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MBA Executive CMB practice questions

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Question 1Strategic Management and Corporate Governance

In corporate governance theory, what distinguishes the agency problem from the stewardship perspective on managerial behaviour?

  1. The agency view assumes managers may pursue self-interest and need monitoring, while stewardship assumes managers are intrinsically motivated to act in the owners' interest. Correct answer.
  2. Both views assume managers act opportunistically, but stewardship relies on shareholder voting rather than board monitoring.
  3. The agency view assumes managers are intrinsically motivated, while stewardship assumes managers require incentive alignment and board oversight.
  4. The agency view applies only to family firms, while stewardship applies only to publicly listed companies with dispersed ownership.

Explanation

Agency theory treats the separation of ownership and control as creating divergent interests, so monitoring, incentives and bonding are needed. Stewardship theory instead presumes managers gain utility from organisational success and are trusted to act as stewards. The two perspectives therefore differ fundamentally in their motivational assumptions and in the governance mechanisms they recommend.

Question 2Strategic Management and Corporate Governance

A board creates a nomination committee composed solely of the CEO and two executives who report to the CEO. Which governance principle is most directly compromised?

  1. Independence of board oversight Correct answer.
  2. Capital adequacy of the firm
  3. Dividend distribution policy
  4. Timeliness of financial reporting

Explanation

Nomination committees exist to select and evaluate directors and senior executives objectively, which requires members free from management influence. Staffing the committee entirely with insiders under the CEO's authority eliminates that objectivity and undermines independent oversight. Reporting timeliness, capital adequacy and dividend policy are separate matters not directly implicated by committee composition.

Question 3Strategic Management and Corporate Governance

Which mechanism is most commonly used to align executive interests with long-term shareholder value rather than short-term accounting results?

  1. Fixed salaries set by industry averages
  2. Annual cash bonuses tied solely to reported earnings per share
  3. Multi-year equity awards with vesting tied to sustained performance Correct answer.
  4. Reimbursement of relocation and travel expenses

Explanation

Equity awards that vest over several years expose executives to the firm's long-run share performance and discourage myopic earnings management. Short-horizon cash bonuses can reward accounting outcomes that are reversed later. Fixed salary and expense reimbursement are not performance-linked incentive mechanisms at all.

Question 4Strategic Management and Corporate Governance

A firm's board is chaired by the same individual who serves as chief executive officer. Which governance concern does this combined role most directly raise?

  1. Reduced access to industry expertise on the board
  2. Excessive frequency of board meetings
  3. Concentration of agenda-setting power and weaker counterbalance to management Correct answer.
  4. Insufficient disclosure of executive travel costs

Explanation

Separating the chair and CEO roles creates a check on management because an independent chair controls board agendas, information flows and evaluation of the CEO. Combining the roles concentrates those powers in the person being evaluated. The other options are unrelated to role duality.

Question 5Strategic Management and Corporate Governance

Which of the following best describes a takeover defence known as a poison pill?

  1. A provision requiring supermajority shareholder approval to amend the charter
  2. A buyback of shares at a premium from a specific large shareholder
  3. A contractual payment to executives triggered when they lose their jobs after a takeover
  4. A shareholder rights plan that dilutes the stake of an acquirer who crosses a threshold without board approval Correct answer.

Explanation

A poison pill is a rights plan: existing shareholders receive rights to buy additional shares at a discount if an unsolicited acquirer passes a trigger threshold, diluting the acquirer's position. It is designed to force negotiation with the board rather than block all bids permanently. The other options describe golden parachutes, supermajority charter provisions and greenmail respectively.

Question 6Strategic Management and Corporate Governance

Under a stakeholder model of corporate purpose, which statement best captures the board's role?

  1. Maximising shareholder wealth in every decision regardless of externalities
  2. Prioritising management's preferences over both owners and other stakeholders
  3. Balancing legitimate claims of shareholders, employees, creditors and other constituencies within a sustainable strategy Correct answer.
  4. Deferring all strategic decisions to the largest institutional investor

Explanation

Stakeholder governance holds that the board mediates among constituencies whose contributions and exposures sustain the firm. This does not mean ignoring shareholders but rather integrating their claims with those of employees, creditors, communities and others. The other options describe shareholder primacy, investor capture or managerial entrenchment.

