MGT 449 Exam 2

4 frameworks for Horizontal Integration

1. Different Types of Diversification 2. Core Competence - Market Matrix 3. How to add businesses to a company's portfolio 4. Growth-Share matrix

A strategist has three options to drive firm growth:

1. Organic (internal) growth through internal development 2. External growth through mergers and acquisitions 3. External growth through alliance

Industry-level integration from upstream to downstream

vertical value chain

two primary competitive levers

value and cost

Ownership of its inputs, production, & outputs in the value chain

vertical integration

tools for external analysis

(O & T) --Pestel --Porters 5

tools for internal analysis

(S & W) -- value chain --VRIO

competitive risks of an integrated strategy

--Often involves compromises --Becoming neither the lowest cost nor the most differentiated firm. --Becoming "stuck in the middle" --Lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy.

competitive risks of differentiation strategy

--The price differential between the differentiator's product and the cost leader's product becomes too large. --Differentiation ceases to provide value for which customers are willing to pay. --Experience narrows customers' perceptions of the value of differentiated features. --Counterfeit goods replicate differentiated features of the firm's products

diversification strategies

--product diversification --geographic diversification --product-market diversification

growth share matrix components

-dog -star -cash cow -question mark

types of vertical integration

-upward industries (backwards vertical integration) -downstream industries (forward vertical integration)

2 frameworks for Vertical Integration

1. Alternatives for the Make or Buy 2. Types of vertical integration

A firm that follows a differentiation strategy: A) can sell its products or services at a premium price. B) has to sell its products or services at its cost price. C) can only sell its products or services below their cost per unit. D) has to have the lowest prices in its strategic group.

A) can sell its products or services at a premium price.

P&G differentiates itself from its competitors by offering branded consumer product goods with distinct features and attributes. This business strategy implies that P&G: P&G differentiates itself from its competitors by offering branded consumer product goods with distinct features and attributes. This business strategy implies that P&G: A) focuses on increasing the perceived value created for customers, which allows it to charge a premium price. B) is primarily focusing on achieving a differentiation parity with its competitors. C) is pursuing a cost-leadership strategy by focusing on increasing the perceived value created for customers. D) focuses on pricing its products lower than its competitors. B) is primarily focusing on achieving a differentiation parity with its competitors. C) is pursuing a cost-leadership strategy by focusing on increasing the perceived value created for customers. D) focuses on pricing its products lower than its competitors.

A) focuses on increasing the perceived value created for customers, which allows it to charge a premium price.

Incremental innovations occur when: A) improved versions of existing technologies are introduced in existing markets. B) new technologies are introduced in new markets. C) improved versions of existing technologies are introduced in new markets. D) new technologies are introduced in existing markets.

A) improved versions of existing technologies are introduced in existing markets.

Google hires programmers to write software code in-house because: A) its costs associated with maintaining computer programmers are less than what they would be in the open market. B) the company can effectively avoid the problem of economies of scope when doing so. C) software code is not a valuable or rare resource for the company in gaining competitive advantage. D) it helps the company reduce bureaucracy, organizational size, and complexity.

A) its costs associated with maintaining computer programmers are less than what they would be in the open market.

When a company defines its _____, it is primarily determining whether to pursue a specific, narrow part of the market or go after the broader market. A) scope of competition B) chain of command C) locus of control D) scalar chain

A) scope of competition

In _____, the firm sources intermediate goods and components from in-house suppliers as well as outside suppliers. A) taper integration B) backward vertical integration C) forward vertical integration D) horizontal integration

A) taper integration

When assessing the performance of their business ventures, social entrepreneurs: A) use the triple-bottom line approach. B) depend solely on financial metrics. C) consider only the accounting profitability. D) eliminate shareholders' value creation.

A) use the triple-bottom line approach.

