Chapter 5 405
17. The brand loyalty enjoyed by the differentiated company does not protect it from substitute goods and services. a. True b. False
ANSWER: False
2. A differentiation strategy allows a company to charge a low price for its products, if it chooses to do so. a. True b. False
ANSWER: False
21. A differentiated company is protected from intense price rivalry within its industry by its brand loyalty which is built through marketing campaigns and expensive product development efforts. a. True b. False
ANSWER: False
22. Actions taken at the functional level should support the business-level strategy, as should the organizational arrangements of the enterprise. a. True b. False
ANSWER: True
11. A company develops a new innovative technique that improves efficiency within the industry. This improvement of performance through innovation causes the efficiency frontier to remain static and not deviate from its original curve. a. True b. False
ANSWER: False
12. Mike's Eatery, a fast-food chain, neither customizes its product offerings nor sells new products based on market segments. Mike's Eatery is pursuing a standardization strategy. a. True b. False
ANSWER: True
37. A market segment consists of a group of: a. similar products. b. customers who have similar needs. c. products that are considered obsolete. d. diverse products produced by the same manufacturer. e. customers who have diverse needs.
ANSWER: b
15. The generic business-level strategies are cost leadership, differentiation, and mass marketing. a. True b. False
ANSWER: False
23. Since there is only one way to compete in a particular industry, a manager must be dedicated to pursuing this strategy and align functional activities and organizational arrangements with that strategy in order to execute it well. a. True b. False
ANSWER: False
24. Standardization describes what happens when innovation pushes out the efficiency frontier in an industry, allowing for greater value to be offered through superior differentiation at a lower cost than was previously thought possible. a. True b. False
ANSWER: False
27. The basic proposition of the blue ocean strategy is that many successful companies have built their competitive advantage by initiating price wars and driving weaker rivals out of the industry. a. True b. False
ANSWER: False
4. A company has a competitive advantage if it can increase costs relative to rivals. a. True b. False
ANSWER: False
6. The only way to exploit successful differentiation is to keep prices the same or only increase them moderately, leading to increased demand, economies of scale and lower costs which results in higher profitability and profit growth. a. True b. False
ANSWER: False
9. A product's appeal to customers' desires cannot be considered a source of differentiation. a. True b. False
ANSWER: False
72. Describe how business-level strategies give a company a competitive advantage over actual and potential rivals.
ANSWER: Properly executed, a well-chosen and well-crafted business-level strategy can give a company a competitive advantage over actual and potential rivals. Consider first the low-cost company; by definition, the low-cost enterprise can make profits at price points that its rivals cannot profitably match. This makes it very hard for rivals to enter its market. In other words, the low-cost company can build an entry barrier into its market. It can, in effect, erect an economic moat around its business that thwarts higher-cost rivals out. A low-cost position and the ability to charge low prices and still make profits also protect a company against substitute goods or services. Low costs can help a company to absorb cost increases that may be passed on downstream by powerful suppliers. Low costs can also enable the company to respond to demands for deep price discounts from powerful buyers and still make money. The low-cost company is often best positioned to survive price rivalry in its industry. Indeed, a low-cost company may deliberately initiate a price war in order to grow volume and drive its weaker rivals out of the industry. Now consider the differentiated company. The brand loyalty associated with differentiation can constitute an important entry barrier, protecting the company's market from potential competitors. Because the successful differentiator sells on non-price factors, such as design or customer service, it is also less exposed to pricing pressure from powerful buyers. Indeed, the converse may be the case—the successful differentiator may be able to implement price increases without encountering much, if any, resistance from buyers. The differentiated company can also easily absorb price increases from powerful suppliers and pass those on downstream in the form of higher prices for its offerings, without suffering much, if any, loss in market share. The brand loyalty enjoyed by the differentiated company also protects it protection from substitute goods and service. The differentiated company is protected from intense price rivalry within its industry by its brand loyalty, and by the fact that non-price factors are important to its customer set. At the same time, the differentiated company often does have to invest significant effort and resources in non-price rivalry, such as brand building through marketing campaigns or expensive product development efforts, but to the extent that it is successful, it can reap the benefits of these investments in the form of stable or higher prices.
