Chapter 6 - Part One

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 A. superior customer service. B. economies of scale. C. availability of complements. D. learning-curve effects.

B. economies of scale. In this scenario, the cost driver behind KitchenThings's strategic position is economies of scale. Firms with greater market share might be in a position to reap economies of scale, decreases in cost per unit as output increases.

A firm experiences _____ when there are increases in cost per unit as output increases. A. diseconomies of scale B. economies of scope C. time compression diseconomies D. economies of flow

A. diseconomies of scale Diseconomies of scale can be described as increases in cost per unit when output increases.

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? A. superior customer service B. low cost of input factors C. availability of complements D. economies of scale

A. superior customer service In this scenario, the key value driver is superior customer service. The most salient value drivers that managers have at their disposal are product features, customer service, and complements. Managers can increase the perceived value of their firms' product or service offerings by focusing on customer service and responsiveness.

Which of the following is more of a value driver than a cost driver? A. superior customer service B. economies of scale C. learning-curve effects D. experience-curve effects

A. superior customer service The most salient value drivers that managers have at their disposal are product features, customer service, and complements.

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? A. 9,000 units B. 11,000 units C. 13,000 units D. 15,000 units

B. 11,000 units The firm experiences economies of scale at an output level of 11,000 units. When a firm operates at the minimum efficient scale, the returns to scale are constant. Minimum efficient scale (MES) is 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.

Which of the following statements is true of learning curves? A. Learning curves are captured at one point in time when output is increased. B. Learning curves can be observed in manufacturing processes and professional services. C. As cumulative output increases, the learning curve becomes less steep. D. The steeper the learning curve, the lesser the learning effects.

B. Learning curves can be observed in manufacturing processes and professional services. Learning curves are a robust phenomenon that have been observed in many industries, not only in manufacturing processes like building airplanes, cars, ships, and semiconductors; but also in alliance management, franchising, and health care.

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? A. economies of scale B. low-cost input factors C. product features D. premium prices

C. product features In this scenario, the key value driver is product features. One of the obvious but most important levers that managers can adjust is the product features and attributes, thereby increasing the perceived value of the product or service offering. Adding unique product features allows firms to turn commodity products into differentiated products commanding a premium price.

A _____ primarily details the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market. A. business-level strategy B. code of ethics C. mission statement D. functional-level strategy

A. business-level strategy A business-level strategy details the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market. It may involve a single product or a group of similar products that use the same distribution channel.

A company that uses a differentiation strategy can achieve a competitive advantage as long as its A. economic value created is greater than that of its competitors. B. value gap is lower than that of its competitors. C. strategic position is below the productivity frontier. D. products and services create a lower consumer surplus than that of its competitors.

A. 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 economic value created (V-C) is greater than that of its competitors.

A firm achieves differentiation parity ideally when A. it creates the same customer value as its competitors. B. its cost of production is higher than that of its competitors. C. it successfully sells its products and services at a higher price than its competitors. D. its product features and services are better than that of its competitors.

A. it creates the same customer value as its competitors. A firm achieves differentiation parity when it creates the same perceived value as its rival firm.

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? A. learning effects B. network effects C. diseconomies of scale D. productivity frontier

A. learning effects As individuals and teams engage repeatedly in an activity, whether writing computer codes, developing new medicines, or building submarines, they learn from their cumulative experiences. Thus, learning by doing can also drive down costs.

Diseconomies of scale refer to A. decreases in cost as profit increases. B. increases in cost as output increases. C. increases in economic value as per-unit cost decreases. D. decreases in profit when consumer demand decreases.

B. increases in cost as output increases. Diseconomies of scale refer to increases in cost per unit when output increases.

Why are differentiation and cost-leadership strategies referred to as generic business strategies? A. They can be simultaneously pursued by a firm without any trade-offs. B. They can be used by any organization independent of industry context. C. They require similar strategic positions in order to increase a firm's chances to gain competitive advantage. D. They can be applied only by businesses, which have a competitive advantage.

B. They can be used by any organization independent of industry context. Differentiation and cost-leadership strategies are called generic strategies because they can be used by any organization—manufacturing or service, large or small, for-profit or nonprofit, public or private, U.S. or non-U.S.—in the quest for competitive advantage, independent of industry context.

