Chapter 4 Business-Level Strategy True/False 1. A business-level strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage in specific product markets. A. True B. False Answer: True 2. Every firm uses all levels of strategy: corporate, acquisition and restructuring, international and cooperative. A. True B. False Answer: False 3. When selecting a business level strategy, the firm determines who will be served, what customer needs will be satisfied, and how those needs will be satisfied. A. True B. False Answer: True 4. Global competition has increased the options for consumers and has made it more imperative for firms to identify the needs of customers in order to earn above-average returns. A. True B. False Answer: True 5. Effective use of the generic business strategies allows the firm to favorably position itself relative to the five forces. A. True B. False Answer: True 6. Almost any identifiable human or organizational characteristic can be used to subdivide a market into segments that differ from one another on a given characteristic. A. True B. False Answer: True 7. The generalized forms of value that goods and services provide are either low cost with acceptable features or highly differentiated features with acceptable cost. A. True B. False Answer: True 8. An English professor spends her summers writing low-brow romance novels that sell directly to paperback. She writes under a fictional name because she is embarrassed to admit to her colleagues and students how she earns the extra money for foreign vacations. The professor is correct in her concern that she is serving customer needs that are objectively inferior and bad. A. True B. False Answer: False 9. Changing consumer needs is illustrated by Starbucks' allowing consumers to have an experience rather than just a cup of coffee and to design their own drinks. A. True B. False Answer: True 10. Companies without the core competencies in their value chain activities and support functions are still able to implement successfully a either a cost leadership or a differentiation strategy, although they cannot implement an integrated cost leadership/differentiation strategy. A. True B. False Answer: False 11. To position itself differently from competitors, a firm must decide to either perform activities differently or to perform different activities. A. True B. False Answer: True 12. Southwest Airlines' tightly integrated activities make its cost leadership strategy more vulnerable to imitation than if its activities were loosely integrated. A. True B. False Answer: False 13. The key to Southwest Airlines' success has been its ability to continuously reduce costs while providing customers with superior levels of differentiation such as an engaging culture. A. True B. False Answer: False 14. Strategic fit among the many activities in the value chain is critical for competitive advantage because it is more difficult for a competitor to match a configuration of integrated activities than to imitate a particular activity such as sales promotion or a process technology. A. True B. False Answer: True 15. The difference between the cost leadership and differentiation business-level strategies, and the focused cost leadership and focused differentiation strategies, is their basis for customer value. A. True B. False Answer: False 16. The integrated cost leadership/differentiation strategy is superior to the other business-level strategies. A. True B. False Answer: False 17. The best of the generic business strategies is the integrated cost leadership/differentiation strategy. A. True B. False Answer: False 18. Low-cost leaders usually concentrate on the value chain activities of inbound logistics and outbound logistics as a means to reduce costs. A. True B. False Answer: True 19. Firms implementing cost leadership strategies often sell no-frills standardized goods or services (but with competitive levels of differentiation) to the industry's most typical customers. A. True B. False Answer: True 20. A low-cost position in the industry is not a valuable defense against rivals when competing on the basis of price. A. True B. False Answer: False 21. Walmart's change in strategy to attract more upscale customers will likely succeed because cost leaders are good at differentiating. A. True B. False Answer: False 22. Walmart's actions of becoming more upscale with the intent of taking sales away from Target provided an opening for competitors such as Amazon and Family Dollar to better compete on the basis of price and attract some of Walmart's customer. A. True B. False Answer: True 23. The value-creating activities associated with the cost leadership strategy and differentiation strategy are the same. A. True B. False Answer: False 24. Human resources and other support functions are not value-creating activities in the value chain; only the value chain activities create value. A. True B. False Answer: False 25. In general, firms can be most effective if they develop business-level strategies that will serve the needs of the "typical customer" in the industry. A. True B. False Answer: False 26. The differentiation strategy is effective for products that are expensive, luxury consumer goods. It is not effective for common, inexpensive products such as doughnuts. A. True B. False Answer: False 27. A risk of the differentiation strategy is that the firm's means of differentiation may eventually not provide value for which customers are willing to pay. A. True B. False Answer: True 28. Unlike a cost leadership and a differentiation strategy, both focus strategies are less dependent on the completion of various value chain and support activities in order to compete in a superior manner. A. True B. False Answer: False 29. The activities in the value chains of companies using focus strategies are quite different than the activities in the value chains of companies using industry-wide business strategies. A. True B. False Answer: False 30. A new generation of lunch trucks in cities such as New York, San Francisco, and Los Angeles serving high-end fare such as hamburgers made from grassfed cattle, escargot, and crème brulee illustrate the focus cost leadership strategy. A. True B. False Answer: True 31. A risk of a focus strategy is that the needs of the customer within a narrow competitive segment may become more similar to those needs of customers in the whole market. A. True B. False Answer: True 32. Although it is a cost leader, IKEA also offers differentiated features that appeal to its target customers, including its unique furniture designs, in-store playrooms for children, wheelchairs for customer use, and extended hours. A. True B. False Answer: True 33. Flexible manufacturing systems, information networks, and total quality management are three techniques that make it possible for firms to implement the focused differentiation strategy. A. True B. False Answer: False 34. A flexible manufacturing system is a computer-controlled process used to produce a variety of products in moderate, flexible quantities with minimal manual intervention. A. True B. False Answer: True 35. Because of its focus on innovation and quality manufacturing, Total Quality Management is not useful for firms that follow a cost leadership strategy. A. True B. False Answer: False 36. One of the benefits of the integrated cost leadership/differentiation strategy is that it is less risky than either the cost leadership or differentiation strategies. A. True B. False Answer: False 37. The hazard