MBA 704 ADVANCED BUSINESS ADMINISTRATION
EXAM QUESTIONS WITH DETAILED ANSWERS
1. : Which of the following best describes a "red ocean strategy"?
Answer: A red ocean strategy refers to competing in existing market space,
trying to beat the competition, exploiting existing demand, and making the
value-cost trade-off. This represents traditional competitive strategy in known
market spaces where industry boundaries are defined and accepted.
2. : In Porter's Five Forces model, which force addresses the threat that
consumers might produce the product themselves rather than purchasing it?
Answer: This threat is specifically addressed under the force of "backward
integration," which is part of the larger force of "bargaining power of buyers."
3. : What does the VRIO framework in strategic management evaluate?
Answer: The VRIO framework evaluates a firm's resources and capabilities
based on four attributes: Value, Rarity, Imitability, and Organization. It helps
determine if resources provide sustainable competitive advantage.
4. : According to the BCG Growth-Share Matrix, what strategic approach is
typically recommended for a "Cash Cow"?
Answer: For a Cash Cow (high market share in a low-growth market), the
recommended strategy is to "harvest" or "milk" the business unit by minimizing
investments while maximizing cash flow and profits.
5. : What is the primary difference between intended strategy and emergent
strategy?
Answer: Intended strategy is deliberately formulated or planned by an
organization's leadership, while emergent strategy evolves from patterns in an
organization's behavior that were not explicitly planned but become the realized
strategy.
6. : In the context of corporate strategy, what does "horizontal integration" refer
to?
Answer: Horizontal integration refers to a growth strategy where a company
acquires or merges with competitors or other businesses operating at the same
stage of the production process in the same or similar industries.
,7. : What is the key distinction between corporate-level strategy and business-
level strategy?
Answer: Corporate-level strategy addresses what businesses the organization
should be in and how resources should be allocated among them, while
business-level strategy focuses on how a single business unit competes within
its industry.
8. : Which theoretical perspective suggests that firms exist primarily to
minimize transaction costs?
Answer: Transaction Cost Economics (TCE), developed by Ronald Coase and
later expanded by Oliver Williamson, suggests that firms exist primarily to
minimize transaction costs that would otherwise be incurred in market
exchanges.
9. : What does Bartlett and Ghoshal's "transnational solution" model propose for
multinational companies?
Answer: The transnational solution model proposes that multinational
companies should simultaneously achieve global efficiency, local
responsiveness, and worldwide learning/knowledge transfer through a complex
configuration of assets and capabilities, distributed but specialized resources,
and robust flows of knowledge.
10. : What is the primary focus of the "resource-based view" (RBV) of strategic
management?
Answer: The resource-based view focuses on the internal resources and
capabilities of firms as the primary sources of competitive advantage,
emphasizing that sustainable competitive advantage comes from resources that
are valuable, rare, imperfectly imitable, and non-substitutable.
Finance
11. : If a project has a negative net present value (NPV), what does this indicate
to financial managers?
Answer: A negative NPV indicates that the present value of future cash flows is
less than the initial investment. This suggests the project will not generate
sufficient returns to cover the cost of capital and should generally be rejected.
12. : What is the primary difference between systematic risk and unsystematic
risk?
Answer: Systematic risk affects the entire market or a large segment of it and
cannot be eliminated through diversification (e.g., interest rates, recessions),
while unsystematic risk is specific to individual companies or sectors and can be
reduced through diversification.
,13. : In the context of the Capital Asset Pricing Model (CAPM), what does a
beta of 1.5 indicate about a stock?
Answer: A beta of 1.5 indicates that the stock is 50% more volatile than the
market. When the market rises or falls by 1%, the stock is expected to move in
the same direction by approximately 1.5%.
14. : Using the Modigliani and Miller theorem (without taxes), what is the
relationship between a firm's capital structure and its overall value?
Answer: According to the M&M theorem without taxes (Proposition I), a firm's
market value is independent of its capital structure. In other words, the value of
a levered firm equals the value of an unlevered firm, assuming perfect capital
markets.
15. : If a company has a dividend payout ratio of 30% and a sustainable growth
rate of 7%, what is its return on equity (ROE)?
Answer: Using the formula: sustainable growth rate = ROE × (1 - dividend
payout ratio) 7% = ROE × (1 - 0.3) 7% = ROE × 0.7 ROE = 7% ÷ 0.7 = 10%
16. : What is the difference between operating leverage and financial leverage?
Answer: Operating leverage refers to the degree to which a firm uses fixed
costs in its operations (like equipment and facilities), while financial leverage
refers to the use of debt financing. Operating leverage affects operating risk,
while financial leverage affects financial risk.
17. : Under the Black-Scholes option pricing model, what effect does an
increase in the underlying asset's volatility have on call option prices?
Answer: An increase in the underlying asset's volatility increases the value of
call options because higher volatility increases the probability that the option
will expire in-the-money, without affecting the maximum possible loss.
18. : What does a company's weighted average cost of capital (WACC)
represent?
