Strategic Management Text And Cases 8th Edition By Mcnamara - Test Bank

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FALSE

A business-level strategy is a strategy designed for a firm or a division of a firm that competes within a single business.

FALSE

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.

FALSE

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.

TRUE

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.

FALSE

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.

TRUE

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.

TRUE

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

The failure to attain parity on the basis of differentiation can be illustrated with an example from the automobile industry which is the ill-fated Yugo. Yugo was offering a lousy value proposition. The cars literally fell apart before your eyes. And the lesson was simple. Price is just one component of value. No matter how good the price, the most cost-sensitive consumer won’t buy a bad product.

FALSE

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. 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. There are a number of reasons why we find this effect. Among the most common factors are workers getting better at what they do, product designs being simplified as the product matures, and production processes being automated and streamlined. However, experience curve gains will be the foundation for a cost advantage only if the firm knows the source of the cost reduction and can keep these gains proprietary.

FALSE

Competitive parity on the basis of differentiation permits a cost leader to translate cost advantages directly into higher profits than competitors. Thus, the cost leader earns above-average returns.

TRUE

Overall cost leadership requires a tight set of interrelated tactics that include: aggressive construction of efficient-scale facilities and vigorous pursuit of cost reductions from experience. Due to its reduced operational costs, Zulily is able to offer attractive prices to customers who are willing to wait.

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.

FALSE

An overall low-cost position enables a firm to achieve above-average returns despite strong competition.

FALSE

An overall low-cost position 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.

TRUE

A low-cost position also protects firms against powerful buyers. Buyers can exert power to drive down prices only to the level of the next most efficient producer.

FALSE

A low-cost position provides more flexibility to cope with demands from powerful suppliers for input cost increases.

FALSE

The factors that lead to a low-cost position also provide a substantial entry barriers position with respect to substitute products introduced by new and existing competitors.

TRUE

Zulily pays close attention to costs helps to protect the company from buyer power and intense rivalry from competitors. Thus, Zulily is able to drive down costs and reduce the bargaining power of its customers.

TRUE

Renault both lessens the degree of rivalry it faces and increases entry barriers for new entrants by increasing productivity and lowering unit costs.

FALSE

The supermarket, Aldi, places extreme focus on minimizing costs across its operations which ultimately makes it less vulnerable to substitutes.

FALSE

The supermarket, Aldi, places extreme focus on minimizing costs across its operations which ultimately makes it less vulnerable to substitutes such as discount retailers like Walmart and dollar stores.

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.

TRUE

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.

FALSE

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 in responding to changes in the environment.

TRUE

Firms may differentiate themselves along several different dimensions at once. For example, the Cheesecake Factory, an upscale casual restaurant, differentiates itself by offering high-quality food, the widest and deepest menu in its class of restaurants, and premium locations.

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.

TRUE

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

Potential pitfalls of focus strategies include that cost advantages may erode within the narrow segment. The advantages of a cost focus strategy may be fleeting if the cost advantages are eroded over time. For example, early pioneers in online education, such as the University of Phoenix, have faced increasing challenges as traditional universities have entered with their own online programs that allow them to match the cost benefits associated with online delivery systems.

FALSE

Potential pitfalls of focus strategies include that product and service offerings that are highly focused are subject to competition from new entrants and from imitation.

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).

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

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.

FALSE

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.

TRUE

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.

FALSE

Integrating activities across the company value chain with the value chain of suppliers and customers involves a significant investment in financial and human resources. Firms must consider the expenses linked to technology investment, managerial time and commitment, and the involvement and investment required by the firm’s customers and suppliers. The firm must be confident that it can generate a sufficient scale of operations and revenues to justify all associated expenses. Underestimating the challenges and expenses with coordinating value-creating activities in the extended value chain is a pitfall of integrated overall cost leadership and differentiation strategy.

FALSE

Firms may fail to accurately assess sources of revenue and profits in their value chain. This can occur for several reasons. For example, a manager may be biased due to his or her functional area background, work experiences, and educational background.

FALSE

Directing an overwhelming amount of managerial time, attention, and resources to value-creating activities that produce the greatest margins, to the detriment of other important, albeit less profitable, activities is a pitfall for companies. For example, a car manufacturer may focus too much on downstream activities, such as warranty fulfillment and financing operations, to the detriment of differentiation and cost of the cars themselves.

