Barney Smca6 Tif 06

Strategic Management and Competitive Advantage, 6e (Barney)
Chapter 6 Flexibility and Real Options
1) Strategic options exist when firms have the ________, but not the ________, to invest in a
particular strategy.
A) ability; obligation
B) obligation; ability
C) money; people
D) people; money
Answer: A
Diff: 1 Page Ref: 156
Learning Obj.: 6.1: Define Strategic Flexibility and Real Options.
AACSB: Analytical Thinking
2) A ________ exists when a firm has the ability, but not the obligation, to invest in real assets of
some type.
A) core competency
B) corporate option
C) real option
D) strategic intent
Answer: C
3) Real assets are ________ resources that can have an impact on a firm's production.
A) intangible
B) ephemeral
C) transitory
D) tangible
Answer: D
4) Which of the following is NOT an example of a real asset?

A) land
B) brand name
C) building
D) raw material
Answer: B
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5) An oil company leasing land for potential exploration instead of buying it is an example of the
option to ________.
A) defer
B) grow
C) contract
D) expand
Answer: A
AACSB: Application of Knowledge
6) A firm building a manufacturing plant that employs only general-purpose machinery is an

example of the option to ________.
A) defer
B) grow
C) abandon
D) contract
Answer: C
7) A firm building a plant with the ability to add capacity at low cost is an example of the option
to ________.
A) defer
B) grow
C) contract
D) abandon
Answer: B
8) A firm investing to create one product because that investment could lead to the development
of other products in the future is an example of the option to ________.
A) defer
B) grow
C) contract
D) expand
Answer: D
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9) A firm hiring contract and temporary employees instead of full-time employees is an example
of the option to ________.
A) defer
B) contract
C) grow
D) abandon
Answer: B
10) A firm outsourcing distribution to a firm that distributes the products of many firms instead
of outsourcing distribution to a firm that distributes only its production is an example of the
option to ________.
A) defer
B) contract
C) grow
D) shut down and restart
Answer: D
3
Seymour Semiconductors is a major global player in the semiconductor and microchip industry.
In the space that they compete in, there is tremendous technological uncertainty as disruptive
innovations seemingly come out of nowhere to upend well-entrenched incumbents. These
disruptions are often fast and are increasingly by companies that do not compete head-to-head
with Seymour Semiconductors. In addition, market tastes for the end products that feature
Seymour Semiconductors' components also change rapidly. The company was hurt financially
when the market shifted away from personal computers (that accounted for a significant portion
of Seymour Semiconductors' revenues), first to tablets, and then to other mobile devices. The
company's new CEO, Lisa Monroe, has decided that the company's basic approach to strategy
should change. Toward this, she has mandated that, at any point in time, Seymour
Semiconductors should be able to choose from several different strategic options instead of a
fixed and planned course of action that the company has pursued since it beginning. One of her
mandates called for the company's future manufacturing plants to be built with the ability to add
capacity at low cost. In addition, she wants to lay off 1,000 of the company's employees and hire
contract and temporary workers in their stead. Finally, Monroe wants the company to use the real
options approach to manage the combination of technological and market uncertainties.
11) Lisa Monroe's decision that called for Seymour Semiconductors to be able to choose from
several strategic options instead of a fixed and planned course of action is called ________.
A) intended strategy
B) strategic flexibility
C) deliberate strategy
D) strategic intent
Answer: B
12) Seymour Semiconductors has strategic options when it has the ________, but not the
________, to invest in a particular strategy.
A) responsibility; resources
B) resources; manpower
C) obligation; ability
D) ability; obligation
Answer: D
4
13) Lisa Monroe's mandate that called for the company's future manufacturing plants to be built
with the ability to add capacity at low cost gives Seymour Semiconductors the option to
________.
A) defer
B) abandon
C) grow
D) contract
Answer: C
14) Lisa Monroe's decision to lay off 1,000 of the company's employees and hire contract and
temporary workers in their stead gives Seymour Semiconductors the option to ________.
A) defer
B) contract
C) grow
D) abandon
Answer: B
15) Maintaining options that create strategic flexibility can be thought of as a third generic
business level strategy.
Answer: TRUE
16) Firms may not be able to create flexibility in their cost leadership strategy.
Answer: FALSE
17) Strategic options exist when firms have the obligation but not the ability to invest in a
particular strategy.
Answer: FALSE
5
18) For a firm to have strategic flexibility, it must possess strategic options.
Answer: TRUE
19) Strategic options are different from real options.

