Theory of Strategic Management with Cases International Edition by Charles W. L. Hill – Test Bank

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Chapter 5—Building Competitive Advantage Through Business-Level Strategy

TRUE/FALSE

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.

ANS: T PTS: 1 DIF: Moderate

OBJ: 1 – Explain why a company must define its business, and how managers do this through choices

about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Analytic | Strategy KEY: Knowledge

2. Both 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.

ANS: T PTS: 1 DIF: Moderate

OBJ: 1 – Explain why a company must define its business, and how managers do this through choices

about which customer groups, customers needs, and distinctive competencies to pursue

NAT: AACSB Analytic | Strategy KEY: Knowledge

3. Companies with a differentiation advantage must charge a lower price for their products.

ANS: F PTS: 1 DIF: Easy

OBJ: 1 – Explain why a company must define its business, and how managers do this through

choices about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Analytic | Strategy KEY: Comprehension

4. A company searching for a successful business model has to group customers according to the

similarities or differences in their needs to discover what kinds of products to develop that will best

meet the needs of different kinds of customers.

ANS: T PTS: 1 DIF: Moderate

OBJ: 1 – Explain why a company must define its business, and how managers do this through choices

about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Analytic | Strategy KEY: Knowledge

5. Market segmentation addresses the “what” portion of a firm’s business model.

ANS: F PTS: 1 DIF: Moderate

OBJ: 1 – Explain why a company must define its business, and how managers do this through choices

about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Analytic | Strategy KEY: Knowledge

6. Maximizing the profitability of a company’s business model is about making the right choices with

regard to value creation through differentiation, costs, and pricing given both the demand conditions in

the company’s market and the competitive conditions in the company’s industry.

ANS: T PTS: 1 DIF: Difficult

OBJ: 2 – Define competitive positioning and explain the tradeoffs between differentiation, cost, and

pricing options NAT: AACSB Analytic | Environmental Influence

KEY: Knowledge

7. Companies that successfully pursue a cost leadership strategy generally have a distinctive competency

in research and development.

ANS: F PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

8. All focus strategies entail serving a specific market segment using a differentiation approach.

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.9. 10. 11. 12. 13. 14. 15. 16. ANS: F PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

A cost leader must respond to the strategic moves of its differentiated competitors.

ANS: T PTS: 1 DIF: Easy

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Environmental Influence KEY: Knowledge

Differentiation on the basis of innovation and technological competency depends on the research and

development function.

ANS: T PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Knowledge

A major problem with a differentiation strategy centers on the long-term ability to maintain a product’s

perceived difference or distinctness in customers’ eyes.

ANS: T PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Knowledge

Once a focused differentiator gains competitive advantage in its market, the threat of competitive

rivalry is greatly reduced.

ANS: F PTS: 1 DIF: Moderate

OBJ: 4 – Explain why each business model allows a company to outperform its rivals, reach the

value-creation frontier, and obtain above average profitability

NAT: AACSB Analytic | Environmental Influence KEY: Comprehension

Differentiation leads to high brand loyalty, which in turn significantly increases the threat of new firms

entering the industry.

ANS: F PTS: 1 DIF: Easy

OBJ: 4 – Explain why each business model allows a company to outperform its rivals, reach the

value-creation frontier, and obtain above average profitability NAT: AACSB Analytic | Strategy

KEY: Knowledge

Market segmentation is an evolving, ongoing process that presents considerable opportunities for

strategic managers to improve their company’s business model.

ANS: T PTS: 1 DIF: Moderate REF: p. 162

OBJ: 1 – Explain why a company must define its business, and how managers do this through

choices about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Analytic | Strategy KEY: Knowledge

Fortunately, focusers are not vulnerable to shifting consumer tastes, because of brand loyalty that

comes with focused strategy.

ANS: T PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Environmental Influence KEY: Comprehension

If consumer tastes change and a focuser’s niche disappears, the danger for the focuser is that it might

have difficulty shifting resources from its niche to another market segment.

