Question 1

An example of a firm applying the overall cost leadership generic strategy in a value-chain activity would be to automate the production assembly line to reduce scrappage from quality errors.

Accepted Answer

Overall cost leadership requires a tight set of interrelated tactics that includes cost minimization in all activities in the value chain of the firm such as R&D, service, sales force, and advertising. An example of this is the effective use of automated technology to reduce scrappage rates.

Question 2

The market life cycle should be used for short-run forecasting because it provides a conceptual framework for understanding what changes typically occur over the life of an industry.

Accepted Answer

The industry life cycle refers to the stages of introduction, growth, maturity, and decline that occur over the life of an industry. In considering the industry life cycle, it is useful to think in terms of broad product lines such as personal computers, photocopiers, or long-distance telephone service. Changes tend to be slower than what is needed for forecasting.

Question 3

A need for turnaround occurs only during the maturity or declining stage of the life cycle.

Accepted Answer

A need for turnaround may occur at any stage in the life cycle but is more likely to occur during maturity or decline.

Question 4

A platform business is like a matchmaker in that it can bring together buyers and sellers.An example of a successful platform provider is Facebook.By attracting and retaining users through expanding services it differentiates itself from more narrowly-focused competitors such as Twitter.

Accepted Answer

Successful platform firms create a business that attracts a large range of suppliers and a wide population of customers, becoming the go-to clearinghouse that both suppliers and customers turn to, in order to facilitate a transaction. In doing so, they typically successfully combine elements of both cost and differentiation advantages. Facebook has looked to continually extend its differentiation by expanding the range of services it offers, and as a result, has been able to put the squeeze on narrow platform providers, such as Twitter.

Question 5

Piecemeal productivity improvements can be used by a mature business in need of a turnaround.

Accepted Answer

There are many ways in which a firm can eliminate costs and improve productivity. Although individually these are small gains, they cumulate over a period of time to substantial gains. Improving business processes by reengineering them, benchmarking specific activities against industry leaders, encouraging employee input to identify excess costs, increasing capacity utilization, and improving employee productivity lead to a significant overall gain.

Question 6

The experience curve is a factor central to an overall cost leadership strategy and refers to how business learns to increase costs as it gains experience with production processes.

Accepted Answer

The experience curve is the decline in unit costs of production as cumulative output increases.

Question 7

A firm can differentiate itself in a support activity by purchasing high-quality components to enhance product image such as Apple does with its laptop computers.

Accepted Answer

As the name implies, a differentiation strategy consists of creating differences in the product or services of the firm by offering by creating something that is perceived industrywide as unique and valued by customers. An example is the use by Apple of quality in procurement to enhance the product image.

Question 8

Airlines such as Emirates exploit the profit pool for competitive advantage by adding fees for a variety of services such as access to airport lounges.

Accepted Answer

By separating the value of the actual flight from the services associated with flying, airlines have greatly expanded the profit pool associated with flying. They have found that flyers may be very price-conscious when purchasing tickets but are willing to shell out more for a range of services.

Question 9

Caterpillar uses data analytics to differentiate itself from competitors by providing information services.

Accepted Answer

More recently, Caterpillar has looked to big data to help it grow its business. In a study of one malfunctioning machine owned by a large mining company, Cat concluded that the new technology of the firm would have reduced repair costs from the 650,000 USD the mining company incurred to 12,000 USD by identifying an emerging problem before it did serious damage. Thus, Cat sees this technology as allowing it to better serve both its customers and dealers, resulting in new sources of income for Cat as customers see value in buying ongoing data-access and software subscriptions.

Question 10

Factors that lead to a low-cost position also provide substantial entry barriers to substitute and new products as is demonstrated by the retailer,Aldi,whose focus on minimizing costs across the entire operation permits it to position well against competitors such as Walmart.

Accepted Answer

The factors that lead to a low-cost position also provide a substantial entry barriers position with respect to substitute products introduced by new and existing competitors. The extreme focus on minimizing costs across its operations makes Aldi less vulnerable to substitutes, such as discount retailers like Walmart and dollar stores.

Question 11

Given the attractiveness of premium pricing during the growth stage of the market life cycle,managers should emphasize short-term results to increase profits.

Accepted Answer

In the growth stage, revenues increase at an accelerating rate because new consumers are trying the product and a growing proportion of satisfied consumers are making repeat purchases. Since repeat purchases are necessary, a long-term strategy is desirable.

