Essentials of Strategic Management The Quest for Competitive Advantage John Gamble 6e - Test Bank

Essentials of Strategic Management The Quest for Competitive Advantage John Gamble 6e – Test Bank

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Essentials of Strategic Management, 6e (Gamble)

Chapter 5 The Five Generic Competitive Strategies

1) The objective of competitive strategy is to

A) provide detail to the company’s business model.
B) build a competitive advantage in the marketplace by giving buyers superior value relative to the offerings of rival sellers.
C) get the company into the best strategic group and then dominate it.
D) establish a competitively powerful value chain.
E) grow revenues at a faster annual rate than rivals are able to grow their revenues.

Answer: B

Explanation: A company’s competitive strategy deals exclusively with the specifics of management’s game plan for competing successfully—its specific efforts to please customers, strengthen its market position, counter the maneuvers of rivals, respond to shifting market conditions, and achieve a particular competitive advantage.

Difficulty: 1 Easy

Topic: Competitive Behavior

Learning Objective: 05-01 Understand what distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of industry and competitive conditions than in others.

Bloom’s: Remember

AACSB: Knowledge Application

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2) While there are many routes to competitive advantage, they all involve

A) building a brand name image that buyers trust.
B) delivering superior value to a broad or narrow market of buyers in ways rivals cannot readily match.
C) achieving lower costs than rivals and becoming the industry’s sales and market share leader.
D) finding effective and efficient ways to strengthen the company’s competitive assets and to reduce its competitive liabilities.
E) getting in the best strategic group and dominating it.

Answer: B

Explanation: The two biggest factors that distinguish one competitive strategy from another boil down to: (1) whether a company’s market target is broad or narrow and (2) whether the company is pursuing a competitive advantage linked to lower costs or differentiation, thereby delivering superior value to buyers.

Difficulty: 2 Medium

Topic: Competitive Behavior

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

3) A company’s competitive strategy deals with

A) management’s game plan for securing a competitive advantage relative to rivals.
B) what its strategy will be in such functional areas as R&D, production, sales and marketing, distribution, finance and accounting, and so on.
C) its efforts to change its position on the industry’s strategic group map.
D) its plans for entering into strategic alliances, utilizing mergers or acquisitions to strengthen its market position, outsourcing some in-house activities to outside specialists, and integrating forward or backward.
E) tweaking the value chain drivers to make them more cost competitive with rivals.

Answer: A

Difficulty: 1 Easy

Topic: Competitive Behavior

Bloom’s: Remember

AACSB: Knowledge Application

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4) A company’s competitive strategy should

A) be well attuned to doing an outstanding job of satisfying the needs and expectations of niche buyers.
B) support its objective to become at least an average performer within its industry.
C) ensure it is designed to concentrate on a small range of products so it can react quickly to competitive moves.
D) be well matched to its resources and capabilities in order to incorporate standard attributes into its product offering.
E) be well matched to its internal situation and be predicated on leveraging its collection of competitively valuable resources and competencies.

Answer: E

Explanation: A company’s competitive strategy should be well matched to its internal situation and be predicated on leveraging its collection of competitively valuable resources and competencies.

Difficulty: 2 Medium

Topic: Competitive Behavior

Bloom’s: Apply

AACSB: Analytical Thinking

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5) Although there are many routes to competitive advantage, the two biggest factors that distinguish one competitive strategy from another are

A) whether a company’s overall costs are lower than a competitors’ and whether the company can achieve strong product differentiation.
B) whether a company can offer the lowest possible prices and whether the company can get the best suppliers in the market.
C) whether a company’s target market is broad or narrow and whether the company is pursuing a low cost or differentiation strategy.
D) whether a company can achieve lower costs than its rivals and whether the company is pursuing the industry’s sales and market share leader’s role.
E) whether a company can build a brand name and an image that buyers trust.

Answer: C

Explanation: The primary determinants of a company’s profitability are whether the company chooses to compete on cost advantage or product differentiation and the scope of its target market—narrow or broad. Defining a target market allows a company to create products to suit the target customers and generates the need to devise a strategy that is best suited for generating profitability for customers and the company alike.

Difficulty: 2 Medium

Topic: Competitive Behavior

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

6) Which of the following is not one of the five generic types of competitive strategy?

A) Best-cost provider strategy
B) Broad low-cost provider strategy
C) Focused differentiation provider strategy
D) Focused low-cost provider strategy
E) Focused best-cost provider strategy

Answer: E

Explanation: See Figure 5.1. Low-cost (broad or focused) differentiation (broad or focused) and a hybrid or best-cost provider are the five generic types of competitive strategies. “Focused best-cost provider” is not a generic strategy.

Difficulty: 1 Easy

Topic: Competitive Behavior

Bloom’s: Remember

AACSB: Knowledge Application

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7) The generic types of competitive strategies include

A) the building, maintaining, and slowly surrendering of market share.
B) offensive strategies and defensive strategies.
C) low-cost provider, broad differentiation, focused low-cost, focused differentiation, and best-cost provider strategies.
D) low-cost/low-price strategies, high-quality/high-price strategies, medium-quality/medium-price strategies, low-cost/high-price strategies.
E) price leader strategies, price follower strategies, technology leader strategies, first-mover strategies, offensive strategies, and defensive strategies.

Answer: C

Explanation: See Figure 5.1. Low-cost (broad or focused), differentiation (broad or focused) and a hybrid or best-cost provider are the five generic types of competitive strategies.

Difficulty: 2 Medium

Topic: Competitive Behavior

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

8) A boutique hotel chain provides upscale rooms and superior customer service at value prices. What strategy is the hotelier using to gain competitive advantage?

A) Focused low-cost strategy
B) Low-cost provider strategy
C) Best-cost provider strategy
D) Broad differentiation strategy
E) Focused differentiation strategy

Answer: C

Explanation: The hotelier has used a hybrid of a focused differentiation strategy and focused low-cost strategy, known as a best-cost provider strategy, by outcompeting rivals via upscale rooms and superior service at value prices. See Figure 5.1. Low-cost (broad or focused), differentiation (broad or focused) and a hybrid or best-cost provider are the five generic types of competitive strategies.

