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CIMA E3 practice questions

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Question 1Strategic Management

A diversified group uses the BCG matrix to review its portfolio. A division holds a high share of a market that is expanding only slowly. Under the BCG framework, how should this division be classified and treated?

  1. Question mark: divest immediately because share is low
  2. Cash cow: harvest cash to fund selected growth elsewhere Correct answer.
  3. Dog: liquidate because market growth is negative
  4. Star: invest heavily to defend share in the fast-growing market

Explanation

The BCG matrix classifies business units by relative market share and market growth. A high-share unit in a low-growth market is a cash cow, expected to generate surplus cash that is redeployed to stars or selected question marks. It is not a star because growth is low, and it is not a question mark or dog because its share is high.

Question 2Strategic Management

A board is reviewing its mission statement. Which characteristic most clearly distinguishes a well-formulated strategic mission from a slogan?

  1. It lists every product the organisation currently sells to its customers
  2. It promises the highest possible returns to shareholders within three years
  3. It states the organisation's purpose and scope of activities in a way that guides resource allocation Correct answer.
  4. It repeats the wording used in the annual advertising campaign

Explanation

A strategic mission defines why the organisation exists and the boundaries of its activities, providing a basis for choosing where to commit resources. Slogans and product inventories lack this guiding scope. Financial return targets belong to objectives, not to mission.

Question 3Strategic Management

A manufacturer of industrial pumps is deciding how to compete. It chooses to serve only customers needing pumps for corrosive chemicals, offering specialist materials and rapid technical support. Which generic strategy is this?

  1. Focus strategy built on serving a narrow segment distinctively Correct answer.
  2. Diversification into unrelated chemical processing services
  3. Cost leadership across the whole pump industry
  4. Differentiation through a broad product range for all buyers

Explanation

Porter's focus strategy targets a narrow market segment and serves it either at lower cost or through differentiation. Restricting to corrosive-chemical applications while offering specialist materials and support is a focused differentiation position. It is neither industry-wide cost leadership nor broad differentiation.

Question 4Strategic Management

Which element of the external environment is normally examined in a PESTLE analysis but sits outside the scope of Porter's Five Forces?

  1. Legal and regulatory change Correct answer.
  2. Threat of new entrants
  3. Bargaining power of suppliers
  4. Intensity of competitive rivalry

Explanation

PESTLE covers political, economic, social, technological, legal and environmental macro factors. Legal and regulatory change is a macro-environmental influence, whereas the Five Forces framework analyses industry structure through rivalry, entrants, substitutes and bargaining power. The two frameworks address different levels of analysis.

Question 5Strategic Management

An organisation's value chain analysis shows that its inbound logistics cost more per unit than any competitor's. Which interpretation is most consistent with value chain thinking?

  1. The activity proves the firm has achieved differentiation leadership
  2. The activity is a primary activity and a potential source of cost disadvantage requiring review Correct answer.
  3. The activity should be outsourced automatically regardless of strategic value
  4. The activity is a support activity and can be ignored in cost analysis

Explanation

Inbound logistics is a primary activity in Porter's value chain, and a cost gap in a primary activity signals a possible competitive disadvantage. Value chain analysis links activities to cost and value, so the firm should examine how that activity is performed. Automatic outsourcing ignores strategic considerations such as control and quality.

Question 6Strategic Management

A company sets an objective to reduce customer complaints by 30 percent within twelve months. Which criterion of good objective setting does this objective best satisfy?

  1. It specifies the strategy to be used
  2. It is measurable and time-bound Correct answer.
  3. It is deliberately vague to allow flexibility
  4. It identifies the competitor benchmark

Explanation

Objectives should be specific, measurable, achievable, relevant and time-bound. A 30 percent reduction within twelve months gives both a metric and a deadline. It does not, however, state how the reduction will be achieved or against which competitor it is measured.

Question 7Strategic Management

A firm's managers observe that a rival's new distribution model is producing better service at lower cost. They decide to copy the model directly. Which risk of benchmarking does this illustrate?

