Strategic Management and Competitive Advantage, 4e (Barney)
Chapter 5 Product Differentiation
1) Wal-Mart exemplifies a firm pursuing a product-differentiation strategy while Victoria’s
Secret exemplifies a firm pursuing a cost-leadership strategy.
2) Product differentiation is a business strategy whereby firms attempt to gain a competitive
advantage by increasing the perceived value of their products and services relative to the
perceived value of other firms’ products or services.
3) Attempts to create differences in the relative perceived value of a firm’s products or services
are rarely made by altering the objective properties of those products or services.
4) While firms often alter the objective properties of their products or services in order to
implement a product-differentiation strategy, the existence of product differentiation is always a
matter of customer perception.
5) If products or services are perceived as being different in a way that is valued by customers,
even if there is no physical differentiation, then product differentiation exists.
6) A hedonic price is that part of a products’ or services’ actual price that is not attributable to a
particular attribute of that product or service.
7) Chryslers’ introduction of the “cab forward” design was an attempt at differentiation through
product features.
8) To the extent that differences in product complexity lead customers to conclude that the
products of some firms are more valuable than the product of other firms, then product
complexity can be a basis of product differentiation.
9) Timing-based product differentiation relies solely on being a first mover.
10) The physical location of a firm cannot be a source of product differentiation.
11) Products can be differentiated by the extent to which they are customized for particular
customer applications.
12) Through advertising and other consumer marketing efforts, firms attempt to alter the
perceptions of current and potential customers, but only when specific attributes of a firm’s
products or services are altered.
13) Once developed, a firm’s reputation can last a long time, even if the basis for that reputation
no longer exists.
14) The ability to use organization structure to facilitate coordination among scientific
disciplines to conduct research is known as architectural competence.
15) When firms place their products in movies, this is known as co-branding.
16) In the information technology business, interconnectivity is a relatively unimportant basis of
potential product differentiation.
17) Product differentiation is ultimately an expression of the creativity of individuals and groups
within firms and is limited only by the opportunities that exist, or that can be created, in a
particular industry and by the willingness and ability of firms to creatively explore ways to take
advantage of those opportunities.
18) It is reasonable to expect that in the near future a marketing specialist will develop a
definitive list of bases of product differentiation.
19) Firms selling differentiated products face a horizontal demand curve.
20) Edward Chamberlin described firms selling differentiated products and facing a downward–
sloping demand curve as being in an industry characterized by monopolistic competition.
21) Product differentiation helps reduce the threat of new entry by forcing potential entrants to
an industry to absorb not only the standard costs of beginning business but also the additional
costs associated with overcoming incumbent firms’ product-differentiation advantages.
22) Product differentiation effectively reduces rivalry to zero.
23) Product differentiation increases the threat of substitutes by making a firm’s current products
appear less attractive than substitutes.
24) Firms with highly differentiated products may have loyal customers, or customers who are
unable to purchase similar products or services from other firms and are therefore more likely to
accept increased prices due to a firm passing on increased costs by a powerful supplier.
25) When a firm sells a highly differentiated product, it enjoys a quasi-monopoly in that segment
of the market.
26) In fragmented industries firms can use product differentiation to help consolidate a market.
27) In emerging industries, product-differentiation efforts often focus on product refinement as a
basis for product differentiation.
28) The concept of product differentiation generally assumes that the number of firms that have
been able to differentiate their products in a particular way is, at some point in time, less than the
number of firms needed to generate perfect competition dynamics.
29) Firms that pursue a product-differentiation strategy can choose whether or not they want to
reveal this strategic choice to their competition by adjusting their prices.
30) Knowing how a firm is differentiating its products necessarily means that competitors will be
able to duplicate a firm’s product-differentiation strategy at a lower cost.
31) Product features as a basis for product differentiation are generally not easy to duplicate.
32) While product features, by themselves, are usually not a source of sustained competitive
advantage, they can be a source of a temporary competitive advantage.
33) Product features, product customization, and product complexity have few obvious close
substitutes and may be sources of sustained competitive advantages.