Question 7Strategic Management and Corporate Governance

In a corporate group, a parent company directs a listed subsidiary to sell goods to another group company at below-market prices. Which governance safeguard is most relevant to protecting the subsidiary's minority shareholders?

  1. An increase in the parent's executive bonuses
  2. A larger annual dividend declared by the parent
  3. A reduction in the subsidiary's board size
  4. Related-party transaction approval by independent directors and disclosure to the market Correct answer.

Explanation

Tunnelling risk arises when controlling shareholders extract value through non-arm's-length dealings. Independent director review and full disclosure are the standard safeguards because they expose the terms to scrutiny and allow minority holders to assess fairness. Dividend changes, board size and parent bonuses do not address the fairness of the transaction.

Question 8Strategic Management and Corporate Governance

Which statement accurately describes the concept of board independence?

  1. A director is independent when free from material relationships with the company or its management that could affect objective judgement Correct answer.
  2. A director is independent when holding no shares in the company
  3. A director is independent when appointed by the largest shareholder
  4. A director is independent when having served on the board for more than ten years

Explanation

Independence concerns the absence of relationships, such as employment, advisory fees or family ties, that could compromise objective judgement. Share ownership alone does not destroy independence, and long tenure or appointment by a dominant shareholder may actually raise independence concerns. The definition is about freedom from conflicting relationships rather than any single attribute.

Question 9Strategic Management and Corporate Governance

A diversified conglomerate's corporate centre imposes a uniform capital charge on all business units regardless of their risk. What is the most likely strategic consequence?

  1. The conglomerate's cost of capital automatically falls
  2. Units with stable cash flows expand more rapidly than risky units
  3. High-risk units are subsidised and low-risk units are overcharged, distorting investment decisions Correct answer.
  4. All units receive accurate risk-adjusted signals and capital is allocated efficiently

Explanation

A single hurdle rate misprices risk: risky projects appear cheaper than they are, while safe projects appear unattractive. The result is overinvestment in volatile businesses and underinvestment in stable ones. Risk-differentiated hurdle rates are needed for sound internal capital allocation.

Question 10Strategic Management and Corporate Governance

A firm's board approves a major acquisition after a two-hour briefing by the CEO, without commissioning independent valuation advice. Which governance weakness does this most clearly illustrate?

  1. Misalignment of dividend policy with free cash flow
  2. Insufficient board challenge and information asymmetry favouring management Correct answer.
  3. Excessive delegation to independent advisers
  4. Overly frequent shareholder engagement

Explanation

Effective boards require timely, high-quality information and the opportunity to test management's proposals critically. A brief management presentation without independent valuation leaves directors dependent on the very executives proposing the deal. This is a classic information asymmetry problem that weakens board challenge.

Question 11Strategic Management and Corporate Governance

A company's remuneration committee sets executive bonuses on annual revenue growth, and sales staff are authorised to offer extended payment terms. Which behaviour is most predictable?

  1. Sales staff tighten credit standards to protect cash flow
  2. The company's cost of debt declines because revenue is growing
  3. Revenue is pulled forward through looser credit terms, raising subsequent receivables risk Correct answer.
  4. Executives reduce revenue to protect long-term margins

Explanation

When rewards depend on revenue, employees optimise the metric rather than the underlying value, and generous payment terms are an easy way to book sales. The predictable result is a build-up of receivables, higher bad-debt risk and weaker cash conversion. This illustrates the principle that incentive metrics shape behaviour in ways designers must anticipate.

Question 12Strategic Management and Corporate Governance

In portfolio strategy, what is the principal rationale for a conglomerate to divest a business unit?

