Ch. 3

What is a value chain? List the primary activities in a value chain.

A value chain is a network of value-creating activities. The generic value chain developed by Porter consists of five primary activities and three support activities. The primary activities are: a. In-bound logistics-which deals with receiving, storing, and disseminating inputs to the product b. Operations-which involves transforming inputs into the final product c. Out-bound logistics-which deals with collecting, storing, and physically distributing the product to buyers d. Marketing and sales-which involves inducing buyers to purchase the product and providing a means for them to do so e. Customer service-which involves assisting customer's use of the product and thus maintaining and enhancing the product's value Page Ref: 54

18) Which of the following is true of a value-chain? A) It is a network of value-creating activities. B) It consists of only primary activities. C) It is specific to manufacturing industries. D) It nullifies the importance of support activities.

A) It is a network of value-creating activities.

19) A business that selects a differentiation strategy would ________. A) add cost to an activity provided it has a positive margin B) provide essential functions at lowest costs C) imitate rival companies' strategy and products D) aim to please stockholders with highest dividends

A) add cost to an activity provided it has a positive margin

4) In which of the following situations would the suppliers have the strongest bargaining power? A) coffee planters during a season of frost that decreases production B) companies negotiating compensation during a booming economy C) providers of logistic support during an economic slowdown D) a wholesaler declaring a stock-clearance sale

A) coffee planters during a season of frost that decreases production

13) An organization responds to the structure of its industry by choosing a(n) ________ strategy. A) competitive B) growth C) leadership D) operational

A) competitive

29) As Porter says, the processes and systems in an organization pursuing differentiation strategy must ________ to avoid negative margins. A) create sufficient value to cover their costs B) provide products at lowest costs to customers C) make it easy for products to be duplicated D) give stiff competition to other similar products

A) create sufficient value to cover their costs

26) Porter's model of business activities includes ________, which are interactions across value activities. A) linkages B) evaluations C) iterations D) operations

A) linkages

28) Manufacturing systems use ________ to reduce inventory costs. A) linkages B) margins C) value chains D) support activities

A) linkages

1) Porter originally developed the five forces model to determine ________. A) the potential profitability of an industry B) the nature of competitive industrial environments C) the reason why certain industries collapse D) the means by which to improve industrial viability

A) the potential profitability of an industry

10) In which of the following cases is the strength of competitive forces low? A) when switching costs are high B) when rival products are priced high C) when customer loyalty to the brand or company is low D) when finding rival products is easy

A) when switching costs are high

What is the criterion on which business processes should run?

According to Porter, whether business processes are low-cost or high-service, these processes and systems must create sufficient value that they will more than cover their costs. If not, the margin of those systems will be negative. If a value chain's margin is negative, the company must make some change. Either the value must be increased, or the costs of the value chain need to be reduced. Page Ref: 56

What are the four competitive strategies based on Porter's five forces model?

An organization responds to the structure of its industry by choosing a competitive strategy. Porter followed his five forces model with the model of four competitive strategies. According to Porter, a firm can engage in one of these four fundamental competitive strategies. An organization can focus on being the cost leader, or it can focus on differentiating its products from those of the competition. Further, the organization can employ the cost or differentiation strategy across an industry or it can focus its strategy on a particular industry segment. According to Porter, to be effective the organization's goals, objectives, culture, and activities must be consistent with the organization's strategy. Page Ref: 52

23) Each stage of the value chain not only adds value to the product but also ________. A) attracts buyers B) accumulates costs C) devalues the final product D) attracts competitors

B) accumulates costs

8) In Porter's five factor model, each of the three competitive forces concerns the danger of ________. A) suppliers favoring rival companies B) customers taking their business elsewhere C) investors refusing to back up new projects D) employees not working toward organizational goals

B) customers taking their business elsewhere

30) Which of the following is a product implementation principle of competitive advantage? A) raise barriers to market entry B) enhance products or services C) establish alliances D) lock in customers and buyers

B) enhance products or services

22) Inducing buyers to purchase the product and providing a means for them to do so describes which of the following primary activities? A) inbound logistics B) sales and marketing C) outbound logistics D) operations/management

B) sales and marketing

27) Manufacturing systems that use linkages also use ________ to plan production. A) past reports B) sales forecasts C) competitors' information D) software packages

B) sales forecasts

2) The competitive strategy followed by an organization is derived from its ________. A) function B) structure C) profits D) goals

