475 Chapter 8

Royal Motor Corp. generates a major portion of its revenues by manufacturing luxury sports cars. However, the company also derives an insignificant percent of its annual revenues by selling its sports merchandise that includes apparel, shoes, and other accessories under the same brand name. Which of the following terms best describes Royal Motor Corp.?

A dominant business firm A dominant-business firm derives between 70-95 percent of its revenues from a single business, but it pursues at least one other business activity. The dominant business shares competencies in products, services, technology, or distribution.

Which of the following best illustrates forward vertical integration?

A firm that manufactures and sells car engines to major automobile companies launches its own line of cars

How is an equity alliance different from a joint venture?

An equity alliance involves taking ownership in a partner; a joint venture involves two or more entities owning a firm.

________, 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.

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?

Diversification Discount

Incline Electronics relied on a large chain of consumer electronics stores to sell its tablet computers, cell phones, and televisions and also to provide customer service and technical support. However, that retailer outsourced its service departments, and customers began to complain that they could not get reliable tech support for Incline products. In response, Incline Electronics decided to set up its own tech support department, and it also began to investigate opening its own brand-based retail stores. What does this scenario best illustrate?

Forward vertical integration. Forward vertical integration involves moving ownership of activities closer to the end customer.

Using the Boston Consulting Group growth-share matrix, the managers of Xylicon International determined that their business unit devoted to personal health monitoring devices was a star. Based on this finding, which of the following strategies is likely to produce the best results?

Increase investment in the personal health monitoring unit to encourage future growth

Each stage of the vertical value chain typically represents a distinct ________ in which a number of different firms are competing.

Industry

________ are best described as costs that occur due to political maneuvering by managers to control capital and resource allocation and the resulting inefficiencies stemming from suboptimal allocation of scarce resources.

Influence costs

________ is best described as a situation in which one party is more informed than another, because of the possession of private information.

Information asymmetry

Why is following an unrelated diversification strategy especially advantageous in an emerging economy?

It allows the conglomerate to overcome institutional weaknesses in emerging economies.

Which of the following is a drawback of vertical integration?

It increases the potential of legal repercussions

Coca-Cola was primarily known for its core competencies in marketing, bottling, and distributing aerated drinks. However, with the success of Gatorade, Coca-Cola developed competencies in the development and marketing of its own sports drink, Powerade. Which of the following is true of Coca-Cola?

It is building new core competencies to protect and extend its current market position.

Greenway Industries is a major multinational conglomerate. Its business units compete in a range of industries, including home appliances, pharmaceuticals, commercial real estate, and plastics manufacturing. Although its largest business unit, which produces kitchen appliances, is among the most profitable in the industry, it generates only 35 percent of the company's revenues. Which of the following is most likely true of Greenway's stock price?

It is valued at less than the sum of its individual business units. Firms that pursue unrelated diversification are often unable to create additional value. They experience a diversification discount:

While KFC focuses on international markets, its competitor, Chick-fil-A, focuses on the domestic U.S. market. What is the reason behind this strategic difference?

KFC has more financial resources than Chick-fil-A since it is a publicly traded stock company.

Phoenix Guitars is interested in pursuing backward integration to take greater ownership of the extraction of raw materials and production of components used in its signature line of guitars. Although this approach would lower the overall cost of producing a guitar, the costs associated with producing electronic pickups for sound amplification are far greater than those associated with sourcing pickups from a reliable supplier. Which of the following approaches is likely to produce superior results?

Pursue taper integration Taper integration is a way of orchestrating value activities in which a firm is backwardly integrated, but it also relies on outside-market firms for some of its supplies

Skylark Sodas has been a market leader in the soft drink industry for several decades. However, its market research shows that consumer tastes have begun to shift to sugar-free flavored seltzer waters, a product that Skylark is capable of producing with minimal changes to its facilities and production processes. Based on your knowledge of the core competence-market matrix, which diversification strategy should Skylark pursue?

Redeploy and recombine existing core competencies to compete in markets of the future.

About 20 years ago, Sturdy Light, Inc., produced a sturdy, lightweight backpack in a market that was rapidly growing. Sturdy Light became a leader in this market. Eventually, the backpack market reached the maturity stage and slowed down. However, by this time, Sturdy Light had developed a strong brand name and continued to steadily lead the market. Which of the following describes this scenario?

Sturdy Light was a star that developed into a cash cow

TL & Co. is following a related-linked diversification strategy, and Soar Inc. is following a related-constrained diversification strategy. How do the two firms differ from each other?

TL & Co. will share fewer common competencies and resources between its various businesses when compared to Soar Inc.

How does a conglomerate benefit from following an unrelated diversification strategy?

The conglomerate can overcome institutional weaknesses, such as a lack of capital markets, in emerging economies.

Banana Computers has decided to procure processing chips required for its laptops from external suppliers instead of manufacturing them in their own facilities. How will this decision affect the firm?

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

BestDrive Inc. is a large automobile company. The company's petrol cars strategic business unit (SBU) has been recognized as a cash cow, and its hybrid electric cars SBU has been categorized under stars. Which of the following can be inferred from this scenario?

