308 Part II
CHAPTER 4: COST LEADERSHIP
TRUE/FALSE QUESTIONS
1.
Corporate level strategies are actions firms take to gain competitive advantages in
a single market or industry.
True
False
Answer: False Page: 116 Difficulty: Easy
Chapter Objective: 1
2.
Cost leadership and product differentiation are so widely recognized that they are
often called generic business strategies.
True
False
Answer: True Page: 116 Difficulty: Easy
Chapter Objective: 1
3.
A firm that chooses a cost-leadership business strategy focuses on gaining
advantages by reducing its costs to a level equal to all of its competitors.
True
False
Answer: False Page: 116 Difficulty: Easy
Chapter Objective: 1
4.
Firms that are successful in pursuing a cost-leadership strategy focus solely on
keeping costs low and abandoning other business or corporate strategies.
True
False
Answer: False Page: 116 Difficulty: Moderate
Chapter Objective: 1
5.
In general, cost advantages are not possible when competing firms produce similar
products.
True
False
Answer: False Page: 116 Difficulty: Moderate
Chapter Objective: 1
6.
Economies of scale are said to exist when the increase in firm size (measured in
terms of volume of production) are associated with lower costs (measured in terms
of average costs per unit of production).
True
False
Answer: True Page: 117
Difficulty: Moderate
Chapter Objective: 2
Chapter 4: Cost Leadership309
7.
As the volume of production in a firm increases, the average cost per unit
decreases until some optimal volume of production is reached, after which the
average costs per unit of production begin to rise because of diseconomies of scale.
True
False
Answer: True Page: 117
Difficulty: Moderate
Chapter Objective: 3
8.
When a firm has high levels of production, it is often able to purchase and use
manufacturing tools that cannot be kept in operation in small firms.
True
False
Answer: True Page: 118
Difficulty: Easy
Chapter Objective: 3
9.
The link between volume of production and the cost of building manufacturing
operations is particularly important in industries characterized by product
manufacturing, such as chemical and oil refining.
True
False
Answer: False Page: 118
Difficulty: Moderate
Chapter Objective: 3
10. High volumes of production are also associated with high levels of generality in
employee tasks and as workers become increasingly generalized in accomplishing a
variety of tasks, they can become more effective at these tasks, thereby reducing
the firm's costs.
True
False
Answer: False
Page: 119
Difficulty: Hard
Chapter Objective: 3
11. There are physical limitations to the size of some manufacturing processes and
when this size is exceeded, diseconomies of scale are experienced.
True
False
Answer: True
Page: 119
Difficulty: Moderate
Chapter Objective: 3
12. As a firm increases in size, it often increases in complexity; however the ability of
managers to control and operate the firm efficiently are virtually unlimited and
therefore costs do not substantially increase.
True
False
Answer: False
Page: 120
Difficulty: Moderate
Chapter Objective: 3
13. Increased worker specialization associated with higher levels of production can
lead to worker de-motivation and diseconomies of scale.
True
False
Answer: True
Page: 120
Difficulty: Moderate
Chapter Objective: 3
310 Part II
14. Large transportation costs can offset cost reductions attributable to the exploitation
of economies of scale in manufacturing.
True
False
Answer: True
Page: 120
Difficulty: Easy
Chapter Objective: 3
15. The link between cumulative volumes of production and cost has been formalized
in the concept of the learning curve.
True
False
Answer: True
Page: 120
Difficulty: Moderate
Chapter Objective: 4
16. Economies of scale focus on the relationship between the cumulative volume of
production and average unit costs, while the learning curve focuses on the
relationship between the volume of production at a given time and average unit
costs.
True
False
Answer: False
Page: 120
Difficulty: Hard
Chapter Objective: 4
17. If a firm gets too large, it will eventually experience both diseconomies of scale
and, an increase in costs associated with the learning-curve effect as cumulative
volume of production grows.
True
False
Answer: False
Page: 121
Difficulty: Moderate
Chapter Objective: 4
18. Learning curve-cost advantages are restricted solely to manufacturing and the
advantage associated only with the manufacturing business function.
True
False
Answer: False
Page: 121
Difficulty: Moderate Chapter Objective: 4
19. Efforts to move down the learning curve quickly, by acquiring market share, are
likely to generate only normal economic performance.
True
False
Answer: True
Page: 122
Difficulty: Moderate
Chapter Objective: 4
20. Differential low-cost access to productive inputs may create cost differences among
firms producing similar products in an industry.
