D. Commercialization stage
43. When a firm pursues a harvest strategy, it:
A. exits the industry by bankruptcy or liquidation.

B. invests significant resources in product innovations.
C. buys out its rivals to strengthen its strategic position.
D. reduces investments in product support.
44. Though Wave Electronics Inc. still sells its VCR players, a product in its decline stage, the investments
made by the company on improving or marketing the product are very low. The company has allocated the
least amount of human and financial capital to this department. Which of the following strategies has Wave
Electronics adopted in this scenario?
A. Harvest strategy
B. Maintain strategy
C. Consolidation strategy
D. Differentiation strategy
45. When the market for photo film negatives declined with the arrival of digital cameras, Momento Films Inc.,
a manufacturer of film negatives, bought out most of its rivals that were planning to exit. This allowed the
company to get rid of all the excess capacity and acquire a monopolistic market power in the declining
industry. Which of the following strategies has Momento Films adopted in this scenario?
A. Harvest strategy
C. Consolidated strategy
46. When a firm pursues a maintain strategy, it:
A. exits a declining industry to maintain the goodwill of its overall brand name.
B. reduces investments in product support and allocates only a minimum of human and other resources.
C. continues to support marketing efforts even if the demand for the product is declining.
D. chooses to consolidate the industry by buying rival firms, those who plan to exit.
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47. While the industry for e-book readers is in its growth stage, the industry for landline telephones is in the
decline stage of the industry life cycle. Which of the following can be inferred from this?
A. While firms in the e-book reader industry will focus on pursuing a harvest strategy, firms in the landline
telephone industry will focus on product innovations.
B. The e-book reader industry is at a more advanced stage than the landline industry of the industry life
cycle.
C. While firms in the e-book reader industry will attract customers categorized under late majority, firms in
the landline telephone industry will attract the early majority customers.
D. The number of competitors in the e-book reader industry will be larger when compared to the landline
telephone industry.
48. While the industry for 3D televisions is in the introduction stage of the industry life cycle, the CRT
(Cathode ray tube) television industry is in its decline stage. Which of the following statements will be true
in this scenario?
A. The market size for 3D televisions is extremely large, while the market size for CRT televisions is
moderate.
B. While product innovation will be at its maximum for the 3D television industry, process innovation will
be more crucial for the CRT television industry.
C. The focus in the 3D television industry will be on cost-leadership, whereas in the CRT television
D. While the strategic objective of the CRT television industry will be achieving market acceptance, the
strategic objective of the 3D television industry will be pursuing a harvest strategy.
49. On which of the following tenets is the crossing-the-chasm framework, suggested by Geoffrey Moore,
based?
A. The number and size of competitors remain constant throughout the industry life cycle.
B. Each stage of the industry life cycle is dominated by a different customer group.
C. Industries tend to follow an unpredictable industry life cycle.
D. The supply and demand sides of the market remain constant irrespective of the phase of the industry life
cycle.
50. Which of the following customer segments as described in the chasm framework make up the mass
market?
A. The early and late majority together

B. The early adopters alone
C. The technology enthusiasts and laggards together
D. The technology enthusiasts alone
51. Which of the following statements is true of technology enthusiasts?
A. They make up the largest market segment.

B. They are the customer segment in the maturity stage of the industry lifecycle.
C. They are highly price conscious buyers.
D. They enjoy using beta versions of products and providing feedback to companies.
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52. The customers entering the market in the growth stage are primarily _____.
A. technology enthusiasts
B. laggards
C. early adopters
D. late majority
53. Which of the following statements accurately brings out the difference between technology enthusiasts and
early adopters?
A. While the customer segment in the introduction stage consists of early adopters, the customers entering
the market in the growth stage are technology enthusiasts.
B. Unlike technology enthusiasts, early adopters' demand is fueled more by intuition and vision rather than
technology concerns.
C. While early adopters make up the smallest market segment, technology enthusiasts make up the mass
market.
D. Firms need to communicate products' potential applications in a more direct way when attracting
technology enthusiasts rather than early adopters.
54. Which of the following statements is true of the early majority section of consumers?
A. They come into the market during the introduction stage.

B. They are unaware that many hyped new product introductions will fade away.
C. They weigh the benefits and costs carefully when adopting a new product.
D. They make up the smallest market segment.
55. It is important for a firm to win over the early majority section of the market to ensure the commercial
success of an innovation because they:
A. are driven by technology concerns rather than the practicality of a new product.
B. influence the purchase decisions of early adopters.
C. enter into the market in large numbers, creating a herding effect.
D. have the highest purchasing power when compared to the other customer segments.
56. When does a firm fall into the large competitive chasm between early adopters and early majority?
A. When it cannot attract technological enthusiasts to try the beta versions of its products
B. When it creates strong network effects during the growth stage
C. When it fails to successfully launch a mass-market version of its product
D. When the early majority create herding effects for its products
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57. At the time when Kevin decided to purchase a tablet computer, the product had just become accessible to
the mass market. He purchased the tablet only after he was completely convinced that the benefits it would
offer him would far exceed its price. Also, he waited for his friends to try the product and popular gadget
television shows to endorse it. Which of the following customer segments does Kevin best represent?
A. Laggards
B. Technology enthusiasts
C. Early adopters
D. Early majority
58. Sara can be categorized under the late majority customer segment. Which of the following behaviors is she
most likely to exhibit?
A. She will be confident in her ability to master any new technology.

B. She will prefer to buy from well-established brands rather than unknown new ventures.
C. She will not rely on endorsements by the early majority or early adopters.
D. She will buy beta versions of new products and technology.
59. How is the early majority section of consumers different from the late majority section?
A. While the early majority makes up the mass market, the late majority is the smallest market segment.
B. The late majority enters the market in the decline stage, whereas the early majority enters the market
during the maturity stage.
C. Although the early majority is confident in their ability to master a new technology, the late majority is
not.
D. While the late majority prefers buying from unknown new ventures, the early majority relies only on
well-established brands.
60. Which of the following statements is true of laggards?
A. They make up the largest customer segment for any business.

B. They tend to enter the market frequently during the decline stage.
C. They do not like waiting too long for new technology to release.
D. They are customers who adopt a new product even if it is not necessary.
61. While the personal computer industry is flooded and growing with laptops and tablets, John recently
bought a desktop, his first personal computer. He realized that a computer at home would be helpful for his
children for their school projects, and he could use it to maintain the simple accounts of his plumbing
business. Which of the following customer segments does John best represent?
A. Early adopters
B. Category captains
C. Laggards
D. Early majority
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62. Which of the following is a drawback of using the industry life cycle as a framework to guide strategic
choice?
A. The framework believes that the life cycle of industries is unpredictable.

B. The framework does not explain everything about changes in industries.
C. The framework is based on the tenet that industries can be rejuvenated even in the declining stage.
D. The framework believes that the number and size of competitors remain constant throughout the life
cycle.
63. SyncTouch Inc. is a manufacturer of cell phones. It has released an improvised version of its smartphone in
markets in which the company already operates. Which of the following types of innovations does this
scenario best illustrate?
A. Radical innovation
B. Incremental innovation
C. Architectural innovation
D. Disruptive innovation
64. In a radical innovation, a firm targets:
A. existing markets by using new technologies.

B. new markets by using existing technologies.
C. new markets by using new technologies.
D. existing markets by using existing technologies.
65. A firm's resistance to changes in the status quo is referred to as _____.
A. organizational parity
B. organizational liquidity
C. organizational inertia
D. organizational efficacy
66. Incumbent firms favor incremental innovation over radical innovation because:
A. their business decisions are independent of the other parties in their innovation ecosystem.
B. radical innovation will disturb the existing power distribution within the firms.
C. incumbent firms do not have formal organizational structures and processes like the way new entrants
do.
D. incremental innovations help firms sustain a permanent competitive advantage, whereas radical
innovations only help gain a temporary advantage.
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67. Why is it easier for new entrants to involve in radical innovations when compared to incumbent firms?
A. Unlike incumbent firms, new entrants do not have to face the high entry barriers, initially.
B. New entrants are embedded in an innovation ecosystem, while incumbent firms are not.
C. Unlike incumbent firms, new entrants do not have formal organizational structures and processes.
D. Incumbent firms do not have the advantages of network effects that new entrants have.
68. When firms innovate by leveraging existing technologies into new markets, they are said to be involved in
_____.
A. incremental innovations
B. radical innovations
C. architectural innovations
D. disruptive innovations
69. ModelLife Electronics Inc. is a company that builds diagnostic devices. It was the first company to develop
a compact MRI scanner by reconfiguring the components of the MRI technology. This smaller and user-
friendly version of the huge MRI scanner created demand from small hospitals, nursing homes, and private
practice doctors who were earlier dependent on the scanning machines in large hospitals. Which of the
following types of innovations does this scenario best illustrate?
A. Disruptive innovation
C. Radical innovation
D. Architectural innovation
70. A(n) _____ leverages new technologies to attack existing markets.
A. disruptive innovation
B. incremental innovation
C. radical innovation
D. architectural innovation
71. Which of the following statements is true of a disruptive innovation?
A. It begins as a low-cost solution to a new problem.

B. It initially performs better than the existing technology.
C. It involves leveraging existing technologies in new markets.
D. It invades the market from the bottom up, by first capturing the low end.
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72. Which of the following is one of the reasons that led to CNN, an innovator, losing its leadership position in
the 24-hour cable news industry?
A. The cable news industry was in the maturity stage of the industry life cycle.
B. The second movers imitated CNN's incremental innovation to continuously improve their offering.
C. It failed to cross the large competitive chasm between the early adopters and early majority.
D. Its business model relied heavily on crowdsourcing for its user-generated content.
73. As a start-up company, Virtue Mobiles Inc. entered the low end of the highly competitive cell phone
industry with its low-cost smartphones. Initially, the company was able to sell its inferior technology due to
its low prices. Over the years, however, its rate of technology improvements increased above the industry
standards. This helped the company to create a strong strategic position for its smartphones in the high-end
segment and claim a premium price. Which of the following types of innovation does this scenario best
illustrate?
74. When Japanese carmakers attacked the existing U.S. automobile market by first offering small fuel-
efficient cars, and then leveraging their low-cost and high-quality advantages into high-end luxury
segments, they were engaging in _____.
A. regressive innovation
B. radical innovation
C. disruptive innovation
75. Digital photography replacing film photography would be an example of a(n) _____.
C. architectural innovation
D. disruptive innovation
76. Which of the following is true of a disruptive innovation?
A. It targets existing markets.

B. It initially provides high-cost solutions to existing problems.
C. It introduces a radical idea and creates a new industry.
D. It attacks the market through a top-down process.
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77. A factor favoring the success of disruptive innovation is that:
A. incumbent firms are slow to change.

B. new entrants have highly formal organizational structures and processes.
C. the low end of the market is highly guarded.
D. incumbent firms focus on radical innovation rather than incremental innovation.
78. Intel's Celeron chip and Atom chip are initiatives to:
A. introduce a new product in a new market to extend its leadership.

B. guard the company against disruptive innovation by protecting the low end of the market.
C. stall its own disruption strategies and wait for its rivals to introduce disruptive forces.
D. target that section of the market that is not particularly price sensitive.
79. General Electric (GE) disrupted itself in the healthcare industry by:
A. replacing the top levels of the executive hierarchy.

