CHAPTER 5
Business-Level Strategy and Competitive
Positioning
Name: __________________________ Date: _____________
1. T F The process of defining a business should address the questions: “What is to be satisfied?,”
“Who is to be satisfied?,” and “How will they be satisfied?”
2. T F A business-level strategy is the plan of action that strategic managers adopt to use a
company’s resources and distinctive competencies to gain a competitive advantage over its rival in a
market or industry.
3. T F Customers needs are desires, wants, or cravings that can be satisfied by means of the
characteristics of a product or service.
4. T F Market segmentation is the way a company decides to group customers, based on important
differences in their needs or preferences.
5. T F Market segmentation addresses the “who” portion of a firm’s business model.
6. T F The three generic competitive approaches are cost leadership, differentiation, and focus.
7. T F Product differentiation is the process of creating a competitive advantage by designing goods
or services to satisfy customer needs.
8. T F Because of its lower cost structure, the cost leader is able to charge a higher price than its
competitors.
42 Chapter 5: Business-Level Strategy and Competitive Positioning
9. T F A cost leader generally has low product differentiation and high market segmentation.
10. T F Cost leaders ignore the many different market segments in an industry and position their
products to appeal to the “average” customer.
11. T F The cost leader is able to withstand competition better than the other companies because of its
lower costs.
12. T F Achieving a low-cost position may require the company to develop skills in flexible
manufacturing and adopt efficient materials-management techniques.
13. T F Many cost leaders gear all their strategic choices to the single goal of squeezing out every cent
of costs to sustain their competitive advantage.
14. T F Companies with a differentiation advantage can charge a higher price for their products.
15. T F The three principal routes to high product differentiation are superior innovation, excellent
quality, and responsiveness to customer needs.
16. T F A product’s appeal to customers’ psychological desires is a source of differentiation.
17. T F A company pursuing a business model based on differentiation usually strives to differentiate
itself on one key dimension.
18. T F Differentiation on the basis of innovation and technological competency depends on the R&D
function.
19. T F For any company, building new competencies in the functions that sustain its differentiation
means neglecting its cost structure.
Chapter 5: Business-Level Strategy and Competitive Positioning 43
20. T F A differentiator should not be concerned about the production cost of a product because it can
charge a premium price.
21. T F Powerful suppliers are usually a problem for companies following a differentiation strategy.
22. T F Differentiation leads to high brand loyalty, which in turn reduces the threat of new firms
entering the industry.
23. T F A factor promoting the trend toward market fragmentation and niche marking is the
substantial reeducation of the costs of differentiation as a result of flexible manufacturing.
24. T F All focus strategies entail serving a specific market segment using a differentiation approach.
25. T F The fate of a company whose strategy fails because it has made product/market choices in a
way that does not lead to a sustained competitive advantage is stuck in the middle.
26. T F A fragmented industry is composed of a large number of small and medium-sized companies.
27. T F Fragmented industries typically have few barriers to entry.
28. T F John wants to open a small sandwich shop, in a city that contains dozens of similar stores.
John’s industry is consolidated.
29. T F A focused company is a specialized differentiator or a cost leader.
30. T F McDonald’s created the first national chain of fast-food restaurants in a previously
fragmented industry. This is an example of consolidation.
31. T F JCPenney’s corporation owns thousands of retail outlets and is pursuing a strategy called
franchising.
44 Chapter 5: Business-Level Strategy and Competitive Positioning
32. T F Through chaining, companies increase their buying power, which allows them to negotiate
large price reductions with their suppliers, which promotes their competitive advantage.
33. T F Product proliferation refers to the strategy of “filling the niches” by catering to the needs of
customers in all market segments.
34. T F A price-cutting strategy will always keep potential entrants from entering the industry.
35. T F Market penetration is a strategy in which a company concentrates on expanding market share
in its existing product markets.
36. T F Market development is the process that a company uses to increase its market share in its
existing, established markets.
37. T F Product proliferation can be used to manage rivalry within an industry and to encourage
other businesses to enter the industry.
38. T F When the size of the total market is shrinking, competition tends to intensify in a declining
industry and profit rates tend to fall.
39. T F A leadership strategy aims at growing in a declining industry by picking up the market share
of companies that are leaving the industry.
40. T F A harvest strategy is the best choice when a company wishes to get out of a declining industry
and perhaps optimize cash flow in the process.
