ch5 Flashcards
The three generic strategies presented by Michael Porter can be shown on two dimensions: competitive advantage and product life cycle.
FALSEMichael Porter presented three generic strategies that a firm can use to achieve competitive advantage. They can be illustrated on two dimensions: competitive advantage and strategic target.
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.
FALSEMichael Porter presented three generic strategies that a firm can use to overcome the five forces and achieve competitive advantage. The strategies are: overall cost leadership, differentiation, and focus.
Concentrating solely on one form of competitive advantage generally leads to the highest possible level of profitability.
FALSEObservation and research support the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not. One study found that businesses combining forms of competitive advantage (differentiation and overall cost leadership) outperformed those using a single form.
A firm striving for cost leadership will typically spend relatively more on product related R&D than on process related R&D.
FALSEOverall cost leadership requires a tight set of interrelated tactics that include aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, and cost minimization in all activities in the value chain.
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.
FALSETo generate above-average performance, a firm following an overall cost leadership position must attain competitive parity on the basis of differentiation relative to competitors. In other words, a firm achieving parity is similar to its competitors, or on par, with respect to differentiated products.
The experience curve concept suggests that production costs tend to decrease as production increases.
TRUEThe experience curve refers to how business learns to lower costs as it gains experience with production processes. With experience, unit costs of production decline as output increases in most industries.
A firm can attain an overall cost leadership position by increasing the management layers in order to reduce overhead costs.
FALSEIn order for a firm to attain a cost leadership position using its infrastructure, it should decrease the number of management layers in order to reduce overhead costs.
A firm can attain an overall cost leadership position by using automated technology to reduce scrappage rates.
TRUEIn order for a firm to attain a cost leadership position using its technology development support activity, it should use automated technology effectively to reduce scrappage rates.
A firm can attain an overall cost leadership position by purchasing media in large blocks and maximizing sales force utilization through territory management.
TRUEIn order for a firm to attain a cost leadership position using its marketing and sales activities it can purchase media in large blocks and maximize the utilization of its sales force through territory management.
The French automobile maker, Renault, attains competitive advantage by revamping cars to be more cost efficient.
TRUEIn these difficult conditions, Renault has been able to carve out a profitable market for itself, selling low-cost, no-frills cars. Renault responded to this shift by creating an entry-level car group that was charged with designing and producing cars for these more cost conscious consumers. Carlos Ghosn, CEO of Renault, stated that they are working on a new platform that will be ultra-low-cost.
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.
TRUEFirms can be vulnerable to price increases in the factors of production. For example, consider manufacturing firms based in China which rely on low labor costs. Due to demographic factors, the supply of workers 16 to 24 years old has peaked and will drop by a third in the next 12 years, thanks to stringent family-planning policies that have sharply reduced population growth in China. This is leading to upward pressure on labor costs in Chinese factories, undercutting the cost advantage of firms producing there.
Too much focus on one or a few value-chain activities can be a pitfall of the overall cost leadership strategy.
TRUEManagers should explore all value-chain activities, including relationships among them, as candidates for cost reductions.
A cost leadership strategy can be at risk of obsolescence of the basis of the cost advantage.
TRUEOther firms may develop new ways of cutting costs, leaving the old cost leaders at a significant disadvantage. The older cost leaders are often locked into their way of competing and are unable to respond to the newer, lower-cost means of competing. This is what happened to the U.S. auto industry in the 1970s.
A cost leadership strategy is not susceptible to the risk of reduced flexibility
FALSEBuilding up a low-cost advantage often requires significant investments in plant and equipment, distribution systems, and large, economically scaled operations. As a result, firms often find that these investments limit their flexibility. As a result, they have great difficulty responding to changes in the environment.
The example of Lexus automobiles in the text points out that a firm can strengthen its differentiation strategy by achieving integration at multiple points along the value chain.
TRUELexus provides an example of how a firm can strengthen its differentiation strategy by achieving integration at multiple points along the value chain. By the early 1990s it soared to the top of J. D. Power customer satisfaction ratings. It found that quality perceptions (design, engineering, and manufacturing) can be strongly influenced by downstream activities in the value chain (marketing and sales, service).
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.
FALSEDifferentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price. By increasing margins of the firm, differentiation also avoids the need for a low-cost position. Higher entry barriers result because of customer loyalty and the ability to provide uniqueness in its products or services.
A successful differentiation strategy increases rivalry since buyers become more price-sensitive.
FALSEDifferentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs.
If a firm has a successful differentiation strategy, it is necessary to attain parity on cost.
FALSEDifferentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs. By increasing company margins, differentiation also avoids the need for a low-cost position. Higher entry barriers result because of customer loyalty and the company’s ability to provide uniqueness in its products or services. Differentiation also provides higher margins that enable a firm to deal with supplier power. And it reduces buyer power, because buyers lack comparable alternatives and are therefore less price sensitive. Supplier power is also decreased because there is a certain amount of prestige associated with being the supplier to a producer of highly differentiated products and services. Last, differentiation enhances customer loyalty, thus reducing the threat from substitutes.
One potential pitfall of a differentiation strategy is that identification of the brand in the marketplace may become diluted through excessive product line extensions.
TRUEPotential pitfalls of a differentiation strategy include dilution of brand identification through product-line extensions. Firms may erode their quality brand image by adding products or services with lower prices and less quality. Although this can increase short-term revenues, it may be detrimental in the long run.
Focus, by itself, often constitutes a competitive advantage.
Focus, by itself, often constitutes a competitive advantage. FALSEA focus strategy is based on the choice of a narrow competitive scope within an industry. A firm following this strategy selects a segment or group of segments and tailors its strategy to serve them. The essence of focus is the exploitation of a particular market niche. As you might expect, narrow focus itself (like merely being different as a differentiator) is simply not sufficient for above-average performance.
A potential pitfall of a focus strategy is that focusers can become too focused to satisfy buyer needs.
TRUEPotential pitfalls of focus strategies include focusers that become too focused to satisfy buyer needs. Some firms attempting to attain advantages through a focus strategy may have too narrow a product or service.
A disadvantage of firms that successfully integrate overall cost leadership and a differentiation strategy is that they are relatively easy for competitors to imitate.
FALSEPerhaps the primary benefit to firms that integrate low-cost and differentiation strategies is the difficulty for rivals to duplicate or imitate. This strategy enables a firm to provide two types of value to customers: differentiated attributes (e.g., high quality, brand identification, reputation) and lower prices (because of the lower costs for the firm in value-creating activities).
A potential pitfall of a focus strategy is that over time the cost advantages in a narrow market niche can erode, leaving the company with little profit.
TRUEThe advantages of a cost focus strategy may be fleeting if the cost advantages are eroded over time. For example, the Dell pioneering direct-selling model in the personal computer industry has been eroded by rivals such as Hewlett-Packard as they gain experience with the Dell distribution method.
Mass customization enables manufacturers to be more responsive to customer demands for high quality products.
TRUEAdvances in manufacturing technologies such as CAD/CAM (computer aided design and computer aided manufacturing) and information technologies allow firms to manufacture unique products in relatively small quantities at lower costs, a concept known as mass customization. Andersen Windows uses this to lower costs, enhance quality and variety, and improve response time to customers.
