Sample Questions
Sample Questions
MBA Proficiency Exam for Business Strategy
The proficiency exam for Business Strategy will consist of 4-6 essay questions, many of which require the analysis of short cases, and others which ask students to identify properties and/or discuss possible courses of action in briefly described organizational situations.
The questions provided below are the sorts of questions that can appear on the strategy proficiency exam from time to time. Please note that they do not represent the full range of topics that the exam can cover, but are only examples of the sorts of questions, and the expected answers, that will appear on the exam. Also note that the suggested answers include references to current theories and concepts about management and organizations. Specific references to theories and concepts will be a key consideration in how well you do on the actual proficiency exam, if you decide to take it.
1. The two parts of this question concern the problems associated with certain strategic positioning decisions made by firms. Please answer both parts:
▪ Why do strategists argue that many firms can get “stuck in the middle” if they try to achieve a dual competitive advantage? In other words, what problems do many firms encounter when trying to adopt a strategic positioning of BOTH low costs and differentiation?
▪ What problems do focused or niche firms with a differentiated positioning encounter when they try to go mass market (i.e. become broad competitors selling products in multiple segments of the market)?
ANSWER: A number of strategy experts over the years have suggested that strategies cohere around certain archetypes that are internally consistent organizational patterns for generating appropriable value. Porter, for example, proposed that strategies tend to coalesce around the archetypes (or generic strategies) of “cost,” “differentiation,” and “focus or niche.” The logic behind this classification is that there are natural tradeoffs, for example between quality and costs, that make it difficult for firms to span radically different positions in the value space. The materials and craft processes that go into manufacturing a Steinway piano, for example, make it very difficult for Steinway to be equally skilled at low cost volume production of less expensive pianos as well. Conversely, Yamaha, a well-recognized mass producer of middle grade pianos, has tried for years to imitate Steinway at the higher ends of the concert piano market, with only limited success. Examples such as these suggest that the organizational activity systems, and the resources and capabilities that underlie them, are specific to particular and somewhat narrow positions in the value space that defines a market. Attempting to straddle these natural positions, so it is argued, gets firms into trouble because straddling firms never really become experts at either quality or costs, and thus are at a disadvantage relative to both ends of the market.
This absolutist position on cost/quality tradeoffs, however, has weakened over the years, and most strategy experts now view the concept of generic strategy as only a general guidepost for thinking creatively about value creation and market positions. This is partly because famous examples of cost-quality “tradeons” are plentiful. For example, Toyota invented a production system that simultaneously increased product quality and reduced product cost by exploiting innovations in organizational processes and statistical quality control. Indeed, the underlying premise of modern total quality control philosophies is that “quality is free” if organizations are properly trained in modern quality control techniques. As well, there has been greater recognition of the fact that quality and cost are not binary concepts, but instead represent dimensions along which products can vary in a graded and overlapping way. Depending on the particular customer needs involved, products or services of intermediate quality and cost might be attractive enough to create viable market positions. So, the “stuck in the middle” dogma among strategists is no longer so straightforward.
It is the case, however, that when firms become especially good at serving a particular market with particular goods and services, moving beyond that market is risky. Research has shown that expertise is quite specific to particular circumstances, and quite fragile when efforts are made to apply the expertise to a different set of activities. This fragility is often apparent when firms that are pursuing a niche or focused strategy attempt to move beyond the boundaries of their current market to appeal to a broader set of customers with a wider array of goods or services. The knowledge and skills that have been built up over time to serve a well-defined set of customers is often not of great value when attempting to serve other customers. For example, would the bespoke tailor who has spent years developing an understanding of his wealthy clients really be knowledgeable about the preferences of the mass market? A mistake that the bespoke tailor could make is to believe that since he is capable of producing business suits of the highest quality he is most certainly qualified to make suits of lower quality that would sell well in the mass market. The domain specificity of organizational expertise limits the transferability of skills significantly.
