Chapter 4
Employee productivity is:
a. a function of management delegation. b. one of the key determinants of a company's efficiency. c. not subject to measurement. d. typically not sustainable in the long run. e. a function that does not affect a company's profitability. ANSWER: b
When Amber first started working at a car manufacturing plant assembling car doors, she was slower at the task than her co-workers. As time passed, her speed at assembling the doors increased and she even taught others how to perform the task more quickly. As a result of increased employee productivity, this particular plant experienced cost savings. These cost savings can be attributed to learning effects.
a. True b. False ANSWER: True
Quality can best be thought of as:
a. a competency in investigating and identifying needs of customers. b. the attributes that customers perceive as superior in a product. c. product development projects driven by customer needs. d. the quantity of inputs that it takes to produce a given output. e. unit cost reductions associated with a large scale of output. ANSWER: b
All else being equal, if a company moves down the experience curve faster than its rivals, it should realize a lower cost structure.
a. True b. False ANSWER: True
Close integration between research and development (R&D), production and marketing can help a company avoid innovation failures.
a. True b. False ANSWER: True
Diseconomies of scale are the unit cost increases associated with a large scale of output
a. True b. False ANSWER: True
Distinctive competencies shape the functional-level strategies that a company can pursue.
a. True b. False ANSWER: True
Flexible production technologies allow a company to produce a wider variety of end products at a unit cost that at one time could be achieved only through the mass production of a standardized output
a. True b. False ANSWER: True
Mass customization describes the ability of companies to use flexible manufacturing technology to reconcile the two goals of low cost and differentiation through product customization.
a. True b. False ANSWER: True
No matter how complex the task is, learning effects typically die out after a limited period of time.
a. True b. False ANSWER: True
Poor commercialization occurs when there is definite customer demand for a new product, but the product is not well adapted to customer needs because of factors such as poor design and poor quality.
a. True b. False ANSWER: True
Poor positioning strategy arises when a company introduces a potentially attractive new product but sales fail to materialize in the marketplace.
a. True b. False ANSWER: True
Product attributes that collectively define product excellence include the form, features, performance, durability, and styling of the product.
a. True b. False ANSWER: True
Six Sigma is a quality and efficiency program derived from the concept of Total Quality Management, and was widely used in Japan before acceptance in the U.S.
a. True b. False ANSWER: True
Strong brand loyalty leads to more sales and the ability to charge higher prices.
a. True b. False ANSWER: True
The "sigma" in the Six Sigma name refers to the Greek letter meaning standard deviation from the mean.
a. True b. False ANSWER: True
Through efficient logistics at Grasshopper Grocers, the stock in the stores is automatically replenished when the company receives an alert from customers that their stock is low. Management at Grasshopper Grocers uses a just-in-time inventory system.
a. True b. False ANSWER: True
You are a consultant offering advice to a large manufacturing firm about ways to increase its distinctive competency in customer responsiveness. What suggestions would you offer? Be specific and detailed in your answer.
ANSWER: In addressing customer responsiveness issues, students should highlight the importance of the other three areas for distinctive competency. That is, one of the best ways to improve customer responsiveness is through improvements in efficiency, quality, and innovation. Another important consideration is that firms must develop mechanisms for gathering feedback from customers and then incorporating that feedback into their operations throughout the firm. Customization is one technique for satisfying unique customer demands. Finally, the students should also mention that for many customers, quick response is desirable.
Identify the two dimensions of quality and describe how companies can achieve them.
ANSWER: Quality can be thought of in terms of reliability (products do the job they were designed to do) and excellence (superior attributes). Superior reliability can result from internal initiatives such as adopting Six Sigma quality improvement methodology. This requires a total value chain focus. Specific things that companies can do include building an organizational commitment to quality, creating quality leaders, focusing on customers, identifying processes and the sources of defects, developing quality metrics, setting goals and creating incentives, soliciting input from employees, improving supplier relations, designing for ease of manufacture, and breaking down functional barriers. Quality as excellence includes improving attributes such as form, features, performance, durability, and styling of a product. For a product's quality to be viewed as excellent, it must be perceived as being superior to its rivals. As such, managers must collect marketing data to determine which attributes customer's desire. Next, products must be developed that contain these attributes. Then, the attributes must be promoted so that it is clear how the product is positioned relative to those of competitors. Companies must be aware that competitors engage in this activity as well, so they must continually monitor competitors' products and be prepared to go through these steps again and again.