Answer: FALSE
AACSB: Reflective Thinking
20) A real option exists when a firm has the ability, but not the obligation, to invest in real assets
of some type.
Answer: TRUE
21) The option to abandon is a type of flexibility.

Answer: TRUE
22) Real assets are tangible resources that can have an impact on a firm's production.
Answer: TRUE
23) An example of the option to contract is to use contract and temporary employees instead of
full-time employees.
Answer: TRUE
24) In most countries, contract and temporary employees are much more expensive to lay off
than full-time employees.
Answer: FALSE
6
25) What is strategic flexibility? Why is it thought of as a third generic business level strategy?
Answer: Strategic flexibility refers to the ability of a company to choose among several strategic
options. An example would be a company choosing to implement a product differentiation
strategy, but not completely committing to a single basis for differentiating its product. Cost
leadership and product differentiation are business level strategies that require both focus and
commitment to implement. In contrast, a firm can have a business level strategy of maintaining
options that create strategic flexibility.
26) What are strategic options?

Answer: A firm has a strategic option when it has the ability, but not the obligation, to invest in
a particular strategy. Options are well-known in the financial field. They allow the holder to buy
stock at a particular price at a future date. Strategic options allow the firm to delay an important
decision to a future date when the uncertainty regarding that option is reduced.
27) What are real options?

Answer: A real option exists when a firm has the ability, but not the obligation, to invest in real
assets of some type. Real assets are tangible resources (land, buildings, raw materials, finished
goods inventories, distribution systems, information technology, etc.) that can have an impact on
a firm's myriad processes and activities.
28) How is the option to defer different from the option to contract?
Answer: A firm can make strategic choices that enhance its ability to postpone additional
investments in a strategy until some later period. This is called the option to defer. Leasing an
asset (land, building, etc.) instead of purchasing it is an example of an option to defer. In contrast
to postponing a decision, a firm can make the choice to enhance its ability to get smaller and
reduce investment in a strategy, should that option turn out to be valuable in the future. This is
what is called the option to contract. An example would be a company using contract and
temporary employees instead of full-time employees. In most countries (including the U.S.),
contract and temporary employees are much less costly to lay off than full-time employees.
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29) A decision-making setting is said to be ________ when the outcome of that decision is not
known with certainty, but the possible outcomes associated with that decision, and their
probability, are known before a decision is made.
A) risky
B) uncertain
C) typical
D) atypical
Answer: A
Learning Obj.: 6.2: Specify the Conditions Under Which Strategic Flexibility and Real Options
Will be Valuable for Firms.
30) Gambling at a casino is a classic example of a(n) ________ decision.

A) uncertain
B) deferred
C) managed
D) risky
Answer: D
31) The ________ value of the cash flows generated by choosing and implementing a particular
strategy is equal to the sum of those cash flows, discounted by how risky they are.
A) future
B) optional
C) present
D) strategic
Answer: C
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32) A decision making setting is said to be ________ when the outcomes of that decision are not
known with certainty, and the possible outcomes associated with that decision, and their
probability, are also not known before a decision is made.
A) risky
B) uncertain
C) strategic
D) typical
Answer: B
33) Under conditions of uncertainty, cash flow projections are ________.

A) simply unreliable
B) fairly certain
C) risk free
D) quite risky
Answer: A
34) Under conditions of ________, the riskiness of the cash flows generated cannot be reliably
anticipated.
A) constraint
B) certainty
C) uncertainty
D) competition
Answer: C
35) In reality, strategic choices are often made over time, in a ________ manner.
A) planned
B) staged
C) deliberate
D) flexible
Answer: B
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36) The riskiest cash flows receive the ________ discount rates.
A) largest
B) smallest
C) standard
D) bank
Answer: A
37) The Black-Scholes model is used for valuing ________ options.