Question 12

The five-forces model suggests that with intense competition an overall low-cost position will not enable a firm to achieve above-average returns.

Accepted Answer

An overall low-cost position enables a firm to achieve above-average returns despite intense competition. It protects a firm against rivalry from competitors, because lower costs allow a firm to earn returns even if its competitors eroded their profits through intense rivalry.

Question 13

If the overall cost leadership strategy is to provide sustainable competitive advantage,all activities in the value-chain need to be evaluated including the relationships among the value-chain activities.

Accepted Answer

Too often managers make big cuts in operating expenses but do not question year-to-year spending on capital projects. Or managers may decide to cut selling and marketing expenses but ignore manufacturing expenses. Managers should explore all value-chain activities, including relationships among them, as candidates for cost reductions.

Question 14

Once established,competitive advantages last forever whether the firm is in a high technology environment or not.

Accepted Answer

Competitive advantages are, however, often short-lived. Nothing is forever when it comes to competitive advantages. Rapid changes in technology, globalization, and actions by rivals from within and outside the industry can quickly erode firm advantages. It is becoming increasingly important to recognize that the duration of competitive advantages is declining, especially in technology-intensive industries. Even in industries that are normally viewed as low tech, the increasing use of technology has suddenly made competitive advantages less sustainable.

Question 15

Combination strategies,such as integrating overall low cost and differentiation,makes it easier for rivals to duplicate or imitate because it is harder for the primary firm to provide value.

Accepted Answer

Perhaps the primary benefit to firms that integrate low-cost and differentiation strategies is the difficulty for rivals to duplicate or imitate. This strategy enables a firm to provide two types of value to customers:differentiated attributes (e.g., high quality, brand identification, reputation) and lower prices (because of the lower costs of the firm in value-creating activities). The goal is thus to provide unique value to customers in an efficient manner.

Question 16

A pitfall of integrated overall cost leadership and differentiation is underestimating the expenses associated with coordinating value-creating activities in the extended value chain.

Accepted Answer

Integrating activities across a value chain of a firm with the value chain of suppliers and customers involves a significant investment in financial and human resources. Firms must consider the expenses linked to technology investment, managerial time and commitment, and the involvement and investment required by the customers and suppliers of the firm. The firm must be confident that it can generate a sufficient scale of operations and revenues to justify all associated expenses.

Question 17

Overall cost leadership is a generic strategy unlike others that does not require a tight set of interrelated tactics.

Accepted Answer

Overall cost leadership requires a tight set of interrelated tactics that include:
Aggressive construction of efficient-scale facilities.
Vigorous pursuit of cost reductions from experience.
Tight cost and overhead control.
Avoidance of marginal customer accounts.
Cost minimization in all activities in the value chain of the firm, such as R/D, service, sales force, and advertising.

Question 18

An important advantage of first movers in a market is that they may establish brand recognition that may later serve as an important switching cost.

Accepted Answer

There is an advantage to being the first mover in a market. It led to the success of Coca-Cola in becoming the first soft-drink company to build a recognizable global brand and enabled Caterpillar to get a lock on overseas sales channels and service capabilities.

Question 19

Few turnarounds require firms to analyze both the external and internal environments relevant to their firm.

Accepted Answer

Most turnarounds require a firm to carefully analyze the external and internal environments. The external analysis leads to identification of market segments or customer groups that may still find the product attractive. Internal analysis results in actions aimed at reduced costs and higher efficiency. A firm needs to undertake a mix of both internally and externally oriented actions to affect a turnaround.

Question 20

A platform business such as Airbnb leverages data analytics to differentiate its offer from that of competitors such as VRBO.

Accepted Answer

Platform businesses can learn a great deal about their suppliers and customers by observing their search and usage patterns. Successful platform firms leverage this data to figure out how to best fill their matchmaking role in bringing together suppliers and users. Airbnb has worked to create systems that increase the likelihood that hosts will agree to offers from potential renters. The firm realizes that renters get frustrated if their rental offers are declined. Additionally, hosts will be dissatisfied if offers come from undesirable renters. Using data analytics, Airbnb analyzed when specific hosts accepted and declined offers and their satisfaction ratings of renters to develop profiles of preferred renter characteristics. Using the resulting algorithm for matching renter characteristics and host preferences, the company saw a 4 percent increase in its rate of converting offers into accepted rental matches

Quiz 5: Business-level Strategy: Creating and Sustaining Competitive Advantages