Strategic Management Creating Competitive Advantages Global Edition Gregory Dess 7e - Test Bank

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Michael Porter presented three generic strategies that a firm can use to achieve competitive advantage. They can be illustrated on two dimensions: competitive advantage and strategic target.

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Michael Porter presented three generic strategies that a firm can use to overcome the five forces and achieve competitive advantage. The strategies are: overall cost leadership, differentiation, and focus.

FALSE

Observation and research support the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not. One study found that businesses combining forms of competitive advantage (differentiation and overall cost leadership) outperformed those using a single form.

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Overall cost leadership requires a tight set of interrelated tactics that include aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, and cost minimization in all activities in the value chain.

FALSE

To generate above-average performance, a firm following an overall cost leadership position must attain competitive parity on the basis of differentiation relative to competitors. In other words, a firm achieving parity is similar to its competitors, or on par, with respect to differentiated products.

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The experience curve refers to how business learns to lower costs as it gains experience with production processes. With experience, unit costs of production decline as output increases in most industries.

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In order for a firm to attain a cost leadership position using its infrastructure, it should decrease the number of management layers in order to reduce overhead costs.

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In order for a firm to attain a cost leadership position using its technology development support activity, it should use automated technology effectively to reduce scrappage rates.

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In order for a firm to attain a cost leadership position using its marketing and sales activities it can purchase media in large blocks and maximize the utilization of its sales force through territory management.

TRUE

In these difficult conditions, Renault has been able to carve out a profitable market for itself, selling low-cost, no-frills cars. Renault responded to this shift by creating an entry-level car group that was charged with designing and producing cars for these more cost conscious consumers. Carlos Ghosn, CEO of Renault, stated that they are working on a new platform that will be ultra-low-cost.

TRUE

Firms can be vulnerable to price increases in the factors of production. For example, consider manufacturing firms based in China which rely on low labor costs. Due to demographic factors, the supply of workers 16 to 24 years old has peaked and will drop by a third in the next 12 years, thanks to stringent family-planning policies that have sharply reduced population growth in China. This is leading to upward pressure on labor costs in Chinese factories, undercutting the cost advantage of firms producing there.

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Managers should explore all value-chain activities, including relationships among them, as candidates for cost reductions.

TRUE

Other firms may develop new ways of cutting costs, leaving the old cost leaders at a significant disadvantage. The older cost leaders are often locked into their way of competing and are unable to respond to the newer, lower-cost means of competing. This is what happened to the U.S. auto industry in the 1970s.

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Building up a low-cost advantage often requires significant investments in plant and equipment, distribution systems, and large, economically scaled operations. As a result, firms often find that these investments limit their flexibility. As a result, they have great difficulty responding to changes in the environment.

TRUE

Lexus provides an example of how a firm can strengthen its differentiation strategy by achieving integration at multiple points along the value chain. By the early 1990s it soared to the top of J. D. Power customer satisfaction ratings. It found that quality perceptions (design, engineering, and manufacturing) can be strongly influenced by downstream activities in the value chain (marketing and sales, service).

FALSE

Differentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price. By increasing margins of the firm, differentiation also avoids the need for a low-cost position. Higher entry barriers result because of customer loyalty and the ability to provide uniqueness in its products or services.

FALSE

Differentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs.

FALSE

Differentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs. By increasing company margins, differentiation also avoids the need for a low-cost position. Higher entry barriers result because of customer loyalty and the company’s ability to provide uniqueness in its products or services. Differentiation also provides higher margins that enable a firm to deal with supplier power. And it reduces buyer power, because buyers lack comparable alternatives and are therefore less price sensitive. Supplier power is also decreased because there is a certain amount of prestige associated with being the supplier to a producer of highly differentiated products and services. Last, differentiation enhances customer loyalty, thus reducing the threat from substitutes.

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Potential pitfalls of a differentiation strategy include dilution of brand identification through product-line extensions. Firms may erode their quality brand image by adding products or services with lower prices and less quality. Although this can increase short-term revenues, it may be detrimental in the long run.

FALSE

A focus strategy is based on the choice of a narrow competitive scope within an industry. A firm following this strategy selects a segment or group of segments and tailors its strategy to serve them. The essence of focus is the exploitation of a particular market niche. As you might expect, narrow focus itself (like merely being different as a differentiator) is simply not sufficient for above-average performance.

TRUE

Potential pitfalls of focus strategies include focusers that become too focused to satisfy buyer needs. Some firms attempting to attain advantages through a focus strategy may have too narrow a product or service.