Answer: WACC represents the average rate of return a company must pay to its
investors (both debt holders and equity holders) to finance its assets. It's the
minimum return that a company needs to earn on its existing asset base to
satisfy its creditors, owners, and other providers of capital.
19. : In the context of international finance, what is the difference between
translation exposure and transaction exposure?
Answer: Translation exposure (also called accounting exposure) refers to the
risk associated with translating foreign subsidiary financial statements into the
parent company's reporting currency. Transaction exposure refers to the risk of
changes in exchange rates affecting the value of future contractual cash flows
denominated in foreign currencies.
, 20. : What does Tobin's q ratio measure, and what does a q ratio greater than 1
suggest?
Answer: Tobin's q ratio measures the market value of a company's assets
relative to their replacement cost. A q ratio greater than 1 suggests that the
market values the company's assets more highly than their replacement cost,
indicating that the company is earning returns above its cost of capital.
Marketing
21. : What is the primary difference between market segmentation and product
differentiation?
Answer: Market segmentation involves dividing the market into distinct groups
of buyers with different needs, characteristics, or behaviors, and then targeting
one or more of these segments. Product differentiation focuses on distinguishing
a product or service from competitors to make it more attractive to a particular
target market.
22. : In the context of pricing strategy, what is the difference between price
skimming and penetration pricing?
Answer: Price skimming involves setting a high initial price for a new product
to capture maximum revenue from segments willing to pay the high price, then
gradually lowering the price. Penetration pricing sets an initially low price to
rapidly gain market share and discourage competitors from entering the market.
23. : What does a high Net Promoter Score (NPS) indicate about a company?
Answer: A high NPS indicates that a company has a larger proportion of
customers who are "promoters" (likely to recommend the company to others)
than "detractors" (unlikely to recommend). This suggests strong customer
loyalty and satisfaction, which typically correlates with business growth.
24. : How does the concept of customer lifetime value (CLV) differ from
period-by-period profitability analysis?
Answer: Customer lifetime value (CLV) measures the total net profit a
company expects from a customer throughout their entire relationship, factoring
in acquisition costs, retention rates, and future revenues. Period-by-period
profitability only looks at short-term metrics without considering the long-term
value of customer relationships.
25. : What is the key difference between push and pull marketing strategies?
Answer: Push marketing strategies focus on "pushing" products through
distribution channels to consumers, often using sales force, trade promotions,
and retailer incentives. Pull marketing strategies focus on creating consumer
demand that "pulls" products through the channels, typically through
advertising, promotions, and other consumer-focused marketing activities.
EXAM QUESTIONS WITH DETAILED ANSWERS
1. : Which of the following best describes a "red ocean strategy"?
Answer: A red ocean strategy refers to competing in existing market space,
trying to beat the competition, exploiting existing demand, and making the
value-cost trade-off. This represents traditional competitive strategy in known
market spaces where industry boundaries are defined and accepted.
2. : In Porter's Five Forces model, which force addresses the threat that
consumers might produce the product themselves rather than purchasing it?
Answer: This threat is specifically addressed under the force of "backward
integration," which is part of the larger force of "bargaining power of buyers."
3. : What does the VRIO framework in strategic management evaluate?
Answer: The VRIO framework evaluates a firm's resources and capabilities
based on four attributes: Value, Rarity, Imitability, and Organization. It helps
determine if resources provide sustainable competitive advantage.
4. : According to the BCG Growth-Share Matrix, what strategic approach is
typically recommended for a "Cash Cow"?
Answer: For a Cash Cow (high market share in a low-growth market), the
recommended strategy is to "harvest" or "milk" the business unit by minimizing
investments while maximizing cash flow and profits.
5. : What is the primary difference between intended strategy and emergent
strategy?
Answer: Intended strategy is deliberately formulated or planned by an
organization's leadership, while emergent strategy evolves from patterns in an
organization's behavior that were not explicitly planned but become the realized
strategy.
6. : In the context of corporate strategy, what does "horizontal integration" refer
to?
Answer: Horizontal integration refers to a growth strategy where a company
acquires or merges with competitors or other businesses operating at the same
stage of the production process in the same or similar industries.
,7. : What is the key distinction between corporate-level strategy and business-
level strategy?
Answer: Corporate-level strategy addresses what businesses the organization
should be in and how resources should be allocated among them, while
business-level strategy focuses on how a single business unit competes within
its industry.
8. : Which theoretical perspective suggests that firms exist primarily to
minimize transaction costs?
Answer: Transaction Cost Economics (TCE), developed by Ronald Coase and
later expanded by Oliver Williamson, suggests that firms exist primarily to
minimize transaction costs that would otherwise be incurred in market
exchanges.
9. : What does Bartlett and Ghoshal's "transnational solution" model propose for
multinational companies?
Answer: The transnational solution model proposes that multinational
companies should simultaneously achieve global efficiency, local
responsiveness, and worldwide learning/knowledge transfer through a complex
configuration of assets and capabilities, distributed but specialized resources,
and robust flows of knowledge.
