MGMT 493 Chapter 8

Why is following an unrelated diversification strategy especially advantageous in an emerging economy? A. It allows the conglomerate to overcome institutional weaknesses in emerging economies. B. It allows the conglomerate to form a monopoly in emerging economies. C. It allows the conglomerate to use well-defined legal systems in emerging economies. D. It allows the conglomerate to take advantage of strong capital markets in emerging economies.

A. It allows the conglomerate to overcome institutional weaknesses in emerging economies. (An unrelated diversification strategy helps firms gain and sustain competitive advantage because it allows the conglomerate to overcome institutional weaknesses in emerging economies, such as a lack of capital markets and well-defined legal systems and property rights)

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? A. Sturdy Light was a star that developed into a cash cow. B. Sturdy Light was a question mark that developed into a star. C. Sturdy Light was a dog that developed into a question mark. D. Sturdy Light was a cash cow that developed into a star.

A. Sturdy Light was a star that developed into a cash cow. (Sturdy Light was a star that developed into a cash cow. A star holds a high market share in a fast growing market. A cash cow holds a high market share in a low-growth market.)

In the early 1990s, Gatorade dominated the market for sports drinks, a segment in which it had been the original innovator. For decades, Coca-Cola had been a leader in marketing, bottling, and distributing soft drinks. However these drinks did not include a sports drink. Soon after Gatorade appeared, Coca-Cola developed and marketed its own sports drink, Powerade. In this example, Coca-Cola A. built new core competencies to protect and extend its current market position. B. built new core competencies to create and compete in markets of the future. C. leveraged core competencies to improve current market position. D. redeployed and recombined core competencies to compete in markets of the future.

A. built new core competencies to protect and extend its current market position. (In this example, Coca-Cola built new core competencies to protect and extend its current market position.)

_____ is best described as a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property. A. Lean manufacturing B. Licensing C. Crowdsourcing D. Bootlegging

B. Licensing (Licensing is a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property such as a patent)

Which quadrant in the core competence-market matrix is the hardest to pursue? A. building new core competencies to protect and extend current market position B. building new core competencies to create and compete in markets of the future C. leveraging core competencies to improve current market position D. redeploying and recombining core competencies to compete in markets of the future

B. building new core competencies to create and compete in markets of the future (The quadrant in the core competence-market matrix that is the hardest to pursue is building new core competencies to create and compete in markets of the future.)

Companies that pursue related diversification are more likely to improve their performance than companies that pursue unrelated diversification because they create a A. diversification discount. B. diversification premium. C. conglomerate discount. D. conglomerate premium.

B. diversification premium. (Companies that pursue related diversification are more likely to improve their performance than companies that pursue unrelated diversification because they create a diversification premium.)

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? A. principal-agent problem B. information asymmetry C. experience-curve effect D. learning-curve effect

B. information asymmetry (Information asymmetries are situations in which one party is more informed than another, because of the possession of private information.)

Investments in specialized assets tend to incur high opportunity costs because the A. assets can be profitably used for multiple purposes. B. threat of one of the partners pursuing his or her self-interest is high. C. social costs associated with these assets are high. D. firms can avoid backward integration by investing in these assets.

B. threat of one of the partners pursuing his or her self-interest is high. (Making a specialized investment opens up the threat of opportunism by one of the partners. Opportunism is defined as self-interest seeking with guile. Backward vertical integration is often undertaken to overcome the threat of opportunism and in securing key raw materials)

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. A. related-constrained strategy B. unrelated diversification strategy C. differentiation strategy D. dominant-business strategy

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

_____ are strategic business units that compete in a low-growth market but hold considerable market share. A. Dogs B. Question marks C. Cash cows D. Stars

C. Cash cows (Cash cows are strategic business units that compete in a low-growth market but hold considerable market share. Their earnings and cash flows are high and stable)

_____ is when a firm moves activities and jobs outside its home country. A. Conglomerate outsourcing B. Alliance outsourcing C. Off-shore outsourcing D. External outsourcing

C. Off-shore outsourcing (Off-shore outsourcing is when a firm moves activities and jobs outside its home country)

Which of the following would hinder firm performance? A. diversification providing economies of scale B. diversification exploiting economies of scope C. diversification raising costs D. diversification raising value

C. diversification raising costs (If diversification raised cost, it would hinder firm performance.)

Caring Ketchup Inc. makes organic ketchup. To promote its products, this firm decided to make bottles in the shape of tomatoes. To accomplish this, Caring Ketchup 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? A. site specificity B. research specificity C. physical-asset specificity D. human-asset specificity

C. physical-asset specificity (This example demonstrates physical-asset specificity, which includes assets whose physical and engineering properties are designed to satisfy a particular customer, such as bottling machinery.)

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? A. experience-curve effects B. time compression diseconomies C. principal-agent problem D. information asymmetry

D. information asymmetry (In the market for used cars, unequal information between sellers and buyers has led to a lemons problem. Information asymmetries can result in the crowding out of desirable goods and services by inferior ones.)

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 A. cash cow. B. star. C. dog. D. question mark.

D. question mark. (According to the BCG growth matrix, TimeEnough is a question mark. Question marks have low, unstable earnings that might be growing.)

In 2009, ExxonMobil bought XTO Energy, a natural gas company, for $31 billion. XTO Energy is known for its core competency to extract natural gas from unconventional places such as shale rock—the type of deposits currently being exploited in the United States. ExxonMobil hopes to leverage its core competency in the exploration and commercialization of oil into natural gas extraction. Based on this example, ExxonMobil is engaging in A. unrelated-linked diversification. B. unrelated-constrained diversification. C. related-linked diversification. D. related-constrained diversification.

