Crafting & Executing Strategy The Quest for Competitive Advantage Concepts and Cases 21st Edition By Arthur A. Thompson Jr – Test Bank

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Chapter 05 The Five Generic Competitive Strategies Answer Key

Multiple Choice Questions

1. A company’s competitive strategy should

A. ensure it is designed to concentrate on a small range of products so it can react quickly to competitive moves.

 

B. be well matched to its internal situation and predicated on leveraging its collection of competitively valuable resources and competencies.

 

C. be well matched to its resources and capabilities in order to incorporate standard attributes into its product offering.

 

D. be supportive with its objective to become at least an average performer within its industry.

 

E. be well attuned to doing an outstanding job of satisfying the needs and expectations of niche buyers.

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

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-01 What distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of competitive conditions than in others.
Topic: Strategy

 

2. Which of the following is NOT one of the five generic competitive strategies?

A. a broad differentiation strategy

 

B. a low-cost provider strategy

 

C. a best-cost strategy

 

D. a narrow differentiation strategy

 

E. a high-cost strategy

The five generic competitive strategies include: (1) broad differentiation, (2) narrow differentiation, (3) low cost provider, (4) focused low-cost provider, and (5) best-cost. A high-cost strategy is illogical and does not exist.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 05-01 What distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of competitive conditions than in others.
Topic: Strategy

 

3. While there are many routes to competitive advantage, the two biggest factors that distinguish one competitive strategy from another are

A. whether a company can build a brand name and an image that buyers trust.

 

B. whether a company’s target market is broad or narrow and whether the company is pursuing a low cost or differentiation strategy.

 

C. whether a company can achieve lower costs than rivals and whether the company is pursuing the industry’s sales and market share leader’s role.

 

D. whether a company can offer the lowest possible prices and whether the company can get the best suppliers in the market.

 

E. whether a company’s overall costs are lower than competitors’ and whether the company can achieve strong product differentiation.

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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 What distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of competitive conditions than in others.
Topic: Strategy

 

4. Whatever strategic approach is adopted by a company to deliver value, it nearly always requires

A. that management undertake formal planning sessions with functional departments to ensure productivity improvement.

 

B. the identification of strengths and weaknesses within the company.

 

C. matching corporate identity with the corporate culture in order to integrate effort and build sales momentum.

 

D. performing value chain activities differently than rivals and building competitively valuable resources and capabilities that rivals cannot readily match.

 

E. constant efforts to thwart entry of new rivals and their attempts to create differentiated products with unit costs above price premium.

There are two ways to gain a competitive edge over rivals: either perform value chain activities more effectively than rivals or revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 What distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of competitive conditions than in others.
Topic: Strategy

 

5. The biggest and most important differences among the competitive strategies of different companies boil down to

A. how they go about building a brand name image that buyers trust and whether they are a risk-taker or risk-avoider.

 

B. the different ways the companies try to cope with the five competitive forces.

 

C. 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.

 

D. the kinds of actions companies take to improve their competitive assets and reduce their competitive liabilities.

 

E. the relative emphasis they place on offensive versus defensive strategies.

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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 What distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of competitive conditions than in others.
Topic: Strategy

 

6. 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. a low-cost provider strategy

 

B. a broad differentiation strategy

 

C. a focused low-cost strategy

 

D. a focused differentiation strategy

 

E. a best-cost provider strategy

The hotelier has used a hybrid of a focused differentiation strategy and focused low cost strategy, known as a best-cost strategy, by outcompeting rivals via upscale rooms and superior service at value prices.

 

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-01 What distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of competitive conditions than in others.
Topic: Strategy

 

7. The generic types of competitive strategies include

A. market share growth provider, sales revenue leader strategy, and market share retention strategy.

 

B. offensive strategies, defensive strategies, and counter maneuvers strategies.

 

C. low-cost provider, broad differentiation, best-cost provider, focused low-cost, and focused differentiation strategies.

 

D. low-cost/low-price strategies, high-quality/high-price strategies, and medium quality/medium price strategies.

 

E. price leader strategies, price follower strategies, technology leader strategies, and first-mover strategies.

A company’s competitive strategy deals exclusively with the specifics of management’s game plan for competing successfully, which gives rise to five competitive strategies: low-cost provider, broad differentiation, focused low-cost, focused differentiation, best-cost provider.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 What distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of competitive conditions than in others.
Topic: Strategy

 

8. Which of the following generic types of competitive strategies is typically the “best” strategy for a company to employ?

A. a strategy that seeks to underprice rivals on comparable products that attract a broad spectrum of buyers

 

B. a strategy that seeks to differentiate product offerings from rivals by offering superior attributes that attract a broad spectrum of buyers

 

C. a strategy that concentrates on a narrow buyer segment and outcompetes rivals by offering niche members customized attributes

 

D. a strategy that concentrates on value-conscious buyers and outcompetes rivals by offering products at attractive prices

 

E. a strategy that is well matched to a company’s internal situation; underpinned by an appropriate set of resources, know-how, and competitive capabilities; and difficult for rivals to match

For all types of generic strategies, success in sustaining the competitive edge depends on having resources and capabilities that rivals have trouble duplicating and for which there are no good substitutes.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 What distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of competitive conditions than in others.
Topic: Strategy

 

9. The objective of a competitive strategy is to

A. establish a competitively powerful value chain.

 

B. grow revenues at a faster annual rate than rivals are able to grow their revenues.

 

C. lend greater detail to the company’s business model.

 

D. provide buyers superior value relative to the offerings of rival sellers in order to attain a competitive advantage.

 

E. get the company into the best strategic group and then dominate it.

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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 What distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of competitive conditions than in others.
Topic: Strategy

 

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

A. lowest possible prices for comparable products.

 

B. a low-cost/moderate price approach to gain the biggest market share.

 

C. high buyer switching costs.

 

D. meaningful lower overall costs than rivals on comparable products.

 

E. higher unit sales than rivals.

A company achieves low-cost leadership when it becomes the industry’s lowest-cost provider rather than just being one of perhaps several competitors with comparatively low costs. Successful low-cost providers boast lower costs than rivals—but not necessarily the absolutely lowest possible cost.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

11. In order to be successful with a low-cost leadership strategy, company managers have to

A. eliminate wholesale and retail intermediaries and instead sell directly to users of their product or service.

 

B. perform value chain activities more cost-effectively than rivals and be proactive in revamping the firm’s overall value chain to eliminate or bypass “nonessential” cost-producing activities.

 

C. outsource the majority of value chain activities to nations that have lower wage rates and fewer regulations.

 

D. develop and market products and services at that absolute lowest possible cost.

 

E. pursue backward or forward integration to deter suppliers or buyers with considerable bargaining power and leverage.

Success in achieving a low-cost edge over rivals comes from eliminating and/or curbing “nonessential” activities and/or bypassing some cost-producing activities, e.g. (1) eliminating and/or curbing “nonessential” activities; (2) out-managing rivals in performing essential activities; (3) achieving efficiencies in supply chain management and (4) scale economies from full capacity utilization. A low-cost provider’s foremost strategic objective is meaningfully lower costs than rivals—butnotnecessarilytheabsolutelylowestpossiblecost.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

12. Low-cost leaders who have the lowest industry costs are likely to

A. have outmanaged rivals in finding ways to perform value chain activities more cost-effectively.

 

B. be considering exiting the current product market and use their competitive low-cost strength to gain a competitive advantage in other product arenas.

 

C. be favorites to win the game of strategy in the long run.

 

D. understand that driving costs to the lowest possible level is the only way to sell cheap products to consumers.

 

E. understand that they have lower bargaining power with suppliers than rivals who employ a different strategy.

To achieve a low-cost edge over rivals, a firm’s cumulative costs across its overall value chain must be lower than competitors’ cumulative costs.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

13. How valuable a low-cost leader’s cost advantage is depends on

A. whether it is easy or inexpensive for rivals to copy the low-cost leader’s methods or otherwise match its low costs.

 

B. how easy it is for the low-cost leader to gain the biggest market share.

 

C. the aggressiveness with which the low-cost leader pursues converting the cost advantage into the absolute lowest possible costs.

 

D. the leader’s ability to combine the cost advantage with a reputation for good quality.

 

E. the low-cost leader’s ability to be the industry leader in manufacturing innovation so as to keep lowering its manufacturing costs.

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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

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

A. underpricing rivals and attracting quality-sensitive buyers in great enough numbers.

 

B. maintaining the present price and using the lower-cost edge 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 its cost advantage to build strong customer loyalty.

