Ch4. The Nature and Sources of Competitive Advantage

Question 1

One firm possesses a competitive advantage over other firms when it earns or has the potential to earn a persistently higher profit margin.
a. true
b. false

Answer 1

a. true
p. 123

Question 2

In the long run competition eliminates differences in profitability between firms.
a. true
b. false

Answer 2

a. true
p. 123

Question 3

The extent to which external change creates competitive advantage depends on the magnitude of the change and the extent of firms’ strategic differences.
a. true
b. false

Answer 3

a. true
p. 124

Question 4

Entrepreneurship can be defined as the ability to identify and rapidly respond to opportunities in the environment.
a. true
b. false

Answer 4

a. true
p. 124-125
The competitive advantage that arises from external change also depends on firms’ ability to respond to change. Any external change creates opportunities for profit, including opportunities for new business initiatives (what is known as entrepreneurship).

Question 5

For some firms, speed of new product development appears to be the only real source of competitive advantage in today’s economy.
a. true
b. false

Answer 5

a. true
p. 124-125

Question 6

The concept of “time-based” competition refers to the entry of emergence of new competitors over time.
a. true
b. false

Answer 6

b. false
p. 124-125
The notion of speed as a source of competitive advantage was pioneered by the Boston Consulting Group with its concept of time‐based competition.

Question 7

A “Blue ocean strategy” refers to the creation of entirely new markets.
a. true
b. false

Answer 7

a. true
p. 125-126

Question 8

Isolating mechanisms are forces tending to equalize profit rates among firms, i.e. phenomena that erode a firm’s competitive advantages.
a. true
b. false

Answer 8

b. false
p. 127-128
Rumelt uses the term isolating mechanisms to describe the barriers that protect a firm’s profits from being driven down by the competitive process.

Question 9

For a firm to imitate the strategy of another firm, it must do four things: identify the target firm, incentivize the rival, diagnose the sources of competitive advantage, and acquire the resources needed.
a. true
b. false

Answer 9

a. true
p. 127-129

Question 10

Starting a price war immediately after a firm enters your industry is an entry deterrent tactic that may dissuade other potential entrants for years to come.
a. true
b. false

Answer 10

a. true
p. 127-129

Question 11

To “pre-empt” an entrant, a firm can occupy existing and potential strategic niches to reduce the range of opportunities open to potential entrants.
a. true
b. false

Answer 11

a. true
p. 127-129

Question 12

“Causal ambiguity” is the failure to clearly understand the source of a rival’s competitive advantages - in particular which of the rival’s distinctive features are causes and which are effects of another feature.
a. true
b. false

Answer 12

a. true
p. 129-130

Question 13

Because some resources are valuable and not perfectly uniform (they are unique, not homogenous) acquiring or developing these can take years before a firm achieves and sustains higher profitability.
a. true
b. false

Answer 13

a. true
p. 130-131

Question 14

In the airline industry where genuinely unique resources or capabilities are hard to find and imitation is fast, sustainable competitive advantage is hard to achieve and often depends on corporate culture.
a. true
b. false

Answer 14

a. true
p. 131

Question 15

Firms can achieve competitive advantage by supplying a product at lower cost than competitors or by effectively differentiating their product so that the customer is willing to pay a higher price.
a. true
b. false

Answer 15

a. true
p. 131-132

Question 16

The two main sources of competitive advantage are cost leadership and differentiation.
a. true
b. false

Answer 16

a. true
p. 131-132

Question 17

A firm has a differentiation advantage when it offers many product features that distinguish its product from everyone else’s.
a. true
b. false

Answer 17

b. false
p. 131-132
A firm has a differentiation advantage when it can supply a product or service that is differentiated in such a way that the customer is willing to pay a price premium that exceeds the additional cost of the differentiation

Question 18

Porter’s value chain is mostly used to analyse the success or otherwise of cost leadership strategies.
a. true
b. false

Answer 18

a. true
p. 132-135

Question 19

If scale economies are a key cost driver, increasing sales volume provides an opportunity for cost reduction.
a. true
b. false

Answer 19

a. true
p. 134

Question 20

The objective of differentiation is to yield cost savings for the firm.
a. true
b. false

Answer 20

b. false
p. 138

Question 21

Singapore Airlines appears to have competitive advantages from:

a. Lower costs than many of its rivals
b. Better plane utilization rates than its rivals
c. Better service levels than many of its rivals
d. All of the above