of getting "stuck in the middle" applies to firms using any business strategy. A. True B. False Answer: True 38. Research shows that firms using a hybrid strategy (i.e., integrated cost leadership/differentiation) often outperform firms using pure strategies ( i.e., cost leadership or differentiation). A. True B. False Answer: False Multiple Choice 39. Business-level strategies detail commitments and actions taken to provide value to customers and gain competitive advantage by exploiting core competencies in A. the selection of industries in which the firm will compete. B. specific product markets. C. primary value chain activities. D. particular geographic locations. Answer: B 40. A firm's core strategy is its _________ strategy. A. corporate B. business C. pricing D. international Answer: B 41. When selecting a business level strategy, the firm must determine all of the following EXCEPT A. how will the customer's needs be satisfied? B. who is the customer? C. what are the customers' needs? D. why should these customers' needs be satisfied? Answer: D 42. The three dimensions of a firm's relationships with customers include all the following EXCEPT A. exclusiveness. B. affiliation. C. richness. D. reach. Answer: A 43. Which of the following is TRUE? A. As customer loyalty increases, customers are more sensitive to price increases. B. Customer loyalty has a positive relationship with firm profitability. C. Customer loyalty is fragile and cannot reliably be considered a factor in firm success. D. Customer loyalty is of importance only to firms using the differentiation strategy. Answer: B 44. The _________ dimension of relationships with customers is particularly important for social networking sites such as Facebook and MySpace. A. reach B. richness C. affiliation D. social Answer: A 45. Amazon has built capabilities around Internet technology and e-commerce to facilitate information exchanges with its customers in a cost effective manner. This represents which of the three service dimension? A. reach B. richness C. affiliation D. None of the these options are correct. Answer: B 46. Viewing the world through the customer's eyes and constantly seeking ways to create more value for the company enhances A. the reach of the company toward the customer. B. the ability to identify the customer. C. the richness of the relationship with the customer. D. affiliation with the customer. Answer: D 47. Before the firm decides what products to offer and what benefits and features they will have, the firm must decide all the following questions EXCEPT A. who the firm should serve. B. when the customer's needs should be satisfied. C. what needs the firm should satisfy. D. what core competencies are needed to satisfy customer needs. Answer: B 48. In the animal food products business, food-product needs of owners of companion animals pets (e.g., dogs and cats) differ from the needs for food and health-related products of those owning production animals (e.g., livestock). Which of the following aspects of managing customer relationships does this choice refer to? A. Who: Determining the Customers to Serve B. What: Determining Which Customer Needs to Satisfy C. How: Determining Core Competencies Necessary to satisfy Customer Needs D. When: Determining When to Satisfy Customer Needs Answer: A 49. Starbuck's determined that all of the following customer needs were important EXCEPT A. low price. B. the experience associated with drinking coffee, not just the coffee. C. the actual product of service (e.g., a cup of coffee), not the experience. D. allowing customer to design their own drinks. Answer: A 50. Hyundai allows customers to return their cars if they lose their job within 12 months of purchase. Which of the following aspects of managing customer relationships is Hyundai engaged in? A. Who: Determining the Customers to Serve B. What: Determining Which Customer Needs to Satisfy C. How: Determining Core Competencies Necessary to satisfy Customer Needs D. When: Determining When to Satisfy Customer Needs Answer: B 51. An interior decorator has moved his business from Los Angeles to St. Paul, Minnesota, because his spouse's company transferred her to St. Paul. The decorator is distressed because the customers in his target market have, in his words, "banal and bourgeois taste." What is the decorator's problem? A. The decorator does not understand that customer needs are neither right nor wrong, good nor bad. B. The decorator has no core competencies that will transfer to his new geographic market. C. The decorator should choose a strategy of cost leadership in this environment. D. The decorator is highly affiliated with the new target market and understands how he can create value for it. Answer: A 52. In order to meet and exceed customer's expectations, firms must A. constantly manipulate customers' perceptions of their needs. B. answer the questions: who, what, when, where, how, and why as they apply to customers. C. continuously improve, innovate, and upgrade their core competencies. D. successfully defend their established core competencies from imitation by competitors. Answer: C 53. Business-level strategies are concerned specifically with A. creating differences between the firm's position and its competitors. B. selecting the industries in which the firm will compete. C. how functional areas will be organized within the firm. D. how a business with multiple physical locations will operate one of those locations. Answer: A 54. An entrepreneur is investigating starting a company that provides tax advice to small companies. In order to position his company differently from the existing competitors, the entrepreneur must A. analyze the reach, richness, and affiliation the company must have with its customers. B. provide tax advice either in a different manner or provide a different kind of tax service than competitors. C. offer tax advice at a price lower than the cheapest competitor. D. offer tax advice at a higher quality than the best competitor. Answer: B 55. Which of the following are central to implementing value-creating strategies and thereby satisfying customers' needs? A. firm resources B. capabilities C. core competencies D. None of the these options are correct. Answer: C 56. The analysis of the activity map of a successful company such as Southwest Airlines emphasizes how A. the organizational culture of Southwest Airlines is the key to the success of the organization. B. understanding of the profit pool in an industry indicates to companies where above-average returns can be earned. C. it is hard for rivals to match a configuration of integrated activities than to imitate a single activity. D. the primary and support activities of a successful company capture value all along the value chain. Answer: C 57. By examining the _______ of Southwest Airlines, one can identify the strategic themes around which it has developed its business strategy. These themes include limited passenger service, high aircraft utilization, highly productive ground and gate crews, and so forth. A. activity map B. profit pool C. value diagram D. five forces model Answer: A 58. If Southwest Airlines employees lost their high enthusiasm and commitment to the company, A. the airline could continue without problems because its cost leadership strategy is dependent on its efficient internal procedures. B. replacement employees could be hired from rival airlines that are laying off employees easily merged into the Southwest culture. C. there would