COMP STRAT CH 6

How does availability of complements act as a value driver?

Complements add value to a product when they are consumed in tandem with it.

The primary goal of a firm pursuing a blue ocean strategy should be to

offer a differentiated product or service at a low cost.

One of the risks of pursuing a blue ocean strategy is that a firm can find itself

"stuck in the middle."

When a firm operates at an output level of 9,000 units, the per-unit cost is $5. When the production is between 10,000-12,000 units, the per-unit cost is $4. At a production level of 13,000 units, the production cost is again $5 per unit. At 14,000 units and above, the production cost increases further. At what output level does the firm experience economies of scale?

11,000 units

When a firm manufactures 2,000-3,000 units of a product, it incurs an average cost of $10 per unit. When it manufactures 3,000-4,000 units of the same product, the average cost per unit reduces to $7. However, manufacturing beyond 4,000 units will raise the average cost per unit to $9. Which of the following is the firm's minimum efficient scale?

3,000-4,000 units

At a certain output level, the per-unit cost incurred by a firm was $70. Once the cumulative output doubled, the cost per unit reduced to $63. All other factors remaining constant, the firm has been able to achieve a

90 percent learning curve.

Pete's Bikes enjoys a competitive advantage as a cost-leader because high demand for its products has allowed it to operate at the minimum efficient scale. Which of the following scenarios would be most concerning to the managers of Pete's Bikes?

A major winter storm shuts down Pete's production for several days

Due to its large sales volume and low-cost structure, Bunny's Lo-Cost enjoys a cost- leadership position. Which of the following scenarios might threaten Bunny's competitive advantage?

A new competitor is perceived to provide similar value, but in addition offers innovative self-checkout that Bunny's doesn't offer.

AcerWare Inc. manufactures external hard disks for $32 per unit, and the maximum price customers are willing to pay is $47 per unit. Data Driver Inc. is a competitor of AcerWare Inc. that produces external hard disks for $37 per unit, and customers are willing to pay a maximum price of $50 per unit. What does this imply?

AcerWare creates a greater economic value than Data Driver.

Bigger & Better Inc. is a big box retailer who is in direct competition with Walmart and Target. Bigger & Better Inc. initially tried to respond to Walmart by cutting its prices and reducing costs. Walmart has greater buying power and a more efficient supply chain, therefore, Bigger & Better Inc. was not able to compete on costs. thecompany then tried to differentiate itself by signing a celebrity to create an in-house line of clothing. However, Target has a celebrity clothing line that has a more differentiated appeal. the economic value created by Bigger & Better Inc. is currently less than Target and Walmart. It can be said that

Bigger & Better Inc. is "stuck in the middle" and has a competitive disadvantage.

CooCoo Cola has successfully achieved a competitive advantage in the soft drink industry as a differentiator. Which of the following scenarios would undermine CooCoo's position?

CooCoo's customers start to consider soda a commodity.

Which of the following provides an example of a firm in a red ocean?

Cool Apparel offered clothing at a low price but failed to differentiate its product as being exclusive.

How is differentiation parity different from cost parity?

Differentiation parity deals with value not cost

Which of the following describes an airline that is most likely stuck in the middle?

Eastern Airlines offers high-quality beverages and meals, plush airport lounges, only a few connections via hubs domestically, poor customer service, and low prices.

________ is best described as decreases in cost per unit as output increases.

Economies of scale

What does it mean for a firm to have an 80 percent learning curve?

Every time the cumulative output is doubled, the cost per unit will decline by 20 percent

While Eye Windows incurs a cost of $12 for a pair of eyeglasses, Dura Frames, its competitor, manufactures a pair of glasses at $10. Both thecompanies are able to sell their glasses for a maximum of $30 per pair. Which of thefollowing statements is true in this scenario?

Eye Windows and Dura Frames have achieved differentiation parity.

T/F A differentiator will always benefit when products have become commoditized.