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.17. 18. 19. 20. 21. 22. 23. 24. ANS: T PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Environmental Influence KEY: Comprehension

Strategic group analysis allows managers to focus only on what is happening in their group.

ANS: F PTS: 1 DIF: Moderate

OBJ: 5 – Discuss why some companies can successfully make the competitive positioning decisions

that allow them to sustain their competitive advantage over time while others cannot

NAT: AACSB Analytic | Strategy KEY: Comprehension

To pursue a successful business model, managers must be careful to ensure that the set of business-

level strategies they have formulated and implemented are working in harmony to support each other.

ANS: T PTS: 1 DIF: Easy

OBJ: 5 – Discuss why some companies can successfully make the competitive positioning decisions

that allow them to sustain their competitive advantage over time while others cannot

NAT: AACSB Analytic | Strategy KEY: Knowledge

The three generic business-level strategies are cost leadership, differentiation, and mass marketing.

ANS: F PTS: 1 DIF: Easy

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Knowledge

Cost leaders ignore the many different market segments in an industry and position their products to

appeal to the average customer.

ANS: T PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Knowledge

To pursue a cost leadership strategy, strategic managers need to incorporate all the latest technology

into their products.

ANS: F PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy TOP: Comprehension

A differentiation business model is based on pursuing a set of generic strategies that allows a company

to achieve a competitive advantage by creating a product that customers perceive as different or

distinct in some important way.

ANS: T PTS: 1 DIF: Moderate

OBJ: 4 – Explain why each business model allows a company to outperform its rivals, reach the

value-creation frontier, and obtain above average profitability NAT: AACSB Analytic | Strategy

KEY: Knowledge

A product’s appeal to customers’ psychological desires cannot be considered a source of

differentiation.

ANS: F PTS: 1 DIF: Easy

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Knowledge

For any company, building new competencies in the functions that sustain its differentiation means

neglecting its cost structure.

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.25. 26. 27. 28. 29. ANS: F PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Knowledge

The problem facing differentiators, such as L. L. Bean, is how to protect the distinctiveness of their

products from imitators who are constantly searching for ways to steal away customers by offering

similar products at lower prices.

ANS: T PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

Ryanair, based in Dublin, Ireland, used the cost-leadership business model pioneered by Southwest

Airlines in the United States to become a leading player in the European air travel market.

ANS: T PTS: 1 DIF: Moderate

OBJ: 4 – Explain why each business model allows a company to outperform its rivals, reach the

value-creation frontier, and obtain above average profitability

NAT: AACSB Reflective Thinking | Strategy KEY: Application

Within the funiture market, Jacob and Edward are both consumers who want to buy furniture for its

looks rather than its functionality. Jacob and Edward are both members of the same customer group.

ANS: T PTS: 1 DIF: Difficult

OBJ: 1 – Explain why a company must define its business, and how managers do this through choices

about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Analytic | Strategy KEY: Application

Apple, Amazon.com, and eBay have used the Internet as a way to become broad differentiators.

ANS: T PTS: 1 DIF: Difficult

OBJ: 5 – Discuss why some companies can successfully make the competitive positioning decisions

that allow them to sustain their competitive advantage over time while others cannot

NAT: AACSB Reflective Thinking | Strategy KEY: Application

Clothing companies Aeropostale and Forever 21 compete for the same group of customers which

consists of females aged 18-24. These two companies would be part of different strategic groups

because they use different marketing strategies to reach their customers.

ANS: F PTS: 1 DIF: Difficult

OBJ: 5 – Discuss why some companies can successfully make the competitive positioning decisions

that allow them to sustain their competitive advantage over time while others cannot

NAT: AACSB Reflective Thinking | Strategy KEY: Application

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.MULTIPLE CHOICE

30. To create a successful business model, managers must choose a set of business-level strategies that

a. allow the company to better compete with rivals within an industry.

b. help them decide what businesses to enter and exit.

c. help build an organizational structure that contains multiple businesses.

d. work together to give a company a competitive advantage over its rivals.

e. help it to diversify to better leverage distinctive competencies.

