CH 6 Business Strategy: Differentiation, Cost Leadership, and Blue Oceans

Bass Watches Inc. initially spent eight man-hours to assemble a wristwatch. But as the production doubled, the number of hours spent on assembling a watch reduced by 20 percent. This increase in productivity reduced the company's cost per unit. What is this phenomenon referred to as? A. learning-curve effect B. network effect C. black-swan event D. time compression diseconomies

A

Lush Roses is a chain of premium hotels around the globe that charges higher prices for its rooms and suites when compared to the average industry standards. Yet, the hotel enjoys the largest market share in the industry. This is mainly due its highly responsive staff that has a strong commitment toward achieving a 100 percent guest satisfaction. In this scenario, which of the following is the key value driver? A. superior customer service B. low cost of input factors C. availability of complements D. economies of scale

A

Which of the following statements is true of a strategic position? A. Choosing a strategic position requires making important trade-offs between value and cost positions. B. Strategic positions are fixed; they do not change like the environment. C. Differentiation and cost leadership require similar strategic positions. D. A firm is said to have a competitive advantage when it ends up with strategic positions below the productivity frontier.

A

Which of the following best describes a strategic trade-off? A. the tension between innovation and keeping manufacturing costs down B. the tension between maintaining both high-quality products and service C. the tension between value creation and the pressure to keep cost in check D. the tension between raising prices and keeping a loyal clientele

C

Which of the following statements accurately brings out the difference between economies of scale and economies of scope? A. Economies of scale refer to the decreases in per-unit cost with decreases in output, whereas economies of scope refer to the increases in per-unit cost with increases in output. B. Economies of scale result in decreasing returns to scale, and economies of scope result in constant returns to scale. C. Economies of scope are the savings that come from producing two or more outputs from the same resources, whereas economies of scale are decreases in per-unit cost with increases in output. D. Economies of scope are realized when a firm operates at the minimum efficient scale, whereas economies of scale are realized when the firm operates beyond the minimum efficient scale.

C

Which of the following will hamper a differentiator's ability to achieve a competitive advantage? A. lower production costs B. premium prices C. lower value gap D. customized goods

C

According to the five forces model, which of the following is viewed as a major risk to a business pursuing a costleadership strategy? A. competition switching from non-price attributes to pricing B. innovation that allows competitors to emerge with more economical replacements C. new entrants with small production scale D. suppliers requesting a 2% price increase across the industry

B

When a firm makes choices between a cost or value position to achieve competitive advantage, it is primarily involved in A. collective bargaining. B. strategic trade-offs. C. arbitration. D. mediation.

B

A firm experiences diseconomies of scale when it A. has a constant return to scale. B. moves down the experience curve. C. produces at an output level beyond the minimum efficient scale. D. has a steep learning curve when compared to its competitors.

C

A firm's business strategy will lead to a competitive advantage if it allows the firm to A. execute the same activities performed by the rivals in a similar manner. B. reduce the value gap. C. perform different activities than its rivals. D. position itself below the productivity frontier.

C

What does it mean for a firm to have an 80 percent learning curve? A. Every time the cumulative output increases by 80 percent, the cost per unit will decline by 20 percent. B. Every time the cumulative output is doubled, the cost per unit will decline by 80 percent. C. Every time the cumulative output goes up by 20 percent, the cost per unit will decline by 80 percent. D. Every time the cumulative output is doubled, the cost per unit will decline by 20 percent.

D

A company that uses a differentiation strategy can achieve a competitive advantage as long as its A. economic value created is greater than that of its competitors. B. value gap is lower than that of its competitors. C. strategic position is below the productivity frontier. D. products and services create a lower consumer surplus than that of its competitors

A

A firm achieves differentiation parity ideally when A. it creates the same customer value as its competitors. B. its cost of production is higher than that of its competitors. C. it successfully sells its products and services at a higher price than its competitors. D. its product features and services are better than that of its competitors.