D. related-constrained diversification. (Based on this example, ExxonMobil is engaging in related-constrained diversification. When executives consider business opportunities only where they can leverage their existing competencies and resources, the firm is using related-constrained diversification)

A firm sources intermediate goods and components from in-house suppliers as well as outside suppliers. In a similar fashion, another firm sells its products through company-owned retail outlets and through independent retailers. Both of these examples demonstrate A. strategic outsourcing. B. strategic insourcing. C. backward horizontal integration. D. taper integration.

D. taper integration. (Both of these examples show taper integration. This type of integration is a way of orchestrating value activities in which a firm is either backwardly integrated and also relies on outside-market firms for some of its supplies or is forwardly integrated and also relies on outside-market firms for some if its distribution.)

Which of the following best illustrates forward vertical integration? A. A firm that manufactures and sells car engines to major automobile companies launches its own line of cars. B. A chain of ice cream parlors launches a brand of toys and accessories for children. C. A multinational coffee chain sources its coffee beans from plantations in Brazil and Vietnam. D. A designer shoe company that previously purchased leather from external suppliers establishes its own leather tannery.

A. A firm that manufactures and sells car engines to major automobile companies launches its own line of cars. (A firm that manufactures car engines and sells it to major automobile companies launching its own line of cars best illustrates forward vertical integration. Forward vertical integration involves moving ownership of activities closer to the end customer.)

_____, 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 B. Fixed costs C. Agency costs D. Network costs

A. Coordination costs (A related-diversification strategy entails coordination costs, which are a function of the number, size, and types of businesses that are linked to one another.)

_____ 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 B. Corporate divestiture C. Reverse engineering D. Closed innovation

A. Forward vertical integration (Forward vertical integration involves moving ownership of activities closer to the end (customer) point of the value chain.)

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. B. Chick-fil-A has a larger customer base and number of outlets in the U.S. market than its competitor KFC. C. KFC wants to follow a differentiation strategy, and Chick-fil-A wants to pursue a cost-leadership strategy. D. Chick-fil-A is part of a large conglomerate, whereas KFC has more flexibility to pursue a geographic diversification strategy.

A. KFC has more financial resources than Chick-fil-A since it is a publicly traded stock company. (KFC is a publicly traded stock company, as part of Yum Brands; Chick-fil-A is privately owned. Public companies are often expected by shareholders to achieve profitable growth as fast as possible to result in an appreciation of the stock price and thus an increase in shareholder value. In contrast, private companies generally grow slower than public companies because their growth is mostly financed through retained earnings and debt rather than equity.)

_____ 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 B. Reverse engineering C. Forward integration D. Horizontal integration

A. Strategic outsourcing (An alternative to vertical integration is strategic outsourcing, which involves moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain)

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? A. The petrol cars SBU operates in a low-growth market, whereas the hybrid electric cars SBU operates in a high-growth market. B. The petrol cars SBU will have a relatively low market share in its industry, whereas the hybrid electric cars SBU will have the least market share in its industry. C. The strategic recommendation for the hybrid electric cars SBU will be to harvest it, whereas for the petrol cars SBU, the company should just maintain it. D. The petrol cars SBU is more important than the hybrid electric cars SBU in terms of future growth for the company.

A. The petrol cars SBU operates in a low-growth market, whereas the hybrid electric cars SBU operates in a high-growth market. (From this scenario, it can be inferred that the petrol cars SBU operates in a low-growth market, whereas the hybrid electric cars SBU operates in a high-growth market. Cash cows are strategic business units that compete in a low-growth market but hold considerable market share. A corporation's star strategic business units (SBUs) hold a high market share in a fast-growing market. Their earnings are high and either stable or growing.)

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 B. a franchisee C. a licensing contract D. a corporate acquisition

A. a joint venture (The scenario best illustrates a joint venture. In a joint venture, which is another special form of strategic alliance, two or more partners create and jointly own a new organization. Since the partners contribute equity to a joint venture, they make a long-term commitment, which in turn facilitates transaction-specific investments.)

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. B. low administrative costs because of reduced bureaucracy. C. eradication of the principal-agent problem. D. high-powered incentive to work as salaried employees for an existing firm.

A. ability to coordinate highly complex tasks to allow for specialized division of labor. (The advantages of organizing economic activity within firms include coordination of highly complex tasks to allow for specialized division of labor. Internal transaction costs include administrative costs associated with coordinating economic activity between different business units of the same corporation such as transfer pricing for input factors, and between business units and corporate headquarters including important decisions pertaining to resource allocation, among others.)

Firms that use taper integration also use _____ when they rely on outside-market firms for some of their supplies. A. backward vertical integration B. forward vertical integration C. backward horizontal integration D. forward horizontal integration

A. backward vertical 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)

The managers at AHL Chemicals Inc. decided that their firm needed to diversify because of falling sales and lower performance in one sector. How does diversifying compensate for the lackluster performance in this sector? A. by having higher performance in another sector B. by sharing their market power C. by increasing the firm's risk in another sector D. by motivating managers

A. by having higher performance in another sector (Firms often attempt to reduce risk by diversifying their product and service portfolio through competing in a number of different industries. The rationale behind these diversification moves is that falling sales and lower performance in one sector might be compensated by higher performance in another.)