A) strategic
B) financial
C) corporate
D) business
Answer: B
38) If the value of an option is $4.59, it means an investor should be willing to pay up to $4.59
for the ________, but not the ________ to buy the stock.
A) right; obligation
B) obligation; right
C) chance; right
D) obligation; opportunity
Answer: A
39) The lower the ________ price, the greater is the value of a real option.
A) stock
B) operational
C) exercise
D) market
Answer: C
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40) The longer the time to ________, the greater is the value of a real option.
A) market
B) profitability
C) exercise
D) maturity
Answer: D
41) The higher the ________ interest rate, the greater is the value of a real option.
A) risk-free
B) risk-adjusted
C) risk-linked
D) risk-mandated
Answer: A
42) The greater the uncertainty the uncertainty about future ________, the greater is the value of
a real option.
A) interest rates
B) cash flows
C) profitability
D) economic cycles
Answer: B
43) Real options are all about the flexibility afforded a firm under conditions of ________.
A) competition
B) risk
C) uncertainty
D) growth
Answer: C
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44) To see if valuing an investment as a real option creates any extra value for a firm, it is
necessary to establish a ________.
A) timeline
B) benchmark
C) ceiling
D) floor
Answer: B
45) According to Rita McGrath and Ian MacMillan, ________ uncertainty refers to the extent to
which managers understand the process by which a new product or service will be developed
before that process is undertaken.
A) technical
B) financial
C) functional
D) market
Answer: A
46) According to Rita McGrath and Ian MacMillan, ________ uncertainty refers to the extent to
which managers understand how a new product or service will be received in the market.
A) technical
B) financial
C) functional
D) market
Answer: D
12
47) Under conditions of ________ market uncertainty and ________ technical uncertainty,
investments in new products and services have limited real option value.
A) low; low
B) low; high
C) high; low
D) high; high
Answer: A
48) When technical uncertainty is high and market uncertainty is low, Rita McGrath and Ian
MacMillan suggest a ________ option.
A) scouting
B) positioning
C) corporate
D) stepping-stone
Answer: B
49) When technical uncertainty is low and market uncertainty is high, Rita McGrath and Ian
MacMillan suggest a ________ option.
A) scouting
B) positioning
C) corporate
D) stepping-stone
Answer: A
50) When both technical and market uncertainty are high, Rita McGrath and Ian MacMillan
suggest a ________ option.
A) scouting
B) positioning
C) corporate
D) stepping-stone
Answer: D
13
51) Putting several new offerings in consumers hand to gauge their reactions and investing once
consumer preferences are clear is what is meant by a ________ option.
A) financial
B) positioning
C) stepping-stone
D) scouting
Answer: D
52) Taking multiple small positions in alternative technologies and waiting until technological
uncertainty is resolved to invest is what is meant by a ________ option.
A) financial
B) positioning
C) stepping-stone
D) scouting
Answer: B
53) Avoiding fixing on a particular design or set of features early, failing fast, failing cheap,
learning fast, and trying again is what is meant by a ________ option.
A) financial
B) positioning
C) stepping-stone
D) scouting
Answer: C
14
54) Toryn, Inc., a major player in semiconductors, makes small investments of 5-10 percent of a
firm's equity in many emerging technology companies. Toryn buys the company outright once
that company's technological uncertainty resolves. The option that Toryn, Inc. uses is called a
________ option.
A) positioning
B) scouting
C) strategic
D) stepping-stone
Answer: A
55) Miranda Fashions competes in the fast-changing world of fickle teenage apparel tastes. To
manage this uncertainty, Miranda Fashions typically puts out several new apparel offerings in
small quantities to get customer reaction and once customer preferences are clear, it invests
heavily to go all out. The option that Miranda Fashions uses is called a ________ option.
A) stepping-stone
B) scouting
C) staged
D) positioning
Answer: B
56) Amberger Products competes in consumer electronics where there is a high level of market
and technological uncertainty. To address these challenges, Amberger Products does not commit
itself to a particular product design or features early on; instead, it is geared to quickly and
inexpensively assess if it has succeeded or failed with a design or feature, learn from its past,
regroup and try again quickly. The option that Amberger Products uses is called a ________
option.
A) staged
B) positioning
C) stepping-stone
D) scouting
Answer: C
15
57) According to Rita McGrath and Ian MacMillan, there are ________ real options for a
company to consider under technical and market uncertainty.
A) 3
B) 5
C) 4
D) 2
Answer: A
58) Which of the following is NOT a type of option to combat technological and market
uncertainty according to Rita McGrath and Ian MacMillan?
A) staged
B) scouting
C) stepping-stone
D) positioning
Answer: A
16
Seymour Semiconductors is a major global player in the semiconductor and microchip industry.
In the space that they compete in, there is tremendous technological uncertainty as disruptive
innovations seemingly come out of nowhere to upend well-entrenched incumbents. These
disruptions are often fast and are increasingly by companies that do not compete head-to-head
with Seymour Semiconductors. In addition, market tastes for the end products that feature
Seymour Semiconductors' components also change rapidly. The company was hurt financially
when the market shifted away from personal computers (that accounted for a significant portion
of Seymour Semiconductors' revenues), first to tablets, and then to other mobile devices. The
company's new CEO, Lisa Monroe, has decided that the company's basic approach to strategy
should change. Toward this, she has mandated that, at any point in time, Seymour
Semiconductors should be able to choose from several different strategic options instead of a
fixed and planned course of action that the company has pursued since it beginning. One of her
mandates called for the company's future manufacturing plants to be built with the ability to add
capacity at low cost. In addition, she wants to lay off 1,000 of the company's employees and hire
contract and temporary workers in their stead. Finally, Monroe wants the company to use the real
options approach to manage the combination of technological and market uncertainties.
59) The uncertainty that Seymour Semiconductors faces is with regard to ________.
A) the economy
B) the market
C) technology
D) both technology and market
Answer: D
60) Per the Rita McGrath and Ian MacMillan typology, to combat the uncertainty that Seymour
Semiconductors faces, the company should use ________ options.
A) stepping-stone
B) staged
C) positioning
D) scouting
Answer: A
17
61) To combat the uncertainty that Seymour Semiconductors faces, Lisa Monroe should direct
the company to ________.
A) take small positions in alternative technologies and wait until technological uncertainty
resolves, then invest
B) decide on a particular course of action, invest, and continue commitment
C) put several new offerings in buyers' hands to gauge their reactions, once their preferences are
clear, invest
D) avoid fixing on a particular design or set of features early; fail fast, fail cheap; learn fast, and
try again
Answer: D
62) In 2019, if Lisa Monroe decides that the market uncertainty for Seymour Semiconductors has
reduced considerably while the high technological uncertainty continues, she should move the
company to using ________ options.
A) staged
B) positioning
C) stepping-stone
D) scouting
Answer: B
63) In 2019, if Lisa Monroe decides that the market uncertainty for Seymour Semiconductors
persists while the technological uncertainty has reduced considerably, she should move the
company to using ________ options.
A) staged
B) positioning
C) stepping-stone
D) scouting
Answer: D
64) Strategic flexibility is most likely to be valuable under conditions of uncertainty.

