Chapter 6
Choosing a strategic position requires making important trade-offs between value and cost positions.
What is true of a strategic position?
Learning curves can be observed in manufacturing processes and professional services.
What is true of learning curves?
a cosmetics brand that offers superior-quality skin lotion priced at 100 dollars per bottle
What uses a focused differentiation strategy?
when mass manufacturing pens
What will have greater effects from economies of scale than from learning effects?
The firm's focus shifts to price rather than value-creating features.
What would threaten a firm that uses a differentiation strategy?
It failed to refine its strategic position over time.
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?
go down
As it takes less and less time to produce the same output, learning curves usually
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.
A blue ocean strategy differs from a low-cost strategy in that
It must reduce the firm's cost below that of its competitors while offering adequate value.
What must a cost-leadership strategy accomplish to be successful?
learning effects
As the cumulative output in a firm increases, managers learn how to optimize the production process and improve workers' performance through repetition. This drives down the per-unit cost. Which of the following phenomena is best described here?
strategy canvas
A _____ is a graphical depiction of a company's relative performance vis-à-vis its competitors across the industry's key success factors.
business-level strategy
A _____ primarily details the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market.
value innovation
A blue ocean strategy tends to be successful only if a firm is able to rely on a _____ that allows it to reconcile trade-offs.
economic value created is greater than that of its competitors.
A company that uses a differentiation strategy can achieve a competitive advantage as long as its
economies of scale.
A cost-leader is protected from the threat of new entrants primarily due to its
firm has intangible resources, is able to pass on increases in supplier cost to the customer, and its differentiation appeal creates customer loyalty.
A differentiation strategy works best when a
differentiator is able to create a significant difference between perceived value and current market prices.
A differentiator is least likely to be threatened by increases in input prices due to powerful suppliers when the
it creates the same customer value as its competitors.
A firm achieves differentiation parity ideally when
diseconomies of scale
A firm experiences _____ when there are increases in cost per unit as output increases.
produces at an output level beyond the minimum efficient scale.
A firm experiences diseconomies of scale when it
focus its research and development on product technologies to add uniqueness.
A firm pursuing a differentiation strategy as opposed to a low-cost strategy will
perform different activities than its rivals.
A firm's business strategy will lead to a competitive advantage if it allows the firm to
The firm is at an advantage when compared to its competitor.
A firm's learning curve is steeper than that of its competitor. What does this imply?
charge a higher price than the cost-leader in the industry.
A successfully implemented blue ocean strategy allows a firm to
zigzags.
A value curve indicates a lack of effectiveness in a firm's strategic profile when it
innovation that allows competitors to emerge with more economical replacements
According to the five forces model, which of the following is viewed as a major risk to a business pursuing a cost-leadership strategy?
AccuroDisk creates a greater economic value than TD Storage.
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?
It appeals to the price-conscious buyers.
Allure is a cosmetic brand that pursues a cost-leader strategy. Which of the following statements is true of the cosmetic brand?
$4
At a certain output level, the per-unit cost incurred by a firm to manufacture a product is $5. Other factors remaining constant, what will be the new per-unit cost if the cumulative output is doubled, and the firm is able to achieve an 80 percent learning curve?
90 percent learning curve.
At a certain output level, the per-unit cost incurred by a firm to manufacture a product was $60. Once the cumulative output doubled, the cost per unit reduced to $54. All other factors remaining constant, the firm has been able to achieve a(n)
Chique Apparel offered clothing at a low price but failed to differentiate its product as being exclusive.
What provides an example of a firm in a red ocean?
observable product features
What sources of differential appeal is least effective in helping a firm sustain its advantage?
cost-leadership
Bargain Styles Inc. is an apparel company that caters to the highly price-conscious customers. Through its simple apparel designs, acceptable quality levels, and minimal customer service, the company has been able to sell its merchandise at the lowest prices in the industry. Which of the following generic business strategies is Bargain Styles applying?
learning-curve effect
Bass Watches Inc. initially spent eight man-hours to assemble a wristwatch. But as the production doubled, the number of hours spent on assembling a watch reduced by 20 percent. This increase in productivity reduced the company's cost per unit. What is this phenomenon referred to as?
availability of complements.
Body Sync Inc. is a chain of gyms. It offers a fitness package that allows its members to use the gym facilities for 12 months by paying only for 10 months. Included in the package are two health checkups and a gym kit. These add-ons by themselves are not very valuable, but as a package they can enhance the perceived value of the service offerings. In this case, Body Sync's primary value driver is
low-cost input factors
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
create greater perceived economic value than CLR.
Both Blue Horizons Electronics Inc. and CLR Inc. have achieved cost parity in the television market. To gain and sustain a competitive advantage against CLR, Blue Horizons Electronics should
JL Electronics can charge a premium price on its televisions.
Both Viten Electronics Inc. and JL Electronics Inc. incur a cost of $400 to manufacture a LED television. However, the economic value created by JL Electronics is more than that created by Viten Electronics. What does this indicate?
reduce the total cost of ownership
Clean Machine Inc. produces a high-quality dishwashing machine that is reliable and durable. How would this product most likely act as a cost driver?
move down a given learning curve.
