Differentiation, Cost Leadership, and Integration Answer Key Part 1

Chapter 06 Business Strategy: Differentiation, Cost Leadership, and Integration Answer Key Multiple Choice Questions 1. A _____ primarily details the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market. A. business-level strategy B. code of ethics C. mission statement D. functional-level strategy A business-level strategy details the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market. It may involve a single product or a group of similar products that use the same distribution channel. 2. Which of the following is a firm effect that has an impact on the competitive advantage of a firm? A. The exit barriers within the industry in which the firm operates B. The number of companies operating in the industry in which the firm operates C. The intensity of rivalry among existing companies in the firm's chosen industry D. The value and the cost position of the firm relative to its competitors To formulate an effective business strategy, managers need to keep in mind that competitive advantage is determined jointly by industry and firm effects. At the firm level, performance is determined by value and cost positions relative to competitors. This is the firm's strategic position. 3. A firm's business strategy will lead to a competitive advantage if it allows the firm to: A. execute the same activities performed by the rivals in a similar manner. B. reduce the value gap. C. perform different activities than its rivals. D. position itself below the productivity frontier. Business strategy is more likely to lead to a competitive advantage if it allows firms to either perform similar activities differently, or perform different activities than their rivals that result in creating more value or offering similar products or services at lower cost. 4. When a firm makes choices between a cost or value position to achieve competitive advantage, it is primarily involved in _____. A. collective bargaining B. strategic tradeoffs C. arbitrati on D. mediati on To achieve a desired strategic position, managers must make strategic trade-offs— choices between a cost or value position. 5. Firms pursuing a differentiation strategy primarily seek to: A. keep their cost structures lower than that of the cost leader. B. reduce the value gap to gain a competitive advantage. C. provide products that are a direct imitation of the competitors' products. D. create higher customer perceived value than the value that competitors create. A differentiation strategy seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels. 6. Home Smart Inc. is a chain of supermarkets that sells its products at higher prices than its competitors. Yet, the supermarket chain has a large customer base due to its wide product portfolio and superior customer service. Which of the following generic business strategies has Home Smart adopted in this scenario? A. Costleadership B. Differentiati on C. Market penetration D. Product diversification Home Smart has adopted the differentiation strategy. A differentiation strategy seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels. 7. Free Color Inc. is an apparel company that caters to the highly price-conscious customers. Through its simple apparel designs, acceptable quality levels, and minimal customer service, the company has been able to sell its merchandise at the lowest prices in the industry. Which of the following generic business strategies is Free Color applying? A. Costleadership B. Differentiati on C. Niche marketing D. Product diversification Free Color is applying the cost-leadership strategy. A cost-leadership strategy seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers. 8. Why are differentiation and cost-leadership strategies referred to as generic business strategies? A. They can be simultaneously pursued by a firm without any trade-offs. B. They can be used by any organization independent of industry context. C. They require similar strategic positions in order to increase a firm's chances to gain competitive advantage. D. They can be applied only by businesses which have a competitive advantage. Differentiation and cost-leadership strategies are called generic strategies because they can be used by any organization—manufacturing or service, large or small, for-profit or non-profit, public or private, U.S. or non-U.S.—in the quest for competitive advantage, independent of industry context. 9. True Empire Autos Inc. is an automobile company known for its luxury cars and follows a differentiation strategy. In this scenario, True Empire Autos should ideally compare its strategic position with a(n) _____. A. automobile company that sells preowned cars B. automobile company that sells high-end, premium cars C. automobile company that manufactures economy cars D. pen manufacturing company that follows a differentiation strategy True Empire Autos should ideally compare its strategic position with an automobile company that sells high-end, premium cars. A differentiation strategy seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels. The idea is to compare True Empire Autos' strategic position with the next-best differentiator. In this case, it will be an automobile company that sells high-end luxury cars. 10. Wear Crush Inc. is an apparel company known for its affordable clothes that follows a cost-leadership strategy. In this scenario, Wear Crush should ideally compare its strategic position with: A. a company that sells wristwatches at affordable prices. B. a luxury apparel company that sells designer clothes. C. an apparel company popular among price-conscious customers. D. an online company that sells customized pet clothing. In this scenario, Wear Crush should ideally compare its strategic position with an apparel company popular among price-conscious customers. A cost-leadership strategy seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers. The idea is to compare Wear Crush Inc.'s strategic position with another cost leader. In this case, it will be an apparel company popular among price-conscious customers. 