  1. Benchmarking may lead to imitation that erodes the firm's own distinctive capability Correct answer.
  2. Benchmarking guarantees first-mover advantage
  3. Benchmarking is only valid for financial measures
  4. Benchmarking removes the need for internal performance data

Explanation

Benchmarking compares performance with best practice, but blind copying can undermine a firm's unique resources and produce convergence rather than advantage. The resource-based view stresses that advantage comes from valuable, rare and hard-to-imitate capabilities. Copying a rival's model may therefore destroy rather than create distinctiveness.

Question 8Strategic Management

A retailer's board wants to grow by opening stores in a neighbouring country using the same format and brand. Which Ansoff category best describes this move?

  1. Product development
  2. Conglomerate diversification
  3. Market development Correct answer.
  4. Market penetration

Explanation

Ansoff's matrix combines products and markets, existing or new. Taking an existing store format and brand into a new geographic market is market development. It is not market penetration because the market is new, and not product development because the offer is unchanged.

Question 9Strategic Management

A firm's core competence in miniaturised sensors allows it to enter markets for medical devices and consumer wearables. Which test of a core competence does this best demonstrate?

  1. It is based solely on a single patented product
  2. It provides potential access to a wide variety of markets Correct answer.
  3. It is confined to one existing business unit
  4. It is easily replicated by competitors within a year

Explanation

Prahalad and Hamel argue that a core competence should provide access to many markets, make a significant contribution to perceived customer value, and be difficult for competitors to imitate. Extending a sensor capability from medical devices to wearables illustrates market access. A single patent or one business unit would not meet the test.

Question 10Strategic Management

A firm's industry is analysed using the Five Forces. Which combination most strongly implies low industry profitability?

  1. Few substitutes, weak buyers, high entry barriers
  2. High supplier concentration and low buyer concentration
  3. Rapid technological change and strong rivalry
  4. Strong buyer power, low switching costs and many substitutes Correct answer.

Explanation

Industry profitability is squeezed when buyers can bargain hard, switching costs are low and substitutes are readily available. These conditions allow customers to force down prices or move away. High entry barriers and weak buyers would instead support profitability.

Question 11Strategic Management

A conglomerate's corporate parent adds little value to its business units but centralises many decisions, slowing their response to customers. Which concept best describes this problem?

  1. Synergy creation through shared services
  2. Economies of scope through central coordination
  3. Portfolio logic through related diversification
  4. Parenting advantage failure through destructive value destruction Correct answer.

Explanation

The parenting framework asks whether the centre adds more value than it costs. A parent that slows units and contributes little destroys value, described as negative parenting or value destruction. Shared services and coordination create synergy only where the benefits exceed the costs of centralisation.

Question 12Strategic Management

A firm's sales have grown rapidly while its market share has fallen because competitors grew faster. Which conclusion is most sound?

  1. The firm is losing relative competitive position despite absolute growth Correct answer.
  2. The firm's growth proves its strategy is superior to rivals
  3. The firm has achieved market leadership
  4. The market is contracting and demand is falling

Explanation

Absolute sales growth can mask relative decline. If the market expands faster than the firm, its share falls, indicating weaker competitive position. Market leadership requires the largest share, and a falling share in a growing market is not evidence of superior strategy.

Question 13Strategic Management

A company operates in a stable market with predictable demand and mature technology. Which approach to strategy development is most appropriate according to the planning school versus emergent strategy debate?

  1. Rapid experimentation with many small ventures
  2. Abandoning objectives in favour of intuition
  3. Formal deliberate planning with detailed long-range plans Correct answer.
  4. Reliance on emergent strategy with no formal planning

Explanation

Deliberate planning suits environments where demand and technology are predictable, because forecasts are reliable and plans can be implemented. Emergent strategy is more useful where conditions are turbulent and plans become quickly outdated. The choice depends on environmental uncertainty.

Question 14Strategic Management

A firm is considering a joint venture with a local partner to enter a country that restricts foreign ownership. Which rationale most strongly supports the joint venture over wholly owned entry?

