Deck 8: The Nature and Sources of Competitive Advantage

Question 1

What does "strategic innovation" mean?

Answer 1

Strategic innovation refers to any new ways of designing and implementing strategy.
Many ways exist to achieve innovation in this area, which all ultimately seek out the creation of greater value for the customer, such as:
-the creation of new experiences, products, or product delivery systems
-the redesign of technological processes or organizational processes, and managerial innovations
-the creation of a new business model
-the reconfiguration of the industry through a new value chain
-the combination of dimensions considered as conflicting in order to increase customer satisfaction
-the creation of new industries or the rejuvenation of existing industries

Question 2

Benefiting from the "first mover advantage" implies that a firm:

A)Cannot be removed from the market
B)Was the first in a market
C)Gains access to assets that a follower cannot match
D)Must now be successful

Answer 2

C

Question 3

Can two firms benefit from the same competitive advantage?

Answer 3

In theory, a competitive advantage exists if the firm that possesses it persistently earns a significant higher return than the rest of the industry.
That implies that if two firms have the same competitive advantage, it does not strictly meet the definition of a competitive advantage.
But read less strictly, firms may benefit from the same combination of assets (resources and competencies) that allows them to create more value for the customer.
Two firms may dominate an industry in the face of small players (Coke and Pepsi); they may enjoy the same competitive advantage provided by different sets of assets but leading to the same advantage; or they may enjoy the same competitive advantage to a different extent, but at a significant level.
This question turns out to be difficult because it tests the robustness and the clarity of the definitions related to the concepts of resource, competence, and competitive advantage, as well as their relationships. The conclusion is that both definitions and relationships still need improvement.

Question 4

The tobacco and the toy industries illustrate:

A)Respectively, a relatively stable environment with firms endowed with similar resources and following similar strategies as opposed to an unpredictable environment characterized by multiple and rapid changes
B)Respectively, an unpredictable environment characterized by multiple and rapid changes as opposed to a relatively stable environment with firms endowed with similar resources and following similar strategies
C)Respectively, an industry whose ethics appears questionable as opposed to an industry very much focused on specific markets and characterized by seasonality
D)That both industries have ethics which can be strongly questioned

Question 5

Zara, the chain of retail stores owned by Inditex, illustrates:

A)The above-average return exhibited by most firms in this industry
B)The importance of fast response to emerging fashion trends
C)The importance of the resources of the corporate parent
D)How quickly fashion trends change

Question 6

Who knows better the nature of a firm's strategic competencies: top managers, employees, or customers?

Question 7

Examples of "efficient markets" are:

A)Securities, grain futures, and knowledge-based items
B)Foreign exchange, securities, and heavy industries' products
C)Foreign exchanges, utilities, and interned-based firms
D)Securities, foreign exchange, and grain futures

Question 8

Imperfection in trading markets can be caused by:

A)Imperfect availability of information and transaction costs
B)Overshooting and systematic behavioral trends
C)Both a and b
D)Systematic behavior trends, overshooting, and contrarianism

Question 9

Is competitive advantage sustainable?

Question 10

"Brand management" and "Lean production systems" were invented or developed respectively by:

A)Apple and Procter & Gamble
B)Toyota and General Electric
C)Cirque du Soleil and Apple
D)Procter & Gamble and Toyota

Question 11

Different market types can be distinguished:

A)Trading, production, and information markets
B)Production and trading markets
C)Production, information, and internet-based markets
D)Existing, emergent, and potential markets

Question 12

Is Differentiation a superior strategy than a Cost strategy because customers prefer to pay a higher price for better quality?

Question 13

The expiration of the Nutrasweet artificial sweetener's patent was a real issue for:

A)Monsanto
B)Pfizer
C)Merck
D)All customers

Question 14

Nintendo competes against Sony and Microsoft:

A)With a very different resource base
B)And has gained market share
C)And has a distinctive strategy for its Wii
D)All of the above

Question 15

If in a vegetable market, prices reflect all available information and adjust instantaneously:

A)This is a perfect market
B)This is a monopolistic market
C)This is an efficient market
D)This is a common or 'garden' market

Question 16

Why do we need the concept of competitive advantage if we identify it with superior financial returns?

Question 17

What is one of the relationships between change and entrepreneurship?

Question 18

How can a firm test the resources and capabilities fundamental to its success without actually implementing them and investing the corresponding money?

Question 19

What differentiates trading and production markets?