74. When a company seeks to carve out a unique market space for themselves through value innovation, they must think about how a company might redefine its market and craft a new business-level strategy. What are four areas that a company should focus on finding new strategies? What questions should be asked for each area? Choose a company that has created market space through value innovation and trace how they addressed these four areas to redefine itself.
ANSWER: Successful enterprises compete differently than their less successful rivals: They carve out a unique market space for themselves through value innovation. When thinking about how a company might redefine its market and craft a new business-level strategy, Kim and Mauborgne suggest that managers ask themselves the following questions: 1. Eliminate: Which factors that rivals take for granted in our industry can be eliminated, thereby reducing costs? 2. Reduce: Which factors should be reduced well below the standard in our industry, thereby lowering costs? 3. Raise: Which factors should be raised above the standard in our industry, thereby increasing value? 4. Create: What factors can we create that rivals do not offer, thereby increasing value? Answers will vary when students choose a company that has created market space through value innovation. One possible example is the strategy for Southwest. Southwest charges a low price and does not provide meals or lounges in airports, business-class seating, or connections through hubs (it flies point to point), but does provide friendly, quick, convenient, reliable low-cost service, which is exactly what its customer set values. Southwest eliminated lounges, business seating, and meals in flight; it reduced in- flight refreshment to be well below industry standards; and by flying point-to-point it raised speed (reducing travel time), convenience, and reliability. Southwest also creates value by flying between smaller, downtown airports whenever possible—something that other airlines did not typically do.
71. Define the generic business-level strategies companies pursue. Provide an example of a company that represents each type of strategy.
ANSWER: There are four generic business-level strategies. When a company lowers costs so that it can lower prices and still make a profit, it is pursuing a broad low-cost strategy. One example of a company that pursues this type of strategy is Wal-Mart. When a company differentiates its product in some way, such as by recognizing different segments or offering different products to each segment, it is pursuing a broad differentiation strategy. Examples of companies that pursue this type of strategy are Toyota and Cola-Cola. When a company targets a certain segment or niche and tries to be the low-cost player in that niche, it is pursuing a focus low-cost strategy. Examples of companies that pursue this type of strategy are Costco and Southwest Airlines. When a company targets a certain segment or niche and customizes its offering to the needs of that segment through the addition of features and functions, it is pursuing a focus differentiation strategy. One example of a company that pursues this type of strategy is Nordstrom.
73. List the features that need to be included in functional strategies to improve differentiation.
ANSWER: To successfully differentiate itself, a company must pursue the right actions at the functional level and organize itself appropriately. Pursuing functional-level strategies that enable the company to achieve superior quality in terms of both reliability and excellence are important, as in an emphasis upon innovation in the product offering, and high levels of customer responsiveness. A firm that implements the differentiation strategy cannot ignore efficiency. Because of its strategic choice, the differentiated company is likely to have a higher cost structure than the low-cost player in its industry. Specific functional-level strategies designed to improve differentiation include: • Customization of the product offering and marketing mix to different market segments • Designing product offerings that have high perceived quality in terms of their functions, features, and performance, in addition to being reliable • A well-developed customer-care function for quickly handling and responding to customer inquiries and problems • Marketing efforts focused on brand building and perceived differentiation from rivals • Hiring and employee development strategies designed to ensure that employees act in a manner that is consistent with the image that the company is trying to project to the world
1. At its most basic, a firm's business-level strategy is about whom a company decides to serve, what customer needs and desires the company is trying to satisfy, and how the company decides to satisfy those needs and desires. a. True b. False
ANSWER: True
10. An efficiency frontier shows of the complete picture of all the different positions that a company can adopt with regard to differentiation and low cost, assuming that its internal functions and organizational arrangements are configured efficiently to support a particular position. a. True b. False
ANSWER: True
13. When a company decides to pursue a segmentation strategy, customization can cause costs to increase and it is difficult to achieve economies of scale. a. True b. False
ANSWER: True
14. A company that already has a low-cost structure must relinquish much differentiation in its product offering to achieve additional cost reductions. a. True b. False
