Chapter 8: Corporate Strategy - Vertical Integration and Diversification

What are the 4 underlying concepts that guide the three dimensions of corporate strategy (vertical integration, diversification, and geographic scope)?

1. core competencies 2. economies of scale 3. economies of scope 4. transaction costs

What is the principal-agent problem? A. advantage B. disadvantage

B. a major disadvantage of organizing economic activity within firms

Who is the manager or employee? A. principal B. agent C. problem

B. agent

Who's goal is to act on behalf of the principal? A. principal B. agent C. problem

B. agent

Which transaction costs are costs that are associated with negotiating an agreements, time spent on meetings, and time expended in written and verbal communications? A. search and information costs B. bargaining and decision costs C. policing and enforcement costs

B. bargaining and decision

What type of corporate diversification has additional business activity pursued? A. single business B. dominant business C. related diversification D. unrelated diversification

B. dominant

The market is ______________ transaction costs. A. internal B. external

B. external

Which part of the vertical value chain of a cell phone would include picking a service provider and getting wireless data and voice service? A. raw materials B. intermediate goods and components C. final assembly and manufacturing D. marketing, sales, after-sales service and support

D. marketing, sales, etc.

What type of corporate diversification does not have any businesses share competencies? A. single business B. dominant business C. related diversification D. unrelated diversification

D. unrelated

What are the actions that leaders take to achieve competitive advantage in several industries and markets?

corporate strategy

Which type of vertical integration involves owning activities closer to the customer: backward or forward?

forward

What is a situation in which one party is more informed than another due to the possession of private information?

information asymmetry

What can result in the crowding out of desirable goods and services by inferior ones?

information asymmetry (ex: used cars, e-commerce, mortgage, backed securities, R and D projects)

What reorganizes and divests business units and activities, helps refocus a company, helps leverage core competencies more fully?

restructuring

Is the following a benefit or risk of vertical integration: increasing costs?

risk

Is the following a benefit or risk of vertical integration: increasing the potential for legal repercussions?

risk

What is associated with economic exchange? A. diversification B. transaction costs C. geographic scope D. economies of scale

B. transaction costs

Firms are which type of transaction cost: internal or external?

internal

In an economic theory which assumes that transaction costs are nonexistent, markets have ____ ____________ to perform.

no function

What are the 3 types of diversification?

1. product 2. geographic 3. product-market

What are three ways in which diversification can enhance firm performance?

1. provides economies of scale (reduces costs) 2. exploits economies of scope (increases value) 3. reduces costs and increase value

What are the 4 types of corporate diversification?

1. single business 2. dominant business 3. related diversification 4. unrelated diversification (conglomerate)

What are the 2 alternatives to vertical integration?

1. taper integration 2. strategic outsourcing

What are three things that can occur in corporate strategy?

1. vertical integration 2. diversification 3. geographic scope Boundaries of a firm

What should people do if the costs in house are less than the costs in market?

1. vertically integrate 2. own production of inputs 3. or own output distribution channels (make)

What three things make vertical integration make sense?

1. when there are issues with raw materials 2. to enhance customer experience 3. vertical market failure

What can be a source of value creation in diversification as a way to allocate capital at a lower cost, if more efficient than external markets? A. internal capital markets B. external capital markets C. restructuring

A. internal capital markets

What is a related diversification strategy that can enhance corporate performance and consider coordination and influence costs? A. internal capital markets B. external capital markets C. restructuring

A. internal capital markets

Who is the owner of a firm? A. principal B. agent C. problem

A. principal

Who's goal is to create shareholder value? A. principal B. agent C. problem

A. principal

Which type of diversification increases in variety of products/services and active in several product markets? A. product diversification B. geographic diversification C. product-market diversification

A. product

Which part of the vertical value chain of a cell phone would include chemicals, ceramics, metals, and oil for plastic? A. raw materials B. intermediate goods and components C. final assembly and manufacturing D. marketing, sales, after-sales service and support

A. raw materials

Which transaction costs are costs incurred in identifying possibilities for mutual gains, identification of funding source, identification of relevant stakeholders, and the cost of gathering information? A. search and information costs B. bargaining and decision costs C. policing and enforcement costs

A. search and information

What type of corporate diversification has a low level of diversification? A. single business B. dominant business C. related diversification D. unrelated diversification

A. single

What is backward or forward integrated plus reliance on outside firms such as suppliers or distributors? A. taper integration B. strategic outsourcing

A. taper

Which type of diversification increases in a variety of markets/geographic regions, is regional, national, or international markets? A. product diversification B. geographic diversification C. product-market diversification

B. geographic

Which part of the vertical value chain of a cell phone would include integrated circuits, displays, touchscreens, cameras, and batteries? A. raw materials B. intermediate goods and components C. final assembly and manufacturing D. marketing, sales, after-sales service and support

B. intermediate

What type of transaction costs recruit and retain employees and set up a shop floor? A. external transaction costs B. internal transaction costs

B. internal

What has moving internal value chain activities, to other firms, and an example would be an HR management system? A. taper integration B. strategic outsourcing

B. strategic outsourcing

Which part of the vertical value chain of a cell phone would include assembly? A. raw materials B. intermediate goods and components C. final assembly and manufacturing D. marketing, sales, after-sales service and support

C. final assembly

Which transaction costs are costs involved in making sure all parties stick to the agreements, employment of an external monitor, and time and effort spent monitoring others informally? A. search and information costs B. bargaining and decision costs C. policing and enforcement costs

C. policing and enforcement

Who are agents that pursue their own interests (corporate jets, golf outings, expensive hotels) A. principal B. agent C. problem

C. problem

Which type of diversification is product and geographic diversification? A. product diversification B. geographic diversification C. product-market diversification

C. product-market

What type of corporate diversification has constrained (all businesses share competencies) and linked (some businesses share competencies)? A. single business B. dominant business C. related diversification D. unrelated diversification

C. related diversification

Which of the following are reasons why firms need to grow? A. to increase profits and shareholder returns B. to lower costs and achieve economies of scale C. to increase market power D. all the above E. none of the above

D.

What does the BCG growth share matrix do? A. guides portfolio planning B. each category warrants a different strategy C. reorganizes stocks D. A and B E. A and C

D. A and B

Which of the following are reasons why firms need to grow? A. to reduce risk through diversification B. to motivate managements C. to increase stock D. B and C E. A and B F. none of the above

E. A and B

Which type of vertical integration involves owning inputs of the value chain: backward or forward?

backward

Is the following a benefit or risk of vertical integration: facilitating scheduling and planning?

benefit

Is the following a benefit or risk of vertical integration: improving quality?

benefit

Is the following a benefit or risk of vertical integration: facilitating investments in specialized assets?

benefit (co-located assets, unique equipment, and human capital)

Is the following a benefit or risk of vertical integration: reducing flexibility?

risk

Is the following a benefit or risk of vertical integration: reducing quality?

risk

What should people do if costs in market are less than costs in house?

the firm should consider purchasing instead (buy)

What is vertical integration?

the ownership of inputs or distribution channels

True or False: transaction costs can help determine the boundaries of a firm

true

What is vertical market failure?

when transactions are too risky or costly

What type of transaction costs search for contractors, negotiate, monitor, and enforce contracts? A. external transaction costs B. internal transaction costs

A. external

Is the following a benefit or risk of vertical integration: lowering costs?

benefit

Is the following a benefit or risk of vertical integration: securing critical supplies and distribution channels?

benefit

What is the helpful restructuring tool? A. ACG growth share matrix B. HCG growth share matrix C. BCG growth share matrix

C. BCG