Difficulty: 3 Hard

Topic: Competitive Behavior

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

9) The greatest and most important differences among the competitive strategies of different companies are essentially

A) whether a company’s market target is broad or narrow and whether the company is pursuing a competitive advantage linked to low cost or differentiation.
B) the kinds of actions companies take to improve their competitive assets and reduce their competitive liabilities.
C) the relative emphasis they place on offensive versus defensive strategies.
D) the different ways the companies try to cope with the five competitive forces.
E) how they go about building a brand name image that buyers trust and whether they are a risk taker or risk avoider.

Answer: A

Explanation: The two biggest factors that distinguish one competitive strategy from another are essentially: (1) whether a company’s market target is broad or narrow and (2) whether the company is pursuing a competitive advantage linked to lower costs or differentiation.

Difficulty: 3 Hard

Topic: Competitive Behavior

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

10) A low-cost leader’s basis for competitive advantage is

A) lower prices than rival firms.
B) using a low-cost/low-price approach to gain the biggest market share.
C) high buyer-switching costs.
D) lower overall costs than competitors.
E) higher unit sales than rivals.

Answer: D

Explanation: A low-cost leader’s basis for competitive advantage is lower overall costs than competitors.

Difficulty: 1 Easy

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

11) A low-cost leader can translate its low-cost advantage over its rivals into superior profit performance by

A) cutting its price to levels significantly below the prices of its rivals.
B) using its low-cost edge to underprice competitors and attract price-sensitive buyers in large enough numbers to increase total profits or refraining from price cutting and using the low-cost advantage to earn a higher profit margin on each unit sold.
C) going all out to use its cost advantage to capture a dominant share of the market.
D) spending heavily on advertising to promote the fact that it charges the lowest prices in the industry.
E) outproducing its rivals and thus having more units available to sell.

Answer: B

Explanation: A company has two options for translating a low-cost advantage over its rivals into attractive profit performance. Option 1 is to use the lower-cost edge to underprice competitors and attract price-sensitive buyers in great enough numbers to increase total profits. Option 2 is to maintain the present price (refrain from price-cutting), be content with the present market share, and use the lower-cost edge to earn a higher profit margin on each unit sold, thereby raising the firm’s total profits and overall return on investment.

Difficulty: 2 Medium

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

12) The major avenues for achieving a cost advantage over its rivals include

A) eliminating or curbing nonessential cost-producing activities and performing essential value chain activities more cost-effectively than its rivals.
B) having a management team that accepts below-market salaries.
C) being a first mover in adopting the latest state-of-the-art technologies, especially those relating to low-cost manufacturing.
D) outsourcing high-cost activities to offshore vendors.
E) paying lower wages to its hourly workers than what rivals are paying their workers.

Answer: A

Explanation: Success in achieving a low-cost edge over its rivals comes from eliminating and/or curbing “nonessential” activities and/or bypassing some cost-producing activities.

Difficulty: 2 Medium

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

13) Low-cost leaders who have the lowest industry costs are likely to

A) pursue backward or forward integration to detour suppliers or buyers with considerable bargaining power and leverage.
B) move the performance of most or all value chain activities to low-wage countries.
C) sell directly to users of their product or service and eliminate the use of wholesale and retail intermediaries.
D) have outmanaged its rivals in finding ways to perform value chain activities more cost-effectively
E) be considering exiting the current product market and using their competitive low-cost strength to gain a competitive advantage in other product arenas.

Answer: D

Explanation: To achieve a low-cost edge over its rivals, a firm’s cumulative costs across its overall value chain must be lower than competitors’ cumulative costs. Success in achieving a low-cost edge over its rivals comes from eliminating and/or curbing “nonessential” activities and/or bypassing some cost-producing activities; for example, outmanaging rivals in performing essential activities and achieving efficiencies in supply chain management and scale economies from full capacity utilization.

Difficulty: 2 Medium

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

14) Achieving a cost advantage over its rivals entails

A) concentrating on the primary activities portion of the value chain and outsourcing all support activities.
B) being a first mover in pursuing backward and forward integration, and controlling as much of the industry value chain as possible.
C) performing value chain activities more cost-effectively than its rivals and finding ways to eliminate or bypass some cost-producing activities.
D) minimizing R&D expenses and paying below-average wages and salaries to conserve on labor costs.
E) producing a standard product, redesigning the product infrequently, and having minimal advertising.

Answer: C

Explanation: See important cost drivers in a company’s value chain as shown in Figure 5.2. Success in achieving a low-cost edge over its rivals comes from eliminating and/or curbing “nonessential” activities and/or bypassing some cost-producing activities; for example, outmanaging its rivals in performing essential activities and achieving efficiencies in supply chain management and scale economies from full capacity utilization.

Difficulty: 1 Easy

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

15) Which of the following is not an action that a company can take to do a better job than its rivals of performing value chain activities more cost-effectively?

A) Striving to capture all available economies of scale
B) Trying to operate facilities at full capacity
C) Taking full advantage of experience and learning curve effects
D) Improving supply chain efficiency
E) Redesigning products to eliminate features that might have market appeal, but excessively increase production costs

Answer: E

Difficulty: 2 Medium

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

16) Which of the following is not one of the ways that a company can achieve a cost advantage by revamping its value chain?

A) Eliminating distributors and dealers by selling direct to customers
B) Replacing certain value chain activities with faster and cheaper online technology
C) Increasing production capacity and then striving hard to operate at full capacity
D) Relocating facilities so as to curb the need for shipping and handling activities
E) Streamlining operations by eliminating low value-added or unnecessary work steps and activities

Answer: C

Explanation: See important cost drivers in a company’s value chain as shown in Figure 5.2. Success in achieving a low-cost edge over its rivals comes from eliminating and/or curbing “nonessential” activities and/or outmanaging its rivals in performing essential activities. Increasing production capacity, etc., without achieving economies of scale does not lead to a cost advantage.

Difficulty: 2 Medium

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

17) A competitive strategy of striving to be the low-cost provider is particularly attractive when

A) buyers are not price sensitive.
B) the industry is made up of a large number of or equal-sized rivals.
C) there are many ways to achieve product differentiation that have value to buyers.
D) price competition is especially vigorous, buyers have low switching costs, and the majority of industry sales are made to a few large-volume buyers.
E) switching costs are high, price competition is strong, and buyers tend to use the industry’s products in many different ways.

Answer: D

Explanation: A low-cost provider strategy works well when: (1) industry newcomers use low introductory price to attract buyers and build a customer base, (2) the products of rival sellers are essentially identical and/or are readily available from several sellers, (3) commodity-like products and/or ample supplies set the stage for lively price competition, and (4) buyers incur low costs in switching from one seller/brand to another. In such markets, it is the less efficient, higher-cost companies that are most vulnerable.