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 B. by adding more unrelated businesses into its corporate portfolio C. by increasing its coordination and influence costs D. by investing in businesses under the question mark quadrant of the BCG matrix

A. by using internal capital markets as a source of value creation (Internal capital markets can be a source of value creation in a diversification strategy if the conglomerate's headquarters does a more efficient job of allocating capital through its budgeting process than what could be achieved in external capital markets)

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 B. single-business firm C. parent company D. subsidiary

A. conglomerate (A company that combines two or more strategic business units under one overarching corporation and follows an unrelated diversification strategy is called a conglomerate.)

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 B. learning-curve effects C. experience-curve effects D. economies of scale

A. diversification discount (Win Goods is experiencing a diversification discount in this scenario. Diversification discount is a situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business units.)

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. B. increasing their level of vertical integration. C. offshoring their core activities. D. engaging in unrelated diversification.

A. engaging in strategic outsourcing. (Rather than developing their own human resource management systems, some firms outsource these non-core activities to companies like PeopleSoft (owned by Oracle), EDS (owned by HP), or Perot Systems (owned by Dell), who can leverage their deep competencies and produce scale effects. This is referred to as strategic outsourcing.)

Which of the following best illustrates site specificity? A. equipment necessary for mining bauxite and aluminum smelting B. bottling machinery to manufacture bottles with trademarked shapes C. investment made in human capital to master procedures of a specific organization D. investment made to train employees to operate computers

A. 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.)

A corporation's star SBUs will A. hold a high market share in a fast-growing market. B. experience low and unstable earnings in a fast-growing market. C. hold a small market share in a low-growth market. D. compete in a low-growth market but hold considerable market share.

A. hold a high market share in a fast-growing market. (A corporation's star strategic business units (SBUs) hold a high market share in a fast-growing market. Their earnings are high and either stable or growing.)

Each stage of the vertical value chain typically represents a distinct _____ in which a number of different firms are competing. A. industry B. functional department C. economy D. customer segment

A. industry (Industry value chains are also called vertical value chains, because they depict the transformation of raw materials into finished goods and services along distinct vertical stages. Each stage of the vertical value chain typically represents a distinct industry in which a number of different firms are competing.)

Chao 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 Chao should be hired as a salesperson in the company. However, in his resume, Chao had not mentioned his previous work experience as he was fired from that job because he used illegal drugs. Which of the following does this scenario best illustrate? A. information asymmetry B. principal-agent problem C. experience-curve effect D. learning-curve effect

A. information asymmetry (The scenario best illustrates information asymmetry. Information asymmetries are situations in which one party is more informed than another, because of the possession of private information.)

Decisions relating to the range of products and services a firm will offer determine the firm's A. level of diversification. B. geographic scope. C. vertical integration. D. absorptive capacity.

A. level of diversification. (The range of products and services that a firm decides to offer determines its level of diversification)

Hitoro 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 Revox Inc., a consumer electronics company, for five years. Which of the following alternatives to integration does this best illustrate? A. licensing B. franchising C. crowdsourcing D. bootlegging

A. licensing (This scenario best illustrates licensing. Licensing is a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property such as a patent.)

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. B. related-linked diversification. C. strategic outsourcing. D. offshore outsourcing.

A. 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. The choices of alternative business activities are limited—constrained—by the fact that they need to be related through common resources, capabilities, and competencies.)

RoboToys, Inc. is involved in the production of robotic toys. This firm produces the raw materials, including metals and oils for plastic; creates the integrated circuits, displays, and batteries; and assembles the toys. Which of the following stages of the industry value chain is RoboToys involved in? A. stages 1, 2, and 3 B. stages 1, 2, and 4 C. stages 2, 3, and 4 D. stages 2, 3, and 5

A. stages 1, 2, and 3 (RoboToys is involved in stages 1, 2, and 3 of the industry value chain. Stage 1 deals with producing raw materials, stage 2 deals with producing components, and stage 3 involves assembling the product.)

How is an equity alliance different from a joint venture? A. An equity alliance involves ownership that facilitates transaction-specific ventures; a joint venture involves taking ownership by buying stock. B. An equity alliance involves taking ownership in a partner; a joint venture involves two or more people owning a firm. C. An equity alliance involves taking ownership in a partner; a joint venture involves taking ownership by buying stock. D. An equity alliance involves partners contributing equity to a joint venture; a joint venture involves two or more people owning a firm.

B. An equity alliance involves taking ownership in a partner; a joint venture involves two or more people owning a firm. (An equity alliance involves taking ownership in a partner; a joint venture involves two or more people owning a firm.)

_____ 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. A. Fixed costs B. Influence costs C. Coordination costs D. Opportunity costs

B. Influence costs (Influence costs occur due to political maneuvering by managers to influence capital and resource allocation and the resulting inefficiencies stemming from suboptimal allocation of scarce resources)

_____ is best described as a situation in which one party is more informed than another, because of the possession of private information. A. Information governance B. Information asymmetry C. Information deregulation D. Information piracy

B. Information asymmetry (Frequently, sellers have better information about products and services than buyers, which in turn creates information asymmetries, situations in which one party is more informed than another, because of the possession of private information.)

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? A. It is leveraging existing core competencies to improve current market position. B. It is building new core competencies to protect and extend its current market position. C. It is redeploying and recombining existing core competencies to compete in markets of the future. D. It is targeting the chasm between the early adopter and early majority market segment.

