FINAL TEST PRACTICE

PART 1. INDUSTRY AND BUSINESS STRATEGY CONCEPTS. In the following section demonstrate your ability to recognize and use business terms and concepts. Select the best answer and fill-in the corresponding letter on the Scantron card. Each item is 2 points.

1. According to Porter, strategy is largely driven by industry competition and influences outside the industry. Firms are expected to experience higher rivalry in an industry under which conditions?

2. In economics “price elasticity” refers to the sensitivity of a product’s demand to price. A positive price elasticity means that the products price increases with demand. But, products can have negative price elasticity. Negative price elasticity indicates that when prices go up, the demand for the product goes down. One reason for negative price elasticity is that a high price point buyers shift their demand to products in another industry which satisfy their needs, if imperfectly. For example, About ten years ago. All types of lettuce were scarce and prices escalated to over $4.00 a head. Lettuce has a negative price elasticity of -2.58. Home shoppers shifted demand away from lettuce products to other salad vegetables. Industries that offer similar, but imperfect substitutes, compete with each other. This competition between industries serves usually to keep prices low, resulting in negative price elasticity. Which of the 5 forces describes this effect?

3. A company desires high growth. It has been in the industry longer than any competitor; has a strong cash flow and access to capital; the technological base is solid; located in a “Right to Work” state, there is no concern for future labor problems. The product is a commodity, and there is no concern for product innovation. Given this information, the most appropriate generic strategy is:

4. Defining concepts of interest to us in business is not always easy. Our “textbook” definitions do not always align with our use. For example, Fortune magazine defines one industry as “Motor Vehicles and Parts”, and places Ford Motors (principally a car manufacturers) and Borg-Warner Automotive (principally a manufacturer of engines and transmissions) in this industry. However, our “textbook” definition of “industry” is:

10. Uniworld Group is the #1 black-owned advertising agency in the US, with such clients as AT&T, Consolidated Edison of New York, Burger King, NationsBank, and Pepsi-Cola. Building on UniWorld Group's experience in marketing for such films as Shaft, Glory, Boys N the Hood, and Amistad, the company's UniWorld Films, launched in late 1998, specializes in film marketing and film-related promotional events. UniWorld's presence in the African-American film market is aided through its relationship with the Acapulco Black Film Festival, an event created in 1997 by UniWorld Group chairman and CEO Byron Lewis. In the early 1970s UniWorld created advertising and media strategies for former Mayor Kenneth Gibson's political campaign in Newark; the first Black Political Summit in Gary, Indiana; Rev. Jesse Jackson's first presidential campaign in 1984; and the first on-site Black radio and press coverage of the 1976 Democratic and Republican presidential conventions. During 1994 UniWorld developed Burger King's (BK's) national interim creative campaign, which generated the greatest six-month sales increase in BK's history. In 1995 UniWorld won Mars, Inc.'s "3Musketeers" general market account. These successes mark the largest mainstream advertising assignments ever awarded to a minority owned agency.

A niche expertise of the African-American market and knowledge of media and entertainment identify this firm’s.

11. A stockholder and member of the Board of Directors of a firm who is also an officer of the firm is a:

13. Until the late 1920’s Ford Motor Company had the largest market share in the U.S. car industry. By 1930 General Motors had surpassed Ford and has maintained market leadership continuously. GM overcame Ford’s sales by adapting a strategy of offering “a different car for every purse.” This generic strategy is:

14. Although Ford’s strategy changed, too late, the company attempted to build market share by high volume production of a standardized product at the lowest possible costs. This strategy is called:

15. Innovation is a strategy that affords a competitive advantage, but we have plenty of evidence that the ability to develop a new product is not sufficient. IBM, for example, dominated the main frame computer industry, but IBM did not produce the first computer. Dell now has the largest market share in the PC market, but Dell did not produce the first PC. What is the problem with an innovation strategy?