Difficulty: 2 Medium

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

18) A competitive strategy to be the low-cost provider in an industry typically does not work well when

A) price competition among rival sellers is especially vigorous.
B) commodity-based product prevails and minimal differentiation exists.
C) buyers incur low costs in switching their purchases from one seller or brand to another.
D) industry newcomers use low introductory prices to attract buyers and build a customer base.
E) emergent strategies are required to respond to changes in competitor power.

Answer: E

Difficulty: 1 Easy

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

19) In which of the following circumstances is a strategy to be the industry’s overall low-cost provider not particularly well matched to the market situation?

A) When the offerings of rival firms are essentially identical, standardized, commodity-like products
B) When there are few ways to achieve differentiation that have value to buyers
C) When price competition is especially vigorous
D) When buyers have widely varying needs and special requirements, and when the costs of switching purchases from one seller to another are relatively high
E) When industry newcomers use introductory prices to build a customer base

Answer: D

Explanation: A low-cost provider strategy does not work well when buyers have varying needs and special requirements, raising the costs of switching from one seller to another.

Difficulty: 3 Hard

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

20) The value to a company of pursuing a low-cost provider strategy is contingent upon

A) the leader’s ability to combine the cost advantage with a reputation for good quality.
B) the leader’s ability to excel in manufacturing innovation so as to continuously reduce its manufacturing costs.
C) the leader’s ability to attain the biggest market share in the industry.
D) whether or not it is easy or inexpensive for rivals to copy the low-cost leader’s methods or otherwise match its low costs.
E) the aggressiveness with which the low-cost leader pursues converting the cost advantage into the absolute lowest possible costs.

Answer: D

Explanation: Relying on an approach to reduce costs that can be easily copied by rivals is one of the pitfalls to avoid while pursuing a low-cost strategy. If rivals find it relatively easy or inexpensive to imitate the leader’s low-cost methods, then the leader’s advantage will be too short-lived to yield a valuable edge in the marketplace.

Difficulty: 3 Hard

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

21) A strategy to be the industry’s overall low-cost provider tends to be more appealing than a differentiation or focus strategy when

A) there are many ways to achieve product differentiation that buyers find appealing.
B) buyers use the product in a variety of different ways.
C) the offerings of rival firms are essentially identical, standardized, commodity-like products.
D) buyers have high switching costs in changing from one seller’s product to another.
E) the market is composed of many buyer types, all with varying needs and expectations.

Answer: C

Explanation: A low-cost provider strategy works well when the products of rival sellers are essentially identical and are readily available from several sellers. Commodity-like products and/or ample supplies set the stage for lively price competition; in such markets, it is the less-efficient, higher-cost companies that are most vulnerable.

Difficulty: 2 Medium

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

22) Which of the following is not one of the pitfalls of a low-cost provider strategy?

A) Overly aggressive price cutting
B) Using a cost-based advantage to improve the company’s bargaining position with high-volume buyers
C) Using approaches to reducing costs that can be easily copied by rivals
D) Cutting prices more than the size of a company’s cost advantage
E) Becoming so fixated on cost reductions that products become too features-poor

Answer: B

Explanation: Perhaps the biggest pitfall of a low-cost provider strategy is getting carried away with overly aggressive price cutting and ending up with lower, rather than higher, profitability. A second big pitfall is relying on an approach to reduce costs that can be easily copied by rivals. A third pitfall is becoming too fixated on cost reduction.

Difficulty: 1 Easy

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

23) Examples of important cost drivers in a company’s value chain do not include

A) input costs.
B) capacity utilization.
C) learning and experience.
D) production technology and design.
E) customer service.

Answer: E

Explanation: See cost drivers in Figure 5.2. Success in achieving a low-cost edge over its rivals comes from eliminating and/or curbing “nonessential” activities and/or outmanaging its rivals in performing essential activities. Customer service is irrelevant here.

Difficulty: 1 Easy

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

24) A fast-food restaurant stocks bread, meat, sauces, and other main ingredients, but does not assemble and cook its burgers and sandwiches until a customer places an order. Which cost driver is the restaurant efficiently using to cut costs?

A) Economies of scale
B) Capacity utilization
C) Supply chain efficiencies
D) Bargaining power
E) Incentive systems and culture

Answer: C

Explanation: The fast-food restaurant is using the just-in-time inventory method to reduce supply chain inefficiency; the products are made-to-order thereby reducing the waste.

Difficulty: 3 Hard

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

25) Successful differentiation allows a firm to

A) command the largest market share in the industry.
B) set the industry ceiling on price.
C) avoid being overly concerned about whether entry barriers into the industry are high or low.
D) command a premium price for its product and/or increase unit sales and/or gain buyer loyalty to its brand.
E) take sales and market share away from rivals by undercutting them on price.

Answer: D

Explanation: Successful differentiation allows a firm to: (1) command a premium price, (2) increase unit sales (because additional buyers are won over by the differentiating features), and/or (3) gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products).

Difficulty: 1 Easy

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

26) Domino’s Pizza has a well-known slogan: “We’ll deliver in 30 minutes or less, or it’s free!” By using this slogan, what has the pizza maker achieved?

A) Given a sense of exclusivity to its customers
B) Increased its ability to charge a price premium for its product (because buyers see its differentiating features as worth something extra)
C) Coordinated with suppliers to better address customer needs
D) Created a new delivery system
E) Built a unique customer value proposition

Answer: E

Explanation: To achieve product differentiation, a company must incorporate desirable features into its product or service to clearly set itself apart from its rivals’ lacking attributes, as shown in the approach taken by Domino’s Pizza. A differentiation strategy, like Domino’s Pizza’s, calls for a customer value proposition that is unique. The strategy achieves its aim when an attractively large number of buyers find the customer value proposition appealing, becoming strongly attached to a company’s differentiated attributes

Difficulty: 3 Hard

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

27) Companies can pursue differentiation from many angles except

A) providing a unique competitive product taste.
B) executing superior customer service.
C) ensuring engineering design and performance benefits.
D) providing products that ensue luxury and prestige.
E) investing in managerial productivity and enjoying experience curve effects.