Which of the following is primarily a framework to guide managerial decisions in the context of diversification strategies? A) VRIO framework B) Core competence-market matrix C) AFI strategy model D) Five forces framework

B) Core competence-market matrix

_____ comprises the decisions that senior management makes and the goal-directed actions it takes in the quest for competitive advantage in several industries and markets simultaneously. A) Functional strategy B) Corporate strategy C) Business-unit strategy D) Departmental strategy

B) Corporate strategy

_____ are best described as the agents who introduce change into the competitive system not only by figuring out how to use inventions, but also by introducing new products or services, new production processes, and new forms of organization. A) Category captains B) Entrepreneurs C) Creditors D) Headhunters

B) Entrepreneurs

First Foods Inc., a company that produces a variety of processed foods, sold its canned baked beans to major food companies who then sold the product to customers under their own brand names. Thus, First Foods only acted as a manufacturer in the industry value chain. However, the company soon realized that it would earn more profits by selling its canned baked beans directly to customers. Hence, it launched its own brand "Bean Cult" and distribution channel to directly sell its canned baked beans to the customers. What does this scenario best illustrate? A) Crowdsourcing B) Forward vertical integration C) New product development D) Viral marketing

B) Forward vertical integration

Which of the following is NOT a feature of the introduction stage in the industry life cycle? A) High product prices B) Large market size C) High barriers to entry D) Few competitors

B) Large market size

Laurel, a product engineer, buys innovative products before they are released into the market, even if it means paying a premium price for the products. She often uses the test versions of the products launched by firms and provides feedback on her blogging site about what she liked in the innovative product and where she thinks the company can improve. Which of the following customer segments does Laurel best represent? A) Early adopter B) Technology enthusiast C) Early majority D) Laggard

B) Technology enthusiast

FN Electronics Inc. has launched a new tablet computer that can also be used as a medical device to diagnose ailments. The firm can confidently conclude that this product is commercially successful when: A) technology enthusiasts agree to test the beta version of the product. B) an adequate demand for the product comes from the early and late majority sections. C) the product moves into the large competitive chasm between early adopters and early majority. D) the product can satisfy the needs of laggards.

B) an adequate demand for the product comes from the early and late majority sections.

The concept _____ best describes the savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology. A) break-even point B) economies of scope C) returns to scale D) network effects

B) economies of scope

Which of the following best illustrates architectural innovation? A) Gillette continually improving its razor blades to sustain its competitive advantage in the industry B) Japanese carmakers leveraging their low-cost and high-quality advantages into high-end luxury segments, captured by brands such as Lexus, Infiniti, and Acura C) Canon reconfiguring the components of the copying machine and creating a user-friendly copier for small and medium-sized businesses D) The British firm de Havilland commercializing the jet-powered passenger airplane for the first time

C) Canon reconfiguring the components of the copying machine and creating a user-friendly copier for small and medium-sized businesses

BioBrain Inc. is a pharmaceutical company that strictly pursues a closed innovation model. Which of the following statements is true of BioBrain? A) It will focus on building a better business model to leverage external R&D, rather than being the first mover in the industry. B) It would not mind selling its intellectual property, if it advances its own business model. C) It will want to hire all the best people, the smartest people in the industry. D) It will avoid using a traditional funnel approach when conducting in-house research and development.

C) It will want to hire all the best people, the smartest people in the industry.

According to the _____, roughly 80 percent of effects come from 20 percent of the causes. A) network effects B) Giffen's paradox C) Pareto principle D) equity theory

C) Pareto principle

The goal of a generic differentiation strategy is to: A) lower the cost of production to have a cost advantage over competitors. B) reduce the value gap created by a firm. C) add unique features to goods and services to increase their perceived value. D) sell products and services at the lowest price in the industry.

C) add unique features to goods and services to increase their perceived value.

The Boston Consulting Group (BCG) growth-share matrix is a tool primarily used to: A) assess the performance of employees. B) measure the effectiveness of a corporate strategy. C) guide corporate portfolio planning. D) plan if an economic activity should be performed in-house or outsourced.

C) guide corporate portfolio planning.

In the second step of the innovation process, a(n): A) idea is presented in terms of abstract concepts. B) invention is commercialized by entrepreneurs. C) idea is transformed into a new product or process. D) new technology is imitated by competitors.

C) idea is transformed into a new product or process.

An integration strategy is quite difficult to translate into reality because it: A) treats investments in differentiation and low cost as substitutes for each other. B) focuses on achieving the lowest value gap in the industry. C) involves increasing value and lowering cost, which have opposite effects. D) involves making a choice between two generic strategies, differentiation or cost-leadership.

C) involves increasing value and lowering cost, which have opposite effects.