  1. Elimination of the need for any governance arrangements
  2. Lower accounting profit in the first year
  3. Legal requirement for local ownership and access to partner's local knowledge Correct answer.
  4. Avoidance of all cultural differences

Explanation

Joint ventures are often chosen where regulation requires local ownership or where a partner provides market knowledge, contacts and legitimacy. They do, however, create governance and control challenges, so they do not eliminate cultural or coordination issues. Lower profit is not a rationale for entry mode.

Question 15Strategic Management

A business unit's performance is assessed using the balanced scorecard. Which measure belongs to the learning and growth perspective?

  1. Number of employees completing advanced data-analysis training Correct answer.
  2. Percentage of customers retained from the prior year
  3. Average order fulfilment cycle time
  4. Operating margin per product line

Explanation

The balanced scorecard's learning and growth perspective covers employee capabilities, information systems and organisational culture. Training completion is a capability measure. Customer retention belongs to the customer perspective, margin to financial, and cycle time to internal process.

Question 16Strategic Management

A firm's strategy relies on a capability that is valuable and rare but can be copied by rivals within six months. According to the resource-based view, what is the most likely consequence?

  1. The capability provides temporary advantage that will erode Correct answer.
  2. The capability guarantees monopoly power
  3. The capability has no value and should be abandoned
  4. The capability provides sustained competitive advantage indefinitely

Explanation

The resource-based view holds that sustained advantage requires resources that are valuable, rare, imperfectly imitable and non-substitutable. A capability that is easily copied may yield short-term advantage but will erode as rivals imitate. Valuable and rare resources still create some advantage, so abandonment is not justified.

Question 17Strategic Management

A company's culture strongly rewards internal competition between teams, while its new strategy requires cross-functional collaboration. Which conclusion is most consistent with the cultural web framework?

  1. The power structure guarantees collaboration
  2. Culture is irrelevant when the strategy is clearly communicated
  3. Rituals and routines reward behaviour that conflicts with the intended strategy Correct answer.
  4. The strategy will automatically change the culture within one quarter

Explanation

The cultural web examines stories, rituals and routines, symbols, power structures and control systems. When routines reward competition, they reinforce behaviour contrary to a collaboration strategy. Culture changes slowly and must be actively aligned, so communication alone rarely realigns embedded routines.

Question 18Strategic Management

A firm wants to assess whether a proposed acquisition creates value. Which analysis is most directly relevant?

  1. Whether the target has the largest revenue in its sector
  2. Whether the combined entity is worth more than the sum of the separate values after integration costs Correct answer.
  3. Whether the deal will be reported favourably in the press
  4. Whether the target's headquarters is near the acquirer's

Explanation

Acquisition value creation depends on synergy exceeding the premium paid and integration costs. The relevant test is whether the combined value exceeds the standalone values plus costs. Size, publicity and proximity do not by themselves demonstrate value creation.

Question 19Strategic Management

A firm faces a strategic decision where outcomes depend on a competitor's response. Which tool is most appropriate for structuring this decision?

  1. Game theory payoff matrix Correct answer.
  2. Product life cycle curve
  3. Value chain analysis
  4. Boston Box growth-share matrix

Explanation

Game theory models interdependent decisions in which one party's payoff depends on another's actions, making it suitable for competitor response analysis. The product life cycle, value chain and growth-share matrix analyse different questions such as stage of maturity, activity costs and portfolio position.

Question 20Strategic Management

A firm's product is entering the maturity stage of the product life cycle. Which strategic emphasis is most typical?

  1. Rapid market expansion with heavy investment in awareness
  2. Setting the highest introductory price to skim early adopters
  3. Defending share through differentiation and cost efficiency as growth slows Correct answer.
  4. Harvesting with minimal investment before withdrawal

Explanation

In maturity, sales growth slows and competition intensifies, so firms typically defend share through differentiation, cost control and customer retention. Heavy awareness investment and price skimming are more characteristic of introduction and growth, while harvesting belongs to decline.

Question 21Strategic Management

A firm's managers find that its industry has high exit barriers and slow demand growth. Which consequence for competitive rivalry is most likely?