Explain the process by which increased production volume leads to lower costs. Give an example from a real or hypothetical firm. Can this process apply to a service organization as well as a manufacturing one? If so, give an example. If not, explain why not.
ANSWER: Students should describe economies of scale, the cost savings that result from spreading fixed costs over a large production volume and achieving greater specialization of labor. For example, when a sawmill is operating at half capacity, the fixed costs of rent, utilities, administrative tasks, and so on, are spread over few products, leading to high expenses per unit produced. But when that same sawmill operates at full capacity, the costs are spread over more units, lowering per-unit costs. Another process that leads to lower costs is learning effects, in which a firm that is beginning to use a new, technologically complex process can learn to be more efficient by performing the task repeatedly. For example, biotechnology firms might spend fifteen years developing their first commercially successful product. But as they learn from that experience, they can reduce development time for subsequent new products. These processes can apply to service firms just as readily as they do to manufacturing firms. For example, a hairstyling salon can spread the fixed costs of rent, utilities, and administration over its customers in exactly the same way that the sawmill can. Also, the salon can learn from experience how to style hair more efficiently, just as the biotechnology firm can learn from experience.
You are a consultant offering advice to a large manufacturing firm about ways to increase its distinctive competency in innovation. What suggestions would you offer? Be specific and detailed in your answer.
ANSWER: Students' answers should point out that innovation is positive because it allows a firm to develop something unique that can be a source of competitive advantage. However, innovation should be focused on commercially viable products as well as on cost-effective means for innovating. In order to reduce innovation failures, managers should make sure there is tight integration between R&D, production, and marketing.
Discuss why superior efficiency is important and the many ways that different parts of the organization can help achieve it.
ANSWER: Superior efficiency can be an important source of competitive advantage because it allows a company to reduce the amount of inputs that are required to produce a given level of output. The more efficient a company is, the lower its cost structure should be. There are ten possible routes to superior efficiency. First, efficiencies can come from economies of scale. Unit costs decrease as output increases. Second, efficiencies can come from learning effects. When a complex task is repeated, companies learn how to perform it more efficiently. Third, efficiencies result from the experience curve. The experience curve refers to the systematic lowering of costs over the life of a product. Economies of scale and learning effects underlie the experience curve and the strategic significance of the experience curve is clear⎯increasing a company's product volume and market share will lower its cost structure relative to its rivals. A fourth path to efficiency, especially for companies that produce a high degree of product variety, is through flexible manufacturing technology. Flexible manufacturing allows companies to reduce setup times, improve scheduling, and improve quality control. Fifth, marketing can also affect efficiency if products are priced, promoted, and advertised aggressively to help a company get further down the learning curve. It can also improve efficiency by reducing customer defection rates. A sixth area that can lead to efficiencies is materials management. Taking a supply-chain management perspective, managers can improve the flow of inputs and components from suppliers into the company's production processes to minimize inventory holding and maximize inventory turnover. Seventh, research and development (R&D) can contribute to efficiency by designing products that are efficient to manufacture and processes that require fewer inputs. Eighth, human resources can play a role in efficiency through hiring, training, self-managed teams, and pay for performance. Ninth, information technology (IT) can help lead to efficiencies in numerous activities up and down the value chain. Tenth, a company's infrastructure⎯structure, culture, strategic leadership, and control systems⎯also plays an important role because it provides the context in which all of the other activities take place.
