Midterm Review BAD 4013 Exam
Questions With Verified Answers
Strategy - ANSWER - firm's theory about how to gain competitive advantage
- mechanism by which firms aim to exploit core competencies
- decisions made in order to obtain outcomes consistent with mission/goals
Key Objectives of the Firm - ANSWER 1. sustainable competitive advantage
2. above-average returns
*strategic objectives can be more general, but all must be measurable
Sustainable Competitive Advantage - ANSWER - firm implements a value-creating
strategy that other companies:
1. are unable to duplicate
2. find too costly to imitate
- ability to create more economic value than competitors
- most dangerous competitors are those that are the most like you
Characteristics of Competitive Advantage - ANSWER 1. provides superior value to
customers
2. hard to imitate
3. enhances one's ability to respond to changes in the environment
Above-Average Returns - ANSWER - returns in excess of what an investor expects to
earn from another investment with a similar amount of risk
- be the more attractive option for investors
- figure out where to invest you money where you will get the best returns for the
comparable risk level
- measured through WACC
Competitive Disadvantage - ANSWER - aspect of your business operations that works
against your ability to cover the cost of your capital
- possible to survive as a firm
- resource that the firm is leveraging is not actually valuable
ex. perception that McDonald's is unhealthy
Economic Performance - ANSWER - ability for the firm to make money
- firm will eventually go out of business
,- POOR: earning less than the cost of capital
- not able to attract new capital
Accounting Performance - ANSWER - you're still making a profit, but it's below the
industry average
- POOR: won't go out of business immediately because you may be investing in
something that will pay off long-term (ex. new technology)
- won't be able to attract new:
1. investors
2. competitors into the market
- applies to: ROA, ROS, ROE, EPS
Economic v. Accounting Performance - ANSWER - economic performance outlines your
ability to cover your costs whereas accounting performance is the outward appearance
at a snapshot of your firm
- you can come back from poor accounting performance, but will eventually go out of
business with poor economic performance
BCG Matrix - ANSWER 1. question marks
2. stars
3. dogs
4. cash cows
AXES: market growth & market share
Question Marks - ANSWER HIGH market growth
LOW market share
- risky investments because they have low market share
- will go one way or the other (become stars or divest)
Stars - ANSWER HIGH market growth
HIGH market share
- increase your investments here
- rapid growth and expansion
- ride these to tons of money
Dogs - ANSWER LOW market growth
LOW market share
- bad investments
Cash Cows - ANSWER LOW market growth
HIGH market share
- consistent money makers that won't advance much, but will make you lots of money
- use these reliable funds to help finance question marks and stars
IO Model - ANSWER Industrial Organization Model
, - industry in which the firm chooses to compete will have a stronger influence on the
firm's performance than the choices made by managers
- how the firm will reach above-average returns
- environment-centric view of business performance
- nature v. NURTURE
- basis for Porter's Five Forces Model
Underlying Assumptions of IO Model - ANSWER 1. external environment imposes
pressure/constraints
2. most firms in the industry control similar resources
3. resources are highly mobile across firms
4. decision-makers are rational AND acting in the firm's best interest
Elements of IO Model - ANSWER **combined, they all lead to above-average returns
1. external environment
2. attractive industry
3. strategy formulation
4. assets and skills
5. strategy implementation
VRIO Model (resource based view) - ANSWER - each organization is a collection of
unique resources and capabilities that is the foundation of its strategy and is the primary
source of its returns
- focus on core competencies
- to provide an advantage, the resources must be:
1. valuable
2. rare
3. costly to imitate
4. organzational
- NATURE v. nurture
Elements of VRIO Model - ANSWER **combined, they all lead to above-average
returns
1. resources
2. capability
3. competitive advantage
4. attractive industry
5. strategy formation/implementation
Corporate-Level Strategy - ANSWER - deciding what markets the company should
operate in that
- look at how to leverage the core competencies of the firm into different industries
ex. diversification, alliances, mergers
Business-Level Strategy - ANSWER - how the company will compete in a single market
ex. cost leadership, differentiation