  1. Rivalry is unaffected by exit barriers
  2. Rivalry intensifies as firms remain in the industry and compete aggressively for share Correct answer.
  3. Rivalry disappears because demand is stable
  4. Rivalry weakens because firms can exit easily

Explanation

High exit barriers trap capacity in the industry, and slow growth means firms fight for a limited market. Together these conditions intensify rivalry, often through price competition. Easy exit would reduce pressure by allowing capacity to leave.

Question 22Strategic Management

A multinational faces pressure for local responsiveness and pressure for global cost reduction simultaneously. Which strategy does the integration-responsiveness framework suggest?

  1. Export-only strategy with no local presence
  2. Pure global standardisation with no local adaptation
  3. Transnational strategy combining local adaptation with global integration Correct answer.
  4. Pure multidomestic strategy with fully autonomous subsidiaries

Explanation

The integration-responsiveness grid identifies the transnational strategy where firms face both strong cost pressure and strong local responsiveness needs. It seeks global efficiency while adapting to local markets through integrated networks. Pure global or multidomestic strategies address only one pressure.

Question 23Strategic Management

A firm's strategy is described as emergent. Which observation best supports that description?

  1. A detailed five-year plan is written and then implemented exactly as designed
  2. A pattern of actions develops from incremental responses to events rather than from a formal plan Correct answer.
  3. Objectives are set annually and cascaded unchanged to all units
  4. The board approves a plan that is never altered

Explanation

Emergent strategy forms through a pattern of decisions and responses that emerges over time, often without a prior intention. A plan implemented exactly as designed is deliberate strategy. The distinction concerns whether realised strategy follows intention or emerges from action and learning.

Question 24Strategic Management

A firm uses a value chain and finds that a support activity, such as procurement, drives a significant share of total cost. Which statement is most consistent with value chain analysis?

  1. Only primary activities should be analysed for cost
  2. Support activities should always be outsourced
  3. Support activities can be strategically significant because they affect cost and value across primary activities Correct answer.
  4. Support activities never affect competitive advantage

Explanation

Porter's value chain distinguishes primary and support activities, but both can create or erode advantage. Procurement affects inputs across many primary activities and can therefore be a major cost or quality driver. Treating support activities as irrelevant misreads the framework.

Question 25Strategic Management

A firm's managers argue that its resource is a source of sustained advantage because it is valuable and rare. Which additional condition must also hold for that claim to be sound?

  1. The resource must be difficult to imitate and have no close substitutes Correct answer.
  2. The resource must be easy to purchase in open markets
  3. The resource must be a tangible asset such as a building
  4. The resource must be held by many competitors

Explanation

The resource-based view requires value, rarity, inimitability and non-substitutability for sustained advantage. If rivals can imitate the resource or substitute for it, the advantage will erode. Tangibility is irrelevant; intangible capabilities can be stronger sources of advantage.

Question 26Strategic Management

A board adopts a mission statement that says the firm 'aims to be the most trusted provider of fresh food in every market it serves'. Which element of the Ashridge mission model does 'most trusted provider of fresh food' most directly express?

  1. Strategy
  2. Purpose Correct answer.
  3. Values
  4. Behaviour standards

Explanation

The Ashridge model separates purpose, strategy, behaviour standards and values. Purpose defines what the organisation exists to do and for whom, so a statement of the business it is in and the standing it seeks expresses purpose rather than the route to get there.

Question 27Strategic Management

A chief executive states that the organisation intends to be the lowest-cost producer in its region within five years. Which characteristic of a well-formulated strategic objective does this statement best illustrate?

  1. It describes the internal culture the firm wishes to build
  2. It is written as a broad aspiration without quantification
  3. It identifies the stakeholders who will receive dividends
  4. It is expressed as a measurable target with a time horizon Correct answer.

Explanation

Strategic objectives work best when they specify an achievement, a measure and a deadline so that progress can be tracked. Naming a competitive position and a five-year horizon gives managers a benchmark against which performance can be assessed.

Question 28Strategic Management

In a PESTLE analysis, a government announces higher minimum wages and stricter limits on temporary contracts. Which category of factor is being described?

