Strategic Management Concepts 4th Edition by Frank Rothaermel – Test Bank

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Strategic Management, 4e (Rothaermel)

Chapter 5   Competitive Advantage, Firm Performance, and Business Models

 

1) A manager’s only responsibility is to monitor and assess the performance of his or her firm.

 

2) Generally speaking, a firm will create value if its return on invested capital (ROIC) is less than the cost of capital.

 

3) A company’s total asset base consists of its current assets plus plant, property, and equipment (PPE).

 

4) The efficient market hypothesis suggests that the market price of a firm’s stock is an objective indicator of a firm’s past, current, and expected future performance.

 

5) A firm will always see its stock price appreciate when it demonstrates measurable growth.

 

6) Competitive advantage goes to the firm that maximizes the difference between the cost of producing a good and the retail price that consumers pay.

 

7) Managers must first develop a strategy that is likely to produce a competitive advantage before implementing a balanced scorecard approach.

 

8) A sustainable strategy is one that produces a competitive advantage that can be maintained over time.

 

9) In the why, what, who, and how of business models framework, the why dimension asks “why does the business model create value?”

 

10) Once a firm chooses a business model, it must stick with it for the life of the firm.

 

11) The three financial ratios that constitute return on revenue are Cost of goods sold/Revenue, Research & development expense/Revenue, and

  1. A) Accounting profitability/Revenue.
  2. B) Economic value created/Revenue.
  3. C) Total return to shareholders/Revenue.
  4. D) Selling, general, & administrative expense/Revenue.

12) It is April 2018 and Mark is a novice investor who wants to decide between purchasing shares in EagleCorp or Myna Bird Inc. In fiscal year 2017, EagleCorp’s return on invested capital (ROIC) was 15 percent, and its cost of capital was 12 percent. During the same period, Myna Bird Inc.’s ROIC was 22 percent and its cost of capital was 25 percent. What does this information tell Mark?

  1. A) Myna Bird Inc. is more likely to create value while EagleCorp is more likely to destroy value.
  2. B) EagleCorp is more likely to create value while Myna Bird Inc. is more likely to destroy value.
  3. C) Both Myna Bird Inc. and EagleCorp are likely to create value.
  4. D) Neither Myna Bird Inc. nor EagleCorp are likely to create value.

 

13) ________ precisely indicates how much of a firm’s sales is converted into profits.

  1. A) Break-even price
  2. B) Working capital turnover
  3. C) Return on revenue
  4. D) Inventory turnover

 

14) The ratio Cost of goods sold/Revenue indicates how efficiently a company can

  1. A) produce a good.
  2. B) sell a good.
  3. C) advertise a good.
  4. D) design a good.

 

15) A high percentage of R&D/Revenue ratio indicates a(n)

  1. A) strong focus on innovation to improve current products and services.
  2. B) inefficiency in the management to focus on new products.
  3. C) strong focus on marketing and sales to promote products and services.
  4. D) negligent investment toward research and development.

 

16) ________ is best described as a measure of how effectively capital is being used by a firm to generate revenue.

  1. A) Return on revenue
  2. B) Risk capital
  3. C) Working capital turnover
  4. D) Revenue per employee

 

17) The ratio of SG&A/Revenue is an indicator of a firm’s focus on

  1. A) researching to produce innovative products and services.
  2. B) marketing and sales to promote its products and services.
  3. C) producing a good in an efficient manner.
  4. D) creating a good that is cost-effective.

18) The working capital turnover of Tesva Systems Corp. is 6.0. What does this financial data suggest?

  1. A) For every $6.00 Tesva Systems puts to work, the company incurs a cost of $1.00.
  2. B) For every $6.00 Tesva Systems puts to work, the company realizes sales of $1.00.
  3. C) For every dollar Tesva Systems puts to work, the company realizes $6.00 in loss.
  4. D) For every dollar Tesva Systems puts to work, the company realizes $6.00 of sales.

 

19) Which of the following statements correctly compares Apple and Microsoft in 2016?

  1. A) Apple had a higher return on revenue than Microsoft.
  2. B) Apple had a higher return on invested capital than Microsoft.
  3. C) Microsoft had higher total sales than Apple.
  4. D) Microsoft had a lower cost structure than Apple.

 

 

 

20) Which of the following statements is true of accounting data?

  1. A) Accounting data focus mainly on intangible assets, rather than tangible assets.
  2. B) Accounting data are historical data and thus backward-looking.
  3. C) Accounting data do not have to be adjusted in any manner to compare companies with different capital structures.
  4. D) Accounting data consider off-balance sheet items, such as pension obligations of a firm.

 

21) Which of the following competitively important assets is typically excluded from a firm’s balance sheet?

  1. A) land and building
  2. B) accounts payable
  3. C) patents
  4. D) customer experience

22) Elena is the CEO of Geode Technologies, a consumer electronics manufacturer. Last year, Geode’s return on invested capital (ROIC) was 11.6 percent, while Geode’s closest competitor, NorthWest Tech, had an ROIC of 17 percent. Which of the following factors might Elena use to convince investors to invest in Geode rather than NorthWest Tech?

  1. A) Geode had a Research & development (R&D) expense / Revenue ratio of 16 percent, while NorthWest Tech had an R&D / Revenue ratio of 12 percent.
  2. B) Geode’s working capital to revenue ratio was 75 percent, while NorthWest Tech’s was 68 percent.
  3. C) Geode’s intangible intensity was 6 percent, while NorthWest Tech’s was 3 percent.
  4. D) Geode’s plant, property, and equipment (PPE) over revenue ratio was 19 percent, while NorthWest Tech’s was 10 percent.

 

23) ________ are the legal owners of public companies.

  1. A) Employees
  2. B) Shareholders
  3. C) Category captains
  4. D) Creditors

 

24) Which of the following is an external performance metric?

  1. A) return on revenue
  2. B) fixed assets turnover
  3. C) inventory turnover
  4. D) total return to shareholders

 

25) From an investors’ or shareholders’ perspective, the measure of competitive advantage that matters most is the

  1. A) return on risk capital.
  2. B) economic value created.
  3. C) consumer surplus.
  4. D) inventory turnover.

 

 

 

26) Return on risk capital primarily includes

  1. A) stock price appreciation plus dividends received over a specific period.
  2. B) consumer surplus plus firm profit.
  3. C) account receivables plus account payables.
  4. D) economic value created by a firm plus reservation price.

 

27) ________, which is the return on risk capital, includes stock price appreciation plus dividends received over a specific period.

  1. A) Total return to shareholders
  2. B) Earnings per share
  3. C) Receivables turnover
  4. D) Dividend yield

28) A firm has 30 million shares outstanding, and each share is traded at $100. Also, each shareholder gets a dividend of $2,000 annually. In this case, the market capitalization is

  1. A) 30,000 shares, that is, 30 million shares/$100.
  2. B) $200,000, that is, $2,000 × $100.
  3. C) $3 billion, that is, 30 million shares × $100.
  4. D) 20:1, that is, $2,000/$100.

 

29) The market capitalization of a public company is $5 billion. Each share of the company is traded at $200. What do you infer from this financial data?

  1. A) The firm’s number of outstanding shares is 25 million.
  2. B) The firm pays an annual dividend of 10 percent.
  3. C) The firm’s total return to shareholder is $5 billion.
  4. D) The firm’s economic value created is $5 billion.

 

30) Which of the following expressions accurately describes market cap?

  1. A) It is the product of the number of outstanding shares and the share price.
  2. B) It is the difference between the book value and the market value of a firm’s assets.
  3. C) It is the ratio of a firm’s equity finance and its debt finance.
  4. D) It is the difference between a firm’s account receivables and account payables.

 

31) Unlike the financial ratios based on accounting data, total return to shareholders is

  1. A) backward-looking and historic in nature.
  2. B) an external performance metric.
  3. C) an absolute measure of competitive advantage.
  4. D) unaffected by market volatility or macroeconomic factors.

 

 

 

32) You are the CEO of a home appliance manufacturing company and have recently undertaken a review of your company’s strategy. In comparing your stock market valuation to that of your closest competitor, you note that your firm is currently valued at $50 billion, while your competitor is valued at $40 billion. How should you proceed?

  1. A) Consider this evidence of a sustainable competitive advantage and maintain your current strategy.
  2. B) Compare the current valuations with past valuations to determine a trend.
  3. C) Assume your current strategy has failed and begin to formulate a new one.
  4. D) Compare your valuation to firms in another industry.

33) Which of the following is a disadvantage of measuring firm performance through total return to shareholders and firm market capitalization?

  1. A) Market volatility makes it difficult to assess firm performance through these measures, particularly in the short-term.
  2. B) These tools fail to indicate how the stock market views all available public information about a firm’s expected future performance.
  3. C) These tools measure competitive advantage in absolute terms rather than relative terms.
  4. D) Only the book value of the share prices is taken into account when applying these measures, and not the market value.

 

34) ________ is best described as the difference between a buyer’s willingness to pay for a product or service and a firm’s total cost to produce it.

  1. A) Economic value created
  2. B) Break-even point
  3. C) Consumer surplus
  4. D) Cost of capital

 

35) A firm incurs $400 to manufacture a television. In the market, customers are willing to pay a maximum of $600 for the television priced at $500. The difference of $200 ($600 minus $400) is the

  1. A) consumer surplus.
  2. B) total return to shareholders.
  3. C) customer lifetime value.
  4. D) economic value created.

 

36) Both Saturn Technologies and Granite Inc. incur a cost of $200 to manufacture a single unit of a cell phone. However, Saturn Technologies charges a higher price than Granite Inc. does, but it still sells a higher number of phones. What does this imply?

  1. A) Saturn Technologies and Granite have achieved a competitive parity.
  2. B) Granite Inc. has a competitive advantage over Saturn Technologies.
  3. C) Saturn Technologies creates more economic value than Granite Inc. does.
  4. D) Granite Inc. is not charging enough for its product.

