Chapter 1: Multiple Choice

If TechnoGeek and VarsityBlue compete in the same market for the same customer and TechnoGeek generates $900 of economic value each time it sells a product or service while VarsityBlue generates $400 of economic value each time it sells a product or service, TechnoGeek has a competitive advantage of

$500

Which of the following is a reason why it is important for students to study strategy and the strategic management process?

- Studying strategy and the strategic management process can give students tools to evaluate the strategies of firms that may employ them. - It can be very important to a new hire's career success to understand the strategies of the firm that hired them and their place in implementing these strategies. - While strategic choices are generally limited to very experienced senior managers in large organizations, in smaller and entrepreneurial firms many employees end up being involved in the strategic management process.

If the risk free rate of return is 4%, the market rate of return is 9%, and a firm's beta is 2.0, what is the firm's cost of equity?

14

One of the first scholars to examine the longevity of competitive advantage was

Dennis Mueller

Green Frog is an environmentally friendly firm in the cosmetics industry. Even though Green Frog is environmentally friendly, the strategic planning team had decided that financial performance is one of the company's top priorities. Which of the following is the best example of an objective the company might use to help it achieve its goal of superior financial performance?

Growth in earnings per share averaging 15% or better annually for the next five years

The realized strategy of most firms tends to be

a combination of both intended and emergent strategies

If the average ROE in the heating and cooling industry is 10.1%, and Thermacorp's ROE is 17.3%, Thermacorp is said to have

above average accounting performance

Using ratio analysis, a firm earns ________ when its performance is greater than the industry average.

above average accounting performance

The two types of measures of competitive advantage include

accounting measures and economic measures

A firm's ________ is a measure of its competitive advantage calculated using information from a firm's published profit and loss and balance sheet statements.

accounting performance

Thermacorp's weighted average cost of capital is 11.35. If the average WACC in the heating and cooling industry is 19, Thermacorp can be said to be earning

below normal economic performance

Actions firms take to gain competitive advantages in a single market or industry are known as

business level strategies

When a firm is able to create more economic value than rival firms it is said to have a(n)

competitive advantage

In many ways, the difference between traditional economics research and strategic management research is that the former attempts to explain why ________, while the latter attempts to explain ________.

competitive advantages should not persist; when they can.

Actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously are known as

corporate level strategies

Green Frog is an environmentally friendly firm in the cosmetics industry. If Green Frog were considering expanding beyond the cosmetics industry into pharmaceuticals in order to gain competitive advantages by operating in multiple markets and industries, this would be an example of which type of strategy?

corporate level strategy

The ________ is the rate of return that a firm promises to pay its suppliers of capital to induce them to invest in the firm.

cost of capital

Green Frog is an environmentally friendly firm in the cosmetics industry that has decided to undertake a strategic planning project. It wants to ensure that it performs the process correctly and so intends to start the process with the first step of the strategic planning process, which is

crafting a mission statement.

Firms that generate less economic value than their rivals experience a competitive

disadvantage

________ measures of competitive advantage compare a firm's level of return to its cost of capital instead of to the average level of return in the industry.

economic

The difference between the perceived benefits gained by a customer who purchases a firm's products or services and the full economic costs of these products or services is known as

economic value

________ strategies are theories of how to gain competitive advantage in an industry that emerge over time or that have been radically reshaped once they are initially implemented.

emergent

Theories of how to gain competitive advantage in an industry that emerge over time or that have been radically reshaped once they are initially implemented are known as

emergent strategies

By conducting a(n) ________, a firm identifies the critical threats and opportunities in its competitive environment.

external analysis

Green Frog is an environmentally friendly firm in the cosmetics industry. If during the strategic planning process Green Frog tried to determine the critical threats and opportunities in its competitive environment, it would be performing a(n)

external analysis

Green Frog is an environmentally friendly firm in the cosmetics industry. If Green Frog undertook an analysis to help it understand which of its resources and capabilities are likely to be sources of competitive advantage and which are less likely to sources of such advantages it would be performing a(n)

internal analysis

________ helps a firm understand which of its resources and capabilities are likely to be sources of competitive advantage.

internal analysis

Ratios that focus on the level of a firm's financial flexibility, including its ability to obtain more debt, are known as

leverage ratios

Which type of ratios focus on the ability of a firm to meet its short-term financial obligations?

liquidity ratios

A firm's ________ is its long-term purpose that defines both what it aspires to be in the long run and what it wants to avoid in the meantime.

mission

Missions are often written in the form of

mission statements

A firm that earns its cost of capital is said to be earning

normal economic performance

________ are specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission.

objectives

Firms that create the same economic value as their rivals experience competitive

parity

Thermacorp's 17.3% ROE is an example of a(n) ________ ratio.

profitability

________ are ratios with some measure of profit in the numerator and some measure of firms' size or assets in the denominator.

profitability

The view that equity holders only receive payment on their investment in a firm after all legitimate claims by a firm's other stakeholders are satisfied is known as the ________ view of equity holders.

residual claimants

The sequential set of analyses and choices that can increase the likelihood that a firm will choose a strategy that generates competitive advantages is the

strategic management process

A firm's ________ is defined as its theory about how to gain competitive advantages.

strategy

________ occurs when a firm adopts organizational policies and practices that are consistent with its strategy.

strategy implementation

From 1926 to 1995, visionary firms earned ________ returns compared to firms that were not visionary firms.

substantially higher

The mission statements of visionary firms

suggest that profit maximizing, while an important corporate objective, is not their primary reason for existence

A competitive advantage that lasts a very short period of time is known as a ________ competitive advantage.

temporary

High quality objectives are those that are

tightly connected to elements of a firm's mission

Firms whose mission is central to all they do are known as ________ firms.

visionary firms

The percentage of a firm's total capital that is debt times the cost of debt plus the percentage of a firm's total capital that is equity times the cost of equity is the

weighted average cost of capital

Which of the following statements regarding firm mission is accurate?

while some firms have used their missions to develop strategies that create significant competitive advantages, firm missions can hurt a firm's performance as well.