Deck 14: Strategic Cost Management and the Value Chain Domain

Question 1

The internal value chain is composed of the set of value-added activities within a particular organization.

Answer 1

True

Question 2

Each firm in an industry value chain vies for power not only with its customers but its suppliers.

Answer 2

True

Question 3

A divergent value chain is one where multiple players converge to one final channel to the customer.

Answer 3

False

Question 4

As compared to a convergent value chain, a divergent structure holds the potential for significant power on the part of a given supplier.

Question 5

Capacity utilization is one of the structural cost drivers that can be used to gain a competitive advantage in an industry.

Question 6

Scope is a measure of the degree of vertical integration a firm chooses.

Question 7

A company that maintains larger average inventories and outstanding accounts receivables balances than the other participants in its value chain will probably suffer low asset intensity.

Question 8

Because increased leverage imposes risk on a firm, it will reduce return on equity.

Question 9

Two companies that earn the same profit margin and maintain the same level of asset intensity will experience the same return on equity.

Question 10

MTH and Lionel are competitors in the market for model trains. Although Lionel once did, neither company now participates in the manufacture of the products they sell, nor does either sell through a retail channel. This indicates that the value chain for model trains has reached the point of de-integration.

Question 11

Companies in an industry value chain will work to strengthen the weakest link in the chain so that they can squeeze more value chain profit from that weakest link.

Question 12

Integrated supply chain management is most concerned with managing the trade-off between responsiveness and efficiency.

Question 13

The tactics chosen to manage its position in the supply chain will determine if a firm will be efficient or responsive.

Question 14

A firm that is attempting to be the lowest cost producer in its industry will find it relatively easy to meet large random fluctuations in demand from its customers.

Question 15

A firm with substantial idle capacity has chosen to be responsive in the "make" step of the supply chain.

Question 16

A linked set of companies that participate in the design, provision, and support of a product describes:

A) An industry value chain.
B) An oligopoly.
C) The internal value chain.
D) The five forces of competition.

Question 17

Of the following, which is not one of Porter's five forces of competition?

A) Suppliers.
B) New entrants.
C) Substitutes.
D) Regulators.

Question 18

Apex Corporation controls the sole source of a critical raw material required to produce ACE inhibitors, one of the types of drugs used to control blood pressure. The other major class of blood pressure medications, called beta-blockers, do not require the material supplied by Apex. In its industry value chain, which of the five forces places a limit on Apex's competitive advantage?

A) New entrants into the market as producers of ACE inhibitors.
B) Raw material substitutes.
C) Customers/patients able to use beta-blockers to control blood pressure.
D) Other raw material suppliers.

Question 19

An industry value chain that contains numerous suppliers of raw materials and semifinished components is best described as:

A) Convergent.
B) Internal.
C) External.
D) Divergent.

Question 20

When a single supplier of a product or service exists, that firm will possess greater power if it is part of:

A) A divergent value chain.
B) An oligopolistic value chain.
C) A convergent value chain.
D) An internal value chain.

Question 21

Northern Exposure, Inc., produces a full line of winter outerwear, which it markets directly to customers over the internet. Until recently, its web-based advertising has been produced by Andrews Images. In the hope of capturing a larger share of its value chain's profits, Northern Exposure has decided to construct its own photographic studio and digital processing facility to produce and distribute its web-based marketing materials. This expanded scope of its business illustrates the strategic use of:

A) A structural cost driver.
B) An executional cost driver.
C) A perceptual cost driver.
D) A value activity.

Question 22

Which of the following strategic choices represents an executional cost driver?

A) Scale.
B) Product line complexity.
C) An unusually efficient plant layout.
D) Perceived high-quality products.

Question 23

Strategic choices made regarding the size of a company, its degree of vertical integration, and the technology it employs fall into the category of:

A) Structural cost drivers.
B) Executional cost drivers.
C) Perceptual cost drivers.
D) Value propositions.

Question 24

A company that is only able to earn a small profit margin and achieve low asset intensity or turnover can still earn an adequate return on equity by:

A) Avoiding non-value-added activities.
B) Employing a high degree of leverage.
C) Establishing a monopoly position.
D) Relying on perceptual cost drivers.

Question 25

In its most recently completed quarter, HighRisk Limited reported total net assets of $20 billion and leverage of 500%. What amount of debt is included in HighRisk's capital structure?

A) $4 billion.
B) $100 billion.
C) $16 billion.
D) Can only be determined if profit margin and asset intensity are known.

Question 26

Recently Old Forge Company reported that it had earned a profit margin of 20% on sales of $10 million. Its net assets totaling $25 million were financed by equal amounts of debt and equity. What return on equity did Old Forge earn?

A) 16%
B) 8%
C) 40%
D) 20%

Question 27

Inchworm Construction Equipment Company maintains a very large investment in plant and equipment assets. Given the size of this investment, the firm experiences very low fixed asset turnover and the lowest asset intensity among its competitors. In order to compensate for this and earn an adequate return on equity, the company must:

A) Be the low cost producer in its industry.
B) Sell its construction equipment through multiple channels.
C) Earn a large profit margin and/or employ a high degree of leverage.
D) Reconfigure its value chain to become more divergent.

