Mgmt 425 Midterm – Pate – Flashcards
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Strategy
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A plan of action a firm takes to gain and sustain superior performance relative to competitors ex. Ryanair's strategy is to make sure flights are as low as $20 while the lack in customer service.
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Competitive Advantage
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Superior performance relative to other competitors in the same industry or industry average ex. Apple's dominance over microsoft, amazon, samsung, and hp in the tablet computer industry since the first ipad was released.
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Sustainable Competitive advantage
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outperforming competitors or the industry average over a prolonged period of time ex. TrueLink Corp. was able to hold its market share of 68 percent in the social networking industry for more than three years.
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Stakeholder
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Organizations, groups, and individuals that can affect or are affected by a firm's actions. Ex. If CSULB education system disintegrate, affects students' attending and alumni's credibility.
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Corporate Social Responsibility
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A framework that helps firms recognize and address the economic, legal, social/ethical and philanthropic responsibilities that society has on the business enterprise at a given point in time. ex. Walmart has a social responsibility to address child labor sweat shops in foreign countries; otherwise, bad PR on their part.
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Mission
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Describes what an (1) organization actually does, (2) the product and services it plans to provide, and (3) the markets in which will compete ex. Airbus translates this ultimate goal into its mission by manufacturing the world's best aircraft, with passengers at heart and airlines in mind.
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Vision
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A statement about what an organization ultimately (1) wants to accomplish and (2) what captures the company's aspiration ex. TFA's (Teach For America organization) vision is to attain an excellent education for all children
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strategic leadership
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Executives use of power and influence in the management of others when pursuing an organization's goals Ex. What roles do strategic leaders play? What are the firm's vision, mission, and values? What is the firm's process for creating strategy (how does strategy come about)?
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Organizational values
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Ethical standards and norms that govern the behavior of individuals within a firm or organization EX: Organizational values can drive strategic decision making, and what can happen if a company deviates from its core values
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scenario planning
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Strategy planning activity in which managers apply different what if scenarios to anticipate plausible futures EX: New laws might expand employee health care
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industry
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A group of companies, usually with the same suppliers and buyers, who often offer similar products or services to meet specific customer needs EX: An industry is where firms and companies come together and compete against each other for sales like the computer industry [hp vs microsoft vs apple vs toshiba vs lenovo]
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porter's five forces model
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A framework that determines the profit potential of an industry and shapes a firm's competitive strategy. OR Identifies and analyzes 5 competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths. 1. Competition in the industry 2. Potential of new entrants into industry 3. Power of suppliers 4. Power of customers 5. Threat of substitute products
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Why is it important for top management of a company to show commitment and involvement toward organizational values?
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Employees tend to follow values practiced by strategic leaders. They observe the day-to-day decisions of top managers and quickly decide whether managers are merely paying lip service to the company's stated values. True values must be lived with integrity, especially by the top management team. Unethical behavior by top managers is like a virus that spreads quickly throughout an entire organization. It is imperative that strategic leaders set an example of ethical behavior by living the values.
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A firm's strategic position is likely to be strong when:
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A firm's strategic position relates to its ability to create value for customers (V) while containing the cost to do so (C). Competitive advantage flows to the firm that is able to create as large a gap as possible between the value the firm's product or service generates and the cost required to produce it.
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Strategic group
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The set of companies with similar strategy within a specific industry EX: Like delta, virgin, and jetblue airlines offering excellent customer service at a great deal.
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Companies in the same strategic group are _____ to each other. A. complementors B. direct competitors C. strategic partners D. shareholders
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B. Direct competitors Companies in the same strategic group are direct competitors. The rivalry among firms of the same strategic group is generally more intense than the rivalry between strategic groups: intra-group rivalry exceeds inter-group rivalry.
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Home Cart, Home Essentials, Good Store, and Price King are all departmental stores that compete for advantage against each other through everyday low-pricing and discounts on bulk purchases. All the four stores cater to the needs of highly price-sensitive customers. Thus, together Home Cart, Home Essentials, Good Store, and Price King form a _____. A. focus group B. command group C. strategic group D. cross-functional group
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C. Strategic Group Together Home Cart, Home Essentials, Good Store, and Price King form a strategic group. A strategic group is a set of companies that pursue a similar strategy within a specific industry in their quest for competitive advantage. Companies in the same strategic group are direct competitors.
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Golden Harvest is a restaurant located inside a five-star hotel. It caters mainly to customers who are concerned about quality dining rather than the prices. In this scenario, which of the following will be a part of Golden Harvest's strategic group? A. A nearby fast food restaurant B. A food kiosk in an adjacent subway station C. A premium rooftop restaurant in the same city D. A mobile food cart parked opposite to the five-star hotel
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C. A premium rooftop restaurant in the same city
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85. Which of the following statements is true about strategic groups? A. It is not possible to have two different strategic groups within the same industry. B. Rivalry within the same strategic group tends to be lower than rivalry between different strategic groups. C. Profitability varies between different strategic groups. D. Companies within the same strategic group are complementors to each other.
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C. Profitability varies between different strategic groups. Some strategic groups tend to be more profitable than others. This difference implies that firm performance is determined not only by the industry to which the firm belongs, but also by its strategic group membership.
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True West Airlines Inc. follows a cost-leadership strategy. Which of the following firms will most likely be its direct competitor? A. Pioneer Airlines Inc., which follows a cost-increase strategy B. West Railways, which follows a differentiation strategy C. Jet King Airlines Inc., which follows a low-cost strategy D. Blue Cabs Inc., which follows a cost-leadership strategy
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C. Jet King Airlines Inc., which follows a low-cost strategy Jet King Airlines Inc., which follows a low-cost strategy, will be True West Airlines Inc.'s direct competitor. Companies in the same strategic group are direct competitors
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core competencies
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Unique strengths within a firm, which differentiate its products and services from those of its rivals by creating higher value for the customer OR offering products and services of comparable value at a lower cost. OR A company's unique strength that provides a competitive advantage in the marketplace, delivers value to customers, and contributes to continued organizational growth.
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Dandelions Max is a consumer electronics company. It has acquired an edge over its competitors through its ability to provide breakthrough technology at the lowest price in the market. This advantage of Dandelions Max best exemplifies a _____. A. markup B. resource flow C. capital gain D. core competency
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D. core competency Core competencies allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost.
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Amazon.com's ability to provide the largest selection of items online, combined with superior IT systems and customer service, can be referred to as its _____. A. equity reserve B. economic equity C. core competency D. capital gain
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C. core competency Amazon.com's core competencies lie in providing the largest selection of items online, combined with superior IT systems and customer service.
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Describe the core competencies of any three successful companies in today's business environment.
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• Coca-Cola: Leveraging one of the world's most recognized brand names (based on its original "secret formula") into a diverse lineup of soft drinks and other beverages. • Facebook: Connecting over one billion social media users worldwide. • General Electric: Designing and implementing efficient management processes, developing and training leaders, leveraging deep industrial engineering expertise. • Honda: Designing and manufacturing of small but powerful and highly reliable internal combustion engines. • Starbucks: Providing high-quality beverages and selected food items, combined with superior customer service in a friendly and welcoming environment.
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Tangible Resources
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Resources that have physical attributes and thus are visible EX: Labor, capital, land, buildings, plant, equipment, and supplies
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The management of a company is assessing the value of all the tangible resources the company owns. Which of the following will be included in this assessment? A. The company's copyrights B. The company's brand equity C. The company's patents D. The company's machinery
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D. The company's machinery The company's plant and machinery will be included in the assessment of the value of all the tangible resources the company owns. Tangible resources have physical attributes and are visible. Examples of tangible resources are labor, capital, land, buildings, plant, equipment, and supplies.