be no impact on Southwest's profitability because Southwest's customers value the low fares rather than being "entertained" by the employees. D. Southwest would have lost one of its competitive advantages and its performance would be threatened. Answer: D 59. Strategic fit among many activities (in an activity map) is fundamental to A. the development of core competencies for a firm. B. the breadth of competitive scope for a firm. C. sustainability of a firm's competitive advantage. D. the integrity of the firm's value chain. Answer: C 60. All of the following are considered generic business-level strategies EXCEPT A. product diversification. B. cost leadership. C. focused differentiation. D. integrated cost leadership/differentiation. Answer: A 61. A company using a narrow target market in its business strategy is A. following a cost leadership business strategy. B. focusing on a broad array of geographic markets. C. limiting the group of customer segments served. D. decreasing the number of activities on its value chain. Answer: C 62. As the television industry has changed in the last few decades from just three major networks to a multiplicity of networks, one of the major aspects of business strategy for the newer networks is _____ than the traditional networks. A. broader target market B. narrower target market C. increased use of primary activities to capture value D. increased use of support activities to capture value Answer: B 63. The effectiveness of any of the generic business-level strategies is contingent upon A. customer needs and competitors' strategies. B. the match between the opportunities and threats in its external market and the strengths of its internal environment. C. the trends in the general consumer base and the robustness of the global and industry economy. D. the firm's competitive scope and its competitive advantage. Answer: B 64. A cost leadership strategy provides goods or services with features that are A. acceptable. B. unique. C. substandard. D. mediocre. Answer: A 65. A cost leadership strategy targets the industry's _________ customers. A. most typical B. poorest C. least educated D. most frugal Answer: A 66. Durable Ceramics, Inc., provides inexpensive ceramic tile to builders of institutional buildings such as schools, prisons, and public administration buildings. It has always competed on a cost leadership basis. Most of its products are purchased by a few commercial construction firms, so it is fairly dependent on these construction firms for selling its product. Durable Ceramic's next most-efficient competitor, Cost-Less Ceramics, Inc., earns average returns, whereas Durable earns above-average returns. The commercial construction firms are putting pressure on Durable to reduce its prices. If Durable reduces its prices below those of Cost-Less's prices, it is likely that A. both Durable and Cost-Less will devise additional ways to become more efficient in their production processes. B. Durable will be unable to absorb the lower cost, and will go out of business. C. both Cost-Less and Durable will go out of business, leaving the customers with fewer alternative sources of low-cost tile. D. Cost-Less will go out of business, and Durable will gain higher power over its customers. Answer: D 67. Research suggests that having a competitive advantage in ______ than it does in the differentiation strategy. A. marketing and sales B. technology development C. logistics D. human resource management creates more value in the cost leadership strategy Answer: C 68. A river barge company can offer cheaper, although slower, per pound transportation of products to companies when compared with transportation by air, truck, or rail. The river barge company should first target customers whose companies use A. the integrated cost leadership/differentiation strategy. B. either of the focus strategies. C. the cost leadership strategy. D. any of the strategies except the focused differentiation strategy. Answer: C 69. Walmart went against business-level strategy and made changes to attract upscale customers. These changes had which of the following results? A. It strengthened Walmart's position against rivals such as Dollar Stores and Amazon. B. It made Walmart vulnerable to Dollar Store and Amazon. C. It attracted significant numbers of new customers. D. Family Dollar, Dollar Tree, and Dollar General all experienced losses in sales as many of their customers went to Walmart. Answer: B 70. Walmart's same store sales have been declining and those of rivals Family Dollar and Amazon have been increasing. What could explain this recent change? A. Walmart was too aggressive with its low-cost position and lost customers who wanted more upscale products. B. Walmart changed its strategy to focused differentiation. C. Amazon and Family Dollar changed their strategies to attract more upscale customers. D. Walmart changed its strategy to attract more upscale customers. Answer: D 71. A company pursuing the differentiation or focused differentiation strategy would tend to A. build economies of scale and efficient operations. B. develop and maintain cost-effective MIS operations. C. develop flexible systems that allow rapid response to customers' changing needs. D. have relationships with suppliers to maintain efficient flow of supplies for operations. Answer: C 72. When the costs of supplies increase in an industry, the low-cost leader A. may continue competing with rivals on the basis of product features. B. will lose customers as a result of price increases. C. will be unable to absorb higher costs because cost-leaders operate on very narrow profit margins. D. may be the only firm able to pay the higher prices and continue to earn average or above-average returns. Answer: D 73. Ever-improving levels of efficiency enhance profit margins for a cost-leader. This effects which of the five forces of industry structure most directly? A. potential entrants B. substitutes C. buyer power D. supplier power Answer: A 74. The typical risks of a cost leadership strategy include A. the inability to balance high differentiation and low price. B. production and distribution processes becoming obsolete. C. excessive differentiation to the point where the customer base is too small. D. loss of customer loyalty. Answer: B 75. When a firm is able to produce non-standardized (that is, distinctive) products for customers who value differentiated features more than they value low cost, the firm is successfully implementing A. a differentiation strategy. B. a cost leadership strategy. C. an integrated cost leadership/differentiation strategy. D. a single-product strategy. Answer: A 76. A firm successfully implementing a differentiation strategy would expect A. customers to be sensitive to price increases. B. to charge premium prices. C. customers to perceive the product as standard. D. to have high levels of power over suppliers. Answer: B 77. The products or services that are differentiated from others have qualities that are A. perceived by the customer to add value for which they will pay a premium. B. valued by the typical industry customer. C. perceived as standardized by the customer. D. seen as classic attributes rather than passing fads. Answer: A 78. Blind taste-tests have shown that the taste of premium-priced vodkas and inexpensive vodkas are indistinguishable even to regular drinkers of vodka. But the sales of premium vodkas are thriving. This is an example of A. the perception of perceived prestige and status