Question 20

For a competitive advantage to exist:

A)There must be weak and strong players in the industry in terms of capability endowments
B)There must be some imperfection in the market
C)There must be the so-called "pure and perfect competition"
D)Causal ambiguity has occurred

Question 21

The ability to buy capabilities depends on:

A)Their transferability between firms
B)Their transferability between firms and the size of transaction costs
C)The time needed to accumulate knowledge about this capability
D)The cost of capabilities on external factor markets

Question 22

The examples of Ikea and Southwest Airlines illustrate:

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 low-price, no-frills business strategy can still be combined with memorable (but very low cost) product differentiation

Question 23

Differentiation is defined as:

A)A strategy where a firm provides a product perceived as unique and valuable by customers, other than a low price
B)Offering a low price based on a low cost
C)A strategy where a firm offers a large range of products to cover all the segments of the market
D)The opposite of cost leadership: having costs as high as possible while still managing to break even or make a profit

Question 24

The difference between a "generic" and a "contextual" best practice is?

A)The concepts are identical in practice
B)Generic best practices should work for any firm in the industry, while contextual practices work only when combined with the original player's other practices
C)Generic best practices are rare, whereas contextual practices are beneficial only when combined with other practices
D)None of the above

Question 25

Overshooting occurs when:

A)You set higher targets than others
B)Someone has created a bandwagon
C)Firms overreact to rivals' aggressive behavior
D)Asset prices overreact to new information

Question 26

"Momentum trading" means:

A)Overshooting
B)Playing catch-up
C)Following the herd
D)Following a contrarian strategy

Question 27

The simple trade-off between high-quality and low cost:

A)Is complex in practice
B)Does not allow for phenomena such as economies of scale funding huge Research & Development programs
C)Has refuted the fiction of total quality management
D)Answers a and b

Question 28

A contrarian is:

A)Someone who acts only as a counterparty
B)Someone who does the opposite of what most people in the market are doing at that time
C)Someone who believes financial derivatives trading violates God's Laws
D)A and C above

Question 29

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 what the firm's goals and strategy really are
D)All of the above

Question 30

The case of "Urban Outfitters" illustrates:

A)Complexity theory
B)That a strategy that successfully integrates many unique features is very hard to copy
C)Excellence of personal leadership
D)All of the above

Question 31

Systematic behavioral trends can be defined as the:

A)Bandwagon effect and the week-end effect
B)Regular patterns in the behavior of people in firms
C)January effect and the small firm effect
D)Fact that prices in financial markets follow systematic patterns that are the result of market psychology

Question 32

An example of "patterns of price movements" is:

A)Head and shoulders
B)Double tops
C)Flags
D)All of the above

Question 33

The growing diversity of players in the European electricity-generating industry illustrates the fact that:

A)The European Economic Commission is extremely powerful
B)Even highly protected industries are not immune from competition
C)The greater the diversity of firms' asset endowments, the greater the potential for competitive advantage
D)The greater the diversity of firms' asset endowments, the smaller the potential for competitive advantage

Question 34

According to Porter, cost leadership and differentiation are:

A)What leads a firm to "be stuck in the middle"
B)Two names for the same fundamental strategy
C)Mutually exclusive
D)Both possible simultaneously

Question 35

Cost leadership and differentiation are:

A)Two of Michael Porter's original five forces
B)Two of Michael Porter's generic strategies
C)Both of the above
D)Neither of the above

Question 36

The development of "collateralized debt obligations", by Drexel Burnham Lambert, shows that:

A)Well-paid bankers always come up with good ideas
B)The financial system can be very fragile
C)Financial products are easily copied so first movers must quickly establish a large track record of successful trades
D)A financial crisis was inevitable

Question 37

Transaction costs include:

A)Search costs
B)Negotiation costs
C)Contract enforcement costs
D)All of the above

Question 38

Characteristics of the industry such as information complexity, difficulties of resource acquisition, and opportunities for deterrence and preemption, are impacting:

A)The extent to which competitive advantage is eroded through imitation
B)The extent to which imitation is difficult
C)The extent to which rivals are not likely to use competition through imitation
D)The extent to which deterrence and preemption will be used

Question 39

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

Question 40

An imperfection of the market in the information area means:

A)Equal access to information for all players
B)Information is imperfectly available
C)Imperfection in the stock exchange mechanisms
D)The people who make up a market have emotions and feelings which are flawed

Question 41

A firm's ability to respond to change:

A)Requires just one key resource: information
B)Impacts its competitive advantage as well
C)Does not impact its competitive advantage
D)Is a classic and not novel issue in strategic management

Question 42

The existence of first mover advantage and the fact that the market is small relative to the minimum efficient scale of production:

A)Are two market imperfections that impact the ability to sustain competitive advantage
B)Are two market imperfections that impact the ability to sustain competitive advantage through preemption
C)Are general attributes of any market
D)Are unrelated

Question 43

In the long run:

A)Imitation erodes differences in competition between firms
B)Competition erodes differences in profitability between firms
C)Cooperation erodes differences in profitability between firms
D)Firms erode differences between them through imitation

Question 44

If competition in an industry has become time-based:

A)A good first mover will 'scoop the market', but if they misjudge the game a fast second mover can 'clean up'
B)Anticipating the market is the only reliable strategy
C)Innovation is the critical competence
D)Another fad has been created by consultants and management researchers

Question 45

How can a firm obscure its performance?