B. introducing inexpensive and smaller diagnostic devices in developing countries.
C. saturating the global market with multiple diagnostic devices.
D. targeting the comparatively less price-sensitive sections of the market.
80. By introducing Vscan, a small, wireless ultrasound device, GE Healthcare (General Electric) was primarily
trying to:
A. cater to the healthcare needs of the developed countries over developing countries.
B. invade the healthcare market from the bottom up.
C. leverage existing technologies to attack new markets.
D. find a market for high-end, high-price diagnostic devices.
81. Which of the following is stated by the long tail phenomenon?
A. When production is increased by 80 percent, the decrease in cost is close to 20 percent due to economies
of scale.
B. To gain a competitive advantage, it is necessary for a business to internalize 80 percent of its R&D, and
outsource the remaining 20 percent.
C. For an incumbent firm, 80 percent of its revenue comes from existing customers, and new customers
account for the remaining 20 percent.
D. Almost 80 percent of sales in a given product category come from only 20 percent of the offerings in
that category.
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82. In the context of the long tail phenomenon, what does the short head represent?
A. It represents products that appeal to the largest segment of the market with homogenous tastes.
B. It represents products that are manufactured from minimal input resources.
C. It represents products that contribute only 20 percent to a firm's total revenue.
D. It represents products that online retailers offer in order to increase their product portfolio and not their
revenues.
83. _____ is a situation in which transactions are likely not to take place because there are only a few buyers
and sellers who have difficulty finding each other.
A. Diseconomies of scale
B. Resource ambiguity
C. Thin markets
D. Buyer resistance
84. The _____ business model is best described as one in which companies can obtain a large part of their
revenues by selling a small number of units from among almost unlimited choices.
A. razor-razor-blade
B. freemium
C. pay-as-you-go
D. long tail
85. How has the long tail business model affected eBay as an online retailer?
A. It has increased the cost of the virtual shelf space.

B. It has allowed eBay to offer limited product selections to its customers.
C. It has helped overcome the problem of thin markets, at no cost to the buyer.
D. It has made eBay highly dependent on products found in the short head to generate revenues.
86. Large companies, such as AT&T, IBM, and GE, have been shifting their knowledge landscape from closed
innovation to open innovation because of the:
A. decreasing capability of external suppliers and vendors.

B. lack of reliability on venture capital.
C. increasing need to internally control research and development.
D. increasing supply and mobility of skilled workers.
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87. Which of the following statements is true of firms pursuing a closed innovation?
A. Firms following the closed innovation model are less likely to be prone to the not-invented-here
syndrome.
B. Firms in the closed innovation model are extremely protective of their intellectual property.
C. Firms in the closed innovation model focus on building a more effective business model to
commercialize R&D, rather than focusing on being first to market.
D. Firms following the closed innovation model will find activities such as spin-out ventures or strategic
alliances crucial to commercialize their internally developed R&D.
88. Globe Source Inc. is a consumer electronics company that follows an open innovation model. Which of the
following can be concluded about this firm?
A. The firm will suffer from the not-invented-here syndrome.

B. The firm is less likely to commercialize researches from other firms.
C. The firm will buy others' intellectual property whenever it advances its own business model.
D. The firm will equate R&D with a high likelihood of benefitting from first-mover advantages.
89. Which of the following statements accurately brings out the difference between closed innovation and open
innovation?
A. Firms following the open innovation model are much more likely to be prone to the not-invented-here
syndrome than firms pursuing a closed innovation model.
B. While open innovation focuses on building an effective business model to commercialize R&D, closed
innovation focuses on being first to market.
C. Firms following the open innovation model are more protective about their intellectual property than
firms pursuing a closed innovation model.
D. While open innovation means introducing new technologies to new markets, closed innovation refers to
introducing new technologies to existing markets.
90. Which of the following key assumptions are innovations like Procter & Gamble's "Connect + Develop"
based on?
A. Combining the best of internal and external R&D will more likely lead to a competitive advantage.
B. Almost 40 percent of sales comes from 80 percent of product selection found in the short head.
C. The low end of a market is highly vulnerable to competitive attacks.
D. Since the best people, the smartest people in the industry work for P&G, the best discoveries must be
invented at P&G.
7-18
91. Norce Autos Inc. allows its customers, suppliers, researchers, and the community in general to contribute
their ideas toward new product developments. Customers and other interested stakeholders can let the
company know what new features they want to see in their next car. If the company faces any technical
complexities that its internal R&D team cannot solve, it posts the problem on its website and allows people
from the external community to provide solutions. In this scenario, Norce Autos Inc. is primarily
leveraging its:
A. economies of scope.
B. open innovation model.
C. razor-razor-blade business model.
D. experience-curve effects.
92. Which of the following reasons led to the launch of Procter & Gamble's "Connect + Develop," a web-based
interface that connects the company's internal-innovation capability with the distributed knowledge in the
global community?
A. The company wanted to focus on process innovation rather than product innovation.
B. The company was no longer able to generate adequate growth through closed innovation.
C. The company wanted to carefully protect its intellectual property.
D. The supply and mobility of unskilled workers within the industry had increased drastically.
Short Answer Questions
93. Explain the reasons for increasingly rapid technological diffusion and adoption.
7-19
94. What does the innovation process begin with?
95. What do you mean by an invention?
96. How do patents protect new technology?
97. Entrepreneurs are the agents who introduce change into the competitive system. Elaborate.
7-20
98. What are the competitive benefits that first movers in an industry experience?
99. Briefly discuss the steps in the innovation process.
100. Define entrepreneurship. Who are entrepreneurs?
101. What do you mean by social entrepreneurship?
7-21
102. List the five distinct stages of the industry life cycle.
103. Explain some of the features of the introduction stage of the industry life cycle.
104. What do you mean by a standard? How does it affect an industry?
105. How is process innovation different from product innovation?
7-22
106. In the introductory stage, the level of product innovation is at a maximum. Elaborate.
107. Why do firms have more strategic variety in the growth stage of the industry life cycle?
108. What happens during the shakeout stage of the industry life cycle?
109. Briefly discuss the four strategic options firms have during the decline stage of the industry life cycle.
7-23
110. Briefly discuss the strategic implications of the crossing-the-chasm framework.
111. Who are technology enthusiasts?
112. Bringing the early majority on board is the key to catching the growth wave of the industry life cycle.
Provide reasons to agree or disagree with this statement.
113. Discuss the characteristics of the customer segment "laggards".
7-24
114. Discuss the drawbacks of the industry life cycle.
115. Differentiate incremental innovation from radical innovation.
116. What are the economic incentives associated with incumbent firms?
117. Why do incumbent firms favor incremental innovation over radical innovation?
7-25
118. What do you mean by an innovation ecosystem?
119. Explain architectural innovation with the help of a real world example.
120. What are the additional characteristics that a new product or technology must have to be a disruptive
force?
121. Discuss the factors favoring the success of disruptive innovation.
7-26
122. What opportunities does online digitalization provide to businesses?
123. How does the long tail business model allow online retailers to overcome the problem of thin markets?
124. Elaborate on the closed-innovation approach.
125. What the factors led to a shift in the knowledge landscape from closed innovation to open innovation?
7-27
126. Compare closed and open innovation models.
127. Does Procter & Gamble's "Connect + Develop" use an open innovation or closed innovation model?
Provide reasons to support your answer.
7-28
Chapter 07 Business Strategy: Innovation and Entrepreneurship Answer Key
Multiple Choice Questions
1. How was Wikipedia able to outperform both Encyclopedia Britannica and Microsoft Encarta?
A. By lowering its network effects

B. By launching an electronic encyclopedia that included a variety of entries
C. By leveraging first-mover advantages
D. By allowing any person, expert or novice, to generate and edit content
In Chapter Case 7, it's given that Wikipedia's slogan is "the Free Encyclopedia that anyone can edit."
Since it is open source, any person, expert or novice, can contribute content and edit pages using the
handy "edit this page" button. It also draws on tens of thousands of volunteer editors, who monitor and
validate content by consensus. Encyclopedia Britannica and Microsoft Encarta do not include user-
generated content.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Outline the four-step innovation process from idea to imitation.
Topic: Competition Driven By Innovation
2. Which of the following is a drawback of Wikipedia's business model?
A. The company's superior differentiated appeal is highly correlated to its cost.

B. The user-generated content may be unreliable and unauthoritative.
C. The company relies on the wisdom of the experts rather than the public.
D. The chances of falling in the competitive chasm, between the early adopters and early majority, are
high.
In Chapter Case 7, it's given that Wikipedia includes user-generated content. Wikipedia's crowdsourcing
approach to display user-generated content is not without criticism. The most serious are that the
content may be unreliable and unauthoritative, that it could exhibit systematic bias, and that group
dynamics might prevent objective and factual reporting.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
7-29
3. The typical four-step innovation process begins with:
A. the modification and recombination of an existing product or process.

B. the presentation of an idea as findings derived from basic research.
C. the commercialization of an invention by entrepreneurs.
D. a competitor's attempt to imitate an innovation.
The innovation process begins with an idea. The idea is often presented in terms of abstract concepts or
as findings derived from basic research.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
4. A _____ is best described as a form of intellectual property that gives the inventor exclusive rights to
benefit from commercializing a technology for a specified time period in exchange for public disclosure
of the underlying idea.
A. patent
B. promissory note
C. franchise
D. royalty
A patent is a form of intellectual property, and gives the inventor exclusive rights to benefit from
commercializing a technology for a specified time period in exchange for public disclosure of the
underlying idea.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-30
5. When TrueHeal Pharma Inc. released a new drug to treat insomnia, its chemical composition was
disclosed at the back of the drug's cover. However, any attempts by competitors to copy the chemical
composition would result in infringement of TrueHeal Pharma's intellectual property rights. Thus, the
drug is protected by a _____.
A. promissory bill
B. patent
C. franchise
D. royalty
In the given scenario, TrueHeal Pharma's drug is protected by a patent. A patent is a form of intellectual
property, and gives the inventor exclusive rights to benefit from commercializing a technology for a
specified time period in exchange for public disclosure of the underlying idea.
AACSB: Reflective Thinking

Blooms: Apply
6. In the U.S., the time period for the right to exclude others from the use of a patented technology is
_____ from the filing date of a patent application.
A. 20 years
B. 25 months
C. 15 months
D. 25 years
In the U.S., the time period for the right to exclude others from the use of a patented technology is 20
years from the filing date of a patent application.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-31
7. _____ is best described as the commercialization of any new product, process, or the modification and
recombination of existing ones.
A. Direct imitation
B. Mass customization
C. Innovation
D. Headhunting
Innovation is the commercialization of any new product, process, or the modification and recombination
of existing ones. To drive growth, innovation also needs to be useful and successfully implemented.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
8. As a research scholar, Richard had built a helicam as part of his project. The helicam could capture
aerial images. Realizing the potential use of this product in movie production and military and rescue
operations, he started a new venture where he could customize these helicams to fit the specific needs of
the buyers and sell them. Richard can be best described as a(n) _____.
A. entrepreneur
B. category captain
C. franchisor
D. early adopter
In the context of this scenario, Richard can be best described as an entrepreneur. Entrepreneurs are the
agents who introduce change into the competitive system. They do this not only by figuring out how to
use inventions, but also by introducing new products or services, new production processes, and new
forms of organization. Entrepreneurs can introduce change by starting new ventures.

Blooms: Apply
7-32
9. An intrapreneur is described as a person who:
A. restricts changes within an organization.