 

 

 

37) A watchmaking company has priced one of its wristwatches at $210. Most of its competitors sell similar watches at $180. Selling anything less than $150 would result in a loss for the company. However, the absolute maximum a customer is willing to pay for it is $170. In this scenario, what is the reservation price of the wristwatch?

  1. A) $150
  2. B) $180
  3. C) $170
  4. D) $210

38) A firm incurs $100 to manufacture an office table. It fixes the market price of the table as $250, and discounts the price to $200. However, the maximum a person is willing to pay for it is $180. What is the amount of total perceived consumer benefits in this scenario?

  1. A) $250
  2. B) $200
  3. C) $180
  4. D) $100

 

39) The difference between the price charged for a product and the cost to manufacture it is referred to as the

  1. A) consumer surplus.
  2. B) break-even price.
  3. C) producer surplus.
  4. D) reservation price.

 

40) ________ denotes the dollar amount a consumer would attach to a good or service.

  1. A) Utility
  2. B) Value
  3. C) Consumer surplus
  4. D) Economic contribution

 

41) The value a consumer attaches to a product or service is captured in the

  1. A) least price a consumer is willing to pay for it.
  2. B) consumer’s maximum willingness to pay for it.
  3. C) expenses incurred by the firm in manufacturing it.
  4. D) difference between the price charged for it and the cost to produce it.

 

42) After trying on a dress, a consumer assesses it to be worth a maximum of $100 and is willing to pay that amount for the dress. However, the dress was priced at $80. What is the amount, $100, referred to as?

  1. A) the producer surplus
  2. B) the firm’s cost (C) in manufacturing the dress
  3. C) the consumer surplus
  4. D) the value (V) the consumer attaches to the dress

 

 

 

43) How does a firm capture its producer surplus for a good or service?

  1. A) as cost per unit sold
  2. B) as profit per unit sold
  3. C) as earnings per share
  4. D) as market price per share

44) Serena paid $900 for a camera that she thought was worth $1100 for all the features included in it. For the consumer electronics firm selling the camera, however, the cost of producing the camera was only $350. What is the consumer surplus in this scenario?

  1. A) $900
  2. B) $1,100
  3. C) $550
  4. D) $200

 

45) Economic value creation is best expressed as

  1. A) producer surplus minus consumer surplus.
  2. B) consumer surplus minus cost of production.
  3. C) consumer surplus plus firm profit.
  4. D) producer surplus plus firm profit.

 

46) Mobius Electronics incurs a cost of $350 to produce one unit of a cell phone. The company’s management has priced the product at $600 in the market. Considering the technological advancement of the cell phone, customers perceive its value to be around $800. What is the economic value created in this scenario?

  1. A) $350
  2. B) $450
  3. C) $800
  4. D) $200

 

47) By selling a laptop at $1,000 for which consumers are willing to pay up to $1,200, a consumer electronics firm makes a profit of $400 per unit. In this scenario, the amount $600, that is ($1200 – $1000) + $400, is the

  1. A) opportunity cost.
  2. B) economic value created.
  3. C) reservation price.
  4. D) consumer surplus.

 

48) In an economic context, strategy for producers is primarily about

  1. A) distributing the economic value created equally between consumers and themselves.
  2. B) reducing the difference between consumer’s willingness to pay for a product and the cost to produce it.
  3. C) capturing the economic value created as much as possible.
  4. D) lowering producer surplus and increasing consumer surplus.

 

 

 

49) Competitive advantage goes to the firm that achieves the

  1. A) largest economic value created.
  2. B) lowest producer surplus.
  3. C) highest payable turnover.
  4. D) highest Cost of goods sold/Revenue ratio.

50) Happy Foods and General Grains both produce similar puffed rice breakfast cereals. For both companies, the cost of producing a box of cereal is 45 cents, and it is not possible for either company to lower their production costs any further. How can one company achieve a competitive advantage over the other?

  1. A) Increase total perceived consumer benefits through differentiation.
  2. B) Raise prices above the current reservation price.
  3. C) Lower prices to the break-even price.
  4. D) Increase the number of stock market shares available to investors.

 

51) The cost of capital to create a product is a fixed cost because it is

  1. A) directly proportional to the output level.
  2. B) uniform throughout all firms and industries.
  3. C) not a part of the profit calculations.
  4. D) unaffected by consumer demand.

 

52) ________ are best described as the value of the best forgone alternative use of the resources employed.

  1. A) Variable costs
  2. B) Opportunity costs
  3. C) Social costs
  4. D) Switching costs

 

53) Zelda is a recent fashion graduate. She started her own apparel store with an investment of $300,000. In the first year she made a profit of $60,000. If she had taken up a job as a fashion editor for a magazine, she would have earned $50,000 as salary per year. Also, she could have invested her capital, $300,000, in treasury bonds and earned an interest of $12,000. Thus, the amount $62,000 ($50,000 + $12,000) would be Genevieve’s

  1. A) social cost.
  2. B) break-even price.
  3. C) reservation price.
  4. D) opportunity cost.

 

54) When SW International declared a dividend of $20,000,000, its market value increased from $8 billion to $8.5 billion. However, it lost a chance to reinvest $20,000,000 in the research and development of a new product which would have earned a profit of $200 million. Thus, this $200 million is referred to as SW International’s

  1. A) producer surplus.
  2. B) consumer surplus.
  3. C) opportunity cost.
  4. D) social cost.

55) Which of the following is an advantage of applying the economic value creation perspective to assess a firm’s performance?

  1. A) When the need for “hard numbers” arises, managers and analysts rely on economic value creation perspective to measure competitive advantage.
  2. B) In economic value perspective, analysts not only consider historical costs, but also opportunity costs.
  3. C) Arriving at the economic value created is easy because determining the value of a good in the eyes of consumers is a simple task.
  4. D) It is the most efficient tool for assessing corporate-level competitive advantage of highly diversified companies with large product portfolios.

 

56) The Lynx Manufacturing Company produces components used in electronic toys. In fiscal year 2017, Lynx earned an accounting profit of $3 million. However, Lynx’s production facilities might have also been used to produce components for mobile phones, which would have generated $2 million in revenues and saved the company $500,000 in production costs. Which of the following statements is true?

  1. A) Lynx earned an economic profit of $5.5 million.
  2. B) Lynx earned an economic profit of $500,000.
  3. C) Lynx suffered an economic loss of $500,000.
  4. D) Lynx suffered an economic loss of $2.5 million.

 

57) Which of the following frameworks used to measure competitive advantage relies on both an internal and an external view of a firm?

  1. A) the economic value creation model
  2. B) the accounting profitability model
  3. C) the shareholder value creation model
  4. D) the balanced-scorecard model

 

58) Which of the following statements is true of the balanced-scorecard?

  1. A) It is a more or less a one-dimensional metric of measuring competitive advantages of a firm.
  2. B) It is one of the traditional approaches of measuring firm performance.
  3. C) Its primary focus is to base a firm’s strategic goals entirely on external performance dimensions.
  4. D) It attempts to provide a holistic perspective on firm performance.

 

59) Which of the following is an advantage of the balanced-scorecard?

  1. A) It is a tool for both strategic formulation and strategic implementation.
  2. B) It allows managers to translate a firm’s vision into measureable operational goals.
  3. C) The balanced-scorecard is independent of the skills of the managers responsible for its implementation.
  4. D) Its implementation is a one-time effort and does not require continuous tracking of metrics or updating of strategic objectives.

 

 

60) The balanced-scorecard can accommodate

  1. A) only short-term performance metrics.
  2. B) only long-term performance metrics.
  3. C) both short- and long-term performance metrics.
  4. D) neither short- or long-term performance metrics.

 

61) Erin is the manager of gardening supplies wholesaler SpringTime Inc. The company’s vision is to become the leading supplier of gardening materials west of the Mississippi River. In assessing the firm’s current state, Erin has determined that the firm could differentiate itself from competitors with an easy-to-use online ordering system and a two-day delivery guarantee. To accomplish this, Erin has determined that SpringTime must spend the next two quarters honing its capabilities for sourcing materials quickly and improving its web development competencies. According to the balanced scorecard approach, what is wrong with Erin’s thinking?

  1. A) She has not considered the opportunity costs associated with launching an online ordering system.
  2. B) She has not addressed the question of which core competencies the firm needs.
  3. C) She has failed to account for external factors such as customer perceptions and shareholder perceptions.
  4. D) She has not addressed the question of how SpringTime will create value.

 

62) Which of the following is a disadvantage of the balanced-scorecard approach?

  1. A) It fails to link the strategic vision to responsible parties within the organization.
  2. B) It fails to translate the vision into measureable operational goals.
  3. C) It provides limited guidance for designing and planning business processes.
  4. D) It provides limited guidance about which metrics to choose.

 

63) Which of the following approaches to assess competitive advantage is based on the view that noneconomic factors can have a significant impact on a firm’s financial performance?

  1. A) the triple-bottom-line approach
  2. B) the economic value creation framework
  3. C) the accounting profitability approach
  4. D) the balanced-scorecard

 

64) The tenet behind the triple-bottom-line is that

  1. A) a firm should solely focus on increasing the economic value created to/for its customers.
  2. B) a firm’s primary objective should be increasing the total returns to its shareholders.
  3. C) a firm should achieve positive results along the economic, social, and ecological dimensions to gain a sustainable strategy.
  4. D) a firm’s return on revenue can be broken down into three ratios: COGS/Revenue, R&D/Revenue, and SG&A/Revenue.

 

 

65) The management team for Volcanic Batteries came up with the following vision statement: “Volcanic Batteries will conscientiously track its financial performance to ensure profits for its investors, enhance its community through employment and supporting charities, and dispose of waste in a manner that will not harm the environment.” This vision statement is most likely based on the

  1. A) accounting profitability approach.
  2. B) economic value creation approach.
  3. C) triple-bottom-line approach.
  4. D) balanced-scorecard approach.