11. In a focused cost-leadership strategy, a firm: A. caters to the segment of the market that is least costsensitive. B. provides high-priced products for many different segments of the mass market. C. delivers low-cost products and services to a specific, narrow part of the market. D. focuses on reducing the economic value created to drive down costs. A focused cost-leadership strategy is the same as the cost-leadership strategy except with a narrow focus on a niche market. 12. Green Curry is a restaurant that caters to the needs of a small percentage of highly health-conscious consumers. It has an all-organic, vegan menu. Since there are very few restaurants that offer the same unique services, customers are willing to pay a premium price for its products and services. In this scenario, Green Curry is following a _____. A. product diversification strategy B. liquidation strategy C. mass market strategy D. focused differentiation strategy Green Curry is following a focused differentiation strategy. The focused differentiation strategy is same as the differentiation strategy except with a narrow focus on a niche market. A differentiation strategy seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels. 13. A company that uses a differentiation strategy can achieve a competitive advantage as long as its: A. economic value created is greater than that of its competitors. B. value gap is lower than that of its competitors. C. strategic position is below the productivity frontier. D. products and services create a lower consumer surplus than that of its competitors. A company that uses a differentiation strategy can achieve a competitive advantage as long as its economic value created (V - C) is greater than that of its competitors. 14. Both Viten Electronics Inc. and JL Electronics Inc. incur a cost of $400 to manufacture an LED television. However, the economic value created by JL Electronics is more than that created by Viten Electronics. What does this indicate? A. Viten Electronics has a competitive advantage over JL Electronics. B. Both Viten Electronics and JL Electronics have achieved competitive parity. C. JL Electronics can charge a premium price on its televisions. D. Viten Electronics has created a higher value gap than JL Electronics. JL Electronics can charge a premium price on its televisions. A company that uses a differentiation strategy can achieve a competitive advantage as long as its economic value created (V - C) is greater than that of its competitors. This allows the firm to charge a premium price, reflecting its higher value creation. 15. A firm pursuing a differentiation strategy as opposed to a low-cost strategy will: A. focus its research and development on product technologies to add uniqueness. B. concentrate on leveraging its economies of scale through process technologies. C. build an organization structure that relies on strict budget controls. D. create a lower economic value as compared to its competitors. The focus of competition in a differentiation strategy tends to be on unique product features, service, and new product launches, or on marketing and promotion rather than price. A differentiator would focus research and development on product technologies in order to add uniqueness. 16. When a differentiator charges a similar price as its competitors in the same strategic group but offers more perceived value, it: A. loses its competitive advantage. B. gains market share from other firms. C. lowers the economic value created. D. results in diseconomies of scale. When a firm is able to offer a differentiated product or service and can control its costs at the same time, it is able to gain market share from other firms by charging a similar price but offering more perceived value. 17. Both Myoco Electronics Inc. and Electra Series Inc. have achieved cost parity in the television market. To gain and sustain a competitive advantage against Electra Series, Myoco Electronics should: A. achieve differentiation parity with Electra Series. B. keep its value gap lower than that of Electra Series. C. create greater perceived economic value than Electra Series. D. increase its cost of production to more than that of Electra Series. To gain and sustain a competitive advantage against Electra Series, Myoco Electronics should create greater perceived economic value than Electra Series. A company that uses a differentiation strategy can achieve a competitive advantage as long as its economic value created is greater than that of its competitors. 18. Which of the following will hamper a differentiator's ability to achieve a competitive advantage? A. Lower production costs B. Premium prices C. Lower value gap D. Customized goods A higher value gap enables a differentiator to achieve a competitive advantage, which allows it to charge a premium price, reflecting its higher value creation. A lower value gap, however, will hamper a differentiator's ability to achieve a competitive advantage. 19. Whole Foods differentiates itself from competitors by offering top-quality foods obtained through sustainable agriculture. This business strategy implies that Whole Foods focuses on: A. decreasing the existing value gap by providing luxury goods to customers. B. maintaining a less steeper learning curve as compared to its competitors. C. increasing the perceived value created for customers, which allows it to charge a premium price. D. lowering its costs compared to its competitors', while offering adequate value for its products and services. As given in Strategy Highlight 6.1, Whole Foods differentiates itself from competitors by offering top-quality foods obtained through sustainable agriculture. This business strategy implies that Whole Foods focuses on increasing the perceived value created for customers, which allows it to charge a premium price.