B. innovates within existing companies.
C. introduces new products or services by starting his or her own ventures.
D. invests funds in the ideas of another person in the same organization.
Entrepreneurs can be found within existing firms. When innovating within existing companies, change
agents are often called intrapreneurs: those pursuing corporate entrepreneurship.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
10. A. G. Lafley at Procter & Gamble (P&G), had implemented an open-innovation model, which had
greatly benefitted the company. In the light of this information, we can conclude that A. G. Lafley is
a(n):
A. venture capitalist.
B. category captain.
C. intrapreneur.
D. early adopter.
Innovators like A. G. Lafley at Procter & Gamble (P&G), innovating within existing firms, are referred
to as intrapreneurs.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
11. Which of the following statements is NOT true about innovation?
A. Innovation as a competitive weapon can simultaneously create and destroy value.

B. Successful innovation allows a firm to extract temporary monopoly profits.
C. Innovation has to be high-tech in order to be a potent competitive weapon.
D. Process innovations are made possible through advances such as the Internet.
It is important to note that innovation need not be high-tech in order to be a potent competitive weapon.
It needs to be novel, useful, and successfully implemented in order to help firms gain and sustain a
competitive advantage.
AACSB: Analytic
Blooms: Understand
7-33
12. How has Apple been able to sustain its competitive advantage in the smartphone industry?
A. By reducing its network effects

B. By targeting its new products and services toward laggards
C. By driving the price for the end user to zero
D. By regularly introducing incremental improvements in its products
To sustain a competitive advantage, a firm must continuously innovate—that is, it must produce a string
of successful new products or services over time. In this spirit, not only has Apple introduced
incrementally improved iPhones, but also the firm has launched other innovative mobile devices such as
the iPad line of products, multimedia tablet computers created with the intent to drive convergence in
computing, telecommunications, and media content.
AACSB: Analytic
Blooms: Understand
13. Which of the following is a competitive benefit experienced by the first mover firm in an industry?
A. The first mover will be able to achieve a less steeper learning curve.
B. The first mover will be able to reduce the switching costs.
C. The first mover will not have to patent its products or technology.
D. The first mover will be able to reduce costs through economies of scale.
Economies of scale refer to the decreases in cost per unit as output increases. First movers may hold
important intellectual property such as critical patents. They may also be able to lock-in key suppliers as
well as customers through increasing switching costs.
AACSB: Analytic
Blooms: Understand
7-34
14. The four-step innovation process ends with:
A. idea generation.
B. invention.
C. idea testing.
D. imitation.
The innovation process ends with imitation. If an innovation is successful in the marketplace,
competitors will attempt to imitate it.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
15. As the inventor of hypertension medication, OneSure Pharmaceuticals (OSP) Inc. was able to reap the
benefits of economies of scale due to a large consumer demand for the drug. Even when competitors
later developed similar drugs after the expiry of OSP's patents, regular users did not want to switch
because they were concerned about possible side-effects. Which of the following benefits does this
A. First-mover advantages
B. Social benefits
C. Network externalities
D. Fringe benefits
In this scenario, OneSure Pharmaceuticals enjoys first-mover advantages. First-mover advantages are
competitive benefits that accrue to the successful innovator.

Blooms: Apply
Difficulty: 3 Hard
7-35
16. Which of the following statements accurately describes social entrepreneurs?
A. Social entrepreneurs are individuals who invest in start-up businesses in order to earn huge returns.
B. Social entrepreneurs are individuals who rely primarily on social networking sites to generate
revenues.
C. Social entrepreneurs are employees within organizations who are responsible for carrying out lean
production.
D. Social entrepreneurs are those who consider financial, ecological, and social metrics to evaluate
their firm's performance.
Social entrepreneurs evaluate the performance of their ventures not only by financial metrics but also by
ecological and social contribution. They use a triple-bottom line approach to assess performance.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Apply strategic management concepts to entrepreneurship and innovation.
Topic: Strategic and Social Entrepreneurship
17. Georgia Ray is the founder of the departmental stores chain, Ether Inc. She ensures that the products in
her stores are ethically and responsibly sourced. Most products are therefore 100 percent organic and
manufactured from recycled material. Also, her company purchases handicrafts from non-profit
organizations supporting the aged. Georgia's belief is that her company should be able to support the
community at large. Which of the following terms best describes Georgia Ray?
A. Headhunter
B. Category captain
C. Social entrepreneur
D. Trade creditor
Georgia Ray can be best described as a social entrepreneur. Social entrepreneurs evaluate the
performance of their ventures not only by financial metrics but also by ecological and social
contribution. They use a triple-bottom line approach to assess performance.

Blooms: Apply
7-36
18. After Jeff Bezos read about how the Internet was growing by 2,000 percent a month, he set out to use
the Internet as a new distribution channel and founded Amazon, which is now the world's largest online
retailer. This is clearly an example of a(n):
A. firm that uses closed innovation.

B. entrepreneur who commercialized invention into an innovation.
C. business that entered the industry during its maturity stage.
D. exception to the long tail business model.
The creation of Amazon by Jeff Bezos is clearly an example of an entrepreneur who transformed an
invention into an innovation. Entrepreneurs innovate by commercializing ideas and inventions. They
seek out or create new business opportunities and then assemble the resources necessary to exploit
them.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
19. The market for 3D televisions is in the introduction stage of the industry life cycle. What does this
imply?
A. There are only a few competitors in the 3D television market.

B. The number of buyers in the market is high.
C. The prices of 3D televisions will be lowest during this stage.
D. The barriers to entry are low in the industry.
In the introductory stage, when barriers to entry tend to be high, generally only a few firms are active in
the market.
AACSB: Analytic
Blooms: Understand
Learning Objective: 07-03 Describe the competitive implications of different stages in the industry life cycle.
Topic: Innovation and the Industry Life Cycle
20. The strategic objective of a first mover during the introduction stage of the industry life cycle is to:
A. pursue a harvest strategy.

B. survive by drawing on deep pockets.
D. lower entry barriers.
The strategic objective during the introductory stage is to achieve market acceptance and seed future
growth.
AACSB: Analytic
7-37
Blooms: Remember
Difficulty: 1 Easy
21. FindFriend is an instant messaging application for smartphones. New smartphone users find it easier to
connect with friends and relatives through this mobile app when compared to other similar instant
messaging applications. Hence, it has the largest user base in the industry. Thus, FindFriend app's value
has increased primarily due to its _____.
A. learning curve effects

B. economies of scale
C. economies of scope
D. network effects
FindFriend app's value has increased primarily due to its network effects. Network effects is the positive
effect that one user of a product or service has on the value of that product for other users. Network
effects occur when the value of a product or service increases, often exponentially, with the number of
users.

Blooms: Apply
22. Which of the following has been a primary reason for increases in the Apple iPhone's installed base?
A. The decision to enter into the smartphone market during the maturity stage
B. The cost-leadership strategy pursued by Apple
C. The availability of apps that led to network effects
D. The decision to target laggards, the most profitable customer segment
As given in the Strategy Highlight 7.1, it is seen that the availability of apps led to network effects that
increased the value of the iPhone for its users. Increased value creation, is positively related to demand,
which in turn increases the installed base, meaning the number of people using an iPhone. This in turn
incentivizes software developers to write more apps.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-38
23. In the context of industrial growth, which of the following statements is true of standards?
A. Standards emerge exclusively from bottom-up through competition in the marketplace.

B. As the size of a market expands, a standard signals the market's agreement on a common set of
engineering features and design choices.
C. Standards are exclusively imposed top-down by government or other standard-setting agencies such
as the Institute of Electrical and Electronics Engineers.
D. After a standard is established in an industry, the basis of competition tends to move away from
process innovations toward product innovations.
As the size of a market expands, a standard signals the market's agreement on a common set of
engineering features and design choices. Standards can emerge bottom-up through competition in the
marketplace, or be imposed top-down by government or other standard-setting agencies.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
24. In which of the following stages of the industry life cycle is a standard first established?
A. Maturity stage
B. Growth stage
C. Shakeout stage
D. Introduction stage
As the size of a market expands and the industry enters the growth stage, a standard signals the market's
agreement on a common set of engineering features and design choices. Standards can emerge bottom-
up through competition in the marketplace, or be imposed top-down by government or other standard-
setting agencies.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-39
25. Which of the following is a feature of the growth stage of the industry life cycle?
A. The consumer demand increases.

B. The prices of goods begin to rise.
C. The basis of competition moves away from process innovation.
D. The number of competitors decreases.
Market growth accelerates in the growth stage of the industry life cycle. After the initial innovation has
gained some market acceptance, demand increases rapidly as first-time buyers rush to enter the market,
convinced by the proof-of-concept demonstrated in the introductory stage.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
26. Which of the following best illustrates a process innovation as opposed to product innovation?
A. A consumer electronics company developing a new generation of tablet computers

B. An automobile company using computer-aided design in its production
C. A consumer electronics company launching 3D televisions
D. An automobile company commercializing electric cars
Process innovations are new ways to produce existing products or to deliver existing services. Process
innovations are made possible through advances such as the Internet, lean manufacturing, Six Sigma,
biotechnology, nanotechnology, and so on.
AACSB: Analytic
Blooms: Understand
27. Process innovation is more important than product innovation during the growth stage because:
A. companies produce very few products during the growth stage, often just prototypes or beta
versions.
B. technological and commercial uncertainties about a new product still exist during this stage.
C. it is more crucial to adopt the integration strategy during this stage.
D. a standard, in terms of engineering features and design choices, has been set across the industry.
During the growth stage, most of the technological and commercial uncertainties about a new product
are gone. After the market accepts a product innovation, and a standard for the new technology has
emerged, process innovation rapidly becomes more important than product innovation.
AACSB: Analytic
7-40
Blooms: Understand
28. While cell phones with holographic keyboards are currently in the introduction stage of the industry life
cycle, tablet computers are in the growth stage. In the context of this scenario, which of the following
statements is true?
A. The industry for cell phones with holographic keyboards will face greater competition than the
tablet industry.
B. While the industry for cell phones with holographic keyboards will focus on product innovation, the
tablet industry will focus on process innovation.
C. While the industry for cell phones with holographic keyboards can reap the benefits of economies of
scale, the tablet industry will experience no such benefits.
D. The industry for cell phones with holographic keyboards will face price competition, whereas, in the
tablet industry, the mode of competition will be non-price.
In the given scenario, while the industry for cell phones with holographic keyboards will focus on
product innovation, the tablet industry will focus on process innovation. In the introductory stage, the
level of product innovation is at a maximum because new features increasing perceived consumer value
are critical to gaining traction in the market. During the growth stage of the industry life cycle, a
standard is established in an industry, due to which the basis of competition tends to move away from
product innovations toward process innovations.

Blooms: Apply
Difficulty: 3 Hard
29. Which of the following statements accurately brings out the distinction between the introduction and
growth stages of the industry life cycle?
A. There is more strategic variety in the growth stage when compared to the introduction stage.
B. The number of competitors is more in the introduction stage than the growth stage.
C. The market size for a new product or service is larger in the introduction stage when compared to
the growth stage.
D. While achieving market acceptance is the strategic objective during the introduction stage, the
objective in the growth stage is to pursue a harvest strategy.
Since market demand is robust in the growth stage and more competitors have entered the market, there
tends to be more strategic variety: Some competitors will continue to follow a differentiation strategy,
emphasizing unique features, product functionality, and reliability. Other firms employ a cost-leadership
strategy in order to offer an acceptable level of value but lower prices to consumers.
AACSB: Analytic
Blooms: Understand
7-41
30. The key objective for firms during the growth phase is to:
A. invest as many resources as possible in product innovations.