 

66) How does a sustainable strategy typically help a firm?

  1. A) It helps the firm focus solely on its financial goals.
  2. B) It reduces the need for corporate social responsibility within the firm.
  3. C) It facilitates the firm in effectively isolating its external stakeholders.
  4. D) It helps the firm achieve positive results along the social and ecological dimensions.

 

67) Which of the following scenarios exemplifies a sustainable strategy under the triple bottom line approach?

  1. A) Rather than complying with the restrictive recycling laws in the United States, Impervious Plastics outsourced its manufacturing to a country that has fewer environmental restrictions.
  2. B) Impervious Plastics developed a chemical additive that doubled the life of its plastics. The additive was currently legal, but environmental groups argued that it harmed the environment.
  3. C) Impervious Plastics reformulated its products to eliminate chemicals that were widely used in the industry but were being investigated for their potential negative effects on the environment.
  4. D) Impervious Plastics’ nearest competitor increased the salaries of its production workers by 30 percent, but Impervious kept its wages the same to gain a cost advantage over its competitor.

 

68) Which of the following is an advantage of a triple-bottom-line approach?

  1. A) The approach takes an integrative and holistic view in assessing a company’s performance.
  2. B) The approach does not rely on an external view of a firm to assess its performance.
  3. C) The approach is more of a quantitative performance metric rather than a mere conceptual framework.
  4. D) The framework can help managers assess a firm’s competitive advantage without taking into account the firm’s performance along noneconomic dimensions.

69) The top management at Sunshine Vitamins, through rigorous testing, ensures that the company develops and sells vitamins that are free of harmful side effects. Also, the company ensures that the chemical waste generated in the manufacturing process is kept to a bare minimum and is disposed of according to the regulations of the Environmental Protection Agency. The management assesses its overall performance based on these dimensions. Thus, the managers at Sunshine Vitamins are applying the ________ approach to measure firm performance.

  1. A) economic value creation
  2. B) shareholder value creation
  3. C) triple-bottom-line
  4. D) accounting profitability

 

70) The translation of strategy into action primarily takes place in a firm’s

  1. A) mission statement.
  2. B) executive summary.
  3. C) business model.
  4. D) code of conduct.

 

71) During the process of formulating an effective business model, a firm’s managers should first

  1. A) transform their strategy of how to compete into a blueprint of actions and initiatives.
  2. B) implement their strategy at corporate, strategic business unit, and functional levels.
  3. C) implement their blueprint of actions and initiatives through structures, processes, culture, and procedures.
  4. D) evaluate the firm’s strategy already in effect and take corrective actions if necessary.

 

72) You are the founder of Shadow Skateboards, and you are considering methods of gaining and sustaining a competitive advantage. Which of the following changes has the best chance of quickly creating a sustainable advantage?

  1. A) devoting significant resources to researching and developing new products that will be more durable than competitors’
  2. B) automating the manufacturing process to reduce production costs
  3. C) allowing customers to upload their own image designs and help assemble the finished product at retail locations
  4. D) switching to a just-in-time inventory system to reduce inventory costs

 

73) ________ is a business model in which the manufacturer sets a fixed price on a product, but the retailer is free to set it’s own price.

  1. A) Agency
  2. B) Freemium
  3. C) Bundling
  4. D) Wholesale

74) Mega Media sells books by having salespeople set up appointments with potential customers and give them a sales pitch for the product. When a salesperson sells a book, he or she gets a predetermined percentage commission. This type of business model is called

  1. A) an agency.
  2. B) bundling.
  3. C) wholesale.
  4. D) a freemium.

 

75) Which of the following scenarios best illustrates bundling?

  1. A) Clean Brush Inc. sells its electric toothbrushes for a low cost, but charges a high price for replacement brushes.
  2. B) Cumulus Media Inc. sells its cloud computing network by having customers pay for the service as they use it.
  3. C) Sharp Cable Inc. sells its basic TV channels for free but charges high prices for any channels that customers add on later.
  4. D) Fresh Seeds Inc. sells seed packages, in which a person can buy a package of three types of seeds at a discounted price compared to buying the seeds individually.

76) Threadless allows customers to submit their own designs and to vote on which designs they would like to see printed on a T-shirt. This business uses a ________ technique.

  1. A) offshoring
  2. B) crowdsourcing
  3. C) peer-to-peer
  4. D) binge watching

 

77) Polygon sells its e-book readers at the cost price of $15 each. However, the company makes its profits when users have to download or buy books online. Which of the following business models is Polygon implementing?

  1. A) subscription-based
  2. B) razor-razor-blade
  3. C) pay-as-you-go
  4. D) direct sales

78) Aguilar Industries has produced a new piece of technology that will monitor the soil moisture in a user’s garden and send a notification to an app on the user’s phone when it is time to water their plants. The goal of this inexpensive technology is to entice users to purchase Aguilar’s more expensive automated watering system, so that they can trigger the watering process from the app on their phones. Which business model is most likely to help Aguilar Industries accomplish its goals?

  1. A) agency
  2. B) wholesale
  3. C) pay-as-you-go
  4. D) freemium

 

79) A defining characteristic of the subscription-based business model is that the

  1. A) user pays for only the services he or she consumes.
  2. B) user pays for access to a product or service whether he or she uses it during the payment term or not.
  3. C) 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.
  4. D) initial product is often sold at a loss or given away for free in order to drive demand for complementary goods.

 

80) Shark Fin Golf Club requires its members to pay a quarterly or an annual fee to use its services. Irrespective of whether they frequently use the services during the payment period or not, members have to pay in advance. Which of the following business models does this best illustrate?

  1. A) razor-razor-blade
  2. B) pay-as-you-go
  3. C) subscription-based
  4. D) freemium

 

 

 

81) A defining characteristic of the pay-as-you-go business model is that the

  1. A) users pay for only the services they consume.
  2. B) users pay for access to a product or service whether they use it during the payment term or not.
  3. C) initial product is often sold at a loss in order to drive demand for complementary goods.
  4. D) the basic features of a service are provided free of charge, but the user must pay for premium services.

82) Unplug Wireless is a cellular service provider that charges its customers $1 for three hours of talk time. So, if a customer’s talk time for a month is 60 hours, the company charges him or her $20 at the end of the month. Which of the following business models does this best illustrate?

  1. A) razor-razor-blade
  2. B) subscription-based
  3. C) pay-as-you-go
  4. D) freemium

 

83) Cloudlink is a file hosting service that allows users to store up to 5GB of data with no restrictions or charges. However, users have to pay a fee for advanced features on the cloud storage system and additional storage space. Which of the following business models does this best illustrate?

  1. A) subscription-based
  2. B) freemium
  3. C) pay-as-you-go
  4. D) razor-razor-blade

 

84) Rock Bottom Tiles has developed a new customer-oriented business model. Rather than maintain a network of showrooms across the country, the business will now let customers choose several styles that interest them from an online site, and will ship samples of each of the styles to the customer to test in their home free of charge. Once they have settled on a tile choice, Rock Bottom will send a representative to their home to schedule installation. The company has determined that busy middle-class customers will value the convenience of the new model, which allow them to upgrade the look of their homes without spending time browsing showrooms. The new model will be created by selling the old showrooms and shifting resources to the new online site and regional offices for sales personnel. What question remains for Rock Bottom to ask in order to put its strategy into action?

  1. A) Why does the business model create value?
  2. B) What activities need to be performed to create and deliver the offerings to consumers?
  3. C) How are the offerings to the customers created?
  4. D) Who are the main stakeholders who will be performing the activities?

 

85) Which of the following statements about competitive advantage is true?

  1. A) Competitive advantage is an absolute measure; it is not relative.
  2. B) Competitive advantage is a one-dimensional concept.
  3. C) Competitive advantage is permanent and not transitory; once gained by a firm it stays with the firm.
  4. D) Competitive advantage can be assessed by measuring accounting profit, shareholder value, or economic value.

86) What are the three financial ratios that constitute return on revenue, and what do they tell us?

 

87) Discuss the limitations associated with using accounting data to measure competitive performance.

 

88) Accounting data focus mainly on tangible assets, which are no longer the most important. Elaborate on this statement.

 

89) What is risk capital?

 

90) What does “total return to shareholders” mean?

 

91) What are the drawbacks of using total return to shareholders and firm market capitalization to measure firm performance?

 

92) What is the relationship between producer surplus and consumer surplus?

 

93) List the dimensions on which a firm can create greater economic value.

 

94) What pricing options does a firm have when the difference between V, the consumer’s willingness to pay, and C, the cost to produce the good or service, is large?

 

95) How does consumer demand affect fixed costs and variable costs?

 

96) What are opportunity costs in general? What are the opportunity costs for entrepreneurs?

 

97) What are the advantages of the balanced scorecard?

 

98) Discuss the four key questions managers need to answer when using the balanced scorecard to develop strategic objectives.

 

99) How does the triple-bottom line approach help managers? Explain with the help of an example.

 

100) Explain how business models put strategy into action.

 

 

 

Strategic Management, 4e (Rothaermel)

Chapter 5   Competitive Advantage, Firm Performance, and Business Models

 

1) A manager’s only responsibility is to monitor and assess the performance of his or her firm.

 

Answer:  FALSE

Explanation:  Since competitive advantage is defined as superior performance relative to other competitors in the same industry or the industry average, a firm’s managers must be able to accurately assess the performance of their firm and compare and benchmark their firm’s performance to other competitors in the same industry or against the industry average.

Difficulty: 2 Medium

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

2) Generally speaking, a firm will create value if its return on invested capital (ROIC) is less than the cost of capital.

 

Answer:  FALSE

Explanation:  As a rule of thumb, if a firm’s ROIC is greater than its cost of capital, it generates value; if it is less than the cost of capital, the firm destroys value. The cost of capital represents a firm’s cost of financing operations from both equity through issuing stock and debt through issuing bonds.

