Chapter 5

Question 1

To effectively measure competitive advantage, you must be able to

Answer 1

(1) assess firm performance and (2) compare it to other firms

Question 2

Firms can be compared on a variety of tangible and intangible
performance metrics

Answer 2

• Accounting profitability
• Shareholder value
• Economic value

Question 3

Some of the profitability measures most commonly used in

strategic management include:

Answer 3

• Return on invested capital (ROIC)
• Return on equity (ROE)
• Return on assets (ROA)
• Return on revenue (ROR; better known as profit margin)

Question 4

RETURN ON INVESTED CAPITAL

Answer 4

Indicates how effectively a company uses its invested capital or working
capital

Question 5

ROIC =

Answer 5

New profits(less taxes)/Working Capital =
(Net Profits/Revenue) x (Revenue/Working Capital)

Question 6

• PROFIT MARGIN

Answer 6

how much of sales are converted to profits

Question 7

WORKING CAPITAL TURNOVER

Answer 7

how effectively is capital being used to

generate revenue

Question 8

Financial leverage

Answer 8

the financial contributions (assets) generated by money

borrowed; efficiency of generating assets from borrowed money

Question 9

Financial leverage =

Answer 9

Total Assets / Total Equity

Higher is better

Question 10

• Return on Assets

Answer 10

a measure that shows the profitability of a firm’s assets;

efficiency of generating net income from assets

Question 11

• ROA =

Answer 11

Net Income / Total Assets

Higher is better

Question 12

• Return on Equity

Answer 12

a measure that shows the profitability of a firm’s equity;

efficiency of generating net income from equity

Question 13

ROE

Answer 13

Net Income / Total Equity

Higher is better

Question 14

Tobin’s q:

Answer 14

ratio between market value and replacement value of the same
physical assets

• Can help a firm better understand the intangible value of the firm

Question 15

• Tobin′s q =

Answer 15

(Market value of equity + market value of liabilities) / (Book value of equity + book value of liabilities)

Question 16

Current Ratio =

Answer 16

Current Assets / Current Liabilites

Question 17

ACID TEST

Answer 17

leaves out inventories

and prepaid expenses from current assets

Question 18

Acid Test =

Answer 18

(Cash + Accounts Receivables) / Current Liabilities

Question 19

CAPITAL

Answer 19

money they provided in return for an equity stake which cannot be
recovered if the firm goes bankrupt

Question 20

Shareholder Returns =

Answer 20

∆ in stock price + dividends received

Question 21

The idea that all available information is reflected in a firm’s stock
price is called the

Answer 21

EFFICIENT-MARKET HYPOTHESIS

Question 22

MARKET CAPITALIZATION

Answer 22

captures the total dollar market value of a

companies outstanding shares

Question 23

Market Cap =

Answer 23

of Shares Outstanding x Share Price

Question 24

____ is the difference between a
buyer’s willingness to pay for a product or service and the total
cost to produce it

Answer 24

ECONOMIC VALUE CREATED

Question 25

• EVC =

Answer 25

V (customer’s willingness to pay) – C (cost to produce the good)

Question 26

Key differences between CONSUMER SURPLUS and

ECONOMIC VALUE CREATED

Answer 26

Maximizing consumer surplus increases SALES
• Maximizing EVC increases OVERALL VALUE and BUILDS COMPETITIVE
ADVANTAGES

Question 27

Limitations of EVC

Answer 27

• Capturing value of a good through the eyes of a consumer is difficult and
tedious
• Preferences vary by goods, brands, firms, etc
• Value changes based on changes in preferences, which can be frequent
and unpredictable
• To determine FIRM-LEVEL competitive advantage, must estimate the EVC
for ALL the products and services offered by the firm

Question 28

Balanced-Scorecard Approach

Answer 28

1. How do customers view us?
2. How do we create value?
3. What core competencies do we need?
4. How do shareholders view us?

Question 29

A TRIPLE BOTTOM LINE approach

Answer 29

emphasizes performance in
three (3) dimensions
• Economic performance (e.g., profitability, economic value, etc)
• Social performance (e.g., employees, customers, society, etc)
• Ecological performance (e.g., environmental sustainability, etc)

Question 30

___ detail a firm’s competitive tactics and
initiatives; stipulates how the firm conducts its business with
buyers, suppliers, and partners

Answer 30

BUSINESS MODELS

Question 31

Two (2) elements of a business model

Answer 31

• The firm’s CUSTOMER VALUE PROPOSITION for satisfying buyer wants
and needs at a perceived good value
• The firm’s PROFIT FORMULA sets out how the firm’s cost structure will allow
for acceptable profits given the pricing tied to its customer value
proposition

Question 32

• Razor-Razor Blade Model

Answer 32

initial product is often sold at a loss or even
given away for free in order to drive demand for COMPLEMENTARY
goods

Question 33

Subscription-Based Model

Answer 33

users pay for access to the product or service

whether they use it

Question 34

Pay-as-you-go Model

Answer 34

er only pays for the services he/she uses

Question 35

Freemium Model

Answer 35

the basic features of a product or service are

provided for free, but the user must pay for premium content