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Profitability
TRUE/FALSE
2. Together with an analysis of the company's external environment, internal analysis gives managers the
information they need to choose the business model and strategies that will enable their company to
attain a sustained competitive advantage.
3. If a company's profitability is higher than the industry average, it has a competitive advantage.
4. Distinctive competencies are firm-specific strengths that allow a company to differentiate its products
and/or achieve substantially lower costs than its rivals.
7. The more a resource is firm-specific and difficult to imitate, the more likely a company holding that
resource is said to have a distinctive competency.
9. The price a company charges for a good or service is typically more than the utility placed on that
good or service by the customer.
10. The more utility a company creates for its customers, the more flexibility it has in determining prices.
11. At the heart of any company's business model is the combination of congruent strategies aimed at
creating distinctive competencies that differentiate its products and result in a lower cost structure.
12. When a company has differentiated products, they have less pricing options.
13. A value chain is a sequence of activities for transforming inputs into outputs that are valued by
customers.
14. At Adam's bicycle repair shop, the primary value chain activity of production occurs each time a
customer's bicycle is repaired.
16. The building blocks of competitive advantage are efficiency, quality, innovation, and profitability.
ANS: F PTS: 1 DIF: Moderate
OBJ: 2 - Identify and explore the role of efficiency, quality, innovation, and customer responsiveness
in building and maintaining a competitive advantage NAT: AACSB Analytic | Strategy
KEY: Knowledge
18. Imitating a company's capabilities tends to be more difficult than imitating its tangible and intangible
resources.
20. Absorptive capacity refers to the ability of an enterprise to identify, value, assimilate, and use new
knowledge.
21. Unfortunately, quality as excellence and quality as reliability are concepts that apply to goods but not
services.
22. The importance of reliability in building competitive advantage has increased dramatically over the
past decade.
23. Taken together, factors such as existing strategic commitments and low absorptive capacity limit the
ability of established competitors to imitate the competitive advantage of a rival.
25. Benchmarking is a practice in which a company's performance is compared against that of competitors
and the historic performance of the company itself.
26. The Icarus paradox suggests that those factors that led to a company's success will continue in the
future becuase the competitors cannot imitate them.
27. The most successful firms are those that constantly learn and upgrade their distinctive competencies.
28. Lucy is an entreprenuer who is interested in opening her own bakery. She is concerned with obtaining
money for equipment for the bakery such as ovens, pots and pans, and display cabinets. Lucy is trying
to obtain intangible resources for her business.
29. Nene works in a factory where she picks crab meat from crabs. She is paid per day based upon the
number of pounds of crab meat that she picks. Nene’s daily number of pounds of crab meat can be
referred to as her productivity.
30. In the fashion industry, the time required to take a new product from design inception to placement in a
retail store is known as customer response time.
MULTIPLE CHOICE
33. Which of the following is not true regarding a company's distinctive competencies?
a. They represent the unique strengths of the company.
b. They refer to company strengths that competitors cannot easily match or imitate.
c. They form the bedrock of a company's strategy.
d. They can be based in any of the value creation functions of the company.
e. They are shared by many firms in an industry.
ANS: E PTS: 1 DIF: Moderate
OBJ: 1 - Discuss the source of competitive advantage NAT: AACSB Analytic | Strategy
KEY: Comprehension
34. Resources
a. are the tangible assets available to a company.
b. can be tangible or intangible.
c. are harder for a company to copy than capabilities are.
d. are the products of a company's control systems.
e. refer to an organization's skills.
