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TRUE/FALSE
3. McDonald's created the first national chain of fast-food restaurants in a previously fragmented
industry. This is called consolidation.
4. Broad cost leadership is the most appropriate generic strategy for a fragmented industry.
5. Barnes & Noble owns thousands of retail outlets and is pursuing a strategy called franchising.
6. Through chaining, companies increase their buying power, which allows them to negotiate large price
reductions with their suppliers, which in turn promotes their competitive advantage.
7. Because franchisees essentially own their own businesses, they are less motivated to make the
companywide business model work and instead pursue strategies that they feel are appropriate for their
unique circumstances.
8. The challenge in a fragmented industry is to figure out the best set of strategies to overcome a
fragmented market so that the competitive advantages associated with pursuing one of the different
business models can be realized.
10. Development of a mass market is the stimulus for an industry to change from growth to embryonic.
11. Both innovators and early adopters enter the market while the industry is in its embryonic stage.
12. The early adopters refers to the customers who purchase a new technology or product only when it is
clear it will be around for a long time.
13. Different strategies are often required to support and strengthen a company's business model as a
market develops over time.
14. The late majority are typically reached through specialized distribution channels, and products are
often sold by word of mouth.
16. Companies in a weak competitive position in the growth stage of the industry life cycle can use a
market concentration strategy to find a viable competitive position.
17. The shakeout strategy of share-increasing is put in place by allocating resources to attract customers
from weak companies exiting the market.
18. As a result of fierce competition in the shakeout stage, an industry becomes fragmented.
19. To be successful in a growth industry, it is important to remain focused on the needs of the early
adopters of the new product.
20. By their choices of competitive actions and decisions about product attributes, managers can speed up
or slow down the rate of progress of an industry through the stages of the industry life cycle.
21. A new product's relative advantage refers to the degree to which a new product is perceived as better at
satisfying customer needs than the product that it supersedes.
23. The goal for companies in the growth stage of the industry life cycle is to maintain its relative
competitive position in a rapidly expanding market.
24. Product proliferation refers to the strategy of filling the niches by catering to the needs of customers in
all market segments.
25. A price-cutting strategy will keep out an entrant that plans to adopt a new production technology.
26. Market penetration involves the creation of new or improved products to replace existing ones.
27. Market development strategy involves finding new market segments for a company's products.
28. A leadership strategy aims at growing in a declining industry by picking up the market share of
companies that are leaving the industry.
30. XYZ Technologies Inc. was one of the first companies to utilize inter-office e-mail. In 1995, before
many other companies, managers at XYZ Technologies Inc. saw that e-mail could be used to
communicate with employees. Managers at XYZ Technologies Inc. belong to the early majority group.
31. Alyse is a manager at Across-the-Nation Railroads, a company that wishes to exit a declining industy
and optimize cash flow in the process. Alyse and other managers should utilize a harvest strategy.
MULTIPLE CHOICE
38. As the supermarket industry began to grow with the opening hundreds of new stores, supermarkets
were able to
a. capture economies of scale not previously available.
b. monopolize new markets.
c. increase costs and reduce profitability.
d. buy from vendors in smaller quantities.
e. all of these.
ANS: A PTS: 1 DIF: Difficult
OBJ: 2 - Identify the strategies managers can develop to increase profitability in fragmented
industries NAT: AACSB Reflective Thinking | Creation of Value
KEY: Application
43. The first group of customers to enter the market for a new product are called
a. early adopters.
b. first users.
c. innovators.
d. adventurers.
e. initial customers.
ANS: C PTS: 1 DIF: Easy
OBJ: 3 - Discuss the special problems that exist in embryonic and growth industries and how
companies can develop successful business models to effectively compete
NAT: AACSB Analytic | Environmental Influence KEY: Knowledge
45. There are many real estate offices in most locations. Some of them are small independent firms; some
are larger and affiliated with national chains. Thus, the real estate sales industry is
a. fragmented.
b. vertically integrated.
c. homogeneous.
d. mature.
e. embryonic.