Combining economies of learning with the existing production technology allows a firm to
the loyalty of its customers
Cool Cat Inc. has dominated the high-end refrigerator market by producing a reliable refrigerator with many bonus features that appeal to customers. Recently, a competitor has developed a refrigerator that offers many of the same features as Cool Cat's refrigerator. Which of the following will most likely help Cool Cat to keep its competitive advantage?
quality.
DFS Electronics Inc. ensures that all its products are highly durable and reliable by using techniques like zero-defect and lean manufacturing systems. These efforts not only add to the products' differential appeal, but also help the company save costs during production and avoid expenses due to after-sales services. Thus, the common value and cost driver responsible for DFS Electronics' strategic position as an integrator is the
economies 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
increases in cost as output increases.
Diseconomies of scale refer to
spread their variable costs over a larger output.
Economies of scale do not allow firms to
economic value creation exceeds that of its competitors.
Even without differentiation parity, a firm pursuing a cost-leadership strategy can still gain a competitive advantage as long as its
Archer Cycles has created a greater economic value than Evia Cycles.
Evia Cycles Inc. incurs $400 to manufacture a bicycle, and the maximum price customers are willing to pay is $550 per unit. Archer Cycles Inc., its competitor, incurs $450 to manufacture a similar bicycle, and customers are willing to pay a maximum price of $620 for it. What does this indicate?
create higher customer perceived value than the value that competitors create.
Firms pursuing a differentiation strategy primarily seek to
jumps to a steeper learning curve
Gotta Get Chocolates, Inc. has recently introduced a new production method that will make the production of their chocolates more cost-effective. Which of the following will most likely be the result of this innovation?
a higher value gap
Handy Helper, Inc. produces decent-quality woodworking tools at a mid-range price. Master Tools, Inc. produces high-quality tools also at a mid-range price. Master Tools gained a competitive advantage because it has ______ than Handy Helper.
It has exploited external opportunities.
Help Yourself Inc. publishes many types self-help books. Recently, the consumer demand for winter gardening books has increased significantly. Although Help Yourself has limited production facilities, it has increased the production of these books to meet this demand. It hopes to get books to the market faster than its closest competitor, who is also increasing the production of winter gardening books. Which of the following aspects of business-level strategy has Help Yourself accomplished?
higher costs
Higher value tends to require
differentiation
Home Smart Inc. is a chain of supermarkets that sells its products at higher prices than its competitors. Yet, the supermarket chain has a large customer base due to its wide product portfolio and superior customer service. Which of the following generic business strategies has Home Smart adopted in this scenario?
Marriott lowered its cost structure by sharing its production assets over a several types of hotels, which increased its menu and thus its differentiated appeal.
How did Marriott use economies of scope to achieve greater economic value than its competitors?
Complements add value to a product when they are consumed in tandem with it.
How does availability of complements act as a value driver?
It is more able to absorb price increases through accepting lower profit margins.
How is a cost-leader protected from threats from powerful buyers?
Differentiation parity deals with value not pricing.
How is differentiation parity different from cost parity?
delivers low-cost products and services to a specific, narrow part of the market.
In a focused cost-leadership strategy, a firm
economies of scale
What is primarily a cost driver?
complements
What is primarily a value driver?
blue ocean
In a successful _____ strategy, the trade-offs between differentiation and low cost are reconciled.
focus its research and development on process technologies to improve efficiency.
In contrast to a differentiator, a cost-leader will
blue ocean strategy
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?
low-cost input factors
Juanita Apparels Inc. outsources its production to contract manufacturers located in underdeveloped nations where unskilled labor is available in plenty for very low wages. This has helped the apparel brand become a price leader in the industry. Which of the following is the key driver behind Juanita Apparel's strategic position?
economies of scale.
KitchenThings Inc. is a company that manufactures plastic kitchenware. It operates at an output level that allows it to keep its unit cost per output to the lowest in the industry. This in turn allows KitchenThings to be the price leader. Other competing companies cannot operate at the same level due to a lack of consumer demand for their products. This puts them at a competitive disadvantage. In this scenario, the cost driver behind KitchenThings's strategic position is
superior customer service
Lush Roses is a chain of premium hotels around the globe that charges higher prices for its rooms and suites when compared to the average industry standards. Yet, the hotel enjoys the largest market share in the industry. This is mainly due its highly responsive staff that has a strong commitment toward achieving a 100 percent guest satisfaction. In this scenario, which of the following is the key value driver?
focused differentiation strategy.