31. 32. 33. 34. ANS: D PTS: 1 DIF: Easy

OBJ: 1 – Explain why a company must define its business, and how managers do this through choices

about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Analytic | Strategy KEY: Knowledge

Which of the following is not a generic competitive strategy?

a. Cost leadership

b. Differentiation

c. Focused cost leadership

d. Focused differentiation

e. Innovation

ANS: E PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

Which generic business-level strategy is based on the intent to outperform competitors by doing

everything a company can to lower its cost structure?

a. Cost leadership

b. Differentiation

c. Broad differentiation

d. Focused differentiation

e. None of these

ANS: A PTS: 1 DIF: Easy

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

A cost leader could reasonably be expected to reduce costs by developing distinctive competencies in

all but

a. manufacturing.

b. materials management.

c. marketing and sales.

d. information technology.

e. learning organizational structure.

ANS: B PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

The main difference between companies following a cost leadership strategy and those following a

focused cost leadership strategy is

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.35. 36. 37. 38. a. standardized market price.

b. industry life cycle stage.

c. degree of market segmentation.

d. age of the market.

e. market trajectory.

ANS: C PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

Companies are now able to pursue cost leadership and differentiation simultaneously because

a. of the emergence of flexible manufacturing technologies and new information

technologies.

b. d. markets have become more homogeneous.

c. industries have become consolidated.

barriers to entry have fallen.

e. government regulation has diminished.

ANS: A PTS: 1 DIF: Difficult

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Technology | Information Technologies KEY: Knowledge

A radio station has a distinctive competency in developing new products (shows) and wants to serve

the upscale market. Which of the following is the most appropriate generic strategy for this

company?

a. Cost leadership

b. Differentiation

c. Both cost leadership and differentiation

d. Focused low-cost approach

e. Focused differentiation approach

ANS: E PTS: 1 DIF: Difficult

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Reflective Thinking | Strategy KEY: Application

A differentiated product is a product that

a. looks different from rival products.

b. better satisfies customer needs than rival products do.

c. is packaged in a unique and eye-appealing manner.

d. always costs more than rival products.

e. always costs less than rival products.

ANS: B PTS: 1 DIF: Easy

OBJ: 1 – Explain why a company must define its business, and how managers do this through choices

about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Analytic | Strategy KEY: Knowledge

A large company produces a variety of clothing for different customer groups. This firm is pursuing

which of the following strategies?

a. Cost leadership

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.39. 40. 41. 42. b. Differentiation

c. Both cost and differentiation

d. Focus

e. Share building

ANS: B PTS: 1 DIF: Difficult

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Reflective Thinking | Strategy KEY: Application

A producer of commodity steel should pursue which of the following generic competitive strategies?

a. Growth

b. Differentiation

c. Focus

d. Cost leadership

e. Profit

ANS: D PTS: 1 DIF: Difficult

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Reflective Thinking | Strategy KEY: Application

The most expensive competitive strategy to pursue is

a. differentiation.

b. cost leadership.

c. focus.

d. growth.

e. hypercompetition.

ANS: A PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Knowledge

When a company produces a wide range of products for different customer groups, it is following a

strategy of

a. cost leadership.

b. differentiation.

c. focus.

d. market concentration.

e. share building.

ANS: B PTS: 1 DIF: Easy

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Knowledge

When technological change is low and customer needs are well established and standardized, the

most appropriate generic strategy to pursue is

a. market concentration.

b. differentiation.

c. focus.

d. asset reduction.

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.43. 44. 45. 46. e. cost leadership.

ANS: E PTS: 1 DIF: Difficult

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

Cost leadership 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.

