Deck 2: Goals, Values and Performance

Question 1

Stagecoach, AMP, and Deustche Telecom are partnering in joint ventures with:

A)Ford
B)DaimlerChrysler
C)Toyota
D)Virgin Group

Answer 1

D

Question 2

The Discounted Cash Flow method is function of three variables. Which are these three variables?

Answer 2

The DCF assesses the value of future projects. It uses historical data and relies also on assumptions about the future.
The three variables are
1-Return on the firm's invested capital ROIC
2-Weighted average cost of capital
3-Rate of growth of the operating profit

Question 3

What happens if the Key success factors of an industry are misunderstood? Does the disaggregation of the profit into components allow analysts to capture the causes of the misunderstanding and to fix it?

Answer 3

If KSF are misunderstood, bad consequences can occur because the strategic process may start on an incorrect basis. If the requirements to be successful are misunderstood the firm will probably not be able to satisfy them. If the firm uses a strong analytical capability, it may be able, afterwards, to identify the right KSF and fix the problem.
The disaggregation of profit into components provides analysts with a useful tool to identify the antecedents and determinants of profit. However, a qualitative analysis often proves to be necessary to capture the entirety of the phenomenon. Another approach, such as the Resource-based view or the Balanced score card can be extremely valuable as well.

Question 4

What could be called a "paradox of the profit motive"?

A)The fact that highly profitable companies continue to be highly profitable, even though they don't need to be
B)The fact that profitable firms might not see threats in their environments which lead to loss of profit in future
C)The fact that many successful firms are not driven purely by profit but by broader aims and goals
D)The fact that most of the world's largest firms from 50 years ago have since been bought or gone out of business

Question 5

Theory explains that corporate strategy and corporate social responsibility must be aligned for better performance and long term success within all the firm's constituencies. Do situations exist where they absolutely conflict in a win-loose game?

Question 6

Is it possible for managers to manipulate their firm's value for stakeholders' interests or for self-serving reasons?

Question 7

How can "motivation" partially explain the paradox of profit?

A)Sustained profits arise from co-ordinated efforts from a motivated workforce, most of whom, have significant non-monetary motives alone
B)Because top managers are not likely to be motivated to increase stockholders' return
C)Vision and mission are the most important drivers of success in an organization
D)Motivation does not explain at all the "paradox of profit"

Question 8

Enron and WorldCom are examples of:

A)Corporate scandals that have undermined the confidence into corporations and top managers' behaviors and have contributed to many improvements of firms' corporate governance systems
B)Corporate scandals where top managers had self-serving behaviors
C)Corporate scandals that are unavoidable in the business world and should not have any impact on corporate governance systems
D)a AND b

Question 9

Ford, Microsoft and Sony are illustrations of:

A)Successful firms whose driving forces are seldom financial
B)Successful firms which are present in technically-intensive industries and obsessed with profit
C)Not so successful firms which are facing economic and strategic down-turns
D)None of the above

Question 10

Although free cash flow is theoretically the best and most appropriate measure of net present value of the firm, in practice economic profit may be a better indicator of performance. Why?

Question 11

What is economic profit?

Question 12

EVA has transformed drink giant Diageo:

A)To measure performance
B)To allocate capital
C)To evaluate its managers
D)All of the above

Question 13

To what extent is a firm's value approach helpful in assessing performance from an external point of view?

Question 14

If a corporation is a living organization with social responsibilities, how would the players in the defense or tobacco industries justify their corporate goals, and their mission, and balance them with human values?

Question 15

To evaluate its strategies, PepsiCo has in the 1990s:

A)Built a very formal strategic planning system
B)Built a strong culture of cooperation and information sharing among top managers
C)Neglected to improve the strategic process, leading to losses and a degradation of its competitive position
D)Integrated value analysis into its strategic management process to assign targets and monitor its divisions performance

Question 16

A firm's vision and mission statement should be:

A)To satisfy its customers and be their supplier of choice
B)To become the "Best in Class"
C)A consistent, long-term sense of purpose which changes relatively little over the life of the firm
D)To create a better everyday life for people

Question 17

William Allen's two conceptions of the public corporation entity are:

A)The profit conception and the not-for-profit conception
B)The property conception and the social entity conception
C)The public conception and the state-owned conception
D)The service to customer conception and the shareholder conception

Question 18

What is the most important for strategic management: preserving stability or flexibility to allow change and adaptation?

Question 19

The "finance-inspired" theory of Real Options has emerged in strategic management and is used by strategy analysts. Why? What is its contribution?

