Which of the following ratio could help the procurement manager to make the right decision?

When a procurement manager considers a substitution, the number and nature of additional func-tions that substitute provides should be taken into account carefully.

Which of the following ratio could help the procurement manager to make the right decision?
A . Value to price ratio
B. Price to Earnings ratio
C. Reserve requirement ratio
D. Price to book value ratio

View Answer

Answer: A

Explanation:

One product substitutes for another if it offers buyers an inducement to switch that exceeds the cost or overcomes the resistance to doing so. A substitute offers an inducement to switch if the substitute provides the buyer with more value relative to its price than the product currently being used. There is always some cost of switching to a substitute because of the disruption and potential reconfiguration of buyer activities that must result, however. The threat of a substitute will vary depending on the size of the inducement relative to the required switching costs.

In addition to relative value to price and switching cost, the pattern of substitution is influenced by what I term the buyer’s propensity to switch. Faced with equivalent economic inducements for substitution, different buyers will often evaluate substitution differently.

The threat of substitution, then, is a function of three factors:

• The relative value/ price of a substitute compared to an industry’s product

• The cost of switching to the substitute

• The buyer’s propensity to switch

Porter, Michael E.. Competitive Advantage: Creating and Sustaining Superior Performance (p. 278). Free Press. Kindle Edition.

The price-to-book ratio compares a company’s market value to its book value. The market

value of a company is its share price multiplied by the number of outstanding shares. The book value is the net assets of a company.

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

The reserve ratio is the portion of reservable liabilities that commercial banks must hold onto, rather than lend out or invest. This is a requirement determined by the country’s central bank, which in the United States is the Federal Reserve. It is also known as the cash reserve ratio.

LO 2, AC 2.2