The petrol cars SBU operates in a low-growth market, whereas the hybrid electric cars SBU operates in a high-growth market.

________ is best described as a firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs

Vertical integration

Argus Inc. is a large multinational company owned by two partners, is active in the petroleum, capital market, chemicals, steel, beverages, hospitality, airlines, education, automobiles, and consumer electronics industries. The company has multiple brands and a large product portfolio under its banner. Which of the following terms would best describe this company?

a conglomerate

Coastal Pharma and Brainwave Technologies have together invested and created a new organization, InnerView, to focus on developing diagnostic devices. Through this new firm, both companies are attempting to combine their core competencies to innovate and reduce their risks associated with transaction-specific investments. However, the new organization operates independent of Coastal Pharma and Brainwave Technologies. Which of the following alternatives to integration does this scenario best illustrate?

a joint venture

Which of the following best illustrates physical-asset specificity?

a machine solely designed to give a candy its trademarked shape Physical-asset specificity is a form of specialized assets that refers to assets whose physical and engineering properties are designed to satisfy a particular customer

A primary advantage of organizing economic activity within firms is the

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

Radial Autos currently sources components such as airbags, upholstery, and brake pads from various suppliers in the industry value chain. In order to lower costs and reduce the risk of interruptions in the supply of components, Radial should pursue

backward integration.

Firms that use taper integration also use ________ when they rely on outside-market firms for some of their supplies.

backward vertical integration

In 2007, Salesforce.com recognized an emerging market for platform as a service (PaaS) offerings and developed a new competency in delivering software development and deployment tools. This allowed its customers to either extend their existing CRM offering or build completely new types of software. This is an example of

building new core competencies to create and compete in markets of the future

Which quadrant in the core competence-market matrix is the hardest to pursue?

building new core competencies to create and compete in markets of the future

Ancho Corp. is an automobile company whose core competency lies in manufacturing petrol- and diesel-based cars. The company realizes that more of its potential customers are switching to electric cars. The R&D department of the company acquires competencies in developing electric cars and launches its first hybrid car, which uses both gas and electricity. In this scenario, Ancho is primarily

building new core competencies to protect and extend current market position.

The managers at Camphor Plastics decided that their firm needed to diversify because of overall falling sales and lower performance in one sector. How does diversifying compensate for the lackluster performance in this sector?

by having higher performance in another sector

HealthTech wanted its research partner, an R&D company, to develop a cancer vaccine. However, the project required huge capital investments, and its research partner was not ready to solely face the risks involved. Thus, to gain its partner's confidence and to prove its involvement, HealthTech invested $100 million in the project. This investment made by HealthTech will result in a

credible commitment.

ESB Group is the parent company of many related businesses under its banner. Each share of the parent company is quoted at $220. However, if this had to be assessed by adding the stock prices of each of its strategic business units, the value would only be $200 per share. In this scenario, what has ESB Group created?

diversification premium

In the context of the Boston Consulting Group (BCG) growth-share matrix, if one of the strategic business units of a conglomerate is categorized under dogs, the management should

divest the strategic business unit.

Which of the following best illustrates site specificity?

equipment necessary for mining bauxite and aluminum smelting Equipment necessary for mining bauxite and aluminum smelting best illustrates site specificity. Site specificity, a form of specialized assets, refers to assets that are required to be co-located, such as the equipment necessary for mining bauxite and aluminum smelting.

Revolution Watches, a Swiss-based premium watch brand, has recently started selling its watches through company-owned retail outlets in major cities of developing nations. Which of the following types of diversification strategies is the firm pursuing?

geographic diversification strategy

The Martinez Legal Firm (MLF) recently acquired a smaller competitor, Miller and Associates, which specializes in issues not previously covered by MLF, such as land use and intellectual property cases. Given the increase in the firm's size and complexity, it is likely that its internal transaction costs will

increase.

Nina is in an interview for a sales job that requires no experience. She is trying to portray herself as a highly enthusiastic, energetic person with high-level communication and interpersonal skills. The interviewer is convinced that Nina should be hired as a salesperson in the company. However, in her resume, Nina had not mentioned her previous work experience as she was fired from that job because of her frequent absenteeism. Which of the following does this scenario best illustrate?

information asymmetry

With reference to the Strategy Highlight 8.2, the Tata Group's corporate strategy is attempting to

integrate different strategic positions, pursued by different strategic business units.

Decisions relating to the range of products and services a firm will offer determine the firm's

level of diversification.

