chapter 7

The main concepts to determine the scope of a firm's activities are:

All of the above

The existence of economies of scope are likely to lead a company to:

Expand the scope of its activities in some relevant way

"Economies of scope" is a more modern expression to replace the old-fashioned term "economies of scale"

False

"How profitable do we want to be?" is the starting-point of corporate strategy.

False

"The cost of corporate complexity" refers to the fact that firms have to pay managers of complex businesses more money.

False

A franchise agreement is an example of an arm's length contract.

False

A major argument against diversification is that it's more efficient for shareholders to hold diversified share portfolios, than to invest in diversified companies

False

Backward vertical integration gives a company far more power over the supplier. This is a type of high-powered incentive.

False

Cash-rich companies in low-growth, declining industries have to diversify to avoid having to pay huge costly dividends to shareholders.

False

If the transaction costs associated with buying in a product or service from the market costs more than the firm providing this internally, then the firm will outsource.

False

Michael Porter suggested that the main indicator that diversification would create value is if the chosen industry is attractive.

False

Michael Porter suggests that one test of whether a diversification makes sense is whether the managers will be better-off as a result.

False

The most sensible corporate strategy is to expand the scope of activities the company is involved in over time.

False

There are 3 types of diversification; related, unrelated and concentric.

False

The most often cited benefits of diversification are:

Growth, risk reduction and value creation

The managers of firms in low-growth, cash-generative industries often opt for diversification because:

Low growth does not look good for managers with an eye on their next job

A strategy of unrelated diversification is:

Not always as unrelated as it may seem e.g. the businesses may share some common attributes which can be exploited

Adam Smith, the famous economist, called the market mechanism:

The Invisible hand

What is the difference between a firm's geographical scope and its vertical scope?

The first describes the regions of the world where the firm is present and the second the stages of the industry value chain which the firm performs itself

Corporate strategy is concerned with:

The scope of a firm's activities

. "Brand extension" is also a way to achieve an "economy of scope", by using a good reputation built around one product to help sell a different product or service.

True

. A major problem with vertical integration is that a downturn in the end-market affects the entire integrated value-chain, representing possible unacceptably high risk.

True

An "arm's length" customer-supplier relationship is one where there is no element of the relationship which distorts the market price for a transaction.

True

An "economy of scope" is where a firm can spread the fixed cost of a common resource or a shared service across multiple products or activities.

True

An argument in favour of diversified companies with a balance of cash-generating and cash-devouring businesses is that it is cheaper and easier to balance capital requirements internally than to source capital in the financial markets.

True

Corporate strategy is concerned with 'where' a firm competes (in which industries it competes), while business strategy is concerned with 'how' a firm competes in a specific industry.

True

Empirical research indicates there are diminishing profit returns for diversification beyond some threshold.

True

Fifty years ago, vertical integration was a fashionable strategy, whereas nowadays the trend is towards de-integration

True

High transaction-specific investment between two industrial process stages is more likely to lead to vertical integration of these processes.

True

Highly diversified "conglomerate" firms have gone out of fashion in the past 30 years - except in emerging economies where they tend to dominate.

True

In recent years there has been a trend away from arm's length contracts towards long-term single-supplier contracts

True

In the past 25 years, there has been a huge trend away from vertical integration towards de-integration, outsourcing, and focusing on core competences.

True

Product scope, international scope, and vertical scope are part of corporate level strategy decisions.

True

The scope of which activities a firm chooses to conduct is largely a matter of transaction costs, economies of scope and the cost of corporate complexity.

True

The usual justification for a diversification strategy is a combination of growth, spreading risk and creating extra value.

True

Vertical integration secures a higher ratio of added-value to input-costs for a company.

True

Where there is volatile, uncertain demand for a resource, it is more likely that this resource will be outsourced, but not in all cases.

True

Whether a proposed diversification is related or not depends to some extent on judgement and context.

True

Corporate strategy is concerned with

Where a firm chooses to compete i.e. in which industries

A significant determining factor on whether a firm conducts an activity internally is:

Whether the transaction costs of buying in the activity in the market exceed the administrative cost of doing it themselves

Economies of scope and economies of scale both relate to lower average cost but:

a. Economies of scale refer to cost-advantage from higher volume of a single product b. Economies of scope refer to cost-advantage from spreading a common cost over multiple products

The starting point for strategy is usually:

a. What business(es) are we in?

Increased corporate complexity because of expanded scope is caused by:

all the above

. A company in a mature industry which is good at cost-reduction is exhibiting:

b. Potential for economy of scope based on organisational or managerial capability

Although economies of scope refer to spreading cost, this is not the case for brand extension:

d. It IS still true for brand extension, since creating and maintaining a brand does cost a lot e.g. in advertising

As a firm progresses, it is invariably the case that it expands its scope:

d. This is not true. Some firms narrow some aspects of their scope, or voluntarily even break up