ESSENTIALS OF STRATEGIC MANAGEMENT, 3RD EDITION
CHAPTER 4
Building Competitive Advantage
Name: __________________________ Date: _____________
1. T F If a company‘s profitability is higher than the industry average, it has a competitive
advantage.
2. T F The price a company charges for a good or service is typically less than the value placed on
that good or service by the customer.
3. T F Efficiency, quality, innovation, and customer responsiveness are the four generic building
blocks of competitive advantage.
4. T F The more value a company creates for its customers, the more willing customers are to pay a
higher price.
5. T F A company has a competitive advantage when its profitability is higher than the average for
its industry.
6. T F To achieve a competitive advantage, a company must excel in all of the building blocks of
competitive advantage—efficiency, quality, innovation, and responsiveness to customers.
7. T F The simplest measure of efficiency is the quantity of inputs that it takes to produce a given
output.
8. T F Michael Porter has argued that low cost and differentiation are the two basic strategies for
creating value and attaining a competitive advantage in an industry.
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9. T F The two least important components of efficiency for many companies are employee
productivity and capital productivity.
10. T F With regard to quality as reliability, a product can be said to be reliable when it consistently
does the job it was designed for, does it well, and rarely, if ever, breaks down.
11. T F Employee productivity is usually measured by output per employee and capital productivity
by output per unit of invested capital.
12. T F Brad has developed a new, improved planting procedure for use in his apple orchard. Brad is
creating a process innovation.
13. T F The attributes of many physical products include the form, features, performance, durability,
reliability, style, and design of the product.
14. T F A value chain is a sequence of activities for transforming inputs into outputs that are valued
by customers.
15. T F In the value chain, support activities are those involved in the physical creation of the
product, its marketing and delivery to buyers, and its after-sales service.
16. T F Primary activities of the value chain relate to the design creation, and delivery of the product,
its marketing, and its support and after-sale service.
17. T F At Adam’s bicycle shop, the primary value chain activity of production occurs each time a
customer’s bicycle is repaired.
18. T F In the value chain, research and development (R&D) is concerned with the design of products
and production processes.
19. T F The primary value chain activities create value for the customer, while the support activities
play no part in creating value.
Chapter 4: Building Competitive Advantage 33
20. T F The R&D function of the value chain can help to lower costs or raise the value of a product
and permit a company to charge higher prices.
21. T F Process innovation is the development of a new process for producing products and delivering
them to customers.
22. T F Competition can be viewed as a process driven by innovations.
23. T F There is a positive relationship between the length of time that a customer stays with a
company and profit per customer.
24. T F Strong brand loyalty reduces customer defection rates.
25. T F A small reduction in materials and transportation costs can have a substantial impact on
profitability.
26. T F The main goal for a company’s human resource function is to find ways to lower wage and
benefits costs.
27. T F The idea behind self-managing teams is to give middle management more control over lower–
level hiring and firing decisions.
28. T F Customer response time is the time it takes for a good to be delivered or a service to be
performed.
29. T F Additional sources of enhanced customer responsiveness include superior design, superior
service, and superior after sales service and support.
30. T F Customer defection rates are determined by customer loyalty which is a function of a
company’s ability to satisfy its customers.
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31. T F Innovation can result in new products that better satisfy customer needs, improved quality of
existing products, or reduced costs.
32. T F Product and process innovation are perhaps the most important building blocks of
competitive advantage.
33. T F Information systems refer to the largely electronic systems for managing inventory, tracking
sales, pricing products, selling products, dealing with customer service inquiries, etc.
34. T F A company’s customers are a good source of quality information but of little use as a source of
new product ideas.
35. T F To add value, R&D can increase a product’s functionality to make it more attractive to
customers.
36. T F Learning effects are cost savings that come from learning through extensive R&D.
37. T F Mass customization is the ability of companies to use flexible manufacturing technology to
customize at cost normally associated with mass production.
38. T F Marketing strategy refers to the position that a company takes with regard to pricing,
promotion, advertising, product design, and distribution.
39. T F Defection rate refers to the percentage of a company’s employees who defect every year to
competitors.
40. T F The principle tool that most managers now use to increase the reliability of their product
offering is the Six Sigma quality improvement methodology.
Chapter 4: Building Competitive Advantage 35
41. The basic philosophy underlying quality improvement methodologies include all of the following
except
a) costs decrease because of less work.
b) productivity improves.
c) better quality leads to higher market share.
d) reduces set-up time for complex manufacturing functions
e) increases the company’s profitability and allows it to stay in business.
