STRAT 5700, CHAPTER 3

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Capabilities are a subset of a firm’s resources and are defined as tangible and intangible assets that enable a firm to take full advantage of other resources it controls.
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Answer: TRUE
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Resources in the resource based view are defined as the tangible and intangible assets that a firm controls, which it can use to conceive and implement its strategies.
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Answer: TRUE
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Financial resources include only the profits a firm has made earlier in its history and that it has reinvested in itself.
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Answer: FALSE
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Organizational resources include the training, experience, judgment, intelligence, relationships and insight of individual managers and workers in a firm, while human resources are an attribute of collections of individuals.
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Answer: FALSE
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One of the key assumptions of the RBV is resource homogeneity.
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Answer: TRUE
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The assumption of resource immobility holds that it may be very costly for firms without certain resources and capabilities to develop or acquire them.
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Answer: TRUE
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Inputs whose quantity of supply is fixed and whose demand does not respond to price increases are said to be elastic in supply.
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Answer: FALSE
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A firm’s plant and equipment, its geographic location and its access to raw materials are all examples of physical resources.
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Answer: TRUE
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In the VRIO framework, the R represents resources.
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Answer: FALSE
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Within the VRIO framework, valuable resources and capabilities are also known as strengths.
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Answer: TRUE
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Within the VRIO framework, resources and capabilities that are not valuable are also known as weaknesses.
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Answer: TRUE
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In general, firms that use their resources and capabilities to exploit opportunities or neutralize threats will see no increase in their net revenues nor a decrease in their net costs compared to the situation where they are not using these resources and capabilities to exploit opportunities or neutralize threats.
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Answer: FALSE
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Many firms have resources and capabilities that are used to neutralize threats and the use of these resources enables the firms to increase their net revenues.
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Answer: TRUE
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Studying a firm’s value chain forces us to think about firm resources in an aggregated way.
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Answer: FALSE
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If a firm creates environmental pollution in the process of manufacturing its goods, the pollution is known as an externality.
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Answer: TRUE
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The value chain model developed by McKinsey and Company divides value-creating activities into two large categories: primary activities and secondary activities.
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Answer: FALSE
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A resource can be a source of competitive advantage even if the resource is controlled by numerous firms.
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Answer: FALSE
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Most firms have a resource base that is composed primarily of valuable but common resources and capabilities, some of which are essential if a firm is to gain competitive parity.
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Answer: TRUE
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In general, as long as the number of firms that possess a particular valuable resource or capability is less than the number of firms needed to generate perfect competition dynamics in an industry, that resource or capability can be considered rare and a potential source of competitive advantage.
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Answer: TRUE
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When firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it, this resource or capability is described as perfectly imitable.
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Answer: FALSE
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A sustained competitive advantage can be competed away by strategic imitation if competing firms face an important cost disadvantage in duplicating a successful firm’s valuable resources.
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Answer: FALSE
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In general, imitation can occur in one of two ways: direct duplication or substitution.
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Answer: TRUE
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The ability of firms to acquire, develop, and use resources often depends upon their place in time and space, and firms that do not have space-and-time-dependent resources face a significant cost disadvantage in obtaining and developing them.
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Answer: TRUE
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A process is said to be path dependent when imitating firms are not able to understand the relationship between the resources and capabilities controlled by a firm and that firm’s competitive advantage.
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Answer: FALSE
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The interpersonal relations among managers in a firm, a firm’s culture, and a firm’s reputation among suppliers and customers can all act to make a firm’s resources and capabilities socially complex.
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Answer: TRUE
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Whenever the sources for competitive advantage are widely diffused across people, locations, and processes in a firm, those sources will be costly to imitate.
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Answer: TRUE
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Most technological developments in an industry are diffused throughout firms in that industry in a relatively brief period of time, but only if the technology in question has not been patented.
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Answer: FALSE
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A firm’s formal reporting structure is a description of who in an organization reports to whom and is often embedded in a firm’s organizational chart.
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Answer: TRUE
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For Southwest Airlines, competitive advantage falls into two big categories: financial decisions made by Southwest and Southwest’s approach to managing people.
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Answer: FALSE
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Compensation policies are the ways that firms pay employees, and such policies create incentives for employees to behave in certain ways.
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Answer: TRUE
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If a resource or capability is valuable and rare but not costly to imitate, exploiting this resource will generate a sustainable competitive advantage for a firm.
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Answer: FALSE
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Decisions made by other firms given the strategic choices of a particular firm define the nature of the competitive dynamics that exist in an industry.
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Answer: TRUE
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One reason a firm may not respond to another firm’s competitive advantage is because it does not have the resources or capabilities to do so.
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Answer: TRUE
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Any actions that a firm takes that have the effect of reducing the level of rivalry in an industry that also do not require firms in an industry to negotiate with each other can be thought of as explicit cooperation.
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Answer: FALSE
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When tacit cooperation has the effect of reducing supply and increasing prices, it is known as tacit collusion.
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Answer: TRUE
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Tacit cooperation is only a viable strategy when an industry is perfectly competitive.
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Answer: FALSE
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In the end, competitive advantage is so important to a firm’s success, it must remain the sole property of senior management.
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Answer: FALSE
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If there is a conflict between the resources a firm controls and the firm’s organization, the resources should be changed.
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Answer: FALSE
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If all a firm does is create value in the same way as its competitors, the best performance it can ever expect to gain is competitive parity.
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Answer: TRUE
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________ in the RBV are defined as the tangible and intangible assets that a firm controls that it can use to conceive and implement its strategies. A) Management controls B) Capabilities C) Resources D) Compensation policies
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C) Resources
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________ are a subset of a firm’s resources and are defined as tangible and intangible assets that enable a firm to take full advantage of other resources it controls. A) Retained earnings B) Capabilities C) Human resources D) Financial resources
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B) Capabilities
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A firm’s marketing skills and teamwork as well as its cooperation among managers are examples of A) financial resources. B) human resources. C) physical resources. D) capabilities.
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D) capabilities.
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The training, experience, judgment, intelligence, relationships and insight of individual managers and workers in a firm are examples of A) physical resources. B) human resources. C) organizational resources. D) financial resources.
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B) human resources.
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Computer hardware and software technology, robots used in manufacturing and automated warehouses are examples of which type of resources? A) financial resources B) physical resources C) human resources D) organizational resources
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B) physical resources
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A firm’s formal reporting structure, its formal and informal planning and its controlling and coordinating systems are examples of which type of resources? A) financial resources B) physical resources C) human resources D) organizational resources
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D) organizational resources
question

