Chapter 7: Value Creation and Strategic Information Systems

MULTIPLE CHOICE QUESTIONS

1. Why is an analysis of added value useful?

A. It helps managers in making decision of whether they should go ahead
with the initiative or not
B. It helps managers in evaluating how to respond to a competitor who took
the leadership position
C. It helps managers in computing a number for the value added by an
initiative envisioned
D. It helps managers in measure how much benefit their competitor is
drawing from an innovation, and what benefits are likely to accrue to them
if they choose to replicate the initiative.
E. All of the above

Correct Answer: A

2. Which of the following is “the minimum amount of money the suppliers are
willing to accept to provide the firm with the needed resources”?
A. Total Value Created
B. Customer Willingness to Pay
C. Firm Cost
D. Supplier Opportunity Cost
E. (e) None of the above

Correct Answer: D

3. Giving the following information, how much is the total value created?

Supplier Customer
opportunity willingness to
cost Firm cost pay

Value
continuum
$15 $25 $40

A. $10
B. $15
C. $25
D. $40
E. None of the above is correct

Correct Answer: C

4. Consider the following information, how much value does the customers
appropriate?
 Supplier Your Customer
opportunity Firm’s willingness to
cost cost Price pay

Value
continuum

$15 $25 $36 $40

A. $4
B. $10
C. $15
D. $25
E. $40

Correct Answer: A

5. The firm’s added value is measured as that portion of the value created in the
transaction involving the firm minus the total value that could be created if the
firm did not exist. When will the added value be zero even if the firm did not
take part in the exchange?
A. When the suppliers do not want to negotiate
B. When the competitors offer perfect substitutes of your products with
the same supplier opportunity cost
C. When the firm cost is equal to supplier opportunity cost
D. When customer willingness to pay is equal to price
E. Added value will never be zero

Correct Answer: B

6. Given the following information, how much is your firm’s added value?

Supplier Coffee Shop

Opportunity willingness to
Cost pay
Your
Firm
$13 $33

Competitor
Firm

$10 $28

A. $2
 B. $3
C. $4
D. $5
E. $6

Correct Answer: A

7. Which of the following statement(s) about strategic information systems

is(are) not true?
A. Strategic information systems are used to support or shape the competitive
strategy of a firm
B. Strategic information systems critical to business operations but that
do not generate added value
C. Strategic information systems enable the creation and appropriation of
value
D. Strategic information systems are defined in terms of the purpose they
serve
E. All of the above are true

Correct Answer: B

8. Which of the following statement(s) about strategic information systems is

(are) not true?
A. Strategic information systems are used to support or shape the competitive
strategy of a firm
B. Strategic information systems critical to business operations but that do
not generate added value
C. Strategic information systems enable the creation and appropriation of
value
D. Strategic information systems are defined in terms of the purpose they
serve
E. All of the above

Correct Answer: D

9. Which of the following is “the minimum amount of money the suppliers are
willing to accept to provide the firm with the needed resources”?
A. Total value created
B. Customer willingness to pay
C. Firm cost
D. Supplier opportunity cost
E. None of the above

Correct Answer: D

10. Which of the following is (are) ways to create value?

 A. Increase customer willingness to pay
B. Decrease supplier opportunity cost
C. Decrease firm costs
D. Price discounting
E. Only A and B

Correct Answer: E

11. We can confidently conclude that a firm has added value when:
A. It creates value for its customers
B. It has low supplier opportunity cost
C. It manages its firm cost aggressively
D. It does something unique and valuable
E. It appropriates less than its fair share

Correct Answer: D

12. With the terminology introduced in Chapter 7, a firm has a competitive

advantage when:
A. It creates significant value for its customers by providing outstanding
service
B. It has created added value
C. It manages its firm cost aggressively
D. It is able to negotiate harder than competitors
E. It appropriates

Correct Answer: B

13. Which of the following is “the maximum amount of money the firm’s
customers are willing to spend in order to obtain the firm’s product”?
A. Total value created
B. Customer willingness to pay
C. Firm cost
D. Supplier opportunity cost
E. None of the above

Correct Answer: B

14. Given your understanding of the definition of Added Value, when will your
firm’s added value be zero?
A. When the suppliers do not want to negotiate.
B. When the competitors offer a perfect substitute of your products and
have the same supplier opportunity cost
C. When the firm cost is equal to supplier opportunity cost
D. When customer willingness to pay is equal to price
E. Added value can never be zero
 Correct Answer: B

15. Given your understanding of the definition of value creation, who benefits?
A. The entire supply chain (except customers)
B. Tier-1 Suppliers only
C. The Firm only
D. Customers Only
E. Any or all of the suppliers and customers, or the firm itself

Correct Answer: E

TRUE/FALSE QUESTIONS

1. The analysis of added value is a formal mechanism that managers and analysts
use to evaluate how much of the value created in a transaction the firm can
appropriate in the form of profits.

Answer: True

2. Value appropriation is the process by which the total value created in the
transaction is split amongst all the entities who contributed to creating it.
Therefore, the total value created is the value appropriated by the firm.

Answer: False

3. Supplier opportunity cost is the maximum amount of money the suppliers are
willing to accept to provide the firm with the needed resources.

Answer: False

4. The total value created in the transaction is computed as the difference

between customer willingness to pay and supplier opportunity cost.

Answer: True

5. A brand new, well-built, and technologically advanced cell phone costs $125
to manufacture. However, it has a value of $0 unless someone is willing to
buy it.

Answer: True

SHORT ANSWER QUESTIONS

1. What are the two essential criteria for value to be created?

 Answer:
- When something novel is done
- When this “something novel” is deemed worthwhile by someone else (e.g., a
customer)

2. What are the two ways to create new value?

Answer:
- Increasing Customer Willingness to Pay
- Decreasing Supplier Opportunity Cost

3. What makes an initiative strategic and IT-dependent?

Answer: An initiative is strategic when the firm seeks to create and appropriate
new value. An initiative is IT-dependent when it cannot be feasibly created and
executed without the use of information technology at its core.

4-7: Consider the following information:

Supplier Your Customer

opportunity Firm’s willingness to
cost cost Price pay
Value
continuum

$15 $25 $36 $40

Compute the following:

4. Total value created

Answer: $25

5. Supplier share (i.e., amount of value appropriated by the supplier)

Answer: (i.e., amount of value appropriated by the supplier) $10

6. Your firm’s share (i.e., amount of value appropriated by your firm)

Answer: (i.e., amount of value appropriated by your firm) $11

7. Customer share (i.e., amount of value appropriated by the customer)

Answer: Customer share (i.e., amount of value appropriated by the customer) $4

 8. Consider the following information, how much value does the customers
appropriate? Please clearly explain your calculation process.

Supplier Your Customer

opportunity Firm’s willingness to
cost cost Price pay
Value
continuum

$15 $25 $36 $40

Answer: The difference between CWP and P therefore $4

9. Consider the following information, how much value does your firm
appropriate? Please clearly explain your calculation process.

Supplier Your Customer

opportunity Firm’s willingness to
cost cost Price pay

Value
continuum

$15 $25 $36 $40

Answer: The difference between FC and P therefore $11

ESSAY QUESTIONS

1. Offer an example, real or imagined, of firms in each of the following

situations (do not use the Wiztech case as the basis of your response).
Thoroughly explain your examples.

- The firm created Added Value by increasing Customer Willingness to Pay

- The firm created Added Value by reducing Supplier Opportunity Cost
- The firm increased Customer Willingness to Pay, but failed to create Added
Value.

Answers will vary

2. Offer an example of a firm that has increased Customer Willingness to Pay for
its products but failed to create Added Value. Thoroughly justify your
examples

Answers will vary