ITM 3060 - Chapter 3

87) Which of the following strategies is also called establishing high switching costs? A) increasing production B) locking in suppliers C) reducing output D) locking in customers

Answer: D

89) 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) increment of purchasing costs

Answer: D

9) The bargaining power of ________ is one of the five competitive forces in Porter's five forces model. A) investors B) competitors C) employees D) customers

Answer: D

19) (T/F) Porter originally developed the five forces model in order to understand organizations' workforce.

Answer: FALSE

20) (T/F) According to Porter's five forces model, a company is profitable if all the five competitive forces are strong.

Answer: FALSE

21) (T/F) Porter identified the bargaining power of competitors as one of the competitive forces.

Answer: FALSE

24) (T/F) The strength of bargaining power forces does not depend on the availability of substitutes.

Answer: FALSE

25) (T/F) Typically, as an individual, a customer has substantial bargaining power over a large manufacturing industry.

Answer: FALSE

35) (T/F) Focused differentiation is a strategy in which a product is unique and is used by a wide range of consumers.

Answer: FALSE

52) (T/F) A business that selects a differentiation strategy will always structure itself around least-cost activities.

Answer: FALSE

54) (T/F) Customer service falls under the category of supporting activities in a value chain.

Answer: FALSE

55) (T/F) Procurement falls under the category of primary activities in a value chain.

Answer: FALSE

56) (T/F) Porter's definition of technology is narrow because it includes only research and development.

Answer: FALSE

57) (T/F) Support activities are business functions that relate directly to the production of the organization's products or services.

Answer: FALSE

59) (T/F) Each stage of the generic value chain accumulates costs and reduces the value of the product.

Answer: FALSE

61) (T/F) Receiving, storing, and disseminating inputs to a product is an operations management activity.

Answer: FALSE

64) (T/F) Firm infrastructure excludes general management, finance, accounting, legal, and government affairs.

Answer: FALSE

65) (T/F) It is easier to calculate the margin of supporting activities.

Answer: FALSE

67) (T/F) Manufacturing systems avoid linkages to reduce inventory costs.

Answer: FALSE

69) (T/F) Inbound and outbound logistics are the primary value generators in a service-oriented company.

Answer: FALSE

83) (T/F) Two companies with the same value chain activities will have the same business processes.

Answer: FALSE

91) (T/F) An information system can be part of a product, but it cannot provide support for a product or service.

Answer: FALSE

92) (T/F) Raising barriers to market entry is a product implementation principle.

Answer: FALSE

94) (T/F) Enhancing existing products and services is a competitive advantage created by the implementation of business processes.

Answer: FALSE

12) In which of the following cases is the strength of competitive forces low? A) when switching costs are high B) when the prices of rival products are relatively high C) when customers are not loyal to the existing company or brand D) when finding rival products is difficult

Answer: A

14) Which of the following is true if the threat from a substitute is strong? A) Customers are likely to switch to competitors' products. B) Competitors' products are of a lower quality. C) Competitors are yet to overcome the entry barriers. D) Prices of competitors' products are higher.

Answer: A

18) The bargaining power of a customer is weak if ________. A) the availability of a rival product is limited B) the cost of switching to a substitute is low C) competitors offer products with same benefits at lower prices D) new entrants are offering a product that uses more recent technology

Answer: A

29) An organization responds to the structure of its industry by choosing a ________ strategy. A) competitive B) growth C) leadership D) diversification

Answer: A

39) 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.

Answer: A

40) A business that selects a differentiation strategy ________. A) adds cost to an activity, provided it has a positive margin B) provides essential functions at lowest costs C) imitates rival companies' strategy and products D) always tries to price its products' higher than its competitors' products

Answer: A

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

Answer: A

5) Porter developed the five forces model to help organizations determine the ________. A) potential profitability of an industry B) services of an industry C) reason for the collapse of certain industries D) means for improving resource utilization

Answer: A

50) A manufacturing system uses sales forecasts to plan production. It uses the production plan to determine raw material needs and then uses the material needs to schedule purchases. This ultimately leads to reduced inventory costs. Which of the following is being used to reduce the inventory cost? A) linkages B) margins C) competitive strategy D) support activities

Answer: A

6) Which of the following statements describes suppliers in a position of strong bargaining power? A) coffee planters during a season of frost that decreases production B) domestic suppliers of corn in the event of removal of import duties on corn C) providers of logistic support when fuel prices have been reduced D) temporary part-time gym instructor

Answer: A

78) According to Porter, 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) develop and adopt new technologies D) increase procurement

Answer: A

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

Answer: A value chain is a network of value-creating activities. The generic value chain developed by Porter consists of five primary activities and four support activities. Primary activities are business functions that relate directly to the production of the organization's products or services. The primary activities are: a. Inbound logistics—deals with receiving, storing, and disseminating inputs to the product. b. Operations—involves transforming inputs into the final product. c. Outbound logistics—deals with collecting, storing, and physically distributing the product to buyers. d. Marketing and sales—involves inducing buyers to purchase the product and providing a means for them to do so. e. Customer service—involves assisting customer's use of the product and thus maintaining and enhancing the product's value.