Question 20

The set of shared values of the firm:

A)Represent the basic reason for the firm's continued existence as a viable organisation.
B)Can be manipulated and transformed easily
C)Are part of a qualitative world that is not relevant to strategic management
D)Are so difficult to assess and understand that it should not be the main focus of strategy analysts and decision-makers

Question 21

Examples of strategic positioning using the real option approach are:

A)Alliances, organizational capability improvement and ethical culture development
B)"Platform" (common underlying technology) investments, alliances and flexible organizational capability e.g. outsourcing
C)Just-in-Time and organizational development techniques and alliances
D)Development of a culture of cooperation, of information sharing and decentralization

Question 22

Accounting Profit can be defined as:

A)The ratio represented by accounting profit divided by economic profit
B)The difference between accounting profit and economic profit
C)The surplus of sales over direct costs available for distribution to the firm's five largest stakeholders
D)The surplus of revenues over costs available for distribution to the firm's owners

Question 23

Which ratio is closest to the "Return On Invested Capital (ROIC)" ratio?

A)Operating Margin
B)Return on Assets (ROA)
C)Return on Capital Employed (ROCE)
D)Net margin

Question 24

The assumption that the maximization of shareholder value equates to long-term maximization of profit, is justified partly by "simplicity" which means that:

A)The battle between many stakeholders requires common goals
B)to attempt to satisfy all multiple stakeholder goals would lead to managerial paralysis
C)It allows a firm to have a single objective
D)No one will ever be able to fully understand a firm's goals

Question 25

How best to express the fundamental objectives of the firm in terms of multiple stakeholders' interests is:

A)Not a real issue because profit maximization is the only fundamental objective
B)A real issue but the State's regulation role clarifies what is expected.
C)A real issue with much debate; however, profit maximization remains the primary objective
D)A real issue to be discussed and decided by politicians and which is beyond the scope of strategic management

Question 26

The assumption that maximization of shareholder value equates to long-term maximization of profit, is justified partly by "competition" which means that:

A)Strong competition erodes profit, so it is always best to operate from a position of strength (high profits) in order to survive the battle
B)Stronger competition emphasizes the need to create more value and more customer loyalty
C)Competition plays at the same level across rivals and geographies, and therefore requires profit maximization
D)Stronger competition increases pressures to expand into other markets thus leading to higher profits

Question 27

How can a firm set its performance goals?

A)By setting performance targets that are consistent with long term goals
B)By setting performance targets which relate to matters over which managers exert significant control
C)By setting performance targets that are linked to strategy
D)All of the above

Question 28

For product development, a "phases and gates" approach means that:

A)A firm's market is divided into specific phases separated by gates, which must be crossed to establish synergies across segments
B)A firm's product development relies on time segments that must be linked through gates
C)Product development is split into several consecutive phases, at the end of each the product is reassessed to continue ( go through the "gate" ) or discontinue
D)For each gate, the value of each product is assessed, and some are abandoned until there is only one left.

Question 29

Corporate Social Responsibility is:

A)Concerned about the environment and working for it
B)About maximising profit and issuing statements saying that the company believes in CSR
C)Genuinely recognising that a firm is answerable to all stakeholders, not just the shareholders.
D)Being willing to do something "environmentally friendly"

Question 30

A balanced scorecard is used for:

A)Assessing on a permanent basis the firm's performance
B)Evaluating the top managers' performance
C)Directing the future evolution of the firm
D)Attempting to involve lower management levels in understanding the link between their short-term targets and long-term strategic goals.

Question 31

Influential management theorists such as Friedman, Allen, Handy, Porter and Prahalad:

A)All agree that CSR is necessary according to a "moral imperative"
B)Disagree widely about the justification for CSR
C)Expect firms to implement CSR according to their theories
D)All of the above

Question 32

Viewing strategy as a portfolio of options rather than a portfolio of investments relies upon the central idea that:

A)Strategy needs to reconcile direction and flexibility in an uncertain environment
B)"All or nothing" strategic projects can be such costly mistakes as to be fatal to the firm
C)The advantage of an option follows from the potential to amend or stop a strategic project during the development process
D)All of the above

Question 33

Backward-looking performance measures include:

A)Cash Flows estimation
B)Previous years' accounting information
C)Accounting data from other firms
D)Regulations and rules regarding accounting in the firm's home country

Question 34

Proper interpretation of accounting ratios requires:

A)Comparison with competitors
B)Analysing trends over 5 years or so
C)An understanding of the business and industry
D)All of the above

Question 35

What is the fundamental problem of any type of performance management system?

A)It is purely to do with financial ratios
B)Middle and junior managers work towards short-term targets, which must always be consistent with long-term goals
C)Performance goals are short term, whereas performance targets need to be monitored over the long term
D)Managerial, politics, and personal interests need to be taken into account

Question 36

How could the assumption of profit maximization be justified?

