Strategic Management Concepts 3rd Edition By Frank Rothaermel – Test Bank

The three financial ratios that constitute return on revenue are Cost of goods sold/Revenue, Research & Development (R&D) expense/Revenue, and Selling, general, & administrative (SG&A) expense/Revenue.

Return on revenue (ROR) indicates how much of a firm’s sales is converted into profits.

The ratio Cost of goods sold/Revenue indicates how efficiently a company can produce a good.

Apple’s profit for each watch sold was an estimated $265, with a profit margin of 315 percent.

The R&D/Revenue ratio indicates how much of each dollar that a firm earns in sales is invested to conduct research and development. A higher percentage is generally an indicator of a stronger focus on innovation to improve current products and services, and to come up with new ones.

A component of return on invested capital is working capital turnover, which is a measure of how effectively capital is being used by a firm to generate revenue.

From the given data, it can be concluded that for every dollar Tesva Systems puts to work, the company realizes $6.00 of sales. A component of return on invested capital is working capital turnover, which is a measure of how effectively capital is being used by a firm to generate revenue.

The company’s working capital turnover would be 3, that is, $600,000/$200,000. A component of return on invested capital is working capital turnover, which is a measure of how effectively capital is being used to generate revenue. Working capital turnover is expressed as revenue/working capital. 

Fixed asset turnover (Revenue/Fixed assets) measures how well a company leverages its fixed assets, particularly property, plant, and equipment (PPE).

From the given data, it can be concluded that every dollar spent on the company’s fixed assets generates $8.30 of revenue. Fixed asset turnover (Revenue/Fixed assets) measures how well a company leverages its fixed assets, particularly property, plant, and equipment (PPE).

Fixed asset turnover (Revenue/Fixed assets) measures how well a company leverages its fixed assets, particularly property, plant, and equipment (PPE).

Inventory turnover is expressed as Cost of goods sold/Inventory. Cost of goods sold (COGS) captures the firm’s production cost of merchandise it has sold. Inventory is the cost of the firm’s merchandise to be sold. This ratio indicates how much of a firm’s capital is tied up in its inventory.

Receivables turnover indicates how fast a firm is collecting the credit amount extended by the firm to its customers. Higher ratios of receivables turnover (Revenue/Accounts receivable) imply more efficient management in collecting accounts receivable and shorter durations of interest-free loans to customers (i.e., time until payments are due).

Payables turnover (Revenue/Accounts payable) indicates how fast a firm is paying its creditors and how much it benefits from interest-free loans extended by its suppliers.

Apple was able to charge a much higher margin for its products and services than Microsoft. One reason for this is that Microsoft had a higher cost structure than Apple. 

In this scenario, the receivables turnover of VK Products Inc. is 13.6 and that of its competitor, DL Goods Inc., is 6.0. Higher ratios of receivables turnover (Revenue/Accounts receivable) imply more efficient management in collecting accounts receivable and shorter durations of interest-free loans to customers (the time until payments are due). 

Apple benefited from strong demand for its products, as well as an effective management of its global supply chain. The vast majority of Apple’s manufacturing is done in China by low-cost producer Foxconn, which employs over 1.2 million people. 

All accounting data are historical data and thus backward-looking. Accounting profitability ratios show us only the outcomes from past decisions, and the past is no guarantee of future performance.

Today, the most competitively important assets tend to be intangibles such as innovation, quality, and customer experience, which are not included in a firm’s balance sheets. Intangibles that are not captured in accounting data have become much more important in firms’ stock market valuations over the last few decades. 

Shareholders—individuals or organizations who own one or more shares of stock in a public company—are the legal owners of public companies. 

Unlike accounting data, total return to shareholders is an external performance metric. It essentially indicates how the stock market views all available public information about a firm’s past, current state, and expected future performance (with most of the weight on future growth expectations). 

From the shareholders’ perspective, the measure of competitive advantage that matters most is the return on their risk capital, which is the money they provide in return for an equity share, money that they cannot recover if the firm goes bankrupt.

From the shareholders’ perspective, the measure of competitive advantage that matters most is the return on their risk capital, which is the money they provide in return for an equity share, money that they cannot recover if the firm goes bankrupt.

Investors are primarily interested in a company’s total return to shareholders, which is the return on risk capital, including stock price appreciation plus dividends received over a specific period.

Investors are primarily interested in a company’s total return to shareholders, which is the return on risk capital, including stock price appreciation plus dividends received over a specific period.