  1. The unit's fit with the parent's distinctive capabilities and value-creation logic is weak relative to other owners Correct answer.
  2. The unit shares the group's core technology platform
  3. The unit is profitable and growing faster than the group average
  4. The unit's customers overlap with those of other group businesses

Explanation

Divestiture creates value when a business no longer benefits from the parent's specific capabilities and would be worth more under a different owner. Parenting advantage, not standalone profitability, is the test. Profitable, technologically related or customer-overlapping units may be precisely those worth retaining.

Question 13Strategic Management and Corporate Governance

A company adopts a dual-class share structure in which founders hold shares carrying ten votes each while public investors hold one vote each. Which governance trade-off does this structure primarily create?

  1. Public shareholders gain stronger voting rights relative to founders
  2. Founders retain strategic control while public shareholders have limited ability to discipline underperformance Correct answer.
  3. Dividend payments become legally guaranteed to founder shares
  4. The company avoids the need for any independent directors

Explanation

Dual-class structures entrench founder control, which can protect a long-term mission from short-term market pressure. The cost is that outside shareholders bear economic risk with limited voting influence, weakening accountability if performance deteriorates. The structure does not eliminate independent directors or guarantee dividends.

Question 14Strategic Management and Corporate Governance

A board's audit committee discovers that the CFO approved a material journal entry without supporting documentation. What is the committee's most appropriate immediate action?

  1. Require investigation of the entry and assess whether controls and reporting are affected Correct answer.
  2. Wait until the next annual general meeting to raise the matter
  3. Approve the entry retroactively to avoid audit qualification
  4. Refer the matter to the sales department for resolution

Explanation

The audit committee oversees financial reporting and internal control, so an unsupported material entry demands prompt investigation and assessment of its effect on disclosures. Delay or retroactive approval would compound the control failure. Referral to sales is inappropriate because the issue concerns finance controls.

Question 15Strategic Management and Corporate Governance

Which competitive scenario best illustrates the resource-based view's criterion of inimitability?

  1. A firm benefits from a temporary tariff on imported rivals
  2. A firm's advantage rests on a tacit organisational routine built over decades of accumulated experience Correct answer.
  3. A firm lowers prices temporarily to gain market share
  4. A firm adopts an ERP system widely available from vendors

Explanation

The resource-based view holds that sustained advantage requires resources that are valuable, rare, hard to imitate and non-substitutable. Tacit, path-dependent routines resist imitation because they are embedded in organisational history and social complexity. Price cuts, purchased software and tariffs are easily matched or transient.

Question 16Strategic Management and Corporate Governance

In a matrix structure, an employee reports simultaneously to a country manager and a global product head. Which governance mechanism is most important to prevent decision paralysis?

  1. Removing performance objectives from one of the two managers
  2. Clearly defined decision rights specifying which dimension has final authority on which issues Correct answer.
  3. Centralising all decisions at corporate headquarters
  4. Increasing the number of reporting lines to capture more information

Explanation

Matrix structures fail when accountability is ambiguous, so explicit decision rights allocate final authority by issue type and speed up resolution. Adding reporting lines or stripping objectives worsens ambiguity. Centralising everything defeats the purpose of the matrix.

Question 17Strategic Management and Corporate Governance

A company's board wants to link executive pay to total shareholder return relative to a peer group. Which design feature most improves the measure's validity?

  1. Comparing TSR against a fixed absolute target rather than peers
  2. Using a peer group that reflects the firm's business mix and risk profile Correct answer.
  3. Measuring TSR over a single quarter
  4. Excluding dividends from the TSR calculation

Explanation

Relative TSR filters out market-wide movements, but only if the comparator group is genuinely comparable in industry, size and risk. A mismatched peer group produces noise and windfall gains or losses. Short measurement windows, dividend exclusion and absolute targets all weaken the link to sustained performance.

Question 18Strategic Management and Corporate Governance

Which situation most clearly constitutes a conflict of interest requiring recusal by a director?