True
False
Answer: True
Page: 122
Difficulty: Moderate Chapter Objective: 2
Chapter 4: Cost Leadership311
21. Productive inputs are any supplies used by a firm in conducting its business
activities.
True
False
Answer: True
Page: 122
Difficulty: Easy
Chapter Objective: 2
22. One of the least important productive inputs in almost all companies is labor and it
is unlikely that differential low cost access to labor can give a firm a cost
advantage.
True
False
Answer: False
Page: 125
Difficulty: Moderate
Chapter Objective: 2
23. Physical technology based cost advantages apply only in manufacturing firms.
True
False
Answer: False
Page: 124
Difficulty: Moderate
Chapter Objective: 2
24. Technological software includes things like the quality of relations among labor
and management, an organization's culture, and the quality of managerial controls.
True
False
Answer: True
Page: 124
Difficulty: Moderate
Chapter Objective: 2
25. In general, firms that are attempting to implement a cost-leadership strategy will
choose to produce relatively simple standardized products that sell for relatively
low prices compared to the products and prices of firms pursuing other business or
corporate strategies.
True
False
Answer: True
Page: 125
Difficulty: Easy
Chapter Objective: 2
26. Firms for whom the price of the products or services they sell is determined by
market conditions and not by the individual decisions of the firms themselves are
known as price makers.
True
False
Answer: False
Page: 127
Difficulty: Hard
Chapter Objective: 2
27. A cost-leadership competitive strategy helps reduce the threat of entry by creating
cost-based barriers to entry.
True
False
Answer: True
Page: 126
Difficulty: Easy
Chapter Objective: 5
312 Part II
28. The threat of rivalry is increased when low-cost firms set their prices equal to those
of higher cost competitors.
True
False
Answer: False
Page: 128
Difficulty: Moderate
Chapter Objective: 5
29. A cost-leadership competitive strategy can reduce both the threat of substitutes and
the threat of suppliers that a firm may face.
True
False
Answer: True
Page: 128
Difficulty: Easy
Chapter Objective: 5
30. Given the relatively low margins of firms pursuing a cost leadership strategy, firms
pursuing this strategy are especially vulnerable to buyers having their revenues
reduced to a point where they are unable to earn normal or above-normal
performance.
True
False
Answer: False
Page: 129
Difficulty: Moderate
Chapter Objective: 5
31. If cost-leadership strategies can be implemented by numerous firms in an industry,
or if no firms face a cost disadvantage in imitating a cost-leadership strategy, then
being a cost leader does not generate a sustained competitive advantage for a firm.
True
False
Answer: True
Page: 129
Difficulty: Moderate
Chapter Objective: 5
32. Sources of cost advantage that are unlikely to be rare include learning-curve
economies, differential low-cost access to productive inputs and technological
software.
True
False
Answer: False
Page: 129
Difficulty: Moderate
Chapter Objective: 6
33. When the efficient size of a firm or plant is significantly smaller than the total size
of an industry, there will usually be numerous efficient firms/plants in that industry,
and a cost-leadership strategy based on economies of scale will be rare.
True
False
Answer: False
Page: 130
Difficulty: Hard
Chapter Objective: 6
34. Cost advantages based on diseconomies of scale are likely to be rare.
True
False
Answer: False
Page: 130
Difficulty: Hard
Chapter Objective: 6
Chapter 4: Cost Leadership313
35. In general, economies of scale and diseconomies of scale are relatively easy-toduplicate bases of cost leadership.
True
False
Answer: True
Page: 131
Difficulty: Moderate
Chapter Objective: 6
36. Firms implementing cost leadership strategies will generally adopt what is known
as a functional organizational structure.
True
False
Answer: True
Page: 135
Difficulty: Moderate
Chapter Objective: 7
37. Cost leadership firms are typically characterized by very tight cost control systems;
frequent and detailed cost control reports; an emphasis on quantitative cost goals
and targets; and close supervision of labor, raw materials, inventory, and other
costs.
True
False
Answer: True
Page: 136
Difficulty: Moderate
Chapter Objective: 8
38. Compensation at cost-leadership firms is usually tied directly to product innovation
and customer service efforts.
True
False
Answer: False
Page: 139
Difficulty: Moderate
Chapter Objective: 8
39. One of the most common reasons that a firm begins international operations is to
reduce its cost position.