B. stake out a strong strategic position not easily imitated by rivals.
C. pursue a harvest strategy.
D. reduce their network effects.
The key objective for firms during the growth phase is to stake out a strong strategic position not easily
imitated by rivals.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
31. Which of the following is a feature of the shakeout phase of the industry life cycle?
A. There is rapid industry growth during this stage.

B. Market demand in this stage primarily consists of first-time adopters.
C. Competitive intensity within the industry increases.
D. The mode of competition shifts from price to non-price in this stage.
Limited market demand in the shakeout phase increases competitive intensity within the industry. Firms
begin to compete directly against one another for market share, rather than trying to capture a share of
an increasing pie.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
32. To be successful and to survive the shakeout stage of the industry life cycle, a firm should:
A. charge higher prices than its competitors.

B. focus on product innovation rather than process innovation.
C. gain economies of scale.
D. shift from price to non-price competition.
Key success factors during the shakeout stage are the manufacturing and process engineering
capabilities that can be used to drive costs down. Generally, the larger firms enjoying economies of
scale are the ones that survived the shakeout phase as the industry consolidated and most excess
capacity was removed.
AACSB: Analytic
7-42
Blooms: Understand
Difficulty: 1 Easy
33. In emerging economies, the LCD television industry is in that phase of the industry life cycle in which
the previously increasing market demand becomes limited. The competitive intensity within the industry
is high, and inefficient firms have begun to exit the industry. This has allowed only a few major
companies to come out as cost leaders and hold the shrinking market. Which of the following stages of
the industry life cycle is the LCD television industry currently in?
A. Growth stage
C. Shakeout stage
D. Decline stage
The LCD television industry is in the shakeout stage in emerging economies. As the industry moves into
the shakeout stage of the industry life cycle, the rate of growth declines. Given the large market size
achieved from the growth stage, any additional market demand in the next stage is limited. Demand
now consists of replacement or repeat purchases only. This limited market demand in turn increases
competitive intensity within the industry.

Blooms: Apply
Difficulty: 3 Hard
34. In developed economies, the electric car industry is in the introduction stage, and the industry for MP3
players is in the shakeout phase. What does this imply?
A. The mode of competition in the electric car industry will be based on price, whereas in the MP3
player industry, the mode of competition will be non-price based.
B. The industry for electric cars will focus more on product innovation, whereas in the MP3 player
industry, the focus will be on process innovation.
C. The electric car industry will move to the maturity stage, whereas the industry for MP3 players will
enter the growth stage next.
D. The industry for electric cars will primarily pursue an integration strategy, whereas in the MP3
players industry, the focus will be on differentiation.
The industry for electric cars will focus more on product innovation, whereas in the MP3 player
industry, the focus will be on process innovation. Following the emergence of a standard during the
growth stage, the importance of process innovation increases rapidly and the importance of product
innovation diminishes quickly.

Blooms: Apply
Difficulty: 3 Hard
7-43
35. The strategic objective of businesses during the shakeout phase of the industry life cycle will primarily
be to:
A. move toward product innovations and away from process innovations.

B. survive by drawing on "deep pockets."
D. reduce the barriers to entry in the industry.
During the shakeout stage, firms begin to compete directly against one another for market share, rather
than trying to capture a share of an increasing pie. As rivals vie for a shrinking pie and competitive
intensity is increasing, the weaker firms are forced out of the industry.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
36. Why is the phase after the growth stage of the industry life cycle referred to as the shakeout stage?
A. The barriers to entry increase during this stage.

B. The firms in the industry yield the highest profits during this phase.
C. Rivalry among competitors decreases in this stage.
D. The weaker firms are forced out of the industry in this stage.
In the shakeout stage, as rivals vie for a shrinking pie and competitive intensity is increasing, the weaker
firms are forced out of the industry. This is the reason why this phase of the industry life cycle is called
the shakeout stage.
AACSB: Analytic
Blooms: Understand
37. A few efficient and strong firms in the laptop industry have remained and emerged successful from the
shakeout stage. Which of the following stages of the industry life cycle will they move to next?
A. Growth stage
C. Maturity stage
D. Decline stage
Generally, the larger firms enjoying economies of scale are the ones that survived the shakeout phase as
the industry consolidated and most excess capacity was removed. After the shakeout is completed and a
few firms remain, the industry enters the maturity stage.
AACSB: Analytic
7-44
Blooms: Understand
38. Which of the following is a feature of the maturity stage of the industry life cycle?
A. The competitive intensity within the industry is at its peak.

B. The market reaches its maximum size.
C. The industry structure is more monopolistically competitive.
D. The focus on product innovation is higher than that on process innovation.
During the fourth stage of the industry life cycle, the industry structure morphs into an oligopoly with
only a few large firms. The market has reached its maximum size, and industry demand is likely to be
zero or even negative going forward.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
39. The compact disk (CD) industry is in the maturity phase of its industry life cycle. What conditions
prevail for an industry in this stage?
A. The type of buyers at this stage will be early adopters.

B. The mode of competition at this stage will be based on non-price factors.
C. The market growth is positive or high at this stage.
D. The industry structure is an oligopoly with only a few large firms.
After the shakeout is completed and a few firms remain, the industry enters the maturity stage. During
the fourth stage of the industry life cycle, the industry structure morphs into an oligopoly with only a
few large firms.

Blooms: Apply
7-45
40. While the domestic airline industry is in the maturity stage of the industry life cycle, the pet clothing
industry is in its growth stage. Which of the following can be inferred from the given data?
A. Competitive intensity will be higher in the domestic airline industry than the pet clothing industry.
B. The pet clothing industry is ahead of the domestic airline industry in the industry life cycle.
C. While the domestic airline industry is free from excess capacity, the pet clothing industry will have
new entrants.
D. The mode of competition will be price-based in the pet clothing industry and will be non-price
based in the domestic airline industry.
Generally, the larger firms enjoying economies of scale are the ones that survived the shakeout phase.
After the shakeout is completed and a few firms remain, the industry enters the maturity stage. The
numbers of competitors are fewer at this stage when compared to the growth stage.

Blooms: Apply
41. Which of the conditions prevail when an industry is at the end of its life cycle?
A. The level of process innovation reaches its maximum as firms attempt to lower cost.
B. The industry structure is perfectly competitive with a large number of buyers and sellers.
C. The strategic objectives of businesses will involve gaining market acceptance.
D. The market reaches its maximum size at this stage.
At the end of a life cycle, the level of process innovation reaches its maximum as firms attempt to lower
cost as much as possible, while the level of incremental product innovation reaches its minimum.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
7-46
42. The demand for video recorders has drastically reduced, and there are only a few consumer electronics
companies selling them at extremely low prices. Also, the current buyers of video recorders are mainly
categorized under laggards. Which of the following stages of the industry life cycle is the video recorder
industry in currently?
A. Growth stage
B. Maturity stage
C. Decline stage
D. Commercialization stage
Video recorders are in the decline stage of the industry life cycle. Changes in the external environment
often take industries from maturity to decline. In this final stage of the industry life cycle, the size of the
market contracts as demand falls.

Blooms: Apply
43. When a firm pursues a harvest strategy, it:
A. exits the industry by bankruptcy or liquidation.

B. invests significant resources in product innovations.
C. buys out its rivals to strengthen its strategic position.
D. reduces investments in product support.
When pursuing a harvest strategy, a firm reduces investments in product support and allocates only a
minimum of human and other resources.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-47
44. Though Wave Electronics Inc. still sells its VCR players, a product in its decline stage, the investments
made by the company on improving or marketing the product are very low. The company has allocated
the least amount of human and financial capital to this department. Which of the following strategies
has Wave Electronics adopted in this scenario?
A. Harvest strategy
C. Consolidation strategy
Wave Electronics is employing the harvest strategy in the given scenario. In pursuing a harvest strategy,
the firm reduces investments in product support and allocates only a minimum of human and other
resources.

Blooms: Apply
45. When the market for photo film negatives declined with the arrival of digital cameras, Momento Films
Inc., a manufacturer of film negatives, bought out most of its rivals that were planning to exit. This
allowed the company to get rid of all the excess capacity and acquire a monopolistic market power in
the declining industry. Which of the following strategies has Momento Films adopted in this scenario?
A. Harvest strategy
C. Consolidated strategy
In the scenario, Momento Films has adopted the consolidation strategy. Although market size shrinks in
a declining industry, some firms may choose to consolidate the industry by buying rivals (those who
choose to exit). This allows the consolidating firm to stake out a strong position—possibly approaching
monopolistic market power, albeit in a declining industry.

Blooms: Apply
7-48
46. When a firm pursues a maintain strategy, it:
A. exits a declining industry to maintain the goodwill of its overall brand name.
B. reduces investments in product support and allocates only a minimum of human and other resources.
C. continues to support marketing efforts even if the demand for the product is declining.
D. chooses to consolidate the industry by buying rival firms, those who plan to exit.
If a firm has been following a maintain strategy, it will continue to support marketing efforts at a given
level despite the fact that the industry has been declining.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
47. While the industry for e-book readers is in its growth stage, the industry for landline telephones is in the
decline stage of the industry life cycle. Which of the following can be inferred from this?
A. While firms in the e-book reader industry will focus on pursuing a harvest strategy, firms in the
landline telephone industry will focus on product innovations.
B. The e-book reader industry is at a more advanced stage than the landline industry of the industry life
cycle.
C. While firms in the e-book reader industry will attract customers categorized under late majority,
firms in the landline telephone industry will attract the early majority customers.
D. The number of competitors in the e-book reader industry will be larger when compared to the
landline telephone industry.
The number of competitors in the e-book reader industry will be larger when compared to the landline
telephone industry. Changes in the external environment often take industries from the maturity stage to
the decline stage. In this final stage of the industry life cycle, the size of the market contracts as demand
falls. Only a few large firms are left in the industry. In the growth stage, however, there are many
competitors.

Blooms: Apply
7-49
48. While the industry for 3D televisions is in the introduction stage of the industry life cycle, the CRT
(Cathode ray tube) television industry is in its decline stage. Which of the following statements will be
true in this scenario?
A. The market size for 3D televisions is extremely large, while the market size for CRT televisions is
moderate.
B. While product innovation will be at its maximum for the 3D television industry, process innovation
will be more crucial for the CRT television industry.
C. The focus in the 3D television industry will be on cost-leadership, whereas in the CRT television
D. While the strategic objective of the CRT television industry will be achieving market acceptance,
the strategic objective of the 3D television industry will be pursuing a harvest strategy.
While product innovation will be at its maximum for the 3D television industry, process innovation will
be more crucial for the CRT television industry. In the introduction stage, product innovation is at a
maximum, and process innovation is at a minimum. Whereas in the decline stage, product innovation is
at a minimum, and process innovation is at a maximum.
AACSB: Analytic
Blooms: Understand
49. On which of the following tenets is the crossing-the-chasm framework, suggested by Geoffrey Moore,
based?
A. The number and size of competitors remain constant throughout the industry life cycle.
B. Each stage of the industry life cycle is dominated by a different customer group.
C. Industries tend to follow an unpredictable industry life cycle.
D. The supply and demand sides of the market remain constant irrespective of the phase of the industry
life cycle.
Based on empirical observations, Geoffrey Moore's core argument is that each stage of the industry life
cycle is dominated by a different customer group. Different customer groups with distinctly different
preferences enter the industry at each stage of the industry life cycle.
AACSB: Analytic
Blooms: Understand
Learning Objective: 07-04 Derive strategic implications of the crossing-the-chasm framework.
7-50
50. Which of the following customer segments as described in the chasm framework make up the mass
market?
A. The early and late majority together

B. The early adopters alone
C. The technology enthusiasts and laggards together
D. The technology enthusiasts alone
As described in the chasm framework, the early and late majority make up the mass market.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
51. Which of the following statements is true of technology enthusiasts?
A. They make up the largest market segment.