42. Examples of successful new product launches include all of the following except
a) Sony Walkman
b) Sony Playstation
c) Nokia cell phones
d) Apple Computer’s Newton – personal digital assistant.
e) Cisco Systems innovations paved the way for rapid growth of the Internet
43. Superior value requires that
a) a company have the lowest cost structure in an industry.
b) the gap between perceived value and costs of production be greater than the gap attained by
competitors.
c) a company create the most valuable product in the eyes of the consumer.
d) a company create the highest quality product in the eyes of the consumer.
e) a company excel in all of the building blocks of competitive advantage.
44. The four generic building blocks of competitive advantage are
a) low cost, quality, efficiency, and customer responsiveness.
b) differentiation, quality, innovation, and customer responsiveness.
c) quality, efficiency, differentiation, and customer responsiveness.
d) customer responsiveness, quality, efficiency, and human resources.
e) quality, customer responsiveness, innovation, and efficiency.
45. When a firm produces products that customers perceive as having higher utility than those of its
rivals, this firm’s source of competitive advantage is
a) design.
b) low innovation.
c) superior quality.
d) efficiency.
e) customer responsiveness.
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46. The reasons that explain why so many new products fail to generate an economic return include all of
the following except
a) the demand for innovations is inherently uncertain.
b) the technology is poorly commercialized.
c) many fail because of poor positioning strategy.
d) development costs are not kept in check.
e) the products are slow to get to the market.
47. John’s bakery is able to produce exactly the right types of bread each day and have them available
when customers come into the store. John’s bakery is superior in
a) innovation.
b) quality
c) human resources.
d) customer responsiveness
e) efficiency.
48. Which primary activity in the value chain is concerned with the design of products and production
processes?
a) Materials management
b) Marketing and sales
c) Research and development
d) Production
e) Company infrastructure
49. Ford Motors developed the Explorer sport utility vehicle, the number one selling SUV in the U.S.,
based on an extensive study of customer preferences. Which value chain activity of Ford conducted
those studies?
a) Research and development
b) Marketing and sales
c) Materials management
d) Human resources
e) Company infrastructure
50. Using the value chain model, which of the following primary activities is performed last, as inputs are
transformed into outputs?
a) R&D
b) Marketing and sales
c) Production
d) After-sales service and support
e) Human resources
Chapter 4: Building Competitive Advantage 37
51. Which of the following support activities in the value chain provides inputs that allow the primary
activities to take place?
a) Human resources
b) Materials management, human resources, information systems, and company infrastructure
c) Company infrastructure
d) Human resources and company infrastructure
e) Information systems
52. Mike works as a corporate trainer, teaching new employees how to perform manufacturing tasks.
Mike works in which value chain activity?
a) Research and development
b) Production
c) Materials management
d) Human resources
e) Company infrastructure
53. Cost accountants are responsible for gathering and monitoring data used for controlling the
organization’s costs. Cost accountants work in which value chain activity?
a) Research and development
b) Company infrastructure
c) Materials management
d) Marketing and sales
e) Human resources
54. Which of the follow support activities in the value chain refers to the company-wide context within
which all the other value creation activities take place?
a) Human resources
b) Information systems
c) Operations
d) Materials management
e) Company infrastructure
55. Strong leadership from top management is
a) a value chain support activity.
b) needed to attain economies of scale.
c) needed to build brand loyalty.
d) part of the human resources value chain activity.
e) a primary activity in the value chain.
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56. Which of the following functions does not contribute to increased efficiency?
a) Research and development
b) Production
c) Marketing
d) Materials management
e) All of these contribute to increased efficiency.
57. Which of the following is not an advantage of flexible manufacturing?
a) Customize product offering
b) Reduction in equipment setup times
c) Increased efficiency
d) Improved quality control
e) Easier project management
58. Flexible manufacturing technology includes all of the following except
a) reduce setup time for complex equipment
b) use individual machines through better scheduling
c) increase product design and distribution
d) improve quality control
e) mass customization of outputs
59. A firm can use __________ strategy, including aggressive pricing and promotion, to increase sales
volume which leads to cost reductions from scale and learning effects.
a) R&D
b) a differentiation
c) TQM
d) marketing
e) a cost leadership
60. Which of the following statements concerning customer defection rates is incorrect?
a) Defection rates are determined by customer loyalty.
b) The longer a company holds on to a customer, the volume of customer-generated unit sales is
greater and the average cost of each sale is lower.
c) Lowering customer defection rates allows a company to achieve a lower cost structure.
d) R&D should address the issue of customer loyalty in product development.
e) There is a positive relationship between length of time that a customer stays with the company
and profit per customer.