2. Rick Burleson, CEO of Fenway Enterprises, is considering a merger with Empire Inc., which is led by CEO Mickey Rivers. The merger of their two firms will enable the creation of a very large diversified conglomerate, with businesses ranging from office supplies to sporting goods, industrial paints, consumer electronics, video games, and marine engines. Consultants from Boston Consulting Group have advised Burleson and Rivers that the merger could create a great deal of value, because the new combined entity can use several lucrative yet mature “cash cows” within Empire Inc. to fund the growth of several promising, but not yet highly profitable, young businesses within Fenway Enterprises. Burleson and Rivers have decided to seek a second opinion from your consulting firm – Stern Associates. Please respond to the following questions posed to you by these two CEOs:
• Could you please explain the “BCG matrix” to us? What is the logic of this model? What are the model’s limitations and weaknesses?
• Should we be employing the matrix to evaluate this merger? Could we create value in the manner that BCG has described?
ANSWER: The BCG matrix, and strategic portfolio planning, in general grew up during a time (1970’s) when conglomerates of unrelated businesses were common among U.S. corporations. Strategists needed some way to understand the sometimes complex (maybe even bizarre??) combinations of businesses within their purview. How should these combinations be evaluated? How does one determine whether one should keep a business in the portfolio or divest it? The Boston Consulting Group (BCG) came up with an easy to understand tool to address this issue. The tool has come to be known as the BCG matrix. The matrix is structured along two dimensions. The first dimension summarizes an industry’s attractiveness in terms of its rate of growth. The second dimension indexes the strength of a business unit’s position within an industry in terms of the unit’s market share. Four cells within the matrix are thus defined: business units having high market share within a high growth industry (“stars”), units having low share within a high growth industry (“question marks”), units having high share in slow growth industries (“cash cows”), and units having low share in slow growth industries (“dogs”). The logic behind this segmentation was that industry attractiveness and competitive dominance within an industry are two crucial metrics that must be evaluated when assessing the viability of a business unit’s future. By classifying firms into categories defined by these two dimensions, strategists were given a clear strategic mandate: divest “dogs” with no future, and use “cash cows” to fund the further growth of “stars” and “question marks.”
Many experts now view the major contribution of the BCG matrix (and other such portfolio evaluation models) as calling attention to the important considerations of industry attractiveness and market position in strategic planning. However, the BCG matrix has now largely been called into question on a number of grounds. First, it is a static representation of a portfolio of businesses and tends to play down the importance of dynamic changes both in the business unit and the environment. Disruptive innovations can quickly transform an industry from slow to fast growth, changing the rules of the game very quickly. Similarly, innovations and new combinations emanating from the business unit can change the unit’s fortunes quickly as well. Such dynamism is an important part of strategic analysis and planning in the current business environment, yet it is not captured well by static portfolio analyses based on historical data.
A second line of questioning has concerned the metrics used to define each of the two dimensions. Industry growth rate is only one measure of industry attractiveness, and market share only one way of describing competitive position. Depending on the metrics used to define these two dimensions, a business unit may appear strong or weak.
Still a third limitation with the BCG matrix is that it encourages a sort of “analytical detachment” from the business units themselves. Units are viewed and evaluated on principally static market grounds rather than as mechanisms to create new opportunities and new markets through constant productive innovations.
Finally, the BCG matrix has been criticized for encouraging a view of business units as independent entities with the only connection among them being financial (e.g., when cash flows from “cash cows” are invested in “stars.”). As the unrelated conglomerate has gone out of favor among publicly owned U.S. corporations and Wall Street, the emphasis on portfolio planning has shifted to the search for ways of creating value across business units via the sharing and/or transference of valuable skills and capabilities.
When viewed with the above considerations in mind, the BCG matrix is of limited help in evaluating the merger between Fenway and Empire. One set of limitations is the misplaced implication that value is being created by transferring cash from cash cows to stars. While stars may benefit from the cash infusion, the future market creating potential of cash cows may be damaged because of underinvestment in new technologies and innovations. Cash flows from cash cows might be better utilized to organically transform the cash cows themselves into new combinations of skills and products rather than siphoning off valued resources and shifting them to other supposedly more attractive business units. In addition, with capital markets so efficient these days, it is unclear whether using so-called cash cows as a mechanism of financing is actually better (and cheaper) than using external sources of debt or equity to grow high potential business units. Arguments can be made, of course, that the cash flows from cash cows are more controllable by managers than external funding, but is this a strength or a weakness of the internal financing model? For these reasons, Burleson and Rivers should look askance at the Boston Consulting Group’s analysis and request that Stern Associates provide a more up to date rationale for the merger.
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