A

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? A. 9,000 units B. 11,000 units C. 13,000 units D. 15,000 units

B

AccuroDisk Inc. manufactures external hard disks for $32 per unit, and the maximum price customers are willing to pay is $47 per unit. TD Storage Inc. is a competitor of AccuroDisk 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? A. AccuroDisk and TD Storage share differentiation parity. B. TD Storage has a competitive advantage over AccuroDisk in terms of perceived value. C. AccuroDisk creates a greater economic value than TD Storage. D. TD Storage is a cost-leader when compared to AccuroDisk.

C

Even without differentiation parity, a firm pursuing a cost-leadership strategy can still gain a competitive advantage as long as its A. learning curve is not steeper than that of its competitors. B. per-unit costs are higher than that of its competitors. C. economic value creation exceeds that of its competitors. D. value gap is lower than that of its competitors.

C

Which of the following contributed the most to JCPenny's failed blue ocean strategy? A. failure to win legal battles against its closest competitors B. failure to conduct an accurate pretest in the market C. failure to apply the strategy to enough stores at the same time D. failure to combine a cost-leadership position with a differentiation position

D

Assume a company has 10 million shares of stock outstanding and that its Income Statement for Year 15 is as follows: Income Statement Data Year 15 (in 000s) Net Revenues from Footwear Sales $ 330,000 Cost of Pairs Sold 240,000 Warehouse Expenses 15,000 Marketing Expenses 35,000 Administrative Expenses 8,000 Operating Profit (Loss) 32,000 Interest Income (expenses) (10,000) Pre-tax Profit (Loss) 22,000 Income Taxes 6,600 Net Profit (Loss) $ 15,400 Compute: Gross Profit Margin, Operating Profit Margin, Net Profit Margin, EPS, Interest Coverage Ratio.

GPM = 27.27%; OPM = 9.69%; NPM = 4.67%; EPS = $1.54; Interest Coverage Ratio = 3.2 times

If a company spends $20 million to install new footwear-making equipment with capacity to produce 1 million pairs of athletic footwear at its North American production facility, then its annual depreciation costs at that facility will rise by what percentage and what dollar amount?

10% & $2,000,000

A successfully implemented blue ocean strategy allows a firm to A. charge a higher price than the cost-leader in the industry. B. create lesser economic value than the differentiator in the industry. C. reduce its value gap beyond that created by the cost-leader in the industry. D. increase its price above that of the differentiator in the industry.

A

Allure is a cosmetic brand that pursues a cost-leader strategy. Which of the following statements is true of the cosmetic brand? A. It appeals to the price-conscious buyers. B. Its primary value driver is product uniqueness. C. It charges a premium price for its products. D. It directly competes against luxury cosmetic brands that charge premium prices

A

At a certain output level, the per-unit cost incurred by a firm to manufacture a product is $5. Other factors remaining constant, what will be the new per-unit cost if the cumulative output is doubled, and the firm is able to achieve an 80 percent learning curve? A. $4 B. $5 C. $3 D. $6

A

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? A. It failed to drive up the perceived customer value. B. It failed to refine its strategic position over time. C. It failed to move into a non-contested market space. D. It failed to offer enough strategic trade-offs.

B

At a certain output level, the per-unit cost incurred by a firm to manufacture a product was $60. Once the cumulative output doubled, the cost per unit reduced to $54. All other factors remaining constant, the firm has been able to achieve a(n) A. 80 percent learning curve. B. 90 percent learning curve. C. 60 percent learning curve. D. 54 percent learning curve.

B

PureRinse Inc. is a brand reputed for its wide variants of body wash that introduced its range of shampoos and skin moisturizers a few years ago. Since most of its products could be produced using the same resources and technology, the company's cost structure lowered, while its product portfolio widened. In this scenario, which of the following value and cost drivers is PureRinse applying? A. mass customization B. economies of scope C. learning-curve effect D. network effect

B

True Empire Autos Inc. is an automobile company known for its luxury cars and follows a differentiation strategy. In this scenario, True Empire Autos should ideally compare its strategic position with a(n) A. automobile company that sells pre-owned cars. B. automobile company that sells high-end, premium cars. C. automobile company that manufactures economy cars. D. pen manufacturing company that follows a differentiation strategy.