ANS: A PTS: 1 DIF: Difficult
OBJ: 1 - Explain why strategic managers need to align their business models with the conditions that
exist in different kinds of industry environments
NAT: AACSB Reflective Thinking | Environmental Influence KEY: Application
48. To compete in the fragmented restaurant industry, Red Lobster Corporation built and now operates
hundreds of stores across the United States and Canada. Red Lobster is using which type of strategy?
a. Acquisitions
b. Horizontal mergers
c. Franchising
d. Diversification
e. Chaining
ANS: E PTS: 1 DIF: Difficult
OBJ: 2 - Identify the strategies managers can develop to increase profitability in fragmented
industries NAT: AACSB Reflective Thinking | Strategy
KEY: Application
49. Which of the following best describes an industry that consists of many small firms?
a. Mature
b. Growth
c. Fragmented
d. Declining
e. Diverse
ANS: C PTS: 1 DIF: Moderate
OBJ: 1 - Explain why strategic managers need to align their business models with the conditions that
exist in different kinds of industry environments
NAT: AACSB Analytic | Environmental Influence KEY: Knowledge
50. Which of the following strategies for fragmented industries grants the right to use the parent's name,
reputation, and business model in a particular location or area in return for a fee and often a percentage
of the profits?
a. Chaining
b. Horizontal merger
c. Vertical merger
d. Franchising
e. B2B
ANS: D PTS: 1 DIF: Moderate
OBJ: 2 - Identify the strategies managers can develop to increase profitability in fragmented
industries NAT: AACSB Analytic | Strategy KEY: Comprehension
51. Factors leading to the slow growth of demand in embryonic industries include all of the following
except the
a. poor quality of the first products.
b. lack of complementary products.
c. lack of venture capital for innovative products.
d. high production costs of the products.
e. lack of distribution channels for the products.
ANS: C PTS: 1 DIF: Difficult
OBJ: 3 - Discuss the special problems that exist in embryonic and growth industries and how
companies can develop successful business models to effectively compete
NAT: AACSB Analytic | Creation of Value KEY: Comprehension
52. Customers who have a practical interest in using a new technology in the future and who are willing to
experiment and envision new uses for the technology are called
a. early adopters.
b. the early majority.
c. innovators.
d. laggards.
e. the late majority.
ANS: A PTS: 1 DIF: Easy
OBJ: 3 - Discuss the special problems that exist in embryonic and growth industries and how
companies can develop successful business models to effectively compete
NAT: AACSB Analytic | Environmental Influence KEY: Knowledge
53. Which of the following customer groups represents the leading wave or edge of the mass market?
a. Early adopters
b. Early majority
c. Innovators
d. Late majority
e. Laggards
ANS: B PTS: 1 DIF: Moderate
OBJ: 3 - Discuss the special problems that exist in embryonic and growth industries and how
companies can develop successful business models to effectively compete
NAT: AACSB Analytic | Environmental Influence KEY: Comprehension
54. Which of the following factors tends to accelerate customer demand for a product?
a. The product's relative advantage
b. The product's compatibility
c. The simplicity of the product's use
d. The degree to which a product can be experimented with
e. All of these
ANS: E PTS: 1 DIF: Difficult
OBJ: 3 - Discuss the special problems that exist in embryonic and growth industries and how
companies can develop successful business models to effectively compete
NAT: AACSB Analytic | Creation of Value KEY: Comprehension
58. Which of the following factors that affect market growth rates refers to the degree to which a new
product is perceived as better at satisfying customer needs than the product it supersedes?
a. Complexity
b. Relative advantage
c. Compatibility
d. Trialability
e. Observability
ANS: B PTS: 1 DIF: Moderate
OBJ: 3 - Discuss the special problems that exist in embryonic and growth industries and how
companies can develop successful business models to effectively compete
NAT: AACSB Analytic | Creation of Value KEY: Comprehension
59. Which of the following factors that affect market growth rates refers to the degree to which a new
product is perceived as difficult to understand and use?
a. Complexity
b. Relative advantage
c. Compatibility
d. Trialability
e. Observability
ANS: A PTS: 1 DIF: Moderate
OBJ: 3 - Discuss the special problems that exist in embryonic and growth industries and how
companies can develop successful business models to effectively compete
NAT: AACSB Analytic | Creation of Value KEY: Comprehension
60. Which of the following factors that affect market growth rates refers to the degree to which the results
of using and enjoying a new product can be seen and appreciated by other people?
a. Complexity
b. Relative advantage
c. Compatibility
d. Trialability
e. Observability
ANS: E PTS: 1 DIF: Moderate
OBJ: 3 - Discuss the special problems that exist in embryonic and growth industries and how
companies can develop successful business models to effectively compete
NAT: AACSB Analytic | Creation of Value KEY: Comprehension
61. Some researchers claim that the spread of new products is similar to a viral infection, suggesting that
a. products that are too new can hurt you.
b. new products change and mutate as rapidly as a virus does.
c. only high-technology products can stop the diffusion.
d. lead adopters become "infected" or enthused with the new product and subsequently infect
others by telling them about it.
e. medical professionals are the first to hear of most new technologies.