 

E. outproducing rivals and thus having more available units for sale.

A company has two options for translating a low-cost advantage over 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, 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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

15. Domino’s Pizza has a well-known slogan: “We’ll deliver in 30 minutes or less, or it’s free!” With it what has the pizza maker achieved?

A. built a unique customer value proposition

 

B. created a new delivery system

 

C. given a sense of exclusivity to its customers

 

D. coordinated with suppliers to better address customer needs

 

E. emphasized human resource management activities

To achieve product differentiation, a company must incorporate desirable features into its product or service to clearly set itself apart from rivals lacking attributes. A differentiation strategy 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 and become strongly attached to a company’s differentiated attributes.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Cost-Leadership Strategy

 

16. The major avenues for achieving a cost advantage over rivals include

A. performing value chain activities more cost-effectively than rivals or revamping the firm’s overall value chain to eliminate or bypass some cost-producing activities.

 

B. having a management team that is highly skilled in cutting costs.

 

C. being a first-mover in adopting the latest state-of-the-art technologies, especially those relating to low-cost manufacture.

 

D. outsourcing high-cost activities to cost-efficient vendors.

 

E. paying lower wages and salaries than rivals.

There are two major avenues for achieving a low-cost edge over rivals: 1. Perform value chain activities more cost-effectively than rivals. 2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

17. Achieving a sure cost advantage over 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. selling a mostly standard product and increasing the scale of operation.

 

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.

Capturing all available economies of scale allows a company to perform value chain activities more cost-effectively than rivals and build a cost advantage over rivals. Outsourcing all support activities, controlling as much of the industry value chain as possible, and minimized spending on R&D are not sure indicators of cost-relative advantages. Paying low salaries could hurt employee morale and minimal advertising could reduce the reach of the products.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

18. 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. supply chain efficiencies

 

B. economies of scale

 

C. incentive systems and culture

 

D. bargaining power

 

E. capacity utilization

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

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

19. Which of the following is NOT an action that a company should take to perform value chain activities more cost-effectively?

A. striving to capture all available economies of scale and taking advantage of experience and learning-curve effects

 

B. trying to operate facilities at full capacity

 

C. adopting labor-saving operating methods

 

D. improving supply chain efficiency

 

E. over-differentiating so that product features exceed the needs of most buyers

A dazzling array of features and options not only drives up product price but also runs the risk that many buyers will conclude that a less deluxe and lower-priced brand is a better value since they have little occasion to use the deluxe attributes.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Value Chain

 

20. Cost-efficient management of a company’s overall value chain activities requires that management

A. ferret out cost-saving opportunities in every part of the value chain.

 

B. undertake an operations functionality redesign.

 

C. establish sales productivity and operating practices guidelines.

 

D. re-create rivals’ assembly plant structuration savings.

 

E. pursue a differentiation strategy that can be easily copied.

For a company to do a more cost-efficient job of managing its value chain than rivals, managers must diligently search out cost-saving opportunities in every part of the value chain. No activity can escape cost-saving scrutiny, and all company personnel must be expected to use their talents and ingenuity to come up with innovative and effective ways to keep costs down.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Value Chain

 

21. Examples of important cost drivers in a company’s value chain do NOT include

A. production technology and design.

 

B. customer service.

 

C. learning and experience.

 

D. capacity utilization.

 

E. input costs.

Success in achieving a low-cost edge over rivals comes from eliminating and/or curbing “nonessential” activities and/or out-managing rivals in performing essential activities. Customer service is irrelevant here.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Value Chain

 

22. The culture of a company can be a cost-efficient value chain activity because it can

A. allow for safeguarding internalized operating benefits.

 

B. distinguish a company’s capacity integration efforts.

 

C. spur worker pride in productivity and continuous improvement.

 

D. foster quality technological enhancements.

 

E. increase a company’s bargaining power with suppliers.

A good corporate culture can substantially improve employee morale and workplace pride, boost productivity, and generate positive working environment thereby contributing indirectly to cost cutting.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Value Chain

 

23. Which of the following is NOT one of the ways that a non-capital-intensive company can achieve a cost advantage by revamping its value chain?

A. creating a direct sales force and bypassing activities and costs of distributors and dealers

 

B. conducting sales operations at the company’s website

 

C. increasing production capacity and then striving hard to operate at full capacity

 

D. relocating facilities so as to curb the cost for shipping and handling activities

 

E. streamlining operations by eliminating low value-added or unnecessary work steps and activities

Whether a company is able to operate at or near full capacity has a big impact on unit costs when its value chain contains activities associated with substantial fixed costs. Higher rates of capacity utilization allow depreciation and other fixed costs to be spread over a larger unit volume, thereby lowering fixed costs per unit.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Value Chain

 

24. An example of how companies can revamp their value chain to reduce costs is to

A. have suppliers locate their plants close to companies’ own facilities.

 

B. continue to utilize traditional methods of distribution and sales.

 

C. not make any changes in product manufacturing but change end distribution methods.

 

D. increase extra services to increase staffing requirements.

 

E. facilitate the learning curve by providing superior training to new employees.

Having suppliers locate their plants or warehouses close to a company’s own plant facilitates just-in-time deliveries of parts and components to the exact workstation where they will be used in assembling the company’s product. This not only lowers incoming shipping costs but also curbs or eliminates the company’s need to build and operate storerooms for incoming parts and components and to have plant personnel move the inventories to the workstations as needed for assembly. The other options provide methods of cost-efficient management of value chain activities.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Value Chain

 

25. Which of the following companies is using cost drivers effectively to manage value chain activities cost efficiently?

A. Company A orders large amounts of supplies and keeps them stocked until customer demand rises to prevent falling behind schedule in meeting customer needs.

 

B. Company B uses just-in-time inventories and produces made-to-order products as and when customer demand rises.

 

C. Company C collects customer requests first and starts processing them only after reaching a certain number.

 

D. Company D routes all its supplies to a warehouse for storage and then transports them to individual factories for processing.

 

E. Company E substitutes lower-cost inputs with high-quality, high-cost inputs to gain customer attention and loyalty.

Company B uses the best method to improve its supply chain activities to cut costs. Just-in-time inventories reduce waiting time for producers and consumers.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

26. A potato chip manufacturer purchases a potato farm. Which of the following regarding its strategy is true?

A. The manufacturer has effectively used vertical integration to increase its bargaining position and reduce transaction costs.

 

B. The manufacturer has efficiently capitalized on the experience and learning-curve effects within the company.

 

C. The manufacturer has enhanced utilization by allowing depreciation and other fixed costs to be spread over a larger unit volume.

 

D. The manufacturer has sacrificed quality by using a lower-cost input.

 

E. The manufacturer has effectively reduced its operating costs by outsourcing its activities.

Integrating into the activities of either suppliers or distribution channel allies can lower costs through greater production efficiencies, reduced transaction costs, or a better bargaining position.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

 

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

A. buyers are not very price-conscious.

 

B. most rivals are trying to be best-cost providers.

 

C. there are many ways to achieve product differentiation that have value to buyers.

 

D. most buyers use the product in much the same ways, with user requirements calling for a standardized product.

 

E. most rivals are pursuing focused low-cost or focused differentiation strategies.

With common user requirements, a standardized product can satisfy buyers’ needs, in which case low price, not features or quality, becomes the dominant factor in causing buyers to choose one seller’s product over another’s.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

28. Being the overall low-cost provider in an industry has the attractive advantage of

A. building strong customer loyalty and locking customers into its product because customers have high switching costs.

 

B. giving the firm a very appealing brand image.

 

C. putting a firm in the best position to win the business of price-sensitive customers and earn profits by setting the floor on market price.

 

D. putting the company in a strong position to be more profitable than companies pursuing a differentiation strategy.

 

E. greatly reducing the strong bargaining power of rivals with the key distributors.

Low-cost providers are in the best position to compete offensively on the basis of price, to gain market share at the expense of rivals, to win the business of price-sensitive buyers, to remain profitable despite strong price competition, and to survive price wars.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

29. A competitive strategy to be the low-cost provider in an industry works well when

A. price competition among rival sellers is especially sluggish.

 

B. there are numerous ways to achieve product differentiation that have no value to buyers.

 

C. buyers incur high costs in switching their purchases from one seller/brand to another.

 

D. industry newcomers use introductory low prices to attract buyers and build a customer base.

 

E. industry newcomers use high introductory prices to let buyers know they have a superior product to build a customer base.