16. Recently several major oil companies have merged. Their argument is that combined oil refining facilities ought to decrease the costs of production, permitting lower gas prices. This argument assumes:

17. DeSota, Inc., a paint manufacturing company, for years was the sole supplier of paints to Sears. Roebuck and Company. Sells to Sears represented 50% of DeSota’s revenues. When Sears decided to switch suppliers, DeSota was forced to sell its paint business to Sherwin-Williams. The power of Sears over DeSota represents:

19. In the current attempted acquisition of Newport News Shipyard by General Dynamics, we have seen multiple interests asserted: the Union, management, investors, the government, and the community. The theory of the firm that assumes that diverse interests affect the firm’s strategy and decision-making is:

20. Industry structure is important because the characteristics of an industry influence the profitability of firms within the industry. When I returned from 10 years of business experience overseas, I decided to invest the funds that I had accrued in a business venture. I investigated franchises. I learned that to buy a franchise I would have to put a large amount of money up front. This was not especially a problem; and, given the knowledge that this requirement created a high entry barrier, I considered this a “plus”. As I read the franchise agreement, I learned that the contract binded me to a long-term agreement with the franchise company. I could not sell my franchise for 10 years! This meant that if the business did not do well, I could not sell and “cut my losses”. This high exit barrier bothered me. Should it? Given the relationship between entry barriers/exit barriers and profitability, what should have been my expectations for this investment?

PART 2. CORPORATE STRATEGY AND GLOBAL STRATEGY. In the following section demonstrate your ability to recognize and use terms and concepts.

21. United Technologies is a $25.7 billion corporation that provides a broad range of high-technology products and support services to customers in the aerospace, building and automotive industries worldwide. UTC is the 43rd largest U.S. corporation, according to the 1998 Fortune 500 list. UTC's best-known products include Pratt & Whitney aircraft engines, Otis elevators and escalators, Carrier heating and air conditioning systems, Sikorsky helicopters, Hamilton Standard aerospace systems and UT Automotive components and systems. UTC’s portfolio of businesses is generally considered to be a conglomerate because its strategy is:

22. Applying the BCG matrix to its portfolio, a corporation identifies that its main Strategic Business Unit has a higher growth rate that the economy and has the highest market share in its industry. This SBU is a:

23. Hospital Corporation of America (HCA) is America's largest corporate manager of private hospitals. American Hospital Supply (AHS) is America's largest distributor of hospital materials (from band-aides to beds). In the mid-1980's HCA attempted to buy AHS, but the merger was deemed to be a violation of anti-trust. Instead, Baxter-Travenol, a manufacturer of hospital supplies, acquired AHS.

25. Arthur Anderson and Company is the 4th largest accounting firm in the world and the largest in the U.S. Arthur Anderson is diversified into auditing, business advising and consulting, tax services, and information services. This strategy is:

26. In the 1950’s Bethlehem Steel Corp., with plants located in the East, desired access to Midwest markets. Bethlehem Steel attempted to acquire Youngstown Steel and Tube Co., strategically located in midwest markets. The Justice Department denied Bethlehem Steel’s acquisition under anti-trust laws. Bethlehem Steel constructed its own plant at Burns Harbor, Indiana, near the site of a Youngstown Steel plant.

27. Led by its flagship publication, Ebony, family-owned Johnson Publishing is the US's leading publisher of black-oriented magazines and one of the country's largest black enterprises. Other Johnson magazines include Jet and Ebony South Africa, which, together with Ebony, reach readers in 40 countries. Johnson Publishing also has a book division (featuring black authors) and sponsors the American Black Achievement Awards on TV. Johnson Publishing also makes personal care products (Supreme Beauty) and cosmetics (Fashion Fair) and hosts a benefit fashion show that visits about 140 North American cities a year. Octogenarian CEO John Johnson founded the firm in 1942 with a $500 loan on his mother's furniture. Johnson Publishing’s diversification strategy is largely:

29. Exxon owns oil drilling businesses, oil refining businesses, and service stations. Its strategy is:

30. Citibank has opened banking branch offices throughout the world. Its corporate strategy is:

31. A pure global strategy is realized when a firm manufactures a standardized product at one location and can exploit low transportation costs. Which of the following products comes closest to meeting this definition?

32. Hilton Hotels has a competitive advantage by its name recognition. In entering overseas markets which strategy makes most sense?

