chapter 7

Corporate strategy is concerned with: a. The scope of a firm's products b. The scope of a firm's activities c. The scope of a firm's structure and corporate governance system d. All of the above

(B)

Corporate strategy is concerned with: a. Where a firm chooses to compete i.e. in which industries b. How a firm chooses to compete in a specific industry c. Why a firm chooses to compete or not d. Answers a and b

(a)

The difference between a firm's geographical scope and its vertical scope is: a. 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 b. The first describes the number of countries in which the firm operates and the second describes the number of businesses in which the firm is present c. The two are highly inter-related d. It's not always clear what the difference is

(a)

Conglomerates are: a. Single corporate parents b. Large firms characterized by inefficiencies and large corporate staff c. Highly diversified firms, generally created by multiple and unrelated acquisitions d. Large firms, but with no core business

(c)

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 c. Answers a and b d. None of the above

(c)

Although economies of scope refer to spreading cost, this is not the case for brand extension: @Pages and References: Pages 239-241 a. Because a brand doesn't cost anything - it's an asset b. Because although the brand costs money, this does not appear in the accounts c. Because the brand is to do with the marketing department, not production cost d. It IS still true for brand extension, since creating and maintaining a brand often costs a lot

(d)

The main concepts that assist us to analyze the scope of a firm's activities are: a. Economies of scope b. Transaction costs c. Corporate complexity d. All three of the above concepts are relevant

(d)

. A problem associated with internal capital markets is: a. Despite the cost-savings, poor investment decisions are sometimes made b. They deny banks much-needed business c. They are illegal in some countries d. The money should have been given to shareholders as dividends

a.

A hybrid vertical relationship is one which: a. Attempts to secure optimum benefits from close collaboration whilst preserving some form of market transaction b. Attempts a relationship where for some products the supplier is integrated, whereas for others it is a competitor c. Is similar to a virtual vertical relationship d. Is a combination of two or more vertical relationships

a.

A significant factor that determines whether or not a firm conducts an activity internally is: a. Whether the transaction costs of using the market to engage a third party to undertake the activity exceed the administrative cost of undertaking the activity in-house b. Whether transaction costs of using the market to engage a third-party to undertake the activity exceed the administrative cost of sorting out contracts c. How reliable the firm's workforce is, compared with an external supplier's reliability d. None of the above

a.

Besides managing the overall corporate portfolio of businesses, corporate management adds value by: a. Providing encouragement, guidance and control, and managing change and linkages between businesses b. Hiring and firing useless employees, managing capabilities, and building advertising campaigns c. Designing strategic orientations, and developing detailed operational plans for each business d. Communicating the strategic orientations to the main stakeholders, and managing conflicts at lower divisional levels

a.

High powered-incentives and low-powered incentives respectively generally apply to: a. Externally and internally sourced inputs b. Internally and externally sourced inputs c. Market and alliance sourced inputs d. Joint venture and alliance sourced inputs

a.

Mergers and acquisitions are frequent. Diversifying into another industry this way: a. Tends to be particularly unsuccessful b. Tends to be particularly successful, hence the frequency of this method c. Is advisable, because it's a relatively low-cost entry method d. Is preferred by shareholders, hence the frequency of this method

a.

Once a firm buys its supplier in order to vertically integrate a process: a. The high-powered incentive of market forces that keep costs low are removed b. Costs are certainly lower because the firm now knows what profit the supplier was making c. The supplier will now offer a better service, since it's owned by its customer d. The purchasing department can be closed to save costs

a.

The most often cited benefits of diversification are: a. Growth, risk reduction and value creation b. Risk reduction and economies of scope c. Value creation and cost reduction d. Cash balancing and risk reduction

a.

The primary source of value creation from diversification is likely to be: a. The linkages or synergies between the businesses concerned b. Risk reduction through balancing of counter-cyclical businesses c. Getting a price reduction when purchasing common resource inputs d. Balancing of cash generation, reducing the need to obtain investment finance externally

a.

To make a choice between vertical integration or external sourcing, which statement is true? a. It depends on the specific factors prevailing b. Vertical integration is preferable in a technology-intensive industry c. Market sourcing is preferable when the industry is very fragmented d. Is simply a matter of managerial preference

a.