Answer: E

Explanation: See Figure 5.3. These include: high-quality inputs for luxury or prestige products, innovation and technological advances, superior product features, production-related R&D investments, continuous quality improvement, improving skills of personnel, marketing and brand-building, and enhanced customer service. Investing in managerial productivity and enjoying experience curve effects are more likely associated with a low-cost provider strategy than with a differentiation strategy.

Difficulty: 1 Easy

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

28) Easy-to-copy differentiating features

A) do not offer the promise of sustainable competitive advantage.
B) are less expensive to integrate into a product or service offering.
C) tend to create as much value for consumers as difficult-to-copy differentiating features.
D) should be patented before other companies follow suit.
E) lead to vigorous price competition.

Answer: A

Explanation: Easy-to-copy differentiating features cannot produce sustainable competitive advantage; differentiation based on hard-to-copy competencies and capabilities tends to be more sustainable.

Difficulty: 1 Easy

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

29) The most appealing approaches to differentiation are those that

A) are the most costly to incorporate.
B) match the differentiating features offered by rivals in the industry.
C) can be made even more attractive to buyers via clever advertising.
D) appeal to the most affluent consumers.
E) are hard or expensive for rivals to duplicate and have considerable buyer appeal.

Answer: E

Explanation: Easy-to-copy differentiating features cannot produce sustainable competitive advantage; differentiation based on hard-to-copy competencies and capabilities tends to be more sustainable.

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

30) Which of the following is not a value driver of a broad differentiation strategy?

A) Seeking out the highest quality inputs
B) Utilizing just-in-time inventories and made-to-order products when customer demand rises
C) Emphasizing human resource management activities that improve the skills, expertise, and knowledge of company personnel
D) Improving customer service or add extra services
E) Creating product features that appeal to a wide range of buyers

Answer: B

Explanation: The value drivers of a broad differentiation strategy do not include just-in-time inventories and made-to-order products contingent upon customer demand. Those drivers may be aspects of a low-cost provider strategy. The value drivers of a broad differentiation strategy do include: (1) creating product features that appeal to a wide range of buyers, (2) improving customer service or adding extra services, (3) investing in production-related R&D activities, (4) striving for innovation or technological advances, (5) pursuing continuous quality improvement, (6) increasing marketing and brand-building activities, (7) seeking out high-quality inputs, and (8) emphasizing human resource management activities that improve the skills, expertise, and knowledge of company personnel.

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

31) A differentiation strategy works best when

A) buyers’ needs are homogeneous.
B) many rival firms are also pursuing a differentiation approach.
C) firms have ample excess cash to invest in R&D activities.
D) there are few other ways to make a product unique to buyers.
E) technological change is fast-paced and competition revolves around rapidly evolving product features.

Answer: E

Explanation: Differentiation strategies tend to work best when (1) buyer needs and uses of the product are diverse, (2) there are many ways to differentiate the product or service that have value to buyers, (3) few rival firms are following a similar differentiation approach, and (4) technological change is fast-paced and competition revolves around rapidly evolving product features.

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

32) A differentiation-based competitive advantage

A) nearly always is attached to the quality and service aspects of a company’s product offering.
B) most often is the result of highly effective marketing and advertising campaigns designed to build awareness and recognition of the product or service offering.
C) requires developing at least one distinctive competence that buyers consider valuable.
D) hinges on a company’s success in developing top-of-the-line product features that will command the biggest price premium in the industry.
E) often hinges on incorporating features that: (1) raise the performance of the product, (2) lower the buyer’s overall costs of using the company’s product, (3) enhance buyer satisfaction in intangible or noneconomic ways, or (4) deliver value to customers by exploiting competitive capabilities that rivals cannot match.

Answer: E

Explanation: While a successful differentiation strategy must offer value in ways unmatched by rivals, a big issue in crafting a differentiation strategy is deciding what is valuable to customers. This can be accomplished in three ways (1) include product attributes and user features that lower the buyer’s costs, (2) incorporate tangible features that improve product performance, or (3) incorporate intangible features that enhance buyer satisfaction in noneconomic ways.

Difficulty: 3 Hard

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

33) Opportunities to differentiate a company’s product offering

A) are always dependent on the capabilities of the company’s R&D staff.
B) are more likely to be captured by highly skilled marketers.
C) can exist in supply chain activities, R&D, manufacturing activities, distribution and shipping, or marketing, sales, and customer service.
D) usually are tied to product quality, durability, reliability, and proliferation.
E) are most frequently attached to a product’s brand image, performance, and reliability.

Answer: C

Explanation: See Figure 5.3. These opportunities include: high-quality inputs, innovation and technological advances, superior product features, production-related R&D investments, continuous quality improvement, improving skills of personnel, marketing and brand-building, and enhanced customer service.

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

34) A route to take in developing a differentiation advantage includes

A) signaling value by targeting sophisticated buyers.
B) incorporating intangible features that enhance buyer satisfaction in economic ways.
C) emphasizing high quality and performance of products through a standard and simple, no-fuss packaging.
D) incorporating product attributes and user features that raise the buyer’s overall costs, but keep the price low.
E) incorporating tangible features that add functionality, increase customer satisfaction with the product specifications, functions, and styling.

Answer: E

Explanation: Incorporating important tangible features increases customer satisfaction with the product, such as product specifications, functions, and styling. This can be accomplished by including attributes that (1) add functionality, (2) enhance the design, (3) save time for the user, (4) are more reliable, or (5) make the product cleaner, safer, quieter, simpler to use, more portable, more convenient, or longer-lasting than a rival brand.

Difficulty: 3 Hard

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

35) Broad differentiation strategies are well-suited for market conditions where

A) there are many ways to differentiate the product or service and many buyers perceive these differences as having value.
B) most buyers have the same needs and use the product in the same ways.
C) buyers are susceptible to clever advertising.
D) barriers to entry are high and suppliers have a low degree of bargaining power.
E) price competition is especially vigorous.

Answer: A

Explanation: Differentiation strategies tend to work best when: (1) buyer needs and uses of the product are diverse, (2) there are many ways to differentiate the product or service that have value to buyers, (3) few rival firms are following a similar differentiation approach, and (4) technological change is fast-paced and competition revolves around rapidly evolving product features.

Difficulty: 1 Easy

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

36) Broad differentiation strategies generally work best in market circumstances where

A) buyer needs and preferences are too diverse to be fully satisfied by a standardized product.
B) most buyers have similar needs and use the product in similar ways.
C) the products of rivals are weakly differentiated and most competitors are resorting to clever advertising to try to set their product offerings apart.
D) buyers are price sensitive and buying switching costs are quite low.
E) the five competitive forces are strong.

