Strategic Management Chapter 4

Large transportation costs can offset cost reductions attributable to the exploitation of economies of scale in manufacturing.

True

Limiting the involvement of functional managers in strategy formulation can limit their commitment to the chosen strategy.

True

Productive inputs are any supplies used by a firm in conducting its business activities.

True

Technological software includes things like the quality of relations among labor and management, an organization's culture, and the quality of managerial controls.

True

The link between cumulative volumes of production and cost has been formalized in the concept of the learning curve.

True

There are physical limitations to the size of some manufacturing processes and when this size is exceeded, diseconomies of scale are experienced.

True

When a firm has high levels of production, it is often able to purchase and use specialized manufacturing tools that cannot be kept in operation in small firms.

True

Cost-leadership firms are typically characterized by very ________ cost-control systems.

tight

The U in U-form structure stands for

unitary

In general, economies of scale and diseconomies of scale are relatively easy-to-duplicate bases of cost leadership.

True

Identify six reasons firms can differ in their costs.

(1) size differences and economies of scale, (2) size differences and diseconomies of scale, (3) experience differences and learning-curve economies, (4) differential low-cost access to productive inputs, (5) technological advantages independent of scale, and (6)policy choices.

Increased worker specialization associated with higher levels of production can lead to worker de-motivation and diseconomies of scale.

True

In general, firms that are attempting to implement a cost-leadership strategy will choose to produce relatively simple standardized products that sell for relatively low prices compared to the products and prices of firms pursuing other business or corporate strategies.

True

Differentiate between business strategies and corporate strategies and define the nature of a cost-leadership strategy.

Business-level strategies are actions firms take to gain competitive advantages in a single market or industry. Corporate-level strategies are actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously. A firm that chooses a cost-leadership business strategy focuses on gaining advantages by reducing its costs below all of its competitors.

The only person in a functional organization who has to have a multifunctional perspective is the

CEO

Identify the types of compensation policies that are appropriate for firms pursuing a cost-leadership strategy.

Compensation at cost-leadership firms is usually tied directly to cost-reducing efforts. Such firms often provide incentives for employees to work together to reduce costs and increase or maintain quality, and they expect every employee to take responsibility for both costs and quality.

Identify the types of control systems that are appropriate for firms pursuing a cost-leadership strategy.

Cost-leadership firms are typically characterized by very tight cost control systems; frequent and detailed cost control reports; an emphasis on quantitative cost goals and targets; and close supervision of labor, raw materials, inventory, and other costs. Less formal management control systems, such as organizational culture, also drive a cost-reduction philosophy at cost-leadership firms.

________ are said to exist when the increase in firm size (measured in terms of volume of production) are associated with lower costs (measured in terms of average costs per unit of production).

Economies of scale

________ focus(es) on the relationship between the volume of production at a given point in time and average unit costs, the ________ focus(es) on the relationship between the cumulative

Economies of scale; learning curve

A firm that chooses a cost-leadership business strategy focuses on gaining advantages by reducing its costs to a level equal to all of its competitors.

False

As a firm increases in size, it often increases in complexity; however, the ability of managers to control and operate the firm efficiently are virtually unlimited and therefore costs do not substantially increase.

False

Compensation at cost-leadership firms is usually tied directly to product innovation and customer service efforts.

False

Corporate level strategies are actions firms take to gain competitive advantages in a single market or industry.

False

Cost advantages based on diseconomies of scale are likely to be rare.

False

Economies of scale focus on the relationship between the cumulative volume of production and average unit costs, while the learning curve focuses on the relationship between the volume of production at a given time and average unit costs.

False

Efforts to move down the learning curve quickly by acquiring market share are likely to obtain a cost advantage over rivals.

False

Even the best formulated strategy is competitively irrelevant if it is not implemented.

False

Firms for whom the prices of the products or services they sell are determined by market conditions and not by the individual decisions of the firms themselves are known as price makers.

False

Firms that are successful in pursuing a cost-leadership strategy focus solely on keeping costs low and abandoning other business or corporate strategies.