34) Timing, location, distribution channels, and service and support are all very similar bases of
product differentiation and can act as substitutes for each other.
35) While the U-form structure for a firm pursuing cost leadership is relatively simple, the U-
form structure for a firm implementing a product-differentiation strategy can be somewhat more
complex.
36) Firms pursuing a differentiation strategy often use temporary cross-divisional and cross-
functional teams to manage the development and implementation of new, innovative and highly
differentiated products.
37) More recent work contradicts Porter’s assertion about being “stuck in the middle” and
suggests that firms that are successful in both cost leadership and product differentiation often
can expect to gain a sustained competitive advantage.
38) McDonald’s is an excellent example of a firm that simultaneously employs both a product-
differentiation and a cost-leadership strategy since their product differentiation based on
cleanliness, consistency and fun in its fast food outlets allowed the company to become the
market share leader in the industry and to reduce its costs.
39) Firms able to successfully differentiate their products and services are likely to see a
decrease in their volume of sales.
40) Product differentiation can lead to high market share and low costs.
41) ________ is a business strategy whereby firms attempt to gain a competitive advantage by
increasing the perceived value of their products or services relative to the perceived value of
other firms’ products or services.
A) Product differentiation
B) Related diversification
C) Cost leadership
D) Best-cost provider
42) By increasing the perceived value of a firm’s products or services, a firm will be able to
A) charge a lower price than it would otherwise be able to do.
B) charge a higher price than it would otherwise be able to do.
C) sell its products at lower prices than firms pursuing a cost-leadership strategy.
D) gain significantly more market share than firms pursuing a cost-leadership strategy.
43) While firms often alter the ________ of their products or services in order to implement a
product-differentiation strategy, the existence of product differentiation, in the end, is always a
matter of ________.
A) customer perceptions; objective properties
B) objective properties; price
C) customer perceptions; price
D) objective properties; customer perception
44) If an individual is considering purchasing a Toyota Camry or a Ferrari and decides that it is
worth paying the extra money for the prestige that is associated with the Ferrari, the additional
money the customer is willing to pay for the prestige is know as a(n)
A) altruistic price.
B) hedonic price.
C) fair market value.
D) margin price.
45) The most obvious way that firms can try to differentiate their products is by
A) making the product more complex.
B) introducing the product at the right time.
C) customizing the product for a particular segment.
D) altering the features of the products they sell.
46) Which of the following bases of product differentiation attempts to create the perception that
a firm’s products or services are unusually valuable by focusing directly on the attributes of the
products or services a firm sells?
A) Product complexity
B) Product customization
C) Consumer marketing
D) Reputation
47) The ability of companies that produce complex software packages to tailor these packages to
the specific needs of their customers is an example of product differentiation through
A) complexity.
B) consumer marketing.
C) product customization.
D) timing.
48) A firm’s ________ is really no more than a socially complex relationship between a firm and
its customers and can serve as a basis for product differentiation.
A) location
B) reputation
C) consumer marketing
D) architectural competence
49) Which of the following bases of product differentiation attempts to create the perception that
a firm’s products or services are unusually valuable by focusing on the relationship between a
firm and its customers?
A) Linkages between functions
B) Product customization
C) Location
D) Product complexity
50) Through which bases of competitive advantage do firms attempt to alter the perceptions of
current and potential customers, whether or not specific attributes of a firm’s products or services
are altered?
A) Reputation
B) Location
C) Product customization
D) Consumer marketing
51) ________ is the ability to use organizational structure to facilitate coordination among
specific disciplines to conduct research.
A) Architectural competence
B) Cross-functional linking
C) Organizational coordination
D) Managerial leverage
52) Which of the following bases of product differentiation attempts to create the perception that
a firm’s products or services are unusually valuable by focusing on links within and between
firms?
A) Reputation
B) Product complexity
C) Consumer marketing
D) Product mix
53) When the television show “American Idol” shows the judges drinking beverages from cups
with the Coca-Cola label, or when a corporate sponsor places its logo on a NASCAR car, this is
an attempt at product differentiation by linking with other firms through
A) product placements.