ANSWER: True
16. A low-cost company is often best positioned to survive price rivalry in its industry. a. True b. False
ANSWER: True
18. Companies that focus on the higher-income or higher-value end of the market will tend to have a higher cost structure. a. True b. False
ANSWER: True
19. Companies that follow a standardization strategy ignore the many different market segments in an industry and position their products to appeal to the average customer. a. True b. False
ANSWER: True
20. By focusing on a niche, and customizing the offering to that segment, a differentiated company can often outsell differentiated rivals that target a broader market. a. True b. False
ANSWER: True
25. The effect of value innovation on the efficiency frontier is that a product can be offered at a greater value at a lower cost than was thought possible. a. True b. False
ANSWER: True
26. When a company pioneers new process innovations that lead to value innovation, it effectively changes the game in an industry and may be able to outperform its rivals for a long period of time. a. True b. False
ANSWER: True
28. When a company is seeking to create a new market space through value innovation, they need to consider factors that must be eliminated, reduced, raised and created in order to change the market and craft new strategies. a. True b. False
ANSWER: True
29. Successful value innovation achieves sustainable competitive advantage due to the inability of rivals to change their strategies in a timely manner without breaking prior commitments. a. True b. False
ANSWER: True
3. In commodity markets, competitive advantage goes to the company that has the lowest costs. a. True b. False
ANSWER: True
5. Differentiation can help a company grow overall demand and capture market share from its rivals. a. True b. False
ANSWER: True
7. Market segmentation refers to the process of subdividing a market into clearly identifiable groups of customers with similar needs, desires, and demand characteristics. a. True b. False
ANSWER: True
8. A generic business-level strategy is a strategy that gives a company a specific form of competitive position and advantage vis-à-vis its rivals, resulting in above-average profitability. a. True b. False
ANSWER: True
32. In what situation can a company have both differentiation and a low-cost position? a. With innovation, a company can push out the efficiency frontier in its industry and can deliver more differentiation at a lower cost than its rivals. b. The company chooses to focus on the commodity market. c. The company focuses on improving the reliability of its product. d. The company improves its customer service on point-of sale and after-sale customer interactions. e. It is impossible to achieve both differentiation and a low-cost position.
ANSWER: a
43. When a company offers a wide variety of products at lower prices than its rivals, it is most likely pursuing a(n) which of the following strategies? a. low-cost b. differentiation c. focus d. exit e. divestment
ANSWER: a
44. A differentiator has the advantage of: a. selling on non-price factors, such as design or customer service. b. producing a large product variety without a large cost penalty. c. producing a basic offering that is relatively inexpensive to produce and deliver. d. being able to respond to demands for deep price discounts from powerful buyers and still make money. e. being able to initiate a price war in order to grow volume and drive its weaker rivals out of the industry.
ANSWER: a
50. Which of the following statements about differentiation and cost structure is true? a. Differentiation and cost structure decisions affect one another. b. Differentiation and cost structure decisions do not affect one another. c. Companies that focus on the higher-value end of the market tend to have a lower cost structure. d. Differentiation decisions do not affect a company's profitability. e. Cost structure decisions do not affect a company's profitability.
ANSWER: a
53. Lilly's Beauty Company sells general haircare products such as shampoo, conditioner, and hairspray. The company does not sell new or customized products to meet the specific needs of certain groups of people. Which of the following approaches is illustrated in this scenario? a. Standardization strategy b. Focus strategy c. Medium market segmentation strategy d. High market segmentation strategy e. Focus market segmentation strategy
ANSWER: a
54. Which of the following is NOT true about the implications for cost and revenue and market segmentation? a. A segmentation strategy is typically associated with lower costs than a standardization strategy. b. A standardization strategy involves a company producing one basic offering and trying to attain economies of scale by achieving high-volume sales. c. A segmentation strategy requires that a company customize its product offering to different segment which causes it to sell less of each offering, making it harder to achieve economies of scale. d. A segmentation strategy requires that a company customize its product offering to different segments and products targeted at segments at the higher-income end of the market may require more functions and features, which can raise the costs of production and delivery. e. A segmentation strategy can allow a company to capture incremental revenues by customizing its offerings to the needs of different groups of consumers and thus selling more in total.