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Which of the following is an example of a firm's intangible resources? A. The firm's cash at bank B. The firm's finished goods inventory C. The firm's organizational culture D. The firm's land and building
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C. The firm's organizational culture The firm's organizational culture should be categorized under its intangible resources. Intangible resources have no physical attributes and thus are invisible. Examples of intangible resources are a firm's culture, its knowledge, brand equity, reputation, and intellectual property.
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10. Which of the following statements accurately brings out the difference between tangible and intangible resources? A. Tangible resources contribute to a company's competitive advantage, whereas intangible resources fail to do the same. B. Tangible assets can be bought on the open market, whereas intangible assets cannot be easily purchased. C. Tangible resources take a longer time to build, whereas intangible assets can be built comparatively easily. D. Tangible assets are difficult to imitate, whereas intangible assets can be easily replicated.
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B. Tangible assets can be bought on the open market, whereas intangible assets cannot be easily purchased. Tangible assets, like buildings or computer servers, can be bought on the open market by any comers who have the necessary cash. However, a brand name must be built, often over long periods of time.
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GN Corp. and BC Inc. are two competing firms in the same industry. GN Corp.'s tangible assets are valued at $15 billion and its intangible assets are valued at $35 billion. BC Inc.'s tangible assets are valued at $5 billion and its intangible assets are valued at $45 billion. What can be concluded from this information? A. It is easier to buy intangible assets with cash than tangible assets. B. It is likely that BC Inc. is better enabled than GN Corp. to gain and sustain a competitive advantage. C. It takes longer time to build tangible assets than intangible assets. D. There is no resource heterogeneity between the two firms, BC Inc. and GN Corp. as they operate in the same industry.
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B. It is likely that BC Inc. is better enabled than GN Corp. to gain and sustain a competitive advantage. It can be concluded that BC Inc. is better positioned than GN Corp. to gain and sustain a competitive advantage. Competitive advantage is more likely to spring from intangible rather than tangible resources. Tangible assets, like buildings or computer servers, can be bought on the open market by any comers who have the necessary cash. However, a brand name must be built, often over long periods of time.
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13. Intangible assets add great value to a firm primarily because the firm's: A. reputation and brand equity are accumulated quickly and can be leveraged easily. B. knowledge and culture take time to develop and are generally difficult to imitate. C. tangible assets require a higher degree of capital than its intangible assets. D. capabilities are by nature typically tangible.
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B. knowledge and culture take time to develop and are generally difficult to imitate. Intangible assets add great value to a firm primarily because the firm's culture and knowledge take time to develop and are generally difficult to imitate. Competitive advantage is more likely to spring from intangible rather than tangible resources. A firm's brand name, reputation, culture, knowledge, and intellectual property must be built, often over long periods of time.
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Intangible Resources
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Resources that do not have physical attributes and thus are invisible EX: Culture, knowledge, brand equity, reputation, and intellectual property
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46. The share price of Groupon, a daily-deal website, fell by 90 percent just a year after its successful initial public offering. The firm was not able to sustain its competitive advantage because of the emergence of other daily-deal sites that were able to better serve the needs of local markets and specific population groups. Which of the following is the most accurate inference from this example? A. Groupon's competency was not hard to imitate. B. Groupon's competency was built more on an intangible resource than on a tangible one. C. Groupon operated in an industry where the barriers to entry were high. D. Groupon invested in resources that were invaluable and common.
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A. Groupon's competency was not hard to imitate. As discussed in Strategy Highlight 4.1, to target and fine-tune its local deals, Groupon relies heavily on human labor to do the selling. Barriers to entry in this type of business are nonexistent because Groupon's competency is built more on a tangible resource (labor) than on an intangible one (proprietary technology). Given that Groupon's valuable and rare competency was not hard to imitate, hundreds of new ventures (so-called "Groupon clones") rushed in to take advantage of the opportunity.
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Value Chain
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The internal activities a firm engages in when transforming inputs into outputs; each activity adds incremental value. (1) Primary activities (Customer service, price, manufacturing, logistics) directly add value; (2) support activities (organizations, human resources, technology) add value indirectly
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76. The value chain describes the: A. competitive challenges a firm faces in a highly dynamic external environment. B. internal activities a firm engages in when transforming inputs into outputs. C. current consequences a firm experiences due to its decisions in the past. D. strategic advantages a firm experiences when its resources lack causal ambiguity.
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B. internal activities a firm engages in when transforming inputs into outputs. The value chain describes the internal activities a firm engages in when transforming inputs into outputs. Each activity the firm performs along the horizontal chain adds incremental value—raw materials and other inputs are transformed into components that are finally assembled into finished products or services for the end consumer.
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77. According to the value chain analysis, which of the following is a primary activity? A. Research and development B. Human resources management C. Accounting and finance D. Marketing and sales
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D. Marketing and sales The primary activities add value directly as the firm transforms inputs into outputs—from raw materials through production phases to sales and marketing and finally customer service. Primary activities are: supply chain management, operations, distribution, marketing & sales, and after-sales service.
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79. In a generic value chain, a firm's after-sales service will be referred to as its _____. A. primary activity B. support activity C. static resource D. resource flow
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A. Primary Activity The primary activities add value directly as a firm transforms inputs into outputs—from raw materials through production phases to sales and marketing and finally customer service. Primary activities are: supply chain management, operations, distribution, marketing & sales, and after-sales service.
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To help a firm achieve a competitive advantage, each distinct activity performed in the value chain needs to: A. contribute to the firm's strategic position as either low-cost leader or differentiator. B. reduce the immobility and the heterogeneity of the firm's resources. C. create a static fit between the company's internal resources and the external environment. D. reduce the causal ambiguity and the social complexity of the firm's source of success.
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A. contribute to the firm's strategic position as either low-cost leader or differentiator. To help a firm achieve a competitive advantage, each distinct activity performed in the value chain needs to contribute to the firm's strategic position as either low-cost leader or differentiator. Each distinct activity performed needs to either add incremental value to the product or service offering or lower its relative cost.
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How do firms benefit from value chain analysis?
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A careful analysis of the value chain allows managers to obtain a more detailed and fine-grained understanding of how the firm's economic contribution (V - C) breaks down into a distinct set of activities that help determine perceived value (V) and the costs (C) to create it. The value chain concept can be applied to basically any firm, from those in manufacturing industries to those in high-tech ones or service firms.
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In the context of value chain, distinguish primary activities from secondary activities.
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Primary activities are firm activities that add value directly by transforming inputs into outputs as the firm moves a product or service horizontally along the internal value chain. Support activities are firm activities that add value indirectly, but are necessary to sustain primary activities.
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Provide examples of the primary activities in a firm's value chain.
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The primary activities of a firm add value directly as the firm transforms inputs into outputs—from raw materials through production phases to sales and marketing and finally customer service. Primary activities are: supply chain management, operations, distribution, marketing & sales, and after-sales service.
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Provide examples of the secondary activities in a firm's value chain.
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Support activities of a firm add value indirectly. These activities—such as research and development (R&D), information systems, human resources, accounting and finance, and firm infrastructure including processes, policies, and procedures—support each of the primary activities.
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SWOT (Strength, Weakness, Opportunities, Threats) analysis (p. 117)
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A framework that allows managers to synthesize insights obtained from an internal analysis of the company's strengths and weaknesses with those from an analysis of external opportunities and threats. OR A method used to evaluate the strengths, weaknesses, opportunities and threats involved within the company.