  1. Political
  2. Technological
  3. Legal Correct answer.
  4. Economic

Explanation

Changes to employment law such as statutory wage floors and restrictions on contract types are legal factors because they create binding rules the firm must comply with. They may also have economic consequences, but the classification follows the nature of the change.

Question 29Strategic Management

A firm's managers plot its business units on the BCG matrix. A unit holds a small share of a market that is expanding quickly and consumes cash to keep pace with growth. Which classification applies?

  1. Star
  2. Dog
  3. Question mark Correct answer.
  4. Cash cow

Explanation

The BCG matrix combines relative market share with market growth. A low-share unit in a high-growth market is a question mark: it needs investment to build share and its future is uncertain, so cash demands are high relative to returns.

Question 30Strategic Management

A firm's managers use the cultural web to diagnose its strategy context. Which element of the web captures the formal reporting relationships and control systems that shape how people work?

  1. Stories and myths
  2. The control systems
  3. The organisational structure Correct answer.
  4. Routines and rituals

Explanation

The cultural web has several interlocking elements: stories, rituals and routines, symbols, organisational structures, control systems and power structures. The organisational structure element specifically covers formal hierarchy, reporting lines and the way work is grouped and coordinated.

Question 31Strategic Management

A firm's managers assess its competitive position using the industry life cycle. In which stage does rivalry typically intensify as demand flattens and firms compete increasingly on price?

  1. Growth
  2. Maturity Correct answer.
  3. Introduction
  4. Development

Explanation

In maturity, demand growth slows and the market becomes largely replacement-driven, so firms compete harder for share and price competition increases. The introduction and growth stages are characterised by expanding demand and less direct price pressure.

Question 32Strategic Management

A firm's managers classify stakeholders using Mendelow's power-interest grid. A regulator has high power to affect the firm but limited interest in its day-to-day operations. Which management approach does the grid recommend?

  1. Minimal effort
  2. Keep informed
  3. Manage closely
  4. Keep satisfied Correct answer.

Explanation

Mendelow's grid pairs power with interest. A stakeholder with high power but low interest should be kept satisfied so that it does not become actively engaged in a negative way, while avoiding unnecessary communication burden.

Question 33Strategic Management

A firm's managers are choosing a basis for segmentation in a business-to-business market. Which variable is a firmographic characteristic rather than a behavioural one?

  1. Loyalty to the incumbent supplier
  2. Order size and purchase frequency Correct answer.
  3. Decision-making style of the buying team
  4. Attitude towards risk in procurement

Explanation

Firmographic segmentation describes observable characteristics of the buying organisation and its purchasing pattern, such as order size and frequency. Behavioural and psychographic variables concern how buyers act, perceive and decide rather than who they are.

Question 34Strategic Management

A firm's managers apply the SAF framework to evaluate a proposed strategy. Which question does the 'suitability' criterion primarily address?

  1. Whether the strategy addresses the key opportunities and threats identified in analysis Correct answer.
  2. Whether stakeholders will accept the strategy
  3. Whether the strategy can be funded and resourced in practice
  4. Whether the strategy will deliver the required return on capital

Explanation

Suitability asks whether a strategy fits the strategic position by responding to the main drivers identified in environmental and capability analysis. Acceptability and feasibility then address stakeholder reaction and practical deliverability respectively.

Question 35Strategic Management

A firm's managers find that a proposed strategy would require capabilities the organisation does not currently possess and cannot acquire quickly. Under the SAF framework, which criterion is most directly threatened?

  1. Feasibility Correct answer.
  2. Consistency
  3. Suitability
  4. Acceptability

Explanation

Feasibility examines whether the organisation has, or can obtain, the resources and competences needed to deliver a strategy. A capability gap that cannot be closed in the required timeframe is a classic feasibility constraint.

Question 36Strategic Management

A firm's managers use the TOWS matrix to generate strategic options. Which option type arises from matching internal strengths with external opportunities?

  1. SO strategies Correct answer.
  2. WO strategies
  3. ST strategies
  4. WT strategies

Explanation

TOWS extends SWOT by pairing internal and external factors to create options. Strengths matched with opportunities produce SO strategies that exploit advantages in attractive areas, while the other combinations address weaknesses, threats or both.