Which of the following is the final result of the five-step chain reaction on which the philosophy of the TQM is based?
a. Better use of time and materials b. Increase in profitability c. Creation of more jobs d. Higher market share e. Improvement in productivity ANSWER: c
Which of the following is not one of the principles commonly found in companies that have successfully embraced the TQM philosophy?
a. Building an organizational commitment to quality b. Finding ways to measure quality c. Giving more time for supervisors to work with employees d. Training new employees e. Defining work standards only in terms of numbers or quotas ANSWER: e
With regard to customer defection, which of the following statements is incorrect?
a. Defection rates are determined by customer loyalty. b. The longer a company holds on to a customer, the greater is the volume of customer-generated unit sales. c. Lowering customer defection rates creates a higher cost structure. d. The longer a company retains a customer the higher the average unit cost of each sale. e. There is a positive relationship between the length of time that a customer stays with the company and profit per customer. ANSWER: d
____ refers to unit cost increases associated with a large scale of output.
a. Economies of scale b. Learning effects c. Diseconomies of scale d. Flexible manufacturing e. Mass customization ANSWER: c
Which of the following is not a product attribute?
a. Form b. Features c. Style d. Price e. Reliability ANSWER: d
Which of the following does the philosophy underlying TQM include?
a. Greater quantity results in cost decreases. b. Better quality leads to higher market share. c. Greater quantity increases a company's profitability. d. Opinions of employees are irrelevant in manufacturing products. e. Work standards should only be defined as numbers or quotas. ANSWER: b
Which of the following is the first step in the five-step chain reaction, as articulated by Deming, with regard to the philosophy underlying TQM ?
a. Improvement in productivity b. Increase in a company's profitability c. Higher market share due to superior quality of products d. Reduction of costs due to improved quality e. Creation of more jobs ANSWER: d
Which of the following statements about customer focus is false?
a. It should be modeled by company leaders. b. It is a central part of TQM. c. It can be facilitated by soliciting feedback from the customer. d. It requires that all employees see the customer as the focus of their activity. e. It can be achieved solely by demonstrating leadership . ANSWER: e
Cool Looks, Inc. is a local fashion design company that actively solicits comments from its customers about the quality of its clothing and the kind of merchandise they want it to supply. Which of the following mechanisms for focusing on the customer is Cool Looks utilizing?
a. Managing materials b. Improving response time c. Demonstrating leadership d. Shaping employee attitudes e. Knowing customer needs ANSWER: e
Which of the following is not a benefit of tight cross-functional integration among research and development (R&D), production, and marketing?
a. New products are designed for ease of manufacture. b. Development costs are kept in check. c. Product development projects are driven by company innovations. d. Time to market is minimized. e. Customer needs are considered in the product development process. ANSWER: c
Which of the following is a tactical step for getting down the experience curve ahead of competitors?
a. Premium pricing to create an image of uniqueness in consumers' minds b. Pursuing a distinctive competence in focused marketing c. Constructing a manufacturing plant of less than minimum efficient scale d. Using aggressive pricing and promotions to expand sales volume as rapidly as possible e. Making the assembly of the product as complex as possible because this results in greater learning effects ANSWER: d
Which of the following is NOT a role played by infrastructure leadership in implementing reliability improvement methodologies?
a. Providing leadership and commitment quality b. Finding ways to manage quality c. Setting goals and creating incentives d. Soliciting input from employees e. Lengthening production runs ANSWER: e
Which of the following trends has led to the fragmentation of many consumer markets?
a. Self-managing teams b. Project management c. TQM d. Customization e. Increased response time ANSWER: d
Although important, unfortunately, innovation plays a minor role in achieving competitive advantage.
a. True b. False ANSWER: False
Customer focus in a function of only the lower levels of an organization.
a. True b. False ANSWER: False
Functional strategies play only a small role in organizational success because they occur at a low level in the firm.
a. True b. False ANSWER: False
Learning effects tend to be more significant when a technologically complex task is performed only occasionally.
a. True b. False ANSWER: False
Production and materials-management functions need not be changed in response to unanticipated customer demands as they do not affect response time.