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Jeremy a manager at a multinational organization is trying to carefully scan and link the firm's internal environment to its external environment. The insights from this analysis will allow him to effectively leverage the company's internal strengths to exploit external opportunities, while mitigating internal weaknesses and external threats. In this scenario, which of the following managerial tools is Jeremy employing? A. Blake Mouton managerial grid B. Ansoff's matrix C. BCG analysis D. SWOT analysis
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D. SWOT analysis In this scenario, Jeremy is using the SWOT analysis. SWOT analysis is a framework that allows managers to synthesize insights obtained from an internal analysis of the company's strengths and weaknesses (S and W) with those from an analysis of external opportunities and threats (O and T).
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83. In the context of the SWOT matrix, which of the following best exemplifies a firm's internal strength? A. Increase in a firm's customer loyalty B. Growth in the size of the market in which a firm operates C. Rise in the income of the demographic segment to which a firm caters D. Loss of a competitor's reputation
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A. Increase in a firm's customer loyalty The increase in a firm's customer loyalty best exemplifies a firm's internal strength. Strengths and weaknesses are internal to an organization, whereas opportunities and threats are external to the organization.
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85. In the context of SWOT analysis, a firm can develop an offensive strategic option primarily by: A. combining an internal weakness with an external threat. B. leveraging its internal strengths to minimize external threats. C. leveraging an external opportunity to overcome an internal threat. D. using its internal strengths to exploit external opportunities.
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D. using its internal strengths to exploit external opportunities. In the context of SWOT analysis, a firm can develop an offensive strategic option primarily by using its internal strengths to exploit external opportunities. In the SWOT matrix, firms focus on the Strengths-Opportunities quadrant to derive "offensive" alternatives by using an internal strength in order to exploit an external opportunity.
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86. In the context of SWOT analysis, which of the following best exemplifies a firm's internal weakness? A. Fall in the purchasing power of the firm's customers B. Increased competition in the industry where the firm operates C. Irregularity in the raw materials supply throughout the industry D. Decline in the firm's market share
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D. Decline in the firm's market share In the context of SWOT analysis, decline in a firm's market share best exemplifies a firm's internal weakness. Strengths and weaknesses are internal to an organization, whereas opportunities and threats are external to the organization.
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87. In the context of SWOT analysis, which of the following best exemplifies a firm's external opportunity? A. An increase in its financial resources B. An increase in its brand equity C. An increase in its customers' disposable income D. An increase in its employee productivity
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C. An increase in its customers' disposable income In the context of SWOT analysis, an increase in its customers' disposable income best exemplifies a firm's external opportunity. Strengths and weaknesses are internal to an organization, whereas opportunities and threats are external to the organization.
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88. Which of the following is a drawback of the SWOT analysis? A. The SWOT analysis takes into account only the internal environment of a firm, ignoring the equally important external environment. B. This framework is only applicable to the manufacturing industries; it is ineffective when applied to the service firms. C. A problem with this framework is that a strength can also be a weakness, and that an opportunity can also simultaneously be a threat. D. A drawback of this framework is that it allows managers to merely evaluate a firm's current situation, and not its future prospects.
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C. A problem with this framework is that a strength can also be a weakness, and that an opportunity can also simultaneously be a threat. Although the SWOT analysis is a widely used management framework, however, a word of caution is in order. A problem with this framework is that a strength can also be a weakness, and that an opportunity can also simultaneously be a threat.
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89. To make the SWOT analysis an effective management tool, a strategist must first: A. distinguish a firm's resources, competencies, and capabilities from each other. B. separate a firm's primary activities from support activities. C. analyze the pros and cons of strategic options. D. scan a firm's internal and external environments.
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D. scan a firm's internal and external environments. To make the SWOT analysis an effective management tool, a strategist must first conduct a thorough external and internal analysis.
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Explain SWOT Analysis
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SWOT analysis is a framework that allows managers to synthesize insights obtained from an internal analysis of the company's strengths and weaknesses (S and W) with those from an analysis of external opportunities and threats (O and T). Strategists synthesize insights from an internal analysis of the company's strengths and weaknesses with those from an analysis of external opportunities and threats, using the SWOT analysis.
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How do managers benefit from conducting a SWOT analysis?
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A SWOT analysis allows managers to evaluate a firm's current situation and future prospects by simultaneously considering internal and external factors. The SWOT analysis encourages managers to scan the internal and external environments, looking for any relevant factors that might affect the firm's current or future competitive advantage. The focus is on internal and external factors that can affect—in a positive or negative way—the firm's ability to gain and sustain a competitive advantage.
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125. In the context of SWOT analysis, distinguish the factors that are internal to an organization from the factors that are external to it.
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Internal strengths (S) and weaknesses (W) concern resources, capabilities, and competencies. Whether they are strengths or weaknesses can be determined by applying the VRIO framework. External opportunities (O) and threats (T) are in the firm's general environment and can be captured by PESTEL and Porter's five forces analyses.
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126. How do managers use the SWOT matrix to develop strategic alternative?
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Managers use the SWOT matrix to develop strategic alternatives for a firm using a four step process: Focus on the Strengths-Opportunities quadrant to derive "offensive" alternatives by using an internal strength in order to exploit an external opportunity. Focus on the Weaknesses-Threats quadrant to derive "defensive" alternatives by eliminating or minimizing an internal weakness in order to mitigate an external threat. Focus on the Strengths-Threats quadrant to use an internal strength to minimize the effect of an external threat. Focus on the Weaknesses-Opportunities quadrant to shore up an internal weakness to improve its ability to take advantage of an external opportunity.
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Shareholders
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Individuals or organizations that own one or more shares of stock in a public company EX: Shareholders are legal owners of public companies
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35. With regard to the VRIO framework, Crocs Shoes was unable to sustain its competitive advantage primarily because its products were: A. invaluable and common. B. easy to imitate. C. extremely expensive. D. non-substitutable.
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B. Easy to imitate Competitive advantage cannot be sustained if the underlying capability can easily be replicated and can thus be directly imitated. Despite its patents and celebrity endorsements, other firms were able to more or less directly copy Crocs shoes, taking a big bite into its profits.
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Which of the following businesses is required by law to make its data available to the public? A. A restaurant owned and managed by an individual proprietor B. A premium salon owned by two business partners C. A carpet manufacturing unit runs solely by a third-generation entrepreneur D. A software company with over 300 shareholders
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D. A software company with over 300 shareholders A software company with over 300 shareholders is required by law to make its data available to the public. Publicly traded firms are required to file the Form 10-K (or 10-K report) annually with the U.S. Securities and Exchange Commission (SEC), a federal regulatory agency. The 10-K reports are the primary source of companies' accounting data available to the public.
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22. From an investors' or shareholders' perspective, the measure of competitive advantage that matters most is the _____. A. return on risk capital B. economic value created C. consumer surplus D. inventory turnover
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A. Return on Risk Capital From the shareholders' perspective, the measure of competitive advantage that matters most is the return on their risk capital, which is the money they provide in return for an equity share, money that they cannot recover if the firm goes bankrupt.
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29. Unlike the financial ratios based on accounting data, total return to shareholders is: A. backward-looking and historic in nature. B. an external performance metric. C. an absolute measure of competitive advantage. D. unaffected by market volatility or macroeconomic factors.
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B. An external performance metric. Unlike accounting data, total return to shareholders is an external performance metric. It essentially indicates how the stock market views all available public information about a firm's past, current state, and expected future performance (with most of the weight on future growth expectations).
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32. A firm incurs $400 to manufacture a television. In the market, customers are willing to pay a maximum of $600 for the television priced at $500. The difference of $200 ($600 minus $400) is the _____. A. consumer surplus B. total return to shareholders C. customer lifetime value D. economic value created
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D. economic value created In this scenario, the difference of $200 ($600 minus $400) is the economic value created. Economic value created is the difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it.