B

When Jean Cult Inc. was operating at the minimum efficient scale of 10,000-12,000 units per month, the firm's cost per unit was $20. However, when the output level was increased beyond 12,000 units, the cost per unit increased to $22. This increase was attributed to the wear-and-tear of the machinery, and complexities of managing and coordinating. What is this phenomenon known as? A. resource ambiguity B. diseconomies of scale C. network effect D. learning-curve effect

B

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? A. 2,000-3,000 units B. 3,000-4,000 units C. below 2,000 units D. above 4,000 units

B

Which of the following best explains why a blue ocean strategy is difficult to implement? A. It requires the combination of fundamentally similar strategic positions—differentiation and low cost. B. It requires the reconciliation of fundamentally different strategic positions—differentiation and low cost. C. It requires the combination of fundamentally similar strategic positions—differentiation and strategic trade-offs. D. It requires the reconciliation of fundamentally different strategic positions—differentiation and strategic trade-offs.

B

Why are differentiation and cost-leadership strategies referred to as generic business strategies? A. They can be simultaneously pursued by a firm without any trade-offs. B. They can be used by any organization independent of industry context. C. They require similar strategic positions in order to increase a firm's chances to gain competitive advantage. D. They can be applied only by businesses, which have a competitive advantage.

B

Body Sync Inc. is a chain of gyms. It offers a fitness package that allows its members to use the gym facilities for 12 months by paying only for 10 months. Included in the package are two health checkups 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, Body Sync's primary value driver is A. economies of scale. B. learning-curve effects. C. availability of complements. D. experience-curve effects.

C

Both Viten Electronics Inc. and JL Electronics Inc. incur a cost of $400 to manufacture a LED television. However, the economic value created by JL Electronics is more than that created by Viten Electronics. What does this indicate? A. Viten Electronics has a competitive advantage over JL Electronics. B. Both Viten Electronics and JL Electronics have achieved competitive parity. C. JL Electronics can charge a premium price on its televisions. D. Viten Electronics has created a higher value gap than JL Electronics.

C

DiscountHaven 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 DiscountHaven's low prices. Thus, DiscountHaven has a competitive advantage due to its A. superior customer service. B. time compression economies. C. economies of scale. D. learning-curve effects.

C

Handy Helper, Inc. produces decent-quality woodworking tools at a mid-range price. Master Tools, Inc. produces highquality tools also at a mid-range price. Master Tools gained a competitive advantage because it has ______ than Handy Helper. A. higher economies of scope B. lower economies of scope C. a higher value gap D. a lower value gap

C

Firms pursuing a differentiation strategy primarily seek to A. keep their cost structures lower than that of the cost leader. B. reduce the value gap to gain a competitive advantage. C. provide products that are a direct imitation of the competitors' products. D. create higher customer perceived value than the value that competitors create

D

How did Marriott use economies of scope to achieve greater economic value than its competitors? A. Marriott increases in cost per hotel unit as number of customers increases. B. Marriott decreases in cost per hotel unit as number of customers increases. C. Marriott lowered its cost structure by focusing its production assets on one type of hotel, which increased its menu and thus its differentiated appeal. D. Marriott lowered its cost structure by sharing its production assets over a several types of hotels, which increased its menu and thus its differentiated appeal.

D

Product features, customer service, and complements are all examples of important A. cost curves. B. cost drivers. C. value curves. D. value drivers.

D

Which of the following examples uses a focused differentiation strategy? A. a tennis pro shop that sells low-quality racquets priced at 150 dollars per racquet B. a coffee shop that offers mediocre lattes at a price of five dollars for a small latte C. a hotel chain that offers high-quality service with room rates of under 75 dollars per night D. a cosmetics brand that offers superior-quality skin lotion priced at 100 dollars per bottle

D

Which of the following is a firm effect that has an impact on the competitive advantage of a firm? A. the exit barriers within the industry in which the firm operates B. the number of companies operating in the industry in which the firm operates C. the intensity of rivalry among existing companies in the firm's chosen industry D. the value and the cost position of the firm relative to its competitors

D