A firm experiences diseconomies of scale when it A. has a constant return to scale. B. moves down the experience curve. C. produces at an output level beyond the minimum efficient scale. D. has a steep learning curve when compared to its competitors.

C. produces at an output level beyond the minimum efficient scale. Diseconomies of scale can be described as increases in cost per unit when output increases. A firm experiences diseconomies of scale when it produces at an output level beyond the minimum efficient scale. Benefits to scale cannot go on indefinitely.

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? A. $4 B. $5 C. $3 D. $6

A. $4 Other factors remaining constant, if the cumulative output is doubled and the firm is able to achieve an 80 percent learning curve, the new per-unit cost will be $4. An 80 percent learning curve indicates that every time the cumulative output is doubled, the cost per unit will decline by 20 percent.

_____ is best described as decreases in cost per unit as output increases. A. Economies of scale B. Economies of scope C. Time compression economies D. Economies of replication

A. Economies of scale Firms with greater market share might be in a position to reap economies of scale, which is described as decreases in cost per unit as output increases.

_____ 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. A. Minimum efficient scale B. Break-even output C. Maximum output capacity D. Optimum sustainable yield

A. Minimum efficient scale Minimum efficient scale (MES) is 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.

A firm's learning curve is steeper than that of its competitor. What does this imply? A. The firm is at an advantage when compared to its competitor. B. The firm and its competitor have achieved cost parity. C. The firm experiences negative returns to scale. D. The firm experiences diseconomies of scale when compared to the competitor.

A. The firm is at an advantage when compared to its competitor. The steeper the learning curve, the more learning takes place. By moving further down a given learning curve than competitors, a firm can gain a competitive advantage.

Which of the following statements accurately brings out the difference between economies of scale and learning effects? A. While there are no diseconomies to learning, there are diseconomies to scale. B. Economies of scale occur over time, whereas learning effects are captured at one point in time. C. Firms experience economies of scale when output increases, and learning effects when output decreases. D. Economies of scale reduce cost per unit, learning effects increase cost per unit.

A. While there are no diseconomies to learning, there are diseconomies to scale. Learning effects occur over time as output is accumulated, while economies of scale are captured at one point in time when output is increased. Although learning declines at some point, there are no diseconomies to learning (unlike diseconomies to scale).

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? A. cost-leadership B. differentiation C. niche marketing D. product diversification

A. cost-leadership Bargain Styles is applying the cost-leadership strategy. A cost-leadership strategy seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers.

A firm pursuing a differentiation strategy as opposed to a low-cost strategy will A. focus its research and development on product technologies to add uniqueness. B. concentrate on leveraging its economies of scale through process technologies. C. build an organization structure that relies on strict budget controls. D. create a lower economic value as compared to its competitors.

A. focus its research and development on product technologies to add uniqueness. The focus of competition in a differentiation strategy tends to be on unique product features, service, and new product launches, or on marketing and promotion rather than price. A differentiator would focus research and development on product technologies in order to add uniqueness.

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? A. learning-curve effect B. network effect C. black-swan event D. time compression diseconomies

A. learning-curve effect The phenomenon seen in this scenario is referred to as learning-curve effect. As individuals and teams engage repeatedly in an activity, whether writing computer code, developing new medicines, or building submarines, they learn from their cumulative experience. This in turn can drive down costs.

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 A. low-cost input factors. B. economies of scale. C. superior customer service. D. availability of complements.

A. low-cost input factors. The key driver for BioThink's competitive advantage is low-cost input factors. One of the most basic advantages a firm can have over its rivals is access to lower-cost input factors such as raw materials, capital, labor, and IT services.

When a firm operates at the minimum efficient scale, the A. returns to scale are constant. B. cost per unit is the highest. C. firm experiences diseconomies of scale. D. firm attains the highest cost position.

A. returns to scale are constant. When a firm operates at the minimum efficient scale, the returns to scale are constant. Minimum efficient scale (MES) is 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.

Value drivers contribute to a firm's competitive advantage only if A. the increase in value creation exceeds the increase in costs. B. they can shrink the firm's value gap. C. they can restrict the firm from claiming a premium price for its products. D. the decrease in perceived value leads to an increase in costs.