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Economic Value Created
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Economic value created is the difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it. (V-C). EX: Your budget is $1,200(V) for a laptop; Firm A has a laptop for $1,000(C) and Firm B sells a laptop for $1,200. This shows that Firm B has a higher value than Firm A, even though they are both laptops. So $1,200-1,000=$200 more for Firm B value than Firm A
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33. Both Vibrant Phones Inc. and Oryxo Inc. incur a cost of $200 to manufacture a single unit of a cell phone. However, Vibrant Phones creates more economic value than what Oryxo does. What does this imply? A. Vibrant Phones and Oryxo have achieved a competitive parity. B. Oryxo has a competitive advantage over Vibrant Phones. C. Vibrant Phones sells its products at a better price than Oryxo. D. Oryxo's offering has greater total perceived consumer benefits than Vibrant Phones's offering.
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C. Vibrant Phones sells its products at a better price than Oryxo. Economic value created is the difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it. Since the cost of production is same for both the companies, the difference in economic value can only be possible when one company has been able to sell at a higher price than the other.
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Osion Electronics Inc. incurs a cost of $350 to produce one unit of a cell phone. The company's management has priced the product at $600 in the market. Considering the technological advancement of the cell phone, customers perceive its value to be around $800. What is the economic value created in this scenario? A. $350 B. $450 C. $800 D. $200
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B. $450 Economic value creation equals consumer surplus plus firm profit, or the sum of consumer and producer surplus. In this case, the economic value created is ($800 - $600) + ($600 - $350) = $450.
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44. By selling a laptop at $1000 for which consumers are willing to pay up to $1200, a consumer electronics firm makes a profit of $400 per unit. In this scenario, the amount $600, that is ($1200 - $1000) + $400, is the _____. A. opportunity cost B. economic value created C. reservation price D. consumer surplus
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B. Economic Value Created Economic value creation equals consumer surplus plus firm profit, or the sum of consumer and producer surplus.
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Which of the following is NOT an accurate expression of the economic value created per unit of a product sold? A. The sum of consumer surplus and producer surplus B. The difference between consumer's reservation price and firm's cost C. The sum of consumer surplus and firm profit D. The difference between the price charged and the firm's cost
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D. The difference between the price charged and the firm's cost Economic value creation equals consumer surplus plus firm profit, or the sum of consumer and producer surplus. It can also be expressed as the difference between the consumers' maximum willingness to pay (reservation price) and the firm's cost (V - C). However, the difference between the price charged and the firm's cost is simply producer surplus.
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47. Competitive advantage goes to the firm that achieves the: A. largest economic value created. B. lowest producer surplus. C. highest payable turnover. D. highest Cost of goods sold/Revenue ratio.
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A. Largest economic value created Competitive advantage goes to the firm that achieves the largest economic value created, which is the difference between V, the consumer's willingness to pay, and C, the cost to produce the good or service.
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54. Which of the following is an advantage of applying the economic value creation perspective to assess a firm's performance? A. When the need for "hard numbers" arises, managers and analysts rely on economic value creation perspective to measure competitive advantage. B. In economic value perspective, analysts not only consider historical costs, but also opportunity costs. C. Arriving at the economic value created is easy because determining the value of a good in the eyes of consumers is a simple task. D. It is the most efficient tool for assessing corporate-level competitive advantage of highly diversified companies with large product portfolios.
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B. In economic value perspective, analysts not only consider historical costs, but also opportunity costs. Rather than merely relying on historical costs, as done when taking the perspective of accounting profitability, in the economic value creation perspective, all costs, including opportunity costs, must be considered.
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When using the balanced scorecard approach to assess a firm's performance, which of the following is NOT a key question that managers need to answer? A. How do customers view us? B. How do we reduce the economic value created? C. What core competencies do we need? D. How do shareholders view us?
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B. How do we reduce the economic value created? Managers using the balanced scorecard develop strategic objectives and appropriate metrics by answering four key questions: (1) How do customers view us? (2) How do we create value? (3) What core competencies do we need? (4) How do shareholders view us?
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57. Which of the following frameworks used to measure competitive advantage relies on both an internal and an external view of a firm? A. The economic value creation model B. The accounting profitability model C. The shareholder value creation model D. The balanced scorecard model
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D. The balanced scorecard model By relying on both an internal and an external view of a firm, the balanced scorecard combines the strengths provided by the individual approaches to assessing competitive advantage: economic value creation, accounting profitability, and shareholder value creation.
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61. Which of the following approaches to assess competitive advantage is based on the view that noneconomic factors can have a significant impact on a firm's financial performance? A. The triple-bottom-line approach B. The economic value creation framework C. The accounting profitability approach D. The balanced scorecard
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A. The triple-bottom-line approach The triple-bottom-line approach considers a combination of economic, social, and ecological concerns that can lead to a sustainable strategy.
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Balanced Score Card
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A strategy performance tool used by mangers by answering four key questions: (1) How do customers view us? (2) How do we create value? (3) What core competencies do we need? (4) How do shareholders view us? It allows managers to translate a firm's vision into measurable operational goals Four Key Questions managers need to answers: - How do customers view us? To learn how customers view a company's products or services, managers collect data to identify areas to improve, with a focus on speed, quality, service, and cost. - How do we create value? Answering this question challenges managers to come up with strategic objectives that ensure future competitiveness, innovation, and organizational learning. It focuses on the business processes and structures that allow a firm to create economic value. - What core competencies do we need? This question focuses managers internally, to identify the core competencies needed to achieve their objectives, and the accompanying business processes that support, hone, and leverage those competencies. - How do shareholders view us? The final perspective in the balanced scorecard is the shareholders' view of financial performance.
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56. When using the balanced scorecard approach to assess a firm's performance, which of the following is NOT a key question that managers need to answer? A. How do customers view us? B. How do we reduce the economic value created? C. What core competencies do we need? D. How do shareholders view us?
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B. How do we reduce the economic value created? Managers using the balanced scorecard develop strategic objectives and appropriate metrics by answering four key questions: (1) How do customers view us? (2) How do we create value? (3) What core competencies do we need? (4) How do shareholders view us?
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Opportunity Recognition
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Entrepreneurs are often characterized by their ability to recognize opportunities and the most basic entrepreneurial actions involve the pursuit of opportunity.
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Which of the following statements is true of the balanced scorecard? A. It is a more or less a one-dimensional metric of measuring competitive advantages of a firm. B. It is one of the traditional approaches of measuring firm performance. C. Its primary focus is to base a firm's strategic goals entirely on external performance dimensions. D. It attempts to provide a holistic perspective on firm performance.
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D. It attempts to provide a holistic perspective on firm performance. The three standard dimensions for measuring competitive advantage, economic value, accounting profitability, and shareholder value, are more or less one-dimensional metrics. However, conceptual frameworks like the balanced scorecard and the triple bottom line attempt to provide a more holistic perspective on firm performance.
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Which of the following is an advantage of the balanced scorecard? A. It is a tool for both strategic formulation and strategic implementation. B. It allows managers to translate a firm's vision into measureable operational goals. C. The balanced scorecard is independent of the skills of the managers responsible for its implementation. D. Its implementation is a one-time effort and does not require continuous tracking of metrics or updating of strategic objectives.
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B. It allows managers to translate a firm's vision into measureable operational goals. The balanced-scorecard approach is popular in managerial practice because it has several advantages. In particular, the balanced scorecard allows managers to translate the vision into measureable operational goals.
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60. Which of the following is NOT an advantage of the balanced scorecard approach to assess firm performance? A. It allows managers to communicate and link the strategic vision to responsible parties within an organization. B. It helps managers to implement feedback and organizational learning in order to modify and adapt strategic goals when indicated. C. It provides a concise report that tracks chosen metrics and measures and compares them to target values. D. It is a tool which can be effectively used by managers for both strategic implementation and strategic formulation.