ANS: B PTS: 1 DIF: Easy
OBJ: 1 - Discuss the source of competitive advantage NAT: AACSB Analytic | Strategy
KEY: Knowledge
37. Factors that help a company to build and sustain competitive advantage include which of the
following?
a. Superior efficiency
b. Product quality
c. Innovation
d. Customer responsiveness
e. All of these
ANS: E PTS: 1 DIF: Moderate
OBJ: 2 - Identify and explore the role of efficiency, quality, innovation, and customer responsiveness
in building and maintaining a competitive advantage NAT: AACSB Analytic | Strategy
KEY: Comprehension
39. Donna can make a chair for about $100, she charges customers $150 to buy the chair, and customers
perceive that the chair is worth $225. In this case, the consumer surplus is
a. $50.
b. $75.
c. $125.
d. $150.
e. $225.
ANS: B PTS: 1 DIF: Difficult
OBJ: 1 - Discuss the source of competitive advantage
NAT: AACSB Reflective Thinking | Creation of Value KEY: Analysis
40. Donna can make a chair for about $100, she charges customers $150 to buy the chair, and customers
perceive that the chair is worth $225. Donna's profit margin is
a. $50.
b. $75.
c. $100.
d. $150.
e. $225.
ANS: A PTS: 1 DIF: Moderate
OBJ: 1 - Discuss the source of competitive advantage
NAT: AACSB Reflective Thinking | Creation of Value KEY: Analysis
41. Which primary activity in the value chain is concerned with the design of products and production
processes?
a. Research and development
b. Marketing and sales
c. Materials management
d. Production
e. Company infrastructure
ANS: A PTS: 1 DIF: Moderate
OBJ: 3 - Explain the concept of the value chain
NAT: AACSB Analytic | Creation of Value KEY: Comprehension
42. Using the value chain model, which of the following primary activities is performed first, as inputs are
transformed into outputs?
a. Research and development
b. Marketing and sales
c. Human resources
d. Production
e. After-sales service and support
ANS: A PTS: 1 DIF: Moderate
OBJ: 3 - Explain the concept of the value chain
NAT: AACSB Analytic | Creation of Value KEY: Comprehension
43. Using the value chain model, which of the following primary activities is performed last, as inputs are
transformed into outputs?
a. Research and development
b. Marketing and sales
c. After-sales service and support
d. Production
e. Human resources
ANS: C PTS: 1 DIF: Moderate
OBJ: 3 - Explain the concept of the value chain
NAT: AACSB Analytic | Creation of Value KEY: Comprehension
44. Ford Motors developed the Explorer sports utility vehicle, the number 1 selling sports utility vehicle in
the United States, based on an extensive study of customer preferences. Which value chain activity of
Ford conducted those studies?
a. Research and development
b. Human resources
c. Materials management
d. Marketing and sales
e. Company infrastructure
ANS: D PTS: 1 DIF: Difficult
OBJ: 3 - Explain the concept of the value chain
NAT: AACSB Reflective Thinking | Creation of Value KEY: Application
45. Mike works as a corporate trainer, teaching new employees how to perform manufacturing tasks. Mike
works in which value chain activity?
a. Research and development
b. Human resources
c. Materials management
d. Production
e. Company infrastructure
ANS: B PTS: 1 DIF: Difficult
OBJ: 3 - Explain the concept of the value chain
NAT: AACSB Reflective Thinking | Creation of Value KEY: Application
46. A company's competitive advantage will not endure for long when that competitive advantage can be
a. quickly or easily duplicated by other companies.
b. protected by patents.
c. protected by significant barriers to imitation.
d. shared with other companies in the industry.
e. shielded by copyrights.
ANS: A PTS: 1 DIF: Moderate
OBJ: 5 - Explain what impatcs the durability of a company's competitive advantage
NAT: AACSB Analytic | Strategy KEY: Comprehension
47. Cost accountants are responsible for gathering and monitoring data used for controlling the
organization's costs. Cost accountants work in which value chain activity?
a. Research and development
b. Human resources
c. Materials management
d. Marketing and sales
e. Company infrastructure
ANS: E PTS: 1 DIF: Difficult
OBJ: 3 - Explain the concept of the value chain
NAT: AACSB Reflective Thinking | Creation of Value KEY: Application
48. Which of the following support activities in the value chain refers to the companywide context within
which all the other value creation activities take place?