A low-cost strategy works best for entrants who could use low prices based on low costs to attract buyers; it also works when price competition among rival sellers is vigorous, the products of rival sellers are essentially identical and readily available from many eager sellers, and it is difficult to achieve product differentiation in ways that have value to buyers.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

30. A low-cost leadership strategy becomes competitively powerful when

A. buyers of the product or service use the product or service in the same ways.

 

B. the offerings of rival firms are essentially unique, different, and customized to end-users.

 

C. price competition among rivals is absent.

 

D. buyers prefer that the products/services of competing sellers have widely varying attributes and prices.

 

E. buyers have high switching costs.

A low-cost strategy works best when most buyers use the product or service in the same ways, price competition among rival sellers is vigorous, the products of rival sellers are essentially identical and readily available from many eager sellers, buyers incur low costs in switching their purchases from one seller to another, and it is difficult to achieve product differentiation in ways that have value to buyers.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: When Low-Cost Provider Strategies Work Best

 

31. 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 and readily available from many eager sellers

 

B. when there are few ways to achieve differentiation that have value to buyers

 

C. when price competition among rival sellers is especially vigorous

 

D. when buyers have widely varying needs and special requirements, and the prices of substitute products are relatively high

 

E. when the majority of industry sales are made to a few, large-volume buyers

When the differences between product attributes or brands do not matter much to buyers, buyers are nearly always sensitive to price differences, and industry-leading companies tend to be those with the lowest-priced brands. With common user requirements, a standardized product can satisfy buyers’ needs, in which case low price, not features or quality, becomes the dominant factor in causing buyers to choose one seller’s product over another’s.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

32. A strategy to be the industry’s overall low-cost provider tends to be more appealing than a differentiation or best-cost or focus/market niche 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 and have high switching costs in changing from one seller’s product to another.

 

C. the offerings of rival firms are essentially identical, standardized, commodity-like products.

 

D. entry barriers are high and competition from substitutes is relatively weak.

 

E. the market is composed of many distinct segments with varying buyer needs and expectations.

Look-alike products and/or overabundant product supply set the stage for lively price competition; in such markets, it is the less efficient, higher-cost companies whose profits get squeezed the most.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

33. Which of the following is NOT one of the pitfalls of a low-cost provider strategy?

A. overly aggressive price-cutting

 

B. setting the industry’s price ceiling to capture volume gains and achieve economies of scale

 

C. relying on an approach to reduce costs that can be easily copied

 

D. becoming too fixated on cost reduction

 

E. having the basis for the firm’s cost advantage undermined by cost-saving technological breakthroughs that can be readily adopted by rival firms

Setting the industry’s price ceiling to capture volume gains and achieve economies of scale is a cost cutting method to optimally lower unit costs and increase production to gain profits.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

34. Which of the following is one of the pitfalls of a low-cost provider strategy?

A. industry cost leadership

 

B. capturing volume gains and achieving economies of scale

 

C. relying on approaches to reduce costs that can be easily copied

 

D. beneficial and sustainable cost reduction

 

E. development of cost-saving technological breakthrough that cannot be readily adopted by rival firms

Relying on approaches to reduce costs that can be easily copied is a major pitfall of a low-cost provider strategy; all of the other choices are benefits of a low-cost provider strategy.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

35. Which of the following companies is NOT the lowest-cost provider in its industry?

A. Southwest Airlines

 

B. Walmart

 

C. Nucor Steel

 

D. CNN

 

E. Amazon

All but CNN are mentioned in the chapter as the lowest cost providers in their respective industries. CNN pursues a differentiation strategy of news-only programming, around the clock, and is often the first television network to get to a news story.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

36. Which of the following is NOT a value driver of a broad differentiation strategy?

A. Create product features that appeal to a wide range of buyers.

 

B. Improve customer service or add extra services.

 

C. Seek out high quality inputs.

 

D. Emphasize human resource management activities that improve the skills, expertise, and knowledge of company personnel.

 

E. Utilize just-in-time inventories and made-to-order products when customer demand rises and that buyers consider worth the cost.

The value drivers of a broad differentiation strategy donotinclude 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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Value Chain

 

37. Companies pursue closer coordination and collaboration with channel suppliers to better address customer needs in order to

A. develop human resource management activities that improve the skills, expertise, and knowledge of company personnel.

 

B. achieve low cost provider status through the value chain system.

 

C. enhance differentiation through the value chain system.

 

D. compensate for inadequate or outdated production capacity.

 

E. improve their scores on the competitive assessment matrix.

Just as pursuing a cost advantage can involve improving a company’s value chain system, the same is true for firms pursing a differentiation advantage. Activities performed upstream by suppliers or downstream by distributors can have a meaningful effect on customers’ perceptions of a company’s offerings and its value proposition. Two approaches to revamping the value chain system to enhance differentiation include: (1) coordinating with channel allies to enhance customer value, and (2) pursuing closer collaboration and coordination with channel suppliers to better address customer needs.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Value Chain

 

38. The essence of a broad differentiation strategy is to

A. appeal to the high-end part of the market and concentrate on providing a top-of-the-line product to consumers.

 

B. incorporate a greater number of differentiating features into its product/service than rivals.

 

C. lower buyer switching costs.

 

D. outspend rivals on advertising and promotion in order to inform and convince buyers of the value of its differentiating attributes.

 

E. offer unique product attributes in ways that are valuable and appealing and that buyers consider worth paying for.

Differentiation strategies are attractive whenever buyers’ needs and preferences are too diverse to be fully satisfied by a standardized product offering. A company must incorporate distinctive, desirable features into its product or service to clearly set itself apart from rivals lacking attributes.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Value Chain

 

39. A company attempting to be successful with a broad differentiation strategy has to

A. study buyer needs and behavior carefully to learn what buyers consider important, what they think has value, and what they are willing to pay for.

 

B. incorporate more differentiating features into its product/service than rivals.

 

C. concentrate its differentiating efforts on marketing and advertising (where almost all differentiating features are created).

 

D. over-differentiate so that product quality, features, or service levels exceed the needs of most buyers.

 

E. concentrate on offering advanced features, whether or not they have value to the customers, to create unique products.

Successful product differentiation requires careful study to determine what attributes buyers find appealing, valuable, and worth paying for. Then the company must incorporate these desirable features into its product or service to clearly set itself apart from rivals lacking attributes. A differentiation strategy calls for a customer value proposition that is unique.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

40. Successful broad differentiation allows a firm to

A. be the industry’s best-cost provider.

 

B. set the industry ceiling on price.

 

C. avoid being dragged into a price war with industry rivals and not be 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.

Successful differentiation allows a firm to do one or more of the following:

• Command a premium price for its product.
• Increase unit sales (because additional buyers are won over by the differentiating features).
• Gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products).

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

41. Which of the following is NOT true of a company that succeeds in differentiating its product offering from those of its rivals?

A. It can avoid having to compete on the basis of simply a low price.

 

B. It commands a premium price for its product.

 

C. It usually increases unit sales.

 

D. It gains buyer loyalty to its brand.

 

E. It attracts mainly price-conscious buyers.

Price-conscious buyers are looking for a basic product at a bargain-basement price.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Differentiation Strategy

 

42. A broad differentiation strategy improves profitability when

A. it is focused on product innovation.

 

B. differentiating enhances product performance and quality.

 

C. the differentiating features appeal to sophisticated and prestigious buyers.

 

D. the higher price the product commands exceeds the added costs of achieving the differentiation.

 

E. the differentiator charges a price that is only fractionally higher than the industry’s low-cost provider.

Differentiation enhances profitability whenever a company’s product can command a sufficiently higher price or produce sufficiently bigger unit sales to more than cover the added costs of achieving the differentiation.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Cost-Leadership Strategy

 

43. Whether a broad differentiation strategy ends up enhancing a company’s profitability depends mainly on whether

A. many buyers view the product’s differentiating features as having value.

 

B. most buyers have similar needs and use the product in the same ways.

 

C. most buyers accept the customer value proposition as unique and the product can produce sufficient unit sales to cover the costs of achieving the differentiation.