  1. A director votes on a supplier contract in which a company she controls is the counterparty Correct answer.
  2. A director votes on a capital expenditure plan for a new factory
  3. A director approves the annual audit plan after reviewing it with the auditor
  4. A director participates in a strategy review of a competitor's market

Explanation

A director with a personal financial interest in a counterparty cannot objectively discharge fiduciary duties on that matter and should withdraw from deliberation and voting. Ordinary strategy, capital and audit matters do not involve a personal interest of that kind. Recusal protects both the decision and the director's duty of loyalty.

Question 19Strategic Management and Corporate Governance

A firm's controlling family rejects a value-creating merger because it would dilute family voting power. Which concept best explains this outcome?

  1. Signalling theory of dividend policy
  2. Agency costs of free cash flow
  3. Private benefits of control outweighing shared economic gains Correct answer.
  4. Market for corporate control disciplining management

Explanation

Controlling shareholders may resist transactions that create value for all holders if the deal erodes their private benefits, such as voting control or perquisites. The decision reflects private benefits rather than the collective interest. The market for corporate control, free cash flow and dividend signalling address different phenomena.

Question 20Strategic Management and Corporate Governance

A board is evaluating a proposal to separate the roles of chair and CEO. Which argument most strongly supports the separation?

  1. It eliminates the need for a nomination committee
  2. It creates an independent counterweight that can challenge management and lead CEO evaluation Correct answer.
  3. It guarantees higher share price in the short term
  4. It reduces the number of board meetings required

Explanation

An independent chair can set agendas, ensure the board receives unfiltered information and lead the assessment of the CEO. This strengthens accountability without guaranteeing market outcomes. It does not remove the need for nomination processes or affect meeting frequency.

Question 21Strategic Management and Corporate Governance

In an acquisition, a board agrees to a large break fee payable to the bidder if shareholders reject the deal. Which governance concern is most relevant?

  1. The fee may unduly deter competing bids and entrench the incumbent deal Correct answer.
  2. The fee eliminates the bidder's financing risk
  3. The fee removes the need for shareholder approval
  4. The fee guarantees a higher premium for shareholders

Explanation

Break fees compensate a bidder for deal risk, but if set too high they can deter rival bidders and effectively lock up the transaction. Governance codes therefore often cap such fees as a percentage of deal value. They do not guarantee premiums, replace shareholder votes or remove financing risk.

Question 22Strategic Management and Corporate Governance

A company's internal audit function reports directly to the CFO. Which governance deficiency does this create?

  1. The company's external audit opinion must be qualified
  2. The audit committee loses its authority to appoint external auditors
  3. Internal audit staff cannot perform operational reviews
  4. Independence of assurance is compromised because the function reports to an executive it must audit Correct answer.

Explanation

Internal audit must be able to assess finance processes objectively, so it should report functionally to the audit committee rather than to the CFO. Reporting to the CFO creates a self-review threat and can suppress unwelcome findings. It does not automatically affect external audit opinions or the scope of operational work.

Question 23Strategic Management and Corporate Governance

A firm's board approves a strategy that relies on aggressive revenue recognition at quarter-end to meet analyst targets. Which control environment weakness is most fundamental?

  1. The board meets more often than required
  2. Tone at the top tolerates meeting targets over accurate reporting Correct answer.
  3. The company has too few sales regions
  4. The external auditor lacks industry expertise

Explanation

The control environment is shaped by the tone set by the board and senior management. If leadership treats hitting targets as more important than accurate reporting, controls below will be overridden or ignored. Auditor expertise, regional footprint and meeting frequency are secondary to this cultural driver.

Question 24Strategic Management and Corporate Governance

A conglomerate's central strategy office requires every division to use the same customer segmentation framework, even where divisions serve structurally different markets. Which parenting style does this most resemble, and what is the risk?

  1. Standardisation-driven value destruction, because imposed frameworks may not fit heterogeneous businesses Correct answer.
  2. Financial-control value creation, because capital is rationed by returns
  3. Strategic planning synergy, because shared frameworks always reduce cost
  4. Portfolio management, because the centre merely sets targets

Explanation

When the centre imposes uniform tools across unrelated markets, it substitutes its own preferences for local knowledge and can destroy value. This is a centralising, standardisation-driven parenting style rather than financial control or pure portfolio management. The risk is misfit between the imposed framework and divisional market realities.