41. Competitive advantage with product differentiation occurs when a company
a) creates competitive advantage by grouping customers on the basis of important differences in
their needs.
b) helps firms keep costs to a minimum.
c) creates, makes, and sells a product in a way that better satisfies customer needs than its rivals.
d) is focused on corporate-level strategy.
e) allows its managers to ignore costs.
Chapter 5: Business-Level Strategy and Competitive Positioning 45
42. Which of the following markets offers the best opportunity for product differentiation and market
segmentation?
a) Bulk chemicals
b) Wheat
c) Cement
d) Home theater
e) Fax machines
43. Which of the following is not a generic competitive strategy?
a) Cost leadership
b) Differentiation
c) Focused cost leadership
d) Focused differentiation
e) Innovation
44. Which of the following industries offers the least opportunity for product differentiation and market
segmentation?
a) Oil and gas
b) Clothing
c) Building supplies
d) Home electronics
e) Computers
45. A producer of commodity steel should pursue which of the following generic competitive strategies?
a) Growth
b) Cost leadership
c) Focus
d) Differentiation
e) Profit
46. When a company services the broad market and has a low degree of product differentiation, it is most
likely
a) pursuing a focus strategy.
b) pursuing a differentiation strategy.
c) pursuing a cost-leadership strategy.
d) stuck in the middle.
e) pursuing both cost leadership and differentiation.
47. Which generic business-level strategy is based on the intent to outperform competitors by doing
everything it can to lower its cost structure?
a) Focused differentiation
b) Differentiation
c) Broad differentiation
d) Cost leadership
e) None of these
48. A true cost leader has a __________ level of product differentiation and __________ market
segmentation.
a) high; low
b) low; high
c) low; low
d) high; high
e) variable; variable
49. Which of the five forces does a cost leadership advantage help protect a company from?
a) Competitive rivalry
b) Power of suppliers
c) Power of buyers
d) Substitute products
e) All of these
50. As compared to a differentiator, the cost leader has the advantage over its rivals of
a) making higher profit margins.
b) being better able to withstand the negative influence of powerful suppliers and buyers.
c) having inimitable production methods.
d) enjoying higher brand loyalty.
e) being preferred by investors.
51. A disadvantage of pursuing a cost leadership strategy is that
a) technological change can make experience curve economies obsolete.
b) price wars make it hard to compete with differentiators.
c) it costs more than a differentiation strategy because of the necessity of high capital investments.
d) powerful buyers are a major threat.
e) no quality control exists.
Chapter 5: Business-Level Strategy and Competitive Positioning 47
52. A large company produces a variety of clothing for different customer groups. This firm is pursuing
which of the following strategies?
a) Cost leadership
b) Differentiation
c) Both cost and differentiation
d) Focus
e) Share building
53. Delta Airlines used to advertise its high–quality air travel service by saying it flew “anywhere,
anytime.” What generic strategy is represented by this advertisement?
a) Cost leadership
b) Focused differentiation
c) Stuck in the middle
d) Differentiation
e) Both cost leadership and differentiation simultaneously
54. Which of the following is not a route that can help a company achieve a differentiation advantage?
a) Superior innovation
b) Low cost structure
c) Responsiveness to customer needs
d) Excellent quality
e) Superior innovation and excellent quality
55. When a company produces a wide range of products for different customer groups, it is following a
strategy of
a) cost leadership.
b) market concentration.
c) focus.
d) differentiation.
e) share building.
56. The most expensive competitive strategy to pursue is
a) growth.
b) cost leadership.
c) focused cost leadership.
d) differentiation.
e) hyper-competition.
48 Chapter 5: Business-Level Strategy and Competitive Positioning
57. The main difference between companies following a cost leadership strategy and those following a
focused cost leadership strategy is
a) standardized market price.
b) industry life cycle stage.
c) degree of market segmentation.
d) age of the market.
e) market trajectory.
