Deck 9: Cost Advantage

Question 1

During recessionary periods:

A)All firms are struggling to increase their market share
B)Nobody really knows about the long term future
C)A firm can increase its profitability
D)The importance of cost efficiency becomes amplified.

Answer 1

D

Question 2

Commodity industries are:

A)Easier to sell because they require little advertising
B)Often characterized by a cost-based competitive advantage
C)Unattractive because differentiated products provide stronger margins
D)No longer pursued by large companies in the developed world, due to labour cost.

Answer 2

B

Question 3

Motel 6, the US cost leader budget motel:

A)Keeps its costs low by building hotels with cheap material
B)Performs extremely well because of its differentiation strategy
C)Serves the high end of the hotel market for leisure
D)Designs its products to keep its costs low

Answer 3

D

Question 4

Why use the value chain tool?

Question 5

In the clothing industry, the critical factor as a cost driver is:

A)Cost of energy
B)Wage rates
C)Cost of raw materials
D)None of the above

Question 6

In packaged consumer goods such as household detergents, beer and soft drinks, the main source of economies of scale is:

A)Indivisibilities
B)Price of inputs
C)Specialization
D)All of the above

Question 7

During the 1970s, cost advantage in large scale manufacturing focused on:

A)Business Process Re-engineering
B)The experience curve
C)The learning curve
D)Economies of scope

Question 8

Is a certain level of "organizational slack" desirable in the organization?

Question 9

Why has the experience curve proved to be a fundamental and very influential concept in the history of strategic management?

Question 10

The identification by a firm of its sources of competitive advantage is critical because:

A)A firm can reduce its costs
B)A firm can organize its activities differently
C)A firm can increase its profitability
D)To continue successfully it is essential that a firm understands why it wins profitable business.

Question 11

During the 20th century, firms were mostly concerned with:

A)The quest for market protection.
B)International competitiveness.
C)The pursuit of profits
D)The quest for economies of scale and scope

Question 12

Which of these industries exhibit cyclical overcapacity?

A)Construction equipment and retailing
B)Railroads, automobiles, and retailing
C)Retailing, US hospital industry, and construction
D)US hospital industry, gasoline, and hotels

Question 13

How can a firm reduce its costs?

Question 14

Firms such as French auto makers Renault and Peugeot, and German BMW are proof that:

A)The European auto industry suffers from many weaknesses
B)Economies of scale are not an absolute requirement for success
C)European firms can compete against the Japanese auto manufacturers
D)Smaller companies are more adaptable to change than large firms

Question 15

Why don't firms try to maximize their economies of scale and run their operations on the largest possible scale?

Question 16

In its early history, strategic management emphasized:

A)Strategic planning tools as the best way to achieve success
B)Corporate culture as the main determinant of competitive advantage
C)Cost advantage based on scale as the primary source of competitive advantage
D)Autocratic management style as most effective.

Question 17

Which general managerial lessons can we draw from this chapter about cost advantage?

Question 18

How could you determine a hospital's cost efficiencies?

Question 19

How could the price of inputs vary?

Question 20

For much of the 20th century, many large corporations were obsessed with:

A)Minimum Efficient Scale
B)The experience curve
C)Economies of scale
D)Moving production to China.

Question 21

The phrase, "association does not imply causation" means that:

A)The existence of a positive relationship between two phenomena does not imply that no causal relation exists
B)The correlation may be due to other unknown or undiscovered factors affecting both variables.
C)Associating concepts does not generate a theory
D)Explaining causation is always harder than making a list of the potential causes of the phenomenon

Question 22

Cost advantage is usually the result of:

A)Economies of scale
B)A combination of significant factors, often inter-related.
C)Wage costs and size of the firm
D)Low costs of inputs and level of technology used

Question 23

Examples of "knowledge-intensive" industries are:

A)Investment banking
B)Management consulting
C)Engineering-based design
D)All of the above

Question 24

Cost drivers are:

A)Factors that determine a firm's unit costs
B)Factors that determine a firm's cost position
C)Factors that are neutral for a firm's costs
D)Factors that explain costs in manufacturing industry

Question 25

To assist in achieving the cost reduction related to the learning curve, firms should:

A)Set price on the basis of anticipated costs rather than on the basis of current costs
B)Set price on the basis of current costs rather than on the basis of anticipated costs
C)Integrate fixed costs in their calculation
D)Only price at the correct level

Question 26

The idea of pricing based on anticipated costs rather than current costs is called:

A)Realizing full scenario analysis rather than benchmarking
B)Anticipatory pricing
C)Full pricing rather than penetration pricing
D)Penetration pricing rather than skimming

Question 27

"Indivisibility" relates to:

A)"Lumpy" resources
B)A characteristic of a resource to be only feasible to increase in large increments e.g. a new mine.
C)"Stretchable" resources
D)Resources that are not tangible

Question 28

Cost drivers:

A)Vary within and across industries
B)Do not vary much across firms within the same industry
C)Vary across industries, firms, and activities within the firm
D)Do not vary across a firm's activities

Question 29

The experience curve can be defined as:

A)A law relating doubling of cumulative volume output to constant percentage reduction in average manufacturing time and labour cost.
B)A law according to which the unit cost of value added declines by a constant percentage of 30% each time cumulative output doubles
C)An observation that direct costs decrease when production increases
D)An observation of the systematic acceleration in output of airplanes and ships during time of war.