Question 25Strategic Management and Corporate Governance

An activist fund argues that a mature, cash-rich company should return capital rather than pursue unrelated acquisitions. Which agency-cost argument best supports the activist's position?

  1. Diversification reliably lowers the cost of capital
  2. Debt financing always increases firm value
  3. Free cash flow retained under weak oversight is prone to value-destroying investment Correct answer.
  4. Managerial equity ownership eliminates agency conflict

Explanation

Jensen's free cash flow argument holds that managers with surplus cash and weak monitoring may invest in empire-building projects that destroy value. Returning capital or increasing leverage commits cash to market discipline. Debt does not always add value, diversification does not reliably lower capital costs, and ownership alone does not eliminate conflict.

Question 26Strategic Management and Corporate Governance

A conglomerate's corporate centre sets a hurdle rate for every division equal to the group's weighted average cost of capital, even though the stable utility division has low business risk and the biotech division has high business risk. Which capital-allocation distortion is most likely to result?

  1. Both divisions will receive exactly their optimal level of capital because a single group-wide rate is risk-neutral.
  2. The distortion disappears once divisional managers are paid on group earnings per share rather than divisional return.
  3. The low-risk division will be starved of capital while the high-risk division is over-funded, destroying value across the group.
  4. The high-risk division will be starved of capital while the low-risk division is over-funded, systematically misallocating investment. Correct answer.

Explanation

A single group-wide hurdle rate ignores differences in business risk across divisions. Applying it uniformly means the low-risk division's projects look less attractive than they are and get under-funded, while the high-risk division's projects clear a rate that is too low for their risk and get over-funded. Divisional risk-adjusted hurdle rates are the standard remedy.

Question 27Strategic Management and Corporate Governance

Which statement best defines the agency problem as it arises between shareholders and professional managers in a widely held public company?

  1. Controlling shareholders extract private benefits from minority investors through related-party transactions.
  2. Bondholders and shareholders disagree over the firm's dividend policy and leverage choices.
  3. Shareholders diversify their holdings across many companies, so they care little about the performance of any single firm.
  4. Managers who own no equity have incentives to pursue growth, perquisites and entrenchment at the expense of shareholder value. Correct answer.

Explanation

The classic agency problem arises because ownership is separated from control: dispersed shareholders cannot closely monitor managers, whose private interests may diverge from value maximisation. Growth, perquisite consumption and entrenchment are the standard manifestations. The other options describe diversification, shareholder–bondholder conflict, and principal–principal conflict respectively.

Question 28Strategic Management and Corporate Governance

A holding company owns 100% of a subsidiary it acquired five years ago. The subsidiary operates in a mature market with stable cash flows but has persistently earned returns below its cost of capital, and the parent has no synergies with it. Applying portfolio-strategy logic, which action is most defensible?

  1. Divest the subsidiary, because continued ownership of a business earning below its cost of capital with no synergy destroys parent shareholder value. Correct answer.
  2. Retain the subsidiary because full ownership eliminates minority conflicts and therefore guarantees control value.
  3. Inject additional capital to grow the subsidiary's revenue, since size alone will restore returns above the cost of capital.
  4. Transfer the subsidiary's cash flows to fund acquisitions in unrelated industries, keeping the unit as a cash generator.

Explanation

Portfolio strategy requires that each unit earn at least its risk-adjusted cost of capital or offer synergy with other units. A wholly owned, non-synergistic unit earning below its cost of capital is worth more to another owner or to its managers, so divestment releases value. Control and revenue growth do not create economic returns on their own.

Question 29Strategic Management and Corporate Governance

A board is designing the mandate of its nomination committee. Which arrangement best supports effective board renewal and succession planning?