Answer: TRUE
18
65) There is no distinction between the concepts of risk and uncertainty.
Answer: FALSE
66) Gambling at a casino is an example of a risky decision.

Answer: TRUE
67) The future value of the cash flows generated by choosing and implementing a particular
strategy is equal to the sum of those cash flows, discounted by how risky they are.
Answer: FALSE
68) A decision making setting is said to be risky when the outcome of that decision is not known
with certainty, and the possible outcomes associated with that decision, and their probability, are
also not known before a decision is made.
Answer: FALSE
69) Using present value analysis does not work under conditions of uncertainty.
Answer: TRUE
70) Cash flow projections can be reliable under conditions of uncertainty.

Answer: FALSE
19
71) Under conditions of uncertainty, the riskiness of the cash flows generated can be reliably
anticipated.
Answer: FALSE
72) Strategic choices are often made over time, in a staged manner.
Answer: TRUE
73) While present value approaches do a wonderful job of incorporating risk into strategic
decision making, they cannot be applied under conditions of uncertainty.
Answer: TRUE
74) The Black-Scholes model is used in valuing financial options.

Answer: TRUE
75) The lower the cost of exercising a real option, the lower is the value of that real option.
Answer: FALSE
76) A low exercise price suggests a higher probability of the option being exercised.
Answer: TRUE
20
77) The shorter the time to maturity, the more valuable a real option is.
Answer: FALSE
78) The greater the uncertainty, the more valuable a real option is.
Answer: TRUE
79) The lower the risk-free interest rate, the more valuable the option is.
Answer: FALSE
80) The effect of uncertainty on the value of a real option is extremely important.
Answer: TRUE
81) The downside risk of a real option is fixed.