FALSE

Perhaps the primary benefit to firms that integrate low-cost and differentiation strategies is the difficulty for rivals to duplicate or imitate. This strategy enables a firm to provide two types of value to customers: differentiated attributes (e.g., high quality, brand identification, reputation) and lower prices (because of the lower costs for the firm in value-creating activities).

TRUE

The advantages of a cost focus strategy may be fleeting if the cost advantages are eroded over time. For example, the Dell pioneering direct-selling model in the personal computer industry has been eroded by rivals such as Hewlett-Packard as they gain experience with the Dell distribution method.

TRUE

Advances in manufacturing technologies such as CAD/CAM (computer aided design and computer aided manufacturing) and information technologies allow firms to manufacture unique products in relatively small quantities at lower costs, a concept known as mass customization. Andersen Windows uses this to lower costs, enhance quality and variety, and improve response time to customers.

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A profit pool is defined as the total profits in an industry at all points along the industry value chain. The pattern of profit concentration in an industry is very often different from the pattern of revenue generation.

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A key issue in strategic management is the creation of competitive advantages that enable a firm to enjoy above-average returns. Some firms may become stuck in the middle, if they try to attain both cost and differentiation advantages.

TRUE

Nothing is forever, when it comes to competitive advantages. Rapid changes in technology, globalization, and actions by rivals from within and outside of the industry can quickly erode company advantages. It is becoming increasingly important to recognize that the duration of competitive advantages is declining, especially in technology intensive industries.

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Nothing is forever, when it comes to competitive advantages. Rapid changes in technology, globalization, and actions by rivals from within and outside of the industry can quickly erode company advantages. It is becoming increasingly important to recognize that the duration of competitive advantages is declining, especially in technology intensive industries.

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Managing costs, and even changing the cost structures of certain industries, is a key feature of the digital economy. Most analysts agree that the ability of the Internet to lower transaction costs has transformed business. Broadly speaking, transaction costs refer to all the various expenses associated with conducting business.

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For many companies, Internet and digital technologies have enhanced their ability to build brand, offer quality products and services, and achieve other differentiation advantages. Among the most striking trends are new ways to interact with consumers. In particular, the Internet has created new ways of differentiating by enabling mass customization, which improves the response to customer wishes.

FALSE

With focus strategies, the Internet offers new avenues in which to compete because they can access markets less expensively (low cost) and provide more services and features (differentiation). Some claim that the Internet has opened up a new world of opportunities for niche players who seek to access small markets in a highly specialized fashion.

FALSE

The Internet has provided all companies with greater tools for managing costs. So it may be that cost management and control will become more important management tools.

TRUE

An incumbent firm that previously thought a niche market was not worth the effort may use Internet technologies to enter that segment for a lower cost than in the past. The larger firm can then bring its market power and resources to bear in a way that a smaller competitor cannot match.

FALSE

The industry life cycle refers to the stages of introduction, growth, maturity, and decline that occur over the life of an industry. In considering the industry life cycle, it is useful to think in terms of broad product lines such as personal computers, photocopiers, or long-distance telephone service. Changes tend to be slower than what is needed for forecasting.

TRUE

There is an advantage to being the first mover in a market. It led to the success of Coca Cola in becoming the first soft-drink company to build a recognizable global brand and enabled Caterpillar to get a lock on overseas sales channels and service capabilities.

FALSE

In the growth stage, the primary key to success is to build consumer preferences for specific brands. This requires strong brand recognition, differentiated products, and the financial resources to support a variety of value-chain activities such as marketing and sales, and research and development.

FALSE

In the growth stage, revenues increase at an accelerating rate because new consumers are trying the product and a growing proportion of satisfied consumers are making repeat purchases. Since repeat purchases are necessary, a long-term strategy is desirable.

TRUE

In the mature stage, rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. Advantages based on efficient manufacturing operations and process engineering become more important for keeping costs low as customers become more price sensitive.

TRUE

In the mature stage, rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. It also becomes more difficult for firms to differentiate their offerings, because users have a greater understanding of products and services.

FALSE

Two positioning strategies that managers can use to affect consumer mental shifts are reverse positioning, which strips away sacred product attributes while adding new ones, and breakaway positioning, which associates the product with a radically different category.

FALSE

Four basic strategies are available in the decline phase: maintaining, harvesting, exiting, or consolidating. Managers must carefully monitor the actions and intentions of competitors before deciding on a course of action.

FALSE

Harvesting involves obtaining as much profit as possible and requires that costs be reduced quickly. Maintaining refers to keeping a product going without significantly reducing marketing support, technological development, or other investments, in the hope that competitors will eventually exit the market.

FALSE

Old technologies that are in decline do not always quickly fade away. Research shows that in a number of cases, old technologies actually enjoy a very profitable last gasp, and can become resilient survivors in some circumstances.