as a means of differentiating a product. B. the importance of high-quality raw materials when using the differentiation strategy. C. the risk of product imitation by competitors. D. the danger counterfeiting holds for firms pursuing the differentiation strategy. Answer: A 79. All of the following are examples of differentiated products EXCEPT A. Mont Blanc pens. B. Caterpillar's heavy-duty earth-moving equipment. C. Great Value brand at Walmart. D. Prada fashion. Answer: C 80. The use of a differentiation strategy would be expected to be LEAST effective in which of the following markets? A. commodity goods B. motion pictures C. popular music D. writing instruments Answer: A 81. All of the following are ways that a good or service can be differentiated EXCEPT A. responsive customer service. B. perceived prestige and status. C. economies of scale and efficient operations. D. engineering design and performance. Answer: C 82. The differentiation strategy can be effective in controlling the power of rivalry with existing competitors in an industry because A. customers will seek out the lowest-cost product. B. customers of nondifferentiated products are sensitive to price increases. C. customers are loyal to brands that are differentiated in meaningful ways. D. the differentiation strategy benefits from rivalry because it forces the firm to innovate. Answer: C 83. Wholesome Pet Food has successfully specialized for 20 years in high-quality pet food made from all-natural ingredients and organically raised lamb. This brand has a strong following and is recommended by veterinarians who practice in affluent neighborhoods. Whole some's main supplier of lamb has announced that the price for lamb will be 15 percent higher next year. A. Wholesome will probably be able to pass the cost on to its customers because they are less sensitive to price increases than the average buyer. B. Companies pursuing Whole some's business strategy are especially vulnerable to this risk. C. If Wholesome raises its pet food prices, customers will turn to less expensive brands such as Purina. D. Wholesome probably operates on very thin margins, and a cost increase will threaten its ability to earn average returns. Answer: A 84. Which of the following is NOT a value-creating activity associated with the differentiation strategy? A. Developing policies to ensure efficient hiring and retention to keep costs low and implement training to ensure high employee efficiency. B. Providing accurate and timely delivery of goods to customers. C. Ensuring receipt of high quality supplies (raw materials and other goods). D. Developing flexible systems that allow rapid response to customers' changing needs. Answer: A 85. A differentiation strategy can be effective in controlling the power of substitutes in an industry because A. customers have low switching costs. B. substitute products are lower quality. C. a differentiating firm can always lower prices. D. customers develop brand loyalty. Answer: D 86. Recently, the only type of car available for Anthony to rent on a business trip was a compact, fuel-efficient Japanese import. Anthony was surprised at the comfort and performance of the car. He is in the market for a new car and had previously considered only buying another luxury SUV. Now, he is thinking about the significant cost savings he would have if he bought the compact vehicle rather than a new SUV. This is an example of the competitive risk that A. a competitor's products can convey a product's differentiated features to a customer at a significantly reduced price. B. a product imitation can cause customers to perceive that competitors offer essentially the same good. C. experience can narrow a customer's perceptions of the value of a product's differentiated features. D. brand loyalty insulates a company from rivalry with competitors. Answer: C 87. A manufacturer of jewelry imitates the style of a popular and expensive brand using manufactured stones rather than real gemstones and lesser grade metals rather than silver and gold. The manufacturer packages the jewelry in boxes of the same color imprinted with an almost identical logo. About 85 percent of the company's sales are through Internet sales. This example illustrates the competitive risk of _____ that threatens companies that use the differentiation strategy. A. customer sensitive to price differentials B. threat by the cost leader C. customer experience D. counterfeiting Answer: D 88. The typical risks of a differentiation strategy do NOT include which of the following? A. Customers may find the price differential between the low-cost product and the differentiated product too large. B. Customers' experience with other products may narrow customers' perception of the value of a product's differentiated features. C. Counterfeit goods are widely available and acceptable to customers. D. Suppliers of raw materials erode the firm's profit margin with price increases. Answer: D 89. When implementing a focus strategy, the firm seeks to A. offer products that are both differentiated and low cost. B. move into the global market. C. target the typical customer in an industry. D. serve the specialized needs of a market segment. Answer: D 90. Ikea offers young customers a selection of home furnishings featuring good design, function, and acceptable quality at low prices. Ikea is using which business-level strategy? A. cost leadership B. focused cost leadership C. differentiation D. focused differentiation Answer: B 91. The focused differentiation strategy differs from the differentiation strategy in that A. the focused differentiators have a broader competitive scope. B. the value-creating activities of focused differentiators are more constrained. C. focused differentiators target a narrower customer market. D. there are fewer risks with the focused differentiation strategy. Answer: C 92. Chico's is a clothing retailer that targets middle-aged women who want stylish and appealing clothes that are suitable for the mature figure. Chico's has an extensive customer list, a frequent-buyer discount card, and frequent sales promotions to Chico's customers based on their spending levels. Chico's uses a _________ strategy. A. focused differentiation based on a buyer group B. focused differentiation based on a product line segment C. generic differentiation D. integrated cost leadership/differentiation Answer: A 93. The new generation of lunch trucks serving high-end fare in cities such as New York, San Francisco, and Los Angeles share which of the following a business strategies? A. cost leadership B. focused differentiation C. integrated cost leadership/differentiation D. differentiation Answer: B 94. The Monteleone Company pays large fees to a highly recognizable, prestigious individual to be the spokesperson for the company's products, luxury private jets. Monteleone is probably following the A. focused cost leadership strategy. B. focused differentiation strategy. C. integrated cost leadership/differentiation strategy. D. total quality strategy. Answer: B 95. The risks of a focus strategy include A. a competitor's ability to use its core competencies to out focus the focuser by serving an even more narrowly defined segment. B. a competitor's ability to use its core competencies to out focus the focuser by serving an even more broadly defined segment. C. decisions by industry-wide competitors to use their resources to serve a wider range of customers' needs than the focuser has been serving. D. decisions