Chapter 8: Functional Strategies

Identify, explain, and provide examples of the component parts of any marketing strategy.

Answers will vary but should include a discussion of the 4 P's: price, product, place (distribution), and promotion.

What differences in financial strategies would you expect to see between a business employing a low-cost strategy and one employing a differentiation strategy?

Low-cost businesses pursue financial strategies that are intended to minimize their financial costs. They place a great emphasis on keeping costs within the limits of the funds they are able to generate from operations. In contrast, differentiated businesses pursue financial strategies that fund initiatives such as quality improvements and product R&D even when the cost of securing funds is relatively high. They may consider selling common stock or incurring debt, regardless of the costs of doing so. The greatest strategic priority is quality maintenance and enhancement of differentiation, not minimizing the cost of funds.

Do differentiated businesses spend more on R&D than their low cost counterparts? Explain.

Differentiated businesses often—but not always—spend more on R&D than low cost businesses. However, differentiated and low cost businesses tend to pursue different types of R&D. Product/service R&D refers to efforts directed toward improvements or innovations in the quality or uniqueness of a company's outputs. In contrast, process R&D seeks to reduce operational costs and make them more efficient. R&D is most important in rapidly changing industries where production modifications are most often required to remain competitive. Low-cost business units tend to emphasize process R&D to reduce their operations costs, whereas differentiators tend to place more importance on product/service R&D to produce improved and innovative outputs.

Capital restructuring refers to an organization's ability to substitute labor for capital, or vice versa as volume increases, depending upon which combination minimizes costs and/or maximizes effectiveness. True or False?

False

Differentiated businesses should emphasize specialized distribution and targeted advertising and promotion at the lowest cost possible. True or False?

False

Differentiated businesses tend to emphasize process R&D. True or False?

False

Differentiated businesses typically emphasize reward systems that encourage cost reductions and innovation. True or False?

False

Just-in-time manufacturing often improves quality but usually does not influence costs. True or False?

False

Knowledge management refers to the sum of the capabilities of individuals in an organization. True or False?

False

Learning is the idea that per-unit production costs decrease when volume increases. True or False?

False

Low-cost-differentiated businesses should emphasize mass distribution and promotion, regardless of cost. True or False?

False

Quality problems are generally limited to poorly managed firms. True or False?

False

Explain the component parts of the experience curve. How is this concept related to the production strategy?

The experience curve is based on the idea that unit costs in most industries decline with experience. As such, the experience curve is critical to the low-cost strategy. The curve is based on three underlying concepts: learning, economies of scale, and capital-labor substitution possibilities. Learning refers to the idea that employees become more efficient when they perform the same task many times. An increase in volume fuels this process, also increasing expertise. This reasoning can be approved in all jobs—line and staff, managerial and non-managerial—at the corporate, business unit, and functional levels. Economies of scale—the reductions in per-unit costs as volume increases—can be great for business such as automobile manufacturers or Internet service providers. Capital-labor substitution refers to an organization's ability to substitute labor for capital, or vice versa as volume increases, depending upon which combination minimizes costs and/or maximizes effectiveness.

Explain the just-in-time inventory system. Identify situations in which JIT tends to be effective and ineffective.

The just-in-time (JIT) inventory system was popularized by Japanese manufacturers to reduce materials management costs. Using this technique, the purchasing manager asks suppliers to ship parts at the precise time they are needed in production in order to hold inventory, storage, and warehousing costs to a minimum. Although American manufacturers have moved in the direction of JIT, this approach works particularly well in Japan where large manufacturers wield considerable bargaining power over their much smaller suppliers. Because it places great delivery demands on suppliers, JIT does not tend to work well when manufacturers do not possess great bargaining power, as is often the case in the U.S. In addition, an occasional late supplier can cripple a firm's production process, and a JIT system also makes a company highly vulnerable to labor strikes.

In general, differentiated businesses emphasize obtaining resources and funding output improvements or innovations, even when financial costs may be high. True or False?

True

Knowledge can be a source of competitive advantage regardless of the choice of generic strategy. True or False?

True

Low-cost businesses emphasize low initial investments in plants, equipment, and outlets, and low operation costs. True or False?

True

Low-cost businesses emphasize timely and pertinent information on the ongoing specialized processes that yield unique products/services. True or False?

True

Process R&D seeks to reduce operational costs and make them more efficient. True or False?

True

Whether it is conducted in-house or outsourced, an information system is deemed effective if it helps the business carry out its strategy. True or False?

True

Which of the following production strategies is most appropriate for a differentiated business? a. Emphasize quality in operations even when the cost of doing so is high. b. Emphasize quality in operations when the cost of doing so is relatively low. c. Emphasize operation efficiencies through learning, economies of scale, and capital-labor substitution possibilities. d. Emphasize specialized quality in operations even when costs are high.

a. Emphasize quality in operations even when the cost of doing so is high.