ANSWER: a
56. Which generic business-level strategy is based on the intent to lower costs so that a company can lower prices and still make a profit? a. Broad low-cost strategy b. Price differentiation strategy c. Broad differentiation strategy d. Focus differentiation strategy e. Focus low-cost strategy
ANSWER: a
59. In which of the following situations is a differentiation strategy used? a. The industry is fragmented into customer groups based on needs. b. Customer needs are primarily satisfied by the price of the product. c. A company's cost structure needs to be reduced. d. There is a demand for deep price discounts from powerful buyers. e. The industry is not allowed to charge a premium price for its products.
ANSWER: a
61. A disadvantage of pursuing a low-cost strategy is that: a. it makes it difficult for the firm to customize its product offerings. b. price wars make it hard to compete with differentiators. c. it makes it easier for rivals to enter the firm's market. d. it makes it difficult to respond to demands from deep price discounts from powerful buyers and still make money. e. it makes it difficult to absorb cost increases that may be passed on downstream by powerful suppliers.
ANSWER: a
63. Which of the following is NOT a principal danger of a low-cost position approach? a. Substitute goods or services b. Technological change c. Imitation of production techniques d. Changes in consumer tastes e. Rivals lowering their costs
ANSWER: a
65. Which of the following allows a company to lower cost through functional strategy and organization? a. Implementing just-in-time inventory control systems b. Customizing the product offering and marketing mix to different market segments c. Focusing marketing efforts on brand building and perceived differentiation from rivals d. Designing strategies to ensure that employees act in a manner that is consistent with the image that the company is trying to project to the world e. Adopting rigid manufacturing technologies
ANSWER: a
69. The basic proposition of the blue ocean strategy is that many successful companies have built their competitive advantage by: a. redefining their product offering through value innovation and creating a new market space. b. initiating a price war to grow volume and drive their weaker rivals out of the industry. c. developing brand loyalty to protect them from intense price rivalry within their industry. d. charging premium prices for their goods or services. e. adopting lean production and flexible manufacturing technologies.
ANSWER: a
33. A differentiated product is a product that: a. has a greater resale value than a rival product. b. provides greater reliability than a rival product. c. is offered free of cost on purchase of a company's standard product. d. always costs more than a rival product. e. always costs less than a rival product.
ANSWER: b
34. Compared to a differentiator, the company that follows a low-cost strategy: a. distinguishes its products from those of rivals by offering something that they find hard to match. b. absorbs cost increases by powerful suppliers while keeping to their lower pricing. c. allows the company to charge a premium price for its good or service, should it choose to do so. d. uses perceived superior value to generate growth in demand among customers. e. creates entry barriers for rivals with greater brand loyalty to the specific products offered.
ANSWER: b
35. A differentiation strategy is based on creating a product that customers perceive as being: a. the same as other available products. b. superior to other available products. c. the least costly product in the industry. d. the most expensive product in the industry. e. cheaper, but inferior to the available products.
ANSWER: b
46. Acknowledging the demand for healthier drinking options, a large beverage company has developed a new line of beverages with no calories and no artificial sweeteners to add to its existing product line. Which of the following approaches to market segmentation is the beverage company using? a. Broad low-cost strategy b. Focus differentiation strategy c. Medium market segmentation strategy d. Focus low-cost strategy e. Broad differentiation strategy
ANSWER: b
48. Delta Air Lines used to advertise its high-quality air travel service by saying it flew "anywhere, anytime." What generic business-level strategy is represented by this advertisement? a. Broad low-cost strategy b. Broad differentiation strategy c. Vertical integration strategy d. Right-time marketing strategy e. Rapid growth strategy
ANSWER: b
49. A company pursuing a focus strategy: a. attempts to serve all market segments. b. concentrates on building market share in one market segment. c. typically has more resources at its disposal than a differentiator does. d. has a greater impact on cost and revenue. e. produce different offerings for different segments.