ANS: E PTS: 1 DIF: Difficult

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

In which of the following situations does a differentiation strategy make the most sense?

a. The industry is fragmented into different customer groups, each of which has different

needs.

b. c. d. e. Customer needs are primarily satisfied by the price of the product.

There is a lot of technological change.

There are low barriers to entry and exit.

The industry is in the maturity stage of the life cycle.

ANS: A PTS: 1 DIF: Difficult

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

When a company services the broad market and has a low degree of product differentiation, it is

most likely

a. pursuing a cost-leadership strategy.

b. pursuing a differentiation strategy.

c. pursuing a focus strategy.

d. stuck in the middle.

e. pursuing both cost leadership and differentiation.

ANS: A PTS: 1 DIF: Difficult

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

Compared to a differentiator, the cost leader has the advantage over its rivals of

a. making higher profit margins.

b. being better able to withstand the negative influence of powerful suppliers and buyers.

c. having inimitable production methods.

d. enjoying higher brand loyalty.

e. being preferred by investors.

ANS: B PTS: 1 DIF: Moderate

OBJ: 4 – Explain why each business model allows a company to outperform its rivals, reach the

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.47. 48. 49. 50. value-creation frontier, and obtain above average profitability NAT: AACSB Analytic | Strategy

KEY: Comprehension

A disadvantage of pursuing a cost leadership strategy is that

a. technological change can make production methods obsolete.

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. no quality control exists.

ANS: A PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

A differentiation strategy is based on creating a product that customers perceive as being

a. about the same as other available products.

b. distinct.

c. the least costly product in the industry.

d. the most costly product in the industry.

e. somewhat faddish in nature.

ANS: B PTS: 1 DIF: Easy

OBJ: 1 – Explain why a company must define its business, and how managers do this through choices

about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Analytic | Strategy KEY: Knowledge

Mercedes-Benz automobiles are a good example of

a. moderately priced products.

b. imitative products.

c. differentiated products.

d. products that are struggling to differentiate.

e. highly competitive products.

ANS: C PTS: 1 DIF: Moderate

OBJ: 1 – Explain why a company must define its business, and how managers do this through choices

about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Reflective Thinking | Strategy KEY: Application

Differentiation is least effective when it is based on

a. physical features.

b. service quality.

c. an appeal to the customer’s psychological needs.

d. reliability.

e. product quality.

ANS: A PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.51. 52. 53. 54. Info Tech, Inc. makes complex telecommunications products, such as cellular telephones. Because

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 price.

ANS: B PTS: 1 DIF: Difficult

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Reflective Thinking | Strategy KEY: Application

A focused differentiator has the advantage of

a. charging a premium price because of its low costs.

b. pursuing differentiation and low-cost strategies simultaneously.

c. being close to the customer.

d. superior materials management.

e. protection against price wars.

ANS: C PTS: 1 DIF: Moderate

OBJ: 4 – Explain why each business model allows a company to outperform its rivals, reach the

value-creation frontier, and obtain above average profitability NAT: AACSB Analytic | Strategy

KEY: Comprehension

A shrinking market segment poses the greatest threat to a company pursuing which of the following

strategies?

a. Cost leadership

b. Differentiation

c. Focused differentiation

d. Growth

e. Both cost leadership and differentiation simultaneously

ANS: C PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

The principal dangers of a cost leadership approach include all of the following except

a. powerful buyers.

b. technological change.

c. imitation of production techniques.

d. changes in consumer tastes.

e. rivals lowering their costs.