Question 30

The experience curve and / or economies of scale have implications for business:

A)A firm must grow its market share to lower costs.
B)A firm can gain market share with a lower price.
C)If a firm can be first to market and maintain dominant market share, it will benefit from a cost advantage compared to its rivals
D)A firm must price on the basis of current costs.

Question 31

Economies of scale can be defined as:

A)Manufacturing progress in technology design and process design
B)A decrease in unit cost of output due to a larger volume
C)A proportionate increase in the amount of inputs employed in a product process that results in a lower unit cost
D)An increase in fixed costs relative to variable costs with a high volume of production

Question 32

A minimum efficient plant size is:

A)The minimal size of a plant that achieves an equilibrium between fixed and variable costs
B)The starting point in terms of output volume for meeting market price at a minimum profit
C)The minimum size of a plant that acquires the largest market share
D)The minimum size of a plant that is required for efficient R&D

Question 33

Economies of scale were traditionally associated with:

A)Marketing
B)Manufacturing
C)Production
D)Any function where human activity is present

Question 34

The "specialization effect" means that:

A)People work faster for production tasks
B)People work more efficiently by avoiding time loss
C)Tasks are divided into different sub-tasks which are performed more efficiently by people who specialise in each sub-task.
D)People can learn faster because they perform one task only

Question 35

One of the purposes of studying cost drivers is to:

A)Understand how they can be reduced
B)Improve strategic goals achievement
C)Generate commitment and dialogue within a firm
D)Keep management informed of progress.

Question 36

Three main sources generate economies of scale:

A)Specialization, indivisibilities, and R&D
B)Technical input-output relationship, indivisibilities, and scale effect on advertising
C)Indivisibilities, specialization, and division of labor
D)Technical input-output relationship, specialization, and indivisibilities

Question 37

The factors which determine costs in an industry:

A)Depend on the industry
B)Are always the same
C)Change over time
D)Are common knowledge in every industry

Question 38

Throughout the 20th century it was assumed that:

A)Globalization was not a major force.
B)Acquisitions were unlikely to fail.
C)Diversification was the rationale for a conglomerate strategy
D)A clear causal relationship existed between market share and profitability

Question 39

Some relatively recent ideas regarding cost reduction include:

A)Reengineering, outsourcing, and organization delayering
B)Innovation, delayering, and outsourcing
C)Outsourcing, reengineering, and organizational structure
D)Reengineering, organizational culture, and innovation

Question 40

Economies of scale are a key determinant of:

A)An industry structure
B)A firm's level of R&D
C)An industry's level of concentration
D)A firm's level of profit

Question 41

Business Process Reengineering (BPR) can be described as:

A)A new management tool
B)A tool involving different indicators of performance
C)A fundamental rethinking and radical redesign of business processes intended to achieve dramatic cost-efficiency improvements
D)All of the above

Question 42

The more complex or labor intensive a product or a process is:

A)The greater the potential for mistakes
B)The greater the potential for learning
C)The smaller the potential for learning
D)All of the above

Question 43

A firm can actually only realize competitive advantage from lower input costs:

A)If it lowers its prices
B)If it does not lower its prices
C)If customers do not find out
D)If its competitors do not do likewise

Question 44

The use of BPR:

A)Always led to disappointing effects
B)Has now been discredited
C)Was just a fad with no basis in theory
D)None of the above

Question 45

Generally, gaining the full cost-reduction from process innovation requires:

A)Changes in the top manager's team
B)Changes in marketing strategy
C)Relevant changes in roles, skills, management practices and organization structure
D)Changes in R&D methods

Question 46

The greatest productivity gains from process innovation typically come from:

A)Technology
B)Total Quality Management
C)Capital investment
D)Organizational improvements

Question 47

Locational differences in input prices, non union labor, and bargaining power are examples of:

A)Sources of lower input cost
B)Sources of higher input cost
C)Sources of product differentiation
D)Sources of strengths and weaknesses

Question 48

The consolidation of the world automobile manufacturing industry can be explained partly by:

A)The growing market for compact cars
B)The harshness of international competition
C)The power of the Japanese manufacturers
D)The consequence of the escalating costs of new car development, incapable of being borne by smaller players.