The VRIO assumption that some of the resource and capability differences among firms may be long lasting because it may be very costly for firms without certain resources and capabilities to develop or acquire them is known as A) resource mobility. B) resource homogeneity. C) resource immobility. D) resource heterogeneity.
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C) resource immobility.
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________ implies that for a given business activity, some firms may be more skilled in accomplishing this activity than other firms. A) Resource mobility B) Resource homogeneity C) Resource immobility D) Resource heterogeneity
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D) Resource heterogeneity
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The theoretical roots of the resource-based view can be traced to research done by A) David Ricardo. B) Adam Smith. C) Oliver Williamson. D) Joseph Schumpeter.
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A) David Ricardo.
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Inputs whose quantity of supply is fixed and does not respond to price increases are said to be A) elastic in supply. B) inelastic in supply. C) elastic in demand. D) perfectly competitive.
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B) inelastic in supply.
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To the extent that a firm’s resources and capabilities enhance a firm’s competitive position by enabling a firm to exploit its opportunities or neutralize its threats, these resources and capabilities are valuable and are known as A) temporary competitive advantages. B) sustainable competitive advantages. C) core competencies. D) strengths.
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D) strengths.
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The set of business activities in which a firm engages to develop, produce, and market its products or services is known as its A) value chain. B) physical resources. C) organizational resources. D) human resources.
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A) value chain.
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If in the process of maximizing its performance, a firm engages in activities that pollute the environment, the impact of that pollution is a(n) A) capability. B) externality. C) competitive advantage. D) weakness.
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B) externality.
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ESPN’s development of an extensive offering of X-Games coverage that is unmatched by any other sports outlet is an example of which element of the VRIO framework? A) organization B) imitability C) competitive parity D) rarity
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D) rarity
question