Hiku Inc. developed a superior touch screen technology for tablet computers that enabled multiple users to operate the screen at the same time. The technology was leased to Broadway Technologies, a consumer electronics company, for five years. Which of the following alternatives to integration does this best illustrate?

licensing

There are many reasons why firms need to grow. Which of the following reasons is strongly influenced by economies of scale?

lowering costs

Which of the following motivations for business growth involves principal-agent problems?

motivating managers

Bulldog Holdings is a U.S.-based consumer electronics company. It owns smaller firms in Japan and Taiwan where most of its cell phone technology is developed and manufactured before being released worldwide. Which of the following alternatives to integration does this best illustrate?

parent-subsidiary relationship

True Tomato Inc. makes organic ketchup. To promote its products, this firm decided to make bottles in the shape of tomatoes. To accomplish this, True Tomato worked with its bottle manufacture to create a set of unique molds for its bottles. Which of the following specialized assets does this example demonstrate?

physical-asset specificity

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?

principal-agent problem

Amazon.com has decided to enter the college bookstore market. The goal of "Amazon Campus" is to offer co-branded university-specific web sites that offer textbooks and paraphernalia, such as logo sweaters and baseball hats. This development shows Amazon's relentless pursuit of

product diversification

WellMade Manufacturing is a large conglomerate that operates only in its home country. The company competes in industries like the consumer electronics, health care, hotel, airlines, education, and steel industries. Which of the following diversification strategies does this best illustrate?

product diversification

Groundswell Industries, a U.S.-based large conglomerate, competes in the hospitality, education, telecommunications, entertainment, airlines, and chemical industries. It currently operates in about 30 nations, and is planning to expand its portfolio by investing in rapidly developing countries. Which of the following strategies is Groundswell Industries pursuing?

product-market diversification strategy

PepsiCo operates in many countries and sells a wide variety of aerated drinks, other beverages, different types of chips, and Quaker Oats goods to achieve continuous growth. From this data, we can conclude that PepsiCo has been involved in

product-market diversification.

Best Burger is a major fast food chain. Its managers are motivated to grow the firm in order to increase their market power and change the industry structure in their favor. Which of the following strategies is most associated with their motive for growth?

purchasing competitors

TimeEnough Inc. entered the low-priced digital watch market several years ago. This firm's earnings have been unsteady, but might be growing. According to the BCG growth matrix, TimeEnough is a

question mark.

The core competency of GoGo Motors is its fuel-efficient engine found in its cars. These engines are developed and built in-house. The company realizes that the growing demand for "green" vehicles has created a new market opportunity. Thus, it uses its existing technology to develop an engine that improves the fuel efficiency of recreational motorhomes. In this scenario, GoGo Motors is

redeploying and recombining existing core competencies to compete in future markets

Beagle Autos is known for its affordable and reliable brand of consumer vehicles. Because its shareholders expect to see an improved rate of growth in the coming years, Beagle's executives have decided to diversify the company's range of products so that at least 40 percent of the firm's revenue is generated by new business units. However, the company's resources, capabilities, and competencies are limited to producing other forms of motorized vehicles, such as motorcycles and all-terrain vehicles (ATVs). Which type of corporate diversification strategy should Beagle pursue?

related-constrained diversification.

When executives of a firm consider business opportunities only where they can leverage their existing competencies and resources, it can be concluded that the firm is using

related-constrained diversification.

A strategy of ________ will be most beneficial for a firm to enhance its overall corporate performance.

related-linked diversification

Nocturnal Products started as a luxury brand for designer apparel. Soon, the company expanded by launching its own line of premium perfumes, watches, bags, and home furnishings. This expansion allowed the businesses under the company to share a few of the common competencies in products, services, technology, and distribution. Which of the following corporate strategies is Nocturnal pursuing in this scenario?

related-linked strategy If executives consider new business activities that share only a limited number of linkages, the firm is using related-linked diversification.

The Boston Consulting Group (BCG) growth-share matrix locates a firm's individual strategic business units (SBUs) in which two dimensions?

relative market share and speed of market growth

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

restructuring

The smartphone division of the large consumer electronics company, True Electra Inc., has a significant market share in the fast-growing cell phone market. If the company invests further into this division, it will be able to reap increased cash flows. In the Boston Consulting Group (BCG) growth-share matrix, the smartphone division of True Electra will be categorized under

stars

Fortress International, a large conglomerate, procures a few component parts from external suppliers and also manufactures some of the key raw materials in its own subsidiaries. Aside from this, the company does not solely depend on outside distributors to reach its customers. In fact, it has its own retail stores to distribute its products. In this scenario, which of the following alternatives to vertical integration is Fortress International applying

taper integration.

Which of the following is an example of an internal transaction cost?

the cost of maintaining a production unit

Which of the following is an example of an external transaction cost?

the cost of searching for a contract manufacturer

A drawback of short-term contracting as an alternative to making a component in-house is that

the supplying firm has no incentive to make any transaction-specific investments to increase performance or quality.

A firm follows a(n) ________ when less than 70 percent of its revenues come from a single business and there are few, if any, linkages among its businesses.

unrelated diversification strategy

Decisions relating to "what stages of the industry value chain to participate in" determine a firm's

vertical integration

) Gold Leaf Computers sources the components for its laptops from various suppliers on the market. The firm pays $100 for processors, $35 for disk drives, $50 for screens, $10 for memory, and $40 for graphics and wireless internet cards. Gold Leaf has determined that it would cost $200 per unit to produce all of the necessary components in its in-house manufacturing facility. In this scenario, Gold Leaf should

vertically integrate.

Anita has been named CEO of a popular sports apparel company. As CEO, she is tasked with setting the firm's corporate strategy. Which of the following decisions is Anita most likely to make?

what range of products the firm should offer