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

Question 46

Preemption means reducing opportunities for challengers by::

A)Occupying existing niches
B)Occupying existing and potential niches
C)Occupying potential niches
D)None of the above

Question 47

"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

Question 48

Schumpeter's "gale of creative destruction":

A)Helps all firms in an industry equally
B)Provides equal opportunities for any firm to overtake the market leader
C)Provides an opportunity for any firm to overturn the competitive advantage of stronger firms
D)No longer applies, after the internet was invented

Question 49

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 a persistently higher profit margin than its rivals
C)A firm's ability to earn a profit rate which is persistently higher than its rivals
D)A firm's ability to outwit its competitors

Question 50

A firm with a competitive advantage other than superior profitability may have?

A)A rising market share
B)Strong and rising customer loyalty, or good executive perks, or both
C)Invested in technology its rivals do not have
D)Some or all of the above

Question 51

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

Question 52

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 should be welcomed.

Question 53

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

Question 54

The simple form of the "theory of limit pricing" postulates that:

A)A firm in a strong market position can obscure superior performance by limiting the release of information about prices
B)A firm always tries to limit price increases to what its customers can afford
C)There is a natural and objective limit to prices, imposed by the market
D)A firm in a strong market position sets prices at a level that dissuades entrants from entering

Question 55

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)Analyze its rival's marketing strategy
D)None of the above

Question 56

If a firm's competitive advantage comes from external change, then:

A)The firm responds better to changing prices, technologies or tastes than its rivals
B)The firm responds faster to changing prices or tastes than its rivals
C)The firm has better creative capabilities than its rivals
D)The firm has a lower cost of capital than its rivals

Question 57

"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

Question 58

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 resource
B)Identify and diagnose the rival's advantage, and then acquire the resource
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

Question 59

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

Question 60

Isolating mechanisms are:

A)Mechanisms that slow or stop the equalization of rents between firms
B)Mechanisms that speed up the equalization of rents 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

Question 61

To transfer or acquire resources a firm will face transaction costs including patent costs, negotiation costs and contract enforcement cost

Question 62

Isolating mechanisms are barriers limiting the equalization of rents among firms, i.e. phenomena that erode a firm's competitive advantages

Question 63

A first mover advantage is the attribute of the first firm entering an industry but only relates to its ability to attract the best human resources

Question 64

Competitive advantage emerges from three sources: external, hybrid, and internal sources

Question 65

A "Blue ocean strategy" refers to the creation of entirely new industries, or the recreation of existing industries

Question 66

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

Question 67

Is it easy for Sears Holdings (Kmart) to understand Wal-Mart's competitive advantages?

A)No, it is not that easy
B)Yes: just walk into any Wal-Mart store
C)Any professional retailer could
D)B and C above

Question 68

A firm can create competitive advantage by responding better than rivals to changes in its environment or by maintaining strategic differences from its rivals that customers accept

Question 69

To "preempt" an entrant, a firm can occupy existing and potential strategic niches to reduce the range of opportunities open to potential entrants

Question 70

The theory of limit pricing postulates that a firm in a strong market position sets prices that create profits which just fail to attract entrants

Question 71

Porter says that cost leadership and differentiation are the two main sources of competitive advantages

Question 72

For some firms, speed of new product development appears to be the only real source of competitive advantage in today's economy

Question 73

Competitive advantage is a relatively simple construct to understand and achieve

Question 74

For competitive advantage to exist, a firm must operate in a market of "pure and perfect competition", as described by economists

Question 75

Regarding causal ambiguity and uncertain imitability :

A)These are academic phrases to describe a state of confusion
B)Causal ambiguity causes uncertain imitability
C)Anyone who tries to imitate something they don't fully understand is asking for trouble
D)All of the above are true

Question 76

A firm that decides as a long term goal to target only part of the overall market has adopted a focus strategy

Question 77

"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

Question 78

Entrepreneurship can be defined as the ability to identify and respond to opportunities in the environment

Question 79

Three different market types lead to different categories of competitive advantage. These three markets are: trading markets, service markets, and production markets

Question 80

Innovation can be narrowly interpreted as technical change, but also more broadly as a sense of novelty in any area of the firm