Deck 2: Strategy and Performance

Question 1

In 2006 U.S. airlines performed nearly identically in terms of financial results.

Answer 1

False

Question 2

Customary performance measures for assessing a strategy should reflect the company's efforts as a whole, be comparable with measures from other companies, and reflect long-term commitments.

Answer 2

True

Question 3

Emerging attributes by which we might assess a company's performance go beyond financial measures and include things like environmental sustainability in company operations and societal contributions by the firm.

Answer 3

True

Question 4

Strategic performance should be assessed by a balance of customary financial measures and emerging, non-financial measures.

Question 5

A normal profit is the minimum return earned by a firm that is necessary to attract and secure the owners' inputs.

Question 6

Economic profit is the residual income above normal profit that accrues to those firms in an industry who choose to use a capital structure without any long-term debt.

Question 7

Return on equity (ROE) is one of the key performance indicators used by the senior managers of organizations.

Question 8

Return on equity (ROE) can be broken down into three other financial measures of performance: Profitability, asset productivity, and financial leverage.

Question 9

Revenue growth is a direct indicator of a firm's ability to pare costs from its operations.

Question 10

As a measure of performance, revenue growth typically occurs in lockstep with growth in profitability; i.e., as revenues increase dramatically so does profitability for nearly all firms.

Question 11

We define common stock returns--a common measure of performance--as the dividend paid per share of stock divided by the price of the stock at a given time.

Question 12

Market capitalization is calculated as the number of shares outstanding times the current market price per share of stock.

Question 13

Strategic financial analysis is able to show us what companies are really doing regardless of what they say they are doing.

Question 14

Common-sized financial statements have been reworked (using the original entries) to fit a standard format that has been developed by a major accounting firm.

Question 15

A fine-grained examination of financial statements can illustrate different approaches to the marketplace.

Question 16

Amazon's decision to build its own warehouses is evident upon close analysis of the trend in its balance sheets.

Question 17

Economic logic is the means by which a company seeks to generate a return that is greater than its cost of capital and greater than the returns earned by rivals.

Question 18

Once a given economic logic has been proven to generate superior returns, all firms in the industry adopt that logic; we do not see a variety of logics being used in any industry that has existed for a reasonable period of time.

Question 19

An economic logic dictates nearly all of the details of a strategy for any firm that chooses to operate under that logic.

Question 20

Every industry has developed measures of operating characteristics, or metrics, that show how competitors are faring.

Question 21

Strategy involves a pattern of asset allocations and inter-related activities that manifests itself in financial results.

Question 22

It is typically a mistake for managers to forecast financial results as part of the strategy formulation process. There are simply too many assumptions necessary and a high probability that the environment will change in significant ways, rendering financial forecasts inaccurate.

Question 23

Which of the following statements is true about the U.S. airline industry as described in the opening vignette for Chapter 2 of the text?

A) All airlines confront identical industry conditions.
B) Financial performance of the U.S. airlines was mixed during 2006.
C) Many airlines were considering mergers in response to tough industry conditions.
D) All of the above statements are true.

Question 24

Studies show that average industry performance varies greatly as does the performance of companies within industries. Thus, one must pay attention to performance measures that

A) can easily be compared to other firms in the same industry.
B) express commonalities across firms in different industries.
C) are unique to the firm of interest.
D) illustrate the risks of doing business in one industry versus another.

Question 25

Which of the following is most likely to measure performance that results from a company's long-term commitments?

A) a financial measure such as return on equity (ROE)
B) a company's stock price at the close of trading on a given day
C) a cell phone service provider's customer "churn" for the most recent quarter
D) a grocer's coupon redemption rate for the most recent fiscal year

Question 26

Which of the following is not an aspect of measuring performance that is important to consider from a strategic point of view?

A) The performance measure reflects the company's efforts as a whole.
B) The performance measure can be compared to the same measure from rivals.
C) The performance measure is easily calculated and interpreted.
D) The performance measure reflects a company's long-term commitments.

Question 27

The financial performance of a firm

A) should be the only consideration when assessing a strategy.
B) should be used along with other measures, including some that are qualitative, to assess a strategy.
C) is not likely to be reported accurately in its financial statements, as can be seen with Enron and WorldCom, so it is of little use when assessing a strategy.
D) is more easily deduced by outsiders when the firm is privately held rather than publicly traded.

Question 28

Value creation by companies can take many forms. Which of the following is not a type of value that might be created by a company?

