Strategic Management Theory and Cases An Integrated Approach 12th Edition By Hill – Test Bank

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Chapter 5 Business Level Strategy
TRUEFALSE
1. A firm’s business model should contain three components: what is to be satisfied, who is to be
satisfied, and how they will be satisfied.
(A) True
(B) False
Answer : (A)
2. The way a product is differentiated from other products of its type and the price of the product
determine which product a customer chooses to satisfy his or her needs.
(A) True
(B) False
Answer : (A)
3. Companies with a differentiation advantage tend to charge a lower price for their products.
(A) True
(B) False
Answer : (B)
4. In commodity markets, competitive advantage goes to the company that has the lowest costs.
(A) True
(B) False
Answer : (A)
5. A company has a competitive advantage if it can increase costs relative to rivals.
(A) True
(B) False
Answer : (B)
6. Differentiation can help a company to grow overall demand and capture market share from its
rivals.
(A) True
(B) False
Answer : (A)
7. Differentiation leads to high brand loyalty, which in turn significantly increases the threat of new
firms entering the industry.
(A) True
(B) False
Answer : (B)
8. Market segmentation refers to the process of subdividing a market into clearly identifiable groups
of customers with similar needs, desires, and demand characteristics.
(A) True
(B) False
Answer : (A)
9. A generic business-level strategy is a strategy that gives a company a specific form of competitive
position and advantage over its rivals that results in above-average profitability.
(A) True
(B) False
Answer : (A)
10. A product’s appeal to customers’ desires cannot be considered a source of differentiation.
(A) True
(B) False
Answer : (B)
11. An efficiency frontier shows all of the different positions that a company can adopt with regard
to differentiation and cost.
(A) True
(B) False
Answer : (A)
12. Mike’s Eatery, a fast food chain, neither customizes its product offerings nor sells new products
based on market segments. Mike’s Eatery is pursuing standardization strategy.
(A) True
(B) False
Answer : (A)
13. When a company decides to serve a limited number of segments, or just one segment, it is
pursuing a segmentation strategy.
(A) True
(B) False
Answer : (B)
14. When a company already has a low-cost structure, it has to give up a lot of differentiation in its
product offering to get additional cost reductions.
(A) True
(B) False
Answer : (A)
15. All focus strategies entail serving a specific market segment using a differentiation approach.
(A) True
(B) False
Answer : (B)
16. The generic business-level strategies are cost leadership, differentiation, and mass marketing.
(A) True
(B) False
Answer : (B)
17. A low-cost company is often best positioned to survive price rivalry in its industry.
(A) True
(B) False
Answer : (A)
18. The brand loyalty enjoyed by the differentiated company will not always protect it from
substitute goods and services.
(A) True
(B) False
Answer : (B)
19. Companies that focus on the higher-income or higher-value end of the market will tend to have a
higher cost structure.
(A) True
(B) False
Answer : (A)
20. Companies that follow a standardization strategy ignore the many different market segments in
an industry and position their products to appeal to the average customer.
(A) True
(B) False
Answer : (A)
21. By focusing on a niche, and customizing the offering to that segment, a differentiated company
can often outsell differentiated rivals that target a broader market.
(A) True
(B) False
Answer : (A)
22. A differentiated company is protected from intense price rivalry within its industry by its brand
loyalty.
(A) True
(B) False
Answer : (A)
23. Actions taken at the functional level should support the business-level strategy, as should the
organizational arrangements of the enterprise.
(A) True
(B) False
Answer : (A)
24. When a company targets a certain segment or niche, and tries to be the low-cost player in that
niche, it is pursuing a broad low-cost strategy.
(A) True
(B) False
Answer : (B)
25. Standardization describes what happens when innovation pushes out the efficiency frontier in an
industry, allowing for greater value to be offered through superior differentiation at a lower cost
than was previously thought possible.
(A) True
(B) False
Answer : (B)
26. The efficiency frontier is not static; it is continually being pushed outwards by the efforts of
managers to improve their firm’s performance through innovation.
(A) True
(B) False
Answer : (A)
27. When a company is able to pioneer process innovations that lead to value innovation, it
effectively changes the game in an industry and may be able to outperform its rivals for a long
period of time.
(A) True
(B) False
Answer : (A)
28. The basic proposition of the blue ocean strategy is that many successful companies have built
their competitive advantage by initiating price wars and driving weaker rivals out of the industry.
