Contemporary Strategy Analysis Text

and Cases 9th Edition Grant Test Bank

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 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]
a. T
*b. F

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]
*a. T
b. F

3. Strategic innovation comprises the introduction of novel products or processes that embody new
technology
[See p.170]
a. T
*b. F

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]
a. T
*b. F

5. A “business model” describes the overall configuration of a firm’s business system.

[See p.171]
*a. T
b. F

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]
a. T
*b. F

7. A firm’s competitive advantages can only be sustained if it is protected by some form of “isolating
mechanisms.”
[See p.173]
*a. T
b. F

8. Causal ambiguity creates uncertain imitability.

[See p.175]
*a. T
b. F
9. Uncertain imitability is one type of isolating mechanisms.
[See p.175]
*a. T
b. F

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.
a. T
*b. F

11. Sustainable competitive advantage can be established in all types of market—including those
financial markets deemed to be “efficient.”
[See p.177]
a. T
*b. F

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]
*a. T
b. F

13. There are two primary sources of competitive advantage: cost advantage and differentiation
advantage.
[See p.178]
*a. T
b. F

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]
*a. T
b. F

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]
a. T
*b. F

16. An industry’s level of concentration is largely determined by the existence of economies of scale.
[See p.179]
*a. T
b. F

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]
a. T
*b. F
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]
*a. T
b. F

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]
a. T
*b. F

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]
*a. T
b. F

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]
a. T
*b. F

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]
*a. T
b. F

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]
a. T
*b. F

24. Physical characteristics of a product are of little importance in determining its potential for
differentiation
[See p.188]
a. T
*b. F

25. Designing a differentiation strategy requires understanding every possible interaction between a
firm and its customers
[See p.188]
*a. T
b. F
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]
a. T
*b. F

27. Differentiation addresses “how” a firm competes in terms of the way in which it can offer
uniqueness to its customers
[See p.189]
*a. T
b. F

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]
a. T
*b. F

29. Cost and differentiation strategies are similar in terms of their potential to confer sustainable
competitive advantage.
[See p.189]
a. T
*b. F

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]
*a. T
b. F

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]
*a. T
b. F

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]
*a. T
b. F

Multiple Choice Questions

33. Competitive advantage can be defined as:

[See pp.168-169]
a. A firm’s ability to establish market leadership.
b. A firm’s ability to grow faster than its competitors.
*c. A firm’s potential to earn a rate of profit that is persistently higher than its rivals.
d. A firm’s potential for launching innovative new products.
34. A firm’s competitive advantage is not necessarily revealed in higher profitability; it may be
reflected in:
[See p.169]
a. Expanding market share
b. An aggressive quest for acquisitions
c. Increasing employee bonuses
*d. Expanding market share and/or increasing employee bonuses ○

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]
a. Those with the highest market share.
*b. Those that that respond most quickly to the change and have the resources and capabilities that are
most closely aligned to the emerging success factors.
c. Those with the greatest agility and capacity for innovation.
d. A combination of (a), (b), and (c).

36. As markets become more turbulent and unpredictable, quick-response capability depends primarily
upon:
[See p.170]
a. Good forecasting
b. Early identification of emerging changes
c. Speed of response
*d. Early identification of emerging changes together with speed in responding to them

37. A firm can pre-empt competitors from invading its market space by:
[See p.174]
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: competitive imitators is inevitable and unstoppable

38. Isolating mechanisms are:

[See p.173]
*a. Barriers to the erosion of interfirm profit differentials
b. Mechanisms that impede the equilibration of rents between industries
c. The same as “barriers to mobility”
d. Sources of disequilibrium that cause the profitability of different firms in an industry to diverge over
time

39. Which of the following is not an isolating mechanism?

[See p.173]
a. Private ownership of a company which means that it is not obliged to publish its financial statements.
b. Competitive advantage which is based upon the interaction of a number of different resources and
capabilities.
*c. Competitive advantage based upon exploiting pricing anomalies.
d. Competitive advantage based upon resources that are difficult to transfer and slow to replicate.

40. Causal ambiguity allows a firm’s competitive advantage to be sustained because potential rivals
are:
[See p.175]
a. Deterred from directly competing with the advantaged firm
*b. Unable to identify the sources of the advantaged firm’s superior performance
c. Unable to acquire the resources needed to compete against the advantaged firm
d. All the above

41. The difference between a “generic” and a “contextual” management practices is:
[See pp.175-176]
a. None: the concepts are identical in practice.
*b. The performance impact of a generic practice is independent of the firm’s other practices; the
impact of a contextual practice depends upon the firm’s other practices.
c. Generic practices relate to basic functions; contextual practices tend to be more idiosyncratic.
d. A generic practices offers incremental performance improvement; a contextual practices leads to a
new fitness peak.

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]
*a. Advertising campaigns are subject to a large minimum budgets (“indivisibilities”)
b. Big brands can negotiate lower rates with advertising agencies and media owners
c. Economies of learning—long-established brands such as Coca-Cola and Pepsi have learned how to
be more efficient in their advertising campaigns
d. Economies of global advertising campaigns

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]
a. Scale economies in operating large individual retail units.
*b. Lower costs of bought-in products as a result of superior bargaining power.
c. Higher capacity utilization in retailing and distribution.
d. Using superior bargaining power to pay lower wage rates.

44. Compared with simple products like flour or toilet paper, complex products such as cars or hotels:
[See p.188]
a. Fewer opportunities for differentiation
*b. Greater potential for differentiation○
c. Offer similar opportunities for differentiation--it all depends upon the creativity of product designers
and marketers
d. Fewer incentives for differentiation because of their high costs

45. Which of the following product categories offers the greatest potential for differentiation?
[See pp.188-189]
*a. Clothes and restaurants
b. Cement and wheat
c. Jet fuel for airline jets
d. Sulfur and ethylene

46. What is the difference between differentiation and segmentation?

[See p.189]
a. There is no difference between the two
*b. Differentiation deals with the “how” a firm chooses to compete, while segmentation describes
“where” in the entire market a firm chooses to compete
c. Differentiation is a firm’s strategic choice, whereas segmentation is given by its environment
d. Segmentation is the head of the marketing department’s responsibility, whereas the CEO is in charge
of differentiation

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]
a. A relentless pursuit of quality.
b. Thorough market research.
*c. Product integrity.
d. Market segmentation.

48. Banks spend more money on their head office buildings than most other large corporations
because:
[See p.195]
a. They tend to be located in financial centers where property prices are high.
*b. They offer “experience goods”, hence they need to signal wealth and stability.
c. Their CEOs are more committed to the display of wealth than other CEOs.
d. Because their products are essentially commodities, they need to find alternative ways of
differentiating.

49. “Experience goods” are those which:

[See p.194]
*a. Have performance attributes that are difficult to ascertain at the moment of purchase
b. Only customers with previous experience of using these goods would rationally consider purchasing
c. Only firms with wide experience in an industry would rationally consider making
d. Have been produced by the firm furthest down the learning curve

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]
a. Employee remuneration based upon individual productivity.
b. Frequent performance reporting.
c. High levels of outsourcing.
*d. Low levels of job specialization.

51. According to Porter, cost leadership and differentiation are:

[See p.198]
a. What leads a firm to “be stuck in the middle”
b. Two names for the same fundamental strategy
*c. Distinct generic strategies
d. Strategies that can be pursued simultaneously

52. The examples of Ikea and Southwest Airlines demonstrate:

[See p.199]
a. The power of brand as a factor of success
b. The quality of the top management of these firms
c. The power of advertising
*d. How a cost-leadership strategy can be combined with distinctive product differentiation