a. True b. False ANSWER: False
Sherree works at Dustcloud Manufacturing where she is part of a seven member team. Her team coordinates its own activities as well as makes its own hiring, training, work, and reward decisions. This type of team is referred to as a virtual team
a. True b. False ANSWER: False
Six Sigma encompasses the activities necessary to get inputs and components to a production facility, through the production process, and out through a distribution system to the end user.
a. True b. False ANSWER: False
The concept of economies of scale suggests that unit costs continue to fall indefinitely as output volume increases.
a. True b. False ANSWER: False
The primary challenge for a company's human resource function is to find ways to lower wage and benefits costs.
a. True b. False ANSWER: False
There is a negative relationship between the length of time that a customer stays with a company and profit per customer.
a. True b. False ANSWER: False
While Information Systems have greatly improved productivity, they have had little impact on lowering costs.
a. True b. False ANSWER: False
A benefit of long-time customer loyalty is the free advertising that customers provide for a company through referrals.
a. True b. False ANSWER: True
A vital source of information about the causes of poor quality is the firm's own employees.
a. True b. False ANSWER: True
A video game console manufacturer hired scientists and engineers to work on ways to improve the video cards used in their game systems. The main aim of the manufacturer was to enhance the utility of the products, as perceived by the customers, above that of its rivals. This company aims to:
a. achieve superior innovation. b. maintain a low cost position. c. increase response time. d. achieve a greater division of labor. e. minimize the time to market. ANSWER: a
Self-managing teams:
a. are limited to only very large organizations. b. require members to coordinate their own activities and make decisions. c. typically increase the need for supervisors. d. create a tall organizational structure. e. show negligible increase in productivity and substantial decrease in product quality. ANSWER: b
Just-in-time inventory systems:
a. are used only by manufacturing firms. b. provide a buffer stock of inventory for a company. c. are used to reduce inventory holding costs. d. save costs by outsourcing inventory management to other companies. e. always keep extra inventory on hand for emergencies. ANSWER: c
Learning effects are a result of:
a. automation. b. knowledge acquired by doing. c. sound product planning tactics. d. diseconomies of scale. e. outsourcing. ANSWER: b
Managers should not become complacent about efficiency-based cost advantages because:
a. both learning effects and economics of scale go on forever. b. the experience curve is likely to bottom out at some point. c. cost advantages gained from experience effects are not affected by the development of new technologies. d. unit costs keep reducing as output increases. e. the experience curve steadily rises after a certain threshold is reached indicating an increase in unit costs. ANSWER: b
Distinctive competencies shape the _____ strategies that a company can pursue
a. business-level b. functional-level c. corporate-level d. global-level e. industry-level ANSWER: b
Unlike traditional manufacturing, flexible manufacturing:
a. decreases efficiency. b. lowers unit costs. c. limits an organization's ability to customize products. d. allows the production of only standardized products. e. limits an organization's ability to offer greater product variety. ANSWER: b
Research and development (R&D) can help a company improve quality by:
a. designing products that are easy to manufacture. b. pursuing economies of scale. c. developing strategies on how to market products. d. upgrading employee skill levels. e. creating teams whose members coordinate their own activities. ANSWER: a
A company's hiring strategy:
a. directly affects employee productivity. b. has little effect on employee productivity. c. does not relate to profitability. d. is not part of the company's overall human resource strategy. e. upgrades an employee's skill level. ANSWER: a
One of the primary roles of research and development in achieving superior efficiency is:
a. facilitating cooperation among functions. b. limiting customer defection rates by building brand loyalty. c. designing products for ease of manufacture. d. instituting training programs to build skills. e. implementing pay for performance. ANSWER: c
In spite of definite customer demand, new products often fail due to
a. faster cycle time. b. low customer defection rate. c. poor commercialization. d. increased response time. e. scramble to gain first-mover advantage. ANSWER: c
The marketing strategy that a company adopts:
a. has little impact on the company's efficiency and cost structure. b. aims at attaining superior efficiency of the company's operations. c. should not take into account the impact the strategy has on the company's cost structure. d. aims at automating much of the work in the production process. e. refers to the position that the company takes with regard to a product's pricing and distribution. ANSWER: e
The experience curve concept:
a. helps a company realize both learning effects and diseconomies of scale. b. suggests that unit manufacturing costs increase by a certain amount each time output is increased. c. is very important in industries that mass-produce a standardized output. d. suggests that achieving low costs allows a firm to charge a premium price. e. is least likely to bottom out as long as the company does not stop production. ANSWER: c
The failure rate of innovative products is:
a. high. b. low. c. nil. d. moderate. e. too difficult to assess. ANSWER: a
Self-managing work teams:
a. increase per-unit costs of manufactured items. b. perform all workplace tasks except the making of hiring decisions. c. increase the cycle time of manufacturing items. d. require team members to learn only one task and specialize in that alone. e. tend to increase productivity and product quality. ANSWER: e
Pay for performance based on individual accomplishment of goals tends to:
a. increase per-unit costs. b. decrease employee productivity. c. increase employee output. d. have little effect on employee output. e. facilitate teamwork. ANSWER: c
Research suggests that the adoption of _____ may increase efficiency and lower unit costs relative to what can be achieved by the mass production of a standardized output.