True
False
Answer: True
Page: 139
Difficulty: Moderate
Chapter Objective: 9
40. The primary driver behind maquiladora investment is lower labor costs than similar
plants located in the United States.
True
False
Answer: True
Page: 140
Difficulty: Moderate
Chapter Objective: 9
314 Part II
MULTIPLE CHOICE QUESTIONS
41. Actions that firms take to gain competitive advantage in a single market or industry
are known as
A. business-level strategies.
B. corporate-level strategies.
C. functional-level strategies.
D. macro-level strategies.
Answer: A
Page: 116
Difficulty: Easy
Chapter Objective: 1
42. Actions firms take to gain competitive advantages by operating in multiple markets
or industries simultaneously are known as
A. business-level strategies.
B. corporate-level strategies.
C. functional-level strategies.
D. macro-level strategies.
Answer: B
Page: 116
Difficulty: Easy
Chapter Objective: 1
43. Cost leadership and product differentiation strategies are so widely recognized that
they are often called
A. common business strategies.
B. generic corporate strategies.
C. generic business strategies.
D. common corporate strategies.
Answer: C
Page: 116
Difficulty: Moderate Chapter Objective: 1
44. A firm that chooses a ________ focuses on gaining advantages by reducing its cost
below all of its competitors.
A. diversification strategy
B. product differentiation business strategy
C. corporate strategy
D. cost-leadership business strategy
Answer: D
Page: 116
Difficulty: Easy
Chapter Objective: 1
45. The best example of a firm following a cost-leadership business strategy is
A. Mercedes Benz.
B. Macy's.
C. Wal-Mart.
D. Rolls Royce.
Answer: C
Page: 116
Difficulty: Easy
Chapter Objective: 1
Chapter 4: Cost Leadership315
46. _________ are said to exist when the increase in firm size (measured in terms of
volume of production) are associated with lower costs (measured in terms of
average costs per unit of production).
A. Sustainable competitive advantages
B. Economies of scale
C. Temporary competitive advantages
D. Economies of scope
Answer: B
Page: 117
Difficulty: Moderate Chapter Objective: 3
47. As the volume of production in a firm increases, the average cost per unit decreases
until some optimal volume of production is reached, after which the average costs
of production begin to rise because of
A. diseconomies of scale.
B. economies of scope.
C. diseconomies of scope.
D. economies of scale.
Answer: A
Page: 117
Difficulty: Moderate Chapter Objective: 3
48. The link between volume of production and the cost of building manufacturing
operations is particularly important in industries characterized by
A. process innovations.
B. product manufacturing.
C. product innovation.
D. process manufacturing.
Answer: D
Page: 118
Difficulty: Moderate Chapter Objective: 3
49. According to the "two-thirds rule," it would cost a firm ___________ to build a
plant with a capacity of 100,000 units.
A. 2/3*100,000
B. 100,000 / 2/3
C. 100,000 raised to the 2/3 power
D. 2 * 100,000 / 3
Answer: C
Page: 118
Difficulty: Hard
Chapter Objective: 3
50. ___________ levels of production are associated with ___________ levels of
employee specialization.
A. High, high
B. High, low
C. Low, high
D. Low, moderated
Answer: A
Page: 118
Difficulty: Moderate Chapter Objective: 3
316 Part II
51. Which of the following is not a potential source of diseconomies of scale?
A. Physical limits to efficient size
B. Worker de-motivation
C. Distance to markets and suppliers
D. Learning-curve economies
Answer: D
Page: 119
Difficulty: Moderate Chapter Objective: 3
52. If Temper Company, a manufacturer of mattresses, was considering moving its
production facilities to China but decided against it because the additional costs of
shipping the mattresses back to the U.S. would offset the cost savings associated
with moving the production facilities, the increased costs associated with shipping
would be an example of
A. learning-curve economies.
B. diseconomies of scale.
C. economies of scale.
D. competitive advantages.
Answer: B
Page: 120
Difficulty: Moderate Chapter Objective: 3
53. ___________ focus(es) on the relationship between the volume of production and a
given point in time and average unit costs, the ______________ focus(es) on the
relationship between cumulative production and average costs.
A. Economies of scale; learning curve
B. Competitive advantage; economies of scale
C. Learning curve; economies of scale
D. Economies of scale; competitive advantage
Answer: A
Page: 120
Difficulty: Hard
Chapter Objective: 4
54. Which of the following statements regarding the learning curve and economies of
scale is accurate?