B) structure

The strength of bargaining power forces depends on the availability of substitutes and ________ compared to the size of suppliers or customers. A) the amount of profit made annually B) the relative size of the firm C) the presence of competitors in the market D) the threat of new competitors

B) the relative size of the firm

25) ________ includes general management, finance, accounting, legal, and government affairs. A) Human resources B) Research and development C) Firm infrastructure D) Operations management

C) Firm infrastructure

6) Porter's five competitive forces can be grouped into two types: forces related to ________ and forces related to supply chain bargaining power. A) pricing B) labor C) competition D) consumers

C) competition

32) Which of the following is a process implementation principle of competitive advantage? A) creating a new product B) enhancing a product C) establishing alliances D) differentiating a product

C) establishing alliances

16) According to Porter, to be effective, the organization's goals, objectives, culture, and activities must be consistent with the ________. A) organization's structure B) organization's competitors C) organization's strategy D) organization's workforce

C) organization's strategy

21) Collecting, storing, and physically distributing the product to buyers describes which of the following primary activities? A) inbound logistics B) sales and marketing C) outbound logistics D) operations/management

C) outbound logistics

11) If customers perceive the benefits of a substitute to be similar to that of a product, then ________. A) the threat from the substitute is weak B) the price of the product should be increased to retain market share C) the threat from the substitute is strong D) there is no threat from the substitute

C) the threat from the substitute is strong

5) Simpson's Lawn Services decides to offer two free mowing services for all customers who booked garden landscaping in the fall. By doing this, which of the following forces is Simpson's addressing? A) the control exercised by Acme Corp. who supplies Simpson with lawn mowers B) the power held by the landlord of the Simpson's office space C) the threat posed by Roger's Landscapes, a new competitor D) the bargaining power of the City Football Club who are Simpson's customers

C) the threat posed by Roger's Landscapes, a new competitor

3) The competitive strategy of an organization determines its ________. A) industry rivals B) short-term goals C) value chains D) structure

C) value chains

7) Porter's model includes the bargaining power of which of the following groups as one of the five factors? A) investors B) competitors C) employees D) customers

D) customers

24) Which of the following is a primary activity in the value chain? A) processes of finding vendors B) setting up contractual arrangements C) negotiating prices D) delivering products to consumers

D) delivering products to consumers

14) If a company produces a uniquely formulated anti-ageing face cream targeted at women above the age of forty, which of the following competitive strategies is it following? A) industry-wide low cost B) industry-wide differentiation C) focused low cost D) focused differentiation

D) focused differentiation

33) Which of the following is least likely to be an outcome of organizations forming alliances with each other? A) promotion of product awareness B) development of market size C) establishment of standards D) increase in purchasing costs

D) increase in purchasing costs

15) Which of the following is an example of a competitive strategy employed by a firm? A) increasing the price of its product when raw material prices increase B) laying off staff in order to cut down costs during a recession period C) advertising its products nationwide like its competitor organizations D) launching a unique product targeted at a section of consumers

D) launching a unique product targeted at a section of consumers

31) Which of the following strategies is also called establishing high switching costs? A) establishing alliances B) locking in suppliers C) reducing costs D) locking in customers

D) locking in customers

20) The difference between the value that an activity generates and the cost of the activity is called the ________. A) equity B) liability C) overhead D) margin

D) margin

9) Two strength factors that relate to all three competitive forces are ________ and customer loyalty. A) market forces B) nature of products C) customer satisfaction D) switching costs

D) switching costs

17) Porter defined ________ as the amount of money that a customer is willing to pay for a resource, product, or service. A) margin B) profit C) price D) value

D) value

How did Porter define technology, human resources and firm infrastructure?

Porter defined technology broadly. It includes research and development, but it also includes other activities within the firm for developing new techniques, methods, and procedures. He defined human resources as recruiting, compensation, evaluation, and training of full-time and part-time employees. Finally, firm infrastructure includes general management, finance, accounting, legal, and government affairs. Page Ref: 54

Briefly describe how organizational strategy determines the structure of information systems.

: Organizations examine the structure of their industry and, from that, develop a competitive strategy. That strategy determines value chains, which, in turn, determine business processes. The nature of business processes determines the requirements and functions of information systems. Page Ref: 48-49

How can one develop competitive strategies using products? How can information systems help in the process?

: Some competitive techniques are created through products and services while some are created through the development of business processes. There are three principles that concern products and services. Organizations gain a competitive advantage by: a. creating new products or services b. enhancing existing products or services c. differentiating their products and services from those of their competitors An information system can be part of a product or it can provide support for a product or service. Page Ref: 56

Describe, using an example, the primary activities in a value chain.

