The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a key question related to a learning objective. The guidelines are the answer to that question.
| Decision | Guidelines |
|---|---|
| 1. What are the two generic strategies a company can use? | The two generic strategies are product differentiation and cost leadership. Product differentiation is offering products and services that customers perceive as superior and unique. Cost leadership is achieving lower costs and prices relative to competitors. A company chooses its strategy based on an understanding of customer preferences and its own internal capabilities to differentiate itself from its competitors. |
| 2. How can an organization translate its strategy into a set of performance measures? | An organization can develop a balanced scorecard that provides the framework for a strategic measurement and management system. The balanced scorecard measures performance from four perspectives: (a) financial, (b) customer, (c) internal business processes, and (d) learning and growth. To build their balanced scorecards, organizations often create strategy maps to represent the cause-and-effect relationships across various strategic objectives. |
| 3. How can a company analyze changes in operating income to evaluate the success of its strategy? | To evaluate the success of its strategy, a company can subdivide the change in operating income into growth, price-recovery, and productivity components. The growth component measures the change in revenues and costs from selling more or less units, assuming nothing else has changed. The price-recovery component measures changes in revenues and costs solely as a result of changes in the prices of outputs and inputs. The productivity component measures the decrease in costs from using fewer inputs, using a better mix of inputs, and reducing capacity. If a company is successful in implementing its strategy, changes in components of operating income align closely with strategy. |
| 4. How can a company identify and manage unused capacity? | Unused capacity costs are the portion of capacity costs that were committed to at the beginning of the period that are not used productively during the period. Downsizing is an approach to managing unused capacity that matches costs to the activities that need to be performed to operate effectively. |