ANSWER: b
64. A company that focuses on a lower-income market segment: a. sells on non-price factors such as design and customer service. b. produces a basic offering to reduce cost structures. c. focuses its marketing efforts on brand building. d. relies on patent protections to keep costs low. e. customizes its marketing mix to different market segments.
ANSWER: b
67. Info Tech, Inc. makes complex telecommunications products, such as cellular telephones. Since this company has a distinctive competency in research and development, it should try to differentiate its product through: a. reliability. b. innovation. c. advertising. d. service. e. low pricing.
ANSWER: b
36. When a company recognizes that the needs of one market segment is not the same as another and accordingly customizes its product offerings, it is said to be pursuing a __________ strategy. a. stuck-in-the-middle b. standardization c. segmentation d. focus e. low-cost
ANSWER: c
38. A segmentation strategy requires that a company: a. standardize its products. b. offer its products at low costs. c. customize its products. d. produce one basic offering. e. attain high economies of scale by achieving a high volume of sales.
ANSWER: c
39. Differentiation allows a company to: a. respond to demands of deep price demands from powerful buyers and still make money. b. lower its cost structure. c. charge a premium price for its good or service, should it choose to do so. d. charge low prices and still make profits. e. initiate a price war to grow volume and drive its weaker rivals out of the industry.
ANSWER: c
40. The main difference between companies following a broad low-cost strategy and those following a focus low-cost strategy is in the: a. standardized market price. b. industry life-cycle stage. c. degree of market segmentation. d. age of the market. e. market trajectory.
ANSWER: c
47. The advantage that focused companies have over their broad market rivals is that they can: a. sell on non-price factors, such as design or customer service. b. respond to demands for deep price discounts. c. can establish a cost advantage and customize offerings for a niche market. d. initiate a price war to grow volume and drive its weaker rivals out of the industry. e. absorb cost increases that may be passed on downstream by powerful suppliers.
ANSWER: c
51. Nick, a professional magician, is often invited to perform magic tricks at birthday parties and other social gatherings from across the country. However, he offers his services only to clients who stay in the same city as him. He is also known to charge less than other magicians in the city. Nick is pursuing which generic business-level strategy? a. Broad differentiation strategy b. Focus differentiation strategy c. Focus low-cost strategy d. Broad low-cost strategy e. Medium market segmentation strategy
ANSWER: c
57. Which of the following matches the correct company with the generic business-level strategy that it practices? a. Wal-Mart practices a broad differentiation strategy. b. Toyota practices a broad low-cost strategy. c. Southwest Airlines practices a focus low cost strategy. d. Costco practices a focus differentiation strategy. e. Nordstrom practices a focus low cost strategy.
ANSWER: c
60. Which of the following is a difference between a standardization and segmentation strategy? a. A standardization strategy has several advantages over a segmentation strategy b. Standardization allows the company to capture incremental revenues by customizing its offerings while segmentation has products aimed at the average consumer c. A standardization strategy may lose sales from customers who desire more functions and features and are prepared to pay more for them while a segmentation strategy meets the needs of different groups of consumers and thus sells more in total. d. A standardization strategy prices product to allow for a wider customer base while segmentation may lose sales from customers who cannot afford to purchase the average product. e. Standardization strategy may have higher costs than a segmentation strategy
ANSWER: c
62. Which of the following is a functional-level strategy designed to improve differentiation? a. Designing products that can be produced and delivered at as low a cost as possible b. Standardization of the product offering and marketing mix to different market segments c. Hiring and employee development strategies designed to ensure that employees act in a manner that is consistent with the image that the company is trying to project to the world d. Initiation of a price war to grow volume and drive its weaker rivals out of the industry e. Products that have lower prices to allow a company to erect an economic moat around its business that thwarts higher-cost rivals out
ANSWER: c
68. The term value innovation is used to describe: a. the way a company decides to group customers based on important differences in their needs to gain a competitive advantage. b. a business's overall competitive theme, the way it positions itself in the marketplace to gain a competitive advantage, and the different positioning strategies that can be used in different industry settings. c. what happens when innovation pushes out the efficiency frontier in an industry, allowing for greater value to be offered through superior differentiation at a lower cost than was previously thought possible. d. what happens when a company decides to ignore different segments, and produce a standardized product for the average consumer. e. what happens when a company decides to serve many segments, or even the entire market, producing different offerings for different segments.