by focused competitors to use their resources to serve a wider range of customers' needs. Answer: A 96. Focus strategies are A. sheltered from the risks associated with industry-wide strategies because of their niche focus. B. able to avoid global risk by focusing on niches in national or regional markets. C. faced with additional types of risks than are industry-wide strategies. D. more subject to failure than industry-wide strategies. Answer: C 97. New Balance Athletic Shoes target Baby Boomers' needs for well-fitting shoes. The company is unique in that it offers a very broad range of shoe widths. A realistic potential risk New Balance runs in this focused differentiation strategy includes the possibility that: A. Baby Boomers may find that they do not need well-fitting shoes, since they will become increasingly sedentary as they age. B. a competitor may be able to better use flexible manufacturing systems to make shoes with an individualized fit. C. athletic shoes may go out of style. D. New Balance shoes may begin to appeal to a wider market, thus losing New Balance's focus advantage. Answer: B 98. Suppose another firm found a way to offer IKEA's customers (young buyers interested in stylish furniture at low cost) additional sources of differentiation while charging the same price or to provide the same service with the same sources of differentiation at a lower price. What category of competitive risk to a focus strategy would this be? A. An industry-wide competitor decides that the market segment served by IKEA is worth entering. B. Focusing on a more narrowly defined segment and "outfocusing" the focuser. C. The needs of the customers in this narrow segment have become more similar to those of industry-wide competitors. D. Experience can narrow customer's perceptions of value of the firm's differentiated features. Answer: B 99. Zara has pioneered "cheap chic" in clothing apparel. Zara offers current and desirable fashion goods at relatively low prices. To implement the strategy, Zara uses sophisticated designers and effective means of managing costs. These are all characteristics of which business level strategy? A. cost leadership B. differentiation C. integrated cost leadership/differentiation D. stuck in the middle Answer: C 100. Firms use the integrated cost leadership/differentiation strategy because A. other firms have established unassailable market dominance with the other four strategies. B. global markets allow for much broader competitive scope. C. most consumers want to pay a low price for products with somewhat highly differentiated features. D. one strategy is not enough for most large firms. Answer: C 101. The integration of a cost leadership and a differentiation strategy A. is challenging because it increases the number of value-chain activities and support functions in which the firm must become competent. B. forces a firm to adapt more slowly to changes in its environment. C. allows the firm to avoid being "stuck in the middle." D. requires such a large customer base that it is most practical for firms in the global marketplace. Answer: A 102. Target's brand promise "Expect More. Pay Less" and appeal to higher-income, fashion-conscious discount shoppers illustrates the _________ strategy. A. cost leadership B. differentiation C. focused differentiation D. integrated cost leadership/differentiation Answer: D 103. J.C. Penney attempted the strategy _______ But it couldn't out _______ Walmart, nor could it _________ Macy's and Target. A. of integrated cost leadership; price; compete with B. of focused differentiation; cost; differentiate between C. of cost leadership; cost; differentiate between D. of focused cost leadership; price; differentiate between Answer: A 104. Three sources of flexibility in completing primary and support activities are particularly useful for firms using the integrated strategy. These are A. Flexible Manufacturing Systems, Reengineering, and Total Quality Management. B. Outsourcing, Reengineering, and Flexible Manufacturing Systems. C. Outsourcing, Total Quality Management, and Information Networks. D. Flexible Manufacturing Systems, Total Quality Management, and Information Networks. Answer: D 105. The benefit of a flexible manufacturing system is that A. the lot size needed to manufacture a firm's product efficiently is reduced. B. the necessary skill levels of workers are reduced, allowing the firm to reduce costs. C. it lends itself to empowerment of employees. D. it captures the cost savings of economies of scale. Answer: A 106. A flexible manufacturing system is A. based on the use of temporary and part-time employees as well as outsourcing. B. a computer-controlled process that is used to produce a variety of products in moderate, flexible quantities with minimal human intervention. C. based on a 360-degree view of the company's relationships with customers. D. a system that identifies "the one best way" to produce each product in the company's line. Answer: B 107. A nationwide chain of pet stores wishes to identify the tradeoffs that its customers are willing to make between low-cost products such as generic pet foods and differentiated features such as pick-up and delivery of pets for grooming. The best technique for this firm to learn this information would be to use A. information networks. B. a flexible manufacturing system. C. differentiation development planning. D. Enterprise Resource Planning. Answer: A 108. By linking companies with their suppliers, distributors, and customers, _________ provide a company with flexibility. A. flexible manufacturing systems B. information networks C. total quality management systems D. capabilities Answer: B 109. TQM is most helpful to firms following the _________ business strategy. A. cost leadership B. integrated cost leadership/differentiation C. focused cost leadership D. focused differentiation Answer: B 110. The term "stuck in the middle" A. means adhering to a middle of the road strategy in the face of negative outcomes. B. indicates that the customers of the firm are willing to pay only a mid-range price for the product. C. reflects the fact that the customers of the firm have only moderate expectations regarding product quality. D. means that the firm's cost structure is not low enough to allow it to attractively price its products and that its products are not sufficiently differentiated to create value for its target customer. Answer: D 111. All of the following describe strategies EXCEPT A. they are purposeful. B. they cannibalize the old strategy. C. they precede the taking of actions to which they apply. D. they demonstrate a shared understanding of the firm's vision and mission. Answer: B 112. More choices and easily accessible information about the functionality of firms' products are creating increasingly ______ customers. A. sophisticated and knowledgeable B. loyal C. dissatisfied D. content Answer: A 113. The _______ dimension of relationships with customers is concerned with the firm's access and connection to customers. A. loyalty B. reach C. richness D. affiliation Answer: B 114. Reach is an especially critical dimension for which firm? A. Google B. J.C. Penney C. Blockbuster D. Colgate-Palmolive Answer: A 115. Customer ratings of products they bought online is an example of A. loyalty. B. reach. C. richness. D. affiliation. Answer: C 116. A company selling diapers knows the market is for people with young children. However, within that segment they can further divide the market by a