Difficulty: 2 Medium

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

3) A company’s total asset base consists of its current assets plus plant, property, and equipment (PPE).

 

Answer:  FALSE

Explanation:  A company’s total asset base includes current assets, PPE, and intangible assets such as intellectual property, goodwill, and brand value. Intangible assets that are not captured in accounting data have become much more important in firms’ stock market valuations over the last few decades.

Difficulty: 2 Medium

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

4) The efficient market hypothesis suggests that the market price of a firm’s stock is an objective indicator of a firm’s past, current, and expected future performance.

 

Answer:  TRUE

Explanation:  The idea that all available information about a firm’s past, current state, and expected future performance is embedded in the market price of the firm’s stock is called the efficient-market hypothesis. From this perspective, a firm’s share price provides an objective performance indicator.

Difficulty: 2 Medium

Topic:  Shareholder Value Creation and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

5) A firm will always see its stock price appreciate when it demonstrates measurable growth.

 

Answer:  FALSE

Explanation:  A firm’s stock price generally increases only if the firm’s rate of growth exceeds investors’ expectations. This is because investors discount into the present value of the firm’s stock price whatever growth rate they foresee in the future. If a low-growth business like Comcast (in cable TV) is expected to grow 2 percent each year but realizes 4 percent growth, its stock price will appreciate. In contrast, if a fast-growing business like Apple in mobile computing is expected to grow by 10 percent annually but delivers “only” 8 percent growth, its stock price will fall.

Difficulty: 2 Medium

Topic:  Shareholder Value Creation and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

6) Competitive advantage goes to the firm that maximizes the difference between the cost of producing a good and the retail price that consumers pay.

 

Answer:  FALSE

Explanation:  Competitive advantage goes to the firm that achieves the largest economic value created, which is the difference between V, the maximum amount a customer is willing to pay (rather than the price they end up paying in the store), and C, the cost to produce the good or service. The reason is that a large difference between V and C gives the firm two distinct pricing options: (1) It can charge higher prices to reflect the higher value and thus increase its profitability, or (2) it can charge the same price as competitors and thus gain market share. Given this, the strategic objective is to maximize V – C, or the economic value created.

Difficulty: 2 Medium

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

7) Managers must first develop a strategy that is likely to produce a competitive advantage before implementing a balanced scorecard approach.

 

Answer:  TRUE

Explanation:  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. When implementing a balanced scorecard, managers need to be aware that a failure to achieve competitive advantage is not so much a reflection of a poor framework but of a strategic failure. The balanced scorecard is only as good as the skills of the managers who use it: they first must devise a strategy that enhances the odds of achieving competitive advantage.

Difficulty: 1 Easy

Topic:  Balanced Scorecard Approach

Learning Objective:  05-04 Apply a balanced scorecard to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

8) A sustainable strategy is one that produces a competitive advantage that can be maintained over time.

 

Answer:  FALSE

Explanation:  A sustainable strategy is a strategy along the social, economic, and ecological dimensions that can be pursued over time without detrimental effects on people or the planet.

Difficulty: 2 Medium

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-05 Apply a triple bottom line to assess and evaluate competitive advantage.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

9) In the why, what, who, and how of business models framework, the why dimension asks “why does the business model create value?”

 

Answer:  TRUE

Explanation:  The why dimension considers the reasons why a proposed business model would create value for both customers and stockholders.

Difficulty: 1 Easy

Topic:  Strategic Group Models for Understanding Industry Rivals

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

10) Once a firm chooses a business model, it must stick with it for the life of the firm.

 

Answer:  FALSE

Explanation:  Business models evolve dynamically, and we can see many combinations and permutations. Sometimes business models are tweaked to respond to disruptions in the market, efforts that can conflict with fair trade practices and may even prompt government intervention.

Difficulty: 2 Medium

Topic:  Strategic Group Models for Understanding Industry Rivals

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

11) The three financial ratios that constitute return on revenue are Cost of goods sold/Revenue, Research & development expense/Revenue, and

  1. A) Accounting profitability/Revenue.
  2. B) Economic value created/Revenue.
  3. C) Total return to shareholders/Revenue.
  4. D) Selling, general, & administrative expense/Revenue.

 

Answer:  D

Explanation:  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.

Difficulty: 1 Easy

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

12) It is April 2018 and Mark is a novice investor who wants to decide between purchasing shares in EagleCorp or Myna Bird Inc. In fiscal year 2017, EagleCorp’s return on invested capital (ROIC) was 15 percent, and its cost of capital was 12 percent. During the same period, Myna Bird Inc.’s ROIC was 22 percent and its cost of capital was 25 percent. What does this information tell Mark?

  1. A) Myna Bird Inc. is more likely to create value while EagleCorp is more likely to destroy value.
  2. B) EagleCorp is more likely to create value while Myna Bird Inc. is more likely to destroy value.
  3. C) Both Myna Bird Inc. and EagleCorp are likely to create value.
  4. D) Neither Myna Bird Inc. nor EagleCorp are likely to create value.

 

Answer:  B

Explanation:  As a rule of thumb, if a firm’s ROIC is greater than its cost of capital, it generates value; if it is less than the cost of capital, the firm destroys value. Since EagleCorp’s ROIC was greater than its cost of capital, the company is more likely to create value. Myna Bird Inc., on the other hand, had a cost of capital that exceeded its ROIC, and was thus more likely to destroy value. Mark would be wise to invest his money in EagleCorp.

Difficulty: 3 Hard

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

13) ________ precisely indicates how much of a firm’s sales is converted into profits.

  1. A) Break-even price
  2. B) Working capital turnover
  3. C) Return on revenue
  4. D) Inventory turnover

 

Answer:  C

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

Difficulty: 1 Easy

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

14) The ratio Cost of goods sold/Revenue indicates how efficiently a company can

  1. A) produce a good.
  2. B) sell a good.
  3. C) advertise a good.
  4. D) design a good.

 

Answer:  A

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

Difficulty: 1 Easy

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

15) A high percentage of R&D/Revenue ratio indicates a(n)

  1. A) strong focus on innovation to improve current products and services.
  2. B) inefficiency in the management to focus on new products.
  3. C) strong focus on marketing and sales to promote products and services.
  4. D) negligent investment toward research and development.

 

Answer:  A

Explanation:  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.

Difficulty: 2 Medium

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

16) ________ is best described as a measure of how effectively capital is being used by a firm to generate revenue.

  1. A) Return on revenue
  2. B) Risk capital
  3. C) Working capital turnover
  4. D) Revenue per employee

 

Answer:  C

Explanation:  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.

Difficulty: 1 Easy

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

17) The ratio of SG&A/Revenue is an indicator of a firm’s focus on

  1. A) researching to produce innovative products and services.
  2. B) marketing and sales to promote its products and services.
  3. C) producing a good in an efficient manner.
  4. D) creating a good that is cost-effective.

 

Answer:  B

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

Difficulty: 1 Easy

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

18) The working capital turnover of Tesva Systems Corp. is 6.0. What does this financial data suggest?

  1. A) For every $6.00 Tesva Systems puts to work, the company incurs a cost of $1.00.
  2. B) For every $6.00 Tesva Systems puts to work, the company realizes sales of $1.00.
  3. C) For every dollar Tesva Systems puts to work, the company realizes $6.00 in loss.
  4. D) For every dollar Tesva Systems puts to work, the company realizes $6.00 of sales.

 

Answer:  D

Explanation:  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.

Difficulty: 2 Medium

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

19) Which of the following statements correctly compares Apple and Microsoft in 2016?

  1. A) Apple had a higher return on revenue than Microsoft.
  2. B) Apple had a higher return on invested capital than Microsoft.
  3. C) Microsoft had higher total sales than Apple.
  4. D) Microsoft had a lower cost structure than Apple.

 

Answer:  B

Explanation:  Apple’s ROIC was 18.3 percent in 2016, while Microsoft’s was 13.7 percent.

Difficulty: 2 Medium

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

20) Which of the following statements is true of accounting data?

  1. A) Accounting data focus mainly on intangible assets, rather than tangible assets.
  2. B) Accounting data are historical data and thus backward-looking.
  3. C) Accounting data do not have to be adjusted in any manner to compare companies with different capital structures.
  4. D) Accounting data consider off-balance sheet items, such as pension obligations of a firm.

 

Answer:  B

Explanation:  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.

Difficulty: 2 Medium

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

21) Which of the following competitively important assets is typically excluded from a firm’s balance sheet?

  1. A) land and building
  2. B) accounts payable
  3. C) patents
  4. D) customer experience

 

Answer:  D

Explanation:  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.

Difficulty: 1 Easy

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

22) Elena is the CEO of Geode Technologies, a consumer electronics manufacturer. Last year, Geode’s return on invested capital (ROIC) was 11.6 percent, while Geode’s closest competitor, NorthWest Tech, had an ROIC of 17 percent. Which of the following factors might Elena use to convince investors to invest in Geode rather than NorthWest Tech?

  1. A) Geode had a Research & development (R&D) expense / Revenue ratio of 16 percent, while NorthWest Tech had an R&D / Revenue ratio of 12 percent.
  2. B) Geode’s working capital to revenue ratio was 75 percent, while NorthWest Tech’s was 68 percent.
  3. C) Geode’s intangible intensity was 6 percent, while NorthWest Tech’s was 3 percent.
  4. D) Geode’s plant, property, and equipment (PPE) over revenue ratio was 19 percent, while NorthWest Tech’s was 10 percent.

 

Answer:  C

Explanation:  Geode’s higher Intangible intensity, or Intangibles / Revenue ratio, suggests that the company has more valuable intangible assets than NorthWest Tech. Intangible assets include a firm’s intellectual property (such as patents, copyrights, and trademarks), goodwill, and brand value. A firm with significant intangible assets may be attractive to investors for its potential to generate higher returns in the future.

Difficulty: 3 Hard

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

23) ________ are the legal owners of public companies.