 

D. buyer switching costs are low and customer loyalty to any one brand is low.

 

E. buyers are prone to shop the market for sellers offering the best price.

A differentiation strategy 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 and become strongly attached to a company’s differentiated attributes. It enhances profitability whenever a company’s product can command a sufficiently higher price or produce sufficiently bigger unit sales to more than cover the added costs of achieving the differentiation.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Cost-Leadership Strategy

 

44. Opportunities to differentiate a company’s product offering

A. are most reliably found in the R&D portion of the value chain.

 

B. are typically located in the sales and marketing portion of the value chain.

 

C. can exist in activities all along an industry’s value chain.

 

D. usually are tied to product quality and customer service.

 

E. are most frequently attached to a company’s manufacturing expertise and to its ability to achieve economies of scale in production.

Differentiation is not something hatched in marketing and advertising departments, nor is it limited to the catchalls of quality and service. Differentiation opportunities can exist in activities all along an industry’s value chain. The most systematic approach that managers can take, however, involves focusing on the value drivers.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

45. What are value drivers?

A. a set of factors (analogous to cost drivers) that are particularly effective in having a strong differentiation effect

 

B. a firm’s hidden success factor for creating over-the-top product features that will command the highest price in the industry

 

C. a technique for easily identifying factors that validate a firm’s performance

 

D. a set of factors that verify the unique nature of a firm

 

E. a set of guidelines for identifying the most promising upscale attributes to incorporate into a product

Value drivers are a set of factors—analogous to cost drivers—that are particularly effective in creating differentiation.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Value Chain

 

46. A differentiation strategy works best when

A. technological change is fast-paced and competition revolves around rapidly evolving product features.

 

B. buyers’ needs are homogeneous.

 

C. many rival firms are also pursuing a differentiation approach.

 

D. there are few other ways to make a product unique to buyers.

 

E. firms have ample excess cash to invest in R&D activities.

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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

47. Which of the following is NOT one of the ways managers can enhance differentiation based on value drivers?

A. striving to create superior product features, design, and performance

 

B. striving for innovation and technological advances

 

C. pursuing continuous quality improvement

 

D. increasing the intensity of marketing, brand building, and sales activities

 

E. seeking out low-quality inputs

A value driver is seeking out high-quality inputs. Input quality can ultimately spill over to affect the performance or quality of the company’s end product.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Value Chain

 

48. Brands create customer loyalty, which in turn

A. increases the perceived cost of switching to another product.

 

B. strengthens the product’s quality.

 

C. validates the motivation for alternate products.

 

D. provides monetary incentive for using the product.

 

E. allows a company to operate facilities at full capacity.

Marketing and advertising can have a tremendous effect on the value perceived by buyers and therefore their willingness to pay more for the company’s offerings. They can create differentiation even when little tangible differentiation exists otherwise. Brands create customer loyalty, which increases the perceived “cost” of switching to another product.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

49. Approaches to enhancing differentiation through changes in the value chain do NOT include

A. coordinating with retailers to enhance the buying experience and building a company’s image.

 

B. coordinating with suppliers to speed up new product development cycles.

 

C. coordinating with distributors or shippers to lower shipping costs.

 

D. collaborating with suppliers to improve many dimensions affecting product features and quality.

 

E. coordinating with employees to create a greater incentive system to encourage worker productivity.

A company’s incentive system can encourage not only greater worker productivity but also cost-saving innovations that come from worker suggestions.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

50. The objective of differentiation is to

A. offer customers something rivals can’t, at least in terms of the level of satisfaction.

 

B. develop strategies that are different from those of rivals.

 

C. establish objectives that are measurable and meaningful when it comes to sales growth.

 

D. offer customers a sustainable competitive advantage.

 

E. offer a diverse range of comparable products with low switching costs.

Differentiation strategies depend on meeting customer needs in unique ways or creating new needs through activities such as innovation or persuasive advertising.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

51. A route to take in developing a differentiation advantage includes

A. incorporating product attributes and user features that raise the buyer’s overall costs, but keep the price minimal.

 

B. incorporating tangible features that add functionality, increase customer satisfaction with the product specifications, functions, and styling.

 

C. signaling value by targeting sophisticated buyers.

 

D. incorporating intangible features that enhance buyer satisfaction in economic ways.

 

E. emphasizing high quality and performance of products through a standard and simple, no-fuss packaging.

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 add functionality, enhance the design, save time for the user, are more reliable, or make the product cleaner, safer, quieter, simpler to use, more portable, more convenient, or longer-lasting than rival brands.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

52. A healthy fast-casual restaurant that offers only vegetarian and vegan meals insists on portraying organic ingredients in its advertisements, charges a higher price for its meals, and has a rigorous quality control process to insure the cleanliness of its facilities. What strategy is the manufacturer using to deliver superior value to customers?

A. incorporating tangible features

 

B. incorporating intangible features

 

C. signaling value by targeting sophisticated buyers

 

D. lowering the buyer’s overall cost

 

E. leveraging its power over suppliers

Superior value could be delivered by signaling the value of the company’s product offering to buyers. Typical signals of value include a high price (in instances where high price implies high quality and performance), more appealing or fancier packaging than competing products, ad content that emphasizes a product’s standout attributes, the quality of brochures and sales presentations, and the luxuriousness and ambience of a seller’s facilities (important for high-end retailers and for offices or other facilities frequented by customers).

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

53. A differentiation-based competitive advantage

A. nearly always is attached to the quality and service aspects of a company’s product offering.

 

B. usually is the result of highly effective marketing and advertising to enhance the brand, raise awareness, and build consistent customer experience.

 

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 highest price premium in the industry.

 

E. often hinges on incorporating features that raise the performance of the product or lower the buyer’s overall costs of using the company’s product, or enhances buyer satisfaction in intangible or noneconomic ways, or delivers value to customers by differentiating on the basis of competencies and capabilities that rivals can’t match.

Differentiation strategies depend on meeting customer needs in unique ways or creating new needs through activities such as innovation or persuasive advertising. The objective is to offer customers something that rivals can’t—at least in terms of the level of satisfaction. There are four basic routes to achieving this aim: lower the buyer’s overall costs, incorporate tangible features that increase customer satisfaction with the product, incorporate intangible features that enhance buyer satisfaction in noneconomic ways, and signal the value of the company’s product offering to buyers.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

54. Which of the following is NOT one of the four basic routes to achieving a differentiation-based competitive advantage?

A. delivering value to customers via the company’s resources, competencies, and value chain activities that rivals don’t have or can’t afford to match and are well-matched to the requirements of the strategy

 

B. incorporating tangible features that raise product performance and increase customer satisfaction with the product

 

C. incorporating product attributes and user features that lower the buyer’s overall costs of using the company’s product

 

D. appealing to buyers who are sophisticated and shop hard for the best, stand-out differentiating attributes

 

E. incorporating features that enhance buyer satisfaction in intangible or noneconomic ways

Differentiation strategies depend on meeting customer needs in unique ways or creating new needs through activities such as innovation or persuasive advertising. The objective is to offer customers something that rivals can’t—at least in terms of the level of satisfaction. There are four basic routes to achieving this aim: lower the buyer’s overall costs, incorporate tangible features that increase customer satisfaction with the product, incorporate intangible features that enhance buyer satisfaction in noneconomic ways, and signal the value of the company’s product offering to buyers.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

55. Achieving a differentiation-based competitive advantage does NOT involve

A. incorporating product attributes and user features that lower a buyer’s overall cost of using the product.

 

B. incorporating features that raise the performance a buyer gets from using the product.

 

C. incorporating features that enhance buyer satisfaction in noneconomic or intangible ways.

 

D. delivering value to customers via competencies and competitive capabilities that rivals don’t have or can’t afford to match.

 

E. appealing to buyers on the basis of attributes that rivals are emphasizing.

The best differentiation approaches involve trying to appeal to buyers on the basis of attributes that rivals are not emphasizing. A differentiator encounters less head-to-head rivalry when it goes its own separate way in creating value and does not try to out differentiate rivals on the very same attributes.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

56. Perceived value and signaling value are often an important part of a successful differentiation strategy because

A. of the standardization of buyer needs and preferences.

 

B. buyers seldom will pay for value they don’t perceive, no matter how real the value of the differentiating extras may be.