  1. The committee is chaired by the CEO and includes the two longest-serving directors, who know the firm best.
  2. The committee includes the largest institutional shareholder's fund manager, who can align board composition with investor preferences.
  3. The committee is an advisory body to the full board and meets only when a vacancy arises, to avoid unnecessary process.
  4. The committee is composed of independent directors and led by an independent chair, and it oversees board composition, director succession and the CEO succession pipeline. Correct answer.

Explanation

Nomination committees are expected to be independent and to lead a continuous process of board composition review, director recruitment and CEO succession planning. Independence protects the process from management capture, and a standing mandate ensures renewal is planned rather than reactive.

Question 30Strategic Management and Corporate Governance

Two shareholders hold 30% each in a listed company, with the remaining 40% widely dispersed. The board proposes a related-party transaction with a company owned by one of the 30% shareholders. Which governance mechanism most directly addresses the risk that this blockholder extracts private benefits at the expense of minority investors?

  1. Approval of the transaction by the full board, on which the blockholder has two of eight seats, since board oversight is the primary safeguard.
  2. A fairness opinion commissioned by the interested blockholder and disclosed alongside the transaction circular.
  3. Approval by a majority of the minority shareholders, excluding the interested blockholder and its associates, together with independent director review. Correct answer.
  4. Relying on the dispersed 40% to vote the transaction down if it is value-destroying, since they hold the largest aggregate stake.

Explanation

Where ownership is concentrated and a controller is interested in a transaction, the principal–principal conflict is best constrained by a majority-of-the-minority vote plus independent director review. These mechanisms ensure that the parties who bear the expropriation risk, rather than the interested controller, decide on the deal.

Question 31Marketing and Customer Value Management

In customer value management, which metric best captures the total profit a customer generates over the entire relationship with the firm, discounted to present value?

  1. Customer acquisition cost
  2. Share of wallet
  3. Customer lifetime value Correct answer.
  4. Net Promoter Score

Explanation

Customer lifetime value (CLV) is the present value of all future profits attributable to a customer relationship, so it is the forward-looking, relationship-level profit measure. The other metrics describe acquisition spending, advocacy, or spend allocation rather than discounted relationship profit.

Question 32Marketing and Customer Value Management

A firm segments its B2B customers by the value they place on co-development versus off-the-shelf supply. Which segmentation base is being used?

  1. Demographic
  2. Behavioural needs Correct answer.
  3. Firmographic
  4. Geographic

Explanation

Segmentation by the benefits or needs customers seek is a needs-based (benefit) approach, which is a behavioural/needs base. Firmographics describe the company, demographics describe people, and geography describes location, none of which capture the value placed on co-development.

Question 33Marketing and Customer Value Management

In the value proposition canvas, the element that describes what customers are trying to get done in their work or life is called the:

  1. Pain reliever
  2. Gain
  3. Product feature
  4. Customer job Correct answer.

Explanation

The customer profile side of the value proposition canvas comprises customer jobs, pains, and gains, where jobs are the tasks customers are trying to accomplish. Pains and gains are the negative and positive outcomes around those jobs, while product features sit on the value map side.

Question 34Marketing and Customer Value Management

A subscription business reports that its average customer stays 4 years. Using the simple approximation of retention-based lifetime, what is the average customer lifetime in years?

  1. 2 years
  2. 0.25 years
  3. 4 years Correct answer.
  4. 8 years

Explanation

When the average tenure is already given as 4 years, the average customer lifetime is simply that figure. The simple approximation lifetime = 1/churn applies only when churn rate is supplied, so no further division is needed here.

Question 35Marketing and Customer Value Management

Which pricing approach sets price primarily by reference to the perceived value the offer delivers rather than to internal cost?

  1. Break-even pricing
  2. Markup pricing
  3. Value-based pricing Correct answer.
  4. Cost-plus pricing

Explanation

Value-based pricing anchors the price to the customer's perceived value and willingness to pay, capturing more of the value created. Cost-plus, markup, and break-even methods all derive price from internal cost structures rather than customer perception.