(A) True
(B) False
Answer : (B)
29. One of the great advantages of successful value innovation is that it can catch rivals off guard
and make it difficult for them to catch up.
(A) True
(B) False
Answer : (A)
MULTICHOICE
30. Focus strategy can be defined as:
(A) the strategy of merging with an established company in order to gain monopoly over the market.
(B) the strategy a company uses when it decides to allocate the company resources equally among
all the marketing segments
(C) the strategy a company uses when it decides to serve a limited number of segments, or just one
segment of the market.
(D) the strategy a company uses when it decides to ignore the different needs of different market
segments, and produce one standardized product for all the customers.
(E) the strategy of closing down one or more business units in order to minimize the losses.
Answer : (C)
31. Which of the following generic competitive strategies is a producer of commodity steel most
likely to pursue?
(A) Exclusive dealing
(B) Broad differentiation
(C) Focus differentiation
(D) Broad low-cost
(E) Horizontal integration
Answer : (D)
32. Companies that successfully differentiate a product often charge _____ prices for them.
(A) premium
(B) exorbitant
(C) low
(D) average
(E) escalating
Answer : (A)
33. A differentiated product is a product that:
(A) has a greater resale value than rival products.
(B) provides greater reliability than rival products.
(C) is offered free of cost on purchase of a company’s standard product.
(D) always costs more than rival products.
(E) always costs less than rival products.
Answer : (B)
34. Cool Looks produces a variety of clothing for various customer groups. Which of the following
strategies is the firm most likely pursuing?
(A) Cost leadership
(B) Differentiation
(C) Product substitution
(D) Focus
(E) Share building
Answer : (B)
35. When a company produces a wide range of products for various customer groups, it is following
a _____ strategy.
(A) cost leadership
(B) differentiation
(C) customer retention
(D) market concentration
(E) share building
Answer : (B)
36. Compared to a differentiator, the company that follows a low-cost strategy:
(A) distinguishes its products from those of rivals by offering something that they find hard to match.
(B) absorbs cost increases by powerful suppliers while keeping to their lower pricing.
(C) allows the company to charge a premium price for its good or service.
(D) uses perceived superior value to generate growth in demand among customers.
(E) creates entry barriers for rivals with greater brand loyalty to the specific products offered.
Answer : (B)
37. A differentiation strategy is based on creating a product that customers perceive as being:
(A) the same as other available products.
(B) distinct from other available products.
(C) the least costly product in the industry.
(D) the most costly product in the industry.
(E) cheaper, but inferior to the available products.
Answer : (B)
38. When a company recognizes that the needs of one market segment is not the same as another
and accordingly customizes its product offerings, it is said to be pursuing:
(A) stuck-in-the-middle strategy.
(B) rapid-growth strategy.
(C) differentiation strategy.
(D) focus strategy.
(E) low-cost strategy.
Answer : (C)
39. A market segment consists of a group of:
(A) similar products.
(B) customers who have similar needs.
(C) products that are considered obsolete.
(D) diverse products produced by the same manufacturer.
(E) customers who have diverse needs.
Answer : (B)
40. A segmentation strategy requires that a company:
(A) standardize its products.
(B) offer its products at low costs.
(C) customize its products.
(D) produce one basic offering.
(E) attain high economies of scale by achieving a high volume of sales.
Answer : (C)
41. Which of the following is NOT a main approach to market segmentation?
(A) Marketing a product targeted toward average or typical customers
(B) Marketing a product to a group of people who are more likely to purchase it
(C) Making customized products to suit the unique requirements of customers
(D) Making products to meet the specific needs of a narrow group of customers
(E) Making one product aimed toward a general, rather than a specific subset of customers
Answer : (E)
42. Differentiation allows a company to:
(A) respond to demands of deep price demands from powerful buyers and still make money.
(B) lower its cost structure.
(C) charge a premium price for its good or service.
(D) charge low prices and still make profits.
(E) initiate a price war in order to grow volume and drive its weaker rivals out of the industry.
Answer : (C)
43. The main difference between companies following a broad low-cost strategy and those following
a focus low-cost strategy is in the:
(A) standardized market price.
(B) industry life cycle stage.
(C) degree of market segmentation.
(D) age of the market.
(E) market trajectory.
Answer : (C)
44. A company that follows the _____ strategy customizes its offering to a particular niche in order to
outsell its rivals.