B. It is building new core competencies to protect and extend its current market position. (By developing competencies in the development and marketing of its own sports drink, Powerade, Coco-Cola was trying to build 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? A. It offered Orocobre exposure to Toyota's proprietary information. B. It made a credible commitment by taking an equity stake in Orocobre. C. It acquired Orocobre as part of its backward vertical integration plans. D. It offered Orocobre franchising opportunities to sell hybrid vehicles.

B. It made a credible commitment by taking an equity stake in Orocobre. (In Strategy Highlight 8.1, it is discussed as to how Toyota took an equity stake, worth an estimated $120 million in this project, to mitigate Orocobre's concerns. Toyota made a credible commitment—a long-term strategic decision that is both difficult and costly to reverse.)

_____ 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. A. Reverse engineering B. Restructuring C. Rebooting D. Reverse brainstorming

B. Restructuring (Restructuring describes the process of reorganizing and divesting business units and activities to refocus a company in order to leverage its core competencies more fully)

Which of the following companies will be considered as a conglomerate? A. ExxonMobil, after it acquired XTO Energy—a natural gas company B. The Tata Group, active in industries such as tea, steel, IT, power, and automobiles C. Harley-Davidson, with its Harley-Davidson branded motorcycle clothing and attire D. Coca-Cola, which solely focuses on soft drinks but operates in many countries

B. The Tata Group, active in industries such as tea, steel, IT, power, and automobiles (The Tata Group, a widely diversified multinational conglomerate, is active in industries such as tea, hospitality, steel, IT, communications, power, and automobiles.)

PrimoDisk 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, PrimoDisk 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, PrimoDisk will be categorized under A. dogs. B. cash cows. C. stars. D. question marks.

B. cash cows. (In the Boston Consulting Group (BCG) growth-share matrix, PrimoDisk will be categorized under cash cows. Cash cows are strategic business units that compete in a low-growth market but hold considerable market share. Their earnings and cash flows are high and stable.)

GreenCure 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, GreenCure Pharma invested $100 million in the project. This investment made by GreenCure Pharma will result in a A. cartel. B. credible commitment. C. corrective action. D. parent-subsidiary relationship.

B. credible commitment. (The strategic decision made by GreenCure Pharma would be referred to as a credible commitment. A credible commitment is a long-term strategic decision that is both difficult and costly to reverse.)

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? A. capital liquidity B. diversification premium C. diversification discount D. demand-pull inflation

B. diversification premium (In this scenario, ESB Group has created a diversification premium. Companies that pursue related diversification are more likely to improve their performance. They create a diversification premium: the stock price of related-diversification firms is valued at greater than the sum of their individual business units)

With reference to the Strategy Highlight 8.2, the Tata Group's corporate strategy is attempting to A. move from unrelated diversification to related-constrained diversification. B. integrate different strategic positions, pursued by different strategic business units. C. pursue a focused differentiation strategy over a focused cost-leadership strategy. D. depend on a single product market to generate most of its revenues.

B. integrate different strategic positions, pursued by different strategic business units. (Tata's corporate strategy is attempting to integrate different strategic positions, pursued by different strategic business units, each with its own profit and loss responsibility.)

If a strategic business unit is recognized as a cash cow, it is advisable to A. harvest the business. B. invest into the business to hold its current position. C. divest the business due to its low market share. D. maintain it till it turns into a dog.

B. invest into the business to hold its current position. (The strategic recommendation for cash cows is to invest enough into them to hold their current position, and to avoid having them turn into dogs.)

There are many reasons why firms need to grow. Which of the following reasons is strongly influenced by economies of scale? A. increasing profits B. lowering costs C. reducing risk D. motivating managers

B. lowering costs (Firms are motivated to grow in order to lower their cost. A larger firm may benefit from economies of scale, thus driving down average costs as their output increases.)

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? A. diseconomies of scale B. principal-agent problem C. experience-curve effects D. information asymmetries

B. principal-agent problem (The principal-agent problem is a major disadvantage of organizing economic activity within firms, as opposed to within markets. It can arise when an agent such as a manager, performing activities on behalf of the principal (the owner of the firm), pursues his or her own interests.)

BM 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? A. process diversification B. product diversification C. geographic diversification D. market diversification

B. product diversification (BM Goods is pursuing a product diversification strategy. A firm that is active in several different product markets is pursuing a product diversification strategy.)

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 A. geographic diversification. B. product diversification. C. vertical integration. D. horizontal integration.

B. product diversification. (In Chapter Case 8, it has been discussed how Amazon.com, lead by Jeff Bezos, has developed from an online bookseller into an online company that sells a wide variety of goods and services. Recently, Amazon has announced plans to enter the college bookstore market, which is an example of how the company has relentlessly pursued product diversification)

The most efficient way to overcome the principal-agent problem in a firm is to A. increase the level of vertical integration within the firm. B. provide stock options to managers. C. downsize the existing workforce. D. organize economic activities within the firm.

B. provide stock options to managers. (The principal-agent problem is a major disadvantage of organizing economic activity within firms, as opposed to within markets. One potential way to overcome the principal-agent problem is to give stock options to managers, thus making them owners)

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 A. dogs. B. question marks. C. stars. D. underdogs.

B. question marks. (In the Boston Consulting Group (BCG) growth-share matrix, the solar-powered car division will be categorized under question marks. It is not clear whether question marks will turn into dogs or stars. Their earnings are low and unstable, but they might be growing. The cash flow, however, is negative.)

