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c.
focused differentiators target a narrower customer market.
d.
there are fewer risks with the focused differentiation strategy.
75. 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 goods.
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.
76. 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.
77. 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.
78. 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.
79. 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.
80. 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.
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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.
81. 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.
82. 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
83. 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.
84. 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
85. 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.
86. 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
87. TQM is most helpful to firms following the ____ business strategy.
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a.
cost leadership
b.
integrated cost leadership/differentiation
c.
focused cost leadership
d.
focused differentiation
88. 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.
89. 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.
90. 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.
91. 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.
92. 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.
93. 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
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94. 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.
95. 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.
96. 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
97. Stage in the family life cycle is a ______ factor.
a.
demographic
b.
socioeconomic
c.
psychological
d.
perceptual
98. 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
99. When firms use core competencies to implement value-creating strategies they are answering the “______” question.
a.
who
b.
what
c.
why
d.
how
100. 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.
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c.
the actual product of service (e.g., a cup of coffee), not the experience.
d.
allowing customer to design their own drinks.
101. 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.
102. 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.
103. 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.
104. 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
105. A cost leadership strategy provides goods or services with features that are:
a.
acceptable.
b.
unique.
c.
substandard.
d.
mediocre.
106. 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.
107. 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
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c.
How: Determining Core Competencies Necessary to satisfy Customer Needs
d.
When: Determining When to Satisfy Customer Needs
108. 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.
109. Reach is an especially critical dimension for which firm?
a.
Google
b.
J.C. Penney
c.
Blockbuster
d.
Colgate-Palmolive
110. 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.
111. 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.
112. 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.
113. 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
114. Target’s brand promise “Expect More. Pay Less” and appeal to higher-income, fashion-conscious discount shoppers
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illustrates the _____ strategy.
a.
cost leadership
b.
differentiation
c.
focused differentiation
d.
integrated cost leadership/differentiation
115. The products or services that are differentiated from others, have qualities that are:
a.
perceived by the customer to add value that they will pay a premium to purchase.
b.
valued by the typical industry customer.
c.
perceived as standardized by the customer.
d.
seen as classic attributes rather than passing fads.
116. 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.
117. 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.
118. A firm’s core strategy is its ____ strategy.
a.
corporate
b.
business
c.
pricing
d.
international
119. 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.
120. 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.
121. Which of the following is NOT a value-creating activity associated with the differentiation strategy?
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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.
122. Research suggests that having a competitive advantage in ____ creates more value in the cost leadership strategy
than it does in the differentiation strategy.
a.
marketing and sales
b.
technology development
c.
logistics
d.
human resource management
123. Describe the risks of a differentiation strategy.
124. 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.
125. How do focused differentiation and focused cost leadership strategies differ from their non-focused counterparts?
126. Describe the advantages of integrating cost leadership and differentiation strategies.
127. Describe a firm with which you are familiar. Which business-level strategy does it use and what are the risk to that
particular firm?
128. Describe the additional risks undertaken by firms pursuing a focus strategy.
129. 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?
130. What are the risks of an integrated cost leadership/differentiation strategy?
131. Describe how a differentiation strategy can help a firm earn above-average returns.
132. Define strategy and business-level strategy. What is the difference between these two concepts?
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Answer Key
1. False
2. True
3. False
4. True
5. False
6. False
7. True
8. False
9. False
10. True
11. False
12. True
13. False
14. True
15. False
16. False
17. False
18. True
19. True
20. False
21. False
22. True
23. False
25. False
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26. True
27. True
28. False
29. False
30. True
31. False
32. False
33. True
34. True
35. True
36. True
37. True
38. a
39. d
40. b
41. c
42. c
43. c
44. c
45. c
46. a
47. c
48. c
49. d
51. d
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52. b
53. d
54. b
55. a
56. a
57. c
58. a
59. c
60. a
61. a
62. a
63. b
64. d
65. b
66. d
67. a
68. a
69. b
70. a
71. b
72. a
73. d
74. c
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77. d
78. d
79. b
80. d
81. a
82. c
83. a
84. b
85. c
86. b
87. b
88. a
89. c
90. c
91. b
92. b
93. a
94. d
95. b
96. b
97. b
98. a
99. d
100. a
102. b
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103. d
104. b
105. a
106. a
107. a
108. c
109. a
110. a
111. d
112. b
113. d
114. d
115. a
116. c
117. a
118. b
119. b
120. a
121. a
122. c
123. 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.
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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.
125. 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.
126. 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 costleadership 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.
127. 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.
128. 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 “outfocus” 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.
129. 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.
130. 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.
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