  1. A) Employees
  2. B) Shareholders
  3. C) Category captains
  4. D) Creditors

 

Answer:  B

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

Difficulty: 1 Easy

Topic:  Shareholder Value Creation and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

24) Which of the following is an external performance metric?

  1. A) return on revenue
  2. B) fixed assets turnover
  3. C) inventory turnover
  4. D) total return to shareholders

 

Answer:  D

Explanation:  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).

Difficulty: 1 Easy

Topic:  Shareholder Value Creation and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

25) From an investors’ or shareholders’ perspective, the measure of competitive advantage that matters most is the

  1. A) return on risk capital.
  2. B) economic value created.
  3. C) consumer surplus.
  4. D) inventory turnover.

 

Answer:  A

Explanation:  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.

Difficulty: 1 Easy

Topic:  Shareholder Value Creation and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

26) Return on risk capital primarily includes

  1. A) stock price appreciation plus dividends received over a specific period.
  2. B) consumer surplus plus firm profit.
  3. C) account receivables plus account payables.
  4. D) economic value created by a firm plus reservation price.

 

Answer:  A

Explanation:  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.

Difficulty: 1 Easy

Topic:  Shareholder Value Creation and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

27) ________, which is the return on risk capital, includes stock price appreciation plus dividends received over a specific period.

  1. A) Total return to shareholders
  2. B) Earnings per share
  3. C) Receivables turnover
  4. D) Dividend yield

 

Answer:  A

Explanation:  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.

Difficulty: 1 Easy

Topic:  Shareholder Value Creation and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

28) A firm has 30 million shares outstanding, and each share is traded at $100. Also, each shareholder gets a dividend of $2,000 annually. In this case, the market capitalization is

  1. A) 30,000 shares, that is, 30 million shares/$100.
  2. B) $200,000, that is, $2,000 × $100.
  3. C) $3 billion, that is, 30 million shares × $100.
  4. D) 20:1, that is, $2,000/$100.

 

Answer:  C

Explanation:  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.

Difficulty: 2 Medium

Topic:  Shareholder Value Creation and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

29) The market capitalization of a public company is $5 billion. Each share of the company is traded at $200. What do you infer from this financial data?

  1. A) The firm’s number of outstanding shares is 25 million.
  2. B) The firm pays an annual dividend of 10 percent.
  3. C) The firm’s total return to shareholder is $5 billion.
  4. D) The firm’s economic value created is $5 billion.

 

Answer:  A

Explanation:  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).

Difficulty: 2 Medium

Topic:  Shareholder Value Creation and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

30) Which of the following expressions accurately describes market cap?

  1. A) It is the product of the number of outstanding shares and the share price.
  2. B) It is the difference between the book value and the market value of a firm’s assets.
  3. C) It is the ratio of a firm’s equity finance and its debt finance.
  4. D) It is the difference between a firm’s account receivables and account payables.

 

Answer:  A

Explanation:  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).

Difficulty: 1 Easy

Topic:  Shareholder Value Creation and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

31) Unlike the financial ratios based on accounting data, total return to shareholders is

  1. A) backward-looking and historic in nature.
  2. B) an external performance metric.
  3. C) an absolute measure of competitive advantage.
  4. D) unaffected by market volatility or macroeconomic factors.

 

Answer:  B

Explanation:  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).

Difficulty: 1 Easy

Topic:  Shareholder Value Creation and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

32) You are the CEO of a home appliance manufacturing company and have recently undertaken a review of your company’s strategy. In comparing your stock market valuation to that of your closest competitor, you note that your firm is currently valued at $50 billion, while your competitor is valued at $40 billion. How should you proceed?

  1. A) Consider this evidence of a sustainable competitive advantage and maintain your current strategy.
  2. B) Compare the current valuations with past valuations to determine a trend.
  3. C) Assume your current strategy has failed and begin to formulate a new one.
  4. D) Compare your valuation to firms in another industry.

 

Answer:  B

Explanation:  When assessing and evaluating competitive advantage, a comparison of rival firms’ share price development or market capitalization provides a helpful yardstick when used over the long term. In order for this comparison of market capitalization to yield useful information, you must consider how it has changed over time. If your competitor has seen significant growth in market cap over the preceding year while your firm has seen its valuation decline slightly, for example, you would have evidence that your firm has begun to lose its competitive advantage.

Difficulty: 3 Hard

Topic:  Shareholder Value Creation and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

33) Which of the following is a disadvantage of measuring firm performance through total return to shareholders and firm market capitalization?

  1. A) Market volatility makes it difficult to assess firm performance through these measures, particularly in the short-term.
  2. B) These tools fail to indicate how the stock market views all available public information about a firm’s expected future performance.
  3. C) These tools measure competitive advantage in absolute terms rather than relative terms.
  4. D) Only the book value of the share prices is taken into account when applying these measures, and not the market value.

 

Answer:  A

Explanation:  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.

Difficulty: 2 Medium

Topic:  Shareholder Value Creation and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

34) ________ is best described as the difference between a buyer’s willingness to pay for a product or service and a firm’s total cost to produce it.

  1. A) Economic value created
  2. B) Break-even point
  3. C) Consumer surplus
  4. D) Cost of capital

 

Answer:  A

Explanation:  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.

Difficulty: 1 Easy

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

35) A firm incurs $400 to manufacture a television. In the market, customers are willing to pay a maximum of $600 for the television priced at $500. The difference of $200 ($600 minus $400) is the

  1. A) consumer surplus.
  2. B) total return to shareholders.
  3. C) customer lifetime value.
  4. D) economic value created.

 

Answer:  D

Explanation:  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.

Difficulty: 2 Medium

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

36) Both Saturn Technologies and Granite Inc. incur a cost of $200 to manufacture a single unit of a cell phone. However, Saturn Technologies charges a higher price than Granite Inc. does, but it still sells a higher number of phones. What does this imply?

  1. A) Saturn Technologies and Granite have achieved a competitive parity.
  2. B) Granite Inc. has a competitive advantage over Saturn Technologies.
  3. C) Saturn Technologies creates more economic value than Granite Inc. does.
  4. D) Granite Inc. is not charging enough for its product.

 

Answer:  C

Explanation:  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 create a more valuable product for which buyers are willing to pay a higher price.

Difficulty: 3 Hard

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

37) A watchmaking company has priced one of its wristwatches at $210. Most of its competitors sell similar watches at $180. Selling anything less than $150 would result in a loss for the company. However, the absolute maximum a customer is willing to pay for it is $170. In this scenario, what is the reservation price of the wristwatch?

  1. A) $150
  2. B) $180
  3. C) $170
  4. D) $210

 

Answer:  C

Explanation:  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.

Difficulty: 2 Medium

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

38) A firm incurs $100 to manufacture an office table. It fixes the market price of the table as $250, and discounts the price to $200. However, the maximum a person is willing to pay for it is $180. What is the amount of total perceived consumer benefits in this scenario?

  1. A) $250
  2. B) $200
  3. C) $180
  4. D) $100

 

Answer:  C

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

Difficulty: 2 Medium

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

39) The difference between the price charged for a product and the cost to manufacture it is referred to as the

  1. A) consumer surplus.
  2. B) break-even price.
  3. C) producer surplus.
  4. D) reservation price.

 

Answer:  C

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

Difficulty: 1 Easy

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

40) ________ denotes the dollar amount a consumer would attach to a good or service.

  1. A) Utility
  2. B) Value
  3. C) Consumer surplus
  4. D) Economic contribution

 

Answer:  B

Explanation:  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.

Difficulty: 1 Easy

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

41) The value a consumer attaches to a product or service is captured in the

  1. A) least price a consumer is willing to pay for it.
  2. B) consumer’s maximum willingness to pay for it.
  3. C) expenses incurred by the firm in manufacturing it.
  4. D) difference between the price charged for it and the cost to produce it.

 

Answer:  B

Explanation:  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.

Difficulty: 1 Easy

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

42) After trying on a dress, a consumer assesses it to be worth a maximum of $100 and is willing to pay that amount for the dress. However, the dress was priced at $80. What is the amount, $100, referred to as?

  1. A) the producer surplus
  2. B) the firm’s cost (C) in manufacturing the dress
  3. C) the consumer surplus
  4. D) the value (V) the consumer attaches to the dress

 

Answer:  D

Explanation:  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.

Difficulty: 2 Medium

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

43) How does a firm capture its producer surplus for a good or service?

  1. A) as cost per unit sold
  2. B) as profit per unit sold
  3. C) as earnings per share
  4. D) as market price per share

 

Answer:  B

Explanation:  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.

Difficulty: 2 Medium

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

44) Serena paid $900 for a camera that she thought was worth $1100 for all the features included in it. For the consumer electronics firm selling the camera, however, the cost of producing the camera was only $350. What is the consumer surplus in this scenario?

  1. A) $900
  2. B) $1,100
  3. C) $550
  4. D) $200

 

Answer:  D

Explanation:  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.

Difficulty: 2 Medium

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

45) Economic value creation is best expressed as

  1. A) producer surplus minus consumer surplus.
  2. B) consumer surplus minus cost of production.
  3. C) consumer surplus plus firm profit.
  4. D) producer surplus plus firm profit.

 

Answer:  C

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

Difficulty: 1 Easy

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

46) Mobius Electronics incurs a cost of $350 to produce one unit of a cell phone. The company’s management has priced the product at $600 in the market. Considering the technological advancement of the cell phone, customers perceive its value to be around $800. What is the economic value created in this scenario?

  1. A) $350
  2. B) $450
  3. C) $800
  4. D) $200

 

Answer:  B

Explanation:  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.

