Test 14: answer key

Question 1 · 2 marks · Strategic Choices · medium

Scenario. Pinnacle Enterprises is considering cooperation with a technology partner for a new platform. One option is an equity joint venture with shared ownership and a separate entity. Another option is a contractual strategic alliance without a separate equity entity. The board is concerned about partner opportunism and the need for governance safeguards while preserving strategic flexibility.

Which feature distinguishes an equity joint venture from a contractual strategic alliance?

1. An equity joint venture creates a separate entity with shared ownership and control. (correct answer)
2. A contractual alliance always transfers ownership of contributed assets.
3. An equity joint venture avoids sharing of profits.
4. A contractual alliance requires creation of a new legal entity.

Answer: A — An equity joint venture creates a separate entity with shared ownership and control.

Working. Conceptual distinction: equity joint venture equals separate entity plus shared equity; contractual alliance equals contract-based cooperation without separate equity entity.

Explanation. An equity joint venture typically involves a separate entity and shared ownership and control. A contractual alliance relies on a contract and does not necessarily create a separate equity entity. Option b is incorrect because contractual alliances do not always transfer ownership. Option c is incorrect because equity joint ventures share profits. Option d reverses the distinction.

Where it goes wrong. Students may treat all alliances as joint ventures or assume every alliance creates a separate company.

Authority. Chapter 4: Strategic Choices - Strategic Alliances

Question 2 · 2 marks · Strategic Choices · hard

Which safeguard is most appropriate for Pinnacle Enterprises to manage the risk of partner opportunism in a strategic alliance?

1. Avoid written governance to preserve mutual trust.
2. Use staged resource commitments and explicit governance safeguards. (correct answer)
3. Rely only on the partner reputation without contractual terms.
4. Transfer all core technology at inception.

Answer: B — Use staged resource commitments and explicit governance safeguards.

Working. Conceptual evaluation: staged commitments and explicit governance reduce exposure while preserving flexibility.

Explanation. Partner opportunism is reduced through governance mechanisms such as staged commitments, clear decision rights, confidentiality and exit clauses. Option a increases risk. Option c ignores contractual protection. Option d increases exposure of core technology.

Where it goes wrong. Students may focus only on trust and ignore contractual and staged governance safeguards.

Authority. Chapter 4: Strategic Choices - Strategic Alliances

Question 3 · 2 marks · Strategic Choices · medium

Which statement correctly compares an equity joint venture with a contractual strategic alliance?

1. An equity joint venture is always shorter in duration than a contractual alliance.
2. A contractual alliance necessarily creates a separate legal entity.
3. An equity joint venture involves shared equity ownership while a contractual alliance relies on contract without a separate equity entity. (correct answer)
4. Both arrangements have identical risk allocation and governance.

Answer: C — An equity joint venture involves shared equity ownership while a contractual alliance relies on contract without a separate equity entity.

Working. Conceptual comparison: shared equity and separate entity versus contract-based cooperation.

Explanation. The equity joint venture involves shared equity ownership and a separate entity in most cases. A contractual alliance is governed by contract and does not necessarily involve shared equity. Option a is not a defining feature. Option b is incorrect. Option d ignores differences in risk and governance.

Where it goes wrong. Students may assume the two forms have the same governance and risk profile.

Authority. Chapter 4: Strategic Choices - Strategic Alliances

Question 4 · 2 marks · Strategy Implementation and Evaluation · medium

Scenario. Pinnacle Enterprises has several related businesses with distinct competitors. The board is considering a strategic business unit structure with delegated unit-level strategy and profit accountability. It is also concerned about inter-divisional friction over transfer prices and resource allocation between units.

In an SBU structure, what is the most appropriate accountability arrangement for an SBU manager?

1. The SBU manager has no profit accountability.
2. The corporate office delegates all strategic planning to functional departments.
3. SBU autonomy removes the need for corporate strategic control.
4. The SBU manager is accountable for unit strategy and profit within corporate direction. (correct answer)

Answer: D — The SBU manager is accountable for unit strategy and profit within corporate direction.

Working. Conceptual: SBU manager handles unit strategy and profit performance; corporate office handles overall corporate strategy.

Explanation. An SBU structure delegates day-to-day operations and unit strategy to SBU managers while the corporate office retains overall direction and strategic control. Option a contradicts profit-centre logic. Option b misplaces strategic planning. Option c ignores corporate oversight.