Answer: A

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

37) A broad differentiation strategy works best in situations characterized by

A) slow-paced technological change and infrequent new or improved product introductions.
B) similar buyer needs and uses of the product.
C) low switching costs to rival brands incurred by buyers.
D) low bargaining power and frequent purchases by buyers.
E) fast-paced technological change and rapidly evolving product features that drive competition.

Answer: E

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

38) A broad differentiation strategy generally produces the best results in situations where

A) buyer brand loyalty is low.
B) few rivals are following a similar differentiation approach.
C) new and improved products are introduced only infrequently.
D) most rivals are seeking to differentiate their products on most of the same features and attributes.
E) price competition is vigorous.

Answer: B

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

39) In which one of the following market circumstances is a broad differentiation strategy generally not well suited?

A) When buyer needs and preferences are diverse
B) When few rivals are pursuing a similar differentiation approach
C) When buyers are homogeneous in their needs and preferences, and are generally satisfied with standardized product
D) When there are many ways to differentiate the product or service and many buyers perceive these differences as having value
E) When technological change is fast-paced and competition revolves around rapidly evolving product features

Answer: C

Explanation: A low-cost provider strategy can always defeat a differentiation strategy when buyers are homogeneous in their needs, are generally satisfied with a basic product, and do not think “extra” attributes are worth a higher price.

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

40) A low-cost provider strategy can defeat a differentiation strategy

A) when a company can offset thinner profit margins per unit by selling sufficient additional units to increase total profits.
B) when there are few ways to differentiate a product or a service and many buyers perceive these differences as valuable.
C) when customers are basically satisfied and do not think extra attributes are worth a higher price feature.
D) when there are many ways to differentiate the product or service and many buyers perceive these differences as having value.
E) when technological change is fast-paced and competition revolves around rapidly evolving product features.

Answer: C

Explanation: Overdifferentiating and overcharging are fatal differentiation mistakes. A low-cost provider can defeat a differentiator when customers are basically satisfied with a product or service and do not think extra bells and whistles merit a premium price.

Difficulty: 3 Hard

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

41) A pitfall to avoid in pursuing a differentiation strategy is

A) charging a premium price for the differentiating features.
B) spending on activities to differentiate the company’s product to enhance profitability.
C) meeting and exceeding the meaningful gaps in quality, performance, service, and other attractive differentiating attributes offered by rivals.
D) choosing a product offering that supports buyers’ indifference to rival brands’ offerings.
E) trying to differentiate on the basis of attributes or features that are easily copied.

Answer: E

Explanation: Rapid imitation means that no rival achieves differentiation because whenever one firm introduces some value-creating aspect that strikes the fancy of buyers, fast-following copycats quickly reestablish parity. This is why a firm must seek out sources of value creation that are time-consuming or burdensome for rivals to match if it hopes to use differentiation to win a sustainable competitive edge.

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

42) Which of the following is not one of the pitfalls of pursuing a differentiation strategy?

A) Trying to strongly differentiate the company’s product from those of rivals rather than be content with weak product differentiation
B) Overdifferentiating so that the features and attributes incorporated exceed buyer needs and requirements
C) Trying to charge too high a price premium for the differentiating features
D) Differentiating on features or attributes that rivals can easily copy
E) Overspending on efforts to differentiate the company’s product offering

Answer: A

Explanation: Differentiation strategies can fail for any of several reasons. A differentiation strategy keyed to product or service attributes that are easily and quickly copied is always suspicious. Differentiation strategies can also falter when buyers see little value in the unique attributes of a company’s product. Overdifferentiating so that product quality or service levels exceed buyers’ needs, trying to charge too high a price premium, and not striving to open up meaningful gaps in quality, service, or performance features vis-à-vis the products of rivals are other pitfalls.

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

43) What sets focused (or market niche) strategies apart from low-cost leadership and broad differentiation strategies is

A) the extra attention paid to top-notch product performance and product quality.
B) their concentrated attention on a narrow piece of the overall market.
C) greater opportunity for competitive advantage.
D) their suitability for market situations where most industry rivals have weakly differentiated products.
E) their objective of delivering more value for the money.

Answer: B

Explanation: What sets focused strategies apart from low-cost leadership or broad differentiation strategies is a concentration on a narrow piece of the total market.

Difficulty: 1 Easy

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

44) The advantages of focusing a company’s entire competitive effort on a single market niche allows for

A) going after a national customer base with a “something for everyone” lineup of models.
B) scaling operations to serve the customer market segment.
C) utilizing the full depth of the company’s resources across a broad base of customers.
D) executing competencies and capabilities better than competitors.
E) developing offensive strategies that address company weaknesses and environmental threats.

Answer: B

Explanation: The advantages of focusing a company’s entire competitive effort on a single market niche are considerable, especially for smaller and medium-sized companies that may lack the scale (e.g., breadth and depth of resources) to tackle going after a national customer base with a “something for everyone” lineup of models, styles, and product selection.

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

45) A focused low-cost strategy seeks to achieve competitive advantage by

A) outmatching competitors in offering niche members an absolute rock-bottom price.
B) delivering more value for the money than other competitors.
C) performing the primary value chain activities at a lower cost per unit than can the industry’s low-cost leaders.
D) dominating more market niches in the industry via a lower cost and a lower price than any other rival.
E) serving buyers in the target market niche at a lower cost and lower price than rivals.

Answer: E

Explanation: A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and a lower price than rivals.

Difficulty: 1 Easy

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

46) The chief difference between a low-cost leader strategy and a focused low-cost strategy is

A) whether the product is strongly differentiated or weakly differentiated from rivals.
B) the degree of bargaining power that buyers have.
C) the size of the buyer group that a company is trying to appeal to.
D) the production methods being used to achieve a low-cost competitive advantage.
E) the number of upscale attributes incorporated into the product offering.

Answer: C

Explanation: The only real difference between a low-cost provider strategy and a focused low-cost strategy is the size of the buyer group to which a company is appealing.

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

47) A focused differentiation strategy aims at securing competitive advantage

A) by providing niche members with a top-of-the-line product at a premium price.
B) by catering to buyers looking for an upscale product at an attractively low price.
C) with a product or service offering carefully designed to appeal to the unique preferences and needs of a narrow, well-defined group of buyers.
D) by developing product attributes that no other company in the industry has.
E) by convincing affluent buyers that the company has a true world-class product.