Market capitalization (or market cap) captures the total dollar market value of a company’s outstanding shares at any given point in time (Market cap = Number of outstanding shares × Share price). Therefore, market cap is equal to $3 billion, that is, 30 million shares × $100. 

Market capitalization (or market cap) captures the total dollar market value of a company’s outstanding shares at any given point in time (Market cap = Number of outstanding shares × Share price). 

Market capitalization (or market cap) captures the total dollar market value of a company’s outstanding shares at any given point in time (Market cap = Number of outstanding shares × Share price).

Unlike accounting data, total return to shareholders is an external performance metric. It essentially indicates how the stock market views all available public information about a firm’s past, current state, and expected future performance (with most of the weight on future growth expectations).

Stock prices can be highly volatile, making it difficult to assess firm performance, particularly in the short-term. This volatility implies that total return to shareholders is a better measure over the long-term due to the “noise” introduced by market volatility, external factors, and investor sentiment. 

Economic value created is the difference between a buyer’s willingness to pay for a product or service and the firm’s total cost to produce it.

In this scenario, the difference of $200 ($600 minus $400) is the economic value created. Economic value created is the difference between a buyer’s willingness to pay for a product or service and the firm’s total cost to produce it.

Economic value created is the difference between a buyer’s willingness to pay for a product or service and the firm’s total cost to produce it. Since the cost of production is same for both the companies, the difference in economic value can only be possible when one company has been able to sell at a higher price than the other.

The absolute maximum a customer would be willing to pay for a product is referred to as its reservation price, which in this case is $170. 

The amount of total perceived consumer benefits equals the maximum willingness to pay, which in this case is $180.

The difference between the price charged for a product (P), and the cost to produce it (C), is the profit, or producer surplus.

Value denotes the dollar amount (V) a consumer would attach to a good or service. Value captures a consumer’s willingness to pay and is determined by the perceived benefits a good or service provides to the buyer.

Value denotes the dollar amount (V) a consumer would attach to a good or service. Value captures a consumer’s willingness to pay and is determined by the perceived benefits a good or service provides to the buyer.

The amount, $100, is referred to as the value (V) the consumer attaches to the dress. Value denotes the dollar amount (V) a consumer would attach to a good or service. Value captures a consumer’s willingness to pay and is determined by the perceived benefits a good or service provides to the buyer.

The difference between the price charged for a product (P), and the cost to produce it (C), is the producer surplus. Firms capture this amount as profit per unit sold.

Consumer surplus is the difference between the value a consumer attaches to a good or service (V), and what he or she pays for it (P), or (V – P), that is, $1100 – $900 = $200. 

Economic value creation equals consumer surplus plus firm profit, or the sum of consumer and producer surplus. 

Economic value creation equals consumer surplus plus firm profit, or the sum of consumer and producer surplus. In this case, the economic value created is ($800 – $600) + ($600 – $350) = $450. 

Economic value creation equals consumer surplus plus firm profit, or the sum of consumer and producer surplus. 

Economic value creation equals consumer surplus plus firm profit, or the sum of consumer and producer surplus. It can also be expressed as the difference between the consumers’ maximum willingness to pay (reservation price) and the firm’s cost (V – C). However, the difference between the price charged and the firm’s cost is simply producer surplus. 

In an economic context, strategy is about (1) creating economic value, and (2) capturing as much of it as possible. 

Competitive advantage goes to the firm that achieves the largest economic value created, which is the difference between V, the consumer’s willingness to pay, and C, the cost to produce the good or service. 

Competitive advantage goes to the firm that achieves the largest economic value created, which is the difference between V, the consumer’s willingness to pay, and C, the cost to produce the good or service. 

Fixed costs are independent of consumer demand—for example, the cost of capital to build computer manufacturing plants or an online retail presence to take direct orders. 

Opportunity costs capture the value of the best forgone alternative use of the resources employed.

In the scenario, the amount $62,000 ($50,000 + $12,000) would be Genevieve’s opportunity cost. An entrepreneur faces two types of opportunity costs: (1) forgone wages she could be earning if she were employed elsewhere, and (2) the cost of capital she invested in her business, which could instead be invested in, say, the stock market or U.S. Treasury bonds. 

In this scenario, Andrew’s opportunity cost is $10,000. Opportunity costs capture the value of the best forgone alternative use of the resources employed. 