Answer: TRUE
82) The greater the uncertainty, the less valuable is the real option.
Answer: FALSE
21
83) To see if valuing an investment as a real option creates any extra value for the firm, it is
necessary to establish a benchmark.
Answer: TRUE
84) Market uncertainty refers to the extent to which managers understand the process by which a
new product or service will be developed before that process is undertaken.
Answer: FALSE
85) A scouting option is used when market uncertainty is high and technical uncertainty is low.
Answer: TRUE
86) A stepping-stone option is recommended when both market and technical uncertainty are
low.
Answer: FALSE
87) Market uncertainty refers to the extent to which managers understand how a new product or
service will be received in the market.
Answer: TRUE
88) The lower the cash flows generated by exercising a real option, the greater is the value of
that real option.
Answer: FALSE
22
89) What is the difference between risk and uncertainty?
Answer: A decision-making setting is said to be risky when the outcome of that decision is not
known with certainty, but the possible outcomes associated with that decision, and their
probability, are known before a decision is made. Gambling at a casino is a good example of a
risky decision. While a specific outcome is not known, all possible outcomes and their
probabilities can be calculated. A decision-making setting, in contrast, is said to be uncertain
when the outcome of that decision is not known with certainty, and the possible outcomes
associated with that decision, and their probability, are also not known before a decision is made.
To extend the casino gambling example, it changes from risky to uncertain when the rules of the
game you are playing in the casino change in unpredictable ways.
90) Why does present value analysis not work under conditions of uncertainty?
Answer: Using present value analysis (of cash flows) does not work under conditions of
uncertainty for three reasons. One is that, under conditions of uncertainty, cash flow projections
are simply unreliable. Under uncertainty, unforeseeable costs and opportunities may affect
realized cash flows in ways that could not have been anticipated. Second, under conditions of
uncertainty, the riskiness of cash flows generated cannot be reliably anticipated. This affects the
discount rate that is to be applied in the analysis. Third, a fundamental assumption that the
present value approach makes is that decision about strategies and how they are implemented are
made all at once, at the moment a strategic choice is made and implemented. This doesn't reflect
reality, because strategic choices are often made over time, in a staged manner.
91) What are positioning options? How are they different from scouting options?
Answer: Rita McGrath and Ian MacMillan have developed a typology of options based on
technological and market uncertainties. A positioning option is recommended when
technological uncertainty is high and marketing uncertainty is either low or medium. In contrast,
they suggest the use of scouting options when a company faces high market uncertainty but low
to medium technological uncertainty.
23
92) What are stepping-stone options? What does a company do in a stepping-stone option?
Answer: According to the McGrath-MacMillan typology, when a company faces both market
and technological uncertainty, it should use a stepping-stone option. In pursuing a stepping-stone
option, a firm avoids fixing on a particular design or set of features early. It is set up to fail fast
and fail cheap. In addition, the option calls for learning fast and trying again.
93) The concepts of flexibility and real options are closely related to the importance of history
and ________ described as potential sources of sustained competitive advantage.
A) cost control
B) causal ambiguity
C) path dependence
D) commitment
Answer: C
Learning Obj.: 6.3: Identify When Strategic Flexibility and Real Options can be a Source of
Sustained Competitive Advantage.
94) Under conditions of high certainty, flexibility is often valuable because it creates real options
for firms.
Answer: FALSE
95) The concepts of flexibility and real options are closely related to the importance of history
and path dependence that are potential sources of sustained competitive advantage.
Answer: TRUE
96) When real options are path dependent, they are not likely to be a source of competitive
advantage for a firm.
Answer: FALSE
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97) Vertically integrating into an exchange is generally ________ than using market contracts or
strategic alliances to manage an exchange.
A) more flexible
B) less strategic
C) more strategic
D) less flexible
Answer: D
Learning Obj.: 6.4: Identify the Organizational Challenges Associated with Implementing
Strategic Flexibility and a Real Options Strategy.
98) Firms seeking to implement a strategy of flexibility under conditions of uncertainty should
adopt flexible forms of organization.
Answer: TRUE
99) Vertically integrating into an exchange is generally less flexible, that is, costlier to change,
than using market contracts or strategic alliances to manage an exchange.
Answer: TRUE
25

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Strategic Management and Competitive Advantage, 6e (Barney)

Chapter 6 Flexibility and Real Options

4) Which of the following is NOT an example of a real asset?

6) A firm building a manufacturing plant that employs only general-purpose machinery is an

19) Strategic options are different from real options.

21) The option to abandon is a type of flexibility.

26) What are strategic options?

27) What are real options?

30) Gambling at a casino is a classic example of a(n) ________ decision.

33) Under conditions of uncertainty, cash flow projections are ________.

37) The Black-Scholes model is used for valuing ________ options.

64) Strategic flexibility is most likely to be valuable under conditions of uncertainty.

66) Gambling at a casino is an example of a risky decision.

70) Cash flow projections can be reliable under conditions of uncertainty.

74) The Black-Scholes model is used in valuing financial options.

81) The downside risk of a real option is fixed.

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