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D. It is a tool which can be effectively used by managers for both strategic implementation and strategic formulation. It is important to note that the balanced scorecard is a tool for strategy implementation, not for strategy formulation. It is up to a firm's managers to formulate a strategy that will enhance the chances of gaining and sustaining a competitive advantage.
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Triple bottom line (p. 146)
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Definition: Triple bottom line is a combination of economic, social, and ecological (environment) concerns that can lead to a sustainable strategy. ex. Interface's case study pg 147
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63. The tenet behind the triple bottom line is that: A. a firm should solely focus on increasing the economic value created to/for its customers. B. a firm's primary objective should be increasing the total returns to its shareholders. C. a firm should achieve positive results along the economic, social, and ecological dimensions to gain a sustainable strategy. D. a firm's return on revenue can be broken down into three ratios: COGS/Revenue, R&D/Revenue, and SG&A/Revenue.
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C. a firm should achieve positive results along the economic, social, and ecological dimensions to gain a sustainable strategy. Three dimensions—economic, social, and ecological—make up the triple bottom line. According to this approach, achieving positive results in all three areas can lead to a sustainable strategy—a strategy that can endure over time.
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65. Using the _____ approach, managers audit their company's fulfillment of its social and ecological obligations to stakeholders such as employees, customers, suppliers, and communities as conscientiously as they track its financial performance. A. triple-bottom-line B. economic value creation C. accounting profitability D. shareholder value creation
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A. triple-bottom-line Using a triple-bottom-line approach, managers audit their company's fulfillment of its social and ecological obligations to stakeholders such as employees, customers, suppliers, and communities as conscientiously as they track its financial performance.
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66. Which of the following is an advantage of a triple-bottom line approach? A. The approach takes an integrative and holistic view in assessing a company's performance. B. The approach does not rely on an external view of a firm to assess its performance. C. The approach is more of a quantitative performance metric rather than a mere conceptual framework. D. The framework can help managers assess a firm's competitive advantage without taking into account the firm's performance along noneconomic dimensions.
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A. The approach takes an integrative and holistic view in assessing a company's performance. Like the balanced scorecard, the triple bottom line takes an integrative and holistic view in assessing a company's performance.
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67. The top management at BioTrue Pharma Inc. through rigorous testing ensures that the company develops and sells drugs that are free of harmful side-effects. Also, the company ensures that the chemical waste generated in the manufacturing process is kept to a bare minimum and is disposed of according to the regulations of the Environmental Protection Agency. The management assesses its overall performance based on these dimensions. Thus, the managers at Bio True Pharma are applying the _____ approach to measure firm performance. A. economic value creation B. shareholder value creation C. triple bottom line D. accounting profitability
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C. Triple bottom line In this scenario, the managers at Bio True Pharma are applying the triple-bottom-line approach to measure firm performance. Using a triple-bottom-line approach, managers audit their company's fulfillment of its social and ecological obligations to stakeholders such as employees, customers, suppliers, and communities as conscientiously as they track its financial performance.
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How are the balanced scorecard and triple-bottom-line approaches different from the traditional approaches to measure competitive advantage?
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Although the three traditional frameworks for measuring competitive advantage—economic value, accounting profitability, and shareholder value—provide unique insights for an assessment of a firm's performance, one drawback is that they are more or less one-dimensional metrics. Focusing on just one performance metric when assessing competitive advantage, however, can lead to significant problems, because each metric has its shortcomings, as listed earlier. By relying on both an internal and an external view of the firm, the balanced scorecard combines the strengths provided by the individual approaches to assessing competitive advantage discussed earlier: economic value creation, accounting profitability, and shareholder value creation. Like the balanced scorecard, the triple bottom line takes a more integrative and holistic view in assessing a company's performance.
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How does the triple-bottom line approach help managers?
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Like the balanced scorecard, the triple bottom line takes a more integrative and holistic view in assessing a company's performance. Using a triple-bottom-line approach, managers audit their company's fulfillment of its social and ecological obligations to stakeholders such as employees, customers, suppliers, and communities as conscientiously as they track its financial performance. In this sense, the triple-bottom-line framework is related to stakeholder theory, an approach to understanding a firm as embedded in a network of internal and external constituencies that each make contributions and expect consideration in return.
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What do you mean by triple-bottom line?
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Triple bottom line is a combination of economic, social, and ecological concerns that can lead to a sustainable strategy. Achieving positive results in all three areas can lead to a sustainable strategy—a strategy that can endure over time. A sustainable strategy produces not only positive financial results, but also positive results along the social and ecological dimensions. Today, managers are frequently asked to maintain and improve not only the firm's economic performance but also its social and ecological performance. Noneconomic factors can have a significant impact on a firm's financial performance, not to mention its reputation and customer goodwill. Being proactive along noneconomic dimensions can make good business sense.
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What are the disadvantages of the balanced scorecard?
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Though widely implemented by many businesses, the balanced scorecard is not without its critics. It is important to note that the balanced scorecard is a tool for strategy implementation, not for strategy formulation. It is up to a firm's managers to formulate a strategy that will enhance the chances of gaining and sustaining a competitive advantage. In addition, the balanced-scorecard approach provides only limited guidance about which metrics to choose. Different situations call for different metrics. The balanced scorecard is only as good as the skills of the managers who use it: They first must devise a strategy that enhances the odds of achieving competitive advantage. Second, they must accurately translate the strategy into objectives that they can measure and manage within the balanced-scorecard approach. Once the metrics have been selected, the balanced scorecard tracks chosen metrics and measures and compares them to target values. It does not, however, provide much insight into how metrics that deviate from the set goals can be put back on track.
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Business model (p. 148)
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Definition: Organizational plan that details the firm's competitive tactics and initiatives; in short, how the firm intends to make money.
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Explain how business models put strategy into action.
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Strategy is a set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors or the industry average. The translation of strategy into action takes place in the firm's business model, which details the firm's competitive tactics and initiatives. Simply put, the firm's business model explains how the firm intends to make money. The business model stipulates how the firm conducts its business with its buyers, suppliers, and partners. How companies do business can sometimes be more important to gaining and sustaining competitive advantage than what they do. This also implies that business model innovation might be more important achieving superior performance than product or process innovation. To come up with an effective business model, the firm's managers first transform their strategy of how to compete into a blueprint of actions and initiatives that support the overarching goals. In a second step, managers implement this blueprint through structures, processes, culture, and procedures. If the company fails to translate a strategy into a profitable business model, the firm will run into trouble.
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Describe the razor-razor-blade business model.
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In this business model, the initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. The company makes their money on the replacement part needed. As the name indicates, it was invented by Gillette, which gave away its razors and sold the replacement cartridges for relatively high prices. The razor-razor-blade model is found in many business applications today. An example is current-generation video game consoles that are sold at a loss to drive demand for games which are sold at a premium to recoup the loss on the consoles.
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Describe the subscription-based business model.
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The subscription-based model has been traditionally used for (print) magazines and newspapers. Users pay for access to a product or service whether they use the product or service during the payment term or not. Industries that use this model presently are cable television, cellular service providers, satellite radio, Internet service providers, and health clubs.
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Describe the pay-as-you go business model.
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In the pay-as-you-go business model, the user pays for only the services he or she consumes. The pay-as-you-go model is most widely used by utilities providing power and water and cell phone service plans, but is gaining momentum in other areas such as rental cars and cloud computing.
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Explain the freemium business model with the help of an example.
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Students' answers may vary. The freemium (= free + premium) business model is a model in which the basic features of a product or service are provided free of charge, but the user must pay for premium services such as advanced features or add-ons. For example, companies provide a minimally supported version of their software as a trial (e.g., business application or video game) to give users the chance to try the product. Users later have the option of purchasing a supported version of software, which includes a full set of product features and product support. The freemium business model is used extensively by open-source software companies, mobile app companies, and other Internet businesses. Many of the free versions of applications include advertisements to make up for the cost of supporting non-paying users. In addition, the paying premium users subsidize the free users. The freemium model is often used to build a consumer base when the marginal cost of adding another user is low or even zero (such as in software sales).
