TESTBANK: CHAPTER 7
The Sources and Dimensions of Competitive Advantage
True/False Questions
1. Competitive advantage is invariably revealed by a firm being more profitable than its rivals.
[See pp.168-169]
2. A change in the external environment creates competitive advantage either because some firms by
responding more effectively than others to the firm or because the change has differential effects upon
competing firms.
[See p.169]
3. Strategic innovation comprises the introduction of novel products or processes that embody new
technology
[See p.170]
4. Gary Hamel argues that management innovations (such as Procter & Gamble’s brand management
system or Toyota’s lean production are unlikely to offer sustainable competitive advantage because
these innovations are easy to imitate.
[See p.172]
5. A “business model” describes the overall configuration of a firm’s business system.
[See p.171]
6. In order to discover a “blue ocean” of uncontested market space, a firm must use technological
innovation to create a new product market
[See p.172]
7. A firm’s competitive advantages can only be sustained if it is protected by some form of “isolating
mechanisms.”
[See p.173]
8. Causal ambiguity creates uncertain imitability.
[See p.175]
9. Uncertain imitability is one type of isolating mechanisms.
[See p.175]
10. The fact that a firm’s “activity system” comprises closely linked, complementary activities
simplifies the task of imitating a competitor’s strategy.
[See p.175.
11. Sustainable competitive advantage can be established in all types of market—including those
financial markets deemed to be “efficient.”
[See p.177]
12. If the prices of securities fully reflect all the information available, then passive investors are best
advised to invest in index-based mutual funds (unit trusts) with the lowest administration costs.
[See p. 177]
13. There are two primary sources of competitive advantage: cost advantage and differentiation
advantage.
[See p.178]
14. The cost reductions that firms derive from moving down their experience curves are mainly the
result of learning which increases the productivity of labor.
[See p.179]
15. The main strategy implication of the Boston Consulting Group’s analysis of experience curves was
that firms should not lower profit trade profit margins in order to seek sales growth.
[See p.180]
16. An industry’s level of concentration is largely determined by the existence of economies of scale.
[See p.179]
17. In the automobile industry, scale economies have resulted in the biggest automobile companies—
Toyota, General Motors, Volkswagen, Ford, and Hyundai—also being the most profitable.
[See p.182]
18. Achieving productivity gains from process innovation usually requires that new production
processes are matched by other management changes—including changes in human resource
management.
[See p.183]
19. A basic principle of Business Process Reengineering is that dramatic improvements in cost
efficiency are better achieved through incremental improvements rather than fundamental redesign.
[See p.183]
20. Business Process Reengineering that starts with a “clean sheet of paper” runs the risk of destroying
some valuable organizational capabilities which have taken many years to build
[See p.183]
21. The potential for spreading fixed costs over a greater volume of output means that unit cost
continues to decline even after full capacity utilization has been reached.
[See pp.183-184]
22. One reason that the value chain analysis is a valuable tool for cost analysis is that cost drivers tend
to be very different between the different activities of the firm.
[See p.185]
23. Achieving a differentiation means making your offering unique in a way that makes it more
valuable to customers, irrespective of the costs of creating that differentiation.
[See p.186]
24. Physical characteristics of a product are of little importance in determining its potential for
differentiation
[See p.188]
25. Designing a differentiation strategy requires understanding every possible interaction between a
firm and its customers
[See p.188]
26. Tangible differentiation comprises observable product features such as shape, color, size, and style;
it does not include performance dimensions such of the product – for instance its reliability and
durability.
[See p.189]
27. Differentiation addresses “how” a firm competes in terms of the way in which it can offer
uniqueness to its customers
[See p.189]
28. The principal distinction between segmentation and differentiation is that segmentation is a
strategic choice by a firm while differentiation is a feature of market structure.
[See p.189]
29. Cost and differentiation strategies are similar in terms of their potential to confer sustainable
competitive advantage.
[See p.189]
30. To understand customer’ willingness to pay for differentiation, it is important to know what
motivates customers, and the criteria they apply when choosing among competing products.
[See pp.190-191]
31. Product integrity refers to the consistency of a firm’s differentiation across all differentiated
features – it is the balance of the overall impression left on most customers’ minds
[See p.193]
32. The difference between “search goods” and “experience goods” depends upon whether customers
can ascertain the product’s true attributes: on inspection or only after consuming the product
[See pp.194-195]
Multiple Choice Questions
33. Competitive advantage can be defined as:
[See pp.168-169]
34. A firm’s competitive advantage is not necessarily revealed in higher profitability; it may be
reflected in:
[See p.169]
35. When an industry is subject to externally generated changes, the firms which are most likely to
establish a competitive advantage are:
[See p.169]
36. As markets become more turbulent and unpredictable, quick-response capability depends primarily
upon:
[See p.170]
37. A firm can pre-empt competitors from invading its market space by:
[See p.174]
38. Isolating mechanisms are:
[See p.173]
39. Which of the following is not an isolating mechanism?
[See p.173]
40. Causal ambiguity allows a firm’s competitive advantage to be sustained because potential rivals
are:
[See p.175]
41. The difference between a “generic” and a “contextual” management practices is:
[See pp.175-176]
42. Advertising costs as a percentage of sales revenue for soft drink brands with large market shares
(such as Coca-Cola and Pepsi-Cola) are lower than for brands with small market shares (Dr. Pepper,
Schweppes, Fresca). This is because:
[See p.182]
43. In retailing, the cost advantages of large retail chains (such as Wal-Mart in the US, Tesco in
Britain, Metro in Germany, and Carrefour in France) is primarily the result of:
[See pp.179-185]
44. Compared with simple products like flour or toilet paper, complex products such as cars or hotels:
[See p.188]
45. Which of the following product categories offers the greatest potential for differentiation?
[See pp.188-189]
46. What is the difference between differentiation and segmentation?
[See p.189]
47. In supplying “lifestyle” products which are designed to meet consumers’ social and psychological
needs, the key to differentiation advantage is:
[See pp.190-193]
48. Banks spend more money on their head office buildings than most other large corporations
because:
[See p.195]
49. “Experience goods” are those which:
[See p.194]
50. Firms pursuing differentiation advantages will implement their strategies differently from those
pursuing cost advantages. The implementation of differentiation strategy is likely to feature:
[See p.199]
51. According to Porter, cost leadership and differentiation are:
[See p.198]
52. The examples of Ikea and Southwest Airlines demonstrate:
[See p.199]