True / False

1. Strategic competitiveness is achieved when a firm successfully formulates and implements a value-creating
strategy.
ANSWER: True

2. Alligator Enterprises has earned above-average returns since its founding five years ago. Since no other firm has
challenged Alligator in its particular market niche, the firm's owners can feel secure that Alligator has established a
competitive advantage.
ANSWER: False

3. The goal of strategic management is to develop a competitive advantage that is permanent.

ANSWER: False
4. Risk in terms of financial returns reflects an investor's uncertainty about economic gains or losses that will
result from a particular investment.
ANSWER: True

5. Average returns are returns in excess of what an investor expects to earn from other investments with a
similar amount of risk.
ANSWER: False

6. Returns can only be measured in accounting terms such as return on assets, return on equity, or return on
sales.
ANSWER: False
7. Economies of scale and huge advertising budgets are just as effective in the new competitive landscape as
they were in the past, but they must be reinforced by strategic flexibility.
ANSWER: False

8. The two primary drivers of hypercompetition are the emergence of the global economy and
technology
ANSWER: True

9. The rate of technology diffusion has been steadily increasing over the last two
decades.
ANSWER: True
10. While patents may be an effective way of protecting proprietary technology in some industries such
as pharmaceuticals, many firms competing in the electronics industry do not apply for patents.
ANSWER: True

11. Examples of incremental innovations include iPods, PDAs, Wi-Fi, and web
browser software
ANSWER: False
12. The rapid rate of technological diffusion has increased the competitive benefits of
patents.
ANSWER: False
13. Developed countries still have major advantages in access to information technology over emerging
economies because of the significant cost of the infrastructure needed for computing power.
ANSWER: False

14. The rate of growth of Internet-based applications could be affected by the possibility of Internet service
providers charging users for downloading those applications.
ANSWER: True

Multiple Choice
 1. McDonald's has been able to
a. earn above-average returns.
b. achieve strategic competitiveness.
c. use the strategic management process.
d. All of these options are correct.

ANSWER: d

2. A firm has achieved when it successfully formulates and implements a value-creating strategy.
a. strategic competitiveness
b. a permanently sustainable competitive advantage
c. substantial returns
d. legal and ethical core values
ANSWER: a
3. A competitive advantage
a. can be permanent if the firm has successfully implemented the strategic management process.
b. entails reducing investors' risk to near zero.
c. can be identified only if it has been unsuccessfully challenged by competitors.
d. exists when competing firms are unable to find investors.
ANSWER: c

4. The primary drivers of hypercompetition are

a. rising global socio-economic instability and increased inflation.
b. the emergence of a global economy and rapid technological change. c.
increased global competition and decreased tariffs.
d. increased availability of capital and increased competition.
ANSWER: b

5. All of the following are characteristic of the global economy EXCEPT

a. the increasing importance of developing countries as sources of revenue growth.
b. the free movement of goods, services, people, skills, and ideas across geographic borders. c.
the increased use of tariffs to protect industries.
d. higher levels of opportunities and challenges.
ANSWER: c

6. Essentially, has become one of the world's largest markets with 700 million potential consumers. a.
the European Union
b. the United States c.
China
d. Japan
ANSWER: a

7. has become the second-largest economy in the world. a. The United States
b. The European Union c.
Japan
d. China
ANSWER: d

8. The economic interdependence among countries as reflected in the flow of goods, services, financial capital, and
knowledge across country borders is defined as
 a. hypercompetition.
b. boundaryless retailing. c.
strategic intensity.
d. globalization.
ANSWER: d

9. Globalization has led to

a. lower operational efficiency as firms must transport raw materials and finished goods farther. b.
increasing loyalty of customers for products made domestically.
c. declining returns from investment in research and development. d.
higher product quality.
ANSWER: d
10. The "liability of foreignness" is the
a. inability of most U.S. managers to truly comprehend foreign cultures.
b. political disadvantage that U.S. firms have when doing business abroad.
c. overall risk of participating outside a firm's domestic country when entering global competition.
d. strong cultural preference for "buying local," which puts foreign firms at a disadvantage when competing in
the U.S. market.

ANSWER: c

11. Even for companies capable of succeeding in global markets, it is critical that they
a. remain committed to and strategically competitive in their domestic market.
b. introduce many new products immediately after entering a new market.
c. acquire a local competitor in each significant foreign market.
d. develop good negotiating skills in order to take advantage of local suppliers in the international market.

ANSWER: a

12. The rate of technological diffusion is increasing. Which of the following was fastest in penetrating 25 percent of
homes in the U.S. market?
a. telephone
b. television
c. personal computer
d. Internet
ANSWER: d
13. New markets created by iPods, PDAs, and Wi-Fi are a result of a.
disruptive technologies.
b. global competition.
c. knowledge intensity. d.
hypercompetition.
ANSWER: a

Short Essay
1. Define strategic competitiveness and above-average returns. What is the relationship between strategic
competitiveness and returns on investment?

ANSWER: Strategic competitiveness is achieved when the firm successfully formulates and
implements a value-creating strategy. Above-average returns are returns in excess of
what investors expect to earn from other investments with similar risk levels. Firms
will only be able to earn above-average returns if they develop a competitive
 advantage. Competitive advantage derives from a strategy that competitors cannot
duplicate or find too costly to imitate.
2 . Hypercompetition is a characteristic of the current competitive landscape. Define hypercompetition and identify
its primary drivers. How can organizations survive in a hypercompetitive environment?

ANSWER: Hypercompetition is a condition of rapidly escalating competition based on price-

quality positioning, competition to create new knowledge and establish first-mover
advantage, and competition to protect or invade established product or geographic
markets. In hypercompetition, firms aggressively challenge their competitors. Markets
are assumed to be inherently unstable and changeable. The two primary drivers of
hypercompetition are the global economy and rapid technological change. To survive
in a hypercompetitive environment firms need strategic flexibility. This demands
continuous learning which allows the firm to develop new skills so that they can adapt
to the changing environment and to consistently engage in change.

3. Describe the industrial organization (I/O) model of above-average returns. What are its main assumptions? What is
the key to success according to the I/O model?

ANSWER: The I/O model of above-average returns argues that the external environment is the
primary determinant of firm success, rather than the firm's internal resources. The
model has four underlying assumptions. First, the external environment is assumed to
impose pressures and constraints that determine the strategies that would result in
above-average returns. Second, most firms competing within a particular industry, or
in a certain segment of the industry, are assumed to control similar strategically
relevant resources and pursue similar strategies in light of those resources. Third,
resources used to implement strategies are mobile across firms, which results in
resource differences between firms being short-lived. Fourth, organizational decision
makers are assumed to be rational and committed to acting in the firm's best interests
as shown by their profit-maximizing behaviors. The key to success according to the
I/O model is to find the most attractive industry (the one with the highest profit
potential) in which to compete.
4. Describe and discuss the resource-based model of above-average returns.

ANSWER: The resource-based model focuses on the firm's internal resources and capabilities.
These resources and capabilities determine the firm's strategy and its ability to earn
above-average returns. The firm's resources are inputs into its production process.
Resources must be formed into capabilities, the capacity to perform a task or activity
in an integrative manner. According to this model, capabilities evolve over time and
must be managed dynamically to achieve above-average returns. Resources and
capabilities that give a firm a competitive advantage are called core competencies.
This model assumes that resources are not highly mobile across firms; consequently,
all firms within a particular industry may not possess the same strategically relevant
resources and capabilities. So, different firms will have different core competencies.
The organization's strategy is based on finding the best environment in which to
exploit its core competencies.