FALSE

Integration of information systems, logistics, and transportation at Walmart helps it to drive down costs and provide outstanding product selection. This serves to erect high entry barriers to potential competitors that have neither the financial nor physical resources to compete head-to-head.

TRUE

The dominant competitive position of Walmart serves to erect high entry barriers to potential competitors that have neither the financial nor physical resources to compete head-to-head. Given the size of Walmart, with over 475 billion USD in sales in 2014, it has enormous bargaining power over suppliers.

FALSE

The overall value proposition of Walmart makes potential substitute products such as Internet competitors a less viable threat.

TRUE

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 firm’s lower costs in value-creating activities). By separating the value of the actual flight from the services associated with flying, airlines have greatly expanded the profit pool associated with flying. They have found that flyers may be very price-conscious when purchasing tickets but are willing to shell out more for a range of services. While this does increase their revenue, it may also provide benefits for at least some customers. Jay Sorensen, CEO of IdeaWorks, noted that it offers the potential for an airline to better tailor service to the needs of individual customers. They can click and buy the amenities they want rather than the airline deciding what is bundled in the base fare.

FALSE

Big Data efforts have the potential to allow firms to better customize their product and service offerings to customers while more efficiently and fully using the resources of the company. Kaiser Permanente collects petabytes of data on the health treatment of its 8 million health care members. This has allowed Kaiser to develop insights on the cost, efficacy, and safety of the treatments provided by doctors and procedures in hospitals, thereby leading to more effective and cost-conscious treatment patterns.

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.

FALSE

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.

TRUE

Dell was a firm whose advantages in the marketplace seemed unassailable in the early 2000s. Cracks began to appear in 2007, and its competitive position has recently been severely eroded both by its traditional competitors and by an onslaught of firms selling tablets and other mobile devices. In short, Dell focused so much on operational efficiency and perfecting its direct model that it failed to deliver innovations that an increasingly sophisticated market demanded.

FALSE

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.

FALSE

Even in industries that are normally viewed as low tech, the increasing use of technology has suddenly made competitive advantages less sustainable.

TRUE

The case example of Atlas Door illustrates how a company can build competitive advantage from just-in-time manufacturing.

TRUE

Even if a strategy is unique in the industry, the central issue in determining if the advantage is sustainable becomes whether or not rivals will be able to easily imitate its strategy or create a viable substitute strategy.

FALSE

In the textbook example of Atlas Door, the company created marketplace competitive advantages by building just-in-time factories that were driven by automated supply chain logistics systems.

FALSE

Atlas Door has attained a very favorable position vis-à-vis the five forces of industry competition. Its dominance in the industry creates high entry barriers for new entrants.

FALSE

In the textbook example of Atlas Door, it integrated many value-chain activities with the firm in order to support its just-in-time strategy. Such integration of activities provides a strong basis for sustainability, because rivals would have difficulty in imitating this strategy due to causal ambiguity and path dependency (i.e., it is difficult to build up in a short period of time the resources that Atlas Door has accumulated and developed, as well as disentangle the causes of what the valuable resources are or how they can be re-created).

TRUE

An argument could be made that much of the Atlas Door strategy relies on technologies that are rather well known and nonproprietary. Over time, a well-financed rival could imitate its strategy (via trial and error), achieve a tight integration among its value-creating activities, and implement a just-in-time manufacturing process.

FALSE

Because human capital is highly mobile, a rival could hire away Atlas Door talent, and these individuals could aid the rival in transferring Atlas Door best practices.

TRUE

A new rival could also enter the industry with a large resource base, which might enable it to price its doors well under Atlas Door to build market share (but this would likely involve pricing below cost and would be a risky and non-sustainable strategy). Finally, a rival could potentially leapfrog the technologies and processes that Atlas Door has employed and achieve competitive superiority.

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.

TRUE

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

The Commerce Bank stripped away all of what customers expected including lots of choices and peak interest rates and it reverse positioned itself as the most convenient bank in America. It was open seven days a week, including evenings until 8 p.m. You could get a debit card while you waited. And when it rained, an escort with an umbrella walked you to your car. Further, the bank offered free coffee and newspapers for customers. Not too surprisingly, despite the inferior rates and few choices, customers regularly flocked to the bank, making it an attractive target for a larger bank to buy.