False

Given the relatively low margins of firms pursuing a cost-leadership strategy, firms pursuing this strategy are especially vulnerable to buyers having their revenues reduced to a point where they are unable to earn normal or above-normal performance.

False

High volumes of production are also associated with high levels of generality in employee tasks and as workers become increasingly generalized in accomplishing a variety of tasks; they can become more effective at these tasks, thereby reducing the firm's costs.

False

If a firm gets too large, it will eventually experience both diseconomies of scale and an increase in costs associated with the learning-curve effect as cumulative volume of production grows.

False

In general, cost advantages are not possible when competing firms produce similar products.

False

Learning curve-cost advantages are restricted solely to manufacturing and the advantage associated only with the manufacturing business function.

False

One of the least important productive inputs in almost all companies is labor and it is unlikely that differential low cost access to labor can give a firm a cost advantage.

False

Physical technology-based cost advantages apply only in manufacturing firms.

False

Sources of cost advantage that are unlikely to be rare include learning-curve economies, differential low-cost access to productive inputs and technological software.

False

The link between volume of production and the cost of building manufacturing operations is particularly important in industries characterized by product manufacturing, such as chemical and oil refining.

False

The threat of rivalry is increased when low-cost firms set their prices equal to those of higher cost competitors.

False

When the efficient size of a firm or plant is significantly smaller than the total size of an industry, there will usually be numerous efficient firms/plants in that industry, and a cost-leadership strategy based on economies of scale will be rare.

False

Which of the following statements is accurate?

Firms with a low-cost position can reduce the threat of rivalry in an industry

________ levels of production are associated with ________ levels of employee specialization.

High, high

Which of the following statements about cost leadership and the threat of buyers is accurate?

If buyers demand increased quality or service, cost leaders can absorb these costs and may still have a cost advantage over the competition.

Which of the following statements is accurate?

In general, both economies of scale and diseconomies of scale are relatively easy-to-duplicate bases of cost leadership.

________ are any supplies used by a firm in conducting its business activities.

Productive inputs

The best example of a firm following a cost-leadership business strategy is

Ryanair

Identify which bases of cost leadership are more likely to be rare and costly to imitate.

Sources of cost advantage that are likely to be rare include learning-curve economies (at least in emerging industries), differential low-cost access to productive inputs, and technological "software." Even when a particular source of cost advantage is rare, it must be costly to imitate in order to be a source of sustained competitive advantage. However, learning-curve economies may not be costly to duplicate in some industries. Only differential low-cost access to productive inputs and technological software are both rare and costly to imitate, because they build on historical, uncertain, and socially complex resources and capabilities.

What are the responsibilities of the CEO in a functional organization?

The U-form structure (the other name for a functional organization) goes well with the cost-leadership strategy. The CEO in a U-form structure has the responsibility of formulating the strategy of the firm and the additional responsibility of coordinating the activities of the functional specialists in the firm to facilitate the implementation of the strategy. The CEO has a unique role in this structure since he/she is the only person in the organization that has a broad, multifunctional corporate perspective.

Identify four reasons why economies of scale can exist and four reasons why diseconomies of scale can exist.