B. They are the customer segment in the maturity stage of the industry lifecycle.
C. They are highly price conscious buyers.
D. They enjoy using beta versions of products and providing feedback to companies.
Technology enthusiasts enjoy using beta versions of products, tinkering with the product's imperfections
and providing (free) feedback and suggestions to companies.
AACSB: Analytic
Blooms: Understand
52. The customers entering the market in the growth stage are primarily _____.
A. technology enthusiasts
B. laggards
C. early adopters
D. late majority
The customers entering the market in the growth stage are early adopters. They make up roughly 13.5
percent of the total market potential.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-51
53. Which of the following statements accurately brings out the difference between technology enthusiasts
and early adopters?
A. While the customer segment in the introduction stage consists of early adopters, the customers
entering the market in the growth stage are technology enthusiasts.
B. Unlike technology enthusiasts, early adopters' demand is fueled more by intuition and vision rather
than technology concerns.
C. While early adopters make up the smallest market segment, technology enthusiasts make up the
mass market.
D. Firms need to communicate products' potential applications in a more direct way when attracting
technology enthusiasts rather than early adopters.
Unlike technology enthusiasts, early adopters' demand is driven by their imagination and creativity
rather than by the technology per se. They recognize and appreciate the possibilities the new technology
can afford them in their professional and personal lives.
AACSB: Analytic
Blooms: Understand
54. Which of the following statements is true of the early majority section of consumers?
A. They come into the market during the introduction stage.

B. They are unaware that many hyped new product introductions will fade away.
C. They weigh the benefits and costs carefully when adopting a new product.
D. They make up the smallest market segment.
The customers coming into the market in the growth stage are called early majority. They are
pragmatists and are most concerned with the question of what the new technology can do for them.
Before adopting a new product or service, they weigh the benefits and costs carefully.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-52
55. It is important for a firm to win over the early majority section of the market to ensure the commercial
success of an innovation because they:
A. are driven by technology concerns rather than the practicality of a new product.
B. influence the purchase decisions of early adopters.
C. enter into the market in large numbers, creating a herding effect.
D. have the highest purchasing power when compared to the other customer segments.
As the early majority section of the market makes up almost one third of the entire market potential,
winning them over is critical to the commercial success of the innovation. They are on the cusp of the
mass market. Bringing the early majority on board is the key to catching the growth wave of the
industry life cycle.
AACSB: Analytic
Blooms: Understand
56. When does a firm fall into the large competitive chasm between early adopters and early majority?
A. When it cannot attract technological enthusiasts to try the beta versions of its products
B. When it creates strong network effects during the growth stage
C. When it fails to successfully launch a mass-market version of its product
D. When the early majority create herding effects for its products
The significant differences in the attitudes toward technology of the early majority when compared to
the early adopters signify the wide competitive gulf—the chasm—between these two consumer
segments. Without adequate demand from the early majority, most innovative products wither away.
AACSB: Analytic
Blooms: Understand
7-53
57. At the time when Kevin decided to purchase a tablet computer, the product had just become accessible
to the mass market. He purchased the tablet only after he was completely convinced that the benefits it
would offer him would far exceed its price. Also, he waited for his friends to try the product and popular
gadget television shows to endorse it. Which of the following customer segments does Kevin best
represent?
A. Laggards
B. Technology enthusiasts
C. Early adopters
D. Early majority
Kevin represents the early majority section of the market. The customers coming into the market in the
growth stage belong to the early majority group. Early majority customers rely on endorsements by
others. They seek out reputable references such as reviews in prominent trade journals or in magazines.
As the early majority makes up almost one third of the entire market potential, winning them over is
critical to the commercial success of the innovation.

Blooms: Apply
Difficulty: 3 Hard
58. Sara can be categorized under the late majority customer segment. Which of the following behaviors is
she most likely to exhibit?
A. She will be confident in her ability to master any new technology.

B. She will prefer to buy from well-established brands rather than unknown new ventures.
C. She will not rely on endorsements by the early majority or early adopters.
D. She will buy beta versions of new products and technology.
Sara is most likely to buy from well-established brands rather than unknown new ventures. The late
majority prefers to buy from well-established firms with a strong brand image rather than from
unknown new ventures.

Blooms: Apply
7-54
59. How is the early majority section of consumers different from the late majority section?
A. While the early majority makes up the mass market, the late majority is the smallest market
segment.
B. The late majority enters the market in the decline stage, whereas the early majority enters the market
during the maturity stage.
C. Although the early majority is confident in their ability to master a new technology, the late majority
is not.
D. While the late majority prefers buying from unknown new ventures, the early majority relies only
on well-established brands.
The late majority shares all the concerns of the early majority. However, there is one important
difference. Although the early majority is confident in their ability to master a new technology, the late
majority is not.
AACSB: Analytic
Blooms: Understand
60. Which of the following statements is true of laggards?
A. They make up the largest customer segment for any business.

B. They tend to enter the market frequently during the decline stage.
C. They do not like waiting too long for new technology to release.
D. They are customers who adopt a new product even if it is not necessary.
Laggards tend to enter the market after it is completely mature and frequently during the decline stage.
They are customers who adopt a new product only if it is absolutely necessary.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-55
61. While the personal computer industry is flooded and growing with laptops and tablets, John recently
bought a desktop, his first personal computer. He realized that a computer at home would be helpful for
his children for their school projects, and he could use it to maintain the simple accounts of his
plumbing business. Which of the following customer segments does John best represent?
A. Early adopters
B. Category captains
C. Laggards
D. Early majority
John best represents the laggards segment. Laggards are customers who adopt a new product only if it is
absolutely necessary. They tend to enter the market after it is completely mature and frequently during
the decline stage.

Blooms: Apply
62. Which of the following is a drawback of using the industry life cycle as a framework to guide strategic
choice?
A. The framework believes that the life cycle of industries is unpredictable.

B. The framework does not explain everything about changes in industries.
C. The framework is based on the tenet that industries can be rejuvenated even in the declining stage.
D. The framework believes that the number and size of competitors remain constant throughout the life
cycle.
Although the industry life cycle is a useful tool, it does not explain everything about changes in
industries. Some industries may never go through the entire life cycle, while others are continually
renewed through innovation.
AACSB: Analytic
Blooms: Understand
7-56
63. SyncTouch Inc. is a manufacturer of cell phones. It has released an improvised version of its
smartphone in markets in which the company already operates. Which of the following types of
innovations does this scenario best illustrate?
The scenario best illustrates an incremental innovation. An incremental innovation squarely builds on an
established knowledge base and steadily improves an existing product or service offering. It targets
existing markets using existing technology.

Blooms: Apply
Learning Objective: 07-05 Categorize different types of innovations in the markets-and-technology framework.
Topic: Types of Innovation
64. In a radical innovation, a firm targets:
A. existing markets by using new technologies.

B. new markets by using existing technologies.
C. new markets by using new technologies.
D. existing markets by using existing technologies.
A radical innovation draws on novel methods or materials, is derived either from an entirely different
knowledge base or from a recombination of existing knowledge bases with a new stream of knowledge,
or targets new markets by using new technologies.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
65. A firm's resistance to changes in the status quo is referred to as _____.
A. organizational parity
B. organizational liquidity
C. organizational inertia
D. organizational efficacy
Organizational inertia is a firm's resistance to changes in the status quo.
AACSB: Analytic
Blooms: Remember
7-57
Difficulty: 1 Easy
66. Incumbent firms favor incremental innovation over radical innovation because:
A. their business decisions are independent of the other parties in their innovation ecosystem.
B. radical innovation will disturb the existing power distribution within the firms.
C. incumbent firms do not have formal organizational structures and processes like the way new
entrants do.
D. incremental innovations help firms sustain a permanent competitive advantage, whereas radical
innovations only help gain a temporary advantage.
Incumbent firms tend to favor incremental innovations that reinforce the existing organizational
structure and power distribution while avoiding radical innovation that could disturb the existing power
distribution (e.g., between different functional areas, such as R&D and marketing).
AACSB: Analytic
Blooms: Understand
67. Why is it easier for new entrants to involve in radical innovations when compared to incumbent firms?
A. Unlike incumbent firms, new entrants do not have to face the high entry barriers, initially.
B. New entrants are embedded in an innovation ecosystem, while incumbent firms are not.
C. Unlike incumbent firms, new entrants do not have formal organizational structures and processes.
D. Incumbent firms do not have the advantages of network effects that new entrants have.
New entrants do not have formal organizational structures and processes, giving them more freedom to
launch an initial breakthrough.
AACSB: Analytic
Blooms: Understand
7-58
68. When firms innovate by leveraging existing technologies into new markets, they are said to be involved
in _____.
A. incremental innovations
B. radical innovations
C. architectural innovations
D. disruptive innovations
Firms can innovate by leveraging existing technologies into new markets. An architectural innovation is
a new product in which known components, based on existing technologies, are reconfigured in a novel
way to create new markets.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
69. ModelLife Electronics Inc. is a company that builds diagnostic devices. It was the first company to
develop a compact MRI scanner by reconfiguring the components of the MRI technology. This smaller
and user-friendly version of the huge MRI scanner created demand from small hospitals, nursing homes,
and private practice doctors who were earlier dependent on the scanning machines in large hospitals.
Which of the following types of innovations does this scenario best illustrate?
A. Disruptive innovation
C. Radical innovation
D. Architectural innovation
This scenario best illustrates architectural innovation. Firms can innovate by leveraging existing
technologies into new markets. An architectural innovation is a new product in which known
components, based on existing technologies, are reconfigured in a novel way to create new markets.

Blooms: Apply
Difficulty: 3 Hard
7-59
70. A(n) _____ leverages new technologies to attack existing markets.
A. disruptive innovation
B. incremental innovation
C. radical innovation
A disruptive innovation leverages new technologies to attack existing markets. It invades an existing
market from the bottom up.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
71. Which of the following statements is true of a disruptive innovation?
A. It begins as a low-cost solution to a new problem.

B. It initially performs better than the existing technology.
C. It involves leveraging existing technologies in new markets.
D. It invades the market from the bottom up, by first capturing the low end.
One factor favoring the success of disruptive innovation is that it relies on stealth attack: It invades the
market from the bottom up, by first capturing the low end. Many times, incumbent firms fail to defend
the low end of the market, because it is frequently a low-margin business.
AACSB: Analytic
Blooms: Understand
72. Which of the following is one of the reasons that led to CNN, an innovator, losing its leadership
position in the 24-hour cable news industry?
A. The cable news industry was in the maturity stage of the industry life cycle.
B. The second movers imitated CNN's incremental innovation to continuously improve their offering.
C. It failed to cross the large competitive chasm between the early adopters and early majority.
D. Its business model relied heavily on crowdsourcing for its user-generated content.
In some instances, an innovator is outcompeted by second movers that quickly introduce a similar
incremental innovation to continuously improve their own offering. For example, although CNN was
the pioneer in 24-hour cable news, today Fox News is the most watched cable news network in the U.S.

