exam #1 Practice • Answers • BUSA 4980
Section A: Multiple Choice
Section B: Short Answers on material
1. As discussed in the course introduction and chapter one, the two main determinants in achieving and sustaining superior performance are (1) industry attractiveness (i.e. external environment) and (2) competitive position (i.e. internal organization). The first input involves the Industrial Organization model of above-average returns, which suggests that the external environment imposes constraints on superior performance. Hence, firms must study the external situation, especially industry and competitor dynamics, to locate an attractive industry and set an appropriate strategy. The second input involves the Resource-Based model, which suggests that a firm’s unique resources and capabilities are the basis of superior returns. Here, firms select a strategy that allows the firm to utilize its capabilities relative to market opportunities in order to build competitive advantage. Strategic management is largely an effort to understand the factors contributing to industry profitability and competitive positioning within an industry. Both factors contribute to the profitability of individual companies. It is not clear if one determinant of performance is more important than the other. Differences in the profitability across industries are clearly evident, as illustrated in chapter 2. However, there is also considerable variation in profitability within an industry and across firms, given competitive positioning and internal strengths. Indeed, differences in profitability tend to be much larger within industries than across industries, suggesting that competitive positioning is more important. Still, both determinants are required to understand the inherent ability of firms to achieve and sustain superior performance.
2. The “Five Forces” model of competition is a widely used tool for exploring the main competitive pressures within an industry. These competitive pressures are influenced by five forces: (1) scope of rivalry among competitors, (2) threat of new entrants, (3) threat of substitute products or services, (4) bargaining power of suppliers, and (5) bargaining power of buyers. The figure below presents these forces, along with a list of factors within each force affecting the nature of competitive pressure. In general, the model describes the attractiveness of the industry, based on the nature of the competitive pressures across the five forces. Intense pressures signal the potential for unattractive profitability, while benign pressures signal attractive profitability. For example, the ideal competitive environment for earning profits is one where suppliers and buyers are in a weak bargaining position, there are no good substitutes, high barriers to entry, and weak rivalry among competitors. Although the model is necessary to understand firm profitability, it is not sufficient. In addition to the competitive pressures of an industry, understanding industry driving forces is also necessary. Furthermore, competitive positioning within an industry will also explain variation in firm profitability. In summary, studies have shown that competitive pressures within an industry determine the sustainability of strong performance, while competitive strategy and positioning determines the emergence of strong performance.
3. There are two empirical indicators to determine if a company’s present strategy is working effectively: (1) whether the company is achieving its stated financial and strategic objectives and (2) whether the company is an above-average performer within its industry. The stronger a company’s financial and market performance, the more likely it has a well-conceived, well-executed strategy. The process of assessing the strength of a firm’s strategy involves the...
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