33. A highly diversified corporation will use the BCG portfolio technique to assess investment strategies for SBU’s. Once a business unit has the greatest market share in its industry and the industry has experienced high growth, the investment strategy is:

34. It is generally not well known that “American” brand names in major household appliances, such as Frigidaire, Gibson, Kelvinator, Tappan, and White-Westinghouse, are owned by the Swedish firm AB Electrolux. Electrolux has made refrigerators in Europe since the 1920’s, and entered the American market through acquisitions in the 1970’s and 1980’s. Although Electrolux is a global company, its entry strategy in major household appliances, such as refrigerators, has been to locate manufacturing within the local market. This strategy is best explained by:

Part 3: Strategy Implementation. In this section demonstrate your knowledge of resource management through organizational structures. Use the following four structural types for multiple choices answers.

36. Organization structures are a focus of strategy implementation because structures presumably arise through management’s efforts to coordinate and control resources and people by which decisions are executed. For example, firms pursuing a strategy of diversification either in multiple markets or in a portfolio of businesses tend to develop what kind of structure?

37. Which of the above organizational structures is a better design for a fast changing, dynamic environment and for innovation, such as a R&D firm.

38. Which of the above organizational structures is a better design for a manufacturing, based on span of control.

39. Which of the above organizational structures has the greatest span of control?

40. Most small firms with a single market and a single product utilize which type of structure:

PART 4. ANALYTIC METHODS. In the following section demonstrate your ability to use analytic techniques.

Compaq Computer has spent the last several years plowing into the market's buzzing swarm and flattening nearly everything in its path on the way to computing superpowerdom. But the forced resignation of its CEO this weekend, coming amid a plunge in the company's stock (enter the obligatory shareholder suits) and on the heels of an announcement that Compaq's quarterly profits would be less than half of what Wall Street expected from the world's #1 PC maker, illustrates a simple but oft-overlooked bit of business wisdom. Yes, sometimes you are the windshield. But if you don't clean the windshield once in a while, the bugs can make it hard to see where you're going.

Since Eckhard Pfeiffer took over as CEO in 1991, Compaq has employed an assertive (and expensive) acquisition strategy to break the chains of its PC heritage. It bought hardware heavyweights such as Tandem Computers, a specialist in continuous-running computer systems, and Digital Equipment, a leader in high-performance, network-powering workstations and servers. Though half of its sales remain in the PC realm, the maneuvers positioned Compaq as the third-largest global provider of hardware, software, and services, behind IBM and Hewlett-Packard. One Digital Equipment manager, sizing up his company’s prospects in the wake of its 1998 sale to Compaq, asked a co-worker how to correctly pronounce Pfeiffer's name. "Aggressive," was the reply.

But other things were more difficult for Compaq to steer as it built up speed. A glut of inventory resulted in price slashing, and failure to integrate its massive purchases created bloat. A late move to emulate Dell Computer and Gateway by selling directly to customers alienated members of Compaq's longtime reseller network, while a crew of wiry up-and-comers such as emachines rocked the market with under-$500 PCs and caught Pfeiffer without a competing low-priced version. Established players completely redesigned their systems around splashy colors (Apple Computer) to the delight of consumers, and pushed their larger servers and workstations (IBM) into corporations to the delight of cubicle jockeys. All of these factors contributed to a loss in profits for 1998, and the loss of Pfeiffer at the hands of Compaq's board. (CFO Earl Mason has also left the company.) Until Compaq finds a new leader (executive search firm Heidrick & Struggles is already on the hunt), longtime chairman Benjamin Rosen will serve as acting CEO.

Compaq's future remains the Web, a fate the company sealed by getting search engine AltaVista with its Digital Equipment purchase. Trying to catch a ride on the hot Internet market's expressway, Compaq has formed AltaVista Company with plans to take the subsidiary public. The company is also pushing services -- another gift from Digital's arsenal -- to boost declining computer sales. But, as always, it had better hurry. The hardware highway is packed and loud with the rev, rev, rev of other rumbling hard-chargers ready to put behind their days of being the bug.