85) What is the criterion on which business processes should run?

Answer: According to Porter, whether business processes are low-cost or high-service, these processes and systems used 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.

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

Answer: An organization responds to the structure of its industry by choosing a competitive strategy. Porter defined four fundamental 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, an organization can employ the cost or differentiation strategy across an industry, or it can focus its strategy on a particular industry segment. To be effective, the organization's goals, objectives, culture, and activities must be consistent with the organization's strategy.

10) In Porter's five forces 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 new projects D) employees not working toward organizational goals

Answer: B

16) 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 production capacity D) the relative size of the employee union

Answer: B

17) Which of the following statements describes a scenario in which the bargaining power of a supplier is strong? A) Competitors have decreased demand for raw materials. B) The availability of raw materials is limited. C) The supplier has excess inventory. D) There are many suppliers providing the same raw materials for comparable prices.

Answer: B

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

Answer: B

31) A firm introduces a new range of laptops that concentrate on delivering good graphics performance. Which of the following competitive strategies has the firm adopted if these laptops have relatively low prices? A) focused differentiation B) focused low cost C) industry-wide differentiation D) industry-wide low cost

Answer: B

43) Which of the following primary value chain activities induce buyers to purchase a product and provide a means for them to do so? A) inbound logistics B) sales and marketing C) outbound logistics D) operations/management

Answer: B

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

Answer: B

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

Answer: B

90) Jupiter Shop is an online store. Customers have to create an online account to purchase products. The purchased products are delivered free of cost. The address of delivery is stored, so that customers can choose the same address for future purchases. Jupiter Shop features seasonal discounts and exchange offers. It also accumulates redeemable points for regular shoppers. Which of the following statements describes the use of information systems (IS) by Jupiter Shop to lock in customers? A) providing free home delivery B) saving the delivery addresses C) offering seasonal discounts D) collecting feedback online

Answer: B

1) The competitive strategy of an organization determines its ________. A) industry rivals B) functions C) value chains D) strategic alliances

Answer: C

13) If the price of an alternative is lower than the price of the existing product, and customers perceive similar benefits from both the products, then the ________. A) switching cost is high B) price of the product should be increased to retain market share C) threat from the substitute is strong D) customers' bargaining power decreases

Answer: C

15) Which of the following is true about new entrants? A) They have strong customer loyalty. B) They will have records on customers' purchase habits. C) They are yet to develop relationships with suppliers. D) They can lock in suppliers to gain a competitive advantage.

Answer: C

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

Answer: C

42) Which of the following primary activities describes collecting, storing, and physically distributing products to buyers? A) customer service B) sales and marketing C) outbound logistics D) operations/management

Answer: C

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

Answer: C

7) Simpson's Lawn Services decides to offer two free mowing services for all customers who booked garden landscaping in the fall. Which of the following forces is Simpson's Lawn Services addressing? A) the control exercised by Acme Corp., who supplies Simpson's 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

Answer: C

8) 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

Answer: C

88) Which of the following is a process implementation principle of competitive advantage? A) creating a new product B) enhancing existing services C) establishing alliances with other organizations D) differentiating a service

Answer: C

11) In Porter's five forces model, the two strength factors that relate to competitive forces are ________ and customer loyalty. A) employee unions B) nature of products C) customer services D) switching costs

Answer: D

30) Which of the following competitive strategies does a company follow if it produces a uniquely formulated anti-ageing face cream targeted at women above the age of forty? A) providing the lowest cost across the industry B) providing a better product across the industry C) focusing on lowering the cost within an industry-segment D) focusing on product differentiation within an industry-segment

Answer: D

32) 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

Answer: D

38) 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

Answer: D

41) 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

Answer: D

44) Which of the following statements describes a customer service activity? A) receiving and storing materials B) transforming customers' inputs into the final product C) inducing buyers to purchase the product D) assisting customers with the use of the product

Answer: D

45) Which of the following is true of supporting activities? A) Their contribution toward a product's value is negligible. B) Their contributions to margin can be calculated easily. C) Customer service is considered as a supporting activity. D) Negotiation of prices is considered as a supporting activity.

Answer: D

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

Answer: D

79) Which of the following statements is true of business processes? A) If a value chain's margin is negative, the value should be decreased. B) Value chain activities differ based on the business processes being used. C) If a value chain's margin is negative, the costs of the value chain should be increased. D) The processes implementing a value chain must create sufficient value to cover their costs.