The four reasons why economies of scale can exist include: 1. Volume of Production and Specialized Machines. When a firm has high levels of production, it is often able to purchase and use specialized manufacturing tools that cannot be kept in operation in small firms. 2. Volume of Production and the Cost of Plant and Equipment. In some industries, the cost of building manufacturing operations per unit of production is lower than the cost of building smaller manufacturing operations per unit of production. Thus large-volume firms, other factors being equal, will be able to build lower per unit cost manufacturing operations and will have lower average costs of production. 3. Volume of Production and Employee Specialization. High volumes of production are also associated with high levels of employee specialization. As workers specialize in accomplishing a narrow task, they can become more and more efficient at this task, thereby reducing their firm's costs. 4. Volume of Production and Overhead Costs. A firm with high volumes of production has the luxury of spreading its overhead costs over more units and thereby reducing the overhead costs per unit. The four reasons why diseconomies of scale can exist include: 1. Physical Limits to Efficient Size. There are some important physical limitations to the size of some manufacturing processes and when these limitations are reached, additional volume increases can lead to higher per unit costs. 2. Managerial Diseconomies. As a firm increases in size, it often increases in complexity, and the ability of managers to control and operate it efficiently becomes limited. 3. Worker De-Motivation. As firms become larger, employee specialization increases. With specialization, workers become more and more efficient at the particular task facing them. However, very specialized jobs can be very de-motivating for employees and productivity and quality both suffer, resulting in cost increases. 4. Distance to Markets and Suppliers. Any reductions in cost attributable to the exploitation of economies of scale in manufacturing may be more than offset by large transportation costs associated with moving supplies and products to and from the manufacturing facility. Firms that build highly efficient plants without recognizing these significant transportation costs may put themselves in a competitive disadvantage compared to firms with slightly less efficient plants but plants that are located nearer suppliers and key markets.

Discuss the difference between the learning curve and economies of scale

The learning curve is very similar to the concept of economies of scale. However, there are two important differences. First, where economies of scale focus on the relationship between the volume of production at a given point in time and average unit costs, the learning curve focuses on the relationship between the cumulative volume of production, that is, how much a firm has produced over time, and average unit costs. Second, where diseconomies of scale are presumed to exist if a firm gets too large, there is no corresponding increase in costs in the learning-curve model as the cumulative volume of production grows. Rather, costs continue to fall until they approach the technologically lowest possible cost.

Identify the most appropriate organizational structure for a firm pursuing a cost-leadership strategy.

The most appropriate organizational structure is a functional structure, or the U-form that divides the company by major business function such as manufacturing, marketing, finance accounting, sales, etc. Each of these functions is managed by a functional manager and all functional managers' report to the chief executive officer or CEO.

Identify how cost leadership helps neutralize each of the major threats in an industry.

Threat of New Entrants. A cost-leadership competitive strategy helps reduce the threat of new entrants by creating cost-based barriers to entry such as economies of scale and cost advantages independent of scale. Threat of Rivalry. Firms with a low-cost position reduce the threat of rivalry. The threat of rivalry is reduced through pricing strategies that low-cost firms can engage in and through their relative impact on the performance of a low-cost firm and its higher-cost rivals.. Threat of Substitutes. Substitutes become a threat to a firm when their cost and performance, relative to a firm's current products or services, become more attractive to customers. Cost leaders have the ability to keep their products and services attractive relative to substitutes. Threat of Suppliers. Suppliers can become a threat to a firm by charging higher prices for the goods or services they supply or by reducing the quality of those goods or services. However, when a supplier sells to a cost leader, that firm has greater flexibility in absorbing higher-cost supplies than does a high-cost firm. Threat of Buyers. Powerful buyers are a threat to firms when they insist on low prices or higher quality and service from their suppliers. Lower prices threaten firm revenues; higher quality can increase a firm's costs. Cost leaders can have their revenues reduced by buyer threats and still earn normal or above-normal performance. These firms can also absorb the greater costs of increased quality or service and may still have a cost advantage over their competition. Cost leaders can also reduce the threat of buyers by deterring backward vertical integration and through large volumes of production.

A cost-leadership competitive strategy can reduce both the threat of substitutes and the threat of suppliers that a firm may face.

True

A cost-leadership competitive strategy helps reduce the threat of entry by creating cost-based barriers to entry

True

As the volume of production in a firm increases, the average cost per unit decreases until some optimal volume of production is reached, after which the average costs per unit of production begin to rise because of diseconomies of scale.

True

Cost leadership and product differentiation are so widely recognized that they are often called generic business strategies

True

Cost-leadership firms are typically characterized by very tight cost control systems; frequent and detailed cost control reports; an emphasis on quantitative cost goals and targets; and close supervision of labor, raw materials, inventory, and other costs.

True

Differential low-cost access to productive inputs may create cost differences among firms producing similar products in an industry.