Annual Income Statement

(in millions except EPS data)
1998

1997

1996

1995

Sales
31,169

24,584

18,109

14,755

Cost of Goods
23,980

17,833

13,913

11,367

Gross Profit
7,189

6,751

4,196

3,388

Selling & Administrative & Depr. & Amort. Expenses
6,331

3,764

2,319

2,200

Income after Depreciation & Amortization
858

2,987

1,877

1,188

Non-Operating Income
(3,520)

(229)

(1)

0

Pretax Income
(2,662)

2,758

1,876

1,188

Income Taxes
81

903

563

399

Income from Cont. Operations
(2,743)

1,855

1,313

789

Net Income
(2,743)

1,855

1,313

789

Income before Depreciation & Amortization
1,751

3,532

2,162

1,402

Depreciation & Amortization (Cash Flow)
893

545

285

214

Income after Depreciation & Amortization
858

2,987

1,877

1,188

FINANCIAL DATA:

Earnings Per Share Data
(1.71)

1.19

0.93

0.57

Shares Outstanding(Mil)
1,608

1,564.2

1,407

1,375

ROE
---

16.3

13.9

12.8

ROS
---

7.5

5.3

5.3

ROA
---

12.7

12.5

10.0

Balance Sheet

Assets (in millions)
1998

1997

1996

1995

Cash & Equivalents
4,091

6,762

3,993

745

Receivables
6,998

2,891

3,168

3,141

Inventories
2,005

1,570

1,152

2,156

Other Current Assets
2,073

794

856

485

Total Current Assets
15,167

12,017

9,169

6,527

Net Property & Equipment
2,902

1,985

1,172

1,110

Deferred Charges
1,341

0

0

0

Deposits & Other Assets
3,641

629

185

181

Total Assets
23,051

14,631

10,526

7,818

Liabilities & Shareholder's Equity

Accounts Payable
4,237

2,837

1,962

1,379

Accrued Expenses
1,110

0

0

0

Income Taxes Payable
282

195

322

190

Other Current Liabilities
5,104

2,170

1,568

1,111

Total Current Liabilities
10,733

5,202

3,852

2,680

Deferred Taxes/Income
0

0

230

224

Long Term Debt
0

0

300

300

Other Non-Current Liabilities
545

0T>

0

0

Minority Interest(Liabilities)
422

0

0

0

Total Liabilities
11,700

5,202

4,382

3,204

Shareholders' Equity

Common Stock (Par)
7,270

2,096

1,107

890

Retained Earnings
4,465

7,333

5,037

3,724

Treasury Stock
384

0

0

0

Total Shareholder's Equity
11,351

9,429

6,144

4,614

Total Liabilities & Shareholder's Equity
23,051

14,631

10,526

7,818

Total Common Equity
11,351

9,429

6,144

4,614

Average Shares
1,608

1,564.2

1,407

1,375

Book Value Per Share
6.68

6.23

4.41

3.47

Compaq’s Stock Price Behavior, Last 6 Months

COMPAQ’s STOCK PRICE: NYSE, April 20, 1999

52 Week

Yld

lement P/E

Sales Volume

Current

High

Low

Div

%

(in 100’s)

High

Low

Close

Change

22¹⁵/₁₆

.08

0.3

(-)

1113612

25

23¹/₈

24¹/₁₆

-6⁷/₈

42. On April 20th, 1999, it is evident that the stock price of Compaq over the past 6 months is:?

43. From 1995 through 1998 the financial performance of Compaq looks pretty good. Examining all the data above which financial indicator would best capture the reason for the forced resignation of Pfeiffer?

44. Sales have increased from 1997 to 1998, but profit has turned negative. Of the cost categories listed above, which item would you investigate as the probable problem?.

45. Which of the following best (roughly) estimates the current Market Value of Compaq?

46. Compaq’s stock is traded on NYSE. A stock market approximates the behavior of a traditional economic market. Examining Sale Volume of Compaq’s stock what inference would you draw as to when stock transactions might be higher than average?

47. Given the current stock price for Compaq and the article, which of following performance indicators would you expect to significantly have fallen since 1997?

48. Based on the information provided, of the following, which environmental factor best explains Compaq’s problems:

50. The distribution channel is key to sales. Compaq has traditionally been sold by retailers. According to the article, Compaq has changed it distribution strategy with what result?