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 A. leveraging existing core competencies to target the chasm between the early adopter and early majority market segment. B. redeploying and recombining existing core competencies to compete in future markets. C. building new core competencies to create and compete in future markets. D. building new core competencies to protect and extend current market position.

B. redeploying and recombining existing core competencies to compete in future markets. (In this scenario, MotorCraft is redeploying and recombining existing core competencies to compete in markets of the future. Here, managers must strategize about how to redeploy and recombine existing core competencies to compete in future markets.)

A firm that engages in strategic outsourcing typically A. increases its internal transaction costs. B. reduces its level of vertical integration. C. reduces its level of external transaction costs. D. increases its level of horizontal integration.

B. reduces its level of vertical integration. (An alternative to vertical integration is strategic outsourcing, which involves moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain. A firm that engages in strategic outsourcing reduces its level of vertical integration.)

The Boston Consulting Group (BCG) growth-share matrix locates a firm's individual strategic business units (SBUs) in which two dimensions? A. start-up capital required and stage of industry life cycle B. relative market share and speed of market growth C. economic value created and costs incurred D. amount of debt financing and equity financing

B. relative market share and speed of market growth (One helpful tool to guide corporate portfolio planning is the Boston Consulting Group (BCG) growth-share matrix. This matrix locates the firm's individual SBUs in two dimensions: relative market share (horizontal axis) and speed of market growth (vertical axis).)

When a firm is said to be pursuing a geographic diversification strategy, it means that the firm will A. introduce different products and services in an existing single market. B. sell its products in several different regional, national, and international markets. C. operate from multiple headquarters across the globe. D. depend solely on its in-house facilities for all its production purposes.

B. sell its products in several different regional, national, and international markets. (A firm that is active in several different countries is pursuing a geographic diversification strategy.)

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 A. question marks. B. stars. C. cash cows. D. dogs.

B. stars. (In the Boston Consulting Group (BCG) growth-share matrix, the smartphone division of True Electra Inc. will be categorized under stars. A corporation's star strategic business units (SBUs) hold a high market share in a fast-growing market. Their earnings are high and either stable or growing.)

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? A. concentric integration B. taper integration C. horizontal integration D. conglomerate integration

B. taper integration (In this scenario, Virtue Products is applying 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, and/or is forwardly integrated but also relies on outside-market firms for some if its distribution.)

Which of the following is an example of an external transaction cost? A. the cost of setting up a production unit B. the cost of searching for a contract manufacturer C. the cost of recruiting and retaining employees D. the cost of maintaining plant and machinery

B. the cost of searching for a contract manufacturer (When companies transact in the open market, they incur external transaction costs: the costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract.)

A drawback of short-term contracting as an alternative to making a component in-house is that A. it is the most-integrated alternative to performing an activity so the principal company has no control over the agent. B. the supplying firm has no incentive to make any transaction-specific investments to increase performance or quality. C. it fails to allow a long planning period that individual market transactions provide. D. the buying firm cannot demand lower prices due to the lack of a competitive bidding process.

B. the supplying firm has no incentive to make any transaction-specific investments to increase performance or quality. (The drawback of short-term contracts is that firms responding to the requests for proposals (RFPs) have no incentive to make any transaction-specific investments (e.g., buy new machinery to improve product quality) due to the short duration of the contract.)

_____ 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. A. Taper integration B. Open innovation C. Diversification D. Differentiation

C. Diversification (Diversification 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. A firm that engages in diversification increases the variety of products and services it offers or markets and the geographic regions in which it competes. A nondiversified company focuses on a single market, whereas a diversified company competes in several different markets simultaneously)

Which of the following statements is true of internal transaction costs? A. Internal transaction costs arise when companies transact in the open market. B. When the internal costs involved in pursuing an activity in-house are more than the costs of transacting, then the concerned firm should vertically integrate. C. Internal transaction costs tend to increase with organizational size and complexity. D. It is beneficial to "buy" goods or services rather than "make" when internal transaction costs are low.

C. Internal transaction costs tend to increase with organizational size and complexity. (Internal transaction costs include administrative costs associated with coordinating economic activity between different business units of the same corporation such as transfer pricing for input factors, and between business units and corporate headquarters including important decisions pertaining to resource allocation, among others. Internal transaction costs tend to increase with organizational size and complexity.)

Which of the following statements is true of taper integration? A. It is the most integrated alternative to performing an activity within one's own corporate family. B. It refers to a situation in which firms narrow their focus on downstream value chain activities and ignore the upstream value chain activities. C. It exposes in-house suppliers and distributors to market competition to make performance comparisons possible. D. It does not rely on outside-market firms for its supplies.

C. It exposes in-house suppliers and distributors to market competition to make performance comparisons possible. (Taper integration exposes in-house suppliers and distributors to market competition so that performance comparisons are possible. Rather than hollowing out its competencies by relying too much on outsourcing, taper integration allows a firm to retain and fine-tune its competencies in upstream and downstream value chain activities.)

Which of the following is a drawback of vertical integration? A. It increases the difficulty of securing critical supplies. B. It impedes scheduling and planning. C. It increases the potential of legal repercussions. D. It impedes investments in special assets.

C. It increases the potential of legal repercussions. (Vertical integration increases the potential of legal repercussions. Due to monopoly concerns, vertical integration has not gone completely unchallenged by the Federal Trade Commission and the Justice Department.)

_____ 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. A. Cost drivers B. Value drivers C. Specialized assets D. Liquid assets

C. Specialized assets (Specialized assets are unique assets with high opportunity costs. They have significantly more value in their intended use than in their next-best use. They come in three types: site specificity, physical-asset specificity, and human-asset specificity.)