"Brand extension" is way of realizing an "economy of scope", because a good reputation built around one product helps to sell a different product or service. a. True b. False

a. True

A firm's decision to extend its corporate activities can be analysed using the concepts of transaction costs, economies of scope and the cost of corporate complexity. a. True b. False

a. True

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

a. 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. a. T b. F

a. 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. a. T b. F

a. 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. a. T b. F

a. 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. a. True b. False

a. True

Empirical research indicates there are diminishing profit returns for diversification beyond some threshold. a. T b. F

a. True

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

a. True

If high transaction-specific investment is required between two stages of an industrial process is likely that these processes will be vertical integrated. a. T b. F

a. True

In recent years many US and European conglomerates have chosen to dispose of parts of their enterprises in order to focus on their core businesses a. True b. False

a. True

In situations where firms needs to respond rapidly to changes in demand, market contracts may be preferable to vertical integration a. T b. F

a. True

Product scope, international scope, and vertical scope are part of corporate level strategy decisions. a. T b. F

a. True

The degree of a firm's vertical integration is indicated by the ration of its value added to sales revenue. a. T b. F

a. True

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

a. True

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

a. True

An economy of scope arises when a firm can spread the fixed cost of a common resource or a shared service across multiple products or activities. a. True b. False

a.True

A "technical economy" is: a. A saving which is only theoretically feasible b. A cost-saving arising from physical integration of production processes c. An economy based on bulk buying d. One which is rarely worth the effort of gaining

b.

A key message for corporate bosses is to recognise that diversification is: a. Always very risky, so should only be attempted when there's no other option b. Inherently risky, but at some stage necessary - so should be based on sound analysis c. Well-known to be primarily about empire building - so is to be discouraged d. Only works in emerging economies nowadays

b.

An internal capital market occurs when: a. A diversified company sets up a finance firm as one of its businesses b. Cash generated by one set of subsidiaries is used by other subsidiaries in need of cash c. A subsidiary starts a money-lending business, offering loans to other subsidiaries d. External sources of capital become too expensive

b.

Michael Porter's "attractiveness test" means that a firm considering diversifying into another industry should: a. See that the barriers to entry to that industry are low b. Be able to see a way to make superior profits in that industry c. Consider how unattractive their existing industry is, by comparison d. See that some firms in that industry have left, leaving space for newcomers

b.

One huge problem with vertical integration of activities with only one major sellable output is: a. The company will be too large to manage efficiently b. The entire integrated value-chain is subject to the same single market risk c. Upstream stages are isolated from market forces d. It's no longer possible to use external suppliers

b.

Over the past 30 years, the tendency in the USA and Europe has been: a. A trend for highly diversified groups to dominate industries b. A trend for diversified firms to refocus and reduce their levels of diversification c. Reduced opportunity for firms to diversify further d. To copy the diversification strategies of firms in emerging economies

b.

Parenting advantage means: a. That corporate managers should act like good parents and use the same skills in the corporate center b. That a corporate parent must add more value to each division or business unit than other corporate parents could c. That the group excels at corporate coaching d. That the group has spawned many successful subsidiaries

b.

The focus of the "Heartland" matrix is: a. industry attractiveness b. the fit between a business and its parent company c. the fit between the products in the firm's portfolio d. the cash flows generated by different parts of the business

b.

The move over the past 25 years to refocus and de-integrate has not been universal; some industries have vertically integrated further : a. Because those industries are old-fashioned and behind-the-times b. Because in some industries the conditions favouring further vertical integration outweigh the benefits of focusing and outsourcing c. Because those industries have probably sought no advice from academics, or taken no notice of the advice d. Answers a and c

b.

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

b. False

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

b. False

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

b. False

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

b. False

The dominant trend of the last two decades has been to increase the scope of firms' activities so that organizations do not have "all their eggs in one basket". a. True b. False

b. False

There are 3 types of diversification; related, unrelated and concentric. a. True b. False

b. False

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

b. false

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

b.False

. One common argument against diversification strategies is: a. Managers do not have sufficient understanding of other industries b. Diversification is simply a poor strategy c. Shareholders can invest in other industries themselves, achieving risk-reduction more efficiently d. All of the above

c.

A firm becomes more vertically integrated when: a. It buys a direct competitor b. Its management and staff are better aligned c. It moves to own more stages of the value chain, either upstream or downstream of its core activity d. It outsources some activities either upstream or downstream of its core business

c.