A. Just as diseconomies of scale are presumed to exist if a firm gets too large, there is
a corresponding increase in costs in the learning-curve model as the cumulative
volume of production grows.
B. Where diseconomies of scale are presumed to exist if a firm gets too large, there is
no corresponding increase in costs in the learning-curve model as the cumulative
volume of production grows.
C. Where diseconomies of scale are presumed to exist if a firm gets too small, there is
no corresponding increase in costs in the learning-curve model as the cumulative
volume of production grows.
D. Just as diseconomies of scale are presumed to exist if a firm gets too small, there is
a corresponding increase in costs in the learning-curve model as the cumulative
volume of production grows.
Answer: B
Page: 121
Difficulty: Hard
Chapter Objective: 4
Chapter 4: Cost Leadership317
55. Learning-curve-cost advantages are
A. restricted only to manufacturing firms.
B. restricted only to firms in services industries.
C. restricted only to firms in extraction industries.
D. not restricted to manufacturing.
Answer: D
Page: 121
Difficulty: Moderate
Chapter Objective: 4
56. ______________ are any supplies used by a firm in conducting its business
activities.
A. Productive assets
B. Productive inputs
C. Productive outputs
D. Productive inventory
Answer: B
Page: 122
Difficulty: Moderate Chapter Objective: 4
57. In order to create a cost advantage, the cost of acquiring low-cost productive inputs
must be __________ the cost savings generated by these factors.
A. greater than
B. equal to
C. less than
D. greater than or equal to
Answer: C
Page: 122
Difficulty: Moderate Chapter Objective: 4
58. Machines and robots are examples of
A. technological software.
B. economies of scale.
C. learning-curve effects.
D. technological hardware.
Answer: D
Page: 124
Difficulty: Easy
Chapter Objective: 4
59. The quality of relations among labor and management, an organization's culture,
and the quality of management controls are all examples of
A. technological hardware.
B. technological software.
C. productive inputs.
D. economies of scale.
Answer: B
Page: 124
Difficulty: Moderate Chapter Objective: 4
60. Choices that firms make about the kinds of products and services they will sell that
impact their relative cost position are known as
A. technological hardware.
B. policy choices.
C. technological software.
D. corporate level strategies.
Answer: B
Page: 125
Difficulty: Moderate Chapter Objective: 4
318 Part II
61. Firms for whom the price of the products or services they sell is determined by
market conditions and not by the individual decision of the firms are known as
A. profit takers.
B. price makers.
C. price takers.
D. profit makers.
Answer: C
Page: 127
Difficulty: Moderate Chapter Objective: 5
62. Which of the following statements is accurate?
A. A cost-leadership competitive strategy increases the threat of new entrants by
lowering cost-based barriers to entry.
B. Firms with a low-cost position can reduce the threat of rivalry in an industry.
C. Cost leaders are especially vulnerable to substitute products.
D. Cost leaders are especially vulnerable to the threat of suppliers.
Answer: B
Page: 126
Difficulty: Moderate Chapter Objective: 5
63. If the potential responses of competing firms are likely to be very detrimental to the
costs advantages of a cost leaders, firms pursuing a cost-leadership competitive
strategy should
A. drop their prices below competitors' prices to increase overall economic
performance through increased volumes of profitable sales.
B. raise their prices above competitors, increasing overall economic performance
through higher margins.
C. focus on a specific niche market to avoid direct competition with aggressive
competitors.
D. set their prices equal to competitors' prices, sacrificing some market share for
increased profit margins and the release of less information.
Answer: D
Page: 128
Difficulty: Hard
Chapter Objective: 5
64. Which of the following statements about cost leadership and the threat of buyers is
accurate?
A. If buyers demand increased quality or service, cost leaders can absorb these costs
and may still have a cost advantage over the competition.
B. Being a cost leader encourages buyer backward vertical integration.
C. Firms pursuing a cost-leadership strategy are especially vulnerable to powerful
buyers who insist on low prices or higher quality and service from their suppliers.
D. Cost leaders are not able to absorb costs associated with buyers' demands for
increased quality or service.
