chapter 06 strategic management

Why are differentiation and cost-leadership strategies referred to as generic business strategies?

They can be used by any organization independent of industry context

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) _____.

automobile company that sells high-end, premium cars

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

jumps to a steeper learning curve.

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

Economies of scale

Which of the following will hamper a differentiator's ability to achieve a competitive advantage?

Lower value gap

Which of the following is more of a value driver than a cost driver?

Superior customer service

An integration strategy differs from a low-cost strategy in that:

the intent of an integration strategy is not to be the absolute lowest-cost provider because an integrator must also increase perceived value.

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

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):

90 percent learning curve

Which of the following statements is true of a strategic position

Choosing a strategic position requires making important trade-offs between value and cost positions.

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

D. The value and the cost position of the firm relative to its competitors To formulate an effective business strategy, managers need to keep in mind that competitive advantage is determined jointly by industry and firm effects. At the firm level, performance is determined by value and cost positions relative to competitors. This is the firm's strategic position.

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

B. Innovation that allows competitors to emerge with more economical replacements

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.

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?

$4

A firm achieves differentiation parity ideally when:

A. it creates the same customer value as its competitors.

Which of the following statements is true of learning curves?

Learning curves can be observed in manufacturing processes and professional services.

Rosa Apparels Inc. outsources its production to contract manufacturers located in underdeveloped nations where unskilled labor is available in plenty for very low wages. This has helped the apparel brand become a price leader in the industry. Which of the following is the key driver behind Rosa Apparel's strategic position?

Low-cost input factors The key driver behind Rosa Apparel's strategic position is low-cost input factors. One of the most basic advantages a firm can have over its rivals is access to lower-cost input factors such as raw materials, capital, labor, and IT services.

_____ is best described as the process of manufacturing a large variety of tailor-made products or services at a relatively low unit cost.

Mass customization

Coral Orchids 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?

Superior customer service

Wear Crush Inc. is an apparel company known for its affordable clothes that follows a cost-leadership strategy. In this scenario, Wear Crush should ideally compare its strategic position with:

an apparel company popular among price-conscious customers.

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 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, Body Sync's primary value driver is:

availability of complements.

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

A successfully implemented integration strategy allows a firm to:

charge a higher price than the cost leader in the industry.

Both Myoco Electronics Inc. and Electra Series Inc. have achieved cost parity in the television market. To gain and sustain a competitive advantage against Electra Series, Myoco Electronics should:

create greater perceived economic value than Electra Series.

In a focused cost-leadership strategy, a firm

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

A firm experiences _____ when there are increases in cost per unit as output increases

diseconomies of scale

BuyMart 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 BuyMart's low prices. Thus, BuyMart has a competitive advantage due to its:

economies of scale

When a firm is successful at pursuing an integration strategy, _____.

investments in differentiation are complements

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

move down a given learning curve.

To be cost-competitive, a firm should:

operate at the minimum efficient scale.

DFS Electronics Inc. ensures that all its products are highly durable and reliable by using techniques like zero-defect and lean manufacturing systems. These efforts not only add to the products' differential appeal, but also help the company save costs during production and avoid expenses due to after-sales services. Thus, the common value and cost driver responsible for DFS Electronics' strategic position as an integrator is the _____.

quality

When a firm operates at the minimum efficient scale, the

returns to scale are constant

The productivity frontier represents a(n):

set of best-in-class strategic positions the firm can take relating to value creation and low cost at a given point in time.

Economies of scale do NOT allow firms to:

spread their variable costs over a larger output.

The productivity frontier function is concave, and it captures the:

trade-off between value creation and production cost.

As the cumulative output in a firm increases, managers learn how to optimize the production process and improve workers' performance through repetition. This drives down the per-unit cost. Which of the following phenomena is best described here?

Learning effects

Oviyo Inc. 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 the following is the key value driver?

Product features

TrueDisk Inc. manufactures external hard disks for $32 per unit, and the maximum price customers are willing to pay is $47 per unit. SW Storage Inc. is a competitor of TrueDisk 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?

TrueDisk creates a greater economic value than SW Storage.

Firms pursuing a differentiation strategy primarily seek to:

create higher customer perceived value than the value that competitors create. A differentiation strategy seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels

A company that uses a differentiation strategy can achieve a competitive advantage as long as its:

economic value created is greater than that of its competitors

Even without differentiation parity, a firm pursuing a cost-leadership strategy can still gain a competitive advantage as long as its:

economic value creation exceeds that of its competitors.

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.

Diseconomies of scale refer to:

increases in cost as output increases

Whole Foods differentiates itself from competitors by offering top-quality foods obtained through sustainable agriculture. This business strategy implies that Whole Foods focuses on:

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

Free Color Inc. is an apparel company that caters to the 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 Free Color applying?

Cost-leadership

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. An 80 percent learning curve indicates that every time the cumulative output is doubled, the cost per unit will decline by 20 percent. Similarly, a 90 percent learning curve indicates that per-unit cost drops 10 percent every time output is doubled. A 70 percent learning curve indicates a 30 percent drop every time output is doubled.

_____ is when a firm is searching for new knowledge that could enhance its future performance.

Exploration When a firm is searching for new knowledge that may enhance its future performance, it is engaging in exploration.

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

Integration strategy True Movies is pursuing the integration strategy. A successful integration strategy requires that trade-offs between differentiation and low cost are reconciled. An integration strategy allows a firm to offer a differentiated product or service at low cost.

GlamorRace is a cosmetic brand that pursues a cost-leader strategy. Which of the following statements is true of the cosmetic brand?