Question 36Marketing and Customer Value Management

A firm tracks the percentage of existing customers who remain active over a period. Which customer value metric is being measured?

  1. Reach
  2. Churn value
  3. Retention rate Correct answer.
  4. Conversion rate

Explanation

Retention rate is the proportion of customers from a cohort who remain active over the period, the direct counterpart to churn. Conversion and reach are funnel metrics about prospects, and churn value is not a standard retention measure.

Question 37Marketing and Customer Value Management

In the customer journey, the stage at which a customer evaluates alternatives against criteria before purchase is best described as:

  1. Advocacy
  2. Awareness
  3. Consideration Correct answer.
  4. Retention

Explanation

The consideration stage is where customers actively compare options against their evaluation criteria. Awareness precedes it, while advocacy and retention are post-purchase stages.

Question 38Marketing and Customer Value Management

A retailer calculates that acquiring a new customer costs 120 and that the customer generates a lifetime margin of 480. What is the customer lifetime value to acquisition cost ratio?

  1. 0.25
  2. 6
  3. 2
  4. 4 Correct answer.

Explanation

The ratio is lifetime margin divided by acquisition cost, 480/120 = 4. A ratio of 4 indicates the relationship returns four times the acquisition spend, a healthy benchmark in many sectors.

Question 39Marketing and Customer Value Management

Which statement best distinguishes customer satisfaction from customer loyalty in value management?

  1. Satisfaction is measured only financially, while loyalty is measured only attitudinally
  2. Loyalty reflects repeat behaviour and commitment, while satisfaction is an evaluation of experience that does not always lead to repurchase Correct answer.
  3. Loyalty and satisfaction are identical constructs measured with the same instrument
  4. Satisfaction guarantees repurchase, whereas loyalty is only attitudinal

Explanation

Satisfaction is a post-experience evaluation, whereas loyalty combines repeat behaviour with commitment. Satisfied customers can still defect, so satisfaction is a necessary but insufficient condition for loyalty.

Question 40Marketing and Customer Value Management

A firm finds that 20% of customers generate 75% of profits. Which customer value management implication is most defensible?

  1. Resources should be prioritised toward high-value segments while managing cost-to-serve for the rest Correct answer.
  2. All customers should receive identical service levels to ensure fairness
  3. Low-profit customers should always be terminated immediately
  4. Profit concentration proves the segmentation model is invalid

Explanation

Profit concentration is common, so value management allocates service and investment toward high-value segments while controlling cost-to-serve elsewhere. Uniform service ignores the value differential, and blanket termination ignores growth potential and relationship effects.

Question 41Marketing and Customer Value Management

When estimating CLV, which adjustment most improves the realism of a simple margin-times-lifetime calculation?

  1. Assuming zero churn for all cohorts
  2. Applying a discount rate to future cash flows Correct answer.
  3. Using gross revenue instead of margin
  4. Ignoring acquisition cost entirely

Explanation

Discounting future cash flows reflects the time value of money and produces a present-value CLV rather than a nominal sum. Using revenue instead of margin, assuming zero churn, or ignoring acquisition cost all overstate or distort value.

Question 42Marketing and Customer Value Management

A brand decides to reposition by targeting a narrower segment with a distinct value proposition. What is the primary risk of this choice?

  1. The brand will automatically lose all existing customers
  2. The segment may be too small to sustain the required investment Correct answer.
  3. Differentiation always reduces perceived value
  4. The value proposition becomes irrelevant to the chosen segment

Explanation

Narrow targeting risks insufficient segment size or profitability to justify the tailored offer and marketing investment. Existing customers are not automatically lost, and a focused proposition is designed to be relevant to the chosen segment.

Question 43Marketing and Customer Value Management

In a customer portfolio matrix plotting customer profitability against loyalty or growth potential, a low-profit but high-potential customer is best managed by:

  1. Raising prices sharply to exit the relationship
  2. Divesting immediately
  3. Investing selectively to develop the relationship Correct answer.
  4. Applying the same treatment as high-profit loyalists

Explanation

Customers with high potential but currently low profit warrant selective investment to grow share and profitability. Immediate divestment or punitive pricing forgoes future value, while uniform treatment ignores the potential differential.