 

C. buyer satisfaction cannot be achieved until a product’s value is promoted through clever ads.

 

D. differentiation is all about selling products to sophisticated buyers.

 

E. there are no other ways to differentiate a product.

Marketing and advertising can have a tremendous effect on the value perceived by buyers and therefore their willingness to pay more for the company’s offerings. They can create differentiation even when little tangible differentiation exists otherwise. Signaling value is particularly important (1) when the nature of differentiation is based on intangible features and is therefore subjective or hard to quantify, (2) when buyers are making a first-time purchase and are unsure what their experience with the product will be, (3) when repurchase is infrequent, and (4) when buyers are unsophisticated.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

57. Broad differentiation strategies are well-suited for market circumstances where

A. there are many ways to differentiate the product or service that has value to buyers.

 

B. most buyers have the same needs and use the product in the same ways.

 

C. technological changes are slow-paced.

 

D. barriers to entry are high and suppliers have a low degree of bargaining power.

 

E. price competition is especially vigorous.

Diverse buyer preferences allow industry rivals to set themselves apart with product attributes that appeal to particular buyers. For instance, the diversity of consumer preferences for menu selection, ambience, pricing, and customer service gives restaurants exceptionally wide latitude in creating a differentiated product offering.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

58. Broad differentiation strategies generally work best in market situations where

A. low-cost value drivers are easily obtained.

 

B. socially complex intangible attributes such as company reputation, long-standing relationships with buyers, and image are relatively easier to imitate.

 

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. technological change is fast-paced and competition revolves around rapidly evolving product features.

 

E. market competition revolves around slowly evolving product features.

A broad differentiation strategy generally works best when at least one of the following conditions are met: (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; or (4) Technological change is fast-paced and competition revolves around rapidly evolving product features.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

59. A broad differentiation strategy works best in situations where

A. technological change is slow-paced and new or improved products are infrequent.

 

B. buyer needs and uses of the product or service are very similar.

 

C. buyers incur low costs in switching their purchases to rival brands.

 

D. buyers have a low degree of bargaining power and purchase the product frequently.

 

E. buyers needs and uses of the product or service are diverse.

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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

60. A broad differentiation strategy generally produces the best results in situations where

A. buyer brand loyalty is low.

 

B. few rival firms are following a similar differentiation approach.

 

C. new and improved products are introduced only infrequently.

 

D. most rivals are pursuing a differentiation strategy and are seeking to differentiate their products on most of the same features and attributes.

 

E. perceived value of a product is not of great importance.

The best differentiation approaches involve trying to appeal to buyers on the basis of attributes that rivals are not emphasizing. A differentiator encounters less head-to-head rivalry when it goes its own separate way in creating value and does not try to out differentiate rivals on the very same attributes.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

61. In which of the following market circumstances is a broad differentiation strategy generally NOT well-suited?

A. when buyer needs and preferences are too diverse to be fully satisfied by a standardized product

 

B. when few rivals are pursuing a similar differentiation approach

 

C. when the products of rivals are weakly differentiated

 

D. when there are many ways to differentiate a product or a service and many buyers perceive these differences valuable

 

E. when technological change is fast-paced and competition revolves around rapidly evolving product features

The best differentiation approaches involve trying to appeal to buyers on the basis of attributes that rivals are not emphasizing. A differentiator encounters less head-to-head rivalry when it goes its own separate way in creating value and does not try to out differentiate rivals on the very same attributes.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

62. A low-cost provider strategy can defeat a differentiation strategy when

A. sellers are not charging a price premium.

 

B. many rivals are pursuing a similar differentiation approach.

 

C. a company can offset thinner profit margins per unit by selling enough additional units to increase total profits.

 

D. there are few ways to differentiate a product or a service and many buyers perceive these differences valuable.

 

E. customers are basically satisfied and don’t think extra attributes are worth a higher price features.

Over-differentiating and over-charging are fatal differentiation mistakes. A low-cost provider can defeat a differentiator when customers are basically satisfied with a product or service and don’t think extra bells and whistles merit a premium price.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

63. A pitfall to avoid in pursuing a differentiation strategy is

A. trying to differentiate on the basis of attributes or features that are easily and quickly copied.

 

B. choosing a product offering that supports buyers’ indifference to rival brands’ offerings.

 

C. charging a premium price for the differentiating features.

 

D. meeting and exceeding the meaningful gaps in quality, performance, service, and other attractive differentiating attributes offered by rivals.

 

E. spending on activities to differentiate the company’s product to enhance profitability.

Rapid imitation means that no rival achieves differentiation, since 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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

64. Which of the following is NOT one of the pitfalls of pursuing a differentiation strategy?

A. over-emphasizing efforts to strongly differentiate the company’s product from those of rivals rather than being content with weak product differentiation

 

B. offering trivial improvements in quality, service, or performance features

 

C. overcharging for the differentiating features

 

D. adding so many frills and extra features that the product exceeds the needs of buyers

 

E. overspending on efforts to differentiate the company’s product offering

Trivial differences between rivals’ product offerings may not be visible or important to buyers. If a company wants to generate the fiercely loyal customer following needed to earn superior profits and open up a differentiation-based competitive advantage over rivals, then its strategy must result in strong rather than weak product differentiation.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

65. Focused strategies keyed either to low cost or differentiation are especially appropriate for situations where

A. the market is composed of distinctly different buyer groups who have different needs or use the product in different ways.

 

B. most other rival firms are using a best-cost producer strategy.

 

C. buyers have strong bargaining power and entry barriers are low.

 

D. most industry rivals have weakly differentiated products.

 

E. most industry participants are also using a focused differentiation strategy.

A focused strategy aimed at securing a competitive edge based on differentiation becomes increasingly attractive when the target market niche is big enough to be profitable and offers good growth potential.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Focused Strategies

 

66. 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 serving the needs of buyers in 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 least money.

What sets focused strategies apart from low-cost provider and broad differentiation strategies is concentrated attention on a narrow piece of the total market. The target segment, or niche, can be in the form of a geographic segment, or a customer segment, or a product segment (such as a class of models or some version of the overall product type).

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Focused Strategies

 

67. 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 lesser 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 a narrow piece of the total market (target market niche) at a lower cost and lower price than rivals.

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 lower price than those of 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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Focused Strategies

 

68. A focused low-cost strategy can lead to attractive competitive advantage when

A. buyers are looking for the best value at the best price.

 

B. buyers are looking for a budget-priced product.

 

C. buyers are price sensitive and are attracted to brands with low switching costs.

 

D. a market is emerging and demand in the target market niche is growing rapidly and is served by industry-wide competitors.

 

E. a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment.

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 lower price than those of 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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Focused Strategies

 

69. Which one of the following does NOT represent market circumstances that make a focused low-cost or focused differentiation strategy attractive?

A. when the target market niche is big enough to be profitable and offers good growth potential

 

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 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

 

D. when industry leaders have chosen not to compete in the niche

 

E. when buyers are not strongly brand loyal and a large number of other rivals are attempting to specialize in the same target segment

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 multi-segment 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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Focused Strategies

 

70. A focused differentiation strategy aims at securing competitive advantage by

A. providing niche members with a top-of-the-line product at a premium price.

 

B. catering to buyers looking for an upscale product at an attractively low price.

 

C. offering a product carefully designed to appeal to the unique preferences and needs of a narrow, well-defined group of buyers.

 

D. developing product attributes that no other company in the industry has.

 

E. convincing a narrow, well-defined group of buyers that the company has a truly world-class product.

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 lower price than those of 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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Focused Strategies

 

71. The major difference between a low-cost provider strategy and a focused low-cost strategy is the

A. amount of outsourcing involved.

 

B. length of the managerial experience curve.

 

C. size of the buyer group to which a company is appealing.

 

D. number of upscale attributes incorporated into the product offering.

 

E. production methods being used to achieve a low-cost competitive advantage.

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—the former involves a product offering that appeals broadly to almost all buyer groups and market segments, whereas the latter aims at just meeting the needs of buyers in a narrow market segment.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Focused Strategies

 

72. A drink manufacturer finds setting up a plant to make its own bottle caps expensive and technically difficult. Which of the following will be most helpful in solving the manufacturer’s problem?

A. outsourcing

 

B. achieving economies of scale

 

C. lowering input costs

 

D. increasing bargaining power

 

E. going for a vertical integration with a distributor

Outsourcing the performance of certain value chain activities can be more economical than performing them in-house if outside specialists, by virtue of their expertise and volume, can perform the activities at lower cost.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

73. A government oil company is having trouble with the private refineries and transporters to whom it delegates important stages of production. It decides to become more active along the entire supply chain from locating deposits to retailing the fuel to consumers. Which of the following does it intend to achieve?

A. outsourcing

 

B. economies of scale

 

C. increase inputs

 

D. advanced production technology

 

E. vertical integration

There can be times when integrating into the activities of either suppliers or distribution-channel allies can lower costs through greater production efficiencies, reduced transaction costs, or a better bargaining position.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Vertical Integration

 

74. The risks of a focused strategy based on either low-cost or differentiation include the

A. chance that niche customers will bargain more aggressively for good deals than customers in the overall marketplace.

 

B. potential for the preferences and needs of niche members to shift over time toward product attributes desired by buyers in the mainstream portion of the market.