Difficulty: 3 Hard

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

47) By selling a laptop at $1,000 for which consumers are willing to pay up to $1,200, a consumer electronics firm makes a profit of $400 per unit. In this scenario, the amount $600, that is ($1200 – $1000) + $400, is the

  1. A) opportunity cost.
  2. B) economic value created.
  3. C) reservation price.
  4. D) consumer surplus.

 

Answer:  B

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

Difficulty: 3 Hard

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

48) In an economic context, strategy for producers is primarily about

  1. A) distributing the economic value created equally between consumers and themselves.
  2. B) reducing the difference between consumer’s willingness to pay for a product and the cost to produce it.
  3. C) capturing the economic value created as much as possible.
  4. D) lowering producer surplus and increasing consumer surplus.

 

Answer:  C

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

Difficulty: 2 Medium

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

49) Competitive advantage goes to the firm that achieves the

  1. A) largest economic value created.
  2. B) lowest producer surplus.
  3. C) highest payable turnover.
  4. D) highest Cost of goods sold/Revenue ratio.

 

Answer:  A

Explanation:  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.

Difficulty: 1 Easy

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

50) Happy Foods and General Grains both produce similar puffed rice breakfast cereals. For both companies, the cost of producing a box of cereal is 45 cents, and it is not possible for either company to lower their production costs any further. How can one company achieve a competitive advantage over the other?

  1. A) Increase total perceived consumer benefits through differentiation.
  2. B) Raise prices above the current reservation price.
  3. C) Lower prices to the break-even price.
  4. D) Increase the number of stock market shares available to investors.

 

Answer:  A

Explanation:  When costs are the same, the only option to increase the amount of economic value created and achieve a competitive advantage is to increase the maximum willingness to pay, or total perceived consumer benefits, through differentiation.

Difficulty: 3 Hard

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

51) The cost of capital to create a product is a fixed cost because it is

  1. A) directly proportional to the output level.
  2. B) uniform throughout all firms and industries.
  3. C) not a part of the profit calculations.
  4. D) unaffected by consumer demand.

 

Answer:  D

Explanation:  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.

Difficulty: 1 Easy

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

52) ________ are best described as the value of the best forgone alternative use of the resources employed.

  1. A) Variable costs
  2. B) Opportunity costs
  3. C) Social costs
  4. D) Switching costs

 

Answer:  B

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

Difficulty: 1 Easy

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

53) Zelda is a recent fashion graduate. She started her own apparel store with an investment of $300,000. In the first year she made a profit of $60,000. If she had taken up a job as a fashion editor for a magazine, she would have earned $50,000 as salary per year. Also, she could have invested her capital, $300,000, in treasury bonds and earned an interest of $12,000. Thus, the amount $62,000 ($50,000 + $12,000) would be Genevieve’s

  1. A) social cost.
  2. B) break-even price.
  3. C) reservation price.
  4. D) opportunity cost.

 

Answer:  D

Explanation:  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.

Difficulty: 2 Medium

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

54) When SW International declared a dividend of $20,000,000, its market value increased from $8 billion to $8.5 billion. However, it lost a chance to reinvest $20,000,000 in the research and development of a new product which would have earned a profit of $200 million. Thus, this $200 million is referred to as SW International’s

  1. A) producer surplus.
  2. B) consumer surplus.
  3. C) opportunity cost.
  4. D) social cost.

 

Answer:  C

Explanation:  SW International’s opportunity cost is $200 million. Opportunity costs capture the value of the best forgone alternative use of the resources employed.

Difficulty: 2 Medium

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

55) Which of the following is an advantage of applying the economic value creation perspective to assess a firm’s performance?

  1. A) When the need for “hard numbers” arises, managers and analysts rely on economic value creation perspective to measure competitive advantage.
  2. B) In economic value perspective, analysts not only consider historical costs, but also opportunity costs.
  3. C) Arriving at the economic value created is easy because determining the value of a good in the eyes of consumers is a simple task.
  4. D) It is the most efficient tool for assessing corporate-level competitive advantage of highly diversified companies with large product portfolios.

 

Answer:  B

Explanation:  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.

Difficulty: 2 Medium

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

56) The Lynx Manufacturing Company produces components used in electronic toys. In fiscal year 2017, Lynx earned an accounting profit of $3 million. However, Lynx’s production facilities might have also been used to produce components for mobile phones, which would have generated $2 million in revenues and saved the company $500,000 in production costs. Which of the following statements is true?

  1. A) Lynx earned an economic profit of $5.5 million.
  2. B) Lynx earned an economic profit of $500,000.
  3. C) Lynx suffered an economic loss of $500,000.
  4. D) Lynx suffered an economic loss of $2.5 million.

 

Answer:  B

Explanation:  Opportunity costs capture the value of the best forgone alternative use of the resources employed. Lynx’s opportunity costs are the $2 million in revenues it would have earned and the $500,000 in costs it would have saved if it would have chosen to produce mobile phone components rather than electronic toy parts. Thus, the total opportunity cost was $2.5 million. After subtracting the $2.5 million in opportunity costs from the $3 million accounting profit, Lynx earned an economic profit of $500,000.

Difficulty: 3 Hard

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

57) Which of the following frameworks used to measure competitive advantage relies on both an internal and an external view of a firm?

  1. A) the economic value creation model
  2. B) the accounting profitability model
  3. C) the shareholder value creation model
  4. D) the balanced-scorecard model

 

Answer:  D

Explanation:  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.

Difficulty: 1 Easy

Topic:  Balanced Scorecard Approach

Learning Objective:  05-04 Apply a balanced scorecard to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

58) Which of the following statements is true of the balanced-scorecard?

  1. A) It is a more or less a one-dimensional metric of measuring competitive advantages of a firm.
  2. B) It is one of the traditional approaches of measuring firm performance.
  3. C) Its primary focus is to base a firm’s strategic goals entirely on external performance dimensions.
  4. D) It attempts to provide a holistic perspective on firm performance.

 

Answer:  D

Explanation:  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.

Difficulty: 2 Medium

Topic:  Balanced Scorecard Approach

Learning Objective:  05-04 Apply a balanced scorecard to assess and evaluate competitive advantage.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

 

59) Which of the following is an advantage of the balanced-scorecard?

  1. A) It is a tool for both strategic formulation and strategic implementation.
  2. B) It allows managers to translate a firm’s vision into measureable operational goals.
  3. C) The balanced-scorecard is independent of the skills of the managers responsible for its implementation.
  4. D) Its implementation is a one-time effort and does not require continuous tracking of metrics or updating of strategic objectives.

 

Answer:  B

Explanation:  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.

Difficulty: 2 Medium

Topic:  Balanced Scorecard Approach

Learning Objective:  05-04 Apply a balanced scorecard to assess and evaluate competitive advantage.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

60) The balanced-scorecard can accommodate

  1. A) only short-term performance metrics.
  2. B) only long-term performance metrics.
  3. C) both short- and long-term performance metrics.
  4. D) neither short- or long-term performance metrics.

 

Answer:  C

Explanation:  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.

Difficulty: 1 Easy

Topic:  Balanced Scorecard Approach

Learning Objective:  05-04 Apply a balanced scorecard to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

61) Erin is the manager of gardening supplies wholesaler SpringTime Inc. The company’s vision is to become the leading supplier of gardening materials west of the Mississippi River. In assessing the firm’s current state, Erin has determined that the firm could differentiate itself from competitors with an easy-to-use online ordering system and a two-day delivery guarantee. To accomplish this, Erin has determined that SpringTime must spend the next two quarters honing its capabilities for sourcing materials quickly and improving its web development competencies. According to the balanced scorecard approach, what is wrong with Erin’s thinking?

  1. A) She has not considered the opportunity costs associated with launching an online ordering system.
  2. B) She has not addressed the question of which core competencies the firm needs.
  3. C) She has failed to account for external factors such as customer perceptions and shareholder perceptions.
  4. D) She has not addressed the question of how SpringTime will create value.

 

Answer:  C

Explanation:  In the balanced scorecard approach, the four questions asked by managers are 1) “How do customers view us?” 2) “How do we create value” 3) “What core competencies do we need?” and 4) “How do shareholders view us?” Erin has determined that SpringTime will create value through its online ordering system and needs core competencies related to sourcing supplies and web development. But she has not addressed how customers and shareholders view the company’s products or services and where they should be improved (e.g., quality, speed…) and how customers and shareholders might perceive and value this new service.

Difficulty: 3 Hard

Topic:  Balanced Scorecard Approach

Learning Objective:  05-04 Apply a balanced scorecard to assess and evaluate competitive advantage.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

62) Which of the following is a disadvantage of the balanced-scorecard approach?

  1. A) It fails to link the strategic vision to responsible parties within the organization.
  2. B) It fails to translate the vision into measureable operational goals.
  3. C) It provides limited guidance for designing and planning business processes.
  4. D) It provides limited guidance about which metrics to choose.

 

Answer:  D

Explanation:  The balanced-scorecard approach provides only limited guidance about which metrics to choose. Different situations call for different metrics.

Difficulty: 1 Easy

Topic:  Balanced Scorecard Approach

Learning Objective:  05-04 Apply a balanced scorecard to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

63) Which of the following approaches to assess competitive advantage is based on the view that noneconomic factors can have a significant impact on a firm’s financial performance?

  1. A) the triple-bottom-line approach
  2. B) the economic value creation framework
  3. C) the accounting profitability approach
  4. D) the balanced-scorecard

 

Answer:  A

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

Difficulty: 1 Easy

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-05 Apply a triple bottom line to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

64) The tenet behind the triple-bottom-line is that

  1. A) a firm should solely focus on increasing the economic value created to/for its customers.
  2. B) a firm’s primary objective should be increasing the total returns to its shareholders.
  3. C) a firm should achieve positive results along the economic, social, and ecological dimensions to gain a sustainable strategy.
  4. D) a firm’s return on revenue can be broken down into three ratios: COGS/Revenue, R&D/Revenue, and SG&A/Revenue.

 

Answer:  C

Explanation:  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 be pursued over time without detrimental effects on people or the planet.