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77. In the _____ business model, the initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. A. subscription-based B. razor-razor-blade C. pay-as-you-go D. direct sales
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B. razor-razor-blade In the razor-razor-blade business model, the initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. The company makes its money on the replacement part needed.
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78. True Vibgyor Inc. sells its e-book readers at the cost price of $15 each. However, the company makes its profits when users have to download or buy books online. Which of the following business models is True Vibgyor implementing? A. Subscription-based B. Razor-razor-blade C. Pay-as-you-go D. Direct sales
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B. Razor-razor-blade True Vibgyor is implementing the razor-razor-blade business model. In the razor-razor-blade business model, the initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. The company makes its money on the replacement part needed.
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Manufacturers of electric fragrance diffusers sell the electric outer device at an extremely low price, sometimes even at a loss. However, they make their money on the product by charging a premium on the perfume refills that have to be replaced regularly. Which of the following business models does this best illustrate? A. Razor-razor-blade B. Subscription based C. Freemium D. Pay-as-you-go
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A. Razor-razor-blade This scenario best illustrates the razor-razor-blade business model. In the razor-razor-blade business model, the initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. The company makes its money on the replacement part needed.
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80. Which of the following business models has been traditionally used by the magazine and newspaper industry? A. Subscription-based B. Razor-razor-blade C. Pay-as-you-go D. Freemium
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A. Subscription-based The subscription-based model has been traditionally used for (print) magazines and newspapers. Users pay for access to a product or service whether they use the product or service during the payment term or not
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81. A defining characteristic of the subscription-based business model is that the: A. user pays for only the services he or she consumes. B. user pays for access to a product or service whether he or she uses it during the payment term or not. C. basic features of a product or service are provided free of charge, but the user must pay for premium services such as advanced features or add-ons. D. initial product is often sold at a loss or given away for free in order to drive demand for complementary goods.
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B. user pays for access to a product or service whether he or she uses it during the payment term or not. In the subscription-based model, users pay for access to a product or service whether they use the product or service during the payment term or not.
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Master's Health Club, a chain of gyms and spas, requires its customers to pay a quarterly or an annual fee to use its services. Irrespective of whether they frequently use the services during the payment period or not, members have to pay in advance. Which of the following business models does this best illustrate? A. Razor-razor-blade B. Pay-as-you-go C. Subscription-based D. Freemium
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C. subscription-based Master's Health Club uses the subscription-based business model in this scenario. In the subscription-based model, users pay for access to a product or service whether they use the product or service during the payment term or not. Industries that use this model presently are cable television, cellular service providers, satellite radio, Internet service providers, and health clubs.
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83. Mia has purchased an Internet package for three months, in which she can use 30 mbps Internet speed. However, for the service, she needs to pay a fee of $50 in advance irrespective of whether she uses the Internet during the service period or not. This arrangement best illustrates the _____ strategy. A. razor-razor-blade B. subscription-based C. pay-as-you-go D. freemium
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B. subscription-based The plan used by Mia best illustrates the subscription-based strategy. In the subscription-based model, users pay for access to a product or service whether they use the product or service during the payment term or not. Industries that use this model presently are cable television, cellular service providers, satellite radio, Internet service providers, and health clubs.
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A defining characteristic of the pay-as-you-go business model is that the: A. users pay for only the services they consume. B. users pay for access to a product or service whether they use it during the payment term or not. C. initial product is often sold at a loss in order to drive demand for complementary goods. D. the basic features of a service are provided free of charge, but the user must pay for premium services.
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A. users pay for only the services they consume. In the pay-as-you-go business model, the user pays for only the services he or she consumes. The pay-as-you-go model is most widely used by utilities providing power and water and cell phone service plans, but is gaining momentum in other areas such as rental cars and cloud computing.
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85. Maverick Communications Inc. is a cellular service provider that charges its customers $1 for three hours of talk time. So, if a customer's talk time for a month is 60 hours, the company charges him or her $20 at the end of the month. Which of the following business models does this best illustrate? A. Razor-razor-blade B. Subscription-based C. Pay-as-you-go D. Freemium
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C. Pay-as-you-go In this scenario, Maverick Communications Inc. uses the pay-as-you go business model. In the pay-as-you-go business model, the user pays for only the services he or she consumes. The pay-as-you-go model is most widely used by utilities providing power and water and cell phone service plans, but is gaining momentum in other areas such as rental cars and cloud computing.
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86. In the freemium business model, the: A. initial product is sold at a premium price and the complementary goods are given free. B. users are free to pay for the services in advance or after using the services. C. users are not charged for the basic features of a product or service, but the user must pay for premium advanced features or add-ons. D. users pay for access to a product or service whether they use it during the payment term or not.
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C. users are not charged for the basic features of a product or service, but the user must pay for premium advanced features or add-ons. The freemium (= free + premium) business model is a model in which the basic features of a product or service are provided free of charge, but the user must pay for premium services such as advanced features or add-ons.
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87. Photohome is a file hosting service that allows users to store up to 5GB of data with no restrictions or charges. However, users have to pay a fee for advanced features on the cloud storage system and additional storage space. Which of the following business models does this best illustrate? A. Subscription-based B. Freemium C. Pay-as-you-go D. Razor-razor-blade
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B. Freemium This scenario best illustrates the freemium business model. The freemium (= free + premium) business model is a model in which the basic features of a product or service are provided free of charge, but the user must pay for premium services such as advanced features or add-ons.
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88. Pilot Games Inc. allows users to play the trial versions of its games without any charge. However, users have to purchase the games to access the upgraded version of the games with advanced features. Which of the following business models is Pilot Games using in this scenario? A. Freemium B. Subscription-based C. Pay-as-you-go D. Razor-razor-blade
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A. Freemium Pilot Games Inc. is using the freemium business model. The freemium (= free + premium) business model is a model in which the basic features of a product or service are provided free of charge, but the user must pay for premium services such as advanced features or add-ons.
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89. Blue Horizon Inc. is an Internet service provider. It provides a router free of charge when users sign up for a two-year wireless service plan. In this plan, users pay in advance irrespective of whether they use the Internet package during the two-year period or not. Which of the following business models does this scenario best illustrate? A. A combination of the razor-razor-blade model and the subscription-based business model B. The pay-as-you-go business model C. A combination of the freemium business model and the pay-as-you-go business model D. The direct sales business model
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A. A combination of the razor-razor-blade model and the subscription-based business model In this scenario, Blue Horizon Inc. uses a combination of the razor-razor-blade model and the subscription-based business model. Telecommunications companies combine the razor-razor-blade model with the subscription-based business model. They provide a basic cell phone at no charge or significantly subsidize high-end smartphones when you sign up for a two-year wireless service plan. Telecom providers recoup the subsidy provided for the smartphone by requiring customers to sign up for lengthy service plans.
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Differentiation strategy (p. 166)
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Definition: The goal of a generic differentiation strategy is to add unique features that will increase the perceived value of goods and services in the minds of the consumers so they are willing to pay a higher price. Ex. Whole foods, Nordstrom, Yeezus clothing
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Cost-leadership strategy (p. 166)
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Definition: The goal of a cost-leadership strategy is to reduce the firm's cost below that of its competitors while offering adequate value. The cost leader, as the name implies, focuses its attention and resources on reducing the cost to manufacture a product or deliver service in order to offer lower prices to its customers. The cost leader optimizes all of its value chain activities to achieve a low-cost position. Although staking out the lowest-cost position in the industry is the overriding strategic objective, a cost leader still needs to offer products and services of acceptable value.