Answer: A
Page: 129
Difficulty: Moderate Chapter Objective: 5
Chapter 4: Cost Leadership319
65. Which of the following is likely to be a rare source of cost advantage?
A. Technological software
B. If the efficient size of a firm or plant is significantly smaller than the total size of an
industry
C. Cost disadvantages based on diseconomies of scale
D. Technological hardware
Answer: A
Page: 129
Difficulty: Moderate Chapter Objective: 6
66. Which of the following is less likely to be a rare source of cost advantage?
A. Technological software
B. Learning–curve advantages
C. Differential low-cost access to productive inputs
D. Policy changes
Answer: D
Page: 129
Difficulty: Hard
Chapter Objective: 6
67. Perhaps the only time economies of scale are not subject to low-cost duplication is
when the ______________ size of operations is a significant percentage of
__________ in an industry.
A. minimum; marginal demand
B. efficient; total demand
C. maximum; marginal demand
D. efficient; marginal demand
Answer: B
Page: 130
Difficulty: Hard
Chapter Objective: 6
68. Which of the following statements is accurate?
A. In general, economies of scale are relatively easy-to-duplicate bases of cost
leadership, but diseconomies of scale are not.
B. In general, diseconomies of scale are relatively easy-to-duplicate bases of cost
leadership, but economies of scale are not.
C. In general, neither economies of scale nor economies are relatively easy-toduplicate bases of cost leadership.
D. In general, both economies of scale and diseconomies of scale are relatively easyto-duplicate bases of cost leadership.
Answer: D
Page: 131
Difficulty: Moderate Chapter Objective: 6
69. When managers committed to an incorrect course of action increase their
commitment to this action even as its limitations become manifest, this is known as
A. de-escalation of commitment.
B. diseconomies of scale.
C. escalation of commitment.
D. economies of scale.
Answer: C
Page: 132
Difficulty: Moderate Chapter Objective: 6
320 Part II
70. Cost advantages based on learning curve economies are
A. rare, but they are usually not costly to duplicate.
B. costly to duplicate, but they are usually not rare.
C. both rare and usually costly to duplicate.
D. not rare and are usually not costly to duplicate.
Answer: A
Page: 132
Difficulty: Hard
Chapter Objective: 6
71. Firms implementing cost leadership strategies will generally adopt a
A. multi-divisional structure.
B. product divisional structure.
C. functional organizational structure.
D. matrix structure.
Answer: C
Page: 135
Difficulty: Easy
Chapter Objective: 7
72. In a functional structure, each of the major business functions is managed by a
A. functional manager.
B. divisional manager.
C. chief executive officer.
D. line manager.
Answer: A
Page: 136
Difficulty: Easy
Chapter Objective: 7
73. The only person in a functional organization to have a multi-functional perspective
is the
A. CFO.
B. CEO.
C. COO.
D. Marketing Manager.
Answer: B
Page: 136
Difficulty: Moderate Chapter Objective: 7
74. Firms pursuing a cost leadership strategy are typically characterized by
A. loose cost control systems.
B. a de-emphasis on quantitative cost goals and costs.
C. infrequent cost control reports.
D. close supervision of labor, raw materials and inventory.
Answer: D
Page: 136
Difficulty: Moderate Chapter Objective: 8
75. Which of the following compensation policies is most likely to enhance a firm's
ability to pursue a low cost strategy?
A. Awarding employees bonuses based on the total amount of goods produced
B. Awarding employees bonuses based on customer comment cards
C. Awarding employees bonuses that are equal to 50% of the total cost savings
achieved based on employee suggestions and initiatives
D. Awarding employees bonuses based solely on how long they have been employed
with the company
Answer: C
Page: 139
Difficulty: Hard
Chapter Objective: 8
Chapter 4: Cost Leadership321
76. According to one estimate, the minimum efficient scale of a single compact-car
manufacturing plant is 400,000 units per year; this implies that firms operating in