Which of the following financial strategies is most appropriate for a low-cost business? a. Lower financial costs by borrowing when credit costs are low and issuing stock when the market is strong. b. Emphasize obtaining resources and funding output improvements or innovations at the lowest possible costs. c. Emphasize obtaining resources and funding output improvements or innovations, even when financial costs may be high. d. None of the above.

a. Lower financial costs by borrowing when credit costs are low and issuing stock when the market is strong.

conduct storage, warehouse, and inventory activities with care, but only if costs are relatively low d. None of the above.

a. Purchase at low costs through quantity discounts

Which of the following is not a factor that can facilitate organizational learning capabilities? a. consistency of perspectives across the organization. b. a climate of openness. c. a scanning imperative. d. All of the above can facilitate organizational learning capabilities.

a. consistency of perspectives across the organization.

Low cost businesses a. emphasize reward systems that encourage cost reductions. b. Emphasize reward systems that encourage innovation. c. Emphasize reward systems that encourage cost reductions and innovation. d. None of the above.

a. emphasize reward systems that encourage cost reductions.

The sum of the capabilities of individuals in an organization is known as a. human capital. b. organizational learning. c. knowledge management. d. None of the above.

a. human capital.

Differentiated businesses a. emphasize reward systems that encourage cost reductions. b. Emphasize reward systems that encourage innovation. c. Emphasize reward systems that encourage cost reductions and innovation. d. None of the above.

b. Emphasize reward systems that encourage innovation.

Which of the following financial strategies is most appropriate for a low-cost-differentiation business? a. Lower financial costs by borrowing when credit costs are low and issuing stock when the market is high. b. Emphasize specialized quality of operations when the cost of doing so is relatively low. c. Emphasize obtaining resources and funding output improvements or innovations, even when financial costs may be high. d. None of the above.

b. Emphasize specialized quality of operations when the cost of doing so is relatively low.

Low-cost businesses a. emphasize reward systems that encourage cost reductions and innovation. b. emphasize timely and pertinent information on costs of operations. c. emphasize timely and pertinent information on the ongoing processes that yield unique products/services. d. None of the above.

b. emphasize timely and pertinent information on costs of operations.

Differentiated businesses tend to emphasize a. process R&D. b. product/service R&D. c. both process & product/service R&D. d. neither process not product/service R&D.

b. product/service R&D.

Which of the following is not a factor that can facilitate organizational learning capabilities? a. Multiple advocates b. Involved leadership. c. An analyzer strategic emphasis. d. All of the above can facilitate organizational learning capabilities.

c. An analyzer strategic emphasis.

Which of the following marketing strategies is most appropriate for a low-cost-differentiation business? a. Emphasize low-cost distribution and low-cost advertising and promotion. b. Emphasize specialized distribution and targeted advertising and promotion at the lowest cost possible. c. Emphasize differentiated distribution, and advertising and promotion, on a large scale at the lowest cost possible. d. Emphasize differentiated distribution and advertising and promotion on a large scale.

c. Emphasize differentiated distribution, and advertising and promotion, on a large scale at the lowest cost possible.

Which of the following production strategies is most appropriate for a low-cost business? a. Emphasize quality in operations even when the cost of doing so is high. b. Emphasize quality in operations when the cost of doing so is relatively low. c. Emphasize operation efficiencies through learning, economies of scale, and capital-labor substitution possibilities. d. Emphasize specialized quality in operations even when costs are high.

c. Emphasize operation efficiencies through learning, economies of scale, and capital-labor substitution possibilities.

conduct storage, warehouse, and inventory activities with care, but only if costs are relatively low. d. None of the above.

c. Purchase high-quality inputs, but only if costs are low

Which of the following is not true about functional strategies? a. They should be considered before the business strategy is formulated. b. The support the implementation of the business strategy. c. They should be formulated after the business strategy but before the corporate strategy. d. All of the above are true.

c. They should be formulated after the business strategy but before the corporate strategy.

The perspective suggesting that people and their skills and abilities represent the only resource that cannot readily be reproduced by a firm's competitors if it is deemed to be a source of competitive advantage is known as a. capital assessment. b. resource based theory. c. knowledge management. d. None of the above.

c. knowledge management.

Which of the following is not a component part of the experience curve? a. economies of scale b. capital-labor substitution c. learning d. All of the above are components of the experience curve.

d. All of the above are components of the experience curve.

Which of the following marketing strategies is most appropriate for a differentiated business? a. Emphasize low-cost distribution and low-cost advertising and promotion. b. Emphasize specialized distribution and targeted advertising and promotion at the lowest cost possible. c. Emphasize differentiated distribution, and advertising and promotion, on a large scale at the lowest cost possible. d. Emphasize differentiated distribution and advertising and promotion on a large scale.

d. Emphasize differentiated distribution and advertising and promotion on a large scale.

An organization's ability to substitute labor for capital or vice versa as volume increases is known as a. economies of scale. b. economies of scope. c. differentiation economies. d. None of the above.

d. None of the above.