FALSE

T/F A value curve that zig-zags across the strategy canvas indicates a focused strategy that is likely to achieve a sustainable competitive advantage.

FALSE

T/F Differentiation and cost-leadership strategies are only effective in manufacturing industries.

FALSE

T/F Due to thedynamic nature of business competition, a firm's strategic position should remain fixed over time.

FALSE

T/F The goal of the differentiator is to have a smaller value gap than competitors.

FALSE

T/F When a firm operates at the minimum efficient scale, there is still opportunity for it to further reduce its cost per unit through economies of scale.

FALSE

T/F When pursuing a blue ocean strategy, a firm in a crowded marketplace attempts to out- compete rivals on both cost and product features with the goal of gaining market share at the expense of other competitors in the same industry.

FALSE

Both Tom's Car Repair and Fast Engines. incur a cost of $9,000 to manufacture a vehicle. However, theeconomic value created by Fast Engines. is more than that created by Tom's Car Repair. What does this indicate?

Fast Engines can charge a premium price on its automobiles.

Bestie Toys faces stiff competition from FunGadgets Inc., a rival firm with which Bestie Toys has achieved differentiation parity. Both firms have invested in state-of-the art production facilities and have similar learning curves of 85 percent. Assuming neither firm can reduce the cost of its input factors, how can Bestie Toys achieve a competitive advantage as a cost- leader?

Have a cumulative output that is greater than FunGadgets Inc.'s.

Evaluate the following statement: Strategic leaders should always try to pursue a blue ocean strategy because it is the most complex, coveted, and most desirable strategy that exists.

I disagree; firms should only pursue this strategy if they are able to reconcile the tradeoff's of each generic strategy.

Although JetBlue used a blue ocean strategy to achieve an initial competitive advantage, it failed to maintain this advantage. Which of the following provides the best reason for this development?

It failed to refine its strategic position over time.

How is a cost-leader protected from threats from powerful suppliers?

It is more able to absorb price increases through accepting lower profit margins.

What must a cost-leadership strategy accomplish to be successful?

It must reduce the firm's cost below that of its competitors while offering adequate value.

Which of the following best explains why a blue ocean strategy is difficult to implement?

It requires the reconciliation of fundamentally different strategic positions— differentiation and low cost.

Which of the following is an accurate statement about learning effects?

Learning effects occur over time as output accumulates.

How did Marriott use economies of scope to achieve greater economic value than its competitors?

Marriott lowered its cost structure by sharing its production assets over several types of hotels, which increased the diversity of its hotel line and thus its differentiated appeal.

________ is best described as the output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale.

Minimum efficient scale

Mohawk is a leader in sustainable and innovative carpeting and floorings, as evidenced by its signature product, theworld's first organic cotton carpet. Its product is unique and has appealing customer attributes. If Mohawk's raw material costs increased by 12 percent this year, what would be thelikely outcome?

Mohawk would pass a major portion of this increase along as a price increase to its customers.

Jonathan is the owner of a landscaping company that caters to a very wealthy clientele. His company has struggled to differentiate itself from the other high-end landscapers in the area, but because he has hired several expensive but highly qualified team members, Jonathan is unable to shift to a cost-leadership strategy. Which strategy is most likely to achieve a competitive advantage?

Narrow the scope of competition and focus on unique features such as the use of organic materials.

T/F A cost-leader is the firm most likely to survive a price war.

TRUE

T/F A firm operating on a 70 percent learning curve will achieve lower per-unit costs after doubling its output than a firm operating on an 80 percent learning curve will.

TRUE

T/F Applying the five forces model to business-level strategy allows managers to assess the benefits and risks of both cost-leadership and differentiation strategies.

TRUE

T/F Differentiators tend to score highly on most competitive elements on a strategy canvas, while cost leaders tend to hover near the bottom of the strategy canvas.

TRUE

T/F The major value drivers that managers have at their disposal include product features, customer service, and complements.

