Strategic Management and Competitive Advantage, 4e (Barney)
Chapter 4 Cost Leadership
1) Corporate level strategies are actions firms take to gain competitive advantages in a single
market or industry.
2) Cost leadership and product differentiation are so widely recognized that they are often called
generic business strategies.
3) A firm that chooses a cost-leadership business strategy focuses on gaining advantages by
reducing its costs to a level equal to all of its competitors.
4) Firms that are successful in pursuing a cost-leadership strategy focus solely on keeping costs
low and abandoning other business or corporate strategies.
5) In general, cost advantages are not possible when competing firms produce similar products.
6) Economies of scale are said to exist when the increase in firm size (measured in terms of
volume of production) are associated with lower costs (measured in terms of average costs per
unit of production).
7) As the volume of production in a firm increases, the average cost per unit decreases until some
optimal volume of production is reached, after which the average costs per unit of production
begin to rise because of diseconomies of scale.
8) When a firm has high levels of production, it is often able to purchase and use manufacturing
tools that cannot be kept in operation in small firms.
9) The link between volume of production and the cost of building manufacturing operations is
particularly important in industries characterized by product manufacturing, such as chemical
and oil refining.
10) High volumes of production are also associated with high levels of generality in employee
tasks and as workers become increasingly generalized in accomplishing a variety of tasks, they
can become more effective at these tasks, thereby reducing the firm’s costs.
11) There are physical limitations to the size of some manufacturing processes and when this
size is exceeded, diseconomies of scale are experienced.
12) As a firm increases in size, it often increases in complexity; however, the ability of managers
to control and operate the firm efficiently are virtually unlimited and therefore costs do not
substantially increase.
13) Increased worker specialization associated with higher levels of production can lead to
worker de-motivation and diseconomies of scale.
14) Large transportation costs can offset cost reductions attributable to the exploitation of
economies of scale in manufacturing.
15) The link between cumulative volumes of production and cost has been formalized in the
concept of the learning curve.
16) Economies of scale focus on the relationship between the cumulative volume of production
and average unit costs, while the learning curve focuses on the relationship between the volume
of production at a given time and average unit costs.
17) If a firm gets too large, it will eventually experience both diseconomies of scale and an
increase in costs associated with the learning-curve effect as cumulative volume of production
grows.
18) Learning curve-cost advantages are restricted solely to manufacturing and the advantage
associated only with the manufacturing business function.
19) Efforts to move down the learning curve quickly by acquiring market share are likely to
generate only normal economic performance.
20) Differential low-cost access to productive inputs may create cost differences among firms
producing similar products in an industry.
21) Productive inputs are any supplies used by a firm in conducting its business activities.
22) One of the least important productive inputs in almost all companies is labor and it is
unlikely that differential low cost access to labor can give a firm a cost advantage.
23) Physical technology-based cost advantages apply only in manufacturing firms.
24) Technological software includes things like the quality of relations among labor and
management, an organization’s culture, and the quality of managerial controls.
25) In general, firms that are attempting to implement a cost-leadership strategy will choose to
produce relatively simple standardized products that sell for relatively low prices compared to
the products and prices of firms pursuing other business or corporate strategies.
26) Firms for whom the price of the products or services they sell is determined by market
conditions and not by the individual decisions of the firms themselves are known as price
makers.
27) A cost-leadership competitive strategy helps reduce the threat of entry by creating cost-based
barriers to entry.
28) The threat of rivalry is increased when low-cost firms set their prices equal to those of higher
cost competitors.
29) A cost-leadership competitive strategy can reduce both the threat of substitutes and the threat
of suppliers that a firm may face.
30) Given the relatively low margins of firms pursuing a cost-leadership strategy, firms pursuing
this strategy are especially vulnerable to buyers having their revenues reduced to a point where
they are unable to earn normal or above-normal performance.
31) If cost-leadership strategies can be implemented by numerous firms in an industry, or if no
firms face a cost disadvantage in imitating a cost-leadership strategy, then being a cost leader
does not generate a sustained competitive advantage for a firm.
32) Sources of cost advantage that are unlikely to be rare include learning-curve economies,
differential low-cost access to productive inputs and technological software.
33) When the efficient size of a firm or plant is significantly smaller than the total size of an
industry, there will usually be numerous efficient firms/plants in that industry, and a cost-
leadership strategy based on economies of scale will be rare.
34) Cost advantages based on diseconomies of scale are likely to be rare.
35) In general, economies of scale and diseconomies of scale are relatively easy-to-duplicate
bases of cost leadership.
36) Firms implementing cost-leadership strategies will generally adopt what is known as a
functional organizational structure.
37) Cost-leadership firms are typically characterized by very tight cost control systems; frequent
and detailed cost control reports; an emphasis on quantitative cost goals and targets; and close
supervision of labor, raw materials, inventory, and other costs.
38) Compensation at cost-leadership firms is usually tied directly to product innovation and
customer service efforts.
39) Even the best formulated strategy is competitively irrelevant if it is not implemented.
40) The U in U-form structure stands for “unitary.”
41) Actions that firms take to gain competitive advantage in a single market or industry are
known as
A) business-level strategies.
B) corporate-level strategies.
C) functional-level strategies.
D) macro-level strategies.
42) Actions firms take to gain competitive advantages by operating in multiple markets or
industries simultaneously are known as
A) business-level strategies.
B) corporate-level strategies.
C) functional-level strategies.
D) macro-level strategies.
43) Cost-leadership and product-differentiation strategies are so widely recognized that they are
often called
A) common business strategies.
B) generic corporate strategies.
C) generic business strategies.
D) common corporate strategies.
44) A firm that chooses a ________ focuses on gaining advantages by reducing its cost below all
of its competitors.