 

C. potential for the segment to be highly vulnerable to economic cycles.

 

D. potential for segment growth to race beyond the production or service capabilities of incumbent firms.

 

E. potential for the segment to become too specialized for other multi-segmented rivals to enter.

A risk of employing a focused 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. An erosion of the differences across buyer segments lowers entry barriers into a focuser’s market niche and provides an open invitation for rivals in adjacent segments to begin competing for the focuser’s customers.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Strategy

 

75. Focusing carries several risks, one of which is the

A. chance that niche customers will bargain more aggressively for good deals than customers in the overall marketplace.

 

B. chance that competitors will find effective ways to match the focused firm’s capabilities in serving the target market.

 

C. potential for the segment to be highly vulnerable to economic cycles.

 

D. potential for the segment to become too specialized for other multi-segmented rivals to enter.

 

E. inability of a company to compete industry-wide.

A risk of employing a focused strategy is that the segment may become so attractive that it is soon inundated with competitors, intensifying rivalry and splintering segment profits.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Strategy

 

76. Focusing the ability can secure a competitive edge but also carries some risks that could be detrimental to the focused firm, such as

A. the likelihood that a focused company will become so cost efficient it will achieve excessive profits.

 

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 it will not attract new competitors thereby providing excessive market segment profits.

 

D. the potential for technological advances to favor only low-cost providers.

 

E. the likelihood that a focused company will become so cost inefficient it will achieve excessive profits.

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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Strategy

 

77. Best-cost provider strategies are those that

A. are a hybrid of low-cost provider and differentiation strategies that aim at providing desired attributes while beating rivals on price.

 

B. are rewarded by providing buyers with the best attributes at a premium.

 

C. have strategy elements related to the lowest-cost provider in the largest and fastest growing (or best) market segment.

 

D. look for a low-cost advantage rather than a differentiation advantage.

 

E. look for a differentiation advantage rather than a low-cost advantage.

Best-cost provider strategies are a hybrid of low-cost provider and differentiation strategies that aim at providing more desirable attributes (quality, features, performance, service) while beating rivals on price.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

78. To profitably employ a best-cost provider strategy, a company must have the resources and capabilities to

A. sell a product with the best cost at the best price.

 

B. have the best cost (as compared to rivals) for each activity in the industry’s value chain.

 

C. provide buyers with the best attributes at the best cost.

 

D. incorporate attractive or upscale attributes into its product offering at a lower cost than rivals.

 

E. do a better job than rivals of adopting the best operating practices.

Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. To profitably employ a best-cost provider strategy, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

79. A firm pursuing a best-cost provider strategy

A. seeks to be the low-cost provider in the largest and fastest growing (or best) market segment.

 

B. tries to have the best cost (as compared to rivals) for each activity in the industry’s value chain.

 

C. tries to outcompete a low-cost provider by attracting buyers on the basis of charging the best price.

 

D. seeks to deliver superior value to buyers by satisfying their expectations on key attributes and beating rivals in meeting customer expectations on price.

 

E. seeks to achieve the best costs by using the best operating practices and incorporating the best features and attributes.

Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. To profitably employ a best-cost provider strategy, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

80. The objective of a best-cost provider strategy is to

A. deliver superior value to value-conscious buyers at a comparatively lower price than rivals.

 

B. offer buyers the industry’s best-performing product at the best cost and best (lowest) price in the industry.

 

C. attract 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. out-compete rivals using low-cost provider strategies.

 

E. translate its best-cost status into achieving the highest profit margins of any firm in the industry.

The target market for a best-cost provider is value-conscious buyers—buyers who are looking for appealing extras and functionality at a comparatively low price.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

81. The competitive objective of a best-cost provider strategy is to

A. outmatch the resource strengths of both low-cost providers and differentiators.

 

B. position the company outside the competitive arena of low-cost producers and differentiators.

 

C. meet or exceed buyer expectations on key quality/performance/features/service attributes and beat their expectations on price (given what rivals are charging for much the same attributes).

 

D. deliver superior value to buyers by doing such a good job of cost control that it ends up with the best cost (as compared to rivals) in performing each activity in its value chain.

 

E. identify and concentrate on those differentiating features that are inexpensive to incorporate.

Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. To profitably employ a best-cost provider strategy, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

82. What is the primary target market for a best cost-provider?

A. value hunting buyers

 

B. price-conscious buyers

 

C. best-price driven buyers

 

D. value-conscious buyers

 

E. brand-conscious buyer

The target market for a best-cost provider is value-conscious buyers—buyers who are looking for appealing extras and functionality at a comparatively low price. Value-hunting buyers (as distinct from price-conscious buyers looking for a basic product at a bargain-basement price) often constitute a very sizable part of the overall market for a product or service.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

83. The competitive advantage of a best-cost provider is

A. having the best value chain in the industry.

 

B. its brand name reputation.

 

C. its capability to incorporate upscale or attractive attributes into its product offering at lower costs than rivals.

 

D. a distinctive competence in delivering top-notch quality and customer service.

 

E. a distinctive competence in supply chain management.

Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. To profitably employ a best-cost provider strategy, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

84. 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. resource strengths and competitive capabilities that allow it to incorporate upscale attributes at lower costs than rivals whose products have similar upscale attributes.

 

C. access to greater learning/experience curve effects and scale economies than rivals.

 

D. one of the best-known and most respected brand names in the industry.

 

E. a short, low-cost value chain.

To profitably employ a best-cost provider strategy, a company must have the capability to incorporate upscale attributes into its product offering at a lower cost than rivals. When a company can incorporate more 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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

85. 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 18-35 age group).

The target market for a best-cost provider is value-conscious buyers—buyers who are looking for appealing extras and functionality at a comparatively low price. Value-hunting buyers (as distinct from price-conscious buyers looking for a basic product at a bargain-basement price) often constitute a very sizable part of the overall market for a product or service.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

86. Best-cost provider strategies are appealing in those market situations where

A. 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.

 

B. a company is positioned between competitors who have ultra-low prices and competitors who have top-notch products in terms of both quality and performance.

 

C. buyers are more quality-conscious than price-conscious.

 

D. 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.

 

E. buyers are more performance-conscious than value-conscious.

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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

87. The big danger or risk of a 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 rivals with low-cost provider strategies 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.

A company’s biggest vulnerability in employing a best-cost provider strategy is getting squeezed between the strategies of firms using low-cost and high-end differentiation strategies. Low-cost providers may be able to siphon customers away with the appeal of a lower price (despite less appealing product attributes). High-end differentiators may be able to steal customers away with the appeal of better product attributes (even though their products carry a higher price tag).

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

88. A company’s biggest vulnerability in employing a best-cost provider strategy is

A. relying too heavily on outsourcing.

 

B. getting squeezed between the strategies of firms employing low-cost provider strategies and 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.

A company’s biggest vulnerability in employing a best-cost provider strategy is getting squeezed between the strategies of firms using low-cost and high-end differentiation strategies. Low-cost providers may be able to siphon customers away with the appeal of a lower price (despite less appealing product attributes). High-end differentiators may be able to steal customers away with the appeal of better product attributes (even though their products carry a higher price tag).

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

89. 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. providing significantly better product attributes in order to justify a price above what low-cost leaders are charging.

 

C. matching the company’s resources and capabilities to a low-cost provider status.

 

D. motivating buyers to purchase upscale features that match rivals.

 

E. achieving the lowest costs in the industry.

To be successful, a best-cost provider must achieve significantly lower costs in providing upscale features so that it can out-compete 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.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

90. Each of the five generic strategies positions the company differently, EXCEPT when it concerns

A. its market and competitive environment.

 

B. establishing a central theme for how the company will endeavor to outcompete rivals.

 

C. having resources and capabilities that rivals have trouble duplicating.

 

D. defining differences in terms of product line and production emphasis.

 

E. defining differences in terms of marketing emphasis and the means of maintaining strategy.

For all types of generic strategies, success in sustaining the competitive edge depends on having resources and capabilities that rivals have trouble duplicating and for which there are no good substitutes.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Strategy

 

91. The production emphasis of a company pursuing a broad differentiation strategy usually involves

A. eliminating cost reduction and decreasing quality and essential features to boost profitability.

 

B. strong efforts to be a leader in manufacturing process innovation.

 

C. emphasis on building differentiating features that buyers are willing to pay for and includes wide selection and many product variations.

