475 Chapter 6
Value drivers contribute to a firm's competitive advantage only if
the increase in value creation exceeds the increase in costs.
Beach Grub is a chain of "fast casual" restaurants that sells its menu items at higher prices than its competitors. Yet, the restaurant has a large customer base due to its wide product portfolio and superior customer service. Which of the following generic business strategies has Beach Grub adopted in this scenario?
differentiation
The concept of a(n) ________ attempts to capture both learning effects and process improvements at firms.
experience curve
When a blue ocean strategy goes bad, a firm has neither a clear differentiation nor a clear cost-leadership profile. This situation is referred to as
stuck in the middle.
The pursuit of both differentiation and low cost at the same time in a way that creates a leap in value for both the firm and consumers is called
value innovation
A firm operating on a 70 percent learning curve will achieve lower per-unit costs after doubling its output than a firm operating on an 80 percent learning curve will
True
How is differentiation parity different from cost parity?
Differentiation parity deals with value not cost.
________ is best described as decreases in cost per unit as output increases.
Economies of scale
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 $70. Once the cumulative output doubled, the cost per unit reduced to $63. All other factors remaining constant, the firm has been able to achieve a(n)
90 percent learning curve
Gilroy Crackers enjoys a competitive advantage as a cost leader because high demand for its products has allowed it to operate at the minimum efficient scale. Which of the following scenarios would be most concerning to the managers of Gilroy Crackers?
A major winter storm shuts down Gilroy's production for several days.
Due to its large sales volume and low cost structure, Quick Serve Mini-Marts enjoys a cost leadership position. Which of the following scenarios might threaten Quick Serve's competitive advantage?
A new competitor is perceived to provide similar value, but in addition offers innovative self-checkout.
While Fun Frames incurs a cost of $12 for a pair of eyeglasses, Highwire, its competitor, manufactures a pair of glasses at $10. Both the companies are able to sell their glasses for a maximum of $30 per pair. Which of the following statements is true in this scenario?
Fun Frames and Highwire have achieved differentiation parity. A firm achieves differentiation parity when it creates the same perceived value as its rival firm.
Unicorn Toys faces stiff competition from Playtime Inc., a rival firm with which Unicorn Toys has achieved differentiation parity. Both firms have invested in state-of-the art production facilities and have similar learning curves of 85 percent. Assuming neither firm can reduce the cost of its input factors, how can Unicorn Toys achieve a competitive advantage as a cost leader?
Have a cumulative output that is greater than Playtime Inc.'s.
Which of the following is an accurate statement about learning effects?
Learning effects occur over time as output accumulates.
How did Marriott use economies of scope to achieve greater economic value than its competitors?
Marriott lowered its cost structure by sharing its production assets over several types of hotels, which increased the diversity of its hotel line and thus its differentiated appeal
Fleet Foot Shoes has been successful at differentiating itself from competitors by claiming a premium price for its athletic footwear based on superior design and high-quality materials. In this scenario, which of the following is the key value driver?
Product features
Both Bison Autos and Sparrow Inc. incur a cost of $9,000 to manufacture a vehicle. However, the economic value created by Sparrow Inc. is more than that created by Bison Autos. What does this indicate
Sparrow Inc. can charge a premium price on its automobiles
Starfish Sodas has successfully achieved a competitive advantage in the soft drink industry as a differentiator. Which of the following scenarios would undermine Starfish's position?
Starfish's customers start to consider soda a commodity
In order to achieve a competitive advantage, the Coastal Haven Hotels, a chain of luxury beach resorts, wants to increase its market share. Which of the following strategies is most likely to do so?
Take advantage of economies of scale and scope by opening a chain of lower-priced economy hotels that leverage the Costal Haven brand image.
Which of the following examples uses a focused differentiation strategy?
a cosmetics brand that offers superior skin lotion for sensitive skin priced at 100 dollars per bottle
A differentiation strategy works best when a
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 wireless service providers offer free or discounted mobile phones for subscriptions to their wireless voice and data service, the perceived value of the service offering increases. In this case, the value driver would be
availability of complements
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?
blue ocean strategy
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
Petra's Programming competes on cost with WonderWeb in the web design industry. Both firms operate on a 90 percent learning curve, and neither firm is capable of increasing its cumulative output any further. How might Petra's Programming achieve a cost leadership position while maintaining customer satisfaction?
by incorporating new programming techniques to take advantage of experience curve effects
Which of the following is primarily a value driver?
complements
In a focused cost-leadership strategy, a firm
delivers low-cost products and services to a specific, narrow part of the market.
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.
When Simple Semiconductors was operating at the minimum efficient scale of 10,000-12,000 units per month, the firm's cost per unit was $45. However, when the output level was increased beyond 12,000 units, the cost per unit increased to $47. 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
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
economies of scale.
Heirloom Furniture is a brand reputed for its wide variants of sofas that introduced a new range of mattresses and bed frames 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 Heirloom applying?
economies of scope The concept economies of scope describes the savings that come from producing two (or more) outputs at less cost than producing each output individually, even though using the same resources and technology.