B) reputation.
C) product mix.
D) architectural competence.
54) Product differentiation is ultimately an expression of the ________ of individuals and groups
within firms and is limited only by the ________ that exist, or that can be created, in a particular
industry.
A) creativity; resources
B) resources; opportunities
C) creativity; opportunities
D) opportunities; resources
55) In general, firms selling differentiated products face a demand curve that is
A) upward sloping.
B) horizontal.
C) vertical.
D) downward sloping.
56) According to Chamberlin, firms selling differentiated products and facing a downward
sloping demand curve are in an industry described as
A) perfect competition.
B) monopolistic competition.
C) oligopolistic competition.
D) semi-structured competition.
57) Which of the following statements regarding the impact of product differentiation on the
threat of new entry is accurate?
A) Product differentiation helps reduce the threat of new entry by forcing potential new entrants
to absorb costs associated with overcoming incumbent firms’ product-differentiation advantages.
B) Product differentiation increases the threat of new entry by allowing potential new entrants to
avoid costs associated with overcoming incumbent firms’ product-differentiation advantages.
C) Product differentiation has no impact on the threat of new entry.
D) It is not possible to determine the impact of product differentiation on the threat of new entry.
58) When considering the impact of product differentiation on the threat of rivalry, product
differentiation
A) reduces the threat of rivalry to zero.
B) increases the threat of rivalry by forcing each firm in an industry to compete directly with one
another instead of allowing them to carve out their own unique product niche.
C) has no impact on the threat of rivalry.
D) reduces the threat of rivalry because each firm in an industry attempts to carve out its own
unique product niche.
59) With regard to the threat of suppliers, product differentiation
A) reduces the threat of suppliers because a firm with a highly differentiated product can pass
increased costs on to customers.
B) increases the threat of suppliers because a firm with a highly differentiated product is unable
to pass increased costs on to customers.
C) has no impact on the threat of suppliers.
D) can either increase or reduce the threat of suppliers.
60) In emerging industries
A) firms that are first movers are unlikely to gain product-differentiation advantages based on
buyer loyalty and high switching costs.
B) firms that are first movers can gain product-differentiation advantages based on perceived
technological leadership.
C) product-differentiation efforts are focused on product refinement as a basis of product
differentiation.
D) firms can sometimes be tempted to exaggerate the extent to which they have refined and
improved their products and services.
61) In a declining industry
A) product-differentiation efforts are focused on product refinement as a basis of product
differentiation.
B) firms that are first movers can gain product-differentiation advantages based on perceived
technological leadership.
C) highly differentiated firms may be able to gain product-differentiation advantages by
preempting strategically valuable assets.
D) highly differentiated firms may be able to discover a viable market niche that will enable
them to survive despite the overall decline in the market.
62) Which of the following bases of product differentiation is almost always easy to duplicate?
A) Product features
B) Product mix
C) Product customization
D) Consumer marketing
63) Which of the following bases of product differentiation is usually costly to duplicate?
A) Product features
B) Links with other firms
C) Reputation
D) Product mix
64) Which bases of product differentiation is by far the most popular way for firms to try to
differentiate their products but is identified as almost always being easy to duplicate?
A) Product mix
B) Product features
C) Customization
D) Distribution channels
65) Product features, by themselves, are
A) usually not a source of temporary competitive advantage, but they can be a source of a
sustainable competitive advantage.
B) usually not a source of either a temporary competitive advantage, or a source of a sustainable
competitive advantage.
C) usually can be a source of both a temporary competitive advantage and a source of a
sustainable competitive advantage.
D) usually not a source of sustained competitive advantage, but they can be a source of a
temporary competitive advantage.
66) Under which of the following conditions is the product mix advantage as a basis of product
differentiation the least difficult to duplicate?
A) When the base of a product mix advantage is a common customer
B) When the mix of products is highly integrated with each other
C) If each of the products in a product mix has unique features
D) If a firm brings a series of products to market