Answer 21

d. All of the above

Question 22

Competitive advantage can be defined as:

a. The difference between a firm’s return on assets and its return on sales
b. A firm’s ability to earn persistently higher revenue than its rivals
c. A firm’s ability to earn a persistently higher profit rate than its rivals
d. A firm’s ability to outwit its competitors

Answer 22

c. A firm’s ability to earn a persistently higher profit rate than its rivals

Question 23

A firm with a competitive advantage that is not manifested in higher profitability may have?

a. A rising market share
b. Strong and rising customer loyalty, or good executive perks, or both
c. Invested in new technologies its rivals do not have
d. Some or all of the above

Answer 23

d. Some or all of the above

Question 24

Competitive advantage:

a. Exists only when an industry is in long term equilibrium
b. Emerges from external and internal sources
c. Both a and b
d. Neither a nor b

Answer 24

b. Emerges from external and internal sources

Question 25

If an industry has a stable environment and firms pursue similar strategies:

a. Firms with similar resources and capabilities should have similar profit rates
b. Firms with similar resources and capabilities should have similar structures
c. Firms without similar resources and capabilities will have left the industry
d. All of the above

Answer 25

a. Firms with similar resources and capabilities should have similar profit rates

Question 26

A firm’s ability to turn change in its external environment into profit:

a. Requires just one key resource: information
b. Depends on its ability to respond by changing its capabilities appropriately
c. Is the test of a Sustained Focus strategy
d. Is always measured by its market share

Answer 26

b. Depends on its ability to respond by changing its capabilities appropriately

Question 27

27. Requirements for quick organizational response to a turbulent environment are:

a. Flexible manufacturing systems and a good ‘gut’ feel for customer trends
b. Excellent resources and capabilities
c. Short product launch cycle times and excellent quality control
d. Quick, accurate information, and short product launch cycle times

Answer 27

d. Quick, accurate information, and short product launch cycle times

Question 28

Zara’s response to very fast-changing fashion demands was:

a. To fight on price by cutting costs to the absolute minimum
b. To have thousands of products in stock at all times
c. To cut the product launch cycle from concept to store to three weeks
d. To hire the best designers and decide new fashions in advance

Answer 28

c. To cut the product launch cycle from concept to store to three weeks

Question 29

“Strategic innovation” means introducing:

a. New products
b. New markets
c. New technologies
d. All of the above, or introducing new ways of doing business

Answer 29

d. All of the above, or introducing new ways of doing business

Question 30

“Strategic innovation” involves:

a. Limitless financial and organizational resources
b. Spending more on Research & Development than your competitors
c. Top managers’ total dedication to achieving timely innovations
d. Pioneering in at least one of the three dimensions: new industry, new customer segment, or new source of competitive advantage

Answer 30

d. Pioneering in at least one of the three dimensions: new industry, new customer segment, or new source of competitive advantage

Question 31

Once established, competitive advantage is:

a. Relatively stable over time
b. Subject to erosion by competitors or entrants
c. A firm’s reward for leading the industry
d. Easily maintained unless entry barriers are high

Answer 31

b. Subject to erosion by competitors or entrants

Question 32

Isolating mechanisms are:

a. Barriers that slow or stop the equalization of profits between firms, such as barriers to imitation
b. Mechanisms that speed up the equalization of profits between firms
c. Barriers that prevent potential entrants from grabbing a significant market share in the industry
d. Mechanisms that limit or enhance the ex post equilibration of rents among individual firms, depending on their relative bargaining powers

Answer 32

a. Barriers that slow or stop the equalization of profits between firms, such as barriers to imitation

Question 33

To successfully imitate the strategy of another firm, an organization must:

a. Identify and diagnose the rival’s advantage, believe in its ability to deliver a superior return, and, finally, acquire the necessary resource and capabilities
b. Identify and diagnose the rival’s advantage, and then acquire the necessary resources and capabilities
c. Benchmark the rival’s activities and resources, believe in a superior return, and build the rival’s resource in-house
d. Benchmark the rival’s activities and resources, identify the rival’s weaknesses, and, finally, believe in its ability to deliver a superior return

Answer 33

a. Identify and diagnose the rival’s advantage, believe in its ability to deliver a superior return, and, finally, acquire the necessary resource and capabilities

Question 34

How can a firm hide its superior profits?

a. By masking its results so that rivals fail to see its success
b. By avoiding disclosing financial performance
c. By temporarily lowering prices, so that the firm forgoes short term profits but succeeds in dissuading potential entrants
d. Any of the above