A strategy of unrelated diversification is: a. Always a mistake b. Likely to be less risky than related diversification c. Not always as unrelated as it may seem e.g. the businesses may share some common attributes which can be exploited d. Always the last resort

c.

An advantage of diversification is a better internal labour market because: a. There's a saving on advertising costs b. There's no commission payable to the internal Human Resources department c. Employees can be transferred rather than hired / fired, and the firm knows these people well d. The firm does not need to invest so much in training new recruits

c.

By leasing out space to specialist retailers and restaurants, airport and railroad station operators: a. Always achieve above average returns b. Exploit their leaning curves c. Exploit economies of scope of their facilities d. Employ their assets to generate little value

c.

Outsourcing is a form of: a. Increased vertical integration b. Decreased horizontal integration c. De-integration or disaggregation d. Answers b and c

c.

When linked processes require large transaction-specific investments by firms that are adjacent to each other in a production process, the outcome is often : a. Firms failing. Inevitably disputes occur, and one firm holds the other to ransom b. The customer having to accept a higher price to pay for the investment c. Vertical integration of the processes involved d. Firms refusing to get involved and production ceasing

c.

Which of these choices is NOT an example of a vertical relationship? a. A franchise agreement b. An exclusive single-supplier agreement c. A long-term agreement with competitors to fix the market price for a commodity product d. A joint development group between a supplier and a customer

c.

A major limitation of the BCG Growth-Share Matrix is: a. It's only based on one variable to judge market attractiveness b. It's only based on one variable to assess competitive strength c. It presumes a portfolio of businesses which have little synergy or mutual dependence d. All of the above

d.

A major reason why managers are attracted to diversification is: a. They believe that shareholders expect it of them, to show dynamism b. It sharpens their managerial skills c. Many managers are attracted to the extra complexity of diversification d. The experience may reduce risk, and secure their job; and if not it looks dynamic for securing their next job

d.

Full vertical integration compounds risk because: a. Top managers have a complete knowledge of the entire value chain b. The capital invested and the fixed costs are often much higher for a vertically integrated firm c. A decline in sales and profits in the end market affects all stages simultaneously d. Answers b and c

d.

Gaining the advantage from economies of scope requires that: a. A company must internally expand its scope b. A company must usually enter into a licence arrangement c. A company must usually acquire a company who is expert in an additional business d. The firm is be able to spread common cost somehow, either by performing the additional activity internally, or by licensing the resource

d.

Increased corporate complexity because of expanded scope is caused by: a. The need for managers to understand a wider range of businesses b. The need for managers to operate differently to succeed in different businesses c. The extent of the linkages between the various businesses d. All of the above

d.

Of Michael Porter's 3 tests of whether a proposed diversification will create value, the most important one is usually: a. None. They are all equally important b. The "attractiveness" test c. The "cost of entry" test d. The "better-off" test

d.

The number of "virtual companies" whose business model is based on co-ordinating the activities of other firms, has grown rapidly in recent years.. The risk for these "virtual firms" is: a. They have little control, so their suppliers may collude to drive prices up b. Such companies may find they lose the capability to adapt to changing circumstance c. the degenarte into "hollow corporations" d. Answers b and c

d.

Vertical integration may afford flexibility in responding to uncertain demand when: a. The firm has built a capability to respond speedily in a coordinated fashion b. Lots of adjustments need to take place simultaneously along the value chain c. Rapid co-ordination of system-wide changes is needed d. All of the above

d.

When a customer and a supplier choose to, or are technically obliged to, integrate their processes: a. There can no longer be a market operating between them for the item concerned b. There can be an adversarial relationship as each tries to gain advantage c. There can be strategic benefit, so long as the partners try to jointly maximise their profit in the downstream market d. All of the above

d.

When increased flexibility is required: a. It is always best to source inputs from the open market b. It is always best to integrate key inputs, to maintain full control c. It is best to operate with a mix of both options d. It depends very much on the circumstances whether it's best to source from the market or vertically integrate

d.

Which of these is NOT a factor to be included in "industry attractiveness" in the GE/McKinsey Matrix? a. market growth rate b. International potential c. the cyclical nature of the industry d. Relative market share

d.