Mgt 3830 Final ch. 7

Vert. Int. may affords flexibility in responding to uncertain demand when:

-firm has built a capability to respond speedily in a coordinated fashion -firm maintains spare capacity, and can bear spare capacity -market cannot respond as quickly, or capacity is unavailable

'Technical Economy'

A cost-saving arising from the technicalities of performing integrated process

Outsourcing is a form of:

De-integration or Disaggregation

To make a choice btwn Vert. Int. or external sourcing, which statement is true?

Depends on the specific factors prevailing

Major problem associated with internal capital markets is:

Despite the cost-savings, poor investment decisions tend to be made

Although E. of scope refers to spreading cost, this is not the case for brand extension:

False. It IS still true for brand extension, since creating and maintaing a brand does cost a lot i.e. advertising

A company in a mature industry which is good at cost-reduction is exhibiting:

Potential for E. of scope based on organizational/managerial capability

Large transaction-specific investments tend to lead to:

Vert. Int. of the process involved

The main concepts to determine the scope of a firm's activities are:

Economies of scale Transaction costs Corporate complexity

Key message for corporate bosses is to recognize that diversification is:

Inherently risky, but at some stage necessary- so should be based on sound analysis .

When increased flexibility is required:

It depends on circumstances whether it's best to source from the market or vert. Int.

One common argument against diversification strategies is:

Shareholders can invest in other industries themselves, achieving risk-reduction more efficiently

Mergers and Acquisitions are frequent. Diversifying into another industry this way:

Tends to be particularly unsuccessful

Usually the most important test, of Porter's 3 tests, involving a proposed diversification to create value is:

The "Better Off" test

A major reason why managers are attracted to diversification is:

The experience may reduce risk, and secure their job: and if not it looks dynamic for securing their next job

A firm's 'Vertical Scope' refers to:

The number of stages in the industry value chain that the firm performs itself.

Economies of Scope are best described as:

The reductions in average costs that result from increasing the output of multiple products.

A significant deterring factor on whether a firm conducts an activity internally is:

Whether the transaction cost of buying in the activity in the market exceed the administrative cost of doing it themselves

Hybrid Vert. relationship is one which:

attempts to secure optimum benefits from close collaboration whilst preserving some form of market transaction

Evidence on the link btwn diversification and performance suggests that:

diversification is associated with increased profitability up to a point after which further diversification is associated with declining performance

Which of these choices is NOT example of a Vert. relationship?

long-term agreement w/competitors to fix market price for a commodity product

Adam Smith, the famous economist, called the market mechanism:

the invisible hand

The starting point for strategy is usually:

what businesses are we in?

Corporate strategy is concerned with:

where a firm chooses to compete i.e. in which industries and the scope of a firm's activities

Full Vertical Integration compounds risk bc:

-The capital invested and the fixed costs are often much higher for a vert. Int'd firm -a decline in sales and profits in the end market affects all stages simultaneously

Once a firm buys its supplier in order to vert. Int. a process:

The lack of a market removes the high-powered incentive of market forces to keep costs low

The move over the past 25 years to refocus and de-integrate has not been universal; some industries have further vertically integrated:

Bc some industries conditions favoring further Ver. Int. outweigh the benefits of focusing & outsourcing

Economies of scope and economies of scale both relate to lower average costs but:

E. of Scale= refers to cost-advantage from higher volume of a single product. E. of Scope= refers to cost-advantage from spreading a common cost over multiple products.

the existence of E. of scope are likely to lead a company to:

Expand the scope of its activities in some relevant way

The most often cited benefits of diversification are:

Growth Risk Reduction & Value Creation

A firm becomes more vertically integrated when:

It moves to own more stages of the value chain, either upstream/downstream of its core activity

Which types of vertical relationships involve the highest degree of commitment and formality?

Joint Ventures

Managers of firms in Low-growth, cash-generative industries often opt for diversification because:

Low-growth does not look good for managers with an eye on their NEXT job

Which NOT a factor included in "industry attractiveness" in the GE/McKinsey Matrix:

Relative market share

Problem with Vert. Int. of activities with only one major sellable output is:

The entire integrated value-chain is subject to the same single market risk

Increased corporate complexity because of expanded scope is caused by:

-Need of managers to understand a wider range of businesses -Need for managers to operate differently to succeed in different businesses -The extent of the linkages between the various businesses

The BCG matrix plots a firms product portfolio in terms of which of the following dimensions?

-Rate of Growth -Relative Market Share

Fashionable trend towards 'virtual companies" in recent years, who make the largest profits in a value chain by co-ordinating all other aspects. The risk with this plan is:

-Such a company may find it loses ability to understand the industry it is in -Group of suppliers and/or customers may decide to co-ordinate themselves, and isolate the virtual company

Examples of 'transaction costs'

-cost of searching for an appropriate supplier -costs of negotiation & drawing up contract with a supplier -costs of monitoring to ensure that the supplier fulfills the contract

The two main issues that lie at the heart of any firm's diversification decision are:

-how attractive is the industry to be entered & -can the firm establish a competitive advantage within the new industry

When a customer and a supplier choose to, or are technically obliged to, integrate their processes: There can...

-no longer be a market operating btwn them for item concerned -be an adversarial relationship as each tries to gain advantage -be strategic benefit, so long as the partners try to jointly maximize their profit in the downstream market

Major limitation of the BCG Growth-Share Matrix is:

-only based on 1 variable to judge market attractiveness -only based on 1 variable to asses competitive strength -presumes portfolio of bus. which have little synergy or mutual dependence

Over the past 30 years, the tendency in the USA & Europe has been:

A trend for diversified firms to refocus and reduce their diversification

Michael Porter's "attractiveness test" mean that a firm considering diversifying into another industry should:

Be able to see a way to make superior profits in that industry

Advantage of diversification is a better internal labour market because:

Employees can be transferred rather than hired/fired, and the firm knows these ppl well

Internal capital market occurs when:

Enough cash generated by one set of internal firms is used by other internal firms in need of cash

High-powered and low-powered incentives, respectfully, generally apply to:

Externally and internally sourced inputs

Firms often diversify to reduce risk by making sure the cash flows from different businesses are highly correlated

False

Primary source of value creation from diversification is likely to be:

Linkages or Synergies between the businesses concerned

A strategy of unrelated diversification :

Not always as unrelated as it may seem i.e. businesses may share some common attributes which can be exploited

Gaining the advantage from E. of scope requires that:

The firm is able to spread common cost somehow, either by performing the additional activity internally, or by licensing the resource

What is the difference between a firm's geographical scope and its Vertical scope?

The first describes the regions of the world where the firm is present. The second, the stages of the industry value chain which the firm performs itself.

As a firm progresses, it is invariably the case that it expands its scope:

This is not true. some firms narrow some aspects of their scope, or voluntarily even break up