this industry are likely to expand internationally to
A. increase sales to realize manufacturing economies of scale.
B. gain access to low cost labor.
C. gain low cost access to raw materials.
D. decrease manufacturing size to avoid diseconomies of scale.
Answer: A
Page: 139
Difficulty: Moderate Chapter Objective: 9
77. Maquiladoras are manufacturing plants owned by _____________ operated in
__________ near the _________ border.
A. non-Canadian firms; Canada; U.S.
B. non-Mexican firms; Mexico; U.S.
C. non-U.S. firms; U.S.; Mexican
D. Mexican firms; U.S.; Canadian
Answer: B
Page: 140
Difficulty: Moderate Chapter Objective: 9
78. Most of the 3,100 maquiladoras operating in Mexico in 1999 were
A. Mexican firms.
B. Japanese firms.
C. European firms.
D. U.S. firms.
Answer: D
Page: 140
Difficulty: Moderate Chapter Objective: 9
79. Historically, the most traditional reason that firms began international operations
was to
A. increase sales to realize economies of scale.
B. gain access to low cost labor.
C. gain low cost access to raw materials.
D. decrease manufacturing size to avoid diseconomies of scale.
Answer: C
Page: 140
Difficulty: Moderate
Chapter Objective: 9
80. In some industries, including the oil and gas industry, virtually the only reason why
firms have begun international operations is to
A. increase sales to realize economies of scale.
B. gain access to low cost labor.
C. gain access to low-cost raw materials.
D. decrease manufacturing size to avoid diseconomies of scale.
Answer: C
Page: 141
Difficulty: Hard
Chapter Objective: 9
322 Part II
Sematech is a producer of computer chips. To gain an advantage over other computer chip
makers, Sematech focuses on reducing its costs below all of its competitors and has aligned its
value chain accordingly. Recently, several of Sematech's competitors have begun to reduce the
company's competitive advantage. In response to this threat, Sematech has decided to add
production capacity in an effort to lower costs.
81. Sematech is pursuing which strategy?
A. Cost-leadership business strategy
B. Product differentiation business strategy
C. Cost-leadership corporate strategy
D. Product differentiation corporate strategy
Answer: A
Page: 116
Difficulty: Moderate
Chapter Objective: 1
82. By increasing production volume in an effort to reduce costs, Sematech is pursuing
which sources of cost advantage?
A. Size differences and diseconomies of scale
B. Differential access to productive inputs
C. Size differences and economies of scale
D. Technological advantages
Answer: C
Page: 117
Difficulty: Moderate Chapter Objective: 2
83. If Sematech's efforts to increase its production capacity resulted in increased
complexity and an inability of managers to control and operate the firm efficiently
this would be an example of
A. physical limits to efficient size.
B. worker de-motivation.
C. distance to markets and suppliers.
D. managerial diseconomies.
Answer: D
Page: 120
Difficulty: Moderate Chapter Objective: 3
84. If Sematech's expansion plans did not produce the desired cost savings but the
company decided to continue production expansion in an effort to capture cost
reductions, this would be an example of
A. economies of scale.
B. escalation of commitment.
C. diseconomies of scale.
D. managerial diseconomies.
Answer: B
Page: 132
Difficulty: Moderate Chapter Objective: 6
Chapter 4: Cost Leadership323
85. If Sematech were to continue seeking methods to maintain the company's cost
leadership position that would be costly to duplicate, which of the following is
most likely to be a basis of cost leadership that may be costly to duplicate?
A. Establishing economies of scale
B. Exploiting learning-curve economies
C. Purchasing new technological hardware
D. Securing differential access to low-cost productive inputs
Answer: D
Page: 134
Difficulty: Hard
Chapter Objective: 6
86. Given Sematech's business level strategy, which organizational structure is the
most appropriate?
A. Matrix structure
B. U-form structure
C. Multi-divisional structure
D. Product-divisional structure
Answer: B
Page: 136
Difficulty: Hard
Chapter Objective: 7
87. If Lucy Sullivan was a Sematech manager who oversaw the finance operations in
the company's functional structure, Lucy would be considered a
A. chief executive officer.
B. divisional manager.
C. chief operating officer.
D. functional manager.
Answer: D
Page: 136
Difficulty: Hard
Chapter Objective: 7
88. By employing a low-cost competitive strategy, Sematech has made itself
A. less able to withstand industry price wars.
B. more vulnerable to rivals.
C. less vulnerable to the power of suppliers.
D. more vulnerable to the power of buyers.
Answer: C
Page: 128
Difficulty: Moderate Chapter Objective: 5
89. If Sematech decided to focus on building its technological hardware, it would focus
on elements such as
A. robots.
B. organizational culture.
C. the quality of organizational controls.
D. the quality of relations among labor and management.
Answer: A
Page: 124
Difficulty: Easy
Chapter Objective: 2
324 Part II
90. If Sematech were to choose to narrow their product line in an effort to reduce costs,
this would be an example of
A. technological software.
B. a policy choice.
C. a competitive advantage.
D. a learning curve effect.
Answer: B
Page: 125
Difficulty: Hard
Chapter Objective: 2
ESSAY QUESTIONS
91. Differentiate between business strategies and corporate strategies and define the
nature of a cost-leadership strategy.