GD Inc.’s opportunity cost is $200 million. Opportunity costs capture the value of the best forgone alternative use of the resources employed.

Rather than merely relying on historical costs, as done when taking the perspective of accounting profitability, in the economic value creation perspective, all costs, including opportunity costs, must be considered.

The relationship between economic value creation and competitive advantage is fundamental in strategic management. It provides the foundation upon which to formulate a firm’s competitive strategy of cost-leadership or differentiation.

Managers using the balanced-scorecard develop strategic objectives and appropriate metrics by answering four key questions: (1) How do customers view us? (2) How do we create value? (3) What core competencies do we need? (4) How do shareholders view us? 

By relying on both an internal and an external view of a firm, the balanced-scorecard combines the strengths provided by the individual approaches to assessing competitive advantage: economic value creation, accounting profitability, and shareholder value creation. 

The three standard dimensions for measuring competitive advantage: economic value, accounting profitability, and shareholder value, are more or less one-dimensional metrics. However, conceptual frameworks like the balanced-scorecard and the triple-bottom-line attempt to provide a more holistic perspective on firm performance. 

The balanced-scorecard approach is popular in managerial practice because it has several advantages. In particular, the balanced-scorecard allows managers to translate the vision into measureable operational goals. 

It is important to note that the balanced-scorecard is a tool for strategy implementation, not for strategy formulation. It is up to a firm’s managers to formulate a strategy that will enhance the chances of gaining and sustaining a competitive advantage. 

The triple-bottom-line approach considers a combination of economic, social, and ecological concerns that can lead to a sustainable strategy. 

Three dimensions—economic, social, and ecological—make up the triple-bottom-line. According to this approach, achieving positive results in all three areas can lead to a sustainable strategy. 

Three dimensions—economic, social, and ecological—make up the triple-bottom-line. According to this approach, achieving positive results in all three areas can lead to a sustainable strategy—a strategy that can endure over time. 

A sustainable strategy is a strategy that can endure over time. A sustainable strategy produces not only positive financial results, but also positive results along the social and ecological dimensions.

Using a triple-bottom-line approach, managers audit their company’s fulfillment of its social and ecological obligations to stakeholders such as employees, customers, suppliers, and communities as conscientiously as they track its financial performance.

Like the balanced-scorecard, the triple-bottom-line takes an integrative and holistic view in assessing a company’s performance. 

In this scenario, the managers at Parallela Pharma are applying the triple-bottom-line approach to measure firm performance. Using a triple-bottom-line approach, managers audit their company’s fulfillment of its social and ecological obligations to stakeholders such as employees, customers, suppliers, and communities as conscientiously as they track its financial performance. 

Janet is the CEO of Far Sight Inc., which uses a triple-bottom-line approach. As a result, Janet will tend to expect her company to be socially responsible. The triple-bottom-line approach emphasizes being socially and ecologically responsible. 

Stakeholder theory is an approach to understanding a firm as embedded in a network of internal and external constituencies that each make contributions and expect consideration in return.

The translation of strategy into action takes place in the firm’s business model, which details the firm’s competitive tactics and initiatives.

To come up with an effective business model, a firm’s managers first need to transform their strategy of how to compete into a blueprint of actions and initiatives that support the overarching goals. In a second step, managers implement this blueprint through structures, processes, culture, and procedures.

Wholesale is a business model in which the manufacturer sets a fixed price on a product, but the retailer is free to set its own price.

In the agency business model, the producer relies on an agent or retailer to sell the product at a predetermined percentage commission. 

The bundling business model sells products or services for which demand is negatively correlated at a discount. For example, in the Microsoft Office Suite, a user might value Word more than Excel and vice versa. Instead of selling both products for $120 dollars each, Microsoft bundles them in a suite and sells them combined at a discount, say $180.

As stated in Strategy Highlight 5.2., Airbnb uses the peer-to-peer technique by renting spaces that previously would have been unused to generate revenue. The peer-to-peer model matches individuals with a needed product or service, such as car rental, house cleaning, or travel accommodations.

The peer-to-peer model matches individuals with a needed product or service, such as car rental, house cleaning, or travel accommodations.

In the razor-razor-blade business model, the initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. The company makes its money on the replacement part needed.

True Vibgyor is implementing the razor-razor-blade business model. In the razor-razor-blade business model, the initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. The company makes its money on the replacement part needed.

This scenario best illustrates the razor-razor-blade business model. In the razor-razor-blade business model, the initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. The company makes its money on the replacement part needed. 