TRUE

In order to achieve a competitive advantage, theHeavenly Hotels, a chain of luxury beach resorts, wants to increase its market share. Which of the following strategies is most likely to do so?

Take advantage of economies of scale and scope by opening a chain of lower-priced economy hotels that leverage the Heavenly Hotels brand image.

When examining all the generic strategies, which of the following below is inherently superior in every industry?

There is no single superior business-level strategy.

All of the following are questions that managers should ask before crafting a business- level strategy except

When should we introduce our product/service in the market?

Tablette Corp. is a consumer electronics company known for its affordable mobile devices that follows a cost-leadership strategy. In this scenario, Tablette Corp. should ideally compare its strategic position with

a consumer electronics company popular among price-conscious customers

Which of the following examples uses a focused differentiation strategy?

a cosmetics brand that offers superior skin lotion for sensitive skin priced at 100 dollars per bottle

Tough Guy's Inc. is a chain of gyms. It offers a fitness package that allows its members to use thegym facilities for 12 months by paying only for 10 months. Included in thepackage are two health check-ups and a gym kit. These add-ons by themselves are not very valuable, but as a package they can enhance the perceived value of the service offerings. In this case, Tough Guy's primary value driver is

availability of complements.

When wireless service providers offer free or discounted mobile phones for subscriptions to their wireless voice and data service, the perceived value of the service offering increases. In this case, the value driver would be

availability of complements.

When a firm is able to successfully employ a blue ocean strategy, it will create a competitive advantage by

beating rivals on product attributes while offering a better price.

In a successful ________ strategy, the trade-offs between differentiation and low cost are reconciled.

blue ocean

In the multiplex industry, Home Again Movies Inc. is an upscale multiplex that focuses on superior customer experience. the firm charges premium prices for its movie tickets and services. Movies-for-less Inc., in contrast, charges the lowest price in the industry with its no-frills approach. In between these two segments is Just Right Films Inc., which offers a customer experience comparable to that of Home Again Movies at a price almost as low as that of Movies- for-less. What strategy is Just Right Films pursuing in this scenario?

blue ocean strategy

A ________ primarily details the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market.

business-level strategy

When pursuing a cost-leadership strategy, a business must remember that

buyers will be reluctant to pay for a product unless thequality is acceptable.

Tindel Inc. competes on cost with Nirvana Sites in the web design industry. Both firms operate on a 90 percent learning curve, and neither firm is capable of increasing its cumulative output any further. How might Tindel Inc. achieve a cost-leadership position while maintaining customer satisfaction?

by incorporating new programming techniques to take advantage of experience- curve effects

In a focused cost-leadership strategy, a firm

delivers low-cost products and services to a specific, narrow part of the market.

Which of the following is primarily a value driver?

complements

Benny's Closet Inc. is an apparel company that caters to highly price-conscious customers. Through its simple apparel designs, acceptable quality levels, and minimal customer service, the company has been able to sell its merchandise at the lowest prices in the industry. Which of the following generic business strategies is Benny's Closet applying?

cost-leadership

Louis's Secondhand Store offers slightly lower quality merchandise than competitors at a much lower price. What strategy is Louis's Secondhand Store using?

cost-leadership

Gr8t Food is a chain of "fast casual" restaurants that sells its menu items at higher prices than its competitors. therestaurant has a large customer base due to its wide product portfolio and superior customer service. Which of thefollowing generic business strategies has Gr8t Food adopted in this scenario?

differentiation

A differentiator is least likely to be threatened by increases in input prices due to powerful suppliers when the

differentiator is able to create a significant difference between perceived value and current market prices.