TRUE

Firms in turnaround situations try to aggressively cut administrative expenses and inventories and speed up collection of receivables. Costs also can be reduced by outsourcing production of various inputs for which market prices may be cheaper than in-house production costs.

FALSE

A need for turnaround may occur at any stage in the life cycle but is more likely to occur during maturity or decline.

TRUE

Software maker Intuit is a case of a quick but well-implemented turnaround strategy. After stagnating and stumbling during the dot-com boom, the company discontinued its offers in online finance, insurance, and bill-paying operations that were losing money and focused on software for small businesses that employ less than 250 people. The company also instituted a performance-based reward system that greatly improved employee productivity.

How firms compete with each other and how they attain and sustain competitive advantages goes to the heart of strategic management. In short, the key issue becomes to identify why some firms outperform others and enjoy such advantages over time.

Examples of overall cost leadership within primary value chain activities may involve the effective layout of receiving dock operations (inbound logistics) and support value chain activities may include expertise in process engineering (technology development).

Key to an overall cost leadership strategy is the experience curve, which refers to how business learns to lower costs as it gains experience with production processes. With experience, unit costs of production decline as output increases in most industries.

Key to an overall cost leadership strategy is the experience curve, which refers to how business learns to lower costs as it gains experience with production processes. With experience, unit costs of production decline as output increases in most industries.

With experience, unit costs of production decline as output increases in most industries. The experience curve, developed by the Boston Consulting Group in 1968, is a way of looking at efficiency gains that come with experience. For a range of products, as cumulative experience doubles, costs and labor hours needed to produce a unit of product decline by 10 to 30 percent.

Research supports the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not. There has been a rich history of strategic management research addressing this topic. One study found that businesses combining multiple forms of competitive advantage (differentiation and overall cost leadership) outperformed businesses that used only a single form.

An overall low-cost position enables a firm to achieve above-average returns despite strong competition. It protects a firm against rivalry from competitors, because lower costs allow a firm to earn returns even if its competitors eroded their profits through intense rivalry. It protects firms against powerful buyers, who can only drive down prices to the level of the next most efficient producer. A low-cost position provides more flexibility to cope with supplier demands for input cost increases.

Potential pitfalls of overall cost leadership strategy include too much focus on one or a few value-chain activities; all rivals share a common input or raw material; the strategy is imitated too easily; a lack of parity on differentiation; and erosion of cost advantages when the pricing information available to customers increases.

Learning Objective: 05-03 The pitfalls managers must avoid in striving to attain generic strategies.
Level of Difficulty: 2 Medium
Topic: Types of Competitive Advantage and Sustainability
 

A differentiation strategy consists of creating differences in the product or service offering of the firm by creating something that is perceived industrywide as unique and valued by customers. Differentiation can take many forms, including prestige or brand image, technology, innovation, features, customer service, or a dealer network.

Examples of value chain activities for differentiation include support value chain activities like excellent applications engineering support (technology development) and facilities that promote a positive firm image (firm infrastructure).

Differentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs. By increasing company margins, differentiation also avoids the need for a low-cost position.

Supplier power is also decreased, because there is a certain amount of prestige associated with being the supplier to a producer of highly differentiated products and services.

Differentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs.

Potential pitfalls of a differentiation strategy include uniqueness that is not valuable; too much differentiation; too high a price premium; differentiation that is easily imitated; dilution of brand identification through product-line extensions; or perceptions of differentiation may vary between buyers and sellers.

Potential pitfalls of a differentiation strategy include the idea that perceptions of differentiation may vary between buyers and sellers. The issue here is that beauty is in the eye of the beholder. Companies must realize that although they may perceive their products and services as differentiated, their customers may view them as commodities.

A narrow market focus is to a differentiation-based strategy as a broadly-defined target market is to a cost leadership strategy.

A focus strategy is based on the choice of a narrow competitive scope within an industry. A firm following this strategy selects a segment or a group of segments and tailors its strategy to serve them. The essence of focus is the exploitation of a particular market niche.

Potential pitfalls of focus strategies include: erosion of cost advantages within the narrow segment; the idea that even product and service offerings that are highly focused are subject to competition from new entrants; and focusers that become too focused to satisfy buyer needs.

Three approaches to combining overall low cost and differentiation include: automated and flexible manufacturing systems, exploiting the profit pool concept for competitive advantage, and coordinating the extended value chain by way of information technology.

A profit pool is defined as the total profits in an industry at all points along the industry value chain.

The pitfalls of integrated overall cost leadership and differentiation include: firms that fail to attain both strategies may end up with neither and become stuck-in-the-middle; underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain; and miscalculating sources of revenue and profit pools in the company industry.