A. the increase in value creation exceeds the increase in costs. Managers must remember that the different value drivers contribute to competitive advantage only if their increase in value creation (ΔV) exceeds the increase in costs (ΔC). The condition of ΔV > ΔC must be fulfilled if a differentiation strategy is to strengthen a firm's strategic position and thus enhance its competitive advantage.

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? A. 2,000-3,000 units B. 3,000-4,000 units C. below 2,000 units D. above 4,000 units

B. 3,000-4,000 units In this scenario, the firm's minimum efficient scale is 3,000-4,000 units. Minimum efficient scale (MES) is 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.

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) A. 80 percent learning curve. B. 90 percent learning curve. C. 60 percent learning curve. D. 54 percent learning curve.

B. 90 percent learning curve. A 90 percent learning curve indicates that per-unit cost drops 10 percent every time output is doubled. In this case, the per-unit cost is reduced by 10 percent of $60; therefore, the new per-unit cost is $54.

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) A. automobile company that sells pre-owned cars. B. automobile company that sells high-end, premium cars. C. automobile company that manufactures economy cars. D. pen manufacturing company that follows a differentiation strategy.

B. automobile company that sells high-end, premium cars. True Empire Autos should ideally compare its strategic position with an automobile company that sells high-end, premium cars. A differentiation strategy seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels. The idea is to compare True Empire Autos' strategic position with the next-best differentiator. In this case, it will be an automobile company that sells high-end luxury cars.

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? A. cost-leadership B. differentiation C. market penetration D. product diversification

B. differentiation Home Smart has adopted the differentiation strategy. A differentiation strategy seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels.

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? A. resource ambiguity B. diseconomies of scale C. network effect D. learning-curve effect

B. diseconomies of scale The phenomenon seen in this scenario is referred to as diseconomies of scale. Diseconomies of scale can be described as increases in cost per unit when output increases. As firms get too big, the complexity of managing and coordinating raises the cost, negating any benefits to scale. Large firms tend to become overly bureaucratic, with too many layers of hierarchy. They grow inflexible and slow in decision making.

When a differentiator charges a similar price as its competitors in the same strategic group but offers more perceived value, it A. loses its competitive advantage. B. gains market share from other firms. C. lowers the economic value created. D. results in diseconomies of scale.

B. gains market share from other firms. When a firm is able to offer a differentiated product or service and can control its costs at the same time, it is able to gain market share from other firms by charging a similar price but offering more perceived value.

To be cost-competitive, a firm should A. position itself below the productivity frontier. B. operate at the minimum efficient scale. C. attain the highest cost position. D. avoid moving on to a steeper experience curve.

B. operate at the minimum efficient scale. When a firm operates at the minimum efficient scale, the returns to scale are constant. Minimum efficient scale (MES) is 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.

When a firm makes choices between a cost or value position to achieve competitive advantage, it is primarily involved in A. collective bargaining. B. strategic trade-offs. C. arbitration. D. mediation.

B. strategic trade-offs. To achieve a desired strategic position, managers must make strategic trade-offs—choices between a cost or value position.

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? A. AccuroDisk and TD Storage share differentiation parity. B. TD Storage has a competitive advantage over AccuroDisk in terms of perceived value. C. AccuroDisk creates a greater economic value than TD Storage. D. TD Storage is a cost-leader when compared to AccuroDisk.

C. AccuroDisk creates a greater economic value than TD Storage. AccuroDisk creates a greater economic value than TD Storage. A cost-leader can achieve a competitive advantage as long as its economic value created is greater than that of its competitors.

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? A. Both Evia Cycles and Archer Cycles have achieved differentiation parity. B. Evia Cycles has a competitive advantage over Archer Cycles. C. Archer Cycles has created a greater economic value than Evia Cycles. D. Both Evia Cycles and Archer Cycles have achieved cost parity.

C. Archer Cycles has created a greater economic value than Evia Cycles. Archer Cycles has created a greater economic value than Evia Cycles. A cost-leader can achieve a competitive advantage as long as its economic value created is greater than that of its competitors.

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? A. Viten Electronics has a competitive advantage over JL Electronics. B. Both Viten Electronics and JL Electronics have achieved competitive parity. C. JL Electronics can charge a premium price on its televisions. D. Viten Electronics has created a higher value gap than JL Electronics.