a. Human resources
b. Information systems
c. Company infrastructure
d. Materials management
e. Operations
ANS: C PTS: 1 DIF: Moderate
OBJ: 3 - Explain the concept of the value chain
NAT: AACSB Analytic | Creation of Value KEY: Comprehension
53. Efficiency is
a. defined as the time it takes to produce a product.
b. defined as the cost of inputs required to produce a given output.
c. pursued only by cost leaders.
d. measured by looking at a product's price.
e. lower when the output is high-quality.
ANS: B PTS: 1 DIF: Easy
OBJ: 2 - Identify and explore the role of efficiency, quality, innovation, and customer responsiveness
in building and maintaining a competitive advantage NAT: AACSB Analytic | Strategy
KEY: Knowledge
54. When a firm produces products that customers perceive as having higher utility than those of its rivals,
this firm's source of competitive advantage is
a. design.
b. low innovation.
c. superior quality.
d. efficiency.
e. customer responsiveness.
ANS: E PTS: 1 DIF: Moderate
OBJ: 2 - Identify and explore the role of efficiency, quality, innovation, and customer responsiveness
in building and maintaining a competitive advantage NAT: AACSB Analytic | Strategy
KEY: Comprehension
57. The term value chain refers to the idea that a company is
a. one of a series of companies that comprise an industry segment.
b. the producer of a series of products that are linked together.
c. a chain of activities for transforming inputs into outputs that customers value.
d. one of a series of economic functions.
e. all of the above.
ANS: C PTS: 1 DIF: Easy
OBJ: 3 - Explain the concept of the value chain
NAT: AACSB Analytic | Creation of Value KEY: Knowledge
59. Which of the following factors does not determine the durability of a company's competitive
advantage?
a. Barriers to imitation
b. A company's prior strategic commitments
c. Capability of competitors
d. General level of dynamism in the industry
e. The rate of product innovation in an industry
ANS: B PTS: 1 DIF: Moderate
OBJ: 5 - Explain what impacts the durability of a company's competitive advantage
NAT: AACSB Analytic | Strategy KEY: Comprehension
60. Which of the following distinctive competencies typically has the lowest barrier to imitation?
a. Efficient scale manufacturing facilities
b. Technological know-how
c. Marketing know-how
d. Organizational capabilities
e. Brand name
ANS: A PTS: 1 DIF: Moderate
OBJ: 5 - Explain what impacts the durability of a company's competitive advantage
NAT: AACSB Analytic | Strategy KEY: Comprehension
67. When companies find it hard to change their strategies and structures to adapt to changing competitive
conditions, they suffer from
a. inertia.
b. prior strategic commitments.
c. barriers to mobility.
d. lack of resources.
e. lack of capabilities.
ANS: A PTS: 1 DIF: Easy
OBJ: 5 - Explain what impacts the durability of a company's competitive advantage
NAT: AACSB Analytic | Environmental Influence KEY: Knowledge
68. Kim's T-shirt factory was expert at providing unique and high-quality but costly shirts. Even though
the designs were very nice and the amount of detail increased over time, the high price meant that few
customers bought shirts from her and her factory went bankrupt. Kim's factory failed due to
a. inertia.
b. prior strategic commitments.
c. the Icarus paradox.
d. lack of distinctive competencies.
e. lack of capabilities.
ANS: C PTS: 1 DIF: Difficult
OBJ: 5 - Explain what impacts the durability of a company's competitive advantage
NAT: AACSB Reflective Thinking | Environmental Influence KEY: Application
69. Dale's horseshoeing methods save time and money for his employer, but when Dale suggests that
everyone use his method, his boss says, "No. That's not the way we've always done it around here."
Dale's employer is suffering from
a. organizational inertia.
b. prior strategic commitments.
c. barriers to mobility.
d. lack of distinctive competencies.
e. the Icarus paradox.