Blooms: Apply
7-60
73. As a start-up company, Virtue Mobiles Inc. entered the low end of the highly competitive cell phone
industry with its low-cost smartphones. Initially, the company was able to sell its inferior technology
due to its low prices. Over the years, however, its rate of technology improvements increased above the
industry standards. This helped the company to create a strong strategic position for its smartphones in
the high-end segment and claim a premium price. Which of the following types of innovation does this
The scenario best illustrates a disruptive innovation. The dynamic process of disruptive innovation
begins when a firm, frequently a startup, introduces a new product based on a new technology to meet
existing customer needs. It invades an existing market from the bottom up.

Blooms: Apply
Difficulty: 3 Hard
74. When Japanese carmakers attacked the existing U.S. automobile market by first offering small fuel-
efficient cars, and then leveraging their low-cost and high-quality advantages into high-end luxury
segments, they were engaging in _____.
C. disruptive innovation
Japanese carmakers successfully followed a strategy of disruptive innovation by first introducing small
fuel-efficient cars, and then leveraging their low-cost and high-quality advantages into high-end luxury
segments, captured by brands such as Lexus, Infiniti, and Acura.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-61
75. Digital photography replacing film photography would be an example of a(n) _____.
C. architectural innovation
D. disruptive innovation
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
76. Which of the following is true of a disruptive innovation?
A. It targets existing markets.

B. It initially provides high-cost solutions to existing problems.
C. It introduces a radical idea and creates a new industry.
D. It attacks the market through a top-down process.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
77. A factor favoring the success of disruptive innovation is that:
A. incumbent firms are slow to change.

B. new entrants have highly formal organizational structures and processes.
C. the low end of the market is highly guarded.
D. incumbent firms focus on radical innovation rather than incremental innovation.
A factor favoring the success of disruptive innovation is that incumbent firms often are slow to change.
Incumbent firms tend to listen closely to their current customers and respond by continuing to invest in
the existing technology and in incremental changes to the existing products.
AACSB: Analytic
Blooms: Understand
7-62
78. Intel's Celeron chip and Atom chip are initiatives to:
A. introduce a new product in a new market to extend its leadership.

B. guard the company against disruptive innovation by protecting the low end of the market.
C. stall its own disruption strategies and wait for its rivals to introduce disruptive forces.
D. target that section of the market that is not particularly price sensitive.
Intel's Celeron chip and Atom chip are initiatives to guard the company against disruptive innovation by
protecting the low end of the market with low-cost innovations to preempt stealth competitors. Intel
introduced the Celeron chip, a stripped-down, budget version of its Pentium chip, in 1998. More
recently, Intel followed up with the Atom chip, a new processor that is inexpensive and consumes little
battery power, to power low-cost mobile devices.

Blooms: Apply
79. General Electric (GE) disrupted itself in the healthcare industry by:
A. replacing the top levels of the executive hierarchy.

B. introducing inexpensive and smaller diagnostic devices in developing countries.
C. saturating the global market with multiple diagnostic devices.
D. targeting the comparatively less price-sensitive sections of the market.
Strategy Highlight 7.2 focuses on GE's new innovation strategy. Realizing that the likelihood of
disruptive innovation increases over time, GE decided to disrupt itself. In 2002, a GE team in China,
through a bottom-up strategic initiative, developed an inexpensive, portable ultrasound device,
combining laptop technology with a probe and sophisticated imaging software. This lightweight device
was first used in rural China.

Blooms: Apply
7-63
80. By introducing Vscan, a small, wireless ultrasound device, GE Healthcare (General Electric) was
primarily trying to:
A. cater to the healthcare needs of the developed countries over developing countries.
B. invade the healthcare market from the bottom up.
C. leverage existing technologies to attack new markets.
D. find a market for high-end, high-price diagnostic devices.
Strategy Highlight 7.2 focuses on GE's new innovation strategy. Realizing that the likelihood of
disruptive innovation increases over time, GE decided to disrupt itself. Vscan is a wireless ultrasound
device that is priced at less than $10,000. There is no market for these high-end, high-price products in
developing countries. Given their large populations, however, there is a strong medical need for
ultrasound devices.
AACSB: Analytic
Blooms: Understand
81. Which of the following is stated by the long tail phenomenon?
A. When production is increased by 80 percent, the decrease in cost is close to 20 percent due to
economies of scale.
B. To gain a competitive advantage, it is necessary for a business to internalize 80 percent of its R&D,
and outsource the remaining 20 percent.
C. For an incumbent firm, 80 percent of its revenue comes from existing customers, and new customers
account for the remaining 20 percent.
D. Almost 80 percent of sales in a given product category come from only 20 percent of the offerings
in that category.
The long tail phenomenon states that 80 percent of offerings in a category are not big hits. It turns out
that 80 percent of sales in a given product category (such as movies, books, and songs) come from
"blockbusters" in the "short head" of the distribution curve, which represents only 20 percent of the
offerings in a category.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-06 Explain the long-tail concept and derive its strategic implications.
7-64
82. In the context of the long tail phenomenon, what does the short head represent?
A. It represents products that appeal to the largest segment of the market with homogenous tastes.
B. It represents products that are manufactured from minimal input resources.
C. It represents products that contribute only 20 percent to a firm's total revenue.
D. It represents products that online retailers offer in order to increase their product portfolio and not
their revenues.
The short head represents the mainstream. These products tend to appeal to the largest segment of the
market with homogenous tastes.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
83. _____ is a situation in which transactions are likely not to take place because there are only a few
buyers and sellers who have difficulty finding each other.
A. Diseconomies of scale
B. Resource ambiguity
C. Thin markets
D. Buyer resistance
Thin markets is a situation in which transactions are likely not to take place because there are only a few
buyers and a few sellers and they have difficulty finding each other.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
84. The _____ business model is best described as one in which companies can obtain a large part of their
revenues by selling a small number of units from among almost unlimited choices.
A. razor-razor-blade
B. freemium
C. pay-as-you-go
D. long tail
The long tail business model is one in which companies can obtain a large part of their revenues by
selling a small number of units from among almost unlimited choices.
AACSB: Analytic
Blooms: Remember
7-65
Difficulty: 1 Easy
85. How has the long tail business model affected eBay as an online retailer?
A. It has increased the cost of the virtual shelf space.

B. It has allowed eBay to offer limited product selections to its customers.
C. It has helped overcome the problem of thin markets, at no cost to the buyer.
D. It has made eBay highly dependent on products found in the short head to generate revenues.
Long tail has enabled buyers and sellers to meet online to exchange any good, no matter how exotic, at
no cost to the buyer.
AACSB: Analytic
Blooms: Understand
86. Large companies, such as AT&T, IBM, and GE, have been shifting their knowledge landscape from
closed innovation to open innovation because of the:
A. decreasing capability of external suppliers and vendors.

B. lack of reliability on venture capital.
C. increasing need to internally control research and development.
D. increasing supply and mobility of skilled workers.
The increasing supply and mobility of skilled workers has led to a shift in the knowledge landscape
from closed innovation to open innovation. Even the largest companies, such as AT&T, IBM, and GE,
are shifting their innovation strategy toward a model that blends internal with external knowledge-
sourcing via licensing agreements, strategic alliances, joint ventures, and acquisitions.
AACSB: Analytic
Blooms: Understand
Learning Objective: 07-07 Compare and contrast closed and open innovation.
7-66
87. Which of the following statements is true of firms pursuing a closed innovation?
A. Firms following the closed innovation model are less likely to be prone to the not-invented-here
syndrome.
B. Firms in the closed innovation model are extremely protective of their intellectual property.
C. Firms in the closed innovation model focus on building a more effective business model to
commercialize R&D, rather than focusing on being first to market.
D. Firms following the closed innovation model will find activities such as spin-out ventures or
strategic alliances crucial to commercialize their internally developed R&D.
Firms in the closed innovation model are extremely protective of their intellectual property. This allows
firms not only to capture all the benefits from their own R&D, but also prevents competitors from
benefitting from it.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
88. Globe Source Inc. is a consumer electronics company that follows an open innovation model. Which of
the following can be concluded about this firm?
A. The firm will suffer from the not-invented-here syndrome.

B. The firm is less likely to commercialize researches from other firms.
C. The firm will buy others' intellectual property whenever it advances its own business model.
D. The firm will equate R&D with a high likelihood of benefitting from first-mover advantages.
Globe Source Inc. will buy others' intellectual property whenever it advances its own business model.
Companies using an open innovation approach realize that great ideas can come from both inside and
outside the company. Significant value can be had by commercializing external R&D and letting others
commercialize internal R&D that does not fit with the company's strategy.
AACSB: Analytic
Blooms: Understand
7-67
89. Which of the following statements accurately brings out the difference between closed innovation and
open innovation?
A. Firms following the open innovation model are much more likely to be prone to the not-invented-
here syndrome than firms pursuing a closed innovation model.
B. While open innovation focuses on building an effective business model to commercialize R&D,
closed innovation focuses on being first to market.
C. Firms following the open innovation model are more protective about their intellectual property than
firms pursuing a closed innovation model.
D. While open innovation means introducing new technologies to new markets, closed innovation
refers to introducing new technologies to existing markets.
In closed innovation, strength in R&D is equated with a high likelihood of benefitting from first-mover
advantages. In open innovation, the focus is on building a more effective business model to
commercialize (internal and external) R&D, rather than focusing on being first to market.
AACSB: Analytic
Blooms: Understand
90. Which of the following key assumptions are innovations like Procter & Gamble's "Connect + Develop"
based on?
A. Combining the best of internal and external R&D will more likely lead to a competitive advantage.
B. Almost 40 percent of sales comes from 80 percent of product selection found in the short head.
C. The low end of a market is highly vulnerable to competitive attacks.
D. Since the best people, the smartest people in the industry work for P&G, the best discoveries must
be invented at P&G.
An example of open innovation is Procter & Gamble's "Connect + Develop," or C + D (a play on

research and development, or R&D). One key assumption underlying the open innovation model is that
combining the best of internal and external R&D will more likely lead to a competitive advantage.
AACSB: Analytic
Blooms: Understand
7-68
91. Norce Autos Inc. allows its customers, suppliers, researchers, and the community in general to
contribute their ideas toward new product developments. Customers and other interested stakeholders
can let the company know what new features they want to see in their next car. If the company faces any
technical complexities that its internal R&D team cannot solve, it posts the problem on its website and
allows people from the external community to provide solutions. In this scenario, Norce Autos Inc. is
primarily leveraging its:
A. economies of scope.
B. open innovation model.
C. razor-razor-blade business model.
D. experience-curve effects.
Norce Autos Inc. is leveraging its open innovation model. Companies using an open innovation
approach realize that great ideas can come from both inside and outside the company. Significant value
can be had by commercializing external R&D and letting others commercialize internal R&D that does
not fit with the firm's strategy. The focus is on building a more effective business model to
commercialize (internal and external) R&D, rather than focusing on being first to market.