Where it goes wrong. Students may overstate SBU independence and ignore corporate strategic control.

Authority. Chapter 5: Strategy Implementation and Evaluation - Organisation Structure

Question 5 · 2 marks · Strategy Implementation and Evaluation · hard

Which mechanism is most appropriate to reduce inter-divisional friction in an SBU structure?

1. Transparent transfer pricing and corporate arbitration for resource conflicts. (correct answer)
2. Abolish all inter-divisional transactions.
3. Centralise all operating decisions at the corporate office.
4. Allow each SBU to set group-wide transfer prices unilaterally.

Answer: A — Transparent transfer pricing and corporate arbitration for resource conflicts.

Working. Conceptual: transparent transfer prices plus corporate arbitration balance autonomy and coordination.

Explanation. Inter-divisional friction in SBU structures is reduced through clear transfer pricing rules, resource allocation norms and corporate arbitration. Option b is impractical. Option c undermines SBU autonomy. Option d creates conflict.

Where it goes wrong. Students may propose centralisation for every conflict, ignoring SBU autonomy.

Authority. Chapter 5: Strategy Implementation and Evaluation - Organisation Structure

Question 6 · 2 marks · Strategy Implementation and Evaluation · medium

Which situation most appropriately supports adoption of an SBU structure?

1. A single-product firm operating in one local market.
2. A multi-business firm can group related businesses into distinct units with their own competitors. (correct answer)
3. A firm with no need for strategic planning.
4. A firm that avoids delegation of authority.

Answer: B — A multi-business firm can group related businesses into distinct units with their own competitors.

Working. Conceptual: SBU structure groups related businesses and delegates unit-level strategic planning.

Explanation. SBU structure is relevant for multi-product or multi-business firms where related businesses can be grouped into distinct strategic units with identifiable competitors. Option a is too simple. Option c is inconsistent with SBU planning. Option d contradicts delegation.

Where it goes wrong. Students may think SBU structure is for every small single-product firm.

Authority. Chapter 5: Strategy Implementation and Evaluation - Organisation Structure

Question 7 · 2 marks · Strategic Choices · medium

Scenario. Pinnacle Enterprises has a non-core division that is viable as a standalone business but has weak strategic fit with the group. Another old plant has no going-concern buyer and its realizable scrap value exceeds its value in continued use. The board is distinguishing between divestment and liquidation decisions.

For the non-core division that is viable as a standalone business but has weak strategic fit, which exit route is most appropriate?

1. Liquidate immediately because any exit destroys value.
2. Merge all non-core units into the core without evaluation.
3. Sell the division as a going concern when it has standalone viability but weak strategic fit. (correct answer)
4. Continue indefinitely regardless of losses.

Answer: C — Sell the division as a going concern when it has standalone viability but weak strategic fit.

Working. Conceptual: going-concern sale preserves value when the unit is viable but non-core.

Explanation. Divestment through sale as a going concern is appropriate where the unit has standalone viability but weak strategic fit. Option a ignores going-concern value. Option b is not an exit strategy. Option d ignores strategic fit and financial discipline.

Where it goes wrong. Students may equate divestment with liquidation and assume immediate scrapping.

Authority. Chapter 4: Strategic Choices - Strategic Exits

Question 8 · 1 marks · Strategic Choices · medium

When is liquidation most appropriate for the old plant?

1. Divestment always yields higher value than liquidation.
2. Liquidation preserves brand and employee continuity.
3. Divestment is chosen when the plant has only scrap value.
4. Liquidation is appropriate when a going-concern sale is not viable and realizable scrap value exceeds continued use value. (correct answer)

Answer: D — Liquidation is appropriate when a going-concern sale is not viable and realizable scrap value exceeds continued use value.

Working. Conceptual comparison: liquidation is selected when going-concern sale is not viable and scrap realizable value exceeds value in continued use.

Explanation. Liquidation is appropriate where no viable going-concern sale exists and scrapping or disposal realizes more value than continued use. Option a overgeneralises. Option b is a benefit associated with going-concern sale, not liquidation. Option c confuses divestment with liquidation.

Where it goes wrong. Students may think liquidation is always inferior to divestment without comparing realizable values.

Authority. Chapter 4: Strategic Choices - Strategic Exits