 

D. the aggressive pursuit of economies of scale and experience-curve effects.

 

E. developing a distinctive competence in zero-defect manufacturing techniques.

The production emphasis of a company pursuing a broad differentiation strategy usually involves building whatever differentiating features buyers are willing to pay for and striving for product superiority.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Differentiation Strategy

 

92. The marketing emphasis of a company pursuing a broad differentiation strategy usually is to

A. underprice rival brands with comparable features.

 

B. tout differentiating features and charge a premium price that more than covers the extra costs of differentiating features.

 

C. out-advertise rivals and make frequent use of discount coupons.

 

D. emphasize selling directly to end-users and promoting personalized customer service.

 

E. communicate the product’s ability to serve the customer’s every need.

The marketing emphasis of a company pursuing a broad differentiation strategy usually is to tout differentiating features and to charge a premium price to cover the extra costs of differentiating features.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Differentiation Strategy

 

93. The keys to maintaining a broad differentiation strategy are to

A. stress constant innovation to stay ahead of imitative rivals and to concentrate on a few differentiating features.

 

B. charge a premium price that more than covers the extra costs of differentiating features and to convince customers to be brand loyal.

 

C. out-innovate and out-advertise rivals.

 

D. emphasize personalized customer service and to add as many differentiating features as possible.

 

E. keep prices close to the average of all rivals and to spend heavily on new product R&D.

The keys to maintaining a broad differentiation strategy are stressing constant innovation to stay ahead of imitative competitors and concentrating on a few key differentiating features.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Differentiation Strategy

 

94. The marketing emphasis of a company pursuing a focused low-cost provider strategy usually is to

A. tout the company’s lower prices.

 

B. tout the lack of frills and extras.

 

C. out-advertise rivals and make frequent use of discount coupons.

 

D. communicate the attractive features of a budget-priced product offering that fits niche members’ expectations.

 

E. communicate the product’s ability to serve the customer’s every need.

The marketing emphasis of a company pursuing a focused low-cost provider strategy usually is to communicate attractive features of a budget-priced product offering that fits niche buyers’ expectations.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

95. The underlying criteria of a best-cost provider strategy usually is found in the ability of a company to

A. offer better goods at attractive prices.

 

B. create attributes that appeal specifically to niche members.

 

C. lower overall costs more than rivals in serving niche members.

 

D. offer buyers something attractively different from competitors’ offerings.

 

E. offer the best product at the industry’s lowest possible price.

The basis of competitive strategy of a best-cost provider strategy is usually found in the ability of a company to offer better goods at attractive prices.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

96. A production-based emphasis toward a low-cost provider strategy usually requires a company to strive for

A. product superiority.

 

B. continuous cost reductions without sacrificing acceptable quality and essential features.

 

C. small-scale production or custom-made products that match the tastes and requirements of niche members.

 

D. appealing features and better quality at lower costs than rivals.

 

E. whatever differentiating features buyers are willing to pay for.

The production emphasis in a low-cost provider strategy usually requires a company to strive for a continuous search for cost reduction without sacrificing acceptable quality and essential features.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

97. Each of the following is likely to help a company’s low-cost provider strategy succeed EXCEPT

A. resources and capabilities to keep costs below those of its competitors.

 

B. cost-effective management of value chain activities better than rivals.

 

C. effective leveraging of cost drivers.

 

D. having the innovative capability to bypass certain value chain activities being performed by rivals.

 

E. capabilities to simultaneously deliver lower cost and higher-quality/differentiated features.

To succeed in employing a low-cost provider strategy, a company must have the resources and capabilities to keep its costs below those of its competitors. This means having the expertise to cost-effectively manage value chain activities better than rivals, leveraging the cost drivers effectively, and/or having the innovative capability to bypass certain value chain activities being performed by rivals.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

Essay Questions

98. 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.

The five generic competitive strategies and their individual competitive advantage are as follows:

Alow-costproviderstrategy—striving to achieve lower overall costs than rivals on comparable products that attract a broad spectrum of buyers, usually by underpricing rivals.
Abroaddifferentiationstrategy—seeking to differentiate the company’s product offering from rivals’ products by offering superior attributes that will appeal to a broad spectrum of buyers.
Afocusedlow-coststrategy—concentrating on a narrow buyer segment (or market niche) and outcompeting rivals on costs, thus being able to serve niche members at a lower price.
Afocuseddifferentiationstrategy—concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals’ products.
Abest-costproviderstrategy—giving customers morevaluefortheirmoney by satisfying buyers’ expectations on key quality, features, performance, and/or service attributes while beating their price expectations. This option is a hybrid strategy that blends elements of low-cost provider and differentiation strategies; the aim is to have the lowest (best) costs and prices among sellers offering products with comparable differentiating attributes.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 What distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of competitive conditions than in others.
Topic: Strategy

 

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

A cost driver is a factor having a strong effect on the cost of a company’s value chain activities and cost structure. These can support a firm’s pursuit of low-cost leadership strategy by: (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.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

100. Identify uniqueness drivers in a company’s value chain. Explain how these drivers impact a firm’s generic strategy.

A uniqueness driver is a value chain activity or factor that can have a strong impact on customer value and creating differentiation. Uniqueness drivers include: (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.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

101. 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.

A cost driver is a factor having 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: (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.

 

AACSB: Analytical Thinking
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Cost-Leadership Strategy
Topic: Differentiation Strategy

 

102. Describe the strategy of striving to be the industry’s overall low-cost provider. What does a company have to do to achieve low-cost provider status?

The strategy of striving to be the industry’s overall low-cost provider involves offering comparable products that attract a broad spectrum of buyers, usually by underpricing rivals. To achieve a low-cost provider status, a company must incorporate features and services that buyers consider essential, keeping the frills down to a minimum. A company has two options for translating a low-cost advantage over 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, 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.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

103. Describe the two basic cost-reducing approaches a company can take to become a low-cost provider in its industry.

The two basic cost-reducing approaches a company can take to become a low-cost provider in its industry are:

1. Perform value chain activities more cost-effectively than rivals. You may do this by:

• Capturing all available economies of scale
• Taking full advantage of experience- and learning-curve effects
• Operating facilities at full capacity
• Improving supply chain efficiency
• Substituting lower-cost inputs wherever there is little or no sacrifice in product quality or performance
• Using the company’s bargaining power vis-à-vis suppliers or others in the value chain system to gain concessions
• Using online systems and sophisticated software to achieve operating efficiencies
• Improving process design and employing advanced production technology
• Being alert to the cost advantages of outsourcing or vertical integration
• Motivating employees through incentives and company culture

2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities. You may do this by:

• Selling direct to consumers and bypassing the activities and costs of distributors and dealers
• Streamlining operations by eliminating low-value-added or unnecessary work steps and activities
• Reducing materials handling and shipping costs by having suppliers locate their plants or warehouses close to the company’s own facilities

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

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

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.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

105. What market conditions and circumstances make a low-cost provider strategy attractive? What are the pitfalls in pursuing a low-cost provider strategy? What can go wrong?

Market conditions and circumstances that make a low-cost provider strategy attractive are:

• Price competition among rival sellers is vigorous.
• The products of rival sellers are essentially identical and readily available from many eager sellers.
• It is difficult to achieve product differentiation in ways that have value to buyers.
• Most buyers use the product in the same ways.
• Buyers incur low costs in switching their purchases from one seller to another.

The pitfalls in pursuing a low-cost provider strategy are:

• Being overly aggressive in price cutting, as higher unit sales and market shares do not automatically translate into higher profits
• Relying on an approach to reduce costs that can be easily copied by rivals, as the advantage you gain will be too short-lived to yield a valuable edge in the marketplace
• Oversimplifying the product to the point of devaluation, as your offering ends up being too feature-poor to generate buyer appeal

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 The major avenues for achieving a competitive advantage based on lower costs.
Topic: Cost-Leadership Strategy

 

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

Differentiation strategies are attractive whenever buyers’ needs and preferences are too diverse to be fully satisfied by a standardized product offering. It allows a firm to do one or more of the following:

• Command a premium price for its product.
• Increase unit sales (because additional buyers are won over by the differentiating features).
• Gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products).