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Focused differentiation strategy (p. 167)
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Definition: 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. For example, a cosmetics brand pursues a focused differentiation strategy when it offers premium, superior-quality cosmetics priced at several hundred dollars.
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Focused cost-leadership strategy (p. 167)
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Definition: Focused cost-leadership strategy delivers low-cost products and services to a specific, narrow part of the market
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Economies of scale (p. 174)
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Definition: Firms with greater market share might be in a position to reap economies of scale, which is described as decreases in cost per unit as output increases. Cost is spread out, thus less cost as output increases/
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Economies of scope (p. 183)
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Definition: The concept economies of scope describes the savings that come from producing two (or more) outputs at less cost than producing each output individually, even though using the same resources and technology. OR Factors that make it cheaper to produce a range of products together than to produce each one of them on its own.
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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.
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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.
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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. Cost-leadership B. Differentiation C. Market penetration D. Product diversification
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B. Differentiation 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.
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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 pre-owned 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
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B. automobile company that sells high-end, premium cars 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.
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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
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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.
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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.
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A. economic value created is greater 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.
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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.
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A. focus its research and development on product technologies to add uniqueness. 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.
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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.
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C. increasing the perceived value created for customers, which allows it to charge a premium price. 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.
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65. A differentiation strategy works best when a: A. firm has tangible resources, its focus of competition shifts to price, and equivalent substitutes are readily available. B. firm's focus of competition shifts to price, and when increasing differentiation of product features do not create additional value. C. firm's differentiated products are commoditized, and costs of providing uniqueness do not rise above the customer's willingness to pay. D. firm has intangible resources, is able to pass on increases in supplier cost to the customer, and its differentiation appeal creates customer loyalty.
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D. firm has intangible resources, is able to pass on increases in supplier cost to the customer, and its differentiation appeal creates customer loyalty. When a firm differentiates itself through intangible resources that increase its differentiation appeal and provide for customer loyalty, it will be able to pass on cost increases to the customer.
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In Chapter Case 6, it is seen that P&G differentiates itself from competitors by offering branded consumer product goods with distinct features and attributes. Discuss how this strategy has affected P&G. What measures can P&G take to strengthen its strategic position?
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P&G differentiates itself from competitors by offering branded consumer product goods with distinct features and attributes. This business strategy implies that P&G focuses on increasing the perceived value created for customers, which allows it to charge a premium price. This approach proved successful, especially in rich countries such as the United States. Over time, though, in response to changes in the external environment, the strategy needed to be fine-tuned. P&G took a fresh look at reinvigorating its business-level strategy in order to strengthen its competitive position. Future growth seems to lie with more cost-conscious consumers, both in the U.S. and global markets. Moreover, P&G needs to focus on consumers in large emerging economies, which it has traditionally neglected.
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What is a focused differentiation strategy? Explain with the help of an example.
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Student answers will vary. In a focused differentiation strategy, a firm seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features and with a narrow focus on a niche market. For example, a cosmetics brand pursues a focused differentiation strategy when it offers premium, superior-quality cosmetics priced at several hundred dollars.
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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. Cost-leadership B. Differentiation C. Niche marketing D. Product diversification
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A. Cost-leadership 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.
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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.
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C. an apparel company popular among price-conscious customers. 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.
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Even without differentiation parity, a firm pursuing a cost-leadership strategy can still gain a competitive advantage as long as its: A. learning curve is not steeper than that of its competitors. B. per-unit costs are higher than that of its competitors. C. economic value creation exceeds that of its competitors. D. value gap is lower than that of its competitors.
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C. economic value creation exceeds that of its competitors. Even without differentiation parity, a firm pursuing a cost-leadership strategy can still gain a competitive advantage as long as its economic value creation exceeds that of its competitors. Even if a firm fails to create differentiation parity, it can still gain a competitive advantage as long as its economic value creation exceeds that of its competitors.
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31. Which of the following factors contributes to the success of the cost-leadership strategy of Ryanair airlines? A. The high input costs B. The luxury services C. The lower value gap D. The rock-bottom air fares
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D. The rock-bottom air fares In Strategy Highlight 6.2, it is seen that Ryanair is a company pursuing a cost-leadership strategy. Headquartered in Dublin, Ireland, Ryanair proudly calls itself "the nastiest airline in the world" because of its relentless effort to drive down costs in order to offer rock-bottom air fares.
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35. _____ is best described as decreases in cost per unit as output increases. A. Economies of scale B. Economies of scope C. Time compression economies D. Economies of replication
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A. Economies of scale Firms with greater market share might be in a position to reap economies of scale, which is described as decreases in cost per unit as output increases.
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36. Economies of scale do NOT allow firms to: A. spread their fixed costs over a larger output. B. employ specialized systems and equipment. C. spread their variable costs over a larger output. D. take advantage of certain physical properties.
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C. spread their variable costs over a larger output. Economies of scale allow firms to spread their fixed costs over a larger output, employ specialized systems and equipment, and take advantage of certain physical properties.
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37. _____ is best described as the output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale. A. Minimum efficient scale B. Break-even output C. Maximum output capacity D. Optimum sustainable yield
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A. Minimum efficient scale Minimum efficient scale (MES) is the output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale.
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41. When a firm operates at an output level of 9,000 units, the per-unit cost is $5. When the production is between 10,000-12,000 units, the per-unit cost is $4. At a production level of 13,000 units, the production cost is again $5 per unit. At 14,000 units and above, the production cost increases further. At what output level does the firm experience economies of scale? A. 9,000 units B. 11,000 units C. 13,000 units D. 15,000 units
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B. 11,000 units The firm experiences economies of scale at an output level of 11,000 units. When a firm operates at the minimum efficient scale, the returns to scale are constant. Minimum efficient scale (MES) is the output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale.
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KitchenThings Inc. is a company that manufactures plastic kitchenware. It operates at an output level that allows it to keep its unit cost per output to the lowest in the industry. This in turn allows KitchenThings to be the price leader. Other competing companies cannot operate at the same level due to a lack of consumer demand for their products. This puts them at a competitive disadvantage. In this scenario, the cost driver behind KitchenThings's strategic position is _____. A. superior customer service B. economies of scale C. availability of complements D. learning-curve effects
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B. economies of scale In this scenario, the cost driver behind KitchenThings's strategic position is economies of scale. Firms with greater market share might be in a position to reap economies of scale, decreases in cost per unit as output increases.
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43. BuyMart Inc. is a large chain of hypermarkets. It has cost benefits due to its extensive operation. The company's marketing and sales, logistics, administrative, and other such related costs get divided between a large number of product units stocked in its stores. This makes it difficult for smaller retail stores and supermarkets to compete against BuyMart's low prices. Thus, BuyMart has a competitive advantage due to its: A. superior customer service. B. time compression economies. C. economies of scale. D. learning-curve effects.
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C. economies of scale. BuyMart has a competitive advantage due to its economies of scale. Economies of scale allow firms to spread their fixed costs over a larger output, employ specialized systems and equipment, and take advantage of certain physical properties.
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56. Which of the following situations will have greater effects from economies of scale than from learning effects? A. When conducting surgeries B. When practicing corporate law C. When mass manufacturing pens D. When making business decisions
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C. When mass manufacturing pens In some production processes (e.g., a simple one-step process in the mass manufacture of pens), effects from economies of scale can be quite significant, while learning effects are minimal. In contrast, in some professions (brain surgery or the practice of estate law), learning effects can be substantial, while economies of scale are minimal.
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61. A cost-leader is protected from the threat of new entrants primarily due to its: A. superior customer service. B. luxury goods. C. economies of scale. D. premium pricing.