C. JL Electronics can charge a premium price on its televisions. JL Electronics can charge a premium price on its televisions. A company that uses a differentiation strategy can achieve a competitive advantage as long as its economic value created (V-C) is greater than that of its competitors. This allows the firm to charge a premium price, reflecting its higher value creation.

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 A. a company that sells wristwatches at affordable prices. B. a luxury apparel company that sells designer clothes. C. an apparel company popular among price-conscious customers. D. an online company that sells customized pet clothing.

C. an apparel company popular among price-conscious customers. In this scenario, Wear Crush should ideally compare its strategic position with an apparel company popular among price-conscious customers. A cost-leadership strategy seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers. The idea is to compare Wear Crush Inc.'s strategic position with another cost-leader. In this case, it will be an apparel company popular among price-conscious customers.

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 A. economies of scale. B. learning-curve effects. C. availability of complements. D. experience-curve effects.

C. availability of complements. Body Sync's primary value driver is availability of complements. Complements add value to a product or service when they are consumed in tandem. Finding complements, therefore, is an important task for managers in their quest to enhance the value of their offerings.

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 A. achieve differentiation parity with CLR. B. keep its value gap lower than that of CLR. C. create greater perceived economic value than CLR. D. increase its cost of production to more than that of CLR.

C. create greater perceived economic value than CLR. To gain and sustain a competitive advantage against CLR, Blue Horizons Electronics should create greater perceived economic value than CLR. A company that uses a differentiation strategy can achieve a competitive advantage as long as its economic value created is greater than that of its competitors.

In a focused cost-leadership strategy, a firm A. caters to the segment of the market that is least cost-sensitive. B. provides high-priced products for many different segments of the mass market. C. delivers low-cost products and services to a specific, narrow part of the market. D. focuses on reducing the economic value created to drive down costs.

C. delivers low-cost products and services to a specific, narrow part of the market. A focused cost-leadership strategy is the same as the cost-leadership strategy except with a narrow focus on a niche market.

Even without differentiation parity, a firm pursuing a cost-leadership strategy can still gain a competitive advantage as long as its A. learning curve is not steeper than that of its competitors. B. per-unit costs are higher than that of its competitors. C. economic value creation exceeds that of its competitors. D. value gap is lower than that of its competitors.

C. 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 economic value creation exceeds that of its competitors. Even if a firm fails to create differentiation parity, it can still gain a competitive advantage as long as its economic value creation exceeds that of its competitors.

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 A. superior customer service. B. time compression economies. C. economies of scale. D. learning-curve effects.

C. economies of scale. DiscountHaven has a competitive advantage due to its economies of scale. Economies of scale allow firms to spread their fixed costs over a larger output, employ specialized systems and equipment, and take advantage of certain physical properties.

In contrast to a differentiator, a cost-leader will A. charge a premium price for its products and services. B. build an organizational culture where creativity and customer responsiveness thrive. C. focus its research and development on process technologies to improve efficiency. D. avoid an organizational structure that relies on strict budget controls.

C. focus its research and development on process technologies to improve efficiency. The cost-leader, as the name implies, focuses its attention and resources on reducing the costs to manufacture a product or deliver service in order to offer lower prices to its customers. The cost-leader optimizes all of its value chain activities to achieve a low-cost position.

Whole Foods differentiates itself from competitors by offering top-quality foods obtained through sustainable agriculture. This business strategy implies that Whole Foods focuses on A. decreasing the existing value gap by providing luxury goods to customers. B. maintaining a less steeper learning curve as compared to its competitors. C. increasing the perceived value created for customers, which allows it to charge a premium price. D. lowering its costs compared to its competitors,' while offering adequate value for its products and services.

C. 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 increasing the perceived value created for customers, which allows it to charge a premium price.

Which of the following will hamper a differentiator's ability to achieve a competitive advantage? A. lower production costs B. premium prices C. lower value gap D. customized goods

C. lower value gap A higher value gap enables a differentiator to achieve a competitive advantage, which allows it to charge a premium price, reflecting its higher value creation. A lower value gap, however, will hamper a differentiator's ability to achieve a competitive advantage.