A)The managers of a commercial firm who do not seek profit maximisation are more likely to lose their jobs, so only profit maximisers will survive.
B)Business scandals such as those that took place at Enron and Ahold prove the wrongness of this assumption; therefore nobody should try to justify it
C)It cannot be justified and is only an easy and common way to overcoming the difficulty to define the ultimate goal of the firm
D)It does not need to be justified because it is a basic assumption of business.

Question 37

To understand poor financial performance, one can identify the "drivers of performance". These drivers are:

A)Elements that emerge from the disaggregation of Return on Capital (for example using the DuPont formula)
B)The firm's cost of capital that encompasses the cost of equity and the cost of debt
C)Organizational capabilities at the top level management team
D)Ability of the firm to satisfy its customers and to grow on a permanent basis its stream of income

Question 38

ROIC, ROE and ROA are indicators that share the following important characteristic:

A)They are all ratios.
B)They are used in finance
C)They are complex to calculate
D)They compare a profit-related indicator of the value produced by the firm to the capital invested in the firm

Question 39

Michael Porter argues that corporate social responsibility should be addressed by a firm:

A)For reasons of reputation, customer expectations and anticipated legislation because it is ultimately in the firm's profit interests
B)Because there is a "moral imperative" to do so
C)The owners no longer "own" the firm in a meaningful sense.
D)Answers a and b

Question 40

Strategic appraisal essentially involves:

A)Bringing in a strategy consultant or "company doctor".
B)Assess the cash situation of the firm, then work out how to improve it.
C)Assess the current situation; how well is the present strategy doing? Then identify the causes of poor performance.
D)Look for obvious problems. If there aren't any, do nothing.

Question 41

The final step when applying enterprise value analysis to the evaluation of business strategies is:

A)The estimation of cash-flows generated by the business for the next 10 years
B)The identification of alternative strategies
C)The identification of the influence of each strategy on the firm's cost of capital
D)The ranking of the alternative strategies in descending order of NPV value

Question 42

Commerce creates value by:

A)Transforming physically products
B)Repositioning products in space
C)Repositioning products in time
D)Repositioning products in space and time

Question 43

The value added created by a firm is:

A)Nearly all distributed to the most powerful stakeholders, especially to members of the Board of directors
B)Completely reinvested into the expansion and improvement of its business activities
C)Appropriated exclusively by its owners
D)Distributed primarily to employees (wages), lenders (interest), government (taxes), and owners (dividends)

Question 44

The two concepts of profit used in the text are:

A)Normal return to capital and abnormal return of capital
B)Return to capital and economic profit
C)Accounting profit and economic profit
D)Accounting rent and economic rent

Question 45

For working out EVA, the cost of capital is calculated as:

A)Capital Employed multiplied by weighted average cost of capital (WACC)
B)Capital borrowed multiplied by the rate of interest
C)Capital provided by the firm's owners multiplied by the long term rate of dividends
D)The cost of a issuing new shares

Question 46

Value added can be defined as:

A)The difference between sales and expenses
B)The difference between the money value of a firm's output and inputs
C)The difference between sales and wages
D)The retained profits

Question 47

Value can be created by:

A)Production
B)Acquiring, turning around and selling off divisions or units
C)Commerce
D)Production and Commerce, or where appropriate by Commerce alone.

Question 48

Different profitability measures can lead to different performance ranking of firms. In particular, the following may affect the measure and ranking:

A)Use of strict Accounting Profit, or an adjusted figure such as EBITDA
B)The application of accounting standards that vary across countries
C)The time period over which performance is measured
D)All of the above

Question 49

The Discounted Cash Flow method is in general used for:

A)Calculating the long-run return on a specific large asset
B)Deciding whether to proceed with a specific investment project
C)Valuing an entire company
D)All of the above

Question 50

The value of a firm is defined as:

A)The sum of its free cash flows in each year, discounted at the firm's weighted average cost of capital (WACC)
B)The sum of its cash flows in each year, discounted at the firm's cost of capital
C)The sum of its free cash flows in each year, discounted at the average cost of debt
D)The sum of its cash flows in each year, discounted at the rate provided by the Federal Bank of each firm's home country on a permanent basis

Question 51

Profit maximization and value of the firm are two concepts which are:

A)Unrelated because cash flow is only one component of the firm's value
B)Closely linked because profit maximization translates into maximizing the firm's value
C)Unrelated because Net Present Value is used to assess the value of the firm
D)Closely linked because the value of a firm is the sum of its free cash flows in each year discounted at the firm's interest rate

Question 52

The concept of consumer surplus is defined as:

A)The difference between the maximum price the customer would have been prepared to pay and the actual price he pays
B)The customer satisfaction generated by the sale
C)The difference between the value of the firm's outputs and inputs
D)The portion of product a customer doesn't consume when he buys too much

Question 53

A key merit of long-term profit maximization as a prime goal is its:

A)Simplicity
B)Consistency over time
C)Tendency to optimise long-term survival
D)All of the above

Question 54

Business is fundamentally about:

A)Making customers satisfied and happy
B)Creating value
C)Satisfying all stakeholders
D)Respecting laws and regulations

Question 55

Maximizing enterprise value and maximizing shareholder value are linked because:

A)Enterprise value and shareholder value are the same thing
B)Shareholder value is calculated by adding debt and other non-equity financial claims to the DCF value of the firm
C)Shareholder value is calculated by subtracting debt and other non-equity financial claims from the enterprise value of the firm
D)It's obvious that they must be linked.

Question 56

EVA stands for:

A)Economic Value of Assets
B)Economic Value Approach
C)Economic Value Added
D)Enhanced Value of Assets

Question 57

To use the Discounted Cash Flow method, the future cash flows have to be forecasted. To determine these estimates management will :

A)Make justified assumptions about income, expenses, profit and all other significant figures
B)Use a benchmarking approach to align the firm's cash flows with its rivals' cash flows
C)Use accounting data and directly extrapolate from the past the future cash flows
D)Reach consensus by discussion with a group of external experts such as stockbrokers

Question 58

The field of "real option analysis" emerged in:

A)Industry economics
B)Corporate Finance and Investment Banking
C)The analysis of systems applied to economics
D)Strategic management

Question 59

To measure performance, economic profit appears superior to accounting profit because:

A)It requires a more demanding performance discipline for managers
B)It improves the allocation of capital across businesses
C)It increases benchmarking and competition within an industry
D)Answers a and b

Question 60

The text focuses on enterprise value rather than shareholder value primarily because:

A)The text is mainly concerned with generating value from how a firm is managed, not from how it is financed
B)They are theoretically different but in practice they are the same
C)The distinction between Debt and Equity is not always easy, and is not the focus of the text.
D)Both a and c

Question 61

Value refers to the estimated monetary worth of a product or asset

Question 62

The value of a firm less the Net Present Value of its debt equals the stock market value of its equity

Question 63

Most of the tools used by top decision-makers in the private-sector corporate world are based upon the central assumption of profit maximization

Question 64

Short term maximization of profit will always lead to long term profit maximization and, therefore, to the maximization of the firm's value

Question 65

In a broad sense, creating value includes two elements:

A)Create value for stakeholders, and then translate this value into low price for customers
B)Create strong customer loyalty, and then to progressively increase prices, thereby creating extra value
C)Create value for customers, and then extracting some of that customer value as profit
D)Create value for customers, and extract some of that customer value through strong motivation of employees

Question 66

Business strategy is primarily a quest for:

A)Attractive markets
B)Profit
C)Superior technology
D)Motivated and talented personnel

Question 67

One of the two ways of creating value from the firm is the so-called "Commerce" activity, which transforms raw material and intermediate products into final products

Question 68

The maximization of the value of the firm is primarily determined by:

A)The profits it earns over its lifetime
B)The market share it enjoys over its lifetime
C)The firm's compliance with state regulations
D)Its market capitalisation.

Question 69

The "real option" analysis developed in financial theory has applications in strategic management. The value of an "option" arises from the possibility to halt a project at various stages, while at the same time building on a head-start if you continue with it

Question 70

In practice, valuing firms by discounting economic profits leads to the same result as by discounting the firm's net cash flows

Question 71

A firm's Value added is the difference between the value of its outputs sold on a market (sales) and all the costs of the inputs employed by the firm to provide these outputs

Question 72

Estimating a firm's future free cash flows is an easy task

Question 73

To survive and generate profit over the long run requires a firm to:

A)Focus on revenue maximisation
B)Be responsive to evolving customer needs and to relevant changes in the wider political, economic, social and technological environment
C)Choose a low cost strategy and a differentiation strategy simultaneously
D)Put emphasis on its top managers' behaviors and ethics

Question 74

The notion that a firm is merely the private property of the shareholders is questioned as outdated by leading contemporary management theorists.

Question 75

The balanced scorecard method developed by Kaplan and Norton attempts to balance short term financial and operational goals against long term financial and strategic goals

Question 76

The DuPont formula is useful to diagnose reasons for poor performance by disaggregating the return on capital to identify the key "drivers of value"

Question 77

Building-in flexibility is a very important and valuable element in the corporate arena because investments can be halted but rarely reversed and strategic behaviors are very hard to alter.

Question 78

The inclusion of Corporate Social Responsibility along with the Profit Maximisation motive means that there is little need for further debate on "the role of the firm".

Question 79

The pursuit of profit above all else is likely to inspire all employees from the janitor to the CEO to work in co-operation and achieve the highest level of financial performance and shareholder value

Question 80

Many of the most successful firms were founded on and are driven by core motives other than pure profit