Answer: C

Difficulty: 1 Easy

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

48) Which one of the following does not represent market circumstances that make a focused low-cost or focused differentiation strategy attractive?

A) When it is costly or difficult for multisegment competitors to meet the specialized needs of the target market niche and at the same time satisfy the expectations of their mainstream customers
B) When the industry has many different segments and market niches, thereby allowing a focuser to pick an attractive niche suited to its resource strengths and capabilities
C) When industry leaders have chosen not to compete in the niche
D) When the target market niche is big enough to be profitable and offers good growth potential
E) When buyers are not strongly brand loyal and a large number of other rivals are attempting to specialize in the same target segment

Answer: E

Explanation: What sets focused (or market niche) strategies apart from low-cost leadership or broad differentiation strategies is a concentration on a narrow piece of the total market. The targeted segment, or niche, can be defined by geographic uniqueness or by special product attributes that appeal only to niche members. This strategy is most attractive when (1) the target market niche is big enough to be profitable and offers good growth potential; (2) industry leaders have chosen not to compete in the niche—focusers can avoid battling head-to-head against the industry’s biggest and strongest competitors; (3) it is costly or difficult for multisegment competitors to meet the specialized needs of niche buyers and at the same time satisfy the expectations of mainstream customers; (4) the industry has many different niches and segments, thereby allowing a focuser to pick a niche suited to its resource strengths and capabilities; or (5) few, if any, rivals are attempting to specialize in the same target segment.

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

49) A focused differentiation strategy can lead to attractive competitive advantage when

A) industry leaders have chosen not to compete in the niche.
B) buyers are not strongly loyal to a brand and a large number of other rivals are attempting to specialize in the same target segment.
C) the industry has many different segments and market niches, thereby allowing a focuser to pick an attractive niche suited to its resource strengths and capabilities.
D) the target market niche is big enough to be profitable and offers good growth potential.
E) it is costly or difficult for multisegment competitors to meet the specialized needs of the target market niche and at the same time satisfy the expectations of their mainstream customers.

Answer: B

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

50) Focusing provides the ability to secure a competitive edge, but it also carries some risks that will be detrimental to the focused firm, such as

A) the chance that competitors will not find effective ways to match the focused company’s capabilities in serving the market niche.
B) the potential for the preferences and needs of niche members to shift over time toward mainstream provider product attributes.
C) the potential for the niche to become so attractive that it will not attract new competitors, thereby providing excessive market segment profits.
D) the likelihood that a focused company will become so cost efficient that it will achieve excessive profits.
E) the possibility that a broad low-cost strategy will always trump a firm’s best-cost provider strategy.

Answer: B

Explanation: Focused differentiation strategies are keyed to offering carefully designed products or services to appeal to the unique preferences and needs of a narrow, well-defined group of buyers (as opposed to a broad differentiation strategy aimed at many buyer groups and market segments). The first major risk is the chance that competitors will find effective ways to match the focused firm’s capabilities in serving the target niche. The second risk of employing a focus strategy is the potential for the preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers.

Difficulty: 1 Easy

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

51) Which of the following are not distinguishing features of a company’s successful best-cost provider strategy?

A) It develops core competencies that allow differentiating attributes to be incorporated at a low cost.
B) It has unmatched efficiency in managing essential value chain activities.
C) It seeks to deliver superior value to buyers by satisfying their expectations on key quality/service/features/performance attributes and beating their expectations on price (given what rivals are charging for much the same attributes).
D) It seeks to be the low-cost provider in the largest and fastest-growing (or best) market segment.
E) It enjoys a competitive advantage based on more value for the money.

Answer: D

Explanation: For a best-cost provider strategy to be successful, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals, hence a competitive advantage. This capability is contingent on (1) a superior value chain configuration that eliminates or minimizes activities that do not add value, (2) unmatched efficiency in managing essential value chain activities, and (3) core competencies that allow differentiating attributes to be incorporated at a low cost.

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-04 Recognize the attributes of a best-cost provider strategy, a hybrid of low-cost provider and differentiation strategies.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

52) A firm pursuing a best-cost provider strategy

A) seeks to offer more value-adding features than the industry’s low-cost providers and lower prices than those pursuing differentiation.
B) achieves competitive advantage because its operating activities are best-in-class or best-in-world.
C) tries to have the best cost (as compared to rivals) for each activity in the industry’s value chain.
D) opts for a middle-of-the-road strategic approach that attempts to satisfy the product or service needs of consumers with average household incomes.
E) follows a hybrid strategy based upon superior resources and a narrow market niche.

Answer: A

Explanation: When a company can incorporate appealing features, good-to-excellent product performance or quality, or more satisfying customer service into its product offering at a lower cost than rivals, then it enjoys “best-cost” status: it is the low-cost provider of a product or service with upscale attributes. A best-cost provider can use its low-cost advantage to underprice rivals whose products or services have similar upscale attributes and still earn attractive profits.

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-04 Recognize the attributes of a best-cost provider strategy, a hybrid of low-cost provider and differentiation strategies.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

53) The aim of the best-cost provider strategy is to create a competitive advantage by

A) incorporating attractive or upscale product attributes at a lower cost than rivals.
B) offering buyers the industry’s best-performing product at the best cost and best (lowest) price in the industry.
C) attracting buyers on the basis of having the industry’s overall best-performing product at a price that is slightly below the industry-average price.
D) outcompeting rivals using low-cost provider strategies.
E) translating its best-cost status into achieving the highest profit margins of any firm in the industry.

Answer: A

Explanation: Companies pursuing best-cost strategies give customers more value for the money by satisfying buyer desires for appealing features/performance/quality/service at a lower cost than their rivals and by charging a lower price for these attributes compared to rivals with similar-caliber product offerings.

Difficulty: 2 Medium

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-04 Recognize the attributes of a best-cost provider strategy, a hybrid of low-cost provider and differentiation strategies.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

54) For a best-cost provider strategy to be successful, a company must have

A) excellent marketing and sales skills in convincing buyers to pay a premium price for the attributes/features incorporated in its product.
B) the capability to incorporate upscale attributes at lower costs than its rivals whose products have similar upscale attributes.
C) access to greater learning and experience curve effects and scale economies than its rivals.
D) one of the best-known and most respected brand names in the industry.
E) a short, low-cost value chain.