_____ 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. A. Embargos B. Cartel agreements C. Strategic alliances D. Corporate acquisitions

C. Strategic alliances (Strategic alliances are 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.)

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? A. Soar Inc. generates 70 percent of its revenues from its primary business, while TL & Co. generates only 10 percent of its revenues from its primary business. B. Soar Inc. pursues a backward diversification strategy, while TL & Co. pursues a forward diversification strategy. C. TL & Co. will share fewer common competencies and resources between its various businesses when compared to Soar Inc. D. TL & Co. pursues a differentiation strategy, and Soar Inc. pursues a cost-leadership strategy, to gain a competitive advantage.

C. TL & Co. will share fewer common competencies and resources between its various businesses when compared to Soar Inc. (TL & Co. will share fewer common competencies and resources between its various businesses when compared to Soar. In related-linked diversification, only some businesses share competencies in products, services, technology, or distribution. In related-constrained diversification, all businesses share competencies in products, services, technology, or distribution.)

The 3-D 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? A. The strategic recommendation for the 3-D television division is to harvest it, and the strategic recommendation for the LCD television division is to invest further in it. B. The 3-D television division will have a high market share in its industry, whereas the LCD television division will have a low-market share in its industry. C. The 3-D television division operates in a high-growth market, whereas the LCD television division operates in a low-growth market. D. The LCD television division will benefit by pursuing a differentiation strategy, and the 3-D television division will benefit by following a cost-leadership strategy.

C. The 3-D television division operates in a high-growth market, whereas the LCD television division operates in a low-growth market. (In this scenario, the 3-D television division operates in a high-growth market, whereas the LCD television division operates in a low-growth market. It is not clear whether question marks will turn into dogs or stars. Their earnings are low and unstable, but they might be growing. Dogs hold a small market share in a low-growth market; they have low and unstable earnings, combined with neutral or negative cash flows.)

How does a conglomerate benefit from following an unrelated diversification strategy? A. The conglomerate can solely depend on its primary business activity for a major portion of its revenues. B. The conglomerate can share most of its competencies in products, services, technology, or distribution between all its businesses. C. The conglomerate can overcome institutional weaknesses, such as a lack of capital markets, in emerging economies. D. The conglomerate can limit the learning- and experience-curve effects it faces.

C. The conglomerate can overcome institutional weaknesses, such as a lack of capital markets, in emerging economies. (Unrelated diversification strategy helps firms gain and sustain competitive advantage because it allows the conglomerate to overcome institutional weaknesses in emerging economies, such as a lack of capital markets and well-defined legal systems and property rights.)

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? A. The firm will be protected against the principal-agent problem. B. The firm's administrative costs will be low because of necessary bureaucracy. C. The firm will have more flexibility in purchasing and comparing prices of goods and services. D. The firm will have high-powered incentives, such as hourly wages and salaries.

C. The firm will have more flexibility in purchasing and comparing prices of goods and services. (Grace Apparel will have more flexibility in purchasing and comparing prices of goods and services. The advantages of obtaining goods and services externally include increased flexibility. Transacting in markets enables those who wish to purchase goods to compare prices and services among many different providers.)

Which of the following is true of the parent-subsidiary relationship? A. The ability to create a community of knowledge is low. B. The parent firm has no control and command over the subsidiary. C. The transaction costs that arise are frequently due to transfer prices. D. The parent firm will lack specialization and division of labor.

C. The transaction costs that arise are frequently due to transfer prices. (In the parent-subsidiary relationships, transaction costs that arise are frequently due to political turf battles, which may include the capital budgeting process and transfer prices, among other areas)

_____ is best described as a firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs. A. Venture capitalism B. Bootlegging C. Vertical integration D. Crowdsourcing

C. Vertical integration (Vertical integration is a firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs. Vertical integration can be measured by a firm's value added: What percentage of a firm's sales is generated within the firm's boundaries?)

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? A. While the tobacco SBU operates in a low-growth market, the beverages SBU operates in a high-growth market. B. The management of the company should use the cash inflow from the beverages SBU and invest it in the tobacco SBU. 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. D. The tobacco SBU should follow a backward integration strategy, and the beverages SBU should pursue a forward integration strategy.

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. (From this scenario, it can be inferred that while the market share of the company in the beverages industry will be high, the market share in the tobacco industry will be low. Cash cows are strategic business units that compete in a low-growth market but hold considerable market share. Dogs hold a small market share in a low-growth market; they have low and unstable earnings, combined with neutral or negative cash flows.)

Which of the following firms is most prone to experiencing a diversification discount? A. a company that deals in petroleum as well as natural gas B. a company that derives its revenues from selling aerated drinks and health drinks C. a company that pursues unrelated diversification D. a company that pursues related-constrained diversification

C. a company that pursues unrelated diversification (Firms that pursue unrelated diversification are often unable to create additional value. They experience a diversification discount in the stock market.)

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? A. a conglomerate B. a subsidiary C. a dominant-business firm D. a single-business firm

C. a dominant-business firm (White Leo Motors is 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.)

Companies that pursue related diversification are able to create a diversification premium because they A. are able to leverage time compression economies. B. can operate beyond the minimum efficient scale. C. are able to increase value due to economies of scope. D. can reduce the value gap created by its products.