Most firms have a resource base that is composed primarily of resources and capabilities that are A) valuable but not rare. B) neither valuable nor rare. C) valuable and rare. D) rare but not valuable.
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A) valuable but not rare.
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Which of the following is not one of the six distinct activities in McKinsey and Company’s value chain model? A) technology development B) product design C) manufacturing D) inbound logistics
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D) inbound logistics
question

In general, as long as the number of firms that possess a particular valuable resource or capability is less than the number of firms needed to generate perfect competition dynamics in an industry, that resource or capability can be considered ________ and a potential source of competitive advantage. A) valuable B) rare C) inimitable D) un-substitutable
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B) rare
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If firms that do not possess valuable and rare resources or capabilities face a cost disadvantage in obtaining these resources or capabilities compared to the firms that already possess them, these resources and capabilities are termed A) rare. B) valuable. C) imperfectly imitable. D) perfectly imitable.
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C) imperfectly imitable.
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Firms that possess and exploit costly-to-imitate, rare and valuable resources in choosing and implementing their strategies may enjoy a period of A) temporary competitive advantage. B) competitive disadvantage. C) competitive parity. D) sustained competitive advantage.
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D) sustained competitive advantage.
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If a firm’s resources and capabilities are costly to imitate because imitating firms may not understand the relationship between the resources and capabilities controlled by a firm and that firm’s competitive advantage, this competitive advantage is said to be protected from imitation by A) path dependence. B) causal ambiguity. C) unique historical conditions. D) social complexity.
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B) causal ambiguity.
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Resources and capabilities, such as interpersonal relations among managers and a firm’s culture, that may be costly to imitate because they are beyond the ability of firms to systematically manage and influence are referred to as A) socially complex. B) causally ambiguous. C) path dependent. D) the result of unique historical conditions.
answer

A) socially complex.
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According to the research in strategic human resources management, A) firms that are able to use human resource practices to develop socially complex human and organizational resources are able to gain competitive advantage over firms that do not engage in these practices. B) firms that are able to use human resource practices to develop socially simplistic human and organizational resources are able to gain competitive advantage over firms that do not engage in these practices. C) firms that are able to use human resource practices to develop socially complex human and organizational resources gain little advantage over firms that do not engage in these practices. D) firms that are able to use human resource practices to develop socially complex human and organizational resources are at a competitive disadvantage when compared to firms that do not engage in these practices.
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A) firms that are able to use human resource practices to develop socially complex human and organizational resources are able to gain competitive advantage over firms that do not engage in these practices.
question

Which of the following statements regarding patents is accurate? A) Patents always increase the costs of imitation. B) Patents may decrease, rather than increase, the costs of imitation. C) Patents always decrease the costs of imitation. D) Patents have no impact on the costs of imitation.
answer

B) Patents may decrease, rather than increase, the costs of imitation.
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The range of formal and informal mechanisms to ensure that managers are behaving in ways consistent with a firm’s strategies are referred to as A) formal reporting structures. B) organizational charts. C) compensation policies. D) management control systems.
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D) management control systems.
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Which of the following is an example of formal management controls? A) a firm’s culture B) the willingness of employees to monitor each other C) budgeting and reporting activities D) managerial motivation
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C) budgeting and reporting activities
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Southwest Airlines’ strong internal culture that helps ensure that employees act in ways consistent with the company’s strategy is an example of a(n) A) informal management control. B) formal management control. C) compensation policy. D) formal reporting structure.
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A) informal management control.
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Resources that are valuable but not rare can be categorized as A) organizational weaknesses. B) distinctive competencies. C) organizational strengths. D) complementary resources and capabilities.
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C) organizational strengths.
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Resources that generate a temporary competitive advantage are A) valuable, rare and costly to imitate. B) valuable but neither rare nor costly to imitate. C) valuable and either rare or costly to imitate. D) valuable and rare but not costly to imitate.
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D) valuable and rare but not costly to imitate.
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If a resource or capability is valuable and rare but not costly to imitate, exploiting this resource will generate a(n) A) sustained competitive advantage. B) perfectly competitive environment. C) temporary competitive advantage. D) environment characterized by competitive parity.
answer

