Question 1

Price elasticity is a measure of how much the supply or demand of a good changes if the price changes.

Accepted Answer

Price elasticity is a measure of how much the supply or demand of a good changes if the price changes. If the percentage change in quantity exceeds percentage change in price, the good is price elastic. If it is less, the good is said to be to be price inelastic.
Key Takeaway: A good approach to pricing questions where the price is already set is to attempt to find out the price elasticity.

Question 2

Reducing inventory levels reduces risk.

Accepted Answer

Carrying inventory is risky. It results in less cash liquidity and can also decrease in value (in some cases, it may also appreciate in value).
Key Takeaway: Better inventory management is a common solution to what ails many companies. It improves their risk file and frees up cash. However, reducing inventory is easier said than done. Two examples of techniques are to accelerate manufacturing times (reducing work-in-progress) and improve forecasting.

Question 3

Liquidity risk is financial risk due to uncertain liquidity. What can cause this to happen?
A)A firm's credit rating falls
B)A firm experiences sudden unexpected cash outflows
C)A firm's market experiences a loss in liquidity
D)All of the above

Accepted Answer

Liquidity risk is financial risk due to uncertain liquidity. The risk stems from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss.
Uncertain liquidity can happen because:
1- a firm's credit rating falls;
2- when the firm experiences sudden unexpected cash outflows and
3-the firm's market itself experiences a loss in liquidity.
Key Takeaway: Liquidity problems caused many institutions to sell valuable assets at a discount in order to get cash to fund operations. For instance, endowments had to sell mutual funds that had performed well to fund university operations because many of their investments were tied up in illiquid assets such as real estate, commodities and private equity funds.

Question 4

Which of the following is a measure of how demand for a good changes with people's income?
A)Price elasticity of demand
B)Income elasticity of demand
C)CPI
D)Michigan Index
E)Marginal Cost

Accepted Answer

The income elasticity of demand measures how much the quantity demanded changes as income increases or decreases. Luxury goods are highly income elastic, while staples such as basic food and clothing or less income elastic.
Key Takeaway: Understanding how a good is treated by consumers in a dynamic economy will be a key to success in many cases.

Question 5

What is an advantage of using licensing as a method of global expansion?
A)Profits are shared equally.
B)There are always no establishment costs.
C)There are high levels of direct control.
D)Low levels of investment are required.
E)All of the above.

Accepted Answer

Licensing means far lower R&D costs. The other options are not always true.
Key Takeaway: Licensing is a good strategy for companies that have strong distribution channels, but are not good at executing on innovation-based R&D.

Question 6

Cannibalization is always a bad thing.

Accepted Answer

an example of a cannibalization that might be a good thing is introducing an improved product. It will destroy sales of the older product line, but if you don't innovate, someone else might do it.
Key Takeaway: More and more, the drive for companies to innovate means a more dynamic consideration of cannibalization.

Question 7

What is MECE?
A)Miminal Exceptions Consulting Excellence Framework
B)Mutual Exclusive Collectively Exhaustive
C)A key six sigma principle
D)STAR

Accepted Answer

MECE stands for mutually exclusive, collective exhaustive.
Key Takeaway: MECE is a grouping principle which states information should be divided into subgroups that comprehensively represent that group without gaps, but also without overlapping. That was there is no double counting, but also nothing left out.

Question 8

Which of the following might prevent an acquisition?
A)Strong synergies
B)Anti-trust
C)EBITDA
D)Economies of scale
E)Decreased marginal cost

Accepted Answer

Anti-trust could prevent an acquisition. The government has the ability to scuttle an acquisition if it gives too much market power to a certain firm.
Key Takeaway: You must consider anti-trust before making an acquisition recommendation. It might be a great strategy for Microsoft to acquire Apple, but there is no way in a billion years the US government would allow it to happen.

Question 9

A stock-out is when demand for a good cannot be fulfilled from inventory.

Accepted Answer

A stock-out is when demand for a good cannot be fulfilled from inventory.
Key Takeaway: Tightening inventory is good way to save companies money. However, if it is too tight, the product will frequently be out of stock. This will cause customer frustration, erode market share and decrease brand loyalty.

Question 10

What are the four options for dealing with a risk?
A)Accept, mitigate, transfer and avoid
B)Accept, insure, transfer and avoid
C)Accept, mitigate, reduce and avoid
D)Situation, task, action, result
E)It's a trick question - there are only three and they are transfer, mitigate and avoid.

Accepted Answer

Accept, mitigate, transfer and avoid are the four acceptable ways of dealing with risk. Remember that mitigating and reducing are synonyms in risk management, and that insuring is a form of transferring risk.
Key Takeaway: We want you to remember these four options and consider them each time you contemplate what to do with a risk. Our natural tendency is to avoid or mitigate, but sometimes that is not possible.

Question 11

Which of the following could be an example of hedging? Select all that apply:
A)Buying futures on oil
B)Hiring a strategy consultant
C)Protecting against fluctuating exchange rates
D)Changing back-office processors

Accepted Answer

Protecting against fluctuating exchange rates and buying oil futures could be hedging against business risk.
Key Takeaway: Hedging is important to smoothing earnings and ensuring consistent cash flow. For instance, Southwest Airlines has protected itself by purchasing contracting for jet fuel at a set price to protect against fluctuating prices.

Question 12

A cream-skinning pricing strategy can erode long-term customer loyalty.

Accepted Answer

A cream-skinning pricing strategy can erode long-term customer loyalty.
In a cream-skinning strategy, a company is typically launching a highly desirable product that has a high willingness to pay group of people. It charges those people a high price, and then it later reduces prices.
The iPhone is a strong example. Apple initially priced high and many of its loyal customers paid up. However, two months later, it substantially reduced the price, angering these customers.
Key Takeaway: You can minimize the erosion of customer loyalty by releasing a new model with slightly fewer features at the reduced price.