Difficulty: 2 Medium

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-05 Apply a triple bottom line to assess and evaluate competitive advantage.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

 

65) The management team for Volcanic Batteries came up with the following vision statement: “Volcanic Batteries will conscientiously track its financial performance to ensure profits for its investors, enhance its community through employment and supporting charities, and dispose of waste in a manner that will not harm the environment.” This vision statement is most likely based on the

  1. A) accounting profitability approach.
  2. B) economic value creation approach.
  3. C) triple-bottom-line approach.
  4. D) balanced-scorecard approach.

 

Answer:  C

Explanation:  Triple-bottom-line stresses a combination of economic, social, and ecological concerns that can lead to a sustainable strategy, which are reflected in the vision statement for Volcanic Batteries.

Difficulty: 2 Medium

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-05 Apply a triple bottom line to assess and evaluate competitive advantage.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

66) How does a sustainable strategy typically help a firm?

  1. A) It helps the firm focus solely on its financial goals.
  2. B) It reduces the need for corporate social responsibility within the firm.
  3. C) It facilitates the firm in effectively isolating its external stakeholders.
  4. D) It helps the firm achieve positive results along the social and ecological dimensions.

 

Answer:  D

Explanation:  A sustainable strategy is a strategy that can be pursued over time without detrimental effects on people or the planet. A sustainable strategy produces not only positive financial results, but also positive results along the social and ecological dimensions.

Difficulty: 2 Medium

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-05 Apply a triple bottom line to assess and evaluate competitive advantage.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

67) Which of the following scenarios exemplifies a sustainable strategy under the triple bottom line approach?

  1. A) Rather than complying with the restrictive recycling laws in the United States, Impervious Plastics outsourced its manufacturing to a country that has fewer environmental restrictions.
  2. B) Impervious Plastics developed a chemical additive that doubled the life of its plastics. The additive was currently legal, but environmental groups argued that it harmed the environment.
  3. C) Impervious Plastics reformulated its products to eliminate chemicals that were widely used in the industry but were being investigated for their potential negative effects on the environment.
  4. D) Impervious Plastics’ nearest competitor increased the salaries of its production workers by 30 percent, but Impervious kept its wages the same to gain a cost advantage over its competitor.

 

Answer:  C

Explanation:  Rather than emphasizing sustaining a competitive advantage over time, sustainable strategy means a strategy that can be pursued over time without detrimental effects on people or the planet. By voluntarily eliminating the harmful chemicals, Impervious not only achieved a positive result in the people and planet dimensions of the triple bottom line, but potentially gave itself a profit advantage by avoiding a shutdown if the government ultimately decided to ban the chemicals.

Difficulty: 3 Hard

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-05 Apply a triple bottom line to assess and evaluate competitive advantage.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

68) Which of the following is an advantage of a triple-bottom-line approach?

  1. A) The approach takes an integrative and holistic view in assessing a company’s performance.
  2. B) The approach does not rely on an external view of a firm to assess its performance.
  3. C) The approach is more of a quantitative performance metric rather than a mere conceptual framework.
  4. D) The framework can help managers assess a firm’s competitive advantage without taking into account the firm’s performance along noneconomic dimensions.

 

Answer:  A

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

Difficulty: 2 Medium

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-05 Apply a triple bottom line to assess and evaluate competitive advantage.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

69) The top management at Sunshine Vitamins, through rigorous testing, ensures that the company develops and sells vitamins that are free of harmful side effects. Also, the company ensures that the chemical waste generated in the manufacturing process is kept to a bare minimum and is disposed of according to the regulations of the Environmental Protection Agency. The management assesses its overall performance based on these dimensions. Thus, the managers at Sunshine Vitamins are applying the ________ approach to measure firm performance.

  1. A) economic value creation
  2. B) shareholder value creation
  3. C) triple-bottom-line
  4. D) accounting profitability

 

Answer:  C

Explanation:  In this scenario, the managers at Sunshine Vitamins 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.

Difficulty: 2 Medium

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-05 Apply a triple bottom line to assess and evaluate competitive advantage.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

70) The translation of strategy into action primarily takes place in a firm’s

  1. A) mission statement.
  2. B) executive summary.
  3. C) business model.
  4. D) code of conduct.

 

Answer:  C

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

Difficulty: 1 Easy

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

71) During the process of formulating an effective business model, a firm’s managers should first

  1. A) transform their strategy of how to compete into a blueprint of actions and initiatives.
  2. B) implement their strategy at corporate, strategic business unit, and functional levels.
  3. C) implement their blueprint of actions and initiatives through structures, processes, culture, and procedures.
  4. D) evaluate the firm’s strategy already in effect and take corrective actions if necessary.

 

Answer:  A

Explanation:  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.

Difficulty: 2 Medium

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

72) You are the founder of Shadow Skateboards, and you are considering methods of gaining and sustaining a competitive advantage. Which of the following changes has the best chance of quickly creating a sustainable advantage?

  1. A) devoting significant resources to researching and developing new products that will be more durable than competitors’
  2. B) automating the manufacturing process to reduce production costs
  3. C) allowing customers to upload their own image designs and help assemble the finished product at retail locations
  4. D) switching to a just-in-time inventory system to reduce inventory costs

 

Answer:  C

Explanation:  Shadow has the best chance of creating a sustainable advantage by adjusting the business model to allow crowdsourcing of design ideas and some of the production process. Many executives consider business model innovation to be more important than process or product innovation. This is because product and process innovation is often more costly, is higher risk, and takes longer to come up with in the first place and to then implement. Moreover, business model innovation is often an area that is overlooked in a firm’s quest for competitive advantage, and thus much value can be unlocked by focusing on business model innovation.

Difficulty: 3 Hard

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

 

73) ________ is a business model in which the manufacturer sets a fixed price on a product, but the retailer is free to set it’s own price.

  1. A) Agency
  2. B) Freemium
  3. C) Bundling
  4. D) Wholesale

 

Answer:  D

Explanation:  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.

Difficulty: 1 Easy

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

74) Mega Media sells books by having salespeople set up appointments with potential customers and give them a sales pitch for the product. When a salesperson sells a book, he or she gets a predetermined percentage commission. This type of business model is called

  1. A) an agency.
  2. B) bundling.
  3. C) wholesale.
  4. D) a freemium.

 

Answer:  A

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

Difficulty: 2 Medium

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

 

75) Which of the following scenarios best illustrates bundling?

  1. A) Clean Brush Inc. sells its electric toothbrushes for a low cost, but charges a high price for replacement brushes.
  2. B) Cumulus Media Inc. sells its cloud computing network by having customers pay for the service as they use it.
  3. C) Sharp Cable Inc. sells its basic TV channels for free but charges high prices for any channels that customers add on later.
  4. D) Fresh Seeds Inc. sells seed packages, in which a person can buy a package of three types of seeds at a discounted price compared to buying the seeds individually.

 

Answer:  D

Explanation:  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.

Difficulty: 2 Medium

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

76) Threadless allows customers to submit their own designs and to vote on which designs they would like to see printed on a T-shirt. This business uses a ________ technique.

  1. A) offshoring
  2. B) crowdsourcing
  3. C) peer-to-peer
  4. D) binge watching

 

Answer:  B

Explanation:  As described in Strategy Highlight 2.2, Threadless uses the crowdsourcing technique by allowing customers to perform tasks that are normally performed by employees.

Difficulty: 2 Medium

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

 

77) Polygon sells its e-book readers at the cost price of $15 each. However, the company makes its profits when users have to download or buy books online. Which of the following business models is Polygon implementing?

  1. A) subscription-based
  2. B) razor-razor-blade
  3. C) pay-as-you-go
  4. D) direct sales

 

Answer:  B

Explanation:  Polygon 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 or consumable when needed.

Difficulty: 2 Medium

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

78) Aguilar Industries has produced a new piece of technology that will monitor the soil moisture in a user’s garden and send a notification to an app on the user’s phone when it is time to water their plants. The goal of this inexpensive technology is to entice users to purchase Aguilar’s more expensive automated watering system, so that they can trigger the watering process from the app on their phones. Which business model is most likely to help Aguilar Industries accomplish its goals?

  1. A) agency
  2. B) wholesale
  3. C) pay-as-you-go
  4. D) freemium

 

Answer:  D

Explanation:  The freemium (free + premium) business model provides the basic features of a product or service free of charge, but charges the user for premium services such as advanced features or add-ons. If Aguilar Industries wants to entice users into purchasing its automated watering system (a premium service), it could first give away the inexpensive soil monitoring technology then charge a higher price for the premium upgrade.

Difficulty: 2 Medium

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

79) A defining characteristic of the subscription-based business model is that the

  1. A) user pays for only the services he or she consumes.
  2. B) user pays for access to a product or service whether he or she uses it during the payment term or not.
  3. C) 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.
  4. D) initial product is often sold at a loss or given away for free in order to drive demand for complementary goods.

 

Answer:  B

Explanation:  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.

Difficulty: 1 Easy

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

80) Shark Fin Golf Club requires its members to pay a quarterly or an annual fee to use its services. Irrespective of whether they frequently use the services during the payment period or not, members have to pay in advance. Which of the following business models does this best illustrate?

  1. A) razor-razor-blade
  2. B) pay-as-you-go
  3. C) subscription-based
  4. D) freemium

 

Answer:  C

Explanation:  Shark Fin Golf 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.

Difficulty: 2 Medium

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

81) A defining characteristic of the pay-as-you-go business model is that the

  1. A) users pay for only the services they consume.
  2. B) users pay for access to a product or service whether they use it during the payment term or not.
  3. C) initial product is often sold at a loss in order to drive demand for complementary goods.
  4. D) the basic features of a service are provided free of charge, but the user must pay for premium services.

 

Answer:  A

Explanation:  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.

Difficulty: 1 Easy

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

82) Unplug Wireless is a cellular service provider that charges its customers $1 for three hours of talk time. So, if a customer’s talk time for a month is 60 hours, the company charges him or her $20 at the end of the month. Which of the following business models does this best illustrate?

  1. A) razor-razor-blade
  2. B) subscription-based
  3. C) pay-as-you-go
  4. D) freemium

 

Answer:  C

Explanation:  In this scenario, Unplug Wireless 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.

Difficulty: 2 Medium

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

83) Cloudlink is a file hosting service that allows users to store up to 5GB of data with no restrictions or charges. However, users have to pay a fee for advanced features on the cloud storage system and additional storage space. Which of the following business models does this best illustrate?

  1. A) subscription-based
  2. B) freemium
  3. C) pay-as-you-go
  4. D) razor-razor-blade

 

Answer:  B

Explanation:  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.

Difficulty: 2 Medium

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

84) Rock Bottom Tiles has developed a new customer-oriented business model. Rather than maintain a network of showrooms across the country, the business will now let customers choose several styles that interest them from an online site, and will ship samples of each of the styles to the customer to test in their home free of charge. Once they have settled on a tile choice, Rock Bottom will send a representative to their home to schedule installation. The company has determined that busy middle-class customers will value the convenience of the new model, which allow them to upgrade the look of their homes without spending time browsing showrooms. The new model will be created by selling the old showrooms and shifting resources to the new online site and regional offices for sales personnel. What question remains for Rock Bottom to ask in order to put its strategy into action?

  1. A) Why does the business model create value?
  2. B) What activities need to be performed to create and deliver the offerings to consumers?
  3. C) How are the offerings to the customers created?
  4. D) Who are the main stakeholders who will be performing the activities?

 

Answer:  B

Explanation:  Rock Bottom Tiles still needs to consider what activities need to be performed to create and deliver the offerings to customers. It has already answered why the new model creates value (convenience), how to create the new offerings (liquidate showrooms and shift resources), and who are the main stakeholders (busy middle-class homeowners). It has not yet considered the steps involved in establishing the new website or hiring and training its new in-home sales force.

Difficulty: 3 Hard

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Apply

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

85) Which of the following statements about competitive advantage is true?

  1. A) Competitive advantage is an absolute measure; it is not relative.
  2. B) Competitive advantage is a one-dimensional concept.
  3. C) Competitive advantage is permanent and not transitory; once gained by a firm it stays with the firm.
  4. D) Competitive advantage can be assessed by measuring accounting profit, shareholder value, or economic value.

 

Answer:  D

Explanation:  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.

Difficulty: 1 Easy

Topic:  Competitive Advantage

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Remember

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

86) What are the three financial ratios that constitute return on revenue, and what do they tell us?

 

Answer:  Return on revenue is broken down into three financial ratios: Cost of goods sold/Revenue, Research & development (R&D) expense/Revenue, and Selling, general, & administrative (SG&A) expense/Revenue.

 

Cost of goods sold/Revenue provides information on how efficiently a company can produce a good. R&D/Revenue, indicates how much of each dollar that the 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. SG&A/Revenue, indicates how much of each dollar that the firm earns in sales is invested in sales, general, and administrative (SG&A) expenses. Generally, this ratio is an indicator of the firm’s focus on marketing and sales to promote its products and services.

Difficulty: 1 Easy

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

87) Discuss the limitations associated with using accounting data to measure competitive performance.

 

Answer:  Although accounting data tend to be readily available and we can easily transform them into financial ratios to assess and evaluate competitive performance, they also exhibit some important limitations:

 

  • 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. Also, there is a significant time delay before accounting data become publicly available.
  • Accounting data do not consider off-balance sheet items. Off-balance sheet items, such as pension obligations (quite large in some U.S. companies) or operating leases in the retail industry, can be significant factors.
  • Accounting data focus mainly on tangible assets, which are no longer the most important.

Difficulty: 1 Easy

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

88) Accounting data focus mainly on tangible assets, which are no longer the most important. Elaborate on this statement.

 

Answer:  Accounting data focus mainly on tangible assets, which are no longer the most important. This limitation of accounting data is nicely captured in the adage: “Not everything that can be counted counts. Not everything that counts can be counted.” Although accounting data capture some intangible assets, such as the value of intellectual property (patents, trademarks, and so on) and customer goodwill, many key intangible assets are not captured. 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. Indeed, intangibles that are not captured in accounting data have become much more important in firms’ stock market valuations over the last few decades.

Difficulty: 1 Easy

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

89) What is risk capital?

 

Answer:  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.

Difficulty: 1 Easy

Topic:  The Roles of Firm Effects and Industry Effects on Firm Performance and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

90) What does “total return to shareholders” mean?

 

Answer:  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. 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).

Difficulty: 1 Easy

Topic:  Shareholder Value Creation and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

91) What are the drawbacks of using total return to shareholders and firm market capitalization to measure firm performance?

 

Answer:  Although measuring firm performance through total return to shareholders and firm market capitalization has many advantages, it is not without problems:

 

  • Stock prices can be highly volatile, making it difficult to assess firm performance, particularly in the short term.
  • 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.
  • Stock prices frequently reflect the psychological mood of investors, which can at times be irrational.

Difficulty: 2 Medium

Topic:  Shareholder Value Creation and Competitive Advantage

Learning Objective:  05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

92) What is the relationship between producer surplus and consumer surplus?

 

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

 

The relationship between consumer and producer surplus is the reason trade happens: both transacting parties capture some of the overall value created.

Difficulty: 2 Medium

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

93) List the dimensions on which a firm can create greater economic value.

 

Answer:  A firm’s advantage can be based on superior product differentiation leading to higher perceived value. Competitive advantage can also result from a relative cost advantage over rivals, assuming all firms can create the same total perceived consumer benefits. Hence, the source of the competitive advantage is a relative cost advantage over rivals.

Difficulty: 2 Medium

Topic:  The Roles of Firm Effects and Industry Effects on Firm Performance and Competitive Advantage

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

94) What pricing options does a firm have when the difference between V, the consumer’s willingness to pay, and C, the cost to produce the good or service, is large?

 

Answer:  A large difference between V, the consumer’s willingness to pay, and C, 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.

Difficulty: 2 Medium

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

95) How does consumer demand affect fixed costs and variable costs?

 

Answer:  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. Variable costs change with the level of consumer demand—for instance, components such as LCD microprocessors, hard drives, display screens, and keyboards.

Difficulty: 2 Medium

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

96) What are opportunity costs in general? What are the opportunity costs for entrepreneurs?

 

Answer:  Opportunity costs capture the value of the best forgone alternative use of the resources employed. Entrepreneurs face two types of opportunity costs: (1) forgone wages they could be earning if they were employed elsewhere and (2) the cost of capital they invested in their businesses, which could instead be invested in, say, the stock market or U.S. Treasury bonds.

Difficulty: 2 Medium

Topic:  Economic Value Creation

Learning Objective:  05-03 Explain economic value creation and different sources of competitive advantage.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

97) What are the advantages of the balanced scorecard?

 

Answer:  The balanced-scorecard approach is popular in managerial practice because it has several advantages. In particular, the balanced scorecard allows managers to:

 

  • Communicate and link the strategic vision to responsible parties within the organization.
  • Translate the vision into measureable operational goals.
  • Design and plan business processes.
  • Implement feedback and organizational learning in order to modify and adapt strategic goals when indicated.

 

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. Including a broader perspective than financials allows managers and executives a more balanced view of organizational performance—hence its name.

Difficulty: 2 Medium

Topic:  Balanced Scorecard Approach

Learning Objective:  05-04 Apply a balanced scorecard to assess and evaluate competitive advantage.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

98) Discuss the four key questions managers need to answer when using the balanced scorecard to develop strategic objectives.

 

Answer:  The four key questions are:

 

  1. How do customers view us? This question is directly linked to how much economic value a firm can create. To learn how customers view a company’s products or services, managers collect data to identify areas to improve, with a focus on speed, quality, service, and cost.
  2. How do we create value? Answering this question 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.
  3. What core competencies do we need? This question focuses managers internally, to identify the core competencies needed to achieve their objectives, and the accompanying business processes that support, hone, and leverage those competencies.
  4. How do shareholders view us? The final perspective in the balanced scorecard is the shareholders’ view of financial performance. Understanding the shareholders’ view of value creation leads managers to a more future-oriented evaluation.

Difficulty: 2 Medium

Topic:  The Roles of Firm Effects and Industry Effects on Firm Performance and Competitive Advantage

Learning Objective:  05-04 Apply a balanced scorecard to assess and evaluate competitive advantage.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

99) How does the triple-bottom line approach help managers? Explain with the help of an example.

 

Answer:  Student examples will vary. A sample response follows:

 

Like the balanced scorecard, the triple bottom line takes a more integrative and holistic view in assessing a company’s 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. Achieving positive results in all three areas can lead to a sustainable strategy, or a strategy that can be pursued over time without detrimental effects on people or the planet. Sustainable strategies can also be good for profits. General Electric, for example, introduced a new line of renewable energy products which brought in more than $9 billion in revenues in 2016.

Difficulty: 2 Medium

Topic:  Financial Analysis Tools for Appraising Firm Performance

Learning Objective:  05-05 Apply a triple bottom line to assess and evaluate competitive advantage.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

100) Explain how business models put strategy into action.

 

Answer:  Strategy is a set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors or the industry average. The translation of strategy into action takes place in the firm’s business model, which details the firm’s competitive tactics and initiatives. Simply put, the firm’s business model explains how the firm intends to make money. The business model stipulates how the firm conducts its business with its buyers, suppliers, and partners. How companies do business can sometimes be more important to gaining and sustaining competitive advantage than what they do. This also implies that business model innovation might be more important achieving superior performance than product or process innovation. To come up with an effective business model, the firm’s managers first 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. If the company fails to translate a strategy into a profitable business model, the firm will run into trouble.

Difficulty: 1 Easy

Topic:  The Importance of a Viable Business Model

Learning Objective:  05-06 Use the why, what, who, and how of business models framework to put strategy into action.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

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