True

Economies of scale are said to exist when the increase in firm size (measured in terms of volume of production) are associated with lower costs (measured in terms of average costs per unit of production).

True

Even when a particular source of cost advantage is rare, it must be costly to imitate in order to be a source of sustained competitive advantage.

True

If cost-leadership strategies can be implemented by numerous firms in an industry, or if no firms face a cost disadvantage in imitating a cost-leadership strategy, then being a cost leader does not generate a sustained competitive advantage for a firm.

True

Sematech is a producer of computer chips. To gain an advantage over other computer chip makers, Sematech focuses on reducing its costs below all of its competitors and has aligned its value chain accordingly. Recently, several of Sematech's competitors have begun to reduce the company's competitive advantage. In response to this threat, Sematech has decided to add production capacity in an effort to lower costs. Given Sematech's business-level strategy, which organizational structure is the most appropriate?

U-form structure

Which of the following statements regarding the learning curve and economies of scale is accurate?

Where diseconomies of scale are presumed to exist if a firm gets too large, there is no corresponding increase in costs in the learning-curve model as the cumulative volume of production grows.

Sematech is a producer of computer chips. To gain an advantage over other computer chip makers, Sematech focuses on reducing its costs below all of its competitors and has aligned its value chain accordingly. Recently, several of Sematech's competitors have begun to reduce the company's competitive advantage. In response to this threat, Sematech has decided to add production capacity in an effort to lower costs. If Sematech were to choose to narrow its product line in an effort to reduce costs, this would be an example of

a policy choice

Which of the following compensation policies is most likely to enhance a firm's ability to pursue a low-cost strategy?

awarding employees bonuses that are equal to 50% of the total cost savings achieved based on employee suggestions and initiatives

Actions that firms take to gain competitive advantage in a single market or industry are known as

business-level strategies.

Firms pursuing a cost-leadership strategy are typically characterized by

close supervision of labor, raw materials,inventory, and other costs

Actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously are known as

corporate-level strategies

A firm that chooses a ________ focuses on gaining advantages by reducing its cost below all of its competitors.

cost-leadership business strategy

Sematech is a producer of computer chips. To gain an advantage over other computer chip makers, Sematech focuses on reducing its costs below all of its competitors and has aligned its value chain accordingly. Recently, several of Sematech's competitors have begun to reduce the company's competitive advantage. In response to this threat, Sematech has decided to add production capacity in an effort to lower costs. Sematech is pursuing which strategy?

cost-leadership business strategy

As the volume of production in a firm increases, the average cost per unit decreases until some optimal volume of production is reached, after which the average costs of production begin to rise because of

diseconomies of scale

If Temper Company, a manufacturer of mattresses, was considering moving its production facilities to China but decided against it because the additional costs of shipping the mattresses back to the U.S. would offset the cost savings associated with moving the production facilities, the increased costs associated with shipping would be an example of

diseconomies of scale

Perhaps the only time economies of scale are not subject to low-cost duplication is when the ________ size of operations is a significant percentage of ________ in an industry.

efficient; total demand

When managers committed to an incorrect course of action increase their commitment to this action even as its limitations become manifest, this is known as

escalation of commitment.

A marketing manager leading the marketing department is an example of a(n) ________ manager.

functional

In a functional structure, each of the major business functions is managed by a

functional manager

Sematech is a producer of computer chips. To gain an advantage over other computer chip makers, Sematech focuses on reducing its costs below all of its competitors and has aligned its value chain accordingly. Recently, several of Sematech's competitors have begun to reduce the company's competitive advantage. In response to this threat, Sematech has decided to add production capacity in an effort to lower costs. If Lucy Sullivan were a Sematech manager who oversaw the finance operations in the company's functional structure, Lucy would be considered a

functional manager

Firms implementing cost-leadership strategies will generally adopt a

functional organizational structure.