ANS: A PTS: 1 DIF: Difficult
OBJ: 5 - Explain what impatcs the durability of a company's competitive advantage
NAT: AACSB Reflective Thinking | Environmental Influence KEY: Application
72. Which of the following is not a way that companies can avoid failure?
a. Benchmarking
b. Continuous learning
c. Developing distinctive competencies
d. Exploiting luck
e. Investing in specialized assets
ANS: E PTS: 1 DIF: Moderate
OBJ: 5 - Explain what impacts the durability of a company's competitive advantage
NAT: AACSB Analytic | Strategy KEY: Comprehension
73. When Rollie's car wash began to lose business to rivals, Rollie read publications for car wash owners
to learn the best practices in the industry. Then she implemented the best practices. Rollie is using
____ to improve her car wash.
a. specialized assets
b. benchmarking
c. strategic commitments
d. inertia
e. the Icarus paradox
ANS: B PTS: 1 DIF: Difficult
OBJ: 5 - Explain what impacts the durability of a company's competitive advantage
NAT: AACSB Reflective Thinking | Strategy KEY: Application
75. Kodak possesses the leading imaging technology. This technology has allowed the company to
differentiate its products from those offered by rivals. Imaging is Kodak’s
a. distinctive competence.
b. resource.
c. capabilitiy.
d. value.
e. barrier to imitation.
ANS: A PTS: 1 DIF: Difficult
OBJ: 1 - Discuss the source of competitive advantage
NAT: AACSB Reflective Thinking | Strategy KEY: Application
76. Ray is a doctor who treats individuals with heart conditions. Ben is one of Ray’s patients. Which
function of the value chain is in operation when Ray checks Ben’s blood pressure?
a. Marketing
b. Development
c. Research
d. Production
e. Sales
ANS: D PTS: 1 DIF: Difficult
OBJ: 3 - Explain the concept of the value chain
NAT: AACSB Reflective Thinking | Creation of Value KEY: Application
77. Intel’s invention of the microprocessor in the early 1970s, Cisco’s development of the router for
routing data over the Internet in the mid-1980s, and Apple’s development of the iPod, iPhone, and iPad
in the 2000s can be referred to as _____ innovations.
a. process
b. product
c. customer
d. sector
e. absorptive
ANS: B PTS: 1 DIF: Moderate
OBJ: 2 - Identify and explore the role of efficiency, quality, innovation, and customer responsiveness
in building and maintaining a competitive advantage
NAT: AACSB Reflective Thinking | Strategy KEY: Application
78. Ted is an accountant at ABC Company. He is calculating the total revenues minus total costs before
tax. Ted is calculating the
a. net profit.
b. capital turnover.
c. cost of goods sold.
d. return on sales.
e. invested capital.
ANS: A PTS: 1 DIF: Moderate
OBJ: 4 - Understand the link between competitive advantage and profitability
NAT: AACSB Reflective Thinking | Strategy KEY: Application
ESSAY
79. Explain how tangible and intangible resources and capabilities can lead to distinctive competencies.
Give specific examples.
ANS:
A firm's unique resources and capabilities that are difficult to imitate can serve as a source of strength
in efficiency, quality, innovation, and responsiveness. When a firm has a strength in one of these areas
and that strength is greater than that of competitors', then the firm has a distinctive competency in that
area. This means that the firm will be able to sell its products for a higher price than its rivals' products
(differentiation) or will be able to reduce costs more than its rivals (cost leadership). If the firm can
sustain the differentiation or cost leadership over time, it has a sustainable competitive advantage over
rivals. To give just one example, ExxonMobil owns more of the worldwide rights to oil-producing
properties than any other firm, which is a tangible resource that is fairly difficult to imitate. This
allows ExxonMobil to produce oil more efficiently than its rivals because its economies of scale are
high.