Business-level strategies are actions firms take to gain competitive advantages in a single
market or industry. Corporate-level strategies are actions firms take to gain competitive
advantages by operating in multiple markets or industries simultaneously. A firm that
chooses a cost-leadership business strategy focuses on gaining advantages by reducing its
costs below all of its competitors.
Page: 116
Difficulty: Moderate
Chapter Objective: 1
92. Identify six reasons firms can differ in their costs.
There are several reasons that firms producing essentially the same products can have
different costs. Some of the most important of these are: (1.) size differences and economies
of scale, (2.) size differences and diseconomies of scale, (3.) experience differences and
learning-curve economies, (4.) differential access to productive inputs, and (5.) technological
advantages independent of scale. In addition, firms competing in the same industry can
make policy choices about the kinds of products and services to sell that can have an
important impact on their relative cost position.
Page: 117
Difficulty: Moderate
Chapter Objective: 2
93.
Identify four reasons why economies of scale can exist and four reasons why
diseconomies of scale can exist.
The four reasons why economies of scale can exist include:
a.
Volume of Production and Specialized Machines. When a firm has high levels
of production, it is often able to purchase and use specialized manufacturing tools that
cannot be kept in operation in small firms.
b.
Volume of Production and the Cost of Plant and Equipment. In some
industries, the cost of building manufacturing operations per unit of production is lower
than the cost of building smaller manufacturing operations per unit of production. Thus
large-volume firms, other factors being equal, will be able to build lower per unit cost
manufacturing operations and will have lower average costs of production.
c.
Volume of Production and Employee Specialization. High volumes of
production are also associated with high levels of employee specialization. As workers
Chapter 4: Cost Leadership325
specialize in accomplishing a narrow task, they can become more and more efficient at this
task, thereby reducing their firm's costs.
d.
Volume of Production and Overhead Costs. A firm with high volumes of
production has the luxury of spreading its overhead costs over more units and thereby
reducing the overhead costs per unit.
The four reasons why diseconomies of scale can exist include:
a. Physical Limits to Efficient Size. There are some important physical limitations to the
size of some manufacturing processes and when these limitations are reached, additional
volume increases can lead to higher per unit costs.
b. Managerial Diseconomies. As a firm increases in size, it often increases in complexity,
and the ability of managers to control and operate it efficiently becomes limited.
c. Worker De-Motivation. As firms become larger, employee specialization increases.
With specialization, workers become more and more efficient at the particular task facing
them. However, very specialized jobs can be very de-motivating for employees and
productivity and quality both suffer, resulting in cost increases.
d. Distance to Markets and Suppliers. Any reductions in cost attributable to the
exploitation of economies of scale in manufacturing may be more than offset by large
transportation costs associated with moving supplies and products to and from the
manufacturing facility. Firms that build highly efficient plants without recognizing these
significant transportation costs may put themselves in a competitive disadvantage
compared to firms with slightly less efficient plants but plants that are located nearer
suppliers and key markets.
Pages: 117-120
Difficulty: Moderate
Chapter Objective: 3
94. Discuss the difference between the learning curve and economies of scale.
The learning curve is very similar to the concept of economies of scale. However, there
are two important differences. First, where economies of scale focus on the relationship
between the volume of production at a given point in time and average unit costs, the
learning curve focuses on the relationship between the cumulative volume of
production—that is, how much a firm has produced over time—and average unit costs.
Second, where diseconomies of scale are presumed to exist if a firm gets too large, there
is no corresponding increase in costs in the learning-curve model as the cumulative
volume of production grows. Rather, costs continue to fall until they approach the
technologically lowest possible cost.
Pages: 120-122
Difficulty: Moderate
Chapter Objective: 4
95. Identify how cost leadership helps neutralize each of the major threats in an
industry.
Threat of Entry. A cost-leadership competitive strategy helps reduce the threat of new
entrants by creating cost-based barriers to entry such as economies of scale and cost
advantages independent of scale.
Threat of Rivalry. Firms with a low-cost position also reduce the threat of rivalry. The
threat of rivalry is reduced through pricing strategies that low-cost firms can engage in
and through their relative impact on the performance of a low-cost firm and its highercost rivals. First, these firms can set their prices equal to the prices of higher-cost
326 Part II
competitors. Second, low-cost firms can price their goods or services slightly below the
prices of their high-cost rivals.