Cost-leadership and product-differentiation strategies are so widely recognized that they are often called

generic business strategies

Which of the following is not a potential source of diseconomies of scale?

learning-curve economies

In order to create a cost advantage, the cost of acquiring low-cost productive inputs must be ________ the cost savings generated by these factors.

less than

Sematech is a producer of computer chips. To gain an advantage over other computer chip makers, Sematech focuses on reducing its costs below all of its competitors and has aligned its value chain accordingly. Recently, several of Sematech's competitors have begun to reduce the company's competitive advantage. In response to this threat, Sematech has decided to add production capacity in an effort to lower costs. By employing a low-cost competitive strategy, Sematech has made itself

less vulnerable to the power of suppliers.

Sematech is a producer of computer chips. To gain an advantage over other computer chip makers, Sematech focuses on reducing its costs below all of its competitors and has aligned its value chain accordingly. Recently, several of Sematech's competitors have begun to reduce the company's competitive advantage. In response to this threat, Sematech has decided to add production capacity in an effort to lower costs. If Sematech's efforts to increase its production capacity resulted in increased complexity and an inability of managers to control and operate the firm efficiently, this would be an example of

managerial diseconomies

Sematech is a producer of computer chips. To gain an advantage over other computer chip makers, Sematech focuses on reducing its costs below all of its competitors and has aligned its value chain accordingly. Recently, several of Sematech's competitors have begun to reduce the company's competitive advantage. In response to this threat, Sematech has decided to add production capacity in an effort to lower costs. If Sematech's expansion plans did not produce the desired cost savings but the company decided to continue production expansion in an effort to capture cost reductions, this would be an example of

managerial diseconomies

In ________ structures, employees report to two or more people.

matrix

Learning-curve-cost advantages are

not restricted to manufacturing

Choices which firms make about the kinds of products and services they will sell that impact their relative cost position are known as

policy choices

Which of the following is less likely to be a rare source of cost advantage?

policy choices

Firms for whom the price of the products or services they sell is determined by market conditions and not by the individual decision of the firms are known as

price takers

The link between volume of production and the cost of building manufacturing operations is particularly important in industries characterized by

process manufacturing

Cost advantages based on learning-curve economies are

rare, but they usually are not costly to duplicate.

Firms implementing cost-leadership strategies will have ________ layers in their reporting structure.

relatively few

Sematech is a producer of computer chips. To gain an advantage over other computer chip makers, Sematech focuses on reducing its costs below all of its competitors and has aligned its value chain accordingly. Recently, several of Sematech's competitors have begun to reduce the company's competitive advantage. In response to this threat, Sematech has decided to add production capacity in an effort to lower costs. If Sematech decided to focus on building its technological hardware, it would focus on elements such as

robots

Sematech is a producer of computer chips. To gain an advantage over other computer chip makers, Sematech focuses on reducing its costs below all of its competitors and has aligned its value chain accordingly. Recently, several of Sematech's competitors have begun to reduce the company's competitive advantage. In response to this threat, Sematech has decided to add production capacity in an effort to lower costs. If Sematech were to continue seeking methods to maintain the company's cost-leadership position that would be costly to duplicate, which of the following is most likely to be a basis of cost leadership that may be costly to duplicate?

securing differential access to low-cost productive inputs

If the potential responses of competing firms are likely to be very detrimental to the costs advantages of cost leaders, firms pursuing a cost-leadership competitive strategy should

set their prices equal to competitors' prices, sacrificing some market share for increased profit margins

Sematech is a producer of computer chips. To gain an advantage over other computer chip makers, Sematech focuses on reducing its costs below all of its competitors and has aligned its value chain accordingly. Recently, several of Sematech's competitors have begun to reduce the company's competitive advantage. In response to this threat, Sematech has decided to add production capacity in an effort to lower costs. By increasing production volume in an effort to reduce costs, Sematech is pursuing which sources of cost advantage?

size differences and economies of scale

Machines and robots are examples of

technological hardware

The quality of relations among labor and management, an organization's culture, and the quality of management controls are all examples of

technological software

Which of the following is likely to be a rare source of cost advantage?

technological software