(A) focused differentiation
(B) broad low-cost
(C) market standardization
(D) rapid growth
(E) stuck in the middle
Answer : (A)
45. Production of a large product variety without a large cost penalty is known as:
(A) market concentration.
(B) market segmentation.
(C) focused differentiation.
(D) mass production.
(E) mass customization.
Answer : (E)
46. When a company offers a wide variety of products at lower prices than its rivals, it is most likely:
(A) pursuing a low-cost strategy.
(B) pursuing a differentiation strategy.
(C) pursuing a focus strategy.
(D) pursuing an exit strategy.
(E) pursuing a divestment strategy.
Answer : (A)
47. A focused differentiator has the advantage of:
(A) selling on non-price factors, such as design or customer service.
(B) producing a large product variety without a large cost penalty.
(C) producing a basic offering that is relatively inexpensive to produce and deliver.
(D) being able to respond to demands for deep price discounts.
(E) being able to initiate a price war in order to grow volume and drive its weaker rivals out of the
industry.
Answer : (A)
48. Lucy’s Swimwear Boutique offers swimwear that is targeted at affluent people who can afford to
buy expensive, handmade swimsuits. Which of the following approaches to market segmentation is
Lucy’s Swimwear Boutique using?
(A) Broad differentiation strategy
(B) Low market segmentation
(C) Medium market segmentation strategy
(D) Broad high-cost strategy
(E) Focus differentiation strategy
Answer : (E)
49. At The Luxury Hotel in Miami, Florida, three hotel employees serve the needs of each guest. In
every room, a guest can summon a chef, a maid, or a valet by pressing a button at his/her bedside.
Which generic business-level strategy is The Luxury Hotel utilizing?
(A) Cost leadership
(B) Differentiation
(C) Vertical integration
(D) Razor and blade
(E) Brand loyalty
Answer : (B)
50. The advantage that focused companies have over their broad market rivals is that they:
(A) can sells on non-price factors, such as design or customer service.
(B) can respond to demands for deep price discounts.
(C) sell fewer products in bulk to outsell their rivals.
(D) can initiate a price war in order to grow volume and drive its weaker rivals out of the industry.
(E) can absorb cost increases that may be passed on downstream by powerful suppliers.
Answer : (C)
51. Delta Airlines used to advertise its high-quality air travel service by saying it flew “anywhere,
anytime.” What generic strategy is represented by this advertisement?
(A) Broad low-cost
(B) Broad differentiation
(C) Vertical integration
(D) Right-time marketing
(E) Rapid growth
Answer : (B)
52. A company pursuing a focus strategy:
(A) attempts to serve all market segments.
(B) concentrates on building market share in one market segment.
(C) typically has more resources at its disposal than a differentiator does.
(D) has a greater impact on costs and revenues.
(E) produce different offerings for different segments.
Answer : (B)
53. Which of the following statements is true of differentiation and cost structure?
(A) Differentiation and cost structure decisions affect one another.
(B) Differentiation and cost structure decisions do not affect one another.
(C) Companies that focus on the higher-value end of the market have a lower cost structure.
(D) Differentiation decisions do not affect a company’s profitability.
(E) Cost structure decisions do not affect a company’s profitability.
Answer : (A)
54. Nick, a professional magician, is often invited to perform magic tricks at birthday parties and
other social gatherings from across the country. However, he offers his services only to clients who
stay in the same city as him. He is also known to charge less than other magicians in the city. Nick is
pursuing which generic business strategy?
(A) Improved services
(B) Right-time marketing
(C) Focused low-cost
(D) Broad low-cost
(E) Deterrence strategy
Answer : (C)
55. Yankee Candle Company offers customers candles that burn for 50-60 hours, much longer than
most department store candle brands. Therefore, customers are willing to pay a higher price for
these candles. Which of the following strategies is Yankee Candle Company following?
(A) Cost leadership
(B) Rapid growth
(C) Market segmentation
(D) Differentiation
(E) Stuck in the middle
Answer : (D)
56. Lilly’s Beauty Company sells haircare products such as shampoo, conditioner, and hairspray. The
company does not sell new or customized products in order to meet the specific needs of certain
groups of people. Which of the following approaches is illustrated in this scenario?
(A) Standardization strategy
(B) Focus strategy
(C) Medium market segmentation
(D) High market segmentation
(E) Focused market segmentation
Answer : (A)
57. A company that follows a low-cost strategy could reasonably be expected to reduce costs by:
(A) increasing the number of business processes.
