Deck 5: Competitive Advantage, Firm Performance, and Business Models

Question 1

In the why, what, who, and how of business models framework, the why dimension asks "why does the business model create value?"

Answer 1

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

Question 2

________ 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

Answer 2

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.

Question 3

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.

Answer 3

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

Question 4

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

Question 5

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.

Question 6

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.

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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.

Question 13

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

Question 14

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

Question 15

________ 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

Question 16

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.

Question 17

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.

Question 18

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.

Question 19

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.

Question 20

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.

Question 21

________, 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

Question 22

________ 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

Question 23

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.

Question 24

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

Question 25

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.

Question 26

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.

Question 27

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

A) Utility
B) Value
C) Consumer surplus
D) Economic contribution

Question 28

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.

Question 29

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

Question 30

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.

Question 31

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

Question 32

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.

Question 33

________ are the legal owners of public companies.

A) Employees
B) Shareholders
C) Category captains
D) Creditors

Question 34

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.

Question 35

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

Question 36

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.

Question 37

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.

Question 38

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.

Question 39

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?

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.

Question 40

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.

Question 41

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.

Question 42

________ 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

Question 43

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.

Question 44

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.

Question 45

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

Question 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?

A) $350
B) $450
C) $800
D) $200

Question 47

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.

Question 48

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

Question 49

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.

Question 50

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.

Question 51

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.

Question 52

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.

Question 53

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.

Question 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

A) producer surplus.
B) consumer surplus.
C) opportunity cost.
D) social cost.

Question 55

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.

Question 56

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.

Question 57

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

Question 58

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

Question 59

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.

Question 60

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.

Question 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?

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.

Question 62

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

Question 63

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.

Question 64

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.

Question 65

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

Question 66

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

Question 67

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.

Question 68

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.

Question 69

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.

Question 70

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.

Question 71

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.

Question 72

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.

Question 73

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

Question 74

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

Question 75

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.

Question 76

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.

Question 77

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

Question 78

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

Question 79

________ 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

Question 80

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.