MGMT425 Chapter 8

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.

How can a firm pursuing a diversification strategy enhance its overall corporate performance by leveraging financial economies?

A. By using internal capital markets as a source of value creation

_____, 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

A corporation's star SBUs will:

A. hold a high market share in a fast-growing market.

GFR 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 GFR Group created?

B. Diversification premium

_____ 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.

B. Influence costs

When approaching a bank for a loan, the borrower has better knowledge than the lender about his or her own ability to repay the loan without defaulting. What is this situation referred to as?

B. Information asymmetry

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

B. Information asymmetry

_____ is best described as a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property.

B. Licensing

The most efficient way to overcome the principal-agent problem in a firm is to:

B. provide stock options to managers.

Which of the following firms is most prone to experiencing a diversification discount?

C. A company that pursues unrelated diversification

White Leo Motors (WLM) Inc. 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 WLM?

C. A dominant-business firm

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?

C. Backward vertical integration

_____ are strategic business units that compete in a low-growth market but hold considerable market share.

C. Cash cows

_____ are best described as voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services to lead to competitive advantage.

C. Strategic alliances

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:

C. restructuring.

Diversification premium is a situation in which:

C. the stock price of related-diversification firms is valued at greater than the sum of their individual business units.

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

C. vertical integration.

Red Empire Inc., 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?

D. A conglomerate

Which of the following firms is least integrated?

D. A firm that buys all the required raw materials from multiple external vendors

Which of the following best illustrates physical-asset specificity?

D. A machine solely designed to give a candy its trademarked shape

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

Which of the following best illustrates site specificity?

A. Equipment necessary for mining bauxite and aluminum smelting

_____ is best described as changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain.

A. Forward vertical integration

Bill is in an interview for a sales job that requires no experience. He is trying to portray himself as a highly enthusiastic, energetic person with high-level communication and interpersonal skills. The interviewer is convinced that Bill should be hired as a sales person in the company. However, in his resume, Bill had not mentioned his previous work experience as he was fired from that job on the account of using illegal drugs. Which of the following does this scenario best illustrate?

A. Information asymmetry

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?

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

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

_____ is best described as moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain.

A. Strategic outsourcing

TrueAutos 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?

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

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.

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?

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

When Toyota wanted to secure a long-term supply of lithium, it had to create a bond of trust with an Australian company, Orocobre Ltd. Orocobre wanted to establish the bond of trust before making huge investments in specialized equipment required to extract the high-quality lithium. What did Toyota do to instill this trust?

B. It made a credible commitment by taking an equity stake in Orocobre.

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?

B. Principal-agent problem

HK Goods Inc. 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?

B. Product diversification

_____ is best described as the process of reorganizing and divesting business units and activities to refocus a company in order to leverage its core competencies more fully.

B. Restructuring

Virtue Products Inc., a large conglomerate, procures a few component parts from external suppliers and also manufactures some of the key raw materials in its own subsidiaries. This apart, 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 Virtue Products applying?

B. Taper integration

Which of the following companies will be considered as a conglomerate?

B. The Tata Group, active in industries such as tea, steel, IT, power, and automobiles

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

B. The cost of searching for a contract manufacturer

DiskOne Inc. holds the highest market share in the low-growth compact disk industry. With the introduction of flash drives, the market for compact disks has reduced. However, DiskOne has been able to generate sufficient revenues for the parent company by selling its products in less developed countries. In the Boston Consulting Group (BCG) growth-share matrix, DiskOne will be categorized under:

B. cash cows.

General Electric's CEO, Jeffrey Immelt, decided to refocus GE's portfolio of businesses and leverage the firm's core competency in industrial engineering while pursuing future-growth industries. The two industries that CEO Immelt had identified as major future-growth industries were the:

B. clean-technology sector and health care sector.

BioGrow Pharma Inc. 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, BioGrow Pharma invested $100 million in the project. This investment made by BioGrow Pharma will result in a _____.