In a bicycle manufacturing unit the primary activities of a value chain are followed. The manufacturer acquires raw materials using the inbound logistics activity. This activity concerns the receiving and handling of raw materials and other inputs. The accumulation of those materials adds value in the sense that even a pile of unassembled parts is worth something to some customer. A collection of the parts needed to build a bicycle is worth more than an empty space on a shelf. The value is not only the parts themselves, but also the time required to contact vendors for those parts, to maintain business relationships with those vendors, to order the parts, to receive the shipment, and so forth. In the operations activity, the bicycle maker transforms raw materials into a finished bicycle, a process that adds more value. Next, the company uses the outbound logistics activity to deliver the finished bicycle to a customer. Of course, there is no customer to send the bicycle to without the marketing and sales value activity. Finally, the service activity provides customer support to the bicycle users. Page Ref: 53-54

Describe Porter's five forces model.

Organizational strategy begins with an assessment of the fundamental characteristics and structure of an industry. Porter's five forces model is used as a way of understanding organizations' competitive environments. Porter's five competitive forces can be grouped into two types: forces related to competition and forces related to supply chain bargaining power. The competitive forces are: competition from vendors of substitutes, competition from new competitors, and competition from existing rivals. The bargaining power forces include the bargaining power of suppliers and the bargaining power of customers. The intensity of each of the five forces determines the characteristics of the industry, how profitable it is, and how sustainable that profitability will be. Organizations examine these five forces and determine how they intend to respond to them. That examination leads to competitive strategy. Page Ref: 49-50

How does competitive strategy determine value chain structure?

Porter defined value as the amount of money that a customer is willing to pay for a resource, product, or service. A value chain is a network of value-creating activities. Organizations analyze the structure of their industry, and, using that analysis, they formulate a competitive strategy. They then need to organize and structure the organization to implement that strategy. If, for example, the competitive strategy is to be a cost leader, then business activities need to be developed to provide essential functions at the lowest possible cost. A business that selects a differentiation strategy would not necessarily structure itself around least-cost activities. Instead, such a business might choose to develop more costly systems, but it would do so only if those systems provided benefits that outweighed their risks. Page Ref: 52-53

Differentiate between value and margin.

Porter defined value as the amount of money that a customer is willing to pay for a resource, product, or service. The difference between the value that an activity generates and the cost of the activity is called the margin. A business with a differentiation strategy will add cost to an activity only as long as the activity has a positive margin. Page Ref: 53

Explain value chain linkages.

Porter's model of business activities includes linkages, which are interactions across value activities. For example, manufacturing systems use linkages to reduce inventory costs. Such a system uses sales forecasts to plan production; it then uses the production plan to determine raw materials needs and then uses the material needs to schedule purchases. The end result is just-in-time inventory, which reduces inventory sizes and costs. Page Ref: 54

Distinguish between a primary and a support activity in the value chain.

Primary activities are business functions that relate directly to the production of the organization's products or services. Support activities are business functions that assist and facilitate the primary activities. Page Ref: 53-54

Describe some competitive advantage strategies that are based on business processes.

Some of the competitive strategies that are based on business processes include: a. Establishing high switching costs-organizations can lock in customers by making it difficult or expensive for customers to switch to another product. b. Locking in suppliers-organizations can lock in suppliers by making it difficult to switch to another organization, or, stated positively, by making it easy to connect to and work with the organization. c. Creating entry barriers-competitive advantage can be gained by creating entry barriers that make it difficult and expensive for new competition to enter the market. d. Establishing alliances-another means to gain competitive advantage is to establish alliances with other organizations. e. Finally, by creating better business processes, organizations can gain competitive advantage by reducing costs. Page Ref: 57-58

Describe the support activities in a value chain.

The support activities in the generic value chain facilitate the primary activities and contribute only indirectly to the production, sale, and service of the product. They include procurement, which consists of the processes of finding vendors, setting up contractual arrangements, and negotiating prices. Porter defined technology broadly. It includes research and development, but it also includes other activities within the firm for developing new techniques, methods, and procedures. He defined human resources as recruiting, compensation, evaluation, and training of full-time and part-time employees. Finally, firm infrastructure includes general management, finance, accounting, legal, and government affairs. Supporting functions add value, albeit indirectly, and they also have costs. Page Ref: 54