10. : What is the primary focus of the "resource-based view" (RBV) of strategic
management?
Answer: The resource-based view focuses on the internal resources and
capabilities of firms as the primary sources of competitive advantage,
emphasizing that sustainable competitive advantage comes from resources that
are valuable, rare, imperfectly imitable, and non-substitutable.
Finance
11. : If a project has a negative net present value (NPV), what does this indicate
to financial managers?
Answer: A negative NPV indicates that the present value of future cash flows is
less than the initial investment. This suggests the project will not generate
sufficient returns to cover the cost of capital and should generally be rejected.
12. : What is the primary difference between systematic risk and unsystematic
risk?
Answer: Systematic risk affects the entire market or a large segment of it and
cannot be eliminated through diversification (e.g., interest rates, recessions),
while unsystematic risk is specific to individual companies or sectors and can be
reduced through diversification.
,13. : In the context of the Capital Asset Pricing Model (CAPM), what does a
beta of 1.5 indicate about a stock?
Answer: A beta of 1.5 indicates that the stock is 50% more volatile than the
market. When the market rises or falls by 1%, the stock is expected to move in
the same direction by approximately 1.5%.
14. : Using the Modigliani and Miller theorem (without taxes), what is the
relationship between a firm's capital structure and its overall value?
Answer: According to the M&M theorem without taxes (Proposition I), a firm's
market value is independent of its capital structure. In other words, the value of
a levered firm equals the value of an unlevered firm, assuming perfect capital
markets.
15. : If a company has a dividend payout ratio of 30% and a sustainable growth
rate of 7%, what is its return on equity (ROE)?
Answer: Using the formula: sustainable growth rate = ROE × (1 - dividend
payout ratio) 7% = ROE × (1 - 0.3) 7% = ROE × 0.7 ROE = 7% ÷ 0.7 = 10%
16. : What is the difference between operating leverage and financial leverage?
Answer: Operating leverage refers to the degree to which a firm uses fixed
costs in its operations (like equipment and facilities), while financial leverage
refers to the use of debt financing. Operating leverage affects operating risk,
while financial leverage affects financial risk.
17. : Under the Black-Scholes option pricing model, what effect does an
increase in the underlying asset's volatility have on call option prices?
Answer: An increase in the underlying asset's volatility increases the value of
call options because higher volatility increases the probability that the option
will expire in-the-money, without affecting the maximum possible loss.
18. : What does a company's weighted average cost of capital (WACC)
represent?
Answer: WACC represents the average rate of return a company must pay to its
investors (both debt holders and equity holders) to finance its assets. It's the
minimum return that a company needs to earn on its existing asset base to
satisfy its creditors, owners, and other providers of capital.
19. : In the context of international finance, what is the difference between
translation exposure and transaction exposure?
Answer: Translation exposure (also called accounting exposure) refers to the
risk associated with translating foreign subsidiary financial statements into the
parent company's reporting currency. Transaction exposure refers to the risk of
changes in exchange rates affecting the value of future contractual cash flows
denominated in foreign currencies.
, 20. : What does Tobin's q ratio measure, and what does a q ratio greater than 1
suggest?
Answer: Tobin's q ratio measures the market value of a company's assets
relative to their replacement cost. A q ratio greater than 1 suggests that the
market values the company's assets more highly than their replacement cost,
indicating that the company is earning returns above its cost of capital.
Marketing
21. : What is the primary difference between market segmentation and product
differentiation?
Answer: Market segmentation involves dividing the market into distinct groups
of buyers with different needs, characteristics, or behaviors, and then targeting
one or more of these segments. Product differentiation focuses on distinguishing
a product or service from competitors to make it more attractive to a particular
target market.
22. : In the context of pricing strategy, what is the difference between price
skimming and penetration pricing?
Answer: Price skimming involves setting a high initial price for a new product
to capture maximum revenue from segments willing to pay the high price, then
gradually lowering the price. Penetration pricing sets an initially low price to
rapidly gain market share and discourage competitors from entering the market.
23. : What does a high Net Promoter Score (NPS) indicate about a company?
Answer: A high NPS indicates that a company has a larger proportion of
customers who are "promoters" (likely to recommend the company to others)
than "detractors" (unlikely to recommend). This suggests strong customer
loyalty and satisfaction, which typically correlates with business growth.
24. : How does the concept of customer lifetime value (CLV) differ from
period-by-period profitability analysis?
Answer: Customer lifetime value (CLV) measures the total net profit a
company expects from a customer throughout their entire relationship, factoring
in acquisition costs, retention rates, and future revenues. Period-by-period
profitability only looks at short-term metrics without considering the long-term
value of customer relationships.
25. : What is the key difference between push and pull marketing strategies?
Answer: Push marketing strategies focus on "pushing" products through
distribution channels to consumers, often using sales force, trade promotions,
and retailer incentives. Pull marketing strategies focus on creating consumer
demand that "pulls" products through the channels, typically through
advertising, promotions, and other consumer-focused marketing activities.