80. Give one example of a firm that has achieved a distinctive competency in efficiency and describe that
competency. Then do the same for a firm with a distinctive competency in quality, innovation, and
responsiveness to customers.
ANS:
Walmart is able to buy its products in high volume and to negotiate low prices from its suppliers,
which it can then pass on to customers through low pricing. Ben and Jerry's Ice Cream is able to
develop trendy flavors that customers desire, giving that firm an advantage in quality. 3M works with
customers to develop new products for specific customer needs, which is a distinctive competency in
innovation. Dell Computers uses its website to offer convenient and cheap after-sales support to
customers, satisfying demands for customer responsiveness.
ANS:
The primary objective of strategy is to achieve a sustained competitive advantage, and all activities
must be geared toward that objective. Distinctive competencies are firm-specific strengths that allow a
company to differentiate its products and/or achieve lower costs than its rivals. Distinctive
competencies form the basis of a company's competitive advantage.
Distinctive competencies are built from resources and capabilities. Resources can be either tangible or
intangible. The more firm-specific and difficult a resource is to imitate, the more likely a company is
to have a distinctive competency.
Capabilities refer to a company's skills at coordinating its resources and putting them into productive
use. Capabilities are intangible and they reside in organizational rules, routines, procedures, and
internal processes that shape the way people interact, cooperate, and make decisions.
The distinction between resources and capabilities is important to understand because, even though a
company many have firm-specific and valuable resources, unless it has the capability to use them
effectively, it may not be able to create distinctive competencies. In addition, even if a firm does not
possess firm-specific and valuable resources, it may be able to develop distinctive competencies if it
has capabilities that no one else has.
Resources and capabilities lead to distinctive competencies. Distinctive competencies shape the
strategies that lead to competitive advantage.
82. Evaluate and comment on this statement: "No competitive advantage lasts forever."
ANS:
Students will acknowledge that this statement is true. In the United States, there are companies with
decades of successful operation, including General Motors, IBM, and others. In parts of Europe, in
Japan, and in several other countries, there are successful firms that have been competitive over
centuries. For example, the English ceramics firm Spode, which manufactures fine china, has been in
business since before the American Revolution, and it is still highly competitive in its industry.
However, even the most successful firms are vulnerable to mistakes and inappropriate strategies over
time. IBM, for example, was struggling in the early 1980s and some observers were predicting its
demise (incorrectly, as it turned out). The reason for the transience of all competitive advantages is that
all the advantages are built on the actions of a group of individuals, and individuals are fallible.
83. Identify and describe the four building blocks of competitive advantage. Provide an example of each
using a real company situation.
ANS:
The four building blocks of competitive advantage are superior efficiency, quality, innovation, and
customer responsiveness. These building blocks allow a company to differentiate its product offering
to provide more utility to customers and/or lower its cost structure.
Superior efficiency is viewed from the perspective of the producers in an industry. It is powerful
because it allows a company to increase the productivity of its employees and capital and thus reduce
its cost structure.
Quality is viewed from the perspective of customers. Quality is commonly viewed in terms of
excellence (product attributes) and reliability (consistently does the job it was intended to do). High
quality increases the utility to customers, which allows the firm some pricing flexibility.
Innovation refers to the ability to create new products or processes. Product innovation results in new
and/or improved products that offer customers more utility. Process innovation results in lower
production costs.
Responsiveness to customers allows a company to do a better job than competitors of identifying and
satisfying customer needs. Responsiveness to customers allows a company to customize its offerings,
improve response time, and provide superior pre- and postsale service.
84. Illustrate the value chain analysis for a manufacturing organization using a visual diagram. Briefly
explain each element of the support and primary activity.
ANS:
Student answers will vary. However, the answers should follow Figure 3.5 in the chapter.
PTS: 1 DIF: Difficult OBJ: 3 - Explain the concept of the value chain
NAT: AACSB Analytic | Strategy KEY: Synthesis