Chapter 4: Building Competitive Advantage 39
61. Sourcing inputs from multiple suppliers is a strategy to
a) reduce risks linked to just-in-time inventory systems.
b) quickly move materials through the production process.
c) increase inventory turnover.
d) manage the distribution of finished products to end users.
e) decrease the organization’s need for working capital.
62. Just-in-time inventory systems
a) are used only by manufacturing firms.
b) are implemented primarily by the manufacturing function.
c) have components arrive at a manufacturing plant just in time to enter the production process.
d) are valuable in times when there is a labor dispute with a key supplier.
e) always keep extra inventory on hand for emergencies.
63. Which of the following is not an example of a human resources strategy that could help improve
organizational efficiency?
a) Hiring strategy
b) Just-in-time inventory system
c) Eliminating supervisors and flattening the organizational structure
d) Self-managing teams
e) Pay for performance
64. Which of the following is not correct concerning self-managed teams?
a) Increased responsibility and empowerment are seen as motivators.
b) Performance bonuses linked to team production and quality targets are seen as motivators.
c) Cost savings arise from eliminating supervisors.
d) A flatter organizational hierarchy is created.
e) All of these statements are correct.
65. Which of the following is not consistent with the philosophy underlying quality improvement
methodologies?
a) Improved quality reduces costs through less rework, fewer mistakes, and fewer delays.
b) Better quality leads to higher market share and allows the company to raise prices.
c) Senior managers must buy into quality improvement programs and communicate their
importance to the organization.
d) Quality improvement methodologies recognize that quality problems generally come from
worker error.
e) All of these are consistent with quality improvement methodologies.
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66. When a company successfully implements Six Sigma quality, about how many units will be defective?
a) 17% (one-sixth of the units)
b) 6% per million units
c) 0.6% per million units.
d) 3.4 defects per million units.
e) three per ten million units.
67. A company can create quality as excellence by emphasizing attributes of service associated with the
product that include all of the following except
a) ordering ease
b) prompt delivery
c) easy installation
d) increasing innovation
e) maintenance services
68. Which of the following is not part of the positioning strategy that a company adopts for a product?
a) price
b) product features
c) focus groups
d) advertising
e) promotion
69. Which of the following is not one of the attributes that seem to be important in order for a product
development team to function effectively?
a) A heavyweight project manager
b) A team leader that is able to act as an advocate of the team to senior management
c) The team should be composed of at least one member from each key function.
d) Team members should be co-located.
e) The organization should develop set policies and procedures that all development teams should
follow.
70. Customer responsiveness is an important ___________________ attribute that can help to build
brand loyalty.
a) marketing
b) leadership
c) management
d) differentiating
e) None of the above
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71. The intellectual property of an organization is
a) a tangible resource.
b) an intangible resource.
c) a tangible capability.
d) an intangible capability.
e) a tangible competence.
72. Which of the following is not an intangible resource?
a) Technological know-how
b) A well-known brand name
c) a favorable corporate reputation
d) Marketing know-how
e) Plant and equipment
73. Capabilities are
a) a company’s physical plant and equipment.
b) a company’s technological know-how.
c) a company’s resources.
d) a company’s reputation.
e) a company’s skills at coordinating resources and putting them to productive use.
74. ____________ are factors that make it difficult for a competitor to copy a company’s distinctive
competencies.
a) Barriers to innovation
b) Organizational inertia
c) Competitive dynamics
d) Barriers to imitation
e) Strategic commitments
75. The more firm-specific and difficult to imitate is a resource, the more likely a company is to have a/an
____________________.
a) tangible resource.
b) intangible resource.
c) distinctive competency.
d) effective marketing strategy.
e) strong barrier to imitation.
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76. Explain how tangible and intangible resources and capabilities can lead to distinctive competencies.
Give specific examples.
77. Give one example of a firm that has achieved a distinctive competency in efficiency, and describe that
competency. Then do the same for a firm with a distinctive competency in quality, innovation, and
responsiveness to customers.
78. Discuss the relationships between competitive advantage, distinctive competencies, resources, and
capabilities.
79. Identify and discuss the four building blocks of competitive advantage.
80. Comment on this statement: “No competitive advantage lasts forever.”