C) temporary competitive advantage.
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Resources and capabilities that are valuable, rare, and costly to imitate are best described as A) distinctive competencies. B) entry barriers. C) complementary resources and capabilities. D) sustainable distinctive competencies.
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D) sustainable distinctive competencies.
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If Delta Airlines were to significantly change its fare structure and flight schedule to enhance its competitive position in response to aggressive price cutting by Southwest Airlines, this would be an example of A) explicit collusion. B) tacit collusion. C) competitive dynamics. D) a harvest strategy.
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C) competitive dynamics.
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Any actions a firm takes that have the effect of reducing the level of rivalry in an industry that also do not require firms in an industry to directly communicate or negotiate with each other can be thought of as A) tacit cooperation. B) tacit collusion. C) explicit collusion. D) competitive parity.
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A) tacit cooperation.
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When tacit cooperation has the effect of reducing supply and increasing prices, it is known as A) monopolistic competition. B) explicit collusion. C) competitive parity. D) tacit collusion.
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D) tacit collusion.
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Tacit cooperation is only a viable strategy when A) an industry is perfectly competitive. B) an industry is heterogeneous with respect to the products it sells and their cost structure. C) there is a strong market share leader in the industry. D) there are low entry barriers in the industry.
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C) there is a strong market share leader in the industry.
question

The specific actions a firm takes to implement its strategies are known as A) competitive advantages. B) objectives. C) goals. D) tactics.
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D) tactics.
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Which of the following statements regarding the resource-based view is accurate? A) Competitively valuable resources and capabilities are controlled only by a firm’s general managers. B) Only lower level employees need to accept the responsibility of creating, nurturing and exploiting resources and capabilities that can generate competitive advantages for a firm. C) Employees should define their jobs in functional terms instead of in competitive and economic terms. D) Competitive advantage is too important to remain the sole property of senior management.
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D) Competitive advantage is too important to remain the sole property of senior management.
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Which of the following statements regarding competitive parity and competitive advantage is accurate? A) Some firms develop valuable, rare, and costly-to-imitate resources and capabilities in being efficient second movers, that is, in rapidly imitating and improving on the product and technological innovations of other firms. B) Firms that benchmark their performance against the performance of successful competitors can expect to develop at least a temporary competitive advantage. C) Firms must be first movers to gain competitive advantages. D) Even if all a firm does is create value in the same way as its competitors, the firm can expect to earn at least a temporary competitive advantage.
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A) Some firms develop valuable, rare, and costly-to-imitate resources and capabilities in being efficient second movers, that is, in rapidly imitating and improving on the product and technological innovations of other firms.
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If there is a conflict between the resources a firm controls and that firm’s organization, ________ should be changed. A) the resources B) both C) nothing D) the organization
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D) the organization
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A process is said to be ________ when events early in the evolution of a process have significant effects on subsequent events. A) causally ambiguous B) path dependent C) socially complex D) path independent
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B) path dependent
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LaserTech’s new technology appears to be A) valuable and rare but not costly to imitate. B) valuable and either rare or costly to imitate. C) valuable but neither rare nor costly to imitate. D) valuable, rare and costly to imitate.
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D) valuable, rare and costly to imitate.
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If one of LaserTech’s rivals were to decide to divest its industrial laser manufacturing business in response to LaserTech’s new technology, this would be an example of A) competitive dynamics. B) tacit collusion. C) a sustainable distinctive competence. D) competitive parity.
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A) competitive dynamics.
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If LaserTech’s new technological development were due to proprietary investments the company made when it was first founded twenty years ago, this would be an example of A) social complexity. B) tacit collusion. C) path dependence. D) causal ambiguity.
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C) path dependence.
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LaserTech’s new technology is an example of A) financial resources. B) physical resources. C) human resources. D) organizational resources.
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B) physical resources.
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The inability of rivals to develop or acquire technology similar to that of LaserTech is an illustration of A) resource immobility. B) resource heterogeneity. C) causal ambiguity. D) path dependence.
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A) resource immobility.
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Bates’ culture is an example of a(n) A) informal management control. B) formal management control. C) compensation policy. D) formal reporting structure.
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A) informal management control.
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The budgeting and reporting activities that Bates uses are examples of A) informal management controls. B) formal reporting structures. C) formal management controls. D) primary value chain activities.
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C) formal management controls.
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The reward system Bates uses to encourage employees to find ways to reduce costs is an example of a(n) A) sustained distinctive competence. B) informal management control. C) formal reporting structure. D) compensation policy.
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D) compensation policy.
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The fact that it would be would be difficult and costly for firms to match Bates’ capabilities in the tool industry indicates that these capabilities are A) imperfectly imitable. B) causally ambiguous. C) substitutable. D) perfectly imitable.
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A) imperfectly imitable.
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It would be costly for competitors to duplicate Bates due to A) path dependence and causal ambiguity. B) causal ambiguity and unique historical conditions. C) path dependence and unique historical conditions. D) causal ambiguity and patents.
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C) path dependence and unique historical conditions.
question