C. are able to increase value due to economies of scope. (Companies that pursue related diversification are more likely to improve their performance. They create a diversification premium. At the most basic level, a corporate diversification strategy enhances firm performance. For diversification to enhance firm performance, it must do at least one of the following: provide economies of scale, exploit economies of scope, or reduce costs and increase value)

Neon Electronics Inc. sourced touch screens 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 touch screens. What does this scenario best illustrate? A. crowdsourcing B. new product development C. backward vertical integration D. conglomerate diversification

C. backward vertical integration (This scenario best illustrates backward vertical integration. Backward vertical integration involves moving ownership of activities upstream nearer to the originating inputs of the industry value chain.)

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 A. stars. B. question marks. C. dogs. D. cash cows.

C. dogs. (The desktop SBU will be categorized under dogs in the Boston Consulting Group (BCG) growth-share matrix. Dogs hold a small market share in a low-growth market; they have low and unstable earnings, combined with neutral or negative cash flows.)

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? A. crowdsourcing B. credit rationing C. franchising D. bootstrapping

C. franchising (This scenario best illustrates franchising. Franchising is a long-term contract in which a franchisor grants a franchisee the right to use the franchisor's trademark and business processes to offer goods and services that carry the franchisor's brand name; the franchisee in turn pays an up-front buy-in lump sum and a percentage of revenues)

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? A. product diversification strategy B. process diversification strategy C. geographic diversification strategy D. product-market diversification strategy

C. geographic diversification strategy (Symphon Times is pursuing a geographic diversification strategy. A firm that is active in several different countries is pursuing a geographic diversification strategy.)

A(n) _____ is best used to depict the transformation of raw materials into finished goods and services along distinct vertical stages. A. encrypt B. chain of command C. industry value chain D. scatter chart

C. industry value chain (Industry value chains are also called vertical value chains, because they depict the transformation of raw materials into finished goods and services along distinct vertical stages. Each stage of the vertical value chain typically represents a distinct industry in which a number of different firms are competing.)

Fantastica 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 Fantastica Industries pursuing? A. zone pricing B. niche marketing C. product-market diversification strategy D. process diversification strategy

C. product-market diversification strategy (Fantastica Industries is pursuing a product-market diversification strategy. A company that pursues both a product and a geographic diversification strategy simultaneously follows a 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 A. strategic outsourcing. B. lean manufacturing. C. product-market diversification. D. process diversification.

C. product-market diversification. (From this data, we can conclude that PepsiCo has been involved in product-market diversification. A company that pursues both a product and a geographic diversification strategy simultaneously follows a product-market diversification strategy.)

Which of the following corporate strategies did ExxonMobil pursue by acquiring XTO Energy, a natural gas company? A. taper integration strategy B. differentiation strategy C. related diversification strategy D. cost-leadership strategy

C. related diversification strategy (In 2009, ExxonMobil bought XTO Energy, a natural gas company, for $31 billion. This strategic move into natural gas is an example of related diversification.)

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 A. reverse engineering. B. benchmarking. C. restructuring. D. crowdsourcing.

C. restructuring. (In this scenario, WJ Group is involved in restructuring. Restructuring describes the process of reorganizing and divesting business units and activities to refocus a company in order to leverage its core competencies more fully.)

Which of the following stakeholders of a company would most likely be responsible for formulating a corporate strategy? A. the first-line employees B. the creditors C. the chief executive officer D. the middle manager

C. the chief executive officer (Although many managers have input to this important decision-making process, the responsibility for corporate strategy ultimately rests with the CEO.)

Diversification premium is a situation in which A. customers have to pay premium prices on products manufactured by firms pursuing unrelated diversification due to the lack of economies of scope. B. the overall value creation of highly diversified firms is more than the sum of the value created by individual business units. C. the stock price of related-diversification firms is valued at greater than the sum of their individual business units. D. shareholders are benefitted from the market capitalization of a highly diversified firm because of its economies of scale.

C. the stock price of related-diversification firms is valued at greater than the sum of their individual business units. (Companies that pursue related diversification are more likely to improve their performance. They create a diversification premium: 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 A. level of diversification. B. geographic scope. C. vertical integration. D. absorptive capacity.

C. vertical integration. (The industry value chain describes the transformation of raw materials into finished goods and services along distinct vertical stages. This decision determines the firm's vertical integration)

Which of the following statements is true of transaction costs? A. When the costs of pursuing an activity in-house are more than the costs of transacting for that activity in the market, then the concerned firm should vertically integrate. B. When companies transact in the open market, they incur internal transaction costs. C. Transaction costs exclusively consist of external costs associated with economic exchanges. D. Transaction costs are necessary to explain and predict the boundaries of a firm.

D. Transaction costs are necessary to explain and predict the boundaries of a firm. (A theoretical framework in strategic management called transaction cost economics explains and predicts the boundaries of the firm. Transaction costs are all internal and external costs associated with an economic exchange, whether it takes place within the boundaries of a firm or in markets.)

How do firms benefit from vertical integration? A. Vertical integration allows firms to reduce organizational complexity and administrative costs. B. Firms that vertically integrate will have increased strategic flexibility when faced with technological changes. C. Firms that vertically integrate do not have to make transaction-specific investments. D. Vertical integration allows firms to increase operational efficiencies through improved coordination of adjacent value chain activities.

D. Vertical integration allows firms to increase operational efficiencies through improved coordination of adjacent value chain activities. (Vertical integration allows firms to increase operational efficiencies through improved coordination and the fine-tuning of adjacent value chain activities. It facilitates scheduling and planning.)

