Chapter 05 Business-Level Strategy: Creating and Sustaining Competitive
Advantages Answer Key
True / False Questions
1.
A business-level strategy is a strategy designed for a multi-business company that competes across
multiple businesses.
2.
The three generic strategies that Michael Porter believes a firm can use to overcome the five forces and
achieve competitive advantage include overall price leadership.
3.
Concentrating solely on one form of competitive advantage generally leads to the highest possible level
of profitability.
4.
A firm striving for cost leadership will typically spend relatively more on product-related research and
development than on process-related research and development.
5.
To generate above average returns, a firm following an overall cost leadership position should not be
concerned with attaining parity or proximity on the basis of differentiation relative to its peers.
6.
The experience curve concept suggests that production costs tend to decrease as production increases.
7.
A firm can attain an overall cost leadership position by increasing the management layers in order to
reduce overhead costs.
overall cost leadership, differentiation, and focus.
Level of Difficulty: 2 Medium
Topic: Types of Competitive Advantage and Sustainability
8.
A firm can attain an overall cost leadership position by using automated technology to reduce scrappage
rates.
9.
A firm can attain an overall cost leadership position by purchasing media in large blocks and
maximizing sales force utilization through territory management.
10.
The Yugo car was cheap, but it was poorly made. Consumers did not purchase it. This is an example of
failure to attain parity on the basis of differentiation.
11.
The experience curve is a way of looking at price benefits that come from studying sales figures.
12.
Competitive parity on the basis of differentiation permits a cost leader to maximize disadvantages and
turn them into higher profits than competitors.
13.
Zulily keeps very little inventory. It orders products from vendors after their customer has completed
the purchase. This is an example of how Zulily intends to enhance a cost leadership position.
14.
The French automobile maker, Renault, attains competitive advantage by revamping cars to be more
cost efficient.
15.
An overall high-cost position enables a firm to achieve above-average returns despite strong
competition.
16.
An overall low-cost position protects a firm against rivalry from competitors, because higher costs
allow a firm to earn returns even if its competitors eroded their profits through intense rivalry.
17.
A low-cost position protects firms against powerful buyers.
18.
A low-cost position provides more flexibility to cope with demands from powerful suppliers for input
cost decreases.
19.
The factors that lead to a low-cost position do not provide a substantial entry barriers position with
respect to substitute products introduced by new and existing competitors.
20.
Zulily pays close attention to costs which helps to protect the company from buyer power and intense
rivalry from competitors.
21.
Renault both lessens the degree of rivalry it faces and increases entry barriers for new entrants by
increasing productivity and lowering unit costs.
22.
The supermarket, Aldi, places extreme focus on minimizing costs across its operations which ultimately
makes it more vulnerable to substitutes.
23.
Discount retailers like Walmart and dollar stores are prime substitutes for Aldi, because Aldi focuses on
minimizing costs across its operations.
24.
Firms can be vulnerable to price increases in the factors of production. For example, consider
supply of workers 16 to 24 years old has peaked and will drop by a third in the next 12 years, thanks to
Firms that compete on overall cost leadership are vulnerable if there is an increase in the cost of the
inputs on which the advantage is based.
25.
Too much focus on one or a few value-chain activities can be a pitfall of the overall cost leadership
strategy.
26.
A cost leadership strategy can be at risk of becoming obsolete and must be evaluated regularly in terms
of current competitor responses.
27.
A cost leadership strategy is not susceptible to the risk of reduced flexibility.
28.
Cheesecake Factory differentiates itself along several different dimensions at once by offering high–
quality food, the widest and deepest menu in its class of restaurants, and premium locations.
29.
A successful differentiation strategy lowers entry barriers because of customer loyalty and the ability of
the firm to provide uniqueness in its products and services.
30.
A successful differentiation strategy increases rivalry since buyers become more price-sensitive.
31.
If a firm has a successful differentiation strategy, it is necessary to attain parity on cost.
32.
One potential pitfall of a differentiation strategy is that identification of the brand in the marketplace
may become diluted through excessive product line extensions.
33.
Focus, by itself, often constitutes a competitive advantage.