Question 37Strategic Management

A firm's managers are analysing its competitive scope using Porter's generic strategies. The firm serves a narrow customer segment and tailors its offer so that buyers pay a premium. Which generic strategy is being pursued?

  1. Cost leadership
  2. Broad differentiation
  3. Differentiation
  4. Cost focus Correct answer.

Explanation

Porter's framework crosses competitive advantage with competitive scope. Serving a narrow segment while meeting its needs better than rivals, so that a premium is accepted, is focus differentiation; a narrow segment served at low cost would be cost focus.

Question 38Strategic Management

A firm's managers are considering a strategy of diversifying into an unrelated industry. Which rationale is most consistent with the concept of corporate parenting advantage?

  1. The parent can transfer a distinctive skill that materially improves the unit's performance Correct answer.
  2. The parent can reduce the volatility of consolidated earnings
  3. The parent can increase its bargaining power with lenders
  4. The parent can spread head-office costs over a larger revenue base

Explanation

Parenting advantage exists when the corporate centre adds more value to a business than an alternative owner would. That value comes from transferring distinctive skills, resources or central services that genuinely improve unit performance, not merely from size or financial engineering.

Question 39Strategic Management

A firm's managers are assessing the attractiveness of entering a new market. Which condition would make the threat of new entrants stronger?

  1. Government licensing that limits the number of operators
  2. Low switching costs for buyers and easy access to distribution Correct answer.
  3. High capital intensity and long payback periods
  4. Strong brand loyalty among existing customers

Explanation

The threat of entry rises when barriers are low. Easy access to distribution and low buyer switching costs let a newcomer win customers quickly, whereas capital intensity, loyalty and licensing all raise barriers.

Question 40Strategic Management

A firm's managers are reviewing its value chain. Which activity is classified as a primary activity rather than a support activity?

  1. Human resource management
  2. Technology development
  3. Inbound logistics Correct answer.
  4. Firm infrastructure

Explanation

In Porter's value chain, primary activities directly create and deliver the product: inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities, including procurement, technology development, HR and infrastructure, enable those primary activities.

Question 41Strategic Management

A firm's managers want to grow by selling existing products to customers in new geographic markets. Under Ansoff's matrix, which strategy is this?

  1. Market penetration
  2. Product development
  3. Market development Correct answer.
  4. Diversification

Explanation

Ansoff's matrix pairs products with markets. Selling the existing offer to a new market, such as a new country or segment, is market development, which carries more risk than penetration but less than unrelated diversification.

Question 42Strategic Management

A firm's managers are deciding how to enter a foreign market. The firm has limited international experience and wants to limit capital exposure while learning about the market. Which entry mode best fits these priorities?

  1. Greenfield manufacturing plant
  2. Full acquisition of a local competitor
  3. Wholly owned subsidiary
  4. Exporting through local distributors Correct answer.

Explanation

Entry mode choice trades control against commitment and risk. Exporting via local distributors requires little capital and limits exposure while the firm gains market knowledge, at the cost of some control over pricing and customer relationships.

Question 43Strategic Management

A firm's managers are considering an alliance with a partner that holds complementary technology. Which condition most undermines the durability of the alliance's benefits?

  1. The alliance covers a clearly defined and limited project
  2. Both parties contribute resources that neither could deploy alone
  3. The partner holds tacit knowledge that is hard to codify
  4. The partner can readily absorb the firm's know-how and become a competitor Correct answer.

Explanation

Alliances create value through complementary resources, but they also expose the firm to learning races and leakage. If a partner can absorb the firm's capabilities and then compete independently, the alliance erodes rather than sustains advantage.

Question 44Strategic Management

A firm's managers are reviewing its product portfolio using the product life cycle. Which pattern of sales and profit behaviour is typical of the introduction stage?