(B) adopting lean production and flexible manufacturing technologies.
(C) implementing first-in-first-out inventory control systems.
(D) taking steps to increase customer churn.
(E) abandoning economies of scale and learning effects.
Answer : (B)
58. When a company targets a certain segment or niche, and customizes its offering to the needs of
that particular segment through the addition of features and functions, the company is pursuing a
_____ strategy.
(A) broad low-cost
(B) broad differentiation
(C) product substitution
(D) focus low-cost
(E) focus differentiation
Answer : (E)
59. Which of the following generic business-level strategies is based on the intent to lower costs so
that a company can lower prices and still make a profit?
(A) Broad low-cost strategy
(B) Price differentiation strategy
(C) Broad differentiation strategy
(D) Focused differentiation strategy
(E) Focused low-cost strategy
Answer : (A)
60. Which of the following is NOT a generic business-level strategy?
(A) Broad differentiation strategy
(B) Broad low-cost strategy
(C) Focused low-cost strategy
(D) Focused differentiation strategy
(E) Focused innovation strategy
Answer : (E)
61. Jordan’s Ice Creams is strategically located near a university. After realizing that most of its
customers, who are mostly students, prefer a wide range of flavors, it started offering different
combinations of premium flavors, cones, and toppings to create hundreds of extravagant, customized
products. Which generic strategy is Jordan pursuing?
(A) Broad low-cost strategy
(B) Broad differentiation strategy
(C) Focused low-cost strategy
(D) Focused differentiation strategy
(E) Product substitution strategy
Answer : (D)
62. A low-cost position is most appropriate when:
(A) the power of buyers is low and barriers to entry are high.
(B) economies of scale are relatively unimportant in manufacturing products.
(C) customers have very different needs and uses for the industry’s products.
(D) product innovation is the key competitive factor.
(E) industry rivalry is high and customers are very sensitive to prices.
Answer : (E)
63. In which of the following situations is a differentiation strategy used?
(A) The industry is fragmented into customer groups based on needs.
(B) Customer needs are primarily satisfied by the price of the product.
(C) A company’s cost structure needs to be reduced.
(D) There is a demand for deep price discounts from powerful buyers.
(E) The industry is not allowed to charge a premium price for its products.
Answer : (A)
64. A disadvantage of pursuing a low-cost strategy is that:
(A) it makes it difficult for firms to customize their product offerings .
(B) price wars make it hard to compete with differentiators.
(C) it costs more than a differentiation strategy because of the necessity of high capital investments.
(D) powerful buyers are a major threat.
(E) it reduces customer retention.
Answer : (A)
65. Functional strategies to improve differentiation should include:
(A) product offerings designed to be can be produced and delivered at as low a cost as possible
(B) standardization of the product offering and marketing mix to different market segments.
(C) hiring and employee development strategies designed to ensure that employees act in a manner
that is consistent with the image that the company is trying to project to the world.
(D) initiation of a price war in order to grow volume and drive its weaker rivals out of the industry.
(E) products that have lower prices to allow a company to erect an economic moat around its
business that keeps higher-cost rivals out.
Answer : (C)
66. Which of the following is NOT a principal danger of a low-cost position approach?
(A) Powerful buyers
(B) Technological change
(C) Imitation of production techniques
(D) Changes in consumer tastes
(E) Rivals lowering their costs
Answer : (A)
67. A company pursuing a low-cost strategy:
(A) Improves non-price factors such as design and customer service
(B) Produces a basic offering to reduce cost structures
(C) Keeps advertising expenses at a maximum
(D) Relies on patent protections to keep costs low
(E) Customizes marketing mix to different market segments
Answer : (B)
68. Which of the following allows a company to lower cost through functional strategy and
organization?
(A) Implementing just-in-time inventory control systems
(B) Customizing the product offering and marketing mix to different market segments
(C) Focusing marketing efforts on brand building and perceived differentiation from rivals
(D) Designing strategies to ensure that employees act in a manner that is consistent with the image
that the company is trying to project to the world
(E) Adopting rigid manufacturing technologies
Answer : (A)
69. Info Tech, Inc. makes complex telecommunications products, such as cellular telephones. Since
this company has a distinctive competency in research and development, it should try to
differentiate its product through:
(A) reliability.
(B) innovation.
(C) advertising.
(D) service.
(E) low pricing.