B. credible commitment

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

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

If a strategic business unit is recognized as a cash cow, it is advisable to:

B. invest into the business to hold its current position.

The solar-powered car division of a large automobile company has been experiencing negative cash flows though the market growth for such cars is predicted to be high. If the company invests further resources into this division, it can increase its relative market share in the future. However, if due to technological changes the car cannot create sufficient consumer demand, then the division can prove to be unprofitable. In the Boston Consulting Group (BCG) growth-share matrix, the solar-powered car division will be categorized under:

B. question marks.

The core competency of MotorCraft Inc. is its fuel-efficient engine found in its cars. These engines are developed and built in-house. The company realizes that there is a new market opportunity to diversify. Thus, it produces the car engines on a large scale and sells them to other automobile companies. In this scenario, MotorCraft is:

B. redeploying and recombining existing core competencies to compete in future markets.

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:

B. stars.

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

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

Investments in specialized assets tend to incur high opportunity costs because the:

B. threat of one of the partners pursuing his or her self-interest is high.

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.

B. unrelated diversification strategy

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

C. Geographic diversification strategy

Which of the following statements is true of taper integration?

C. It exposes in-house suppliers and distributors to market competition to make performance comparisons possible

Marva 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 Marva Industries pursuing?

C. Product-market diversification strategy

Which of the following corporate strategies did ExxonMobil pursue by acquiring XTO Energy, a natural gas company?

C. Related diversification strategy

_____ 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.

C. Specialized assets

The 3D television division of a large consumer electronics company has been recognized as a question mark. The company's LCD television division has been categorized under dogs. Which of the following statements will hold well in this scenario?

C. The 3D television division operates in a high-growth market, whereas the LCD television division operates in a low-growth market.

Which of the following stakeholders of a company would most likely be responsible for formulating a corporate strategy?

C. The chief executive officer

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

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

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?

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

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?

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.

Companies that pursue related diversification are able to create a diversification premium because they:

C. are able to increase value due to economies of scope.

ElectraSync Inc., a large consumer electronics company, has divided each product in its portfolio into a separate strategic business unit (SBU). The desktop SBU has been experiencing drastic decline in its cash flow, and its market share has also reduced to an insignificant 10 percent. This has been attributed to the low-growth in the desktop market after the arrival of tablet computers and laptops. In the context of the Boston Consulting Group (BCG) growth-share matrix, the desktop SBU will be categorized under:

C. dogs

A(n) _____ is best used to depict the transformation of raw materials into finished goods and services along distinct vertical stages.

C. industry value chain

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 _____.

C. product-market diversification

In the market for used cars, which of the following is a reason behind the crowding out of desirable cars by lemons or inferior ones?

D. Information asymmetry

Evara Inc. 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, if not all, of the common competencies in products, services, technology, and distribution. Which of the following corporate strategies is Evara pursuing in this scenario?

D. Related-linked strategy

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

D. The cost of maintaining a production unit

Which of the following statements is true of transaction costs?

D. Transaction costs are necessary to explain and predict the boundaries of a firm.

How do firms benefit from vertical integration?

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

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 softwares. This is an example of:

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

MotorCult Inc. 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. In this scenario, MotorCult is primarily:

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

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:

D. divest the strategic business unit.

In the Boston Consulting Group (BCG) growth-share matrix, strategic business units categorized under dogs:

D. hold a small market share in a low-growth market.

Strategic business units that have a relatively low market share but have the potential to grow are best categorized under _____ in the Boston Consulting Group (BCG) growth-share matrix.

D. question marks

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

D. related-linked diversification

Divina Pharma Inc. and MF Electronics Inc. have together invested and created a new organization, FirstHealth Inc., 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 Divina Pharma and MF Electronics. Which of the following alternatives to integration does this scenario best illustrate?

A. A joint venture

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

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.

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

A. industry

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 _____.

A. related-constrained diversification

A firm that engages in strategic outsourcing typically:

B. reduces its level of vertical integration.

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

B. relative market share and speed of market growth.

When a firm is said to be pursuing a geographic diversification strategy, it means that the firm will:

B. sell its products in several different regional, national, and international markets.

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

C. DS & Co. will share fewer common competencies and resources between its various businesses when compared to GreenWing Inc.

_____ is best described as an increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes.

C. Diversification

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?

C. Franchising

Which of the following statements is true of internal transaction costs?

C. Internal transaction costs tend to increase with organizational size and complexity.

Which of the following is true of the parent-subsidiary relationship?

C. The transaction costs that arise are frequently due to transfer prices.

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

C. Vertical integration

Galaxi Products Inc. 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?

D. Parent-subsidiary relationship

Which of the following alternatives on the make-or-buy continuum allows for most integration?

D. Parent-subsidiary relationship

Apple and Nike have their own retail outlets and also use other independent retailers, both the brick-and-mortar type and online, to sell their products. This is an example of _____.

D. taper integration