demographic factor like A. culture. B. lifestyle. C. consumption pattern. D. income. Answer: D 117. Consumers in the United States are known for their A. low income. B. impatience. C. loyalty. D. group think. Answer: B 118. When firms use core competencies to implement value-creating strategies they are answering the "_________" question. A. who B. what C. why D. how Answer: D 119. Stage in the family life cycle is a _________ factor. A. demographic B. socioeconomic C. psychological D. perceptual Answer: B 120. The book The Dyslexic Advantage appeals to a market of educators, people with dyslexia, their friends, family, and coworkers. This is customer segmentation by _________ factors. A. demographic B. socioeconomic C. psychological D. consumption Answer: C 121. Religious beliefs are an example of customer segmentation by _________ factors. A. demographic B. socioeconomic C. geographic D. psychological Answer: D 122. Historically, women have paid more for dry cleaning than men. Signature Cleaners advertises "equal price" for all customers. Signature Cleaners appeals to women, which is market segmentation by _________ factors. A. demographic B. socioeconomic C. geographic D. consumption pattern Answer: A 123. Chelsea Milling Company makes Jiffy packaged baking mixes. It was established in 1930. It has never spent one cent on advertising, which is one reason it is able to pursue a(n) _________ strategy. A. differentiation B. focused differentiation C. integrated cost leadership/differentiation D. cost leadership Answer: D 124. Mercedes mass produces luxury vehicles at a premium price. It uses a(n) _________ strategy. A. differentiation B. focused differentiation C. integrated cost leadership/differentiation D. focused cost leadership Answer: A 125. A firm using a(n) _______ strategy generally needs to operate "below the radar" of larger and more resource rich firms that serve the broader market. A. cost leadership B. differentiation C. focused D. integrated cost leadership/differentiation Answer: C Subjective Short Answer Case Scenario 1: International Cow Packers. International Cow Packers (ICP) is a $12 billion meat processor (slaughter, processing, and packing). Founded in 1943, ICP has grown to become the largest beef and pork processor in the United States (revenues come 90 percent from beef and 10 percent from pork) and also has a growing export market to Japan. The company follows a focused cost leadership strategy, delivering USDA-graded meats primarily to the institutional (schools, prisons, hospitals) and supermarket channels. ICP's entire value chain is organized to deliver volume product at the industry's lowest per-unit cost. Its supplier industries, primarily cattle and swine feedlots, have relatively little power since prices for these raw materials are determined in the commodity markets. While entry barriers to the industry are high due to high minimum startup costs, industry rivalry is extremely intense—primarily due to the fact that three large companies (including ICP) control 80 percent of the market for processed meats. The threat of substitutes is high with an increasing trend for consumers to favor poultry and other non-beef proteins. Buyers are also powerful since supermarkets are relatively concentrated at a regional level and end consumers have ample choices. 126. (Refer to Case Scenario 1). Is ICP's focused low-cost strategy appropriate for its industry? Why? Answer: The best answers will begin by noting that ICP sells a commodity product, as evidenced by the fact that there are only so many grades of USDA-certified beef and pork. Since the product is an undifferentiated commodity, customers typically base their purchasing decisions on price alone. 127. (Refer to Case Scenario 1). What risks is ICP accepting by adopting its focused low-cost strategy? Answer: The best answers will note that since ICP has aligned its entire value-chain with its low-cost strategy, it has linked its own ups and downs to the ups and downs of the beef and pork industries. Thus, like commodity prices, we can expect that ICP will do well when general demand for beef and pork is up, and less well when such demand is down. A more nuanced answer may also point out that ICP's intense focus on costs may essentially drive out any opportunities for it to develop differentiation advantages (other than offering the lowest cost product). If competitors are able to match ICP's efficiency as well as build other differentiation advantages (like brand management skills or forward integration into value-added meat products like prepackaged meals), ICP may find itself at a competitive disadvantage in the long run. 128. (Refer to Case Scenario 1). What can ICP do to decouple itself from the ups and downs of the pure commodity markets? What specific actions might ICP undertake? Answer: The best answers will begin by suggesting that ICP must retain its cost advantage while developing differentiation advantages. At a general industry level, ICP can promote the consumption of beef and pork to counter trends away from these meats. Specific to ICP, it can begin experimenting with value- added products like prepackaged meals (frozen dinners, etc.). A related strategy would be the development of organic products that do not fall within the USDA categories. Selling high-quality beef and pork outside of the USDA categories would be another strategy as well. The theme across students' recommendations should be one of developing products that no longer have commodity-like characteristics. Case Scenario 2: Walt Disney Company. Walt Disney Company is famed for its creativity, strong global brand, and uncanny ability to take service and experience businesses to higher levels. In the early 1990s, then-CEO Michael Eisner looked to the fast-food industry as a way to draw additional attention to the Disney presence outside of its theme parks—its retail chain was highly successful and growing rapidly. A fast-food restaurant made sense from Eisner's perspective since Disney's theme parks had already mastered rapid, high-volume food preparation, and, despite somewhat undistinguished food and high prices (or perhaps because of), all its in-park restaurants were extremely profitable. From this inspiration, Mickey's Kitchen was launched. The first two locations were opened in California and in a suburb of Chicago, adjacent to existing Disney stores. Menu items included healthy, child-oriented fare like Jumbo Dumbo burgers and even a meatless Mickey Burger. Eisner thought that locating each restaurant next to existing Disney stores was sure to increase foot traffic through both venues. Less than 2 years later Disney closed down the California and Chicago stores and shuttered further expansion plans. Eisner cited overwhelming competition from McDonalds and general oversaturation in the fast-food industry as the primary reasons for closing down the failing Mickey's Kitchen. 129. (Refer to Case Scenario 2). Based on your own knowledge of Disney and the information provided in the scenario, does Disney appear to create value in its businesses primarily through a cost leadership or through a differentiation strategy? Answer: The best answers will begin by noting that Disney, via Mickey Mouse, is probably one of the world's most recognized brands. This unique asset complements a differentiation strategy well. Students may further remark that while Disney may seek efficiencies in all of its operations, ticket prices for the theme parks do not appear to be a particular bargain, and that Disney never seems to promote its products based on their cost. This is illustrated by the point that the in-park restaurants charge high prices. 