Question 49

In Business Process Reengineering, the key aspect was:

A)To start with a clean sheet
B)To be critical about existing processes
C)Cultural change
D)Integration of stakeholders' interests

Question 50

Differences in bargaining powers between supplier and customer can be:

A)A source of competitive advantage for the customer
B)A very common feature in business
C)Extremely time-consuming for both players
D)A source of competitive advantage for the strongest of the two players

Question 51

Firms should maintain capacity utilization at 100% at all times to minimize costs:

A)Yes, this is the right approach
B)No, since in practice 100% utilization is already beyond normal practical utilization, and increases costs.
C)No: in practice this is not feasible, and leaves no room for contingencies
D)Both b and c above

Question 52

Economies of scale have:

A)No limits
B)Upper limits due to impracticality
C)A positive impact on profit in all cases
D)Been exploited by large firms in the past, so are no longer important.

Question 53

Learning-by-doing relies on:

A)Repetition and building experience.
B)Breaking down a complex task into sub.tasks
C)The development and refinement of organizational routines
D)The improvement of individuals' dexterity

Question 54

Small and medium size firms can offset the disadvantages of their size by:

A)Exploiting their flexibility
B)Avoiding the difficulties of coordination and motivation often associated with a large size
C)Not basing their competitive advantage on low cost.
D)Amalgamating.

Question 55

In cyclical industries:

A)The same recipes and tools apply as in steady-demand industries
B)The ability to speedily adjust capacity to demand can be a source of competitive advantage
C)Being successful is always more difficult than in steady-demand industries
D)Players encounter hyper-competition

Question 56

Residual efficiency:

A)Is defined as the remaining unit cost differences between firms once all other drivers are taken into account
B)Is often called "organizational fat"
C)Depends on a firm's ability to eliminate organizational slack
D)All of the above

Question 57

The gains from BPR:

A)Were not positive in every case
B)Were the introduction of "lean methods" in manufacturing
C)Were unlikely to result from a blind "wrecking" approach to the processes which existed before
D)Both a and c

Question 58

From a purely cost point of view, is capacity utilization less than 100% desirable or not desirable?

A)This depends on the capital structure
B)Neither of these, because it is neutral
C)Desirable, because it decreases unit costs
D)Not desirable, because in theory it raises unit costs

Question 59

With regard to cyclical and structural excess capacity:

A)They are basically the same thing
B)The latter signifies a long term imbalance in the industry
C)The former may be unavoidable in some industries
D)Both b and c above

Question 60

Designing products for ease of production and maintenance requires:

A)Good linkages between the R&D department, the factory and the after-sales service department
B)Extra funding
C)A compliant factory management
D)A compliant factory management and maintenance department.

Question 61

The experience curve concept became a popular focus for cost-advantage in the 1970's.

Question 62

Until a few years ago, the dominant view of large industrial corporations was that strategy was largely about scale-economies and mass-market dominance.

Question 63

The experience curve is mostly based on learning-by-doing on the part of the individuals and organizations, including redesigning workflows in the light of experience.

Question 64

It is impossible for a firm to be competitive if its output volume is significantly below the Minimum Efficient Plant Size or Minimum Efficient Scale

Question 65

The cost reduction to be achieved through the experience curve effect relates primarily to labor costs saved as a result of reduction in production time.

Question 66

BPR has produced only disappointing results

Question 67

To use the value chain to identify only where the major costs are:

A)Is inadvisable, since this ignores whether the costs contribute to value or not
B)Would save a lot of time, and make the tool more useful
C)Is no more nor less than it's designed to do
D)Would identify which managers are wasting money

Question 68

Eliminating excessive costs is:

A)Easy
B)A battle between senior and middle managers
C)Almost impossible
D)A capability which must be developed over time

Question 69

Even where competitive advantage is not primarily based on cost, a firm needs to be reasonably cost-efficient compared to close competitors.

Question 70

Cost drivers are factors that together determine a firm's cost position, generally measured by the cost per unit of output

Question 71

There are seven main cost drivers of cost advantage according to the text.

Question 72

Generally, the greatest productivity gains from process innovation only accrue when all other relevant aspects of the system are improved too, for example new job roles and new structure.

Question 73

An industry's level of concentration is largely determined by the existence of economies of scale.

Question 74

One founding idea of BPR is to achieve dramatic improvements in cost-efficiency, not achievable through incremental process evolution.

Question 75

New process technology cannot reduce costs, because costs depend on the relative prices of inputs

Question 76

BPR as originally conceived runs the risk of destroying some valuable organizational capabilities which have taken many years to build.

Question 77

Analysis of a firm's internal value chain:

A)Is a systematic way of identifying opportunities for reducing costs without damaging value.
B)Is primarily a management consultancy tool
C)Is an unnecessary activity for experienced managers.
D)Is a job for the accounting department.

Question 78

"Business Process Reengineering" (BPR) was a management tool introduced in the early 1990's, involving redesigning processes from a clean sheet.

Question 79

Firms and strategic analysts recognized that cost advantage is the result of multiple factors, and not only the result of the experience curve

Question 80

Economies of scale exist where proportionate increases in the amount of inputs employed in a production process result in lower average unit costs