ANS: A PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.55. 56. Jordan’s ice cream stand offers different combinations of premium flavors, cones, and toppings to

create hundreds of extravagant, customized products. Which generic strategy is Jordan following in

the restaurant industry?

a. Cost leadership

b. Differentiation

c. Focused cost leadership

d. Focused differentiation

e. Both cost leadership and differentiation simultaneously

ANS: D PTS: 1 DIF: Difficult

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Reflective Thinking | Strategy KEY: Application

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. Cost leadership

b. Differentiation

c. Stuck in the middle

d. Focused differentiation

e. Both cost leadership and differentiation simultaneously

ANS: B PTS: 1 DIF: Difficult

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Reflective Thinking | Strategy KEY: Application

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.57. 58. 59. 60. 61. Nick is often asked to perform his clown act for birthday parties and school groups, but he offers his

most inexpensive services only to children’s hospitals. Nick is pursuing which generic business

strategy?

a. Cost leadership

b. Differentiation

c. Focused cost leadership

d. Focused differentiation

e. Stuck in the middle

ANS: C PTS: 1 DIF: Difficult

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Reflective Thinking | Strategy KEY: Application

A market segment consists of a group of

a. similar products.

b. customers who have similar needs.

c. companies who produce similar products.

d. diverse products produced by one manufacturer.

e. customers who have diverse needs.

ANS: B PTS: 1 DIF: Easy

OBJ: 1 – Explain why a company must define its business, and how managers do this through choices

about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Analytic | Strategy KEY: Knowledge

Market segmentation is best described as what type of process?

a. Static

b. Regressive

c. Evolving

d. Normative

e. Revolving

ANS: C PTS: 1 DIF: Easy

OBJ: 1 – Explain why a company must define its business, and how managers do this through

choices about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Analytic | Strategy KEY: Knowledge

Companies that successfully differentiate a product often charge ____ prices for them.

a. premium

b. exorbitant

c. below cost

d. average

e. none of these choices

ANS: A PTS: 1 DIF: Easy

OBJ: 1 – Explain why a company must define its business, and how managers do this through choices

about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Analytic | Strategy KEY: Knowledge

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 targeted toward most or all of the different market segments

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.62. 63. 64. c. d. e. Making customized products to meet the specific needs of customers

Making products to meet the specific needs of a narrow group of customers

Making one product aimed toward a general rather than a specific subset of customers

ANS: E PTS: 1 DIF: Moderate

OBJ: 1 – Explain why a company must define its business, and how managers do this through choices

about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Analytic | Strategy KEY: Comprehension

Which of the following statements is true?

a. Differentiation and cost structure decisions affect one another.

b. Differentiation and cost structure decisions do not affect one another.

c. Differentiation and cost structure decisions have little effect on a company’s profitability.

d. Differentiation decisions do not affect a company’s profitability.

e. Cost structure decisions do not affect a company’s profitability.

ANS: A PTS: 1 DIF: Difficult

OBJ: 2 – Define competitive positioning and explain the tradeoffs between differentiation, cost, and

pricing options NAT: AACSB Analytic | Strategy KEY: Comprehension

Generally speaking, a differentiator chooses to divide its market into

a. one generic market.

b. two or three major segments.

c. niches and segments in which customers will pay premium prices.

d. as few segments as possible.

e. None of these.

ANS: C PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Knowledge

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. need not be concerned that a differentiator will try to imitate the company’s products or

services.

e. none of these.

ANS: B PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Knowledge

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.65. 66. 67. 68. 69. A company pursuing a cost-leadership strategy does which of the following?

a. b. c. d. Includes substandard components in the product to keep costs low

Chooses strategies that keep costs as low as feasible and are effective

Keeps advertising expenses at a maximum

Relies on patent protections to keep costs low

e. None of these

ANS: B PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Comprehension

If a company uses a focused cost-leadership strategy, it competes in the market segments where

a. it can operate at no cost disadvantage.

b. where cost is not a high concern.

c. it can operate at a minimal cost disadvantage.

d. there is frequently little or no competition.

e. none of these.

ANS: A PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Knowledge

A business model based on differentiation requires a company to

a. make strategic choices that reinforce each other and increase the value of a good or service

in the eyes of customers.

b. c. d. serve several market segments simultaneously to take full advantage of differentiation.

systematically raise its prices at stipulated times.

develop a functional organization structure.

e. all of these.