A) diversification strategy
B) product-differentiation business strategy
C) corporate strategy
D) cost-leadership business strategy
45) The best example of a firm following a cost-leadership business strategy is
A) Mercedes Benz.
B) Macy’s.
C) Wal-Mart.
D) Rolls Royce.
46) ________ are said to exist when the increase in firm size (measured in terms of volume of
production) are associated with lower costs (measured in terms of average costs per unit of
production).
A) Sustainable competitive advantages
B) Economies of scale
C) Temporary competitive advantages
D) Economies of scope
47) As the volume of production in a firm increases, the average cost per unit decreases until
some optimal volume of production is reached, after which the average costs of production begin
to rise because of
A) diseconomies of scale.
B) economies of scope.
C) diseconomies of scope.
D) economies of scale.
48) The link between volume of production and the cost of building manufacturing operations is
particularly important in industries characterized by
A) process innovations.
B) product manufacturing.
C) product innovation.
D) process manufacturing.
49) According to the “two-thirds rule,” it would cost a firm ________ to build a plant with a
capacity of 100,000 units.
A) 2/3*100,000
B) 100,000 / 2/3
C) 100,000 raised to the 2/3 power
D) 2 * 100,000 / 3
50) ________ levels of production are associated with ________ levels of employee
specialization.
A) High, high
B) High, low
C) Low, high
D) Low, moderated
51) Which of the following is not a potential source of diseconomies of scale?
A) Physical limits to efficient size
B) Worker de-motivation
C) Distance to markets and suppliers
D) Learning-curve economies
52) If Temper Company, a manufacturer of mattresses, was considering moving its production
facilities to China but decided against it because the additional costs of shipping the mattresses
back to the U.S. would offset the cost savings associated with moving the production facilities,
the increased costs associated with shipping would be an example of
A) learning-curve economies.
B) diseconomies of scale.
C) economies of scale.
D) competitive advantages.
53) ________ focus(es) on the relationship between the volume of production and a given point
in time and average unit costs, the ________ focus(es) on the relationship between cumulative
production and average costs.
A) Economies of scale; learning curve
B) Competitive advantage; economies of scale
C) Learning curve; economies of scale
D) Economies of scale; competitive advantage
54) Which of the following statements regarding the learning curve and economies of scale is
accurate?
A) Just as diseconomies of scale are presumed to exist if a firm gets too large, there is a
corresponding increase in costs in the learning-curve model as the cumulative volume of
production grows.
B) Where diseconomies of scale are presumed to exist if a firm gets too large, there is no
corresponding increase in costs in the learning-curve model as the cumulative volume of
production grows.
C) Where diseconomies of scale are presumed to exist if a firm gets too small, there is no
corresponding increase in costs in the learning-curve model as the cumulative volume of
production grows.
D) Just as diseconomies of scale are presumed to exist if a firm gets too small, there is a
corresponding increase in costs in the learning-curve model as the cumulative volume of
production grows.
55) Learning-curve-cost advantages are
A) restricted only to manufacturing firms.
B) restricted only to firms in services industries.
C) restricted only to firms in extraction industries.
D) not restricted to manufacturing.
56) ________ are any supplies used by a firm in conducting its business activities.
A) Productive assets
B) Productive inputs
C) Productive outputs
D) Productive inventory
57) In order to create a cost advantage, the cost of acquiring low-cost productive inputs must be
________ the cost savings generated by these factors.
A) greater than
B) equal to
C) less than
D) greater than or equal to
58) Machines and robots are examples of
A) technological software.
B) economies of scale.
C) learning-curve effects.
D) technological hardware.
59) The quality of relations among labor and management, an organization’s culture, and the
quality of management controls are all examples of
A) technological hardware.
B) technological software.
C) productive inputs.
D) economies of scale.
60) Choices that firms make about the kinds of products and services they will sell that impact
their relative cost position are known as
A) technological hardware.
B) policy choices.
C) technological software.
D) corporate level strategies.
61) Firms for whom the price of the products or services they sell is determined by market
conditions and not by the individual decision of the firms are known as
A) profit takers.
B) price makers.
C) price takers.
D) profit makers.
62) Which of the following statements is accurate?
A) A cost-leadership competitive strategy increases the threat of new entrants by lowering cost-
based barriers to entry.
B) Firms with a low-cost position can reduce the threat of rivalry in an industry.
C) Cost leaders are especially vulnerable to substitute products.
D) Cost leaders are especially vulnerable to the threat of suppliers.
63) If the potential responses of competing firms are likely to be very detrimental to the costs
advantages of cost leaders, firms pursuing a cost-leadership competitive strategy should
A) drop their prices below competitors’ prices to increase overall economic performance through
increased volumes of profitable sales.
B) raise their prices above competitors, increasing overall economic performance through higher
margins.
C) focus on a specific niche market to avoid direct competition with aggressive competitors.
D) set their prices equal to competitors’ prices, sacrificing some market share for increased profit
margins and the release of less information.
64) Which of the following statements about cost leadership and the threat of buyers is accurate?
A) If buyers demand increased quality or service, cost leaders can absorb these costs and may
still have a cost advantage over the competition.
B) Being a cost leader encourages buyer backward vertical integration.
C) Firms pursuing a cost-leadership strategy are especially vulnerable to powerful buyers who
insist on low prices or higher quality and service from their suppliers.
D) Cost leaders are not able to absorb costs associated with buyers’ demands for increased
quality or service.
65) Which of the following is likely to be a rare source of cost advantage?
A) Technological software
B) If the efficient size of a firm or plant is significantly smaller than the total size of an industry
C) Cost disadvantages based on diseconomies of scale
D) Technological hardware