ANS: D PTS: 1 DIF: Difficult
OBJ: 3 - Discuss the special problems that exist in embryonic and growth industries and how
companies can develop successful business models to effectively compete
NAT: AACSB Analytic | Creation of Value KEY: Comprehension
63. John, a computer scientist, is willing to pay premium prices to be one of the first to have new versions
of software packages. John is in the ____ customer group.
a. laggard
b. early majority
c. early adopter
d. late majority
e. innovator
ANS: E PTS: 1 DIF: Difficult
OBJ: 3 - Discuss the special problems that exist in embryonic and growth industries and how
companies can develop successful business models to effectively compete
NAT: AACSB Reflective Thinking | Creation of Value KEY: Application
64. Which of the following factors is crucial in choosing an investment strategy to pursue and thus
maximize the profitability of a company's business model?
a. The competitive advantage that a company's business model gives it in an industry relative
to competitors
b. The stage of the industry life cycle
c. The age of the firm
d. The competitive advantage that a company's business model gives it in an industry relative
to competitors and the stage of the industry life cycle
e. All of these choices
ANS: D PTS: 1 DIF: Difficult
OBJ: 3 - Discuss the special problems that exist in embryonic and growth industries and how
companies can develop successful business models to effectively compete
NAT: AACSB Analytic | Strategy KEY: Comprehension
65. Which of the following shakeout strategies requires a company to limit or decrease its investment in a
business and to extract, or milk, the investment as much as it can?
a. Market concentration strategy
b. Share-increasing strategy
c. Cost-leadership strategy
d. Hold-and-maintain strategy
e. Harvest strategy
ANS: E PTS: 1 DIF: Moderate
OBJ: 3 - Discuss the special problems that exist in embryonic and growth industries and how
companies can develop successful business models to effectively compete
NAT: AACSB Analytic | Strategy KEY: Comprehension
66. In which stage of the industry life cycle do both cost leaders and differentiators adopt a hold-and-
maintain strategy to defend their business models and ward off threats from focused companies that
might be appearing?
a. Late majority
b. Growth
c. Shakeout
d. Mature
e. Decline
ANS: D PTS: 1 DIF: Difficult
OBJ: 3 - Discuss the special problems that exist in embryonic and growth industries and how
companies can develop successful business models to effectively compete
NAT: AACSB Analytic | Strategy KEY: Comprehension
69. Which of the following strategies allows interdependent firms indirectly to coordinate their actions?
a. Cost cutting
b. Vertical integration
c. Preemption
d. Price signaling
e. Horizontal mergers
ANS: D PTS: 1 DIF: Difficult
OBJ: 4 - Understand competitive dynamics in mature industries and discuss the strategies managers
can develop to increase profitability even when competition is intense
NAT: AACSB Analytic | Strategy KEY: Comprehension
70. Which of the following strategies helps companies with high cost structures, allowing them to survive
without having to implement strategies to become more productive and efficient?
a. Price signaling
b. Nonprice competition
c. Capacity control
d. Market development
e. Price leadership
ANS: E PTS: 1 DIF: Difficult
OBJ: 4 - Understand competitive dynamics in mature industries and discuss the strategies managers
can develop to increase profitability even when competition is intense
NAT: AACSB Analytic | Strategy KEY: Comprehension
71. A telecommunications firm is working on the next generation of switching equipment that allows calls
to be digitally transmitted from sender to receiver. If the new product will be sold to existing
customers, the firm is pursuing a strategy of
a. product development.
b. market penetration.
c. product proliferation.
d. market signaling.
e. market development
ANS: A PTS: 1 DIF: Difficult
OBJ: 4 - Understand competitive dynamics in mature industries and discuss the strategies managers
can develop to increase profitability even when competition is intense
NAT: AACSB Reflective Thinking | Strategy KEY: Application
72. All of the following factors cause excess industry capacity except
a. widely deployed, cost-reducing technological developments.
b. industry competitive factors.
c. new entrants into the industry.
d. declining customer demand.
e. powerful suppliers.