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.
According to the five forces model, which of the following is viewed as a major risk to a business pursuing a cost-leadership strategy
innovation that allows competitors to emerge with more economical replacements
Heartbeat Industries has recently introduced a new production method that will make the production of their medical devices more cost-effective. Which of the following will most likely be the result of this innovation
jumps to a steeper learning curve.
When a firm combines experience based learning and process innovation, the firm
jumps to a steeper learning curve.
Meadows Mowers initially spent nine man-hours to assemble a lawnmower. But as the production doubled, the number of hours spent on assembling a mower 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
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
Combining economies of learning with the existing production technology allows a firm to
move down a given learning curve.
Which of the following sources of differential appeal is least effective in helping a firm sustain its advantage?
observable product features
The primary goal of a firm pursuing a blue ocean strategy should be to
offer a differentiated product or service at a low cost.
A firm's business strategy can 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
When a firm makes choices between a cost or value position to achieve competitive advantage, it is primarily involved in
strategic trade-offs
Which of the following is a firm effect that has an impact on the competitive advantage of a firm?
the value and the cost position of the firm relative to its competitors
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?
AccuroDisk creates a greater economic value than TD Storage
Which of the following provides an example of a firm in a red ocean?
Chique Apparel offered clothing at a low price but failed to differentiate its product as being exclusive
How does availability of complements act as a value driver?
Complements add value to a product when they are consumed in tandem with it.
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?
It failed to refine its strategic position over time.
How is a cost-leader protected from threats from powerful suppliers?
It is more able to absorb price increases through accepting lower profit margins.
What must a cost-leadership strategy accomplish to be successful?
It must reduce the firm's cost below that of its competitors while offering adequate value
The major value drivers that managers have at their disposal include product features, customer service, and complements.
True
In a successful ________ strategy, the trade-offs between differentiation and low cost are reconciled.
blue ocean
) Swan Song is a spa that caters to the needs of a small percentage of highly health-conscious consumers. It offers state-of-the-art treatments in a luxurious setting. Since there are very few spas that offer the same unique services, customers are willing to pay a premium price for its products and services. In this scenario, Swan Song is following a
focused differentiation strategy
Trader Joe's successfully used a blue ocean strategy by offering lower cost food than Whole Foods for the same market of patrons. By doing this, Trader Joe's was able to
gain a market share and make up the loss in margin through increased sales
Quick Clean Chemicals 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 company become a price leader in the chemicals industry. Which of the following is the key driver behind Quick Clean's strategic position?
low-cost input factors
To initiate a strategic move that allows a firm to open up new and uncontested market space through value innovation, managers must address four key questions when formulating a blue ocean business strategy. These questions focus on
lowering cost and increasing perceived customer benefits.
Which of the following best explains why a blue ocean strategy is difficult to implement?
It requires the reconciliation of fundamentally different strategic positions—differentiation and low cost.
Which of the following describes an airline that is most likely stuck in the middle?
Just Right Airline offers high-quality beverages and meals, plush airport lounges, only a few connections via hubs domestically, poor customer service, and low prices
________ 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
Thomas is the owner of a landscaping company that caters to a very wealthy clientele. His company has struggled to differentiate itself from the other high-end landscapers in the area, but because he has hired several expensive but highly-qualified team members, Thomas is unable to shift to a cost leadership strategy. Which strategy is most likely to achieve a competitive advantage?
Narrow the scope of competition and focus on unique features such as the use of organic materials.
The strategy canvas for movie theaters includes factors such as prices, comfort, customer service, concessions variety, and hours of operation. Which of the following value curves is most likely to represent a theater that successfully positions itself as a differentiator?
high price, high comfort, high customer service, high concessions variety, low hours of operation
A blue ocean strategy differs from a low-cost strategy in that
the intent of a blue ocean strategy is not to be the absolute lowest-cost provider because a blue ocean must also increase perceived value.
Which of the following best describes a strategic trade-off?
the tension between value creation and the pressure to keep costs in check
Product features, customer service, and complements are all examples of important
value drivers.
Red Sapphire is a wristwatch company known for its luxury watches and that follows a differentiation strategy. In this scenario, Red Sapphire should ideally compare its strategic position with a
watch maker that sells high-end, premium watches
A value curve indicates a lack of effectiveness in a firm's strategic profile when it
zigzags
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.
Backyard BBQ is a chain of casual restaurants that promises affordable barbecue using top-quality local ingredients. However, the company has struggled to achieve a competitive advantage because of its high overhead costs. Which of the following scenarios is most likely to result in a competitive advantage?
eliminating brick-and-mortar locations and offering delivery from a central kitchen
A value curve that zig-zags across the strategy canvas indicates a focused strategy that is likely to achieve a sustainable competitive advantage.
False
When a firm operates at the minimum efficient scale, there is still opportunity for it to further reduce its cost per unit through economies of scale.
False
Which of the following drivers simultaneously increases value while lowering cost?
Innovation