Question 44Marketing and Customer Value Management

Which measure is most appropriate for assessing the effectiveness of a loyalty programme in value management terms?

  1. Number of programme members enrolled
  2. Incremental margin attributable to programme members versus a matched control Correct answer.
  3. Number of promotional emails sent
  4. Total marketing spend on the programme

Explanation

Effectiveness should be judged by incremental margin relative to a comparable control group, isolating the programme's causal value. Enrolment counts, spend, and email volume are activity inputs rather than outcome measures.

Question 45Marketing and Customer Value Management

A firm observes high satisfaction scores but rising defection. Which explanation is most consistent with customer value management theory?

  1. Satisfaction and defection are unrelated, so the data must be wrong
  2. Competitors offered better value on attributes that matter more, so satisfaction on measured attributes did not prevent switching Correct answer.
  3. High satisfaction always causes defection
  4. Defection is driven only by price, regardless of value

Explanation

Satisfaction surveys often measure attributes that are not decisive for the customer, so superior competitor value on key drivers can trigger defection despite high scores. This is the classic satisfaction-loyalty gap, not evidence of measurement error.

Question 46Marketing and Customer Value Management

Which of the following best describes 'share of wallet' as a customer value metric?

  1. The proportion of the firm's revenue from new customers
  2. The percentage of customers who repurchase within a year
  3. The proportion of a customer's total category spend captured by the firm Correct answer.
  4. The ratio of marketing spend to sales

Explanation

Share of wallet measures how much of a customer's spending in the category the firm captures, indicating cross-sell and deepening potential. It is distinct from new-customer revenue share, repurchase rate, and marketing efficiency ratios.

Question 47Marketing and Customer Value Management

A manager argues that all acquisition spending should be judged by first-year payback. What is the main limitation of this rule in customer value management?

  1. It ignores value created after the first year, potentially rejecting profitable long-term relationships Correct answer.
  2. It overstates long-term value by ignoring churn
  3. It applies only to B2B markets
  4. It cannot be computed from accounting data

Explanation

A strict first-year payback rule ignores cash flows beyond year one, so relationships with slow but substantial long-run value may be wrongly rejected. Judging acquisition against full CLV, not just early payback, gives a more complete view.

Question 48Marketing and Customer Value Management

Which element of the marketing mix most directly communicates and delivers the value proposition to the target segment?

  1. Promotion, because advertising creates value
  2. Place, because distribution determines availability and access Correct answer.
  3. Product, because features alone define value
  4. Price, because it always signals quality

Explanation

Place ensures the offer is available where and when the target customer wants it, directly supporting value delivery through access and convenience. Product, price, and promotion contribute, but availability is the channel's distinctive role in delivering value.

Question 49Marketing and Customer Value Management

A firm uses RFM analysis. Which combination of dimensions does it use to prioritise customers?

  1. Reach, frequency, margin
  2. Revenue, feedback, market share
  3. Retention, familiarity, motivation
  4. Recency, frequency, monetary value Correct answer.

Explanation

RFM scores customers on how recently they purchased, how often they purchase, and how much they spend. These three behavioural dimensions predict responsiveness and value, unlike the distractor acronyms.

Question 50Marketing and Customer Value Management

A customer's expected annual margin is 200, retention probability is 0.8 per year, and the discount rate is 10%. Using a simplified perpetuity with churn, which formula best approximates CLV?

  1. 200 / (1 + 0.10)
  2. 200 × (0.8 + 0.10)
  3. 200 × 0.8 / 0.10
  4. 200 / (0.10 + 0.20) Correct answer.

Explanation

With margin M, retention r, and discount rate d, CLV approximates M / (d + (1 - r)), here 200 / (0.10 + 0.20). The churn term (1 - r) is added to the discount rate to reflect expected attrition.