ANS: E PTS: 1 DIF: Moderate
OBJ: 4 - Understand competitive dynamics in mature industries and discuss the strategies managers
can develop to increase profitability even when competition is intense
NAT: AACSB Analytic | Strategy KEY: Comprehension
73. In deciding on a strategy, a company in a declining industry must do all of the following except
a. lower prices.
b. manage industry capacity.
c. evaluate its strengths relative to the remaining pockets of demand.
d. evaluate the severity of decline.
e. monitor its cash flow.
ANS: A PTS: 1 DIF: Moderate
OBJ: 5 - Outline the different strategies that companies in declining industries can use to support
their business models and profitability NAT: AACSB Analytic | Strategy
KEY: Comprehension
75. Product proliferation occurs in which stage of the product life cycle?
a. Embryonic
b. Growth
c. Shakeout
d. Maintenance
e. Maturity
ANS: E PTS: 1 DIF: Moderate
OBJ: 4 - Understand competitive dynamics in mature industries and discuss the strategies managers
can develop to increase profitability even when competition is intense
NAT: AACSB Analytic | Strategy KEY: Comprehension
78. Companies like Swedish furniture retailer Ikea can be described as a cost leaders. Ikea established
networks of linked mechandising outlets that are interconnected by IT and function as one large
company. Which of the following strategies for consolidating a fragmented industry does Ikea pursue?
a. Chaining
b. Franchising
c. Horizontal merger
d. Niche strategy
e. Divestment strategy
ANS: A PTS: 1 DIF: Difficult
OBJ: 2 - Identify the strategies managers can develop to increase profitability in fragmented
industries NAT: AACSB Reflective Thinking | Strategy
KEY: Application
79. Meineke Car Care Centers, Dunkin Donuts, Burger King, Subway, and Liberty Tax Service all use
which of the following strategies for consolidating in a fragmented industry?
a. Horizontal merger
b. Chaining
c. Divestment strategy
d. Niche strategy
e. Franchising
ANS: E PTS: 1 DIF: Moderate
OBJ: 2 - Identify the strategies managers can develop to increase profitability in fragmented
industries NAT: AACSB Reflective Thinking | Strategy
KEY: Application
80. Today, just about everyone has a cell phone. However, Thomas did not own a cell phone until he took
a job as a store manager where he was required to own a cell phone so that his employees may reach
him in case of an emegency. Which of the following customer groups does Thomas belong to?
a. Early majority
b. Late majority
c. Laggards
d. Early adopters
e. Innovators
ANS: C PTS: 1 DIF: Difficult
OBJ: 3 - Discuss the special problems that exist in embryonic and growth industries and how
companies can develop successful business models to effectively compete
NAT: AACSB Reflective Thinking | Environmental Influence KEY: Application
81. Music CDs and newspaper sales have been falling as users turn to the Internet for their music and
news. Which of the following is NOT a strategy for companies in these declining industries?
a. Leadership
b. Chaining
c. Niche
d. Divestment
e. Harvest
ANS: B PTS: 1 DIF: Difficult
OBJ: 5 - Outline the different strategies that companies in declining industries can use to support
their business models and profitability NAT: AACSB Reflective Thinking | Strategy
KEY: Application
ESSAY
82. What advice would you give to a manager of a business in a fragmented industry about how to
successfully compete? About how to achieve industry consolidation?
ANS:
Students should recognize that a generic strategy of focused differentiation is best suited to help a
company achieve competitive advantage in a fragmented industry. Reasons include the ability to
produce products customized to local tastes, the constraints that small size puts on a firm's ability to
serve the broad market, and the continued turnover in competitors due to the low entry barriers. As an
alternative, students might suggest that a firm turn to the Internet to increase the firm's reach. For
example, many small specialty retailers have established websites that allow them to serve customers
nationwide or even worldwide.
83. Explain why a company in a fragmented industry would want to consolidate the industry. Discuss the
strategies that they might use to do this.
ANS:
Companies in a fragmented industry have many competitors, and the industry typically has low entry
barriers and many small- to medium-sized competitors. Companies in a fragmented industry are often
successful following a type of focus strategy. However, they may want to consolidate a fragmented
industry and thus enjoy the higher profit potential from either a cost leadership or differentiation
business model, both of which are successful in a consolidated industry.