Questions With Verified Answers
Strategy - ANSWER - firm's theory about how to gain competitive advantage
- mechanism by which firms aim to exploit core competencies
- decisions made in order to obtain outcomes consistent with mission/goals
Key Objectives of the Firm - ANSWER 1. sustainable competitive advantage
2. above-average returns
*strategic objectives can be more general, but all must be measurable
Sustainable Competitive Advantage - ANSWER - firm implements a value-creating
strategy that other companies:
1. are unable to duplicate
2. find too costly to imitate
- ability to create more economic value than competitors
- most dangerous competitors are those that are the most like you
Characteristics of Competitive Advantage - ANSWER 1. provides superior value to
customers
2. hard to imitate
3. enhances one's ability to respond to changes in the environment
Above-Average Returns - ANSWER - returns in excess of what an investor expects to
earn from another investment with a similar amount of risk
- be the more attractive option for investors
- figure out where to invest you money where you will get the best returns for the
comparable risk level
- measured through WACC
Competitive Disadvantage - ANSWER - aspect of your business operations that works
against your ability to cover the cost of your capital
- possible to survive as a firm
- resource that the firm is leveraging is not actually valuable
ex. perception that McDonald's is unhealthy
Economic Performance - ANSWER - ability for the firm to make money
- firm will eventually go out of business
,- POOR: earning less than the cost of capital
- not able to attract new capital
Accounting Performance - ANSWER - you're still making a profit, but it's below the
industry average
- POOR: won't go out of business immediately because you may be investing in
something that will pay off long-term (ex. new technology)
- won't be able to attract new:
1. investors
2. competitors into the market
- applies to: ROA, ROS, ROE, EPS
Economic v. Accounting Performance - ANSWER - economic performance outlines your
ability to cover your costs whereas accounting performance is the outward appearance
at a snapshot of your firm
- you can come back from poor accounting performance, but will eventually go out of
business with poor economic performance
BCG Matrix - ANSWER 1. question marks
2. stars
3. dogs
4. cash cows
AXES: market growth & market share
Question Marks - ANSWER HIGH market growth
LOW market share
- risky investments because they have low market share
- will go one way or the other (become stars or divest)
Stars - ANSWER HIGH market growth
HIGH market share
- increase your investments here
- rapid growth and expansion
- ride these to tons of money
Dogs - ANSWER LOW market growth
LOW market share
- bad investments
Cash Cows - ANSWER LOW market growth
HIGH market share
- consistent money makers that won't advance much, but will make you lots of money
- use these reliable funds to help finance question marks and stars
IO Model - ANSWER Industrial Organization Model
, - industry in which the firm chooses to compete will have a stronger influence on the
firm's performance than the choices made by managers
- how the firm will reach above-average returns
- environment-centric view of business performance
- nature v. NURTURE
- basis for Porter's Five Forces Model
Underlying Assumptions of IO Model - ANSWER 1. external environment imposes
pressure/constraints
2. most firms in the industry control similar resources
3. resources are highly mobile across firms
4. decision-makers are rational AND acting in the firm's best interest
Elements of IO Model - ANSWER **combined, they all lead to above-average returns
1. external environment
2. attractive industry
3. strategy formulation
4. assets and skills
5. strategy implementation
VRIO Model (resource based view) - ANSWER - each organization is a collection of
unique resources and capabilities that is the foundation of its strategy and is the primary
source of its returns
- focus on core competencies
- to provide an advantage, the resources must be:
1. valuable
2. rare
3. costly to imitate
4. organzational
- NATURE v. nurture
Elements of VRIO Model - ANSWER **combined, they all lead to above-average
returns
1. resources
2. capability
3. competitive advantage
4. attractive industry
5. strategy formation/implementation
Corporate-Level Strategy - ANSWER - deciding what markets the company should
operate in that
- look at how to leverage the core competencies of the firm into different industries
ex. diversification, alliances, mergers
Business-Level Strategy - ANSWER - how the company will compete in a single market
ex. cost leadership, differentiation