A cost leader primarily focuses on: A) reducing the value gap by bringing down its costs. B) offering unique products and services so as to charge a premium price. C) offering lower prices than that of the competitors by reducing production costs. D) using value drivers, like superior customer service, to differentiate itself from competitors.

C) offering lower prices than that of the competitors by reducing production costs.

General Electric (GE) was engaging in _____ when it divested business units like NBC Universal and split its energy business into three standalone strategic business units. A) reverse engineering B) backward integration C) restructuring D) disruptive innovation

C) restructuring

AllRun Inc. is a sports shoe manufacturing company that solely concentrates on developing highly affordable shoes for those who wear prosthetic legs. The company aims to bring out the athletic spirit in them through its innovative and low-priced shoes. Which of the following business strategies does this best exemplify? A) Product diversification strategy B) Direct imitation strategy C) Mass market strategy D) Focused cost-leadership strategy

D) Focused cost-leadership strategy

_____ is the value-cost relationship that captures the result of performing best practices at any given time. A) Demand function B) Experience-curve effect C) Minimum efficient scale D) Productivity frontier

D) Productivity frontier

Which of the following sources of differential appeal is most effective in helping a firm sustain its advantage? A) Availability of complements B) Imitable product features C) Observable service features D) Reputation for innovation

D) Reputation for innovation

Which of the following is a risk associated with a firm vertically integrating along its value chain? A) The firm will lose ownership and control over stages in the industry value chain. B) The firm will fail to reap the benefits of economies of scope or increase differentiation. C) The firm will fail to effectively plan its production and respond to changes in demand. D) The firm will face legal repercussions if it tries to create a monopoly industry structure.

D) The firm will face legal repercussions if it tries to create a monopoly industry structure.

Viosa, a luxury brand, earns 70 percent of its revenues from its shoe line and the rest of its revenues from its line of leather bags. On the basis of this information, we can conclude that the firm is pursuing the: A) taper integration strategy. B) cost-leadership strategy. C) backward integration strategy. D) related diversification strategy.

D) related diversification strategy.

A diversification discount is a situation in which the: A) customers are benefitted from the discounted prices available on products manufactured by firms pursuing unrelated diversification due to economies of scope. B) overall value creation of highly diversified firms is more than the sum of the value created by individual business units. C) shareholders are benefitted from the market capitalization of a highly diversified firm because of its economies of scale. D) stock price of highly diversified firms is valued at less than the sum of their individual business units.

D) stock price of highly diversified firms is valued at less than the sum of their individual business units.

the firm competes in many customer segments

broad scope

-earnings: high, stable -cash flow: high, stable -strategy: hold

cash cow

Quest for competitive advantage when competing in multiple industries

corporate strategy

Achieving lower overall costs than rivals

cost

--Relatively standardized products --Features acceptable to many customers --Lowest competitive price

cost leadership strategy

An integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors with features that are acceptable to customers

cost leadership strategy

An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them.

differentiation strategy

Focus is on nonstandardized products Appropriate when customers value differentiated features more than they value low cost

differentiation strategy

-earnings: low, unstable -cash flow: negative or neutral -strategy: harvest/divest

dog

Average per-unit cost decreases as its output increases

economies of scale

Savings that come from producing more outputs or providing different services at less cost

economies of scope

Active in several different countries

geographic diversification

A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to: --Adapt quickly to environmental changes. --Learn new skills and technologies more quickly. --Effectively leverage its core competencies while competing against its rivals.

integrated strategy

the firm selects a segment or group of segments in the industry and tailors its strategy to serving them at the exclusion of others

narrow scope

-- MAKE OR BUY -most integrated alternative -parent companies have command and control

parent-subsidiary relationship MAKE

Active in several different product categories

product diversification

-earnings: low, unstable, or growing -cash flow: negative -strategy: increase market share or harvest/divest

question mark

--MAKE OR BUY -Competitive bidding process -Less than one-year term -Lower prices -cost advantages

short-term contracts BUY

-earnings: high, stable, or growing -cash flow: neutral -strategy: hold or invest for growth

star

--MAKE OR BUY -facilitate investment without administrative costs

strategic alliance INTERMEDIATE

Provides guidance to executives on how to diversify in order to achieve continued growth

the core competence - market mix

Possessing the capability to differentiate the firm's product or service and command a premium price

value

The cost associated with economic exchange

transaction cost