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C. economies of scale. Since reaping economies of scale is critical to reaching a low-cost position, the cost leader is likely to have a large market share, which in turn reduces the threat of entry.
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70. Which of the following statements accurately brings out the difference between economies of scale and economies of scope? A. Economies of scale refer to the decreases in per-unit cost with decreases in output, whereas economies of scope refer to the increases in per-unit cost with increases in output. B. Economies of scale result in decreasing returns to scale, and economies of scope result in constant returns to scale. C. Economies of scope are the savings that come from producing two or more outputs from the same resources, whereas economies of scale are decreases in per-unit cost with increases in output. D. Economies of scope are realized when a firm operates at the minimum efficient scale, whereas economies of scale are realized when the firm operates beyond the minimum efficient scale.
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C. Economies of scope are the savings that come from producing two or more outputs from the same resources, whereas economies of scale are decreases in per-unit cost with increases in output. The concept economies of scope describes the savings that come from producing two (or more) outputs at less cost than producing each output individually, even though using the same resources and technology. Economies of scale are decreases in cost per unit as output increases.
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List how economies of scale contribute to a firm.
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Economies of scale allow firms to: • Spread their fixed costs over a larger output. • Employ specialized systems and equipment. • Take advantage of certain physical properties.
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What is the difference between economies of scale and diseconomies of scale?
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In economies of scale, there is a decrease in cost per unit as output increases. In diseconomies of scale, firms experience an increase in cost per unit as output increases.
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Discuss the important differences between economies of scale and learning effects.
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There are some important differences between economies of scale and learning effects: • Learning effects occur over time as output is accumulated, while economies of scale are captured at one point in time when output is increased. Although learning declines at some point, there are no diseconomies to learning (unlike diseconomies to scale). • In some production processes (e.g., a simple one-step process in the manufacture of steel rods), effects from economies of scale can be quite significant, while learning effects are minimal. In contrast, in some professions (brain surgery or the practice of estate law), learning effects can be substantial, while economies of scale are minimal.
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BodyBlush Inc. is a brand reputed for its wide variants of body wash that introduced its range of shampoos and skin moisturizers a few years ago. Since most of its products could be produced using the same resources and technology, the company's cost structure lowered, while its product portfolio widened. In this scenario, which of the following value and cost drivers is BodyBlush applying? A. Mass customization B. Economies of scope C. Learning-curve effect D. Network effect
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B. Economies of scope BodyBlush is applying the strategy of economies of scope in this scenario. The concept economies of scope describes the savings that come from producing two (or more) outputs at less cost than producing each output individually, even though using the same resources and technology.
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Explain economies of scope.
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The concept economies of scope describes the savings that come from producing two (or more) outputs at less cost than producing each output individually, even though using the same resources and technology. In economies of scope, a firm lowers its cost structure by sharing its production assets over multiple outputs, while increasing its menu and thus its differentiated appeal.
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According to the text, some analysts contend that _______ may become the first $1 trillion company on the planet. (p. 3) Coke Apple Nike Tesla Facebook None of the above
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Apple
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Firm performance is determined primarily by two factors. One of these is Industry Effects. What is the other factor? (p. 9)
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Firm Effects
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Which of the following has never been the world's most valuable company? (p. 3) McDonald's Microsoft Exxon Mobile General Electric Apple None of the above (i.e., each at one time has been the most valuable)
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McDonald's
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What are the two ways to grow a business? (class discussion) ___________________________ ___________________________
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Sell existing products/services to a different set of customers Sell additional products/services to the same set of customers
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Which of the following is an external stakeholder? (p. 11) Customers Media Creditors Unions All of the above None of the above
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All of the above
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Which of the following defines Pepsi's "Performance with a Purpose" vision? (p. 29) Human sustainability Environmental sustainability The whole person at work All of the above None of the above
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All of the above
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A company's ________ is a statement about what it wants to accomplish. (p. 30)
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Vision
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Which of the following companies lost more than 45% of its $658 billion market valuation, wiping out close to $290 billion in shareholder value? (p. 20) Toyota Walmart McDonald's Apple Volkswagen Tesla
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Apple
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Which of the following is not a component of a triple bottom line? (pp. 146-7) Economic Political Social Ecological None of the above (i.e., they are all components of the triple bottom line)
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political
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A firm that is able to outperform its competitors or the industry average over a prolonged period of time has a
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sustainable competitive advantage
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What is competitive advantage? (p. 5) __________________________________________________________
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Superior performance relative to other competitors in the same industry or the industry average.
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The greatest strategic advantage is ____________________________________. (in class)
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changing the rules of the game
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_______________________________________ pertains to executives' use of power and influence to direct the activities of others when pursuing an organization's goals. (p. 30)
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Strategic leadership
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_____________________________ has four components: economic, legal, ethical, and philanthropic responsibilities. (pp. 15-16)
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Corporate social responsibility (CSR)
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Which of the following is largely considered the best business model? (pp. 150-151) Razor-Razor-Blade Subscription-Based Pay-As-You-Go Freemium None of the above
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None of the above
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Which of the following generic business strategies is characterized by narrow competitive scope and cost? (p. 167) Cost Leadership Focused Cost Leadership Differentiation Focused Differentiation None of the above
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Focused Cost Leadership
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Which of the following once held more than a 50% U.S. market share? (p. 57) Nike Apple General Motors McDonald's All of the above None of the above
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General Motors
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A set of companies that pursue a similar strategy within a specific industry in their quest for competitive advantage is known as a __________. (p. 83) Strategic partnership Strategic alliance Strategic group Strategic market Smart strategy
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Strategic group
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Which of the following top companies went into Chapter 11 bankruptcy? (p. 88) GM GE P&G JC Penny AT&T KFC
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GM
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Which of the following companies is currently #2 in its industry? (p. 137) Microsoft Samsung Google Amazon Apple
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Microsoft
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A balanced scorecard is optimal if it ___________________
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Sets both financial and strategic goals
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Which of the following is true? a. The terms "vision" and "mission" are often used interchangeably and are, essentially, the same thing. (p. 31) b. SWOT analysis is most useful in the strategy formulation stage. (pp. 117-120) c. The five-forces model identifies the various types of environments (p. 67) d. PESTEL is a framework for understanding rivalry among competitors (p. 67) e. Risk is when 0 < p < 1 (in class discussion) f. All of the above g. None of the above
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e. Risk is when 0 < p < 1 (in class discussion)
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What is the purpose of SWOT analysis?
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SWOT provides a good overview to determine if the company's overall situation is fundamentally healthy or unhealthy.
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Which of the following companies lost 90% of its $16B value and its competitive advantage in one year? (p. 109) Microsoft Groupon Blackberry Adidas P&G
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Groupon
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The difference between value and cost is known as ______. (p. 139) Economic value created Residual Profit Producer surplus Consumer surplus None of the above
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Economic value created
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According to the text, "Apple's ROIC was 35.0 percent, which was more than 21 percentage points higher than Blackberry's (14.1 percent)." What is ROIC? (p. 129) _________________________________________
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Return on invested capital
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The _____________ is a widely used tool for systematically diagnosing the principal competitive pressures in a market and assessing the strength and importance of each.
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Five-forces model of competition
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The first ingredient of successful leadership is ________________
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self-awareness
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What are the forces in the Five-Forces Model of Competition? (p. 67)
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rivalry among existing competitors, threats of substitute products or services, threat of new entrants, bargaining power of suppliers, and bargaining power of buyers.
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What does SWOT stand for?
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Strengths, weaknesses, opportunities, threats
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What is risk? (in class discussion)
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p = 1 p = ? 0 < p < 1
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A __________ is a competitively valuable activity a company performs better than its rivals.
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Distinctive competence
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What is a strategic group?
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A cluster of industry rivals that have similar competitive approaches and market positions