Answer: B

Explanation: For a best-cost provider strategy to be successful, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than its rivals. This capability is contingent on (1) a superior value chain configuration that eliminates or minimizes activities that do not add value, (2) unmatched efficiency in managing essential value chain activities, and (3) core competencies that allow differentiating attributes to be incorporated at a low cost.

Difficulty: 3 Hard

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-04 Recognize the attributes of a best-cost provider strategy, a hybrid of low-cost provider and differentiation strategies.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

55) The target market of a best-cost provider is

A) value-conscious buyers.
B) brand-conscious buyers.
C) price-sensitive buyers.
D) middle-income buyers.
E) young adults (in the 18-to-35 age group).

Answer: A

Explanation: Companies pursuing best-cost strategies aim squarely at the sometimes great mass of value-conscious buyers looking for a good-to-very-good product or service at an economical price.

Difficulty: 1 Easy

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-04 Recognize the attributes of a best-cost provider strategy, a hybrid of low-cost provider and differentiation strategies.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

56) The greatest danger or risk of an unsound best-cost provider strategy is

A) that buyers will be highly skeptical about paying a relatively low price for upscale attributes/features.
B) not establishing strong alliances and partnerships with key suppliers.
C) that low-cost leaders will be able to steal away some customers on the basis of a lower price, and high-end differentiators will be able to steal away customers with the appeal of better product attributes.
D) that it will be unable to achieve top-notch quality at a rock-bottom cost.
E) becoming too highly integrated and not relying enough on outsourcing.

Answer: C

Explanation: A company with a modest degree of differentiation and no real cost advantage will most likely find itself losing market share to those firms using low-cost strategies and those using high-end differentiation strategies involving better product attributes.

Difficulty: 3 Hard

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-04 Recognize the attributes of a best-cost provider strategy, a hybrid of low-cost provider and differentiation strategies.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

57) A company’s biggest vulnerability in employing a best-cost provider strategy is

A) relying too heavily on outsourcing.
B) getting squeezed between firms employing low-cost provider strategies and those using high-end differentiation strategies.
C) getting trapped in a price war with low-cost leaders.
D) being timid in cutting its prices far enough below high-end differentiators to win away many of their customers.
E) not having a sustainable distinctive competence in cost reduction.

Answer: B

Explanation: A company’s biggest vulnerability in employing a best-cost provider strategy is not having the requisite core competencies and efficiencies in managing value chain activities to support the addition of differentiating features without significantly increasing costs. A company with a modest degree of differentiation and no real cost advantage will most likely find itself squeezed between the firms using low-cost strategies and those using differentiation strategies.

Difficulty: 3 Hard

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-04 Recognize the attributes of a best-cost provider strategy, a hybrid of low-cost provider and differentiation strategies.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

58) Best-cost provider strategies are appealing in those market situations where

A) buyers are more quality-conscious than price-conscious.
B) diverse buyer preferences make product differentiation the norm and where a large number of value-conscious buyers can be induced to purchase mid-range products.
C) there are numerous buyer segments, buyer needs are diverse across these segments, only a few of the segments are growing rapidly, and sellers’ products are strongly differentiated.
D) buyers are more performance-conscious than value-conscious.
E) a company is positioned between rivals who have ultra-low prices and rivals who have top-notch products in terms of both quality and performance.

Answer: B

Explanation: A best-cost provider strategy works best in markets where product differentiation is the norm and an attractively large number of value-conscious buyers can be induced to purchase midrange products rather than cheap, basic products or expensive, top-of-the-line products. A best-cost provider needs to position itself near the middle of the market with either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher price.

Difficulty: 3 Hard

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-04 Recognize the attributes of a best-cost provider strategy, a hybrid of low-cost provider and differentiation strategies.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

59) Success with a best-cost provider strategy designed to outcompete high-end differentiators requires.

A) achieving significantly lower costs in providing the upscale features.
B) motivating buyers to purchase upscale features that match those of the rivals.
C) achieving the lowest costs in the industry.
D) matching the company’s resources and capabilities to a low-cost provider status.
E) providing significantly better product attributes in order to justify a price above what low-cost leaders are charging.

Answer: A

Explanation: To be successful, a best-cost provider must achieve significantly lower costs in providing upscale features so that it can outcompete high-end differentiators on the basis of a significantly lower price. Likewise, it must offer buyers significantly better product attributes to justify a price above what low-cost leaders are charging. In other words, it must offer buyers a more attractive customer value proposition

Difficulty: 3 Hard

Topic: Implementation of Product Differentiation Strategies

Learning Objective: 05-04 Recognize the attributes of a best-cost provider strategy, a hybrid of low-cost provider and differentiation strategies.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

60) What are the five generic competitive strategies? Briefly describe each one and identify the type of competitive advantage that each strategy is aimed at achieving.

Answer: See Figure 5.1. Low cost (broad or focused), differentiation, (broad or focused), and a hybrid or best-cost provider are the five generic types of competitive strategies.

Difficulty: 1 Easy

Topic: Gaining Competitive Advantage Through Differentiation

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

61) Identify cost drivers in a company’s value chain. Explain how these drivers impact a firm’s generic strategy.

Answer: A cost driver is a factor having a strong effect on the cost of a company’s value chain activities and cost structure. See Figure 5.2 for a list of cost drivers. Aspects of a low-cost leadership strategy can include: (1) striving to capture all available economies of scale, (2) taking full advantage of experience and learning curve effects, (3) trying to operate facilities at full capacity, (4) substituting lower-cost inputs whenever there’s little or no sacrifice in product quality or product performance, (5) employing advanced production technology and process design to improve overall efficiency, (6) using communication systems and information technology to achieve operating efficiencies, (7) using the company’s bargaining power vis-à-vis suppliers to gain concessions, (8) being alert to the cost advantages of outsourcing and vertical integration, and (9) pursuing ways to boost labor productivity and lower overall compensation costs.

Difficulty: 2 Medium

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

62) Compare and contrast cost drivers and uniqueness drivers in a company’s value chain. Explain how these drivers might support a firm’s generic strategy.