Answer : (B)
70. The term value innovation is used to describe:
(A) the way a company decides to group customers based on important differences in their needs to
gain a competitive advantage.
(B) a business’s overall competitive theme, the way it positions itself in the marketplace to gain a
competitive advantage, and the different positioning strategies that can be used in different industry
settings.
(C) what happens when innovation pushes out the efficiency frontier in an industry, allowing for
greater value to be offered through superior differentiation at a lower cost than was previously
thought possible.
(D) what happens when a company decides to ignore different segments, and produce a
standardized product for the average consumer.
(E) what happens when a company decides to serve many segments, or even the entire market,
producing different offerings for different segments.
Answer : (C)
71. The basic proposition of the blue ocean strategy is that many successful companies have built
their competitive advantage by:
(A) redefining their product offering through value innovation and creating a new market space.
(B) initiating a price war in order to grow volume and drive its weaker rivals out of the industry.
(C) developing brand loyalty to protect them from intense price rivalry within their industry.
(D) charging premium prices for their goods or services.
(E) adopting lean production and flexible manufacturing technologies.
Answer : (A)
ESSAY
72. Define the generic business-level strategies companies pursue.
Graders Info :
There are four generic business-level strategies.
When a company lowers costs so that it can lower prices and still make a profit, it is pursuing a
broad low-cost strategy.
When a company differentiates its product in some way, such as by recognizing different segments
or offering different products to each segment, it is pursuing a broad differentiation strategy.
When a company targets a certain segment or niche, and tries to be the low-cost player in that
niche, it is pursuing a focus low-cost strategy.
When a company targets a certain segment or niche, and customizes its offering to the needs of that
particular segment through the addition of features and functions, it is pursuing a focus
differentiation strategy.
73. Describe how business-level strategies give a company a competitive advantage over actual and
potential rivals.
Graders Info :
Properly executed, a well-chosen and well-crafted business-level strategy can give a company a
competitive advantage over actual and potential rivals.
Consider first the low-cost company; by definition, the low-cost enterprise can make profits at price
points that its rivals cannot profitably match. This makes it very hard for rivals to enter its market.
In other words, the low-cost company can build an entry barrier into its market. It can, in effect,
erect an economic moat around its business that keeps higher-cost rivals out.
A low-cost position and the ability to charge low prices and still make profits also give a company
protection against substitute goods or services. Low costs can help a company to absorb cost
increases that may be passed on downstream by powerful suppliers. Low costs can also enable the
company to respond to demands for deep price discounts from powerful buyers and still make
money. The low-cost company is often best positioned to survive price rivalry in its industry. Indeed,
a low-cost company may deliberately initiate a price war in order to grow volume and drive its
weaker rivals out of the industry.
Now consider the differentiated company. The brand loyalty associated with differentiation can
constitute an important entry barrier, protecting the company’s market from potential competitors.
Because the successful differentiator sells on non-price factors, such as design or customer service,
it is also less exposed to pricing pressure from powerful buyers. Indeed, the converse may be the
case-the successful differentiator may be able to implement price increases without encountering
much, if any, resistance from buyers. The differentiated company can also fairly easy absorb price
increases from powerful suppliers and pass those on downstream in the form of higher prices for its
offerings, without suffering much, if any, loss in market share. The brand loyalty enjoyed by the
differentiated company also gives it protection from substitute goods and service.
The differentiated company is protected from intense price rivalry within its industry by its brand
loyalty, and by the fact that non-price factors are important to its customer set. At the same time,
the differentiated company often does have to invest significant effort and resources in non-price
rivalry, such as brand building through marketing campaigns or expensive product development
efforts, but to the extent that it is successful, it can reap the benefits of these investments in the
form of stable or higher prices.
74. List the features that need to be included in functional strategies to improve differentiation.
Graders Info :
A firm that implements the differentiation strategy cannot ignore efficiency. By virtue of its strategic
choice, the differentiated company is likely to have a higher cost structure than the low-cost player
in its industry. Specific functional strategies designed to improve differentiation include the
following:
• Customization of the product offering and marketing mix to different market segments
• Designing product offerings that have high perceived quality in terms of their functions, features,
and performance, in addition to being reliable
• A well-developed customer care function for quickly handling and responding to customer
inquiries and problems
• Marketing efforts focused on brand building and perceived differentiation from rivals
• Hiring and employee development strategies designed to ensure that employees act in a manner
that is consistent with the image that the company is trying to project to the world

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