  1. Sales are low and profits are often negative because of launch costs Correct answer.
  2. Sales are high and profits peak as the market expands
  3. Sales are flat and profits decline as price competition grows
  4. Sales are falling and profits are sustained by loyal buyers

Explanation

In introduction, volumes are small while development and launch spending is high, so profits are often negative. Growth brings rising sales and improving margins, maturity brings flattening sales and pressure on price, and decline brings falling demand.

Question 45Strategic Management

A firm's managers are evaluating whether a proposed strategy is acceptable to shareholders. Which measure is most directly concerned with acceptability rather than feasibility?

  1. The payback period and the risk of the expected cash flows Correct answer.
  2. The lead time needed to recruit specialist engineers
  3. The availability of suitably skilled project managers
  4. The capacity of the existing plant to absorb higher volumes

Explanation

Acceptability asks whether the expected outcomes and risks are tolerable to stakeholders. Financial return measures and risk assessment of cash flows speak directly to shareholder acceptability, while the other options describe resource constraints.

Question 46Strategic Management

A firm's managers find that its competitive advantage rests on a process that rivals have repeatedly failed to imitate despite observing it in operation. Which explanation best accounts for this?

  1. The process uses publicly available software with open documentation
  2. The process is protected by a patent registered in several countries
  3. The process relies on a single machine that can be purchased by anyone
  4. The process depends on tacit knowledge embedded in teams and routines Correct answer.

Explanation

Causal ambiguity and social complexity protect advantages that are embedded in routines and team knowledge, because competitors can observe outcomes without being able to replicate the underlying practice. Formal legal protection is a different mechanism, and easily purchased inputs offer no barrier.

Question 47Strategic Management

A firm's managers are analysing its industry using the Five Forces and conclude that supplier power is high. Which combination of conditions best supports that conclusion?

  1. The input is undifferentiated and accounts for a small share of the firm's costs
  2. A few suppliers dominate and switching would require costly re-engineering Correct answer.
  3. Many substitute suppliers exist and the input is a commodity
  4. The firm buys in large volumes and can threaten backward integration

Explanation

Supplier power rises when supply is concentrated, the input is important or differentiated, and switching is costly. Concentration combined with expensive switching leaves the buyer with little credible alternative and weak bargaining leverage.

Question 48Strategic Management

A firm's managers are considering a strategy that requires capabilities it lacks but that could be acquired through a takeover. Which argument most strongly supports choosing an alliance instead?

  1. The needed capability is embedded in tacit routines that are hard to transfer through ownership alone Correct answer.
  2. The target operates in the same country as the acquirer
  3. The firm has surplus cash and a low cost of capital
  4. The target's shares are trading below their book value

Explanation

Where the required capability is tacit and socially embedded, ownership does not guarantee transfer, and integration may destroy the very routines being bought. An alliance lets the firm access the capability while learning alongside the partner, reducing the risk of value destruction.

Question 49Strategic Management

A firm's managers are assessing a proposed diversification into a market where it has no existing customers, channels or technical knowledge, and the industry already contains several strong incumbents. Which conclusion is most defensible?

  1. The move is likely to destroy value because it adds little parenting advantage and faces high entry barriers Correct answer.
  2. The move is justified because the parent can spread fixed costs over more units
  3. The move is sound because unrelated markets avoid the risk of competitor retaliation
  4. The move will create value because diversification always reduces total risk

Explanation

Diversification creates value only when the parent adds something the business would not otherwise have, or when the target market is attractive and entry is achievable. Entering an unfamiliar market against strong incumbents offers neither, so the expected outcome is value destruction.

Question 50Strategic Management

A firm's managers find that its strategy has drifted as frontline staff responded to customer requests in ways that were never formally approved but proved commercially successful. Which interpretation is most consistent with the concept of emergent strategy?

  1. The firm has no strategy because nothing was formally authorised
  2. Realised strategy includes patterns that emerged from local decisions rather than deliberate design Correct answer.
  3. The intended strategy has been fully implemented as planned
  4. The drift reflects a failure of the budgeting process only

Explanation

Mintzberg distinguishes intended, deliberate, emergent and realised strategy. Realised strategy is what actually happens, and it can include patterns that arose from local experimentation and were later recognised and adopted, even without prior formal approval.