Answer: See Figures 5.2 and 5.3. A cost driver is a factor that has a strong effect on the cost of a company’s value chain activities and ability to become a low-cost provider, whereas uniqueness driver is a value chain activity or factor that can have a strong impact on customer value and creating differentiation. Cost drivers include (1) striving to capture all available economies of scale, (2) taking full advantage of experience and learning curve effects, (3) trying to operate facilities at full capacity, (4) substituting lower-cost inputs whenever there’s little or no sacrifice in product quality or product performance, (5) employing advanced production technology and process design to improve overall efficiency, (6) using communication systems and information technology to achieve operating efficiencies, (7) using the company’s bargaining power vis-à-vis suppliers to gain concessions, (8) being alert to the cost advantages of outsourcing and vertical integration, and (9) pursuing ways to boost labor productivity and lower overall compensation costs. Uniqueness drivers, on the other hand, include such factors as (1) high quality inputs, (2) innovation and technological advances, (3) superior product features, (4) production-related R&D investments, (5) continuous quality improvement, (6) improving skills of personnel, marketing and brand-building, and (7) enhanced customer service.

Difficulty: 3 Hard

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Reflective Thinking

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63) What are the distinctive features of a focused low-cost strategy? How does a focused low-cost strategy differ from a low-cost leadership strategy?

Answer: Achieving a low-cost edge over rivals comes from eliminating and/or curbing “nonessential” activities and outmanaging rivals in performing essential activities. A cost driver is a factor having a strong effect on the cost of a company’s value chain activities and cost structure. See Figure 5.2 for a list of cost drivers. Aspects of a low-cost leadership strategy can include: (1) striving to capture all available economies of scale, (2) taking full advantage of experience and learning curve effects, (3) trying to operate facilities at full capacity, (4) substituting lower-cost inputs whenever there’s little or no sacrifice in product quality or product performance, (5) employing advanced production technology and process design to improve overall efficiency, (6) using communication systems and information technology to achieve operating efficiencies, (7) using the company’s bargaining power vis-à-vis suppliers to gain concessions, (8) being alert to the cost advantages of outsourcing and vertical integration, and (9) pursuing ways to boost labor productivity and lower overall compensation costs. A focused strategy based on low cost, on the other hand, aims at securing a competitive advantage by serving buyers in a target market niche at a lower cost and a lower price than rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment. The avenues to achieving a cost advantage over rivals also serving the target market niche are the same as for low-cost leadership: outmanaging rivals in keeping the costs to a bare minimum and searching for innovative ways to bypass or reduce nonessential activities. The only real difference between a low-cost provider strategy and a focused low-cost strategy is the size of the buyer group to which a company is appealing.

Difficulty: 2 Medium

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Bloom’s: Understand

AACSB: Analytical Thinking

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64) What are the distinctive features of a broad differentiation strategy? Under what circumstances is a broad differentiation strategy appealing?

Answer: See Figure 5.3. Aspects of a broad differentiation strategy can include: (1) seeking out high-quality input; (2) striving for innovation and technological advances; (3) creating superior product features, design, and performance; (4) investing in production-related R&D activities; (5) pursuing continuous quality improvement; (6) emphasizing human resource management activities that improve the skills, expertise, and knowledge of company personnel; (7) increasing emphasis on marketing and brand-building activities; and (8) improving customer service or adding additional services. A broad differentiation strategy tends to work best when (1) buyer needs and uses of the product are diverse; (2) there are many ways to differentiate the product or service that have value to buyers; (3) few rival firms are following a similar differentiation approach; and (4) technological change is fast-paced and competition revolves around rapidly evolving product features.

Difficulty: 2 Medium

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

Bloom’s: Understand

AACSB: Analytical Thinking

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65) What are the distinctive features of a focused differentiation strategy? How is it different from a broad differentiation strategy?

Answer: A focused differentiation strategy is keyed to offering carefully designed products or services to appeal to the unique preferences and needs of a narrow, well-defined group of buyers, or market niche, whereas a broad differentiation strategy is aimed at a mass market composed of many buyer groups and market segments.

Difficulty: 3 Hard

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.; 05-04 Recognize the attributes of a best-cost provider strategy, a hybrid of low-cost provider and differentiation strategies.

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66) In what market and competitive circumstances are focused low-cost and focused differentiation strategies attractive?

Answer: As opposed to broader market strategies, a focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and a lower price than rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment. Focused differentiation strategies, on the other hand, are keyed to offering carefully designed products or services to appeal to the unique preferences and needs of a narrow, well-defined group of buyers, or market niche, instead of a broad differentiation strategy that is aimed at many buyer groups and market segments.

Difficulty: 3 Hard

Topic: Broad Differentiation Strategies; Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.; 05-03 Explain the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.; 05-04 Recognize the attributes of a best-cost provider strategy, a hybrid of low-cost provider and differentiation strategies.

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AACSB: Analytical Thinking

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67) Which one of the five generic competitive strategies is most likely to be best suited for an industry whose product is a commodity? Explain.

Answer: A low-cost provider strategy tends to work best when the products of rival sellers are essentially identical and are readily available from several sellers. Commodity-like products and/or ample supplies set the stage for lively price competition; in such markets, it is the less-efficient, higher-cost companies that are most vulnerable.

Difficulty: 2 Medium

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-02 Explain the major avenues for achieving a competitive advantage based on lower costs.

Bloom’s: Understand

AACSB: Analytical Thinking

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68) One of the big pitfalls in crafting a competitive strategy is that managers, who are torn about the pros and cons of the various generic strategies, will opt for “stuck-in-the-middle” strategies that represent compromises between lower costs and greater differentiation, and between broad and narrow market appeal. True or false? Explain your answer.

Answer: True. A company’s biggest vulnerability in employing a best-cost provider strategy is not having the requisite core competencies and efficiencies in managing value chain activities to support the addition of differentiating features without significantly increasing costs. A company with a modest degree of differentiation and no real cost advantage will most likely find itself squeezed (or trapped in the middle) between the firms using low-cost strategies and those using differentiation strategies. Thus, a successful best-cost provider must offer buyers significantly better product attributes to justify a price above what low-cost leaders are charging. Likewise, it has to achieve significantly lower costs in providing upscale features so that it can outcompete high-end differentiators on the basis of a significantly lower price.

Difficulty: 3 Hard

Topic: Relationship Between Cost Drivers and Cost-Leadership and Differentiation Strategies

Learning Objective: 05-04 Recognize the attributes of a best-cost provider strategy, a hybrid of low-cost provider and differentiation strategies.

Bloom’s: Analyze

AACSB: Analytical Thinking

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