a. just-in-time manufacturing b. quick technology c. flexible production technology d. stable production e. unscheduled manufacturing ANSWER: c
The experience curve refers to the:
a. learning by doing technique. b. company's overall experience in a particular industry. c. systematic lowering of the cost structure and unit cost reductions. d. diseconomies of scale caused by inexperienced workers. e. increases in unit costs experienced over time. ANSWER: c
Cream Cups bakes cakes in several varieties dedicated to special occasions. It also allows its customers to personalize the cakes according to their personal preferences. This is an example of:
a. learning effects. b. just-in-time inventory. c. customer defection. d. mass customization. e. diseconomies of scale. ANSWER: d
Mass customization:
a. limits a company's ability to customize products. b. reduces the use of individual machines and hinders quality control at all stages of the manufacturing process. c. increases the setup times for complex equipment. d. is the use of technology to produce large quantities of a standardized output. e. is a company's ability to reconcile low cost and differentiation that were once thought incompatible. ANSWER: e
When credit card companies such as Visa and Mastercard allow an individual to put one of their own photos on their account credit card, they are utilizing:
a. mass customization. b. a flexible manufacturing system. c. quality as reliability mantra. d. supply-chain management. e. a just-in-time inventory system. ANSWER: a
Customer defection rates are:
a. not directly related to unit cost. b. an indication of a company's ability to satisfy its customers. c. irrelevant as they are unlikely to impact advertising and marketing costs. d. unlikely to affect sales volumes. e. not affected by cost of products. ANSWER: b
If a product is to be properly commercialized, there must be integration between:
a. research and development and marketing. b. R&D and materials management. c. marketing and materials management. d. finance and marketing. e. marketing and after-sales support. ANSWER: a
Learning effects:
a. result in unit manufacturing costs increasing by a certain amount each time output is increased. b. suggest that production costs increase because of increasing labor productivity. c. are more significant when simple steps in an assembly process are performed over and over again. d. are more significant when a technologically complex task is repeated. e. lead to diseconomies of scale. ANSWER: d
One of the primary roles of human resources in achieving superior efficiency is
a. scheduling meetings among various value creation functions. b. adopting aggressive marketing to ride down the experience curve. c. designing products for ease of manufacture. d. using information systems to automate processes. e. implementing self-managing teams. ANSWER: e
Economies of scale are:
a. unit cost increases associated with learning effects. b. unit cost reductions due to inferior quality of products. c. realized when output is reduced to a minimum. d. realized when the selling price is equal to the cost price of the products. e. unit cost reductions associated with a large-scale output. ANSWER: e
The Mountain Ski Lodge spent $100,000 marketing and advertising its new ski trails and on-site spa. The money used for marketing and advertising can be referred to as:
a. variable costs. b. fixed costs. c. ratio costs. d. diseconomies of scale. e. economies of scale. ANSWER: b