Differentiation strategies are most appealing under the following circumstances:

• Buyer needs and uses of the product are diverse.
• There are many ways to differentiate the product or service that have value to buyers.
• Few rival firms are following a similar differentiation approach.
• Technological change is fast-paced and competition revolves around rapidly evolving product features.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

107. What are the pitfalls to be avoided in pursuing a broad differentiation strategy?

Following are the pitfalls in pursuing a broad differentiation strategy:

• focusing on product or service attributes that are easily and quickly copied
• buyers seeing little value in the unique attributes of a company’s product
• overspending on efforts to differentiate the company’s product offering, thus eroding profitability
• offering only trivial improvements in quality, service, or performance features vis-à-vis rivals’ products
• over-differentiating so that product quality, features, or service levels exceed the needs of most buyers
• charging too high a price premium

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
Topic: Differentiation Strategy

 

108. What are the distinctive features of a best-cost provider strategy? Under what circumstances is a best-cost provider strategy appealing?

Best-cost provider strategies stake out a middle ground between pursuing a low-cost advantage and a differentiation advantage and between appealing to the broad market as a whole and a narrow market niche. The essence of a best-cost provider strategy is giving customers more value for the money by satisfying buyer desires for appealing features and charging a lower price for these attributes compared to rivals with similar-caliber product offerings.

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. Best-cost provider strategies also work well in recessionary times, when masses of buyers become value-conscious and are attracted to economically priced products and services with more appealing attributes.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

109. What type of competitive advantage does a best-cost provider strategy aim at achieving? Explain what a company has to do to achieve this advantage.

Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. To profitably employ a best-cost provider strategy, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals. A best-cost provider strategy works best in markets with large numbers of value-conscious buyers desirous of purchasing better products and services for less money.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

110. Explain how the strategic target of a low-cost provider differs from the strategic target of a best-cost provider.

The strategic target of a low-cost provider are buyers looking for a basic product with few frills and thus at a low cost, while the target of best-cost providers are the value-conscious buyers willing to pay for additional attractive attributes, appealing extras and functionalities, at a comparatively low price. Value-hunting buyers (as distinct from price-conscious buyers looking for a basic product at a bargain-basement price) often constitute a very sizable part of the overall market for a product or service.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Strategy

 

111. What are the distinctive features of a focused low-cost strategy? How does it differ from a low-cost leadership strategy?

A focused low-cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than those of 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 those for low-cost leadership—use the cost drivers to keep the costs of value chain activities to a bare minimum and search for innovative ways to bypass 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—the former involves a product offering that appeals broadly to almost all buyer groups and market segments, whereas the latter aims at just meeting the needs of buyers in a narrow market segment.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Strategy

 

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

In a focused differentiation strategy the strategic target is a narrow market niche where buyer needs and preferences are distinctively different. Through small-scale production or custom-made products, it focuses on product features and attributes that appeal specifically to niche members. Its marketing emphasis is on communicating how product offering does the best job of meeting niche buyers’ expectations. So it calls for staying committed to serving the niche better than rivals without blurring the firm’s image by entering other market segments or adding other products to widen market appeal.
In a broad differentiation strategy the strategic target is a broad cross-section of the market to which it offers something attractively different from competitors’ offerings with many product variations, wide selection, and emphasis on differentiating features. It involves building in whatever differentiating features buyers are willing to pay for. Constantly innovating and concentrating on a few key differentiating features, it helps stay ahead of imitative competitors.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Strategy

 

113. What strategy would you recommend for a small-sized company entering a highly segmented market, each segment with a complex set of needs and spending power?

A focused low-cost strategy or a focused differentiation strategy would be best. 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 breadth and depth of resources to tackle going after a broader customer base with a more complex set of needs.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Strategy

 

114. A mobile manufacturer decides to reduce the price of its latest line of smart phones, which are not the cheapest but have features that are popular among most users. Which strategy is the manufacturer using?

The best-cost provider strategy gives customers more value for their money by satisfying buyers’ expectations on key quality, features, performance, and/or service attributes while beating their price expectations. This option is a hybrid strategy that blends elements of low-cost provider and differentiation strategies; the aim is to have the lowest (best) costs and prices among sellers offering products with comparable differentiating attributes.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Cost-Leadership Strategy

 

115. In what market and competitive circumstances are focused low-cost and focused differentiation strategies NOT attractive?

Focused low-cost and focused differentiation strategies are attractive under the following conditions:

• The target market niche is big enough to be profitable and offers good growth potential.
• Industry leaders have chosen not to compete in the niche—in which case focusers can avoid battling head to head against the industry’s biggest and strongest competitors.
• 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 their mainstream customers.
• The industry has many different niches and segments, thereby allowing a focuser to pick the niche best suited to its resources and capabilities. Also, with more niches there is more room for focusers to avoid competing for the same customers.
• Few if any rivals are attempting to specialize in the same target segment—a condition that reduces the risk of segment overcrowding.

However, focused low-cost and focused differentiation strategies become unattractive when:

• competitors find effective ways to match the focused firm’s capabilities in serving the target niche.
• preferences and needs of niche members shift over time with respect to the product attributes desired by the majority of buyers.
• differences across buyer segments erodes and lowers entry barriers into a focuser’s market niche, thereby providing an open invitation for rivals in adjacent segments to begin competing for the focuser’s customers.
• the segment becomes so attractive it is soon inundated with competitors, intensifying rivalry and splintering segment profits.

 

AACSB: Analytical Thinking
Blooms: Create
Difficulty: 3 Hard
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Strategy

 

116. Explain how the marketing emphasis of a low-cost provider differs from the marketing emphasis of a best-cost provider.

The marketing emphasis of a low cost provider is on low prices and good value while trying to make a virtue out of product features that lead to low cost. The marketing emphasis of a best cost provider is on delivery of best value for the money.

Being a best-cost provider is different from being a low-cost provider because the additional attractive attributes entail additional costs (which a low-cost provider can avoid by offering buyers a basic product with few frills). Moreover, the two strategies aim at a distinguishably different market target. The target market for a best-cost provider is value-conscious buyers—buyers who are looking for appealing extras and functionality at a comparatively low price. Value-hunting buyers (as distinct from price-conscious buyers looking for a basic product at a bargain-basement price) often constitute a very sizable part of the overall market for a product or service.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Strategy

 

117. Explain how the keys to sustaining a broad differentiation strategy differ from the keys to sustaining a best-cost producer strategy.

The keys to sustaining a broad differentiation strategy are an emphasis on constant innovation to stay ahead of imitative competitors and a focus on a few key differentiating features. The key to sustaining best-cost producer strategy is a unique expertise in simultaneously managing costs down while incorporating upscale features and attributes. For all types of generic strategies, success in sustaining the competitive edge depends on having resources and capabilities that rivals have trouble duplicating and for which there are no good substitutes.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Strategy

 

118. What are the keys to sustaining a focused low-cost strategy?

The keys to sustaining a focused low-cost strategy are staying committed to serving the niche at the lowest overall cost and making the effort not to blur the firm’s image by entering other market segments or adding other products to widen market appeal. 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 lower price than those of 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.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Strategy

 

119. One of the big dangers in crafting a competitive strategy is that managers, torn between 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.

The statement is false. That managers would go for a mix of the various generic strategies is not to be seen as a danger at all. With changing markets it is important for companies to change their strategies and this may involve a hybrid of two or more strategies. The wise approach would be to respond to the market and the opportunities present in it rather than to be straitjacketed by “pure” strategies.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Strategy

 

120. For a company’s competitive strategy to succeed in delivering favorable performance and the intended competitive edge over rivals, it has to be well-matched to a company’s internal situation and underpinned by an appropriate set of resources, know-how, and competitive capabilities. True or false? Explain your answer.

The statement is true. To succeed in employing a low-cost provider strategy, a company must have the resources and capabilities to keep its costs below those of its competitors. This means having the expertise to cost-effectively manage value chain activities better than rivals, leveraging the cost drivers effectively, and/or having the innovative capability to bypass certain value chain activities being performed by rivals. To succeed in a differentiation strategy, a company must have the resources and capabilities to leverage value drivers effectively and incorporate attributes into its product offering that a broad range of buyers will find appealing. Successful focused strategies (both low cost and differentiation) require the capability to do an outstanding job of satisfying the needs and expectations of niche buyers. Success in employing a best cost strategy requires the resources and capabilities to incorporate upscale product or service attributes at a lower cost than rivals. For all types of generic strategies, success in sustaining the competitive edge depends on having resources and capabilities that rivals have trouble duplicating and for which there are no good substitutes.

 

AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 05-04 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies.
Topic: Strategy

 

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