Describe the difference between resources and capabilities.
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Resources in the RBV are defined as the tangible and intangible assets that a firm controls that it can use to conceive of and implement its strategies. Examples of resources might include a firm’s factories (a tangible asset), its products (a tangible asset), its reputation among customers (an intangible asset), and teamwork among its managers (an intangible asset). Capabilities are a subset of a firm’s resources and are defined as tangible and intangible assets that enable a firm to take full advantage of other resources it controls. That is, capabilities do not enable a firm to conceive of and implement its strategies by themselves but enable a firm to use other resources to conceive of and implement such strategies. Examples of capabilities might include a firm’s marketing skills and teamwork and cooperation among its managers.
question

Identify the four broad categories that a firm’s resources and capabilities can be classified into.
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A firm’s resources and capabilities can be classified into four broad categories: financial resources, physical resources, individual resources, and organizational resources. *Financial resources include all the money, from whatever source, that a firm uses to conceive of and implement strategies. *Physical resources include all the physical technology used in a firm. This includes a firm’s plant and equipment, its geographic location, and its access to raw materials. *Human resources include the training, experience, judgment, intelligence, relationships, and insight of individual managers and workers in a firm. *Organizational resources are an attribute of collections of individuals.
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Identify and describe the two fundamental assumptions about the resources and capabilities that firms may control that the RBV rests on.
answer

The two fundamental assumptions that the RBV rests on are resource heterogeneity and resource immobility. *Resource heterogeneity* implies that for a given business activity, some firms may be more skilled in accomplishing this activity than other firms. *Resource immobility* implies that it may be very costly for firms without certain resources and capabilities to develop or acquire them.
question

Identify the four questions represented in the VRIO framework that one must ask about a resource or capability to determine its competitive potential.
answer

The four questions are: *The Question of Value Does a resource enable a firm to exploit an external opportunity or neutralize an external threat? *The Question of Rarity How many competing firms already possess particular valuable resources and capabilities? *The Question of Imitability Do firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it? *The Question of Organization Is a firm organized to exploit the full competitive potential of its resources and capabilities?
question

Define the concept of a value chain.
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A firm’s *value chain* is the set of business activities in which it engages to develop, produce, and market its products or services. One model is the *McKinsey and Company value chain model*, which suggests that the creation of value almost always involves six distinct activities: technology development, product design, manufacturing, marketing, distribution, and service. Firms can develop distinctive capabilities in any one or any combination of these activities. (Note: Porter is no longer included in this edition.
question

Discuss whether a firm must be must be the only one to possess a valuable resource or capability in order for the firm to benefit from the resource or capability’s rarity or if other firms may own it as well.
answer

A firm does not have to be the sole possessor of a valuable resource or capability for the firm to benefit from the rarity of a resource or capability. It may be possible for a small number of firms in an industry to possess a particular valuable resource or capability and still obtain a competitive advantage. In general, as long as the number of firms that possess a particular valuable resource or capability is less than the number of firms needed to generate perfect competition dynamics in an industry, that resource or capability can be considered rare and a potential source of competitive advantage.
question