FALSE

With breakaway positioning, a product escapes its category by deliberately associating with a different one. Thus, managers leverage the conventions of the new category to change both how products are consumed and with whom they compete. Instead of seeing the breakaway product as an alternative to others in its category, consumers perceive it as altogether different. The name Swatch is often misconstrued as a contraction of the words Swiss watch. However, Nicolas Hayek, chairman, affirms that the original contraction was second watch. The new watch was introduced as a new concept of watches as casual, fun, and relatively disposable accessories. Therein lies the Swatch breakaway positioning.

TRUE

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. Companies use three approaches to keep the products in play successfully. One of these is to improve the price-performance trade-off in which desktop computers are retooled with technology originally developed for the lightweight and ultrafast laptops.

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

Most mature or declining firms have many product lines that are losing money or are only marginally profitable. One strategy is to discontinue such product lines and focus all resources on a few core profitable areas. For example, in 2014, Procter and Gamble announced that it would sell off or close down up to 100 of its brands, allowing the firm to improve its efficiency and its innovativeness as it focused on its core brands. The remaining 70 to 80 core brands accounted for 90 percent of total company sales.

FALSE

Most turnarounds require a firm to carefully analyze the external and internal environments. The external analysis leads to identification of market segments or customer groups that may still find the product attractive. Internal analysis results in actions aimed at reduced costs and higher efficiency. A firm needs to undertake a mix of both internally and externally oriented actions to affect a turnaround.

FALSE

Very often, mature firms tend to have assets that do not produce any returns. These include real estate, buildings, and so on.

FALSE

A study of 260 mature businesses in need of a turnaround identified three strategies used by successful companies. One of these strategies is asset and cost surgery. Firms in turnaround situations try to aggressively cut administrative expenses and inventories and speed up collection of receivables.

TRUE

There are many ways in which a firm can eliminate costs and improve productivity. Although individually these are small gains, they cumulate over a period of time to substantial gains. 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 lead to a significant overall gain.

TRUE

Grossman managed a successful turnaround of HSN by first finding value in engaging with employees. During her first day at HSN, she choose to go through the same new-employee orientation that all employees go through. She felt this humanized her in the minds of other employees. On her second day, she held a town-hall meeting so that she could directly introduce herself and set the tone that she was accessible and that all employees were valued and could have a future at HSN. She also set up a policy to regularly have breakfasts and lunches with employees.

TRUE

She tailored company offerings to meet the changing needs of her customer base. In the deep days of the recession in 2008-2009, this meant shifting from offering high-priced jewelry and fashions to providing products and services that helped the HSN customers save time and money.

FALSE

When company performance severely erodes, turnaround strategies are needed to reverse its situation and enhance its competitive position. We have discussed three approaches: asset cost surgery, selective product and market pruning, and piecemeal productivity improvements.

FALSE

Piecemeal productivity improvements, although individually are small gains, cumulate over a period of time to substantial gains.

FALSE

One of the strategies used by successful companies in need of a turnaround is to 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 turnaround strategy involves reversing performance decline and reinvigorating growth toward profitability. The need for turnaround may occur at any stage in the life cycle but is more likely to occur during maturity or decline.

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.

Inbound logistics is a primary activity in the value chain. These global logistics firms strive to achieve cost advantages through the design of their receiving dock operations, among other operation design features.

Exhibit 5.3 draws on the value-chain concept to provide examples of how a firm can attain an overall cost leadership strategy in its primary and support activities. Reducing management layers to reduce overhead costs is the support activity associated with the firm infrastructure.

Overall cost leadership requires a tight set of interrelated tactics that include: aggressive construction of efficient-scale facilities and vigorous pursuit of cost reductions from experience.

Tesco, the largest grocery retailer in Britain, has changed how it views waste in order to become more efficient. This enhances its cost leadership position.

A business that strives for a low-cost advantage must attain an absolute cost advantage relative to its rivals.

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. The no-frills product strategy employed by Southwest Airlines may fail if it is unable to attain parity on important dimensions of differentiation such as quick responses to customer requests for services or design changes.

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.

An overall low-cost position enables a firm to achieve above-average returns despite strong competition.

An overall low-cost position 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.

An overall low-cost position enables a firm to achieve above-average returns because it protects firms against powerful buyers.

A low-cost position permits buyers to exert power to drive down prices only to the level of the next most efficient producer.

A low-cost position provides more flexibility to cope with demands from powerful suppliers for input cost increases.

The factors that lead to a low-cost position also provide a substantial entry barriers position with respect to substitute products introduced by new and existing competitors.