Answer 34

d. Any of the above

Question 35

A firm can pre-empt imitation by:

a. Vigorous legal action
b. Threatening to imitate its imitators
c. Introducing new products to fill each niche, investing in capacity ahead of market growth and filing many patents
d. None of these: imitators cannot be deterred

Answer 35

c. Introducing new products to fill each niche, investing in capacity ahead of market growth and filing many patents

Question 36

Rivals can be pre-empted from entering a firm’s markets only if:

a. The market is small relative to the minimum efficient scale of production
b. There are significant first-mover advantage available to the firm
c. Brand names matter to consumers in this industry
d. Answers a and b

Answer 36

d. Answers a and b

Question 37

To imitate the competitive advantage of another company, a firm must first:

a. Understand the basis of its rival’s success
b. Collect comprehensive information about its rival
c. Analyse its rival’s marketing strategy
d. None of the above

Answer 37

a. Understand the basis of its rival’s success

Question 38

Causal ambiguity and uncertain imitability are:

a. Two academic phrases to describe the difficulty of linking superior performance to the strategic decisions that generate that performance
b. Related because causal ambiguity causes uncertain imitability (the rival doesn’t know what to imitate)
c. related because competitive advantage is often based on complex bundles of organizational capabilities
d. All of the above

Answer 38

d. All of the above
p. 129-130

Question 39

Overall, the Singapore Airlines case shows:

a. SA’s biggest resource is the innate culture of its staff
b. SA’s biggest resource is the location of its hub
c. That rivals may copy parts of your business strategy but some unique resources and causal ambiguity can successfully hide your key distinctive capabilities
d. Answers a and b

Answer 39

c. That rivals may copy parts of your business strategy but some unique resources and causal ambiguity can successfully hide your key distinctive capabilities

Question 40

The fundamental choice for capability acquisitions is the decision to either:

a. Buy them or sell them
b. Develop them or maintain them
c. Buy them or build them
d. Buy them or copy them

Answer 40

c. Buy them or build them
If resources and capabilities are transferable – they can be bought and sold – then any competitive advantage that is based upon them will be eroded. If a firm cannot buy a resource or capability, it must build it.

Question 41

According to Porter and Siggelkow, Urban Outfitters was successful because:

a. it developed a set of management practices that were distinctive
b. It tailored its retail environment to target customers
c. It developed a highly integrated strategy
d. All of the above

Answer 41

d. All of the above

Question 42

Cost leadership means a firm must:

a. Exploit all sources of cost advantage before tailoring the product to each customer
b. Exploit all sources of cost advantage in providing customers with a standardised product
c. Exploit all sources of cost advantage in providing each customer with their minimum requirements
d. Exploit all sources of cost advantage while providing every customer an individual service

Answer 42

b. Exploit all sources of cost advantage in providing customers with a standardised product

Question 43

Differentiation is when a firm:

a. Offers customers something valuable and unique at a significantly lower price than rivals
b. Offers customers something valuable and unique for which customers are willing to pay a price premium
c. Offers customers a uniquely low price
d. Offers customers products with many additional features

Answer 43

b. Offers customers something valuable and unique for which customers are willing to pay a price premium

Question 44

When using value chain analysis to analyse a firm’s competitive strategy, the main aim is to:

a. compare costs with those of competitors
b. identify where costs have increased over time
c. identify opportunities for reducing costs
d. a and c

Answer 44

d. a and c

Question 45

The seven drivers of cost advantage:

a. Must be equally examined in all firms
b. Can be a useful framework within which to compare a firm’s cost improvements in the last few years
c. Can be a useful framework within which to compare a firm’s costs with its competitors
d. Can be a useful framework within which to compare a firm’s profit margins with its competitors

Answer 45

c. Can be a useful framework within which to compare a firm’s costs with its competitors

By examining each of these different cost drivers, in relation to a particular firm, we can analyse a firm’s cost position relative to its competitors and diagnose the sources of inefficiency and make recommendations as to how a firm can improve its cost efficiency

Question 46

The value chain analysis of Singapore Airlines, illustrated in Case Insight 4.3, is:

a. sufficiently comprehensive to guide strategic decision-making
b. irrelevant because Singapore Airlines doesn’t have a cost leadership strategy
c. is a reasonable start on analysis but now needs to be followed up with hard figures of cost comparisons between SA and its rivals
d. of little practical value

