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.