Answer: D

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

Answer: 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.

28) Describe Porter's five forces model.

Answer: Organizational strategy begins with an assessment of the fundamental characteristics and structure of an industry. Porter developed the five forces model to help organizations determine the potential profitability of an industry. Over the years, this model has also been applied to understand 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 include 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. This examination leads to development of competitive strategies.

4) Briefly describe how organizational strategy determines the functions of information systems.

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

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

Answer: 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. Human resources include recruiting, compensation, evaluation, and training of full-time and part-time employees. Firm infrastructure includes general management, finance, accounting, legal, and government affairs.

70) How does competitive strategy determine value chain structure?

Answer: 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 formulate a competitive strategy using that analysis. 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.

72) Differentiate between value and margin.

Answer: 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.

75) Explain value chain linkages.

Answer: 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 uses the production plan to determine raw material needs and then uses the material needs to schedule purchases. The end result is just-in-time inventory, which reduces inventory sizes and costs. Value chain analysis has a direct application to manufacturing businesses and also exists in service-oriented companies.

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

Answer: Primary activities are business functions that relate directly to the production of an organization's products or services. Primary activities include inbound logistics, operations, customer service, and sales and marketing. These activities add value to a product. Support activities are business functions that assist and facilitate the primary activities. Supporting functions add value to a product indirectly. They also have costs and contribute to a margin. It is difficult to calculate their margins because the specific value added is difficult to measure.

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

Answer: 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 creating new products or services, by enhancing existing products or services, and by 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.

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

Answer: Some of the competitive strategies that are based on business processes include: 1. Locking in customers—organizations can lock in customers by making it difficult or expensive for customers to switch to another product. This strategy is also called establishing high switching costs. 2. 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. 3. 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. 4. Establishing alliances—another means to gain competitive advantage is to establish alliances with other organizations. Such alliances establish standards, promote product awareness and needs, develop market size, reduce purchasing costs, and provide other benefits. 5. Reducing costs—organizations can gain competitive advantage by creating better business processes at reduced costs. Such reductions enable the organization to reduce prices and/or to increase profitability.

77) Describe the support activities in a value chain.

Answer: Support activities are business functions that assist and facilitate the primary activities. 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 not only includes research and development, but it also includes other activities within the firm for developing new techniques, methods, and procedures. Human resources includes recruiting, compensation, evaluation, and training of full-time and part-time employees. Firm infrastructure includes general management, finance, accounting, legal, and government affairs. Supporting functions add value, albeit indirectly, and they also have costs.

22) (T/F) The three competitive forces in Porter's model concern the danger of customers taking their business elsewhere.

Answer: TRUE

23) (T/F) If the costs of switching to another vendor are high, then the strength of the competitive forces is low.

Answer: TRUE

26) (T/F) Availability of substitutes plays a role in determining the bargaining power of suppliers.

Answer: TRUE

27) (T/F) Vendor knowledge and vendor relationships serve as a barrier to entry for new competitors.

Answer: TRUE

3) (T/F) Competitive strategy determines an organization's value chain.

Answer: TRUE

34) (T/F) An organization can choose to either minimize cost or maximize differentiation to gain a competitive advantage.

Answer: TRUE

36) (T/F) According to Porter, to be effective an organization's goals, objectives, cultures, and activities must be consistent with the organization's strategy.

Answer: TRUE

51) (T/F) Organizations analyze the structure of their industry and use that analysis to formulate a competitive strategy.

Answer: TRUE

53) (T/F) The difference between the value that an activity generates and the cost of the activity is called the margin.

Answer: TRUE

58) (T/F) A business with a differentiation strategy will add cost to an activity only as long as the activity has a positive margin.

Answer: TRUE

60) (T/F) 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.

Answer: TRUE

62) (T/F) A company uses the outbound logistics activity to deliver the finished product to a customer.

Answer: TRUE

63) (T/F) Porter's model of business activities includes linkages, which are interactions across value activities.

Answer: TRUE

66) (T/F) Value chain analysis has a direct application to manufacturing businesses.

Answer: TRUE

68) (T/F) Value chains exist in service-oriented companies.

Answer: TRUE

80) (T/F) Business processes implement value chains or portions of value chains.

Answer: TRUE

81) (T/F) Each value chain is supported by one or more business processes.

Answer: TRUE

82) (T/F) Value chain activities are not dependent on the competitive strategies used by organizations.

Answer: TRUE

84) (T/F) If a value chain's margin is negative, the company must reduce the cost of the value chain.

Answer: TRUE

93) (T/F) Establishing alliances with other organizations promotes product awareness.

Answer: TRUE