The subscription-based model has been traditionally used for (print) magazines and newspapers. Users pay for access to a product or service whether they use the product or service during the payment term or not.

In the subscription-based model, users pay for access to a product or service whether they use the product or service during the payment term or not. 

Best Fit Club uses the subscription-based business model in this scenario. In the subscription-based model, users pay for access to a product or service whether they use the product or service during the payment term or not. Industries that use this model presently are cable television, cellular service providers, satellite radio, Internet service providers, and health clubs.

The plan used by Mia best illustrates the subscription-based strategy. In the subscription-based model, users pay for access to a product or service whether they use the product or service during the payment term or not. Industries that use this model presently are cable television, cellular service providers, satellite radio, Internet service providers, and health clubs.

In the pay-as-you-go business model, the user pays for only the services he or she consumes. The pay-as-you-go model is most widely used by utilities providing power and water and cell phone service plans, but is gaining momentum in other areas such as rental cars and cloud computing.

In this scenario, Free Spirit Communications Inc. uses the pay-as-you go business model. In the pay-as-you-go business model, the user pays for only the services he or she consumes. The pay-as-you go model is most widely used by utilities providing power and water and cell phone service plans, but is gaining momentum in other areas such as rental cars and cloud computing. 

The freemium (= free + premium) business model is a model in which the basic features of a product or service are provided free of charge, but the user must pay for premium services such as advanced features or add-ons.

This scenario best illustrates the freemium business model. The freemium (= free + premium) business model is a model in which the basic features of a product or service are provided free of charge, but the user must pay for premium services such as advanced features or add-ons. 

Pilot Games Inc. is using the freemium business model. The freemium (= free + premium) business model is a model in which the basic features of a product or service are provided free of charge, but the user must pay for premium services such as advanced features or add-ons. 

In this scenario, GlobalCom Inc. uses a combination of the razor-razor-blade model and the subscription-based business model. Telecommunications companies combine the razor-razor-blade model with the subscription-based business model. They provide a basic cell phone at no charge or significantly subsidize high-end smartphones when you sign up for a two-year wireless service plan. Telecom providers recoup the subsidy provided for the smartphone by requiring customers to sign up for lengthy service plans. 

We can assess competitive advantage by measuring accounting profit, shareholder value, or economic value. More recently, competitive advantage has been linked to a firm’s triple-bottom-line, the ability to maintain performance in the economic, social, and ecological contexts to achieve a sustainable strategy.

We always assess competitive advantage relative to a benchmark, either using competitors or the industry average. 

SG&A/Revenue is an indicator of the firm’s focus on marketing to promote its products and services. 

Inventory turnover (COGS/Inventory) indicates how much of a firm’s capital is tied up in its inventory, such as the accessory items for Kerry the Kangaroo.

Higher ratios of receivables turnover imply more efficient management in collecting accounts receivable and shorter durations of interest-free loans to customers. 

Risk capital is the money shareholders provide in return for an equity share, which they cannot recover if the firm goes bankrupt.

The firm has 20 million shares outstanding. Market capitalization = number of outstanding shares × share price. Therefore, to answer the question share price ($50) needs to be divided into the market capitalization ($1 billion).

Because overall macroeconomic factors, such as the unemployment rate, economic growth or contraction, and interest and exchange rates, all have a direct bearing on stock prices, using total return to shareholders and firm market capitalization to measure firm performance is not recommended. Other factors also make this method a drawback, including the volatility of stock prices and, at times, the irrational mood of investors. Return on revenue is not an external factor. 

Consumer surplus is the difference between the value a consumer attaches to a good or service ($1,500) and what he or she pays for it ($1,500).

Value is determined by the perceived benefits a good or service provides to a buyer.

A large difference between the consumer’s willingness to pay and the cost to produce the good or service gives the firm two distinct pricing options: (1) it can charge higher prices to reflect the higher product value and thus increase its profitability, or (2) it can charge the same price as competitors and thus gain market share. 

The balanced-scorecard can accommodate both short- and long-term performance metrics. It provides a concise report that tracks chosen metrics and measures and compares them to target values. This approach allows managers to assess past performance, identify areas for improvement, and position the company for future growth. 

The question “How do we create value?” challenges managers to come up with strategic objectives that ensure future competitiveness, innovation, and organizational learning. It focuses on the business processes and structures that allow a firm to create economic value.