130. (Refer to Case Scenario 2). What resources and value-chain activities did Disney try to leverage through the opening of Mickey's Kitchen? Answer: It appears that Disney was hoping for a differentiation advantage through (1) the image of Mickey Mouse, (2) its service management expertise, particularly in food service, and (3) locations next to its already successful chain of retail outlets. 131. (Refer to Case Scenario 2). Why do you think that Mickey's Kitchen failed? Answer: The best answers will begin with the observation that it is hard to imagine that Mickey's Kitchen could create the differentiated Disney experience and margins at fast-food prices. The discussion can then be extended to note that Disney did deploy a set of resources that were valuable, rare, costly to imitate, and non-substitutable, but it did so in the fast-food industry where consumers make choices based primarily on price. Thus, Disney's particular resources generated differentiation advantages, but not the needed cost advantages. It also can be pointed out that Disney's theme park restaurants have likely done well because guests of the park are a captive audience and have few food choice alternatives unless they opt to leave its park or properties. 132. (Refer to Case Scenario 2). Mickey's Kitchens was successful primarily because it was able to create a differentiated Disney experience that drew customers away from other fast-food restaurants such as McDonald's. Answer: F Case Scenario 3: Abrahamson's Jewelers. Through its sole location in an affluent suburb of San Francisco, Abrahamson's Jewelers has established a strong niche market in the upscale jewelry store segment. Abrahamson's was founded in 1871 and is currently owned and operated by John Wickersham, who bought the firm from its namesake founders in 1985. Wickersham joined the firm as a trainee out of high school, completed his gemology training, and several years later took ownership with the financial help of his parents. That debt has long been paid off and business has thrived. When he first acquired the business, Abrahamson's offered a full range of jewelry and gift items from watches to wedding sets to silverware to clocks. This broad range of products was mirrored by a broad price range-$10,000 Rolex watches were sold next to $50 Seiko watches. While some jewelry was custom designed and manufactured, most of the products were "case ready," meaning they were sourced from large jewelry and silver manufacturers from around the world. Over the last 15 years, Wickersham has narrowed the company's product offering considerably to focus only on high-end watches like Rolex and Piaget, custom jewelry, and estate jewelry. Wickersham stresses that this is an appropriate focus for his business since each of the products lends itself to relationship selling, and price rarely comes into the discussion. Despite the narrower offering moreover, Abrahamson's floor space has doubled, and clients are intensely loyal to the good taste, design skills, and personal service level provided by Mr. Wickersham. 133. (Refer to Case Scenario 3). What generic business strategy best describes Abrahamson's? Why? Answer: The best answers will observe that all the features of this case point to a focused differentiation strategy. The company is focused both in terms of product offering and geography. Purchase decisions are based primarily on a relationship with Mr. Wickersham and unique products, not on price. 134. (Refer to Case Scenario 3). While Abrahamson's is doing well, Mr. Wickersham would like to grow his business beyond the present location. He believes that growth may bring greater profitability, as well as employment avenues for his only child, who will soon be finishing high school. What recommendations do you have for Mr. Wickersham regarding his growth choices? Answer: The objective here is to get students to see the limits to growth presented by Abrahamson's current strategy and key resources. This scenario also provides a nice opportunity to link a company's strategy and resource base with a key individual—in this instance, Mr. Wickersham. The best answers will start by walking through a particular expansion plan and then noting how the company's resources do and do not support that plan. For instance, one obvious avenue is to open additional locations. Such an avenue would likely leverage Wickersham's contacts and expertise in sourcing raw materials, as well as providing a greater market to exploit his representation and contracts with watch firms like Rolex and Piaget. A second avenue would be to leverage Wickersham's design skills to go into the wholesale jewelry business. The risk underlying both of these growth avenues is that it may spread Mr. Wickersham too thin: as the scenario clearly suggests, his personal knowledge and relationships (and time) are central to Abrahamson's current success. 135. (Refer to Case Scenario 3). Would you recommend that Mr. Wickersham embark on an Internet sales strategy for his company? Answer: The best answers will note that some aspect of the Internet may be valuable for Abrahamson's, but that his current resource base does not lend itself well to an Internet sales vehicle. Customers typically expect that products sourced and sold online will be cheaper than through traditional retail channels, even for high-end items like watches (for instance, have students do a Web search for Rolex watches). Abrahamson's is not poised to, nor does it seem inclined to, compete on price. In terms of customer relations, however, Abrahamson's could use some form of Internet presence to show its customers a broader variety of products in its already narrow line. They could also perhaps see prior design work to help them better imagine what a custom-designed piece might look like. Particularly for the estate sales, Abrahamson's could link its inventory to larger, reputable online estatesale houses—thus giving its customers the benefit of local relationships with the power of the Internet's worldwide markets. Finally, use of the Internet for maintaining contact with existing customers would enhance its relationship with and knowledge of them. Essay 136. Define strategy and business-level strategy. What is the difference between these two concepts? Answer: In general, a strategy consists of the choices an organization makes in an attempt to gain strategic competitiveness and earn above-average returns. The organization's strategic choices are influenced by threats and opportunities in the external environment and by the nation and quality of its internal resources, capabilities, and core competencies. The strategy reflects the firm's vision and mission. Business-level strategy is concerned with a particular product market. Business-level strategy is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage in a particular product market. It is the organization's core strategy. Every firm, no matter how small, will have at least one business-level strategy. A diversified firm will have several types of corporate-level strategies as well as a separate business-level strategy in each product market area in which the company competes. The essence of a firm's business level strategy is choosing to perform activities differently or to perform different activities than competitors. 