Blooms: Apply
Difficulty: 3 Hard
92. Which of the following reasons led to the launch of Procter & Gamble's "Connect + Develop," a web-
based interface that connects the company's internal-innovation capability with the distributed
knowledge in the global community?
A. The company wanted to focus on process innovation rather than product innovation.
B. The company was no longer able to generate adequate growth through closed innovation.
C. The company wanted to carefully protect its intellectual property.
D. The supply and mobility of unskilled workers within the industry had increased drastically.
P&G is an $85-billion company whose investors expect it to grow at least 4-6 percent a year, which
implies generating between $3 and $5 billion in incremental revenue annually. P&G was no longer able
to generate this amount of growth through closed innovation. By 2000, P&G's closed-innovation
machine had stalled, and the company lost half its market value. It needed a change in innovation
strategy to drive organic growth.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Short Answer Questions
7-69
93. Explain the reasons for increasingly rapid technological diffusion and adoption.
One determinant is that initial innovations such as the car, airplane, telephone, and the use of electricity
provided the necessary infrastructure for newer innovations to diffuse more rapidly. Another reason is
the emergence of new business models that make innovations more accessible. The speed of technology
diffusion has accelerated further with the emergence of the Internet, social networking sites, and viral
messaging.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
94. What does the innovation process begin with?
The innovation process begins with an idea. The idea is often presented in terms of abstract concepts or
as findings derived from basic research. Basic research is conducted to discover new knowledge. This
may be done to enhance the fundamental understanding of nature, without any commercial application
or benefit in mind. In the long run, however, basic research is often transformed into applied research
with commercial application.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
95. What do you mean by an invention?
Invention describes the transformation of an idea into a new product or process, or the modification and
recombination of existing ones. If an invention is useful, novel, and non-obvious, it can be patented.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-70
96. How do patents protect new technology?
A patent is a form of intellectual property, and gives the inventor exclusive rights to benefit from
commercializing a technology for a specified time period in exchange for public disclosure of the
underlying idea. In the U.S., the time period for the right to exclude others from the use of the
technology is 20 years from the filing date of a patent application. Exclusive rights often translate into a
temporary monopoly position until the patent expires. For instance, many pharmaceutical drugs are
patent protected.
Moreover, patents can be enforced in court.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
97. Entrepreneurs are the agents who introduce change into the competitive system. Elaborate.
Entrepreneurs are the agents who introduce change into the competitive system. They do this not only
by figuring out how to use inventions, but also by introducing new products or services, new production
processes, and new forms of organization. Entrepreneurs can introduce change by starting new ventures,
or they can be found within existing firms. When innovating within existing companies, change agents
are often called intrapreneurs. Entrepreneurs who drive innovation need just as much skill, commitment,
and daring as inventors who are responsible for the process of invention.
AACSB: Analytic
Blooms: Understand
98. What are the competitive benefits that first movers in an industry experience?
Successful innovators can benefit from a number of first-mover advantages, including economies of
scale as well as experience and learning curve effects. First movers may also benefit from network
effects. Moreover, first movers may hold important intellectual property such as critical patents. They
may also be able to lock-in key suppliers as well as customers through increasing switching costs.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-71
99. Briefly discuss the steps in the innovation process.
Innovation describes the discovery and development of new knowledge in a four-step process captured
in the 4 - I's: idea, invention, innovation, and imitation.
1. The innovation process begins with an idea. The idea is often presented in terms of abstract concepts
or as findings derived from basic research.
2. In a next step, invention describes the transformation of an idea into a new product or process, or the
modification and recombination of existing ones.
3. Innovation concerns the commercialization of an invention by entrepreneurs.
4. The innovation process ends with imitation. If an innovation is successful in the marketplace,
competitors will attempt to imitate it.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
100. Define entrepreneurship. Who are entrepreneurs?
Entrepreneurship describes the process by which change agents undertake economic risk to innovate—
to create new products, processes, and sometimes new organizations. If successful, entrepreneurship not
only drives the competitive process, it also creates value for the individual entrepreneurs and society at
large.
Entrepreneurs are the agents that introduce change into the competitive system. They do this not only by
figuring out how to use inventions, but also by introducing new products or services, new production
processes, and new forms of organization. Entrepreneurs innovate by commercializing ideas and
inventions. They seek out or create new business opportunities and then assemble the resources
necessary to exploit them.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
101. What do you mean by social entrepreneurship?
Social entrepreneurship describes the pursuit of social goals by using entrepreneurship. Social
entrepreneurs evaluate the performance of their ventures not only by financial metrics but also by
ecological and social contribution. They use a triple-bottom line approach to assess performance.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-72
102. List the five distinct stages of the industry life cycle.
As an industry evolves over time, we can identify five distinct stages: introduction, growth, shakeout,
maturity, and decline.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
103. Explain some of the features of the introduction stage of the industry life cycle.
When an individual inventor or company launches a successful innovation, a new industry may emerge.
In this introductory stage, the innovator's core competency is R&D, which is necessary to creating a
new product category that will attract customers. This is a capital-intensive process, in which the
innovator is investing in designing a unique product, trying new ideas to attract customers, and
producing small quantities—all of which contribute to a high price when the product is launched. The
initial market size is very small, and growth is slow.
In this introductory stage, when barriers to entry tend to be high, generally only a few firms are active in
the market. In their competitive struggle for market share, they emphasize unique product features and
performance rather than price.
AACSB: Analytic
Blooms: Understand
104. What do you mean by a standard? How does it affect an industry?
A standard signals the market's agreement on a common set of engineering features and design choices.
Standards can emerge bottom-up through competition in the marketplace, or be imposed top-down by
government or other standard-setting agencies.
After a standard is established in an industry, the basis of competition tends to move away from product
innovations toward process innovations.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-73
105. How is process innovation different from product innovation?
Product innovations, as the name suggests, are new or recombined knowledge embodied in new
products—the jet airplane, electric vehicle, MP3 player, smartphones, and tablet computers. On the
other hand, process innovations are new ways to produce existing products or to deliver existing
services. Process innovations are made possible through advances such as the Internet, lean
manufacturing, Six Sigma, biotechnology, nanotechnology, and so on.
AACSB: Analytic
Blooms: Understand
106. In the introductory stage, the level of product innovation is at a maximum. Elaborate.
In the introductory stage, the level of product innovation is at a maximum because new features
increasing perceived consumer value are critical to gaining traction in the market. In contrast, process
innovation is at a minimum in the introductory stage because companies only produce a small number
of products, often just prototypes or beta versions. The main concern is to commercialize the invention
—that is, to demonstrate that the product works and that a market exists.
AACSB: Analytic
Blooms: Understand
107. Why do firms have more strategic variety in the growth stage of the industry life cycle?
Competitive rivalry is muted in the growth stage because the market is growing fast. Since market
demand is robust in this stage and more competitors have entered the market, there tends to be more
strategic variety: Some competitors will continue to follow a differentiation strategy, emphasizing
unique features, product functionality, and reliability. Other firms employ a cost-leadership strategy in
order to offer an acceptable level of value but lower prices to consumers. They realize that lower cost is
likely a key success factor in the future, because this will allow the firm to lower prices and attract more
consumers into the market.
AACSB: Analytic
Blooms: Understand
7-74
108. What happens during the shakeout stage of the industry life cycle?
As the industry moves into the shakeout stage of the industry life cycle, the rate of growth declines.
Demand was largely satisfied in the prior growth stage. Given the large market size achieved from the
growth stage, any additional market demand in the next stage is limited. Demand now consists of
replacement or repeat purchases only. This limited market demand in turn increases competitive
intensity within the industry.
Firms begin to compete directly against one another for market share, rather than trying to capture a
share of an increasing pie. As rivals vie for a shrinking pie and competitive intensity is increasing, the
weaker firms are forced out of the industry. This is the reason why this phase of the industry life cycle is
called the shakeout stage: Only the strongest competitors survive increasing rivalry as firms begin to cut
prices and offer more services, all in an attempt to capture more of a shrinking market. The winners in
this increasingly competitive environment are generally firms that stake out a strong position as cost
leaders.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
109. Briefly discuss the four strategic options firms have during the decline stage of the industry life cycle.
At the decline stage, managers generally have four strategic options:
• Exit: Some firms are forced to exit the industry by bankruptcy or liquidation.
• Harvest: In pursuing a harvest strategy, the firm reduces investments in product support and allocates
only a minimum of human and other resources.
• Maintain: When following a maintain strategy, firms continue to support marketing efforts at a given
level despite the fact that demand has been declining.
• Consolidate: Although market size shrinks in a declining industry, some firms may choose to
consolidate the industry by buying rivals (those who choose to exit). This allows the consolidating firm
to stake out a strong position—possibly approaching monopolistic market power, albeit in a declining
industry.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-75
110. Briefly discuss the strategic implications of the crossing-the-chasm framework.
Based on empirical observations, Geoffrey Moore's core argument is that each stage of the industry life
cycle is dominated by a different customer group. Different customer groups with distinctly different
preferences enter the industry at each stage of the industry life cycle. Each customer group responds
differently to a technological innovation. This is due to differences in the psychological, demographic,
and social attributes observed in each unique customer segment. Moore's main contribution is that the
significant differences between the customer groups that enter early during the introductory stage of the
industry life cycle versus customers that enter later during the growth stage make a firm's smooth
transition between the different parts of the industry life cycle difficult. That is, these distinct
differences between customer groups lead to a big gulf or chasm into which companies and their
innovations frequently fall. Only companies that recognize these differences and are able to apply the
appropriate competencies at each stage of the industry life cycle will have a chance to transition
successfully from stage to stage.
AACSB: Analytic
Blooms: Understand
111. Who are technology enthusiasts?
The customer segment in the introductory stage of the industry life cycle is called technology
enthusiasts. This is the smallest market segment, and makes up no more than 2.5 percent of the total
market potential. Technology enthusiasts often have an engineering mindset and pursue new technology
proactively. They frequently seek out new products before the products are officially introduced into the
market. Technology enthusiasts enjoy using beta versions of products, tinkering with the product's
imperfections and providing (free) feedback and suggestions to companies. Moreover, technology
enthusiasts are often willing to pay a premium price to have the latest gadget. The endorsement by
technology enthusiasts validates the fact that the new product does in fact work.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-76
112. Bringing the early majority on board is the key to catching the growth wave of the industry life cycle.
Provide reasons to agree or disagree with this statement.
The early majority makes up almost one third of the entire market potential, winning them over is
critical to the commercial success of the innovation. They are on the cusp of the mass market. Bringing
the early majority on board is the key to catching the growth wave of the industry life cycle. Once they
decide to enter the market, a herding effect is frequently observed: the early majority enters in large
numbers. Without adequate demand from the early majority, most innovative products wither away.
AACSB: Analytic
Blooms: Understand
113. Discuss the characteristics of the customer segment "laggards".
Laggards are customers who adopt a new product only if it is absolutely necessary. These customers
generally don't want new technology, either for personal or economic reasons. Given their reluctance to
adopt new technology, they are generally not considered worth pursuing. Laggards make up no more
than 16 percent of the total market potential. They tend to enter the market after it is completely mature
and frequently during the decline stage. Their demand is far too small to compensate for reduced
demand from the early and late majority, who are moving on to different products and services.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
114. Discuss the drawbacks of the industry life cycle.
Although the industry life cycle is a useful framework to guide strategic choice, industries do not
necessarily evolve through these stages. Moreover, innovations can emerge at any stage of the industry
life cycle, which in turn can initiate a new cycle. Industries can also be rejuvenated, often in the
declining stage. The industry life cycle model does not explain everything about changes in industries.
Some industries may never go through the entire life cycle, while others are continually renewed
through innovation. It is necessary to consider that other factors such as fads in fashion, changes in
demographics, or deregulation can affect the dynamics of industry life cycles.
AACSB: Analytic
Blooms: Understand
7-77
115. Differentiate incremental innovation from radical innovation.
An incremental innovation squarely builds on an established knowledge base and steadily improves an
existing product or service offering. It targets existing markets using existing technology.
On the other hand, radical innovation draws on novel methods or materials, is derived either from an
entirely different knowledge base or from a recombination of existing knowledge bases with a new
stream of knowledge, or targets new markets by using new technologies.
AACSB: Analytic
Blooms: Understand
116. What are the economic incentives associated with incumbent firms?
Once an innovator has become an established incumbent firm, it has strong incentives to defend its
strategic position and market power. An emphasis on incremental innovations strengthens the
incumbent firm's position and thus maintains high entry barriers. A focus on incremental innovation is
particularly attractive once an industry standard has emerged and technological uncertainty is reduced.
As a result, the incumbent firm uses incremental innovation to extend the time it can extract profits
based on a favorable industry structure.
AACSB: Analytic
Blooms: Understand
117. Why do incumbent firms favor incremental innovation over radical innovation?
Incumbent firms favor incremental innovation over radical innovation for the following reasons.
• Once an innovator has become an established incumbent firm, it has strong incentives to defend its
strategic position and market power. An emphasis on incremental innovations strengthens the
incumbent firm's position and thus maintains high entry barriers.
• From an organizational perspective, as firms become established and grow, they rely more heavily on
formalized business processes and structures. In some cases, the firm may experience organizational
inertia—resistance to changes in the status quo. Incumbent firms, therefore, tend to favor incremental
innovations that reinforce the existing organizational structure and power distribution while avoiding
radical innovation that could disturb the existing power distribution.
• A final reason incumbent firms tend to be a source of incremental rather than radical innovations is
that they become embedded in an innovation ecosystem: a network of suppliers, buyers,
complementors, and so on. They no longer make independent decisions but must consider the
ramifications on other parties in their innovation ecosystem.
AACSB: Analytic
7-78
Blooms: Understand
118. What do you mean by an innovation ecosystem?
An innovation ecosystem is a firm's embeddedness in a complex network of suppliers, buyers, and