Nothing is forever, when it comes to competitive advantages. Rapid changes in technology, globalization, and actions by rivals from within and outside of the industry can quickly erode company advantages. It is becoming increasingly important to recognize that the duration of competitive advantages is declining, especially in technology intensive industries.

When Atlas began operations, distributors had little interest in its product. The established distributors already carried the door line of a much larger competitor and saw little to no reason to switch suppliers except, perhaps, for a major price concession. But as a startup, Atlas was too small to compete on price alone. Instead, it positioned itself as the door supplier of last resort, that is, the company people came to if the established supplier could not deliver or missed a key date. With an average industry order fulfillment time of almost four months, some calls inevitably came to Atlas. And when it did get the call, Atlas commanded a higher price because of its faster delivery. Atlas not only got a higher price, but its effective integration of value-creating activities saved time and lowered costs. Thus, it enjoyed the best of both worlds.

Hiring new employees, meeting with customers, ordering supplies, and addressing government regulations; all have some costs associated with them that can be lowered with the use of the Internet. Removing intermediaries also lowers transaction costs, and Internet search reduces the need for travel.

Among the most striking differentiation trends are new ways to interact with consumers. In particular, the Internet has created new ways of differentiating by enabling mass customization, which improves the response to customer wishes.

Among the most striking differentiation trends are new ways to interact with consumers. In particular, the Internet has created new ways of differentiating by enabling mass customization, which improves the response to customer wishes.

With focus strategies, the Internet offers new avenues in which to compete because they can access markets less expensively (low cost) and provide more services and features (differentiation). Some claim that the Internet has opened up a new world of opportunities for niche players who seek to access small markets in a highly specialized fashion.

Many experts agree that the net effect of the digital economy is fewer rather than more opportunities for sustainable advantages. This means strategic thinking becomes more important. More specifically, the Internet has provided all companies with greater tools for managing costs.

Industry life cycles are important because the emphasis on various generic strategies, functional areas, value-creating activities, and overall objectives varies over the course of an industry life cycle.

In the introduction stage, products are unfamiliar to consumers. Market segments are not well defined, and product features are not clearly specified.

In the introduction stage, products are unfamiliar to consumers. Market segments are not well defined, and product features are not clearly specified. The early development of an industry typically involves low sales growth, rapid technological change, operating losses, and the need for strong sources of cash to finance operations. Since there are few players and not much growth, competition tends to be limited.

The growth stage is the second stage of the product life cycle, characterized by strong increases in sales and growing competition.

In the maturity stage of the industry life cycle, there are many segments, competition is very intense, and the emphasis on process design is high.

In the maturity stage of the industry life cycle, rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. Advantages based on efficient manufacturing operations and process engineering become more important for keeping costs low as customers become more price sensitive. It also becomes more difficult for firms to differentiate their offerings, because users have a greater understanding of products and services.

In the maturity stage of the industry life cycle, aggregate industry demand softens. As markets become saturated, there are few new adopters. Rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising.

In the maturity stage of the industry life cycle, advantages based on efficient manufacturing operations and process engineering become more important for keeping costs low as customers become more price sensitive.

In the maturity stage of the industry life cycle, rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. It also becomes more difficult for firms to differentiate their offerings, because users have a greater understanding of products and services.

In the maturity stage of the industry life cycle, rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. It also becomes more difficult for firms to differentiate their offerings, because users have a greater understanding of products and services.

In the decline stage of the industry life cycle, there are few segments, the emphasis on process design is low, and the major functional areas of concern are general management and finance.

Four basic strategies are available in the decline phase: maintaining, harvesting, exiting, or consolidating.

Harvesting involves obtaining as much profit as possible and requires that costs be reduced quickly.

A study of 260 mature businesses in need of a turnaround identified three strategies used by successful companies: asset and cost surgery, selective product and market pruning, and piecemeal productivity improvements.

Piecemeal productivity improvements include improving business processes by reengineering them, benchmarking specific activities against industry leaders, encouraging employee input to identify excess costs, increasing capacity utilization, and improving employee productivity.

First, a plan was executed to undertake a dramatic refinancing of the business by raising bank loans secured against company assets. Second, the firm concentrated resources on the Ford brand and sold off the Premier Automotive Group (PAG) businesses. Third, Ford narrowed the range of cars down to 36 from 97 different models. Fourth, emphasis was placed on quality and being the best in class. Fifth, more shared platforms for building cars economically were installed. Sixth, Ford cut half of its shop-floor workforce and a third of its office jobs. By 2011, 17 factories had been closed and employment was reduced to 75,000 from 128,000.

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