137. When a firm chooses a business-level strategy, it must answer the questions "Who? What? and How?" What are these questions and why are they important? Answer: The firm must decide (1) who are the customers who will be served, (2) what needs do the target customers have that must be satisfied, and (3) how will those needs be satisfied by the firm. The choice of target customer (who) usually involves segmenting the market to cluster people with similar needs into groups. The target customers' needs drive "what" benefits and features the firm's product will have. This involves a choice and balance between cost and differentiation of the product. Finally, firms use their core competencies (how) to implement value-creating strategies and satisfy customers' needs. 138. Discuss how a cost leadership strategy can allow a firm to earn above-average returns in spite of strong competitive forces. Address each of the five competitive forces. Answer: 1) Rivalry: Having the low cost position serves as a valuable defense against rivals. Because of the cost leader's advantageous position, especially in logistics, rivals cannot reduce their costs lower than the cost leaders', and so they cannot earn above- average returns. 2) Buyers: The cost leadership strategy also protects against the power of customers. Powerful customers can drive prices lower, but they are not likely to be driven below that of the next-most-efficient industry competitor. Prices below this would cause the next-most-efficient competitor to leave the market, leaving the costleader in a stronger position relative to the buyer. 3) Suppliers: The cost leadership strategy also allows a firm to better absorb any cost increases forced on it by powerful suppliers, because the cost leader has greater margins than its competitors. In fact, a cost leader may be able to force its suppliers to keep prices low for them. 4) Entrants: The cost leadership strategy also discourages new entrants because the new entrant must be willing to accept no better than average returns until they gain the experience and core competencies required to approach the efficiency of the cost leader. 5) Substitutes: For substitutes to be used, they must not only perform a similar function but also be cheaper than the cost leader's product. When faced with substitute products, the cost leader can reduce its price. 139. Describe the risks of a differentiation strategy. Answer: The risks of a differentiation strategy include the fact that the price differential between the low-cost producer and the differentiated firm's product may be too high for the customer. The differentiated products may exceed the customers' needs. Additionally, differentiation may cease to provide value for which customers are willing to pay. This can occur if rivals imitate the firm's product and offer it at a lower price. A third risk is that customer learning can narrow the customer's perception of the value of the firm's differentiated product. If customers have positive experience with low-cost products, they may decide the additional cost for the differentiated product is too high. Finally, counterfeit products are a risk to a differentiation strategy if these products provide the same differentiated features to customers at significantly reduced prices. 140. How do focused differentiation and focused cost leadership strategies differ from their non-focused counterparts? Answer: Focus strategies target specific industry segments or niche rather than the entire market. The market can be segmented into 1) a particular buyer group, 2) a different part of a product line, or 3) different geographic areas. The firm using a focus strategy hopes to meet the needs of a particular target market better than firms with a more broad-based approach. Or, they hope to meet needs of a market niche that has been overlooked or neglected by broad-based rivals. 141. Describe the additional risks undertaken by firms pursuing a focus strategy. Answer: Focus firms face three additional risks beyond the general risks of industry-wide strategies. First, a competitor may be able to focus on a more narrowly defined competitive segment and "out focus" the focuser. Second, a firm competing on an industry-wide basis may decide the targeted market segment is attractive and worthy of competitive pursuit. Finally, the needs of the firm's customer group may become more similar to the needs of industry-wide customers as a whole, thereby eliminating the advantages of a focus strategy. 142. Describe the advantages of integrating cost leadership and differentiation strategies. Answer: Customers have increasingly high expectations for products, wanting products that are both low-priced and differentiated. So a number of firms are trying to simultaneously follow both a cost leadership and a differentiation strategy. This requires the firm to perform the primary and support activities required of both strategies, which is challenging. Successful integration of strategies allows firms to adapt quickly to environmental changes, and learn new technologies. The firm gains more skills which makes it more flexible. Evidence suggests that successful use of integrated strategies is related to above-average returns. A number of firms such as Target Stores and European-based Zara owe their success to the integrated cost leadership/differentiation strategy. 143. What are the risks of an integrated cost leadership/differentiation strategy? Answer: Integrated strategies present risks that go beyond those that arise from the pursuit of any single strategy by itself. Principal among these risks is that a firm becomes "stuck in the middle." In such a situation a firm fails to implement either the differentiation or the cost leadership strategy effectively. The firm will not be able to earn above- average returns, and without favorable conditions, it will earn below-average returns. Recent research suggests that firms using either cost leadership or differentiation often outperform firms attempting to use a "hybrid" strategy (i.e., integrated cost leadership/differentiation). This research suggests the risks associated with the integrated strategy. 144. Describe how a differentiation strategy can help a firm earn above-average returns. Answer: The differentiation strategy is an integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them. Product innovation is critical to successful use of the differentiation strategy. If the firm has a thorough understanding of what its target customers value, the relative importance they attach to the satisfaction of different needs, and for what they are willing to pay a premium, the differentiation strategy can be effective in helping it earn above-average returns. 145. Describe a firm with which you are familiar. Which business-level strategy does it use and what are the risk to that particular firm? Answer: Students will most likely choose a firm with a cost-leader or differentiation strategy because they are simpler to describe. The risks of each strategy can be found on pages 117, 121, 123, and 126. The firm I know uses a differentiation strategy by focusing on unique product features and high-quality customer service. Risks include price competition eroding their premium image and innovation fatigue impacting their differentiation. Test Bank for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781285425177, 9780538753098, 9781133495239, 9780357033838, 9781305502208, 9781305502147
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