A firm's business strategy will lead to a competitive advantage if it allows the firm to A. execute the same activities performed by the rivals in a similar manner. B. reduce the value gap. C. perform different activities than its rivals. D. position itself below the productivity frontier.

C. perform different activities than its rivals. Business strategy is more likely to lead to a competitive advantage if it allows firms to either perform similar activities differently, or perform different activities than their rivals that result in creating more value or offering similar products or services at lower cost.

Economies of scale do not allow firms to A. spread their fixed costs over a larger output. B. employ specialized systems and equipment. C. spread their variable costs over a larger output. D. take advantage of certain physical properties.

C. spread their variable costs over a larger output. Economies of scale allow firms to spread their fixed costs over a larger output, employ specialized systems and equipment, and take advantage of certain physical properties.

What does it mean for a firm to have an 80 percent learning curve? A. Every time the cumulative output increases by 80 percent, the cost per unit will decline by 20 percent. B. Every time the cumulative output is doubled, the cost per unit will decline by 80 percent. C. Every time the cumulative output goes up by 20 percent, the cost per unit will decline by 80 percent. D. Every time the cumulative output is doubled, the cost per unit will decline by 20 percent.

D. Every time the cumulative output is doubled, the cost per unit will decline by 20 percent. An 80 percent learning curve indicates that every time the cumulative output is doubled, the cost per unit will decline by 20 percent. Similarly, a 90 percent learning curve indicates that per-unit cost drops 10 percent every time output is doubled. A 70 percent learning curve indicates a 30 percent drop every time output is doubled.

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? A. Both Aros and Shoes Cult have achieved differentiation parity. B. Aros is a cost-leader when compared to Shoes Cult. C. Aros has created a greater economic value than Shoes Cult. D. Shoes Cult has a competitive advantage over Aros.

D. Shoes Cult has a competitive advantage over Aros. Shoes Cult does not have a competitive advantage over Aros. A cost-leader can achieve a competitive advantage as long as its economic value created is greater than that of its competitors. A firm achieves differentiation parity when it creates the same perceived value as its rival firm.

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 A. economies of scale. B. learning-curve effects. C. experience-curve effects. D. availability of complements.

D. availability of complements. Complements add value to a product or service when they are consumed in tandem. Finding complements, therefore, is an important task for managers in their quest to enhance the value of their offerings.

Firms pursuing a differentiation strategy primarily seek to A. keep their cost structures lower than that of the cost leader. B. reduce the value gap to gain a competitive advantage. C. provide products that are a direct imitation of the competitors' products. D. create higher customer perceived value than the value that competitors create.

D. create higher customer perceived value than the value that competitors create. A differentiation strategy seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels.

Which of the following contributed the most to JCPenny's failed blue ocean strategy? A. failure to win legal battles against its closest competitors B. failure to conduct an accurate pretest in the market C. failure to apply the strategy to enough stores at the same time D. failure to combine a cost-leadership position with a differentiation position

D. failure to combine a cost-leadership position with a differentiation position In Strategy Highlight 6.2, it is seen that JC Penny failed with its blue ocean strategy mainly because it failed to combine a cost-leadership position with a differentiation position.

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 A. product diversification strategy. B. liquidation strategy. C. mass market strategy. D. focused differentiation strategy.

D. focused differentiation strategy. Organic Eats is following a focused differentiation strategy. The focused differentiation strategy is same as the differentiation strategy except with a narrow focus on a niche market. A differentiation strategy seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels.

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? A. network effects B. superior customer service C. availability of complements D. low-cost input factors

D. low-cost input factors The key driver behind Juanita Apparel's strategic position is low-cost input factors. One of the most basic advantages a firm can have over its rivals is access to lower-cost input factors such as raw materials, capital, labor, and IT services.

Which of the following is a firm effect that has an impact on the competitive advantage of a firm? A. the exit barriers within the industry in which the firm operates B. the number of companies operating in the industry in which the firm operates C. the intensity of rivalry among existing companies in the firm's chosen industry D. the value and the cost position of the firm relative to its competitors

D. the value and the cost position of the firm relative to its competitors To formulate an effective business strategy, managers need to keep in mind that competitive advantage is determined jointly by industry and firm effects. At the firm level, performance is determined by value and cost positions relative to competitors. This is the firm's strategic position.