ANSWER: c
Multiple Choice 30. Focus strategy can be defined as the strategy: a. of merging with an established company to gain monopoly over the market. b. a company uses when it decides to allocate the company resources equally among all the marketing segments. c. a company uses when it decides to serve a limited number of segments, or just one segment of the market. d. a company uses when it decides to ignore the different needs of different market segments to produce one standardized product for all the customers. e. of closing one or more business units in order to minimize the losses.
ANSWER: c
31. Which of the following generic competitive strategies would a producer of commodity such as steel most likely pursue? a. Exclusive dealing b. Broad differentiation c. Focus differentiation d. Broad low cost e. Horizontal integration
ANSWER: d
41. Which of the following is NOT true of a company that follows a niche strategy? a. The company is focused on just one or a few segments of the market. b. They can try to become the low-cost player in a particular niche. c. They can try to customize their offering to the needs of their particular segment. d. The company is focused on serving the average customer. e. Customization can occur through the addition of new features and functions.
ANSWER: d
52. Yankee Candle Company offers customers candles that burn for 50-60 hours, much longer than most department store candle brands. Therefore, customers are willing to pay a higher price for these candles. Which of the following strategies is Yankee Candle Company following? a. Cost leadership strategy b. Rapid growth strategy c. Market segmentation strategy d. Differentiation strategy e. Stuck-in-the-middle strategy
ANSWER: d
58. Jordan's Ice Creams is strategically located near a university. After realizing that most of its customers, who are mostly students, prefer a wide range of flavors, it started offering different combinations of premium flavors, cones, and toppings to create hundreds of extravagant, customized products. Which generic business-level strategy is Jordan pursuing? a. Broad low-cost strategy b. Broad differentiation strategy c. Focus low-cost strategy d. Focus differentiation strategy e. Product substitution strategy
ANSWER: d
66. Which of the following organizational arrangements does NOT support a company taking a low-cost position? a. Incentive systems that empower employees to suggest and pursue initiatives that are consistent with productivity improvements. b. A frugal company culture that emphasizes the need to control costs. c. Measurement and control systems that focus on productivity and cost containment. d. A multi-level structure with several tiers in the management hierarchy. e. Clear lines of accountability and control.
ANSWER: d
42. The production of more product variety without a large cost penalty is known as: a. market concentration. b. market segmentation. c. focus differentiation. d. mass production. e. mass customization.
ANSWER: e
45. Lucy's Swimwear Boutique offers swimwear that is targeted at affluent people who can afford to buy expensive, handmade swimsuits. Which of the following approaches to market segmentation is Lucy's Swimwear Boutique using? a. Broad differentiation strategy b. Low market segmentation strategy c. Medium market segmentation strategy d. Broad high-cost strategy e. Focus differentiation strategy
ANSWER: e
55. Which of the following is an example of a differentiated company's attention to efficiency? a. To not cut costs so deeply that it harms its capability to differentiate its offering from that of rivals. b. To be careful and aware of all costs and not let them get out of control. c. To not waver in its choice of how to compete and maintain this focus in all strategic decisions. d. Managers are confident in their business-level strategy, have clear logic for pursuing that strategy, have an offering that matches their strategy, and have aligned functional activities and organizational arrangements with that strategy in order to execute it well. e. All of these are ways a differentiated company's shows attention to efficiency.
ANSWER: e
70. How does value innovation achieve sustained competitive advantage for the innovating company? a. It shifts the basis of competition. b. It can catch rivals off guard and make it difficult for them to catch up. c. It forces the innovative company to think differently than rivals in order to create an offering and strategic position that is unique. d. Rivals are unable to change focus from prior strategic commitments. e. All of these are reasons why value innovation can achieve sustained competitive advantage for an innovating company.
ANSWER: e