ANS: A PTS: 1 DIF: Moderate

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Knowledge

A strategic group is a group of companies within a particular industry

a. with the same overhead costs.

b. with the same cost structure.

c. that are pursuing a similar business model.

d. that are using the same suppliers.

e. all of these choices.

ANS: C PTS: 1 DIF: Easy

OBJ: 4 – Explain why each business model allows a company to outperform its rivals, reach the

value-creation frontier, and obtain above average profitability NAT: AACSB Analytic | Strategy

KEY: Knowledge

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. Yankee Candle Company is utilizing which of the following?

a. Cost leadership

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.70. 71. b. Focused cost leadership

c. Market segmentation

d. Product differentiation

e. A strategic group

ANS: D PTS: 1 DIF: Difficult

OBJ: 1 – Explain why a company must define its business, and how managers do this through choices

about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Reflective Thinking | Strategy KEY: Application

Lilly’s Beauty Company sells haircare products such as shampoo, conditioner, and hairspray. These

products are targeted at the average or typical customer and prices are typically low in comparison to

other haircare products. Which of the following approaches to market segmentation is Lilly’s Beauty

Company using?

a. No market segmentation

b. Low market segmentation

c. Medium market segmenation

d. High market segmentation

e. Focused market segmentation

ANS: A PTS: 1 DIF: Difficult

OBJ: 1 – Explain why a company must define its business, and how managers do this through choices

about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Reflective Thinking | Strategy KEY: Application

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. No market segmentation

b. Low market segmentation

c. Medium market segmentation

d. High market segmentation

e. Focused market segmentation

ANS: E PTS: 1 DIF: Difficult

OBJ: 1 – Explain why a company must define its business, and how managers do this through choices

about which customer groups, customer needs, and distinctive competencies to pursue

NAT: AACSB Reflective Thinking | Strategy KEY: Application

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.72. 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 bedside. Which generic

business-level strategy is The Luxury Hotel utilizing?

a. Cost leadership

b. Differentiation

c. Focus

d. Strategic group

e. Brand loyalty

ANS: B PTS: 1 DIF: Difficult

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Reflective Thinking | Strategy KEY: Application

ESSAY

73. What does the broad differentiation business model look like and how can this model benefit

companies that employ it?

ANS:

Broad differentiation is a business model that seeks to improve a company’s differentiation and cost

structure simultaneously. Companies following this model have pursued a differentiation approach, but

they have done so in a way that allows them to lower their cost structure. Broad differentiators may

have a cost structure that is higher than the cost leaders and a level of product differentiation that is

less than the most differentiated product in the market. However, they may be able to provide more

value to customers if they can balance the tradeoff between differentiation and cost.

The broad differentiation model allows a company to realize the benefits of being in the middle

between differentiators and cost leaders, but this situation can be desirable if they can still offer a

somewhat differentiated product at a premium price (compared to cost leaders). Over time, successful

broad differentiators can grow their profits, which gives them more capital to reinvest in their business

and continually improve their business model, and in turn continue to increase both differentiation and

lower their cost structure. Over time, differentiators and cost leaders may find that broad

differentiators have completely taken away their competitive advantage.

PTS: 1 DIF: Difficult

OBJ: 4 – Explain why each business model allows a company to outperform its rivals, reach the

value-creation frontier, and obtain above average profitability NAT: AACSB Analytic | Strategy

KEY: Analysis

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.74. 75. 76. What is meant by the term strategic group and why is it important for managers to understand this

term to position their companies in a competitive marketplace?

ANS:

A company’s business model determines how it will compete for customers in a particular market, and

typically several companies are competing for the same set of customers. This means that the

strategies of companies affect the strategies pursued by the others. A strategic group refers to a group

of firms within an industry that are competing for the same customers and using the same business

model. Cost leaders comprise one strategic group; differentiators comprise another; and broad

differentiators, focus cost-leaders, and focus differentiators comprise still others.