58. Nick is often asked to perform his clown act for birthday parties or school groups, but instead he only
offers his very inexpensive services to children’s hospitals. Nick is pursuing which generic business
strategy?
a) Cost leadership
b) Differentiation
c) Focused cost leadership
d) Focused differentiation
e) Stuck in the middle
59. Which of the following types of businesses would not be considered a focused differentiator?
a) A store specializing in fly-fishing
b) A plus-size clothing store
c) A Belgian chocolate shop
d) A Mexican fast food restaurant chain
e) An aquarium store selling only salt water fish and equipment
60. A radio station has a distinctive competency in developing new products (shows) and wants to serve
the upscale market. Which of the following is the most appropriate generic strategy for this
company?
a) Cost leadership
b) Differentiation
c) Both cost leadership and differentiation
d) Focused low cost approach
e) Focused differentiation approach
61. Which of the following best describes an industry that consists of many small firms?
a) Fragmented
b) Growth
c) Mature
d) Declining
e) Diverse
Chapter 5: Business-Level Strategy and Competitive Positioning 49
62. Which of the following is not a characteristic of fragmented industries?
a) A large number of small competitors
b) High barriers to entry
c) Many “custom–made” or specialty firms
d) Few economies of scale
e) Low consolidation
63. If a firm operating in a fragmented industry can find a way to __________, the profit potential is
high.
a) backwards integrate
b) consolidate the industry
c) change its generic strategy
d) diversify
e) change strategic groups
64. All of the following strategies are used to grow and consolidate fragmented industries except
a) chaining.
b) using the Internet and IT
c) franchising.
d) horizontal merger.
e) vertical merger
65. One strategy used to consolidate fragmented industries is
a) vertical mergers.
b) horizontal merger
c) product proliferation.
d) chaining
e) non-price competition.
66. To compete in the fragmented restaurant industry, Red Lobster Corporation built and operated
hundreds of restaurants across the United States and Canada. Red Lobster is using which type of
strategy?
a) Acquisitions
b) Chaining
c) Franchising
d) Diversification
e) Horizontal mergers
50 Chapter 5: Business-Level Strategy and Competitive Positioning
67. Which of the following strategies for fragmented industries grants the right to use the parent’s name,
reputation, and business model in a particular location or area in return for a fee and often a
percentage of the profits?
a) Chaining
b) Franchising
c) Vertical merger
d) Horizontal merger
e) B2B
68. Which of the following is an example of a company following a strategy of consolidating a fragmented
industry through horizontal merger?
a) Mail Boxes Etc. grew through the investments of local owner-managers.
b) America Online grew by acquiring rivals such as Netscape, CompuServe, and ICQ.
c) Sears funded growth with cash from operations in its existing stores.
d) Software House International is licensed to sell over 100,000 products in a dozen countries.
e) Heinz started with just one product, pickled horseradish, and today manufactures almost 6,000
foods.
69. Which of the following refers to the process by which companies increase or decrease product prices
to convey their competitive intention to other companies and so influence the way they price their
products?
a) Cost cutting
b) Price signaling
c) Preemption
d) Non-price competition
e) Horizontal mergers
70. Which of the following refers to the process by which one company informally takes the responsibility
for setting industry prices?
a) Price leadership
b) Non-price competition
c) Capacity control
d) Market development
e) Price signaling
71. A telecommunications firm is working on the next generation of switching equipment that allows calls
to be digitally transmitted from sender to receiver. If the new product will be sold to existing
customers, the firm is pursuing a strategy of
a) product proliferation
b) market penetration.
c) product development
d) market signaling.
e) market development.
72. A Japanese automaker begins selling its compact cars in Southeast Asia. This firm is pursuing a
strategy of
a) market penetration.
b) market signaling
c) product proliferation.
d) market development
e) product development.
73. Competitive intensity in a declining industry is greatest when
a) exit barriers are high.
b) the product has high differentiation.
c) the industry is declining slowly instead of rapidly
d) the industry cannot keep up with demand.
e) industry fixed costs are low.
74. Which of the following is not a strategy used in declining industries?
a) Leadership
b) Niche
c) Divestment
d) Harvest
e) Diversification
75. If a firm has the resources to serve a stable pocket of demand in a declining industry, then it should
pursue a __________ strategy.
a) harvest
b) product development
c) product proliferation
d) niche
e) divestiture
76. Are the generic business-level strategies of differentiation and cost leadership incompatible? Explain.
52 Chapter 5: Business-Level Strategy and Competitive Positioning
77. For each of the generic strategies—cost leadership, differentiation, and focus—describe one
advantage and one disadvantage.
78. Empirical evidence shows that firms that pursue cost leadership or differentiation achieve returns
that are about equivalent, firms that pursue both cost leadership and differentiation have the highest
returns, and firms that are stuck in the middle have the lowest returns. Using concepts from this
chapter, explain why this is so.