To both grow and consolidate their industry, companies have several options. First, they can choose
chaining to establish networks of linked merchandising outlets that are interconnected in a way that
allows them to operate as one large business. A second approach is franchising. With franchising, a
company may be able to expand its market presence quickly and, because franchisees essentially own
their own business, they are usually strongly motivated to make the companywide business model
work. A third option for consolidating an industry is through horizontal mergers, which allow a
company to obtain economies of scale and a larger market for their products. Finally, by using
information technology (IT) and the Internet, a company can increase its market potential and greatly
lower its costs.
84. Consider the following statement: "A firm competing in an embryonic industry cannot afford to lose its
few customers, and so it should do everything it can to satisfy the needs of innovators." Do you agree
or disagree, and why?
ANS:
Students should disagree with this statement. Paradoxically, firms in embryonic industries should not
be driven by the needs of innovators or early adopters; instead, they should be focusing on satisfying
the needs of the mass-market majority, even though the mass market will not develop until some
unknown time in the future. Firms cannot satisfy both innovators and the majority because their
preferences are different. The needs of innovators are for products that are exciting, novel, and unique,
and they are not deterred by high prices or product unreliability. On the other hand, the mass market
requires products that are affordable, easy to use, familiar, and reliable. Given that firms cannot satisfy
both sets of customers, they should focus on the mass market because the size of that market is much
larger and that market will endure for a longer time. Thus, focusing on the future needs of the majority
will ensure that the firm's products have high sales volume and therefore are more likely to be
profitable in the long run.
85. In his book Crossing the Chasm, Geoffrey Moore discusses some of the issues involved in marketing
technologically new products as markets develop through different stages. What groups does Moore
identify and what must companies do if they are to successfully cross the chasm?
ANS:
Moore's thesis is that different groups of customers enter the market for technologically new products
at different times. And to appeal to these groups, companies must adopt business models and strategies
that are appropriate given the stage of industry development and who is purchasing the company's
products.
The first group to enter the market is innovators. Innovators are technocrats who enjoy and appreciate
the new technology for its own sake. They are not very price sensitive.
The next group to enter the market is the early adopters. Early adopters realize the potential of the new
technology to improve their own business models and are willing to experiment with it. These buyers
are not very price sensitive either.
The third group to enter the market is the early majority. This is the leading wave of the mass market,
and the gap between the early adopters and early majority is the chasm. Companies must use a
business model to appeal to these buyers and satisfy the growing demand. These buyers tend to be
comfortable with technology, but it has to be cost-effective.
The fourth group to enter the market is the late majority. These buyers adopt the new technology
because they are convinced it will be somewhat enduring. They tend to be price sensitive. The entry of
this group signals the end of the growth stage.
The last group to enter is the laggards. These are the buyers that are often considered to be
technophobic.
Innovators and early adopters are often reached through specialized distribution channels, and word of
mouth is very important in the buying decision. Reaching the early majority requires mass-market
distribution channels and advertising campaigns that require a different set of marketing and sales
strategies. Companies that cannot adapt their business models fall into the chasm and often go out of
business.
86. Imagine that a new product becomes available to the public tomorrow a personal transportation
device that can move individuals or cargo from place to place instantly (yes, just like Star Trek).
Industries such as airlines, auto manufacturing, railroads, and delivery services would immediately
enter a severe decline. What advice would you give the firms in those industries? What strategies
should they pursue, and why?
ANS:
The answer to this question depends on whether the new transportation device is economical compared
to traditional modes of transportation. If the new device is less expensive, then the decline is likely to
be swift and permanent. In that case, established companies in traditional transportation industries
should first consider a niche strategy, if they can identify a pocket of remaining demand for their
product. If a niche cannot be found, then the companies should consider a harvest strategy, in which
they can reduce investment but continue to make sales and generate profits for a time. If the niche
strategy is not feasible and the decline is very severe, the companies will have to use a divestment
strategy and sell their assets. This will not produce much profit for them, however, because any
potential buyers would have to convert the assets to a different use; there will be no buyers from within
the industry.
If the new device is more expensive than the traditional modes of transportation, the existing
companies may face a decline that is slower and more gradual. However, research on the new method
will probably generate a breakthrough fairly quickly, so the firms should not count on an extended
reprieve. If the decline is gradual, the stronger firms in each industry could consider pursuing a
leadership strategy, buying the assets of the weaker firms that are trying to exit the industry. This
strategy consolidates the industry and can result in a short-term increase in profits for the leaders. After
the new technology becomes cost-effective for consumers, the companies should move through the
strategies of niche, harvest, and divestment, in that order, as described in the paragraph above.