BUSINESS STRATEGY FINAL EXAM
QUESTIONS WITH CORRECT
ANSWERS RATED A+
Strategy - CORRECT ANSWERSplan of action, designed on the basis of an understanding of the
firm and its environment, that seeks to achieve a specific competitive advantage through the
use of firm resources
competitive advantage - CORRECT ANSWERSoutcome that arises when a firm is able, for a
significant amount of time, to accrue a larger divergence between average costs and willingness
to pay compared to its competitors
4 "P"s of Strategy - CORRECT ANSWERSPlan, Position, Pattern, Perception
How is Strategy a Plan? - CORRECT ANSWERSconscious outcome of a rational assessment of
resources, sectors, and time
How is Strategy a Position? - CORRECT ANSWERSHelps to create a competitive advantage
because it designs the best use of resources inside a sector: it understands the interplay
between firms and environment
How is Strategy a Pattern? - CORRECT ANSWERStool to create consensus and leadership inside
organization; decisions taken from a good strategy are rarely criticized; it also defines how to
compete in a market
How is Strategy a Perception? - CORRECT ANSWERSfights inertia in firms because it moves the
organization towards new forms of competitive advantage to facilitate adaptation
When is Value Created? - CORRECT ANSWERSwhen the maximum customer's willingness to pay
is greater than the average cost the firm sustains to produce the product
,Where is Value Captured by Firms? - CORRECT ANSWERSIn the difference between the average
costs to produce and the market price (the margin)
Twofold effect of Market Price - CORRECT ANSWERSincreases demand but reduces margins and
vice versa
ROI - CORRECT ANSWERSEBIT/[FA+(CA-CL)]
ROA - CORRECT ANSWERSEBIT/TA
ROE - CORRECT ANSWERSNet Income/Equity
Decomposition of ROI - CORRECT ANSWERSROS x Capital Turnover
ROS - CORRECT ANSWERSEBIT/Sales; ability to return a profit on sales made (margin aka value
captured)
Capital Turnover - CORRECT ANSWERSSales/[FA+(CA-CL)]; ability to generate sales from the
capital invested (increasing WTP aka value creation)
WACC - CORRECT ANSWERS(D/D+E) x i + (E/D+E) x d; aka percent debt x i + percent equity x d -
this measure explains how economic activities of the firm create value given the cost of capital
sources, debt, and equity
Current Ratio - CORRECT ANSWERSCA/CL
, Quick Ratio - CORRECT ANSWERSCA-Inventories/CL **if much higher than the current ratio
there could be a problem with selling ability
Market Value - CORRECT ANSWERSshare price x number of shares outstanding
When Markets are efficient, what does Market Value represent? - CORRECT ANSWERSall future
cash flows of the company at their net present value
Tobin's q - CORRECT ANSWERSTotal market value of a firm/book value of the company
(P x N of shares + Debt - WC)/(FA + Inventory) ; if > 1, the firm's value is greater than its tangible
assets and therefore the firm holds intangible value
SCP Paradigm - CORRECT ANSWERSstructure, conduct, performance paradigm; if you
understand the sector (S), you can derive the best position and behavior of a company (C) in
order to explain the performance it accrues (P)
Sector Characteristics are responsible for.... - CORRECT ANSWERSlevel of value creation
Firm Position is responsible for... - CORRECT ANSWERSlevel of value capture
Porter's 5 Forces - CORRECT ANSWERS1. actual competition
2. future competition
3. power of suppliers
4. power of buyers/customers
5. presence of substitutes and complements
C2, C3, C4 - CORRECT ANSWERSaccrued sums of the market shares of the top two, three, and
four largest firms in the sector
QUESTIONS WITH CORRECT
ANSWERS RATED A+
Strategy - CORRECT ANSWERSplan of action, designed on the basis of an understanding of the
firm and its environment, that seeks to achieve a specific competitive advantage through the
use of firm resources
competitive advantage - CORRECT ANSWERSoutcome that arises when a firm is able, for a
significant amount of time, to accrue a larger divergence between average costs and willingness
to pay compared to its competitors
4 "P"s of Strategy - CORRECT ANSWERSPlan, Position, Pattern, Perception
How is Strategy a Plan? - CORRECT ANSWERSconscious outcome of a rational assessment of
resources, sectors, and time
How is Strategy a Position? - CORRECT ANSWERSHelps to create a competitive advantage
because it designs the best use of resources inside a sector: it understands the interplay
between firms and environment
How is Strategy a Pattern? - CORRECT ANSWERStool to create consensus and leadership inside
organization; decisions taken from a good strategy are rarely criticized; it also defines how to
compete in a market
How is Strategy a Perception? - CORRECT ANSWERSfights inertia in firms because it moves the
organization towards new forms of competitive advantage to facilitate adaptation
When is Value Created? - CORRECT ANSWERSwhen the maximum customer's willingness to pay
is greater than the average cost the firm sustains to produce the product
,Where is Value Captured by Firms? - CORRECT ANSWERSIn the difference between the average
costs to produce and the market price (the margin)
Twofold effect of Market Price - CORRECT ANSWERSincreases demand but reduces margins and
vice versa
ROI - CORRECT ANSWERSEBIT/[FA+(CA-CL)]
ROA - CORRECT ANSWERSEBIT/TA
ROE - CORRECT ANSWERSNet Income/Equity
Decomposition of ROI - CORRECT ANSWERSROS x Capital Turnover
ROS - CORRECT ANSWERSEBIT/Sales; ability to return a profit on sales made (margin aka value
captured)
Capital Turnover - CORRECT ANSWERSSales/[FA+(CA-CL)]; ability to generate sales from the
capital invested (increasing WTP aka value creation)
WACC - CORRECT ANSWERS(D/D+E) x i + (E/D+E) x d; aka percent debt x i + percent equity x d -
this measure explains how economic activities of the firm create value given the cost of capital
sources, debt, and equity
Current Ratio - CORRECT ANSWERSCA/CL
, Quick Ratio - CORRECT ANSWERSCA-Inventories/CL **if much higher than the current ratio
there could be a problem with selling ability
Market Value - CORRECT ANSWERSshare price x number of shares outstanding
When Markets are efficient, what does Market Value represent? - CORRECT ANSWERSall future
cash flows of the company at their net present value
Tobin's q - CORRECT ANSWERSTotal market value of a firm/book value of the company
(P x N of shares + Debt - WC)/(FA + Inventory) ; if > 1, the firm's value is greater than its tangible
assets and therefore the firm holds intangible value
SCP Paradigm - CORRECT ANSWERSstructure, conduct, performance paradigm; if you
understand the sector (S), you can derive the best position and behavior of a company (C) in
order to explain the performance it accrues (P)
Sector Characteristics are responsible for.... - CORRECT ANSWERSlevel of value creation
Firm Position is responsible for... - CORRECT ANSWERSlevel of value capture
Porter's 5 Forces - CORRECT ANSWERS1. actual competition
2. future competition
3. power of suppliers
4. power of buyers/customers
5. presence of substitutes and complements
C2, C3, C4 - CORRECT ANSWERSaccrued sums of the market shares of the top two, three, and
four largest firms in the sector