Answer 46

a. sufficiently comprehensive to guide strategic decision-making

Question 47

Increasing flight reliability at Singapore Airlines, alluded to in Case Insight 4.4:

a. Is likely to be the outcome of several linked activities
b. Is basically down to the age of the planes
c. Depends on the incentives given to ground and air crew for planes to take off on time
d. Answers b and c

Answer 47

a. Is likely to be the outcome of several linked activities

Question 48

Porter’s value chain:

a. Can only be used to analyse cost leadership strategies
b. Can be used to look at the current and additional costs of changes in a differentiation strategy
c. Can be used to examine the current and additional service levels offered to customers in a differentiation strategy
d. Answers b and c

Answer 48

d. Answers b and c

Question 49

The central task of a differentiation strategy is:

a. To yield a price premium for the firm
b. To add valuable new features to your product so long as the extra value to customers exceeds the extra cost to you of supplying it
c. To ask how all your customers’ interactions with your product could be enhanced even more
d. All of the above

Answer 49

d. All of the above

Question 50

Porter (1980) in his early work suggests that combining cost leadership and differentiation strategies:

a. is relatively easy. Successful firms can pursue both strategies at the same time
b. can be accomplished by focussing on a narrow market segment
c. is likely to result in a firm becoming ‘stuck in the middle’
d. is likely to result in above average performance

Answer 50

c. is likely to result in a firm becoming ‘stuck in the middle’

Question 51

A typical cost leadership strategy involves:

a. A firm producing a few limited-feature standard products, or providing a very standardised service
b. A medium or small firm with minimal overheads, and cheaply acquired (sometimes second-hand) assets
c. Answers a and b
d. Being the firm with the highest market share, and, often, the best-known brand in the industry

Answer 51

c. Answers a and b

Question 52

In many industries the market leaders

a. Manage to reconcile low costs with some effective differentiation
b. Are the cost leaders
c. Have very well-differentiated brands
d. Answers b and c

Answer 52

a. Manage to reconcile low costs with some effective differentiation

Question 53

57. Porter says that firms get stuck in the middle because:

a. The mindsets of cost-minimization and differentiation are culturally opposed, and firms cannot optimize the investments needed for both at once
b. As a above and firms need very different organizational processes to achieve the lowest costs or effective differentiation in the industry
c. Mid-market positions are unattractive to consumers
d. Many firms have had several different CEOs, each determined to pursue different strategies

Answer 53

a. The mindsets of cost-minimization and differentiation are culturally opposed, and firms cannot optimize the investments needed for both at once

Question 54

Being ‘stuck in the middle’ gives low profits because:

a. The firm loses those customers who want the lowest prices
b. The firm loses those customers who want the best product on the market
c. Employees become confused about what the firm’s goals and strategy really are
d. All of the above

Answer 54

d. All of the above

Question 55

Overall, the Singapore Airlines case shows that:

a. Firms do face the stark choices of being stuck in the middle that Porter cites
b. Firms can create cultures that do motivate staff to continually eliminate waste, reduce costs and improve customer service
c. Firms that create causal ambiguity cause creative ambiguity
d. Cost leadership and low costs are the same thing

Answer 55

b. Firms can create cultures that do motivate staff to continually eliminate waste, reduce costs and improve customer service

Question 56

Cost leaders are frequently:

a. Market leaders
b. Firms with cheaply acquired assets
c. Smaller competitors with minimal overheads
d. b and c

Answer 56

d. b and c

Question 57

A cost leadership strategy:

a. Requires a commodity product
b. Requires a firm to produce a “no frills” product - even if the industry’s product is differentiable (e.g. cars or airlines)
c. Can be achieved with a unique brand image
d. Can only be achieved in the modern world by outsourcing to cheap-labor countries

Answer 57

b. Requires a firm to produce a “no frills” product - even if the industry’s product is differentiable (e.g. cars or airlines)

Question 58

Competitive advantage depends on:
a. the existence of market imperfections
b. the ability of the firm to compete in more than one market
c. the absence of barriers to exit
d. all of the above

Answer 58

a. the existence of market imperfections

Question 59

The success of Japanese Total Quality Management:

a. Shows that it is possible to pursue Cost Leadership and Differentiation strategies simultaneously
b. Refutes the perceived trade-off between low cost products and high quality products
c. Has made Porter’s analysis outdated
d. Answers b and c

Answer 59

d. Answers b and c