It directly competes against luxury cosmetic brands that charge premium prices. GlamorRace appeals to the price-conscious buyers. Cost leaders appeal to the price-conscious buyer, whose main criterion is the price of the product or service. By attending to the reduction of costs in each value chain activity, managers aim to achieve the lowest cost position in the industry.

Both Viten Electronics Inc. and JL Electronics Inc. incur a cost of $400 to manufacture an LED television. However, the economic value created by JL Electronics is more than that created by Viten Electronics. What does this indicate?

JL Electronics can charge a premium price on its televisions.

Bass Watches Inc. initially spent eight man-hours to assemble a wrist watch. 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?

Learning-curve effect

Innovate Electronics Inc. allows its customers to personalize their refrigerators in terms of the dimensions, the panels inside, and the color and design of the outer body. Also, customers can include additional features like in-built radios, extra lights, and cold water dispensers based on their individual requirements. The company successfully manufactures these tailor-made goods at a relatively low unit cost and provides it to the customers at a price almost equal to that of the standard refrigerators sold by other companies. What does this scenario best illustrate?

Mass customization

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

Observable product features If the source of the differential appeal is intangible rather than tangible (e.g., reputation rather than observable product and service features), a differentiator is even more likely to sustain its advantage. Competitors will find such intangible advantages time-consuming and costly, and maybe impossible, to imitate

While Aros Inc. incurs a cost of $20 for a pair of shoes, Shoes Cult Inc., its competitor, manufactures a pair of shoes at $22. Both the companies are able to sell their shoes for a maximum of $30 per pair. Which of the following statements is NOT true in this scenario?

Shoes Cult has a competitive advantage over Aros.

The productivity frontier provides a theoretical reflection of the possible best practices at any given time. Why is this an important tool for managers?

Strategic positions are not fixed, and firms have to refine their positions over time.

Which of the following statements accurately brings out the difference between economies of scale and learning effects?

While there are no diseconomies to learning, there are diseconomies to scale.

KitchenThings Inc. is a company that manufactures plastic kitchenware. It operates at an output level that allows it to keep its unit cost per output to the lowest in the industry. This in turn allows KitchenThings to be the price leader. Other competing companies cannot operate at the same level due to a lack of consumer demand for their products. This puts them at a competitive disadvantage. In this scenario, the cost driver behind KitchenThings's strategic position is _____.

economies of scale

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

integration strategy

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

low-cost input factors.

A firm's business strategy will 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

A firm is said to have a competitive advantage over its rivals when it:

reaches the productivity frontier.

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

strategic trade-offs

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

the increase in value creation exceeds the increase in costs.

In contrast to a differentiator, a cost leader will

focus its research and development on process technologies to improve efficiency.

A firm pursuing a differentiation strategy as opposed to a low-cost strategy will:

focus its research and development on product technologies to add uniqueness.

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

Evia Cycles Inc. incurs $400 to manufacture a bicycle, and the maximum price customers are willing to pay is $550 per unit. Archer Cycles Inc., its competitor, incurs $450 to manufacture a similar bicycle, and customers are willing to pay a maximum price of $620 for it. What does this indicate?

Archer Cycles has created a greater economic value than Evia Cycles.

Home Smart Inc. is a chain of supermarkets that sells its products at higher prices than its competitors. Yet, the supermarket chain has a large customer base due to its wide product portfolio and superior customer service. Which of the following generic business strategies has Home Smart adopted in this scenario?

Differentiation

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?

Diseconomies of scale

BodyBlush 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 BodyBlush applying?

Economies of scope

Which of the following statements accurately brings out the difference between economies of scale and economies of scope?

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.

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

Innovation Quality, economies of scope, customization, innovation, and structure, culture, and routines are drivers that simultaneously increase value while lowering cost (used for integration strategies). Availability of complements, superior customer service, and economies of scale are drivers that uniquely affect either value creation or low cost (used for differentiation or cost-leadership strategies).

_____ 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

A firm's learning curve is steeper than that of its competitor. What does this imply?

The firm is at an advantage when compared to its competitor

Which of the following factors contributes to the success of the cost-leadership strategy of Ryanair airlines?

The rock-bottom air fares In Strategy Highlight 6.2, it is seen that Ryanair is a company pursuing a cost-leadership strategy. Headquartered in Dublin, Ireland, Ryanair proudly calls itself "the nastiest airline in the world" because of its relentless effort to drive down costs in order to offer rock-bottom air fares.

Which of the following situations will have greater effects from economies of scale than from learning effects?

When mass manufacturing pens

The primary goal of a firm pursuing an integration strategy should be to:

achieve a larger economic value created than that of rivals in the industry.

When Internet service providers offer free routers for subscriptions to their wireless Internet packs, the perceived value of the service offering increases. In this case, the value driver would be:

availability of complements. Complements add value to a product or service when they are consumed in tandem. Finding complements, therefore, is an important task for managers in their quest to enhance the

A cost-leader is protected from the threat of new entrants primarily due to its

economies of scale

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

experience curve

When a firm applies its current knowledge to enhance its performance in the short term, it is referred to as _____.

exploitation

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. When a firm differentiates itself through intangible resources that increase its differentiation appeal and provide for customer loyalty, it will be able to pass on cost increases to the customer.

Green Curry is a restaurant that caters to the needs of a small percentage of highly health-conscious consumers. It has an all-organic, vegan menu. Since there are very few restaurants that offer the same unique services, customers are willing to pay a premium price for its products and services. In this scenario, Green Curry is following a _____.

focused differentiation strategy Green Curry is following a focused differentiation strategy. The focused differentiation strategy is same as the differentiation strategy except with a narrow focus on a niche market. A differentiation strategy seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels