CHAPTER 8 QUIZ

Companies that pursue related diversification are able to create a diversification premium because they: a) are able to leverage time compression economies. b) can operate beyond the minimum efficient scale. c) are able to increase value due to economies of scope. d) can reduce the value gap created by its products.

c) are able to increase value due to economies of scope.

Which of the following best illustrates forward vertical integration? a) A firm that manufactured and sold car engines to major automobile companies launches its own line of cars. b) A chain of ice cream parlors launches a brand of toys and accessories for children. c) A multinational coffee chain sources its coffee beans from plantations in Brazil and Vietnam. d) A designer shoe company that previously purchased leather from external suppliers establishes its own leather tannery.

a) A firm that manufactured and sold car engines to major automobile companies launches its own line of cars.

_____, which are incurred when pursuing a related-diversification strategy, are a function of the number, size, and types of businesses that are linked to one another. a) Coordination costs b) Fixed costs c) Agency costs d) Network costs

a) Coordination costs

Win Goods Inc. is a large multinational conglomerate. As a single business unit, the company's stock price is estimated to be $200. However, by adding the actual market stock prices of each of its individual business units, the stock price of the company as one unit would be $300. What is Win Goods experiencing in this scenario? a) Diversification discount b) Diversification premium c) Experience-curve effects d) Economies of scale

a) Diversification discount

Hitoro Inc. developed a superior touchscreen technology for tablet computers that enabled multiple users to operate the screen at the same time. The technology was leased to Revox Inc., a consumer electronics company, for five years. Which of the following alternatives to integration does this best illustrate? a) Licensing b) Franchising c) Crowdsourcing d) Bootlegging

a) Licensing

A primary advantage of organizing economic activity within firms is the: a) ability to coordinate highly complex tasks to allow for specialized division of labor. b) low administrative costs because of reduced bureaucracy. c) eradication of the principal-agent problem. d) high-powered incentive to work as salaried employees for an existing firm.

a) ability to coordinate highly complex tasks to allow for specialized division of labor.

A _____ is best defined as a company that combines two or more strategic business units under one overarching corporation and follows an unrelated diversification strategy. a) conglomerate b) single-business firm c) parent company d) subsidiary

a) conglomerate

Today, many companies use PeopleSoft and EDS to avoid maintaining a human resource management system. By doing this, these firms are: a) engaging in strategic outsourcing. b) increasing their level of vertical integration. c) offshoring their core activities. d) engaging in unrelated diversification.

a) engaging in strategic outsourcing.

Each stage of the vertical value chain typically represents a distinct _____ in which a number of different firms are competing. a) industry b) functional department c) economy d) customer segment

a) industry

_____ is best described as a situation in which one party is more informed than another, because of the possession of private information. a) Information governance b) Information asymmetry c) Information deregulation d) Information piracy

b) Information asymmetry

Managers in a firm hired to improve the firm's profitability and ultimately the shareholders' value will add to the overall costs if they pursue their own self interests. What does this best illustrate? a) Diseconomies of scale b) Principal-agent problem c) Experience-curve effects d) Information asymmetries

b) Principal-agent problem

Neon Electronics Inc. sourced touchscreens required for its tablet computers, cell phones, and televisions from a manufacturer in China. But the demand for such components was high globally, and the supplier could not meet the quality standards of Neon Electronics. Thus, Neon Electronics decided to set up its own unit to develop and manufacture the required touchscreens. What does this scenario best illustrate? a) Crowdsourcing b) New product development c) Backward vertical integration d) Conglomerate diversification

c) Backward vertical integration

Silver Weave Inc., an apparel company, operates through a business model in which individuals can buy the rights to set up Silver Weave stores and sell the company's merchandise in return for a lump sum fee at the beginning of the contract and a percentage of revenues every month. The owners of the stores have to stock the collection approved from the company's headquarters and also maintain consistent customer service as expected in its flagship store. Which of the following alternatives to integration does this best illustrate? a) Crowdsourcing b) Credit Rationing c) Franchising d) Bootstrapping

c) Franchising

____ are best described as unique assets with high opportunity costs that have significantly more value in their intended use than in their next-best use. a) Cost drivers b) Value drivers c) Specialized assets d) Liquid assets

c) Specialized assets

Grace Apparel Inc. has decided to procure fabrics required for its garments from external suppliers instead of maintaining its own dyeing and weaving facilities. How will this decision affect the firm? a) The firm will be protected against the principal-agent problem. b) The firm's administrative costs will be low because of necessary bureaucracy. c) The firm will have more flexibility in purchasing and comparing prices of goods and services. d) The firm will have high-powered incentives, such as hourly wages and salaries.

c) The firm will have more flexibility in purchasing and comparing prices of goods and services.

_____ is best described as a firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs. a) Venture capitalism b) Bootlegging c) Vertical integration d) Crowdsourcing

c) Vertical integration

Real Goods Inc. is a large conglomerate. The company's beverages strategic business unit (SBU) has been recognized as a cash cow, and its tobacco SBU has been categorized as a dog. Which of the following can be inferred from this scenario? a) While the tobacco SBU operates in a low-growth market, the beverages SBU operates in a high-growth market. b) The management of the company should use the cash inflow from the beverages SBU and invest it in the tobacco SBU. c) While the market share of the company in the beverages industry will be high, the market share in the tobacco industry will be low. d) The tobacco SBU should follow a backward integration strategy, and the beverages SBU should pursue a forward integration strategy.

c) While the market share of the company in the beverages industry will be high, the market share in the tobacco industry will be low.

A(n) _____ is best used to depict the transformation of raw materials into finished goods and services along distinct vertical stages. a) encrypt b) chain of command c) industry value chain d) scatter chart

c) industry value chain

WJ Group Inc., a large multinational conglomerate, had begun to experience declining revenues over the years. The top management at the headquarters of the company decided that it was important for the company to avoid deviating from its core competencies. Thus, a few of the company's key businesses like energy, telecommunications, and automobiles were centralized, giving the top management more control over them. Also, relatively newer businesses like beverages and food processing were divested. In this scenario, WJ Group is involved in: a) reverse engineering. b) benchmarking. c) restructuring. d) Crowdsourcing.

c) restructuring.

Decisions relating to "what stages of the industry value chain to participate in" determine a firm's: a) level of diversification. b) geographic scope. c) vertical integration. d) absorptive capacity.

c) vertical integration.

Which of the following alternatives on the make-or-buy continuum allows for most integration? a) Short-term contracting b) Joint ventures c) Licensing d) Parent-subsidiary relationship

d) Parent-subsidiary relationship

How do firms benefit from vertical integration? a) Vertical integration allows firms to reduce organizational complexity and administrative costs. b) Firms that vertically integrate will have increased strategic flexibility when faced with technological changes. c) Firms that vertically integrate do not have to make transaction-specific investments. d) Vertical integration allows firms to increase operational efficiencies through improved coordination of adjacent value chain activities.

d) Vertical integration allows firms to increase operational efficiencies through improved coordination of adjacent value chain activities.