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? A. a flagship brand B. a single-business firm C. a dominant-business firm D. a conglomerate

D. a conglomerate (Red Empire is a conglomerate. A company that combines two or more strategic business units under one overarching corporation and follows an unrelated diversification strategy is called a conglomerate.)

Which of the following firms is least integrated? A. a firm that enters a joint venture with another company to develop a new technology B. a firm that owns production subsidiaries across the globe C. a firm that makes equity investments in its supplier's company D. a firm that buys all the required raw materials from multiple external vendors

D. a firm that buys all the required raw materials from multiple external vendors (In the make-or-buy-continuum, the "make" and "buy" choices anchor each end of a continuum from markets to firms. Moving from transacting in the market ("buy") to full integration ("make"), alternatives include short-term contracts as well as various forms of strategic alliances (long-term contracts, equity alliances, and joint ventures) and parent-subsidiary relationships.)

Which of the following best illustrates physical-asset specificity? A. a unique training program developed in an organization B. a ship container designed to carry more than the average load of iron ore C. a generic machine that can be used to churn different mixtures D. a machine solely designed to give a candy its trademarked shape

D. a machine solely designed to give a candy its trademarked shape (A machine solely designed to give a candy its trademarked shape best illustrates physical-asset specificity. 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.)

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 A. leveraging existing core competencies to improve current market position. B. building new core competencies to achieve vertical integration. C. redeploying and recombining existing core competencies to compete in markets of the future. D. building new core competencies to create and compete in markets of the future.

D. building new core competencies to create and compete in markets of the future. (Hamel and Prahalad call the combination of new core competencies with new market opportunities as "mega opportunities"—those that hold significant future-growth opportunities. For example, Salesforce.com is a company that employs this diversification strategy well.)

Vehmo 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, Vehmo is primarily A. leveraging new core competencies to improve current market position. B. redeploying existing core competencies to compete in future markets. C. unlearning existing core competencies to create and compete in markets of the future. D. building new core competencies to protect and extend current market position.

D. building new core competencies to protect and extend current market position. (In this scenario, Vehmo is primarily building new core competencies to protect and extend current market position. Here, managers must come up with strategic initiatives to build new core competencies to protect and extend the company's 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 A. infuse more capital into the strategic business unit. B. provide more human resources to the business. C. hold the business till it turns into a star. D. divest the strategic business unit.

D. divest the strategic business unit. (The strategic recommendations for dogs are either to divest the business or to harvest it. This implies stopping to invest in the business and squeezing out as much cash flow as possible before shutting it down or selling it.)

In the Boston Consulting Group (BCG) growth-share matrix, strategic business units categorized under dogs A. compete in a low-growth market but hold considerable market share. B. hold a high market share in a fast-growing market. C. compete in a high-growth market but have low and unstable earnings. D. hold a small market share in a low-growth market.

D. hold a small market share in a low-growth market. (Dogs hold a small market share in a low-growth market; they have low and unstable earnings, combined with neutral or negative cash flows.)

Which of the following motivations for business growth involves principal-agent problems? A. increasing profits B. increasing market power C. reducing risk D. motivating managers

D. motivating managers (Firms may grow to achieve goals that benefit its managers more than their stockholders. This motivation for managers is called the principal-agent problem.)

Stellar 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? A. venture capitalism B. franchising C. joint venture D. parent-subsidiary relationship

D. parent-subsidiary relationship (The parent-subsidiary relationship describes the most-integrated alternative to performing an activity within one's own corporate family. The corporate parent owns the subsidiary and can direct it via command and control.)

Which of the following alternatives on the make-or-buy continuum allows for most integration? A. short-term contracting B. joint ventures C. licensing D. parent-subsidiary relationship

D. parent-subsidiary relationship (The parent-subsidiary relationship describes the most-integrated alternative to performing an activity within one's own corporate family.)

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. A. dogs B. stars C. cash cows D. question marks

D. question marks (It is not clear whether question marks will turn into dogs or stars. Their earnings are low and unstable, but they might be growing. The cash flow, however, is negative.)

A strategy of _____ will be most beneficial for a firm to enhance its overall corporate performance. A. unrelated level of diversification B. single-business level of diversification C. dominant-business level of diversification D. related-linked diversification

D. related-linked diversification (A strategy of related-constrained or related-linked diversification is more likely to enhance corporate performance than either a single or dominant level of diversification or an unrelated level of diversification. The reason is that the sources of value creation include not only restructuring, but more fundamentally, the potential benefits of economies of scope and scale.)

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? A. taper integration strategy B. niche marketing strategy C. related-constrained strategy D. related-linked strategy

D. related-linked strategy (Evara is pursuing a related-linked strategy in this scenario. If executives consider new business activities that share only a limited number of linkages, the firm is using related-linked diversification)

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 A. monopsony. B. geographic diversification. C. crowdsourcing. D. taper integration.

D. taper integration. (Both Apple and Nike use taper integration: They own retail outlets but also use other retailers, both the brick-and-mortar type and online.)

Which of the following is an example of an internal transaction cost? A. the cost of searching for a contract manufacturer B. the cost of signing a contract with a supplier C. the cost of buying raw materials D. the cost of maintaining a production unit

D. the cost of maintaining a production unit (Transaction costs can occur within a firm. Considered internal transaction costs, these include costs pertaining to organizing an economic exchange within a firm—for example, the costs of recruiting and retaining employees, paying salaries and benefits, maintaining a production unit, setting up a shop floor, providing office space and computers, and organizing, monitoring, and supervising work.)