A) economic
B) cultural
C) social
D) instrumental

Question 29

Eliminating waste, selling products that are produced with sustainable methods, and installing natural power generation illustrate what approach to achieving a competitive advantage and creating value?

A) a purely economic approach
B) a "green" or environmentally sustainable approach
C) a knowledge-based approach
D) a politically correct approach

Question 30

A key element of the emergent view of the appropriate dimensions for assessing company performance is that the interests of ________ should be taken into account.

A) various stakeholders
B) only stockholders
C) capital providers, including debt holders,
D) employees

Question 31

Individuals or groups who have an interest in or influence on the operations of a company are called

A) external operatives.
B) moral agents.
C) stakeholders.
D) special interests.

Question 32

Employees, managers and officers, boards of directors, and stockholders are all ________ of a company.

A) external stakeholders
B) indirect beneficiaries
C) internal stakeholders
D) fiduciary agents

Question 33

Suppliers, creditors, customers, communities, and governments are all ________ of a company.

A) internal stakeholders
B) participatory agents
C) informal auditors
D) external stakeholders

Question 34

Newman's Own and Ben & Jerry's are two examples of companies that began their business operations with

A) funding from friends and family.
B) explicit social objectives.
C) the desire to be the most profitable firms in their respective industries.
D) a wish to employ as many people as possible.

Question 35

Strategy should be assessed by combination of _______ and ________ measures.

A) financial; environmental
B) financial; governmental
C) non-financial; legal
D) financial; non-financial

Question 36

The minimum return earned by a company that is necessary to attract capital is known as

A) normal profit.
B) its internal rate of return.
C) external profit.
D) the hurdle rate.

Question 37

The residual income above that from normal profit that derives from the efforts of management is known as

A) excess rent.
B) windfall profit.
C) economic profit.
D) return on investment.

Question 38

Which of the following is not a component of the key performance indicator return on equity (ROE)?

A) profitability
B) asset productivity
C) financial leverage
D) market capitalization

Question 39

A company that achieves a higher return on equity (ROE) than the industry average earns

A) the disdain of its peers.
B) normal rents.
C) the Malcolm Baldrige award.
D) economic profit.

Question 40

For 2006 Continental Airlines was able to report ROE of 106% compared to 7.3% for Southwest Airlines. While Southwest achieved higher profitability, Continental had a much higher level of

A) operating leverage.
B) financial leverage.
C) receivables turnover.
D) working capital.

Question 41

Aside from return on equity (ROE), which of the following is commonly used as a measure of performance?

A) sales revenue growth
B) returns to common stock
C) measures of a company's market value such as market capitalization
D) all of the above are commonly used.

Question 42

The advantage of common-sized financial statements is that they

A) offer a clear comparison between companies of different sizes.
B) are more accurate than the unconverted source statements.
C) have all figures in U.S. dollars for comparative purposes.
D) have been subject to a final audit by one public accounting firm.

Question 43

The detailed analysis of the financial statements of retail chains A (Safeway), B (CVS Caremark), and C (Kohl's) best illustrates the idea that

A) drugstores always have a lower return on equity than grocers or department stores.
B) retail chains carry little cash and near-cash equivalents on their balance sheets compared to other types of businesses.
C) different businesses have operating characteristics that can be discerned by way of a thorough investigation of their financial and operating data.
D) grocers typically operate at low levels of overhead expense.

Question 44

An examination of a company's financial statements from a period of several years allows the analyst to

A) extrapolate the company's likely future stock price from its past investments.
B) estimate accurately the size and quality of the company's pipeline of products that are to be introduced in the near future.
C) identify changes in strategy as well as gain insight into the higher-level thinking that guides the company.
D) forecast the company's market capitalization for the next five- to ten-year period.

Question 45

The means by which a company seeks to generate returns greater than those that rivals earn and that are greater than its cost of capital is called

A) capital restructuring.
B) economic logic.
C) business process re-engineering.
D) structuring for strategic change.

Question 46

Once we understand the economic logics of an industry, we have a better chance of

A) accurately diagnosing the strategy of a particular company in the industry.
B) successful entry with a business model unlike any currently used by incumbents.
C) using that knowledge to drive competitors from markets where we have significant interests.
D) creating first-mover advantages.

Question 47

Why should firms use non-financial measures of performance to assess their strategies?

Question 48

Give some specific examples of how you might use the income statements for two rivals in a comparison of their strategies.

Question 49

What is meant when we say that one or more economic logics exist in an industry?

Question 50

Briefly describe the relationship between strategy formulation and the analysis of financial statements.