When Total Semiconductors was operating at the minimum efficient scale of 10,000- 12,000 units per month, the firm's cost per unit was $45. However, when the output level was increased beyond 12,000 units, the cost per unit increased to $47. This increase was attributed to the wear-and-tear of the machinery, and complexities of managing and coordinating. What is this phenomenon known as?

diseconomies of scale

Food Tiger Inc. is a large chain of hypermarkets. It has cost benefits due to its extensive operation. the company's marketing and sales, logistics, administrative, and other such related costs get divided between a large number of product units stocked in its stores. This makes it difficult for smaller retail stores and supermarkets to compete against Food Tiger's low prices. Thus, Food Tiger has a competitive advantage due to its

economies of scale.

ComfySeat Furniture is a brand reputed for its wide variants of sofas that introduced a new range of mattresses and bed frames a few years ago. Since most of its products could be produced using thesame resources and technology, thecompany's cost structure lowered, while its product portfolio widened. In this scenario, which of thefollowing value and cost drivers is ComfySeat applying?

economies of scope

Marriott is able to create greater economic value than its competitors due to their ability to take advantage of ________, which describe the savings that come from producing two (or more) outputs at less cost than producing one output individually, while utilizing thesame amount of resources and technology.

economies of scope

Finger Lickin' BBQ is a chain of casual restaurants that promises affordable barbecue using top-quality local ingredients. However, the company has struggled to achieve a competitive advantage because of its high overhead costs. Which of the following scenarios is most likely to result in a competitive advantage?

eliminating brick-and-mortar locations and offering delivery from a central kitchen

The concept of a(n) ________ attempts to capture both learning effects and process improvements at firms.

experience curve

A differentiation strategy works best when a

firm has intangible resources, is able to pass on increases in supplier cost to the customer, and its differentiation appeal creates customer loyalty.

Power Juice is the owner of a firm that produces sports drinks. Since there are a number of firms in the industry competing on cost, Power Juice has decided to pursue a differentiation strategy. In this case, she should

focus on adding unique features to her product that customers will value.

Whole Foods focuses on a small market segment, affluent consumers who want to buy high-end, organic groceries. What is theappropriate name for Whole Foods's scope of competition?

focused

Bath & Chill is a spa that caters to the needs of a small percentage of highly health- conscious consumers. It offers state-of-the-art treatments in a luxurious setting. Since there are very few spas that offer the same unique services, customers are willing to pay a premium price for its products and services. In this scenario, Bath & Chill is following a

focused differentiation strategy.

All of thefollowing are generic business-level strategies except

focused marketing strategy.

The fact that both Whole Foods (a high-end grocery store) and Aldi (an inexpensive grocery store) have a competitive advantage in thegrocery store industry is an indication that

following a different generic business strategy within the same industry can lead to a competitive advantage for more than one organization.

Trader Joe's successfully used a blue ocean strategy by offering lower-cost food than Whole Foods for the same market of patrons. By doing this, Trader Joe's was able to

gain a market share and make up the loss in margin through increased sales.

When a differentiator charges a similar price as its competitors in the same strategic group but offers more perceived value, it

gains market share from other firms.

The strategy canvas for movie theaters includes factors such as prices, comfort, customer service, concessions variety, and hours of operation. Which of the following value curves is most likely to represent a theater that successfully positions itself as a differentiator?

high price, high comfort, high customer service, high concessions variety, low hours of operation

The question that business-level strategy answers is ________ thefirm will compete.

how

Trader Joe's differentiates itself from competitors by offering top-quality foods obtained through sustainable agriculture. This business strategy implies that Trader Joe's focuses on

increasing the perceived value created for customers, which allows it to charge a premium price.

Which of the following sources of differential appeal is least effective in helping a firm sustain its advantage?

observable product features

Which of the following drivers simultaneously increases value while lowering cost?

innovation

According to the five forces model, which of the following is viewed as a major risk to a business pursuing a cost-leadership strategy?

innovation that allows competitors to emerge with more economical replacements

NuLiver Corp. has recently introduced a new production method that will make the production of their medical devices more cost-effective. Which of the following will most likely be the result of this innovation?

jumps to a steeper learning curve

When a firm combines experience-based learning and process innovation, the firm

jumps to a steeper learning curve.