Question 13

Which of the following are switching costs? Select all that apply:
A)The time it takes to learn a new software program
B)Fee for cancelling mobile phone service
C)Search costs
D)Emotional attachment
E)Cannibalization

Accepted Answer

Switching costs are any costs that prevent customers from changing from one provider to another.
Key Takeaway: If switching costs are very high, then a customer is said to be locked in. Companies seek to have lock-in, although some methods can upset customers. For instance, people do not like cancellation fees, but they are very effective once implemented.

Question 14

What does the Place mean in the 4Ps framework for marketing?
A)Inventory and Storage
B)Distribution Channels
C)Manufacturing Location
D)Location of Advertising
E)Home Office

Accepted Answer

Place refers to distribution in the 4Ps framework. The others are more obvious - Price, Promotion and Product.
Key Takeaway: Many cases are about distribution. Specifically, many strategy consultants are asked to align the incentives between a company and those who distribute its goods. For example, think of how things like wholesale pricing, sales incentives and stock outs might affect the relationship between the product maker and its distributors.

Question 15

Different technological platforms, systems and products are moving towards performing the same functions. What is this phenomenon referred to as?
A)Confluence
B)Co-radiation
C)Cooperation
D)Convergence
E)Synergy

Accepted Answer

Convergence is the trend for different technological platforms, systems and products moving towards performing the same functions.
Key Takeaway: There is convergence in industries such as telecommunications and computing. Think how much a smart phone can do, or how many services Verizon or Comcast can provide you with now.

Question 16

Why might a company want to increase inventory turns? Select all that apply:
A)Reduce inventory risk
B)Reduce holding cost
C)Increase stockouts
D)Improve cash flows
E)Factor accounts receivable

Accepted Answer

Reducing inventory turns can happen by selling faster or reducing the amount of inventory held. Holding inventory is risky - your inventory can fall substantially in value in bad circumstances (product becomes obsolete due to new product launch, commodity risk, economic slowdown.) Additionally, you reduce holding costs. You spend less on your warehouse, inventory insurance and lose less to theft. You also have less cash invested at any given time.
Key Takeaway: Reducing inventory too much results in stockouts which makes customers unhappy, so there is a balance to be struck.

Question 17

Bill's Organic Diapers acquires Organic Diaper Masters. What is this an example of?
A)Vertical integration
B)Horizontal integration
C)Value destruction
D)Anti-trust
E)Monopoly

Accepted Answer

When two similar firms merge, it is horizontal integration.
Key Takeaway: Be sure to know the difference between vertical and horizontal integration.

Question 18

Which of the following would best describe the role of a merchant bank?
A)Securities lending
B)To act as a banker and financial agent to the federal government
C)To provide borrowing and lending services, primarily to the business sector
D)To provide loans to the corporate sector through receipts of insurance premiums

Accepted Answer

to provide borrowing and lending services, primarily to the business sector and high network individuals.
Key Takeaway: Merchant banks were badly hit by the global economic crisis and seriously tightened lending. This led to increased cost of capital and major liquidity issues for many companies. You should understand these key points and how they impacted businesses. Many managers have spent a substantial amount of their time dealing directly with these issues.

Question 19

Cost-of-Goods-Sold (COGS) is defined as the costs that go into creating the products or services that a company sells.

Accepted Answer

The part that sometimes gets people is that COGS can apply to services as well. Labor costs can also be included in COGS.
Key Takeaway: Review all your general accounting principles prior to an interview.

Question 20

What are three areas of synergies? Select 3 answers:
A)Revenue
B)Inventory
C)Quality
D)Cost
E)Management

Accepted Answer

Revenue, Management and Cost are basic buckets of synergies.
Generally, synergies between companies can be divided into three buckets.
Revenue: When the combined product offerings of two companies combine to generate more revenue than the two pre-merger companies. This could be through economies of scope or cross-promotional considerations.
Cost: In general, a larger company will have cost advantages due to economies of scale and elimination of duplicate entities. For instance, you might only need one office or e-mail system.
Management: If skill sets are complimentary, say a great technical team combining with a great leadership team, then there is a potential synergy. More often though, you have just the opposite. Culture clashes and strong employees choosing to leave (many because they are cashing in on the acquisition) are just the beginning of team-related problems after M&A.
Key Takeaway: Take each of the three categories and make a list of what falls within them. For instance, information technology synergies come primarily in cost. Remember Revenue-Cost-Management for your case interviews where this inevitably comes up.

Quiz 7: Strategy

Price elasticity is a measure of how much the supply or demand of a good changes if the price changes.

Reducing inventory levels reduces risk.

Liquidity risk is financial risk due to uncertain liquidity. What can cause this to happen?

Which of the following is a measure of how demand for a good changes with people's income?

What is an advantage of using licensing as a method of global expansion?

Cannibalization is always a bad thing.

What is MECE?

Which of the following might prevent an acquisition?

A stock-out is when demand for a good cannot be fulfilled from inventory.

What are the four options for dealing with a risk?

Which of the following could be an example of hedging? Select all that apply:

A cream-skinning pricing strategy can erode long-term customer loyalty.

Which of the following are switching costs? Select all that apply:

What does the Place mean in the 4Ps framework for marketing?

Different technological platforms, systems and products are moving towards performing the same functions. What is this phenomenon referred to as?

Why might a company want to increase inventory turns? Select all that apply:

Bill's Organic Diapers acquires Organic Diaper Masters. What is this an example of?

Which of the following would best describe the role of a merchant bank?

Cost-of-Goods-Sold (COGS) is defined as the costs that go into creating the products or services that a company sells.

What are three areas of synergies? Select 3 answers: