MGT 3830 Exam 2 Ch. 5
) 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? A) razor-razor-blade B) pay-as-you-go C) subscription-based D) freemium
C
) Discuss the four key questions managers need to answer when using the balanced scorecard to develop strategic objectives.
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.
Discuss the limitations associated with using accounting data to measure competitive performance.
: 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.
A defining characteristic of the pay-as-you-go business model is that the A) users pay for only the services they consume. B) users pay for access to a product or service whether they use it during the payment term or not. C) initial product is often sold at a loss in order to drive demand for complementary goods. D) the basic features of a service are provided free of charge, but the user must pay for premium services.
A
During the process of formulating an effective business model, a firm's managers should first A) transform their strategy of how to compete into a blueprint of actions and initiatives. B) implement their strategy at corporate, strategic business unit, and functional levels. C) implement their blueprint of actions and initiatives through structures, processes, culture, and procedures. D) evaluate the firm's strategy already in effect and take corrective actions if necessary.
A
From an investors' or shareholders' perspective, the measure of competitive advantage that matters most is the A) return on risk capital. B) economic value created. C) consumer surplus. D) inventory turnover.
A
Return on risk capital primarily includes A) stock price appreciation plus dividends received over a specific period. B) consumer surplus plus firm profit. C) account receivables plus account payables. D) economic value created by a firm plus reservation price.
A
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? A) The firm's number of outstanding shares is 25 million. B) The firm pays an annual dividend of 10 percent. C) The firm's total return to shareholder is $5 billion. D) The firm's economic value created is $5 billion.
A
The ratio Cost of goods sold/Revenue indicates how efficiently a company can A) produce a good. B) sell a good. C) advertise a good. D) design a good.
A
Which of the following expressions accurately describes market cap? A) It is the product of the number of outstanding shares and the share price. B) It is the difference between the book value and the market value of a firm's assets. C) It is the ratio of a firm's equity finance and its debt finance. D) It is the difference between a firm's account receivables and account payables.
A
Which of the following is a disadvantage of measuring firm performance through total return to shareholders and firm market capitalization? A) Market volatility makes it difficult to assess firm performance through these measures, particularly in the short-term. B) These tools fail to indicate how the stock market views all available public information about a firm's expected future performance. C) These tools measure competitive advantage in absolute terms rather than relative terms. D) Only the book value of the share prices is taken into account when applying these measures, and not the market value.
A
Which of the following is an advantage of a triple-bottom-line approach? A) The approach takes an integrative and holistic view in assessing a company's performance. B) The approach does not rely on an external view of a firm to assess its performance. C) The approach is more of a quantitative performance metric rather than a mere conceptual framework. D) The framework can help managers assess a firm's competitive advantage without taking into account the firm's performance along noneconomic dimensions.
A
________ 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. A) Economic value created B) Break-even point C) Consumer surplus D) Cost of capital
A
________, which is the return on risk capital, includes stock price appreciation plus dividends received over a specific period. A) Total return to shareholders B) Earnings per share C) Receivables turnover D) Dividend yield
A
List the dimensions on which a firm can create greater economic value.
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.
Accounting data focus mainly on tangible assets, which are no longer the most important. Elaborate on this statement.
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.
What are the drawbacks of using total return to shareholders and firm market capitalization to measure firm performance?
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.
) 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? A) subscription-based B) freemium C) pay-as-you-go D) razor-razor-blade
B
) Which of the following statements is true of accounting data? A) Accounting data focus mainly on intangible assets, rather than tangible assets. B) Accounting data are historical data and thus backward-looking. C) Accounting data do not have to be adjusted in any manner to compare companies with different capital structures. D) Accounting data consider off-balance sheet items, such as pension obligations of a firm.
B
A defining characteristic of the subscription-based business model is that the A) user pays for only the services he or she consumes. B) user pays for access to a product or service whether he or she uses it during the payment term or not. 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. D) initial product is often sold at a loss or given away for free in order to drive demand for complementary goods.
B
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 A) opportunity cost. B) economic value created. C) reservation price. D) consumer surplus.
B
How does a firm capture its producer surplus for a good or service? A) as cost per unit sold B) as profit per unit sold C) as earnings per share D) as market price per share
B
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? A) Why does the business model create value? B) What activities need to be performed to create and deliver the offerings to consumers? C) How are the offerings to the customers created? D) Who are the main stakeholders who will be performing the activities?
B
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. A) offshoring B) crowdsourcing C) peer-to-peer D) binge watching
B
Unlike the financial ratios based on accounting data, total return to shareholders is A) backward-looking and historic in nature. B) an external performance metric. C) an absolute measure of competitive advantage. D) unaffected by market volatility or macroeconomic factors.
B
Which of the following is an advantage of applying the economic value creation perspective to assess a firm's performance? A) When the need for "hard numbers" arises, managers and analysts rely on economic value creation perspective to measure competitive advantage. B) In economic value perspective, analysts not only consider historical costs, but also opportunity costs. 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. D) It is the most efficient tool for assessing corporate-level competitive advantage of highly diversified companies with large product portfolios.
B
Which of the following is an advantage of the balanced-scorecard? A) It is a tool for both strategic formulation and strategic implementation. B) It allows managers to translate a firm's vision into measureable operational goals. C) The balanced-scorecard is independent of the skills of the managers responsible for its implementation. D) Its implementation is a one-time effort and does not require continuous tracking of metrics or updating of strategic objectives.
B
Which of the following statements correctly compares Apple and Microsoft in 2016? A) Apple had a higher return on revenue than Microsoft. B) Apple had a higher return on invested capital than Microsoft. C) Microsoft had higher total sales than Apple. D) Microsoft had a lower cost structure than Apple.
B
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? A) Consider this evidence of a sustainable competitive advantage and maintain your current strategy. B) Compare the current valuations with past valuations to determine a trend. C) Assume your current strategy has failed and begin to formulate a new one. D) Compare your valuation to firms in another industry.
B
_______ are best described as the value of the best forgone alternative use of the resources employed. A) Variable costs B) Opportunity costs C) Social costs D) Switching costs
B
________ are the legal owners of public companies. A) Employees B) Shareholders C) Category captains D) Creditors
B
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 A) 30,000 shares, that is, 30 million shares/$100. B) $200,000, that is, $2,000 × $100. C) $3 billion, that is, 30 million shares × $100. D) 20:1, that is, $2,000/$100.
C
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? A) $250 B) $200 C) $180 D) $100
C
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? A) $150 B) $180 C) $170 D) $210
C
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? A) She has not considered the opportunity costs associated with launching an online ordering system. B) She has not addressed the question of which core competencies the firm needs. C) She has failed to account for external factors such as customer perceptions and shareholder perceptions. D) She has not addressed the question of how SpringTime will create value.
C
The tenet behind the triple-bottom-line is that A) a firm should solely focus on increasing the economic value created to/for its customers. B) a firm's primary objective should be increasing the total returns to its shareholders. C) a firm should achieve positive results along the economic, social, and ecological dimensions to gain a sustainable strategy. D) a firm's return on revenue can be broken down into three ratios: COGS/Revenue, R&D/Revenue, and SG&A/Revenue.
C
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. A) economic value creation B) shareholder value creation C) triple-bottom-line D) accounting profitability
C
The translation of strategy into action primarily takes place in a firm's A) mission statement. B) executive summary. C) business model. D) code of conduct.
C
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 A) producer surplus. B) consumer surplus. C) opportunity cost. D) social cost.
C
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? A) devoting significant resources to researching and developing new products that will be more durable than competitors' B) automating the manufacturing process to reduce production costs C) allowing customers to upload their own image designs and help assemble the finished product at retail locations D) switching to a just-in-time inventory system to reduce inventory costs
C
_______ is best described as a measure of how effectively capital is being used by a firm to generate revenue. A) Return on revenue B) Risk capital C) Working capital turnover D) Revenue per employee
C
________ precisely indicates how much of a firm's sales is converted into profits. A) Break-even price B) Working capital turnover C) Return on revenue D) Inventory turnover
C
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? A) the producer surplus B) the firm's cost (C) in manufacturing the dress C) the consumer surplus D) the value (V) the consumer attaches to the dress
D
) 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? A) $900 B) $1,100 C) $550 D) $200
D
) Which of the following competitively important assets is typically excluded from a firm's balance sheet? A) land and building B) accounts payable C) patents D) customer experience
D
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? A) agency B) wholesale C) pay-as-you-go D) freemium
D
How does a sustainable strategy typically help a firm? A) It helps the firm focus solely on its financial goals. B) It reduces the need for corporate social responsibility within the firm. C) It facilitates the firm in effectively isolating its external stakeholders. D) It helps the firm achieve positive results along the social and ecological dimensions.
D
The cost of capital to create a product is a fixed cost because it is A) directly proportional to the output level. B) uniform throughout all firms and industries. C) not a part of the profit calculations. D) unaffected by consumer demand.
D
The three financial ratios that constitute return on revenue are Cost of goods sold/Revenue, Research & development expense/Revenue, and A) Accounting profitability/Revenue. B) Economic value created/Revenue. C) Total return to shareholders/Revenue. D) Selling, general, & administrative expense/Revenue.
D
The working capital turnover of Tesva Systems Corp. is 6.0. What does this financial data suggest? A) For every $6.00 Tesva Systems puts to work, the company incurs a cost of $1.00. B) For every $6.00 Tesva Systems puts to work, the company realizes sales of $1.00. C) For every dollar Tesva Systems puts to work, the company realizes $6.00 in loss. D) For every dollar Tesva Systems puts to work, the company realizes $6.00 of sales.
D
Which of the following frameworks used to measure competitive advantage relies on both an internal and an external view of a firm? A) the economic value creation model B) the accounting profitability model C) the shareholder value creation model D) the balanced-scorecard model
D
Which of the following is a disadvantage of the balanced-scorecard approach? A) It fails to link the strategic vision to responsible parties within the organization. B) It fails to translate the vision into measureable operational goals. C) It provides limited guidance for designing and planning business processes. D) It provides limited guidance about which metrics to choose.
D
Which of the following is an external performance metric? A) return on revenue B) fixed assets turnover C) inventory turnover D) total return to shareholders
D
Which of the following statements about competitive advantage is true? A) Competitive advantage is an absolute measure; it is not relative. B) Competitive advantage is a one-dimensional concept. C) Competitive advantage is permanent and not transitory; once gained by a firm it stays with the firm. D) Competitive advantage can be assessed by measuring accounting profit, shareholder value, or economic value.
D
________ 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. A) Agency B) Freemium C) Bundling D) Wholesale
D
) A sustainable strategy is one that produces a competitive advantage that can be maintained over time.
F
A company's total asset base consists of its current assets plus plant, property, and equipment (PPE).
F
A firm will always see its stock price appreciate when it demonstrates measurable growth.
F
A manager's only responsibility is to monitor and assess the performance of his or her firm.
F
Competitive advantage goes to the firm that maximizes the difference between the cost of producing a good and the retail price that consumers pay.
F
Generally speaking, a firm will create value if its return on invested capital (ROIC) is less than the cost of capital.
F
Once a firm chooses a business model, it must stick with it for the life of the firm
F
) How does consumer demand affect fixed costs and variable costs?
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.
What is risk capital?
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.
What does "total return to shareholders" mean?
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).
How does the triple-bottom line approach help managers? Explain with the help of an example.
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.
What are opportunity costs in general? What are the opportunity costs for entrepreneurs?
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.
In the why, what, who, and how of business models framework, the why dimension asks "why does the business model create value
T
Managers must first develop a strategy that is likely to produce a competitive advantage before implementing a balanced scorecard approach.
T
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.
T
What are the advantages of the balanced scorecard?
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.
What is the relationship between producer surplus and consumer surplus?
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.
A high percentage of R&D/Revenue ratio indicates a(n) A) strong focus on innovation to improve current products and services. B) inefficiency in the management to focus on new products. C) strong focus on marketing and sales to promote products and services. D) negligent investment toward research and development.
A
Competitive advantage goes to the firm that achieves the A) largest economic value created. B) lowest producer surplus. C) highest payable turnover. D) highest Cost of goods sold/Revenue ratio.
A
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? A) Increase total perceived consumer benefits through differentiation. B) Raise prices above the current reservation price. C) Lower prices to the break-even price. D) Increase the number of stock market shares available to investors.
A
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 A) an agency. B) bundling. C) wholesale. D) a freemium.
A
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? A) the triple-bottom-line approach B) the economic value creation framework C) the accounting profitability approach D) the balanced-scorecard
A
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?
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.
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? A) Myna Bird Inc. is more likely to create value while EagleCorp is more likely to destroy value. B) EagleCorp is more likely to create value while Myna Bird Inc. is more likely to destroy value. C) Both Myna Bird Inc. and EagleCorp are likely to create value. D) Neither Myna Bird Inc. nor EagleCorp are likely to create value.
B
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? A) $350 B) $450 C) $800 D) $200
B
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? A) subscription-based B) razor-razor-blade C) pay-as-you-go D) direct sales
B
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? A) Lynx earned an economic profit of $5.5 million. B) Lynx earned an economic profit of $500,000. C) Lynx suffered an economic loss of $500,000. D) Lynx suffered an economic loss of $2.5 million.
B
The ratio of SG&A/Revenue is an indicator of a firm's focus on A) researching to produce innovative products and services. B) marketing and sales to promote its products and services. C) producing a good in an efficient manner. D) creating a good that is cost-effective.
B
The value a consumer attaches to a product or service is captured in the A) least price a consumer is willing to pay for it. B) consumer's maximum willingness to pay for it. C) expenses incurred by the firm in manufacturing it. D) difference between the price charged for it and the cost to produce it.
B
________ denotes the dollar amount a consumer would attach to a good or service. A) Utility B) Value C) Consumer surplus D) Economic contribution
B
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? A) Saturn Technologies and Granite have achieved a competitive parity. B) Granite Inc. has a competitive advantage over Saturn Technologies. C) Saturn Technologies creates more economic value than Granite Inc. does. D) Granite Inc. is not charging enough for its product.
C
Economic value creation is best expressed as A) producer surplus minus consumer surplus. B) consumer surplus minus cost of production. C) consumer surplus plus firm profit. D) producer surplus plus firm profit.
C
In an economic context, strategy for producers is primarily about A) distributing the economic value created equally between consumers and themselves. B) reducing the difference between consumer's willingness to pay for a product and the cost to produce it. C) capturing the economic value created as much as possible. D) lowering producer surplus and increasing consumer surplus
C
The balanced-scorecard can accommodate A) only short-term performance metrics. B) only long-term performance metrics. C) both short- and long-term performance metrics. D) neither short- or long-term performance metrics.
C
The difference between the price charged for a product and the cost to manufacture it is referred to as the A) consumer surplus. B) break-even price. C) producer surplus. D) reservation price.
C
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 A) accounting profitability approach. B) economic value creation approach. C) triple-bottom-line approach. D) balanced-scorecard approach.
C
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? A) razor-razor-blade B) subscription-based C) pay-as-you-go D) freemium
C
Which of the following scenarios exemplifies a sustainable strategy under the triple bottom line approach? 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. 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. 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. 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.
C
lena 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? 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. B) Geode's working capital to revenue ratio was 75 percent, while NorthWest Tech's was 68 percent. C) Geode's intangible intensity was 6 percent, while NorthWest Tech's was 3 percent. D) Geode's plant, property, and equipment (PPE) over revenue ratio was 19 percent, while NorthWest Tech's was 10 percent.
C
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 A) consumer surplus. B) total return to shareholders. C) customer lifetime value. D) economic value created.
D
Which of the following scenarios best illustrates bundling? A) Clean Brush Inc. sells its electric toothbrushes for a low cost, but charges a high price for replacement brushes. B) Cumulus Media Inc. sells its cloud computing network by having customers pay for the service as they use it. C) Sharp Cable Inc. sells its basic TV channels for free but charges high prices for any channels that customers add on later. 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.
D
Which of the following statements is true of the balanced-scorecard? A) It is a more or less a one-dimensional metric of measuring competitive advantages of a firm. B) It is one of the traditional approaches of measuring firm performance. C) Its primary focus is to base a firm's strategic goals entirely on external performance dimensions. D) It attempts to provide a holistic perspective on firm performance.
D
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 A) social cost. B) break-even price. C) reservation price. D) opportunity cost.
D
What are the three financial ratios that constitute return on revenue, and what do they tell us?
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.
Explain how business models put strategy into action.
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.