complementors, which requires interdependent strategic decision making.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
119. Explain architectural innovation with the help of a real world example.
Student answers may vary.

Firms can also innovate by leveraging existing technologies into new markets. Doing so generally
requires them to reconfigure the components of a technology, meaning they alter the overall
"architecture" of the product. An architectural innovation, therefore, is a new product in which known
components, based on existing technologies, are reconfigured in a novel way to create new markets.
Example: By applying an architectural innovation, the Japanese entry Canon was able to redesign the
copying machine so that it didn't need professional service—reliability was built directly into the
machine, and the user could replace parts such as the cartridge. What Xerox had not envisioned was the
possibility that the components of the copying machine could be put together in an altogether different
way that was more user-friendly. More importantly, Canon addressed a need in a specific consumer
segment—small and medium-sized businesses and individual departments or offices in large companies
—that Xerox neglected.
AACSB: Analytic
Blooms: Understand
7-79
120. What are the additional characteristics that a new product or technology must have to be a disruptive
force?
The dynamic process of disruptive innovation begins when a firm, frequently a startup, introduces a new
product based on a new technology to meet existing customer needs. To be a disruptive force, however,
this new product or technology has to have additional characteristics:
1. It begins as a low-cost solution to an existing problem.

2. Initially, its performance is inferior to the existing technology, but its rate of technological
improvement over time is faster than the rate of performance increases required by different market
segments.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
121. Discuss the factors favoring the success of disruptive innovation.
One factor favoring the success of disruptive innovation is that it relies on stealth attack: It invades the
market from the bottom up, by first capturing the low end. Many times, incumbent firms fail to defend
(and sometimes are even happy to cede) the low end of the market, because it is frequently a low-
margin business.
Another factor favoring the success of disruptive innovation is that incumbent firms often are slow to
change. Incumbent firms tend to listen closely to their current customers and respond by continuing to
invest in the existing technology and in incremental changes to the existing products. When a newer
technology matures and proves to be a better solution, those same customers will switch over. At that
time, however, the incumbent firm does not yet have a competitive product ready that is based on the
disruptive technology.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-80
122. What opportunities does online digitalization provide to businesses?
To harness the power of the Internet, firms digitize their offerings. This process acts as an especially
disruptive force. In the physical world of brick-and-mortar retail stores, product selections are often the
only choice on display because there are significant costs to carrying broader inventory to meet a wider
variety of consumer needs.
The disruptive force of the Internet provides an opportunity to online retailers to benefit from marketing
the long tail. Online retailers can "sell less of more" by taking advantage of low-cost virtual shelf space,
which is basically unlimited. The Internet, combined with sophisticated search engines and inventory-
management software, allows firms to drive down transaction costs to match individual consumer
demand with supply.
The Internet as a disruptive innovation enables companies to solve important strategic trade-offs. It
lowers the costs of shelf space, inventory, and distribution to near zero and enables firms to aggregate
non-hits and match unique consumer preferences to supply.
AACSB: Analytic
Blooms: Understand
123. How does the long tail business model allow online retailers to overcome the problem of thin markets?
The long tail allows online retailers to overcome the problem of thin markets, in which transactions are
likely not to take place because there are only a few buyers and a few sellers and they have difficulty
finding each other.
It enables buyers and sellers to meet online to exchange any good, no matter how exotic, at no cost to
the buyer. In any distribution, the short tail captures only the tip of the iceberg. The long tail, in contrast,
captures the bottom of the iceberg, the non-obvious choices.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
124. Elaborate on the closed-innovation approach.
During the twentieth century, the closed-innovation approach was the dominant research and
development (R&D) approach for most leading industrial corporations: They tended to discover,
develop, and commercialize new products internally. Although this approach was costly and time
consuming, it allowed firms to fully capture the returns to their own innovations.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7-81
125. What the factors led to a shift in the knowledge landscape from closed innovation to open innovation?
Several factors led to a shift in the knowledge landscape from closed innovation to open innovation.
They include:
• The increasing supply and mobility of skilled workers

• The exponential growth of venture capital
• The increasing availability of external options (such as spinning out new ventures) to commercialize
ideas that were previously shelved or in-source promising ideas and inventions
• The increasing capability of external suppliers
Taken together, these factors have led more and more companies to adopt an open innovation approach
to research and development.
AACSB: Analytic
Blooms: Understand
126. Compare closed and open innovation models.
In the closed innovation model, the firm is conducting all research and development in-house, using a
traditional funnel approach. The boundaries of the firm are impenetrable. Outside ideas and projects
cannot enter, nor does the firm allow its own research ideas and development projects to leave the firm.
Firms in the closed innovation model are extremely protective of their intellectual property. This allows
the firm not only to capture all the benefits from their own R&D, but also prevents competitors from
benefitting from it. The mindset of firms in the closed innovation model is that to profit from R&D, the
firm must come up with its own discoveries, develop them on their own, and control the distribution
channels.
In the open innovation model, in contrast, a company attempts to commercialize both its own ideas and
research from other firms. It also finds external alternatives such as spin-out ventures or strategic
alliances to commercialize its internally developed R&D. The boundary of the firm has become porous,
allowing the firm to spin out some R&D projects while insourcing other promising projects. Companies
using an open innovation approach realize that great ideas can come from both inside and outside the
company.
AACSB: Analytic
Blooms: Understand
7-82
127. Does Procter & Gamble's "Connect + Develop" use an open innovation or closed innovation model?
Provide reasons to support your answer.
An example of open innovation is Procter & Gamble's "Connect + Develop," or C + D (a play on

research and development, or R&D). Because of the maturing of its products and markets, P&G's CEO
A. G. Lafley decided it was time to look outside for new ideas. P&G was no longer able to generate this
amount of growth through closed innovation. By 2000, P&G's closed-innovation machine had stalled,
and the company lost half its market value. It needed a change in innovation strategy to drive organic
growth.
P&G's Connect + Develop is a web-based interface that connects the company's internal-innovation
capability with the distributed knowledge in the global community. From that external community,
researchers, entrepreneurs, and consumers can submit ideas that might solve some of P&G's toughest
innovation challenges. The C + D model is based on the realization that innovation was increasingly
coming from small entrepreneurial ventures and even from individuals. Universities also became much
more proactive in commercializing their inventions. The Internet now enables access to widely
distributed knowledge from around the globe.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
7-83

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Chapter 07

Business Strategy: Innovation and Entrepreneurship

Multiple Choice Questions

A. By lowering its network effects

2. Which of the following is a drawback of Wikipedia's business model?

A. The company's superior differentiated appeal is highly correlated to its cost.

3. The typical four-step innovation process begins with:

A. the modification and recombination of an existing product or process.

9. An intrapreneur is described as a person who:

A. restricts changes within an organization.

11. Which of the following statements is NOT true about innovation?

A. Innovation as a competitive weapon can simultaneously create and destroy value.

A. By reducing its network effects

14. The four-step innovation process ends with:

A. firm that uses closed innovation.

A. There are only a few competitors in the 3D television market.

A. pursue a harvest strategy.

A. learning curve effects

A. Standards emerge exclusively from bottom-up through competition in the marketplace.

A. The consumer demand increases.

A. A consumer electronics company developing a new generation of tablet computers

A. invest as many resources as possible in product innovations.

A. There is rapid industry growth during this stage.

A. charge higher prices than its competitors.

A. move toward product innovations and away from process innovations.

A. The barriers to entry increase during this stage.

A. The competitive intensity within the industry is at its peak.

A. The type of buyers at this stage will be early adopters.

43. When a firm pursues a harvest strategy, it:

A. exits the industry by bankruptcy or liquidation.

46. When a firm pursues a maintain strategy, it:

A. The early and late majority together

51. Which of the following statements is true of technology enthusiasts?

A. They make up the largest market segment.

A. They come into the market during the introduction stage.

A. She will be confident in her ability to master any new technology.

60. Which of the following statements is true of laggards?

A. They make up the largest customer segment for any business.

A. The framework believes that the life cycle of industries is unpredictable.

64. In a radical innovation, a firm targets:

A. existing markets by using new technologies.

65. A firm's resistance to changes in the status quo is referred to as _____.

70. A(n) _____ leverages new technologies to attack existing markets.

71. Which of the following statements is true of a disruptive innovation?

A. It begins as a low-cost solution to a new problem.

76. Which of the following is true of a disruptive innovation?

A. It targets existing markets.

A. incumbent firms are slow to change.

A. introduce a new product in a new market to extend its leadership.

A. replacing the top levels of the executive hierarchy.

81. Which of the following is stated by the long tail phenomenon?

A. It has increased the cost of the virtual shelf space.

A. decreasing capability of external suppliers and vendors.

A. The firm will suffer from the not-invented-here syndrome.

Short Answer Questions

95. What do you mean by an invention?

96. How do patents protect new technology?

99. Briefly discuss the steps in the innovation process.

100. Define entrepreneurship. Who are entrepreneurs?

101. What do you mean by social entrepreneurship?

104. What do you mean by a standard? How does it affect an industry?

105. How is process innovation different from product innovation?

111. Who are technology enthusiasts?