Question 28

Little Company is part of an industry value chain in which it has little competitive power. It has been forced to be responsive to both supplier and customer demands for timely delivery and cash payments on open accounts, and as a result experiences very low inventory and accounts receivable turnover. The company's low return on equity is probably most attributable to weak:

A) Leverage.
B) Profit margins.
C) Asset intensity.
D) Executional cost drivers.

Question 29

Simple Company reported the following: sales of $10 million; profit of $1.5 million; asset intensity of 40%; and leverage of 400%. What is Simple Company's return on assets?

A) 24%
B) 6%
C) 1.5%
D) 15%

Question 30

Simple Company reported the following: sales of $10 million; profit of $1.5 million; asset intensity of 40%; and leverage of 400%. What is Simple Company's return on equity?

A) 24%
B) 6%
C) 1.5%
D) 15%

Question 31

Simple Company reported the following: sales of $10 million; profit of $1.5 million; asset intensity of 40%; and leverage of 400%. What amount of total net assets did Simple Company's report?

A) $40 million
B) $600,000
C) $4 million
D) $25 million

Question 32

A firm's ability to create and capture value in the marketplace is effectively measured by:

A) Its degree of leverage.
B) Its asset intensity.
C) The sum of its long-term debt and the value of its outstanding shares of stock.
D) Its throughput.

Question 33

SmoothNTasty, Inc., is a leading producer of high-quality Greek yogurt. The company originally maintained its own dairy farms as the sole source of milk used in its yogurt products. It has recently sold all of its interests in these dairy farms and now focuses on the production of yogurt. The value chain of which SmoothNTasty is a part has experienced:

A) De-integration.
B) Integration.
C) Value chain squeeze.
D) Value migration.

Question 34

Circuit Techniques, Inc., specialized in the production of components for electrical fuse boxes. The company was forced into bankruptcy and liquidation following continuous demands for price concessions from its major customer, which was in turn under price pressure from the dominant retailer in the value chain for electrical products. Circuit Techniques, Inc., was a victim of:

A) De-integration.
B) Integration.
C) Value chain squeeze.
D) Value migration.

Question 35

Beta Company has entered into an arrangement with Big Auto, Inc., under which Beta will supply automotive seating to Big Auto's assembly plant on a just-in-time basis. In order to respond to Big Auto's fluctuating demands, Beta must maintain substantial inventories of raw materials and adequate idle capacity. Beta has:

A) Sacrificed efficiency for responsiveness.
B) Sacrificed responsiveness for efficiency.
C) Experienced value chain integration.
D) Experienced value chain reintegration.

Question 36

Value migration or the flow of market value from one firm to another in the industry value chain occurs over time because:

A) Virtual integration has taken place across the value chain.
B) All firms in the value chain have cooperated to strengthen the weakest link.
C) One firm does a better job of serving customers than others.
D) One firm minimizes its channel costs.

Question 37

Penzey's Spices sells its products through two channels: direct sales through its internet website and sales through its own retail outlets. Of the following channel costs, which is likely to be larger for Penzey's internet channel as compared to its retail channel?

A) Channel management and maintenance.
B) Advertising and marketing.
C) Sales staff.
D) Trade show costs.

Question 38

A company that has decided to emphasize efficiency over responsiveness will find that it is unable to:

A) Meet unexpected fluctuations in demand for its products.
B) Make use of idle capacity to fill a large unexpected order from a new customer.
C) Take advantage of a relatively expensive location near key sources of supply to shorten its cycle time.
D) All of the above.

Question 39

In the "make" phase of supply chain management, the SCOR model would classify a company as responsive if:

A) It maintains significant idle capacity.
B) It has relatively few SKUs.
C) It sells across a single channel.
D) It maintains minimal days' supplies of raw materials.

Question 40

Of the following, which is not one of the five major supply chain drivers?

A) New entrants.
B) Production.
C) Location.
D) Information.

Question 41

Dover Industries, Inc., is a major supplier of components to Ford Motor Company. In a recently completed year, Dover Industries, Inc., reported the following (all amounts are in millions):
Required:
a. Compute Dover Industries' profit margin, asset intensity, and leverage.
b. Use the results from part (a) to compute the company's return on equity.

Question 42

Dover Industries, Inc., is a major supplier of components to Ford Motor Company. In a recently completed year, Dover Industries, Inc., reported the following (all amounts are in millions):
Required:
a. Compute the company's days of inventory on hand.
b. Based on your answer to part (a), does Dover Industries appear to emphasize responsiveness or efficiency in managing its supply chain?

Question 43

Crisps, Inc., is a manufacturer of potato chips. Its value chain partners and information relating to the potato chip market is given in the table below.
Required:
a. Compute the profit on sales, sales per assets, and return on assets for each firm in the value chain.
b. Which firm has the best position in the value chain? Explain.