Strategic group analysis helps managers to understand the sets of strategies that their rivals are using.

Once they understand this, they can then position themselves to better appeal to customers by

identifying which competencies and resources they should be trying to develop. Another benefit of

strategic group analysis is that it can help managers better understand the way changes taking place in

an industry are affecting its relative standing concerning differentiation and cost structure. Relative

standing on these dimensions determines a firm’s profit potential. Finally, because strategic group

analysis forces managers to focus on the activities of companies in the other strategic groups, they are

in a better position to identify emerging threats from companies outside their strategic group. This also

helps them understand opportunities and threats that may arise due to changes in the environment.

PTS: 1 DIF: Difficult

OBJ: 4 – Explain why each business model allows a company to outperform its rivals, reach the

value-creation frontier, and obtain above average profitability NAT: AACSB Analytic | Strategy

KEY: Synthesis

For each of the generic strategiescost leadership, differentiation, and focusdescribe one advantage

and one disadvantage.

ANS:

Students should mention items from the following lists. Cost leadership provides protection against

rivalry and price wars, protection against price pressure from suppliers and buyers, competitive pricing

compared to the price of substitutes, and the creation of high entry barriers. Disadvantages include a

vulnerability to imitation and the risk of losing sight of customer needs or technological advances.

Differentiation provides lessened rivalry due to brand loyalty, protection from price pressure from

suppliers, low customer defection rates, protection from substitutes, and high barriers to entry.

Disadvantages include the risk of losing their source of uniqueness, risk from changing customer

preferences, and price competition.

Focus provides a niche strategy that protects against rivals and new entrants, power over buyers, and

lower risk from substitutes. Disadvantages include the risks from powerful suppliers, high costs,

disappearance of the niche, and vulnerability to competition from larger firms.

PTS: 1 DIF: Difficult

OBJ: 3 – Identify the choices managers make to pursue a business model based on a combination of

the primary generic business-level strategies: cost leadership, differentiation, and focus

NAT: AACSB Analytic | Strategy KEY: Analysis

What factors may account for a company’s failure to achieve effective competitive positioning? What

actions should a company take to avoid such failures?

ANS:

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.Among the factors that account for a company’s failure to achieve effective competitive positions are

the following: failure to achieve proper fit between strategies and business model, lack of harmony

between business-level strategies, failure to perform strategic-group analysis, failure to identify and

respond to changing business opportunities and threats in the industry environment, loss of

competitive advantage, loss of control of the business model, increase in company size and

complexity, changes in the external environment, and attacks from more specialized or low-cost

competitors.

To avoid failures in competitive positioning a company needs to stay in touch with itself, its external

environment, and its competitors. More specifically, a company must always assure that its business-

level model and its strategies are compatible. Moreover, all business-level strategies must be internally

harmonious. Conflict between strategies at this level will result in serious problems. Companies must

examine the strategic group or groups to which they belong or to which they compare themselves to be

assured that they are still comparing to the correct group(s). Continuous environmental scanning is

also necessary to discern changes in industry opportunities and threats. Growth in company size and

complexity can also cause problems in that they may necessitate changes in competitive positioning.

Changes in the overall external environment may affect competitive positioning. The external

environment must always be monitored for potential internal changes it may require a company to

make. Attacks from more specialized or low-cost competitors may require adjusting a company’s

business model or its competitive positioning. Different approaches may be required in the face of

attacks. In summary, a company should always be alert for changes that occur within itself, its

environments, and its competitive position. What works in one instance will not always work in

another instance.

PTS: 1 DIF: Difficult

OBJ: 5 – Discuss why some companies can successfully make the competitive positioning decisions

that allow them to sustain their competitive advantage over time while others cannot

NAT: AACSB Analytic | Strategy KEY: Evaluation

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.