Threat of Substitutes. Substitutes become a threat to a firm when their cost and
performance, relative to a firm's current products or services, become more attractive to
customers. Cost leaders have the ability to keep their products and services attractive
relative to substitutes.
Threat of Suppliers. Suppliers can become a threat to a firm by charging higher prices
for the goods or services they supply or by reducing the quality of those goods or
services. However, when a supplier sells to a cost leader, that firm has greater flexibility
in absorbing higher-cost supplies than does a high-cost firm.
Threat of Buyers. Powerful buyers are a threat to firms when they insist on low prices or
higher quality and service from their suppliers. Lower prices threaten firm revenues;
higher quality can increase a firm's costs. Cost leaders can have their revenues reduced by
buyer threats and still earn normal or above-normal performance. These firms can also
absorb the greater costs of increased quality or service and may still have a cost advantage
over their competition. Cost leaders can also reduce the threat of buyers by deterring
backward vertical integration, and through large volumes of production.
Pages: 126-129
Difficulty: Hard
Chapter Objective: 5
96. Identify which bases of cost leadership are more likely to be rare and costly to
imitate.
Sources of cost advantage that are likely to be rare include learning-curve economies (at
least in emerging industries), differential low-cost access to productive inputs, and
technological "software." However, even when a particular source of cost advantage is
rare, it must be costly to imitate in order to be a source of sustained competitive
advantage. However, learning-curve economies may not be costly to duplicate in some
industries. Therefore only differential low-cost access to productive inputs and
technological software are both rare and costly to imitate, because they build on
historical, uncertain, and socially complex resources and capabilities.
Page: 129-135
Difficulty: Hard
Chapter Objective: 6
97. Identify the most appropriate organizational structure for a firm pursuing a costleadership strategy, and identify the two basic responsibilities of the CEO in this
type of organization.
The most appropriate organizational structure is a functional structure, or the U-form that
divides the company by major business function such as manufacturing, marketing,
finance accounting, sales, etc. Each of these functions is managed by a functional
manager and all functional managers report to the chief executive officer or CEO. The
CEO in a U-form organization has two basic responsibilities: (1) to formulate the
strategy of the firm and (2) to coordinate the activities of the functional specialists in the
firm to facilitate the implementation of this strategy. In the special case of a cost
leadership strategy, the CEO must decide on which bases such a strategy should be
founded and then must coordinate functions within a firm to make sure that the economic
potential of this strategy is fully realized.
Pages: 135-138
Difficulty: Hard
Chapter Objective: 7
Chapter 4: Cost Leadership327
98. Identify the types of control systems that are appropriate for firms pursuing a cost
leadership strategy.
Cost leadership firms are typically characterized by very tight cost control systems;
frequent and detailed cost control reports; an emphasis on quantitative cost goals and
targets; and close supervision of labor, raw materials, inventory, and other costs. Less
formal management control systems, such as organizational culture, also drive a cost
reduction philosophy at cost-leadership firms.
Pages: 138-139
Difficulty: Easy
Chapter Objective: 8
99. Identify the types of compensation policies that are appropriate for firms pursuing a
cost leadership strategy.
Compensation at cost-leadership firms is usually tied directly to cost-reducing efforts.
Such firms often provide incentives for employees to work together to reduce costs and
increase or maintain quality, and they expect every employee to take responsibility for
both costs and quality.
Page: 139
Difficulty: Easy
Chapter Objective: 8
100.
Identify three ways that firms pursuing a cost leadership strategy can use
international operations to reduce costs.
International operations can reduce a firm’s costs in at least three ways:
(1) Increasing sales to realize economies of scale. Gaining access to new customers for
a firm’s current products or services can increase a firm’s volume of sales. If a firm’s
production process is sensitive to economies of scale, this increased volume of sales can
reduce a firm’s costs and enable a firm to gain cost advantages in both its domestic and
non-domestic operations.
(2) Gaining access to low cost labor. Given the differential wage rates in various
countries many firms look to overseas manufacturing as a way to keep their labor cost
low.
(3) Gaining access to low cost raw materials. Finally, firms can engage in international
operations to gain access to low cost raw materials. Indeed, historically, this was the
most traditional reason that firms began international operations.
Pages: 139-141
Difficulty: Moderate Chapter Objective: 9