34.
A potential pitfall of a focus strategy is that focusers can become too focused to satisfy buyer needs.
35.
A potential pitfall of a focus strategy is that cost advantages will not change over time.
36.
A potential pitfall of a focus strategy is that highly focused product and service offerings are not subject
to competition from new entrants and from imitation.
37.
A disadvantage of firms that successfully integrate overall cost leadership and a differentiation strategy
is that they are relatively easy for competitors to imitate.
38.
The combination strategy of low-cost and differentiation provides lower prices and no differentiated
attributes for customers.
39.
Mass customization enables manufacturers to be more responsive to customer demands for high quality
products.
40.
An important idea behind the profit pool concept is that there is always a strong relationship between
the generation of revenues and the capturing of profits.
41.
An important potential pitfall of an integrated overall cost leadership and differentiation strategy is that
firms may fail to implement either one and become stuck in the middle.
42.
Firms can underestimate the challenges and expenses associated with coordinating value-creating
activities in the extended value chain. This is an advantage of integrated overall cost leadership and
differentiation.
43.
Firms may fail to accurately assess sources of revenue and profits in their value chain. This might be a
result of an unbiased manager.
44.
If a car manufacturer focuses a lot on downstream activities such as warranty fulfillment and financing
operations, but also considers the differentiation and cost of the cars themselves, the resulting strategy is
likely to be a failed strategy.
45.
Integration of information systems, logistics, and transportation at Walmart helps it to drive down costs
and provide outstanding product selection. This serves to erect low entry barriers to potential
competitors.
46.
Due to its size with over 475 billion USD in sales in 2014, Walmart has enormous bargaining power
over its suppliers.
47.
The overall value proposition of Walmart makes potential substitute products such as Internet
competitors a more viable threat.
48.
By separating the value of the actual flight from the services associated with flying, airlines have greatly
expanded the profit pool associated with flying. This combines the advantages of integrating overall low
cost and differentiation strategies.
49.
Big Data efforts have the potential to allow firms to better customize their product and service offerings
to customers but are less efficient at using the resources of the company. Kaiser Permanente is an
example of how big data does not lead to cost-conscious treatment patterns.
50.
In technology intensive industries, the duration of competitive advantages is declining.
51.
Competitive advantage is not affected by actions by rivals from within and outside of the industry.
52.
The reason Dell lost its competitive advantage is that it focused too much on operational efficiency and
not enough on innovations demanded by the changing market.
53.
Rapid changes in technology, globalization, and actions by rivals cannot erode company advantages.
54.
The increasing use of technology in low tech industries has made competitive advantages more
sustainable.
55.
Competitive advantage can be found in just–in-time manufacturing processes.
56.
An important issue in evaluating the sustainability of a unique strategy is whether or not rivals will be
able to imitate its strategy or create a viable substitute.
57.
Using information systems to streamline and automate the primary activities of a manufacturing
company value chain does not provide competitive advantage.
58.
In the textbook example of Atlas Door, it created low entry barriers for new entrants through its
development of competitive advantages.
59.
In the textbook example of Atlas Door, it integrated many value-chain activities with the firm in order
to support its just-in–time strategy. This, however, did not provide sustainable competitive advantage.
60.
Many companies have a tight integration among their value-creating activities and have implemented
just-in-time manufacturing. The textbook example of Atlas Door suggests that this is a competitive
advantage, but it is easily imitated and therefore may not be sustainable in the long run.
61.
In the textbook example of Atlas Door, human talent trained in the new just–in-time systems have little
reason to leave the company and therefore this is a sustainable competitive advantage.
62.
In the textbook example of Atlas Door, the threat of new rivals who could bring new technologies and
processes to a similar business model diminishes the sustainability of the Atlas Door just–in-time
model.
63.
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.
64.
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.
65.
During the growth stage of the market life cycle, customers are very likely to establish brand loyalty.
66.
Given the attractiveness of premium pricing during the growth stage of the market life cycle, managers
should emphasize short-term results to increase profits.
67.
As markets mature, competition on the basis of differentiation is preferable to price competition.