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.

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.

Porsche has enjoyed enhanced power over buyers because its strong reputation makes buyers more willing to pay a premium price. This lessens rivalry, since buyers become less price-sensitive. The prestige associated with its brand name also lowers supplier power since margins are high. Suppliers would probably desire to be associated with prestige brands, thus lessening their incentives to drive up prices.

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.

Customers may desire the product, but they are repelled by the price premium. For example, Duracell recently charged too much for batteries. The firm tried to sell consumers on its superior-quality products, but the mass market was not convinced. Why? The price differential was simply too high. Clearly, the price-performance proposition Duracell offered customers was not accepted.

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.

Given the advances in manufacturing technologies such as CAD-CAM (computer aided design and computer aided manufacturing) as well as information technologies, many firms have been able to manufacture unique products in relatively small quantities at lower costs. This is a concept known as mass customization.

Andersen developed an interactive computer version of its paper catalogs that it sold to distributors and retailers. Salespersons can now customize each window to meet customer needs, check the design for structural soundness, and provide a price quote. The system is virtually error-free, customers get exactly what they want, and the time to develop the design and furnish a quotation has been cut by 75 percent. Each showroom computer is connected to the factory, and customers are assigned a code number that permits them to track the order. The manufacturing system has been developed to use some common finished parts, but it also allows considerable variation in the final products.

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. Mainline supermarket chains find themselves stuck in the middle as their cost structure is higher than discount retailers offering groceries and their products and services are not seen by consumers as being as valuable as those of high-end grocery chains, such as Whole Foods.

Pepsi used data analytics to develop an algorithm that lowers the rate of inventory out-of-stocks and has shared the algorithm with partners and retailers.

Corporations are increasingly collecting and analyzing data on their customers, including data on customer characteristics, purchasing patterns, employee productivity, and physical asset utilization. These efforts, commonly referred to as Big Data, have the potential to allow firms to better customize their product and service offerings to customers while more efficiently and fully using the resources of the company.

Many firms have achieved success by integrating activities throughout the extended value chain by using information technology to link their own value chain with the value chains of their customers and suppliers.

Outside the flight experience itself, airlines are generating revenue by charging fees for credit cards, frequent-flyer programs, and access to airport lounges. This serves to expand the profit pool.

By separating the value of the actual flight from the services associated with flying, airlines have greatly expanded the profit pool associated with flying.

The pitfalls of integrated overall cost leadership and differentiation include: firms underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain.

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.

Dell went from being the Fortune magazine darling in 2005 to a weak competitor in 2007 when cracks began to appear. Its competitive position has recently been severely eroded both by its traditional competitors and by an onslaught of firms selling tablets and other mobile devices. In short, Dell focused so much on operational efficiency and perfecting its direct model that it failed to deliver innovations that an increasingly sophisticated market demanded.

Clearly, nothing is forever when it comes to competitive advantages. Rapid changes in technology, globalization, and actions by rivals from within as well as outside the industry can quickly erode company advantages.

Even in industries that are normally viewed as low tech, the increasing use of technology has suddenly made competitive advantages less sustainable. The Amazon success in book retailing at the cost of Barnes and Noble, the former industry leader, as well as BlackBerry difficulties in responding to Apple innovations in the smartphone market, serves to illustrate how difficult it has become for industry leaders to sustain competitive advantages that they once thought would last forever.

Atlas tightly controlled logistics so that it always shipped only fully complete orders to construction sites. Orders require many components, and gathering all of them at the factory and making sure that they are with the correct order can be a time-consuming task. Of course, it is even more time-consuming to get the correct parts to the job site after the order has been shipped. Atlas developed a system to track the parts in production and the purchased parts for each order. This helped to ensure the arrival of all necessary parts at the shipping dock in time. This time-saving efficiency also had cost benefits that make it difficult for new entrants to compete successfully, at least in the short run.

It is important, of course, to assume that the Atlas Door strategy is unique in the industry, and the central issue becomes whether or not rivals will be able to easily imitate its strategy or create a viable substitute strategy.

Atlas Door has created competitive advantages in both overall low cost and differentiation. Its strong linkages among value-chain activities, a requirement for its just-in-time operations, not only lower costs but enable the company to respond quickly to customer orders. As noted in Exhibit 5.4, many of the value-chain activities associated with a differentiation strategy reflect the element of speed or quick response.