Organic Eats is a restaurant that caters to the needs of a small percentage of highly health-conscious consumers. It has an all-organic, vegan menu. Since there are very few restaurants that offer the same unique services, customers are willing to pay a premium price for its products and services. In this scenario, Organic Eats is following a
product features
Oviyo Inc. has been successful at differentiating itself from competitors by claiming a premium price for its digital cameras based on superior image quality and advanced technology. In this scenario, which of the following is the key value driver?
value drivers
Product features, customer service, and complements are all examples of important
economies of scope
PureRinse Inc. is a brand reputed for its wide variants of body wash that introduced its range of shampoos and skin moisturizers a few years ago. Since most of its products could be produced using the same resources and technology, the company's cost structure lowered, while its product portfolio widened. In this scenario, which of the following value and cost drivers is PureRinse applying?
cost-leadership
Tangles Costume Jewelry offers slightly lowerquality merchandise than competitors at a much lower price. What strategy is Tangles using?
experience curve
The concept of a(n) _____ attempts to capture both learning effects and process improvements at firms.
offer a differentiated product or service at a low cost.
The primary goal of a firm pursuing a blue ocean strategy should be to
value innovation
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
operate at the minimum efficient scale.
To be cost-competitive, a firm should
lowering cost and increasing perceived customer benefits.
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
gain a market share and make up the loss in margin through increased sales.
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
automobile company that sells high-end, premium cars.
True Empire Autos Inc. is an automobile company known for its luxury cars and follows a differentiation strategy. In this scenario, True Empire Autos should ideally compare its strategic position with a(n)
the increase in value creation exceeds the increase in costs.
Value drivers contribute to a firm's competitive advantage only if
an apparel company popular among price-conscious customers.
Wear Crush Inc. is an apparel company known for its affordable clothes that follows a cost-leadership strategy. In this scenario, Wear Crush should ideally compare its strategic position with
Economies of scope are the savings that come from producing two or more outputs from the same resources, whereas economies of scale are decreases in per-unit cost with increases in output.
What accurately brings out the difference between economies of scale and economies of scope?
While there are no diseconomies to learning, there are diseconomies to scale.
What accurately brings out the difference between economies of scale and learning effects?
the tension between value creation and the pressure to keep cost in check
What best describes a strategic trade-off?
It requires the reconciliation of fundamentally different strategic positions—differentiation and low cost.
What best explains why a blue ocean strategy is difficult to implement?
failure to combine a cost-leadership position with a differentiation position
What contributed the most to JCPenny's failed blue ocean strategy?
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.
What describes an airline that is most likely stuck in the middle?
the conflicting requirements of two generic strategies
What does blue ocean strategy attempt to reconcile?
Every time the cumulative output is doubled, the cost per unit will decline by 20 percent.
What does it mean for a firm to have an 80 percent learning curve?
innovation
What drivers simultaneously increases value while lowering cost?
the value and the cost position of the firm relative to its competitors
What is a firm effect that has an impact on the competitive advantage of a firm?
How will we satisfy our customer needs?
What is a key question managers must answer to formulate an appropriate business-level strategy?
economic value creation
What is a value gap?
superior customer service
What is more of a value driver than a cost driver?
availability of complements.
When Internet service providers offer free routers for subscriptions to their wireless Internet packs, the perceived value of the service offering increases. In this case, the value driver would be
diseconomies of scale
When Jean Cult Inc. was operating at the minimum efficient scale of 10,000-12,000 units per month, the firm's cost per unit was $20. However, when the output level was increased beyond 12,000 units, the cost per unit increased to $22. This increase was attributed to the wear-and-tear of the machinery, and complexities of managing and coordinating. What is this phenomenon known as?
stuck in the middle
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
gains market share from other firms.
When a differentiator charges a similar price as its competitors in the same strategic group but offers more perceived value, it
jumps to a steeper learning curve.
When a firm combines experience based learning and process innovation, the firm
investments in differentiation are complements.
When a firm is successful at pursuing a blue ocean strategy,
strategic trade-offs.
When a firm makes choices between a cost or value position to achieve competitive advantage, it is primarily involved in
3,000-4,000 units
When a firm manufactures 2,000-3,000 units of a product, it incurs an average cost of $10 per unit. When it manufactures 3,000-4,000 units of the same product, the average cost per unit reduces to $7. However, manufacturing beyond 4,000 units will raise the average cost per unit to $9. Which of the following is the firm's minimum efficient scale?
11,000 units
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?
returns to scale are constant.
When a firm operates at the minimum efficient scale, the
Learning effects involve the accumulation of output over time.
Which of the following is an accurate statement about learning effects?
lower value gap
Which of the following will hamper a differentiator's ability to achieve a competitive advantage?
Shoes Cult has a competitive advantage over Aros.
While Aros Inc. incurs a cost of $20 for a pair of shoes, Shoes Cult Inc., its competitor, manufactures a pair of shoes at $22. Both the companies are able to sell their shoes for a maximum of $30 per pair. Which of the following statements is true in this scenario?
increasing the perceived value created for customers, which allows it to charge a premium price.
Whole Foods differentiates itself from competitors by offering top-quality foods obtained through sustainable agriculture. This business strategy implies that Whole Foods focuses on
They can be used by any organization independent of industry context.
Why are differentiation and cost-leadership strategies referred to as generic business strategies?
Economies of scale
_____ is best described as decreases in cost per unit as output increases.
Minimum efficient scale
_____ 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.