We Cut Corners lawn service initially spent nine man-hours to assemble a lawnmower. But as the production doubled, the number of hours spent on assembling a mower reduced by 20 percent. This increase in productivity reduced the company's cost per unit. What is this phenomenon referred to as?

learning-curve effect

Spotless Inc. outsources its production to contract manufacturers located in underdeveloped nations where unskilled labor is at very low wages is plentiful. This has helped the company become a price leader in the chemicals industry. Which of the following is the key driver behind Spotless Inc.'s strategic position?

low-cost input factors

Both Acme Inc. and Farma & Farma Corp. have discovered similar vaccines to prevent cancer. While Farma & Farma Corp.'s vaccine sells at $100 per unit, Acme sells its vaccine at $90 per unit. This price differentiation has mainly been attributed to the companies' capital decisions. While Acme used its retained earnings to develop the vaccine, Farma & Farma Corp. borrowed funds from banks to develop the vaccine. Thus, Farma & Farma Corp. pays a higher interest on its capital, which makes it necessary to price its vaccine higher. Thus, the key driver for Acme's competitive advantage is

low-cost input factors.

To initiate a strategic move that allows a firm to open up new and uncontested market space through value innovation, managers must address four key questions when formulating a blue ocean business strategy. These questions focus on

lowering cost and increasing perceived customer benefits.

Combining economies of learning with the existing production technology allows a firm to

move down a given learning curve.

A firm's business strategy can lead to a competitive advantage if it allows the firm to

perform different activities than its rivals.

A firm experiences diseconomies of scale when it

produces at an output level beyond the minimum efficient scale.

ConnellInc. has been successful at differentiating itself from competitors by claiming a premium price for its digital cameras based on superior image quality and advanced technology. In this scenario, which of thefollowing is thekey value driver?

product features

Golden Soles has been successful at differentiating itself from competitors by claiming a premium price for its athletic footwear based on superior design and high-quality materials. In this scenario, which of the following is the key value driver?

product features

Customer service and ________ are two of thevalue drivers that managers can utilize when trying to improve a firm's differentiation strategic position.

product uniqueness

When a firm makes choices between a cost or value position to achieve competitive advantage, it is primarily involved in

strategic tradeoffs.

When a blue ocean strategy goes bad, a firm has neither a clear differentiation nor a clear cost-leadership profile. This situation is referred to as

stuck in the middle.

In order for a firm to formulate an effective business-level strategy, it is important to remember that competitive advantage is determined by

the characteristics of both the industry and the firm.

Value drivers contribute to a firm's competitive advantage only if

the increase in value creation exceeds the increase in costs.

A blue ocean strategy differs from a low-cost strategy in that

the intent of a blue ocean strategy is not to be the absolute lowest-cost provider because a blue ocean must also increase perceived value.

Which of the following best describes a strategic tradeoff?

the tension between value creation and the pressure to keep costs in check

Which of the following is a firm effect that has an impact on the competitive advantage of a firm?

the value and the cost position of the firm relative to its competitors

One of the reasons that big box retailers like Home Depot are able to achieve economies of scale is that

they are able to take advantage of physical properties and maximize their scale efficiencies by stocking more merchandise and handling inventory more efficiently.

Product features, customer service, and complements are all examples of important

value drivers.

The pursuit of both differentiation and low cost at the same time in a way that creates a leap in value for both the firm and consumers is called

value innovation.

The goal of a strategic position is to create the largest gap possible between the________ that a firm creates through its offerings and the________ required to create these offerings.

value; cost

Ticker Inc. is a wristwatch company known for its luxury watches, and it follows a differentiation strategy. In this scenario, Ticker Inc. should ideally compare its strategic position with a

watch maker that sells high-end, premium watches.

A value curve indicates a lack of effectiveness in a firm's strategic profile when it

zig-zags.