Identify two forms of imitation and describe four sources of costly imitation.
answer

In general, imitation occurs in one of two ways: *direct duplication or *substitution. Imitating firms can attempt to directly duplicate the resources possessed by the firm with a competitive advantage. Imitating firms can also attempt to substitute other resources for a costly-to-imitate resource possessed by a firm with a competitive advantage. The four sources of costly imitation include: • Unique Historical Conditions. It may be the case that a firm was able to acquire or develop its resources and capabilities in a low-cost manner because of its unique historical conditions. The ability of firms to acquire, develop, and use resources often depends upon their place in time and space. • Causal Ambiguity. A second reason why a firm’s resources and capabilities may be costly to imitate is that imitating firms may not understand the relationship between the resources and capabilities controlled by a firm and that firm’s competitive advantage. • Social Complexity. A third reason that a firm’s resources and capabilities may be costly to imitate is that they may be socially complex phenomena, beyond the ability of firms to systematically manage and influence. • The existence of patents is the fourth. Patents may restrict direct duplication for a time, but they may actually increase the chances of substitution by functionally equivalent technologies.
question

Identify four components of a firm’s organization that are relevant to the question of organization and discuss what role they play in building a competitive advantage.
answer

Numerous components of a firm’s organization are relevant to the question of organization, including its formal reporting structure, its formal and informal management control systems, and its compensation policies. *A firm’s formal reporting structure* is a description of whom in an organization reports to who and is often embodied in a firm’s *organizational chart*. *Management control systems* include a range of formal and informal mechanisms to ensure that managers are behaving in ways consistent with a firm’s strategies. *Formal management controls* include a firm’s budgeting and reporting activities that keep people higher up in a firm’s organizational chart informed about the actions taken by people lower down in a firm’s organizational chart. *Informal management controls* might include a firm’s culture and the willingness of employees to monitor each other’s behavior. *Compensation policies* are the ways that firms pay employees. Such policies create incentives for employees to behave in certain ways. These components of a firm’s organization are often called *complementary resources and capabilities* because they have limited ability to generate competitive advantage in isolation. However, in combination with other resources and capabilities, they can enable a firm to realize its full potential for competitive advantage potential.
question

Discuss the questions underlying the VRIO framework and use these questions to differentiate between a simple distinctive competence and a sustained distinctive competence.
answer

The four questions underlying the VRIO framework are value, rarity, inimitability and organization. If a resource or capability is valuable and rare but not costly to imitate, exploiting this resource will generate a temporary competitive advantage for a firm. Consequently, this type of resource or capability can be thought of as an organizational strength and as a distinctive competence. If a resource or capability is valuable, rare, and costly to imitate, exploiting this resource will generate a sustained competitive advantage. In this case, competing firms face a significant cost disadvantage in imitating a successful firm’s resources and capabilities and thus cannot imitate this firm’s strategies. This cost advantage may reflect the unique history of the successful firm, causal ambiguity about which resources to imitate, the socially complex nature of these resources and capabilities, or any patent advantages a firm might possess. In any case, attempts to compete away the advantages of firms that exploit these resources will not generate competitive advantage or even competitive parity for imitating firms. Even if these firms are able to acquire or develop the resources or capabilities in question, the very high costs of doing so would put them at a competitive disadvantage compared to the firm that already possessed the valuable, rare, and costly-to-imitate resources. These kinds of resources and capabilities are organizational strengths and sustainable distinctive competencies.
question

Define the nature of competitive dynamics and identify three reasons why a firm might not respond to another firm’s competitive advantage.
answer

Decisions made by other firms given the strategic choices of a particular firm define the nature of the competitive dynamics that exist in an industry. There are at least three reasons why a firm might not respond to another firm’s competitive advantage. • First, this firm might have its own competitive advantage. Responding to another firm’s competitive advantage might destroy, or at least compromise, this firm’s sources of competitive advantage. • Second, a firm may not respond to another firm’s competitive advantage because it does not have the resources and capabilities to do so. • Finally, a firm may not respond to the advantages of a competitor because it is trying to reduce the level of rivalry in an industry.

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