mgt ch 8
Managers have exactly two choices when determining the boundaries of the firm: produce goods and services in-house ("make") or purchase them externally ("buy").
Answer: FALSE Explanation: The "make" and "buy" choices anchor each end of a continuum from markets to firms. Several alternative hybrid arrangements are available between these two extremes. 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.
A firm that decides to stop purchasing components from suppliers and start producing them in-house is pursuing backward vertical integration.
Answer: TRUE Explanation: Moving ownership of activities upstream to the originating (inputs) point of the value chain is known as backward vertical integration.
________, 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
Answer: A Explanation: 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.
Using the Boston Consulting Group growth-share matrix, the managers of Xylicon International determined that their business unit devoted to personal health monitoring devices was a star. Based on this finding, which of the following strategies is likely to produce the best results? A) Increase investment in the personal health monitoring unit to encourage future growth. B) Seek to lower costs in the personal health monitoring unit to increase market share. C) Harvest as much cash flow as possible before shutting the business down. D) Immediately divest from the personal health monitoring industry.
Answer: A Explanation: A corporation's star SBUs hold a high market share in a fast-growing market. Their earnings are high and either stable or growing. The recommendation for the corporate strategist is to invest sufficient resources to hold the star's position or even increase investments for future growth.
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.
Answer: A Explanation: 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.
Firms are more capable than markets at coordinating highly complex tasks, while markets are more capable of providing high-powered incentives for entrepreneurship.
Answer: TRUE Explanation: Firms and markets, as different institutional arrangements for organizing economic activity, have their own distinct advantages and disadvantages. The advantages of a firm include the ability to make command-and-control decisions and coordinate highly complex tasks, while the advantages of the market include high-powered incentives and increased flexibility.
Not all firms are motivated by a need to grow.
Answer: TRUE Explanation: Sometimes small-business owners operate a business for convenience, stability, and lifestyle; growth could threaten those goals. In social entrepreneurship, business micro-solutions are often operated outside of capital motives, where the need to solve a social problem outweighs the need of the firm to insure longevity beyond the solution of the problem.
The most challenging diversification strategy is likely to be one that combines new core competencies with new and emerging markets.
Answer: TRUE Explanation: The upper-right quadrant of the core competence-market matrix combines new core competencies with new market opportunities. Hamel and Prahalad call this combination "mega-opportunities"—those that hold significant future-growth opportunities. At the same time, it is likely the most challenging diversification strategy because it requires building new core competencies to create and compete in future markets.
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.
Answer: A Explanation: 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.
Radial Autos currently sources components such as airbags, upholstery, and brake pads from various suppliers in the industry value chain. In order to lower costs and reduce the risk of interruptions in the supply of components, Radial should pursue A) backward integration. B) forward integration. C) product diversification. D) geographic diversification.
Answer: A Explanation: Backward integration is moving ownership of activities upstream to the originating inputs of the value chain. By pursuing backward integration, Radial would produce all necessary components for its automobiles in-house, reducing the costs and potential for interruptions associated with sourcing components from external suppliers.
Firms that pursue extremely high or extremely low levels of diversification perform better than those that pursue moderate levels of diversification.
Answer: FALSE Explanation: A cumulative body of research indicates an inverted U-shaped relationship between the type of diversification and overall firm performance. High and low levels of diversification are generally associated with lower overall performance, while moderate levels of diversification are associated with higher firm performance. This implies that companies that focus on a single business, as well as companies that pursue unrelated diversification, often fail to achieve additional value creation.
Corporate strategy is focused solely on determining the geographic locations in which the firm should compete.
Answer: FALSE Explanation: Although corporate strategy provides answers to the key question of where to compete, strategic leaders must answer three related questions: In what stages of the industry value chain should the company participate? What range of products and services should the company offer? Where should the company compete geographically in terms of regional, national, or international markets?
Sending jobs out of the country to lower costs is known as outsourcing.
Answer: FALSE Explanation: Outsourcing involves moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain. When outsourced activities take place outside the home country, the correct term is offshoring (or offshore outsourcing).
A conglomerate receives less than 70 percent of its revenues from any single business and features a number of strategic business units that have little to no relationship with each other.
Answer: TRUE Explanation: A firm follows an unrelated diversification strategy when less than 70 percent of its revenues comes from a single business and there are few, if any, linkages among its businesses. 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 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
Answer: A Explanation: 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.
The managers at Camphor Plastics decided that their firm needed to diversify because of overall falling sales and lower performance in one sector. How does diversifying compensate for the lackluster performance in this sector? 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
Answer: A Explanation: 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.
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.
Answer: A Explanation: 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.
Greenway Industries is a major multinational conglomerate. Its business units compete in a range of industries, including home appliances, pharmaceuticals, commercial real estate, and plastics manufacturing. Although its largest business unit, which produces kitchen appliances, is among the most profitable in the industry, it generates only 35 percent of the company's revenues. Which of the following is most likely true of Greenway's stock price? A) It is valued at less than the sum of its individual business units. B) It is valued at greater than the sum of individual business units. C) It is valued at the exact sum of individual business units. D) It is consistently lower than the industry average.
Answer: A Explanation: Greenway Industries has pursued an unrelated diversification strategy. Firms that pursue unrelated diversification are often unable to create additional value. They experience a diversification discount: The stock price of such highly diversified firms is valued at less than the sum of their individual business units.
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
Answer: A Explanation: 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.
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.
Answer: A Explanation: 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.
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.
Answer: A Explanation: 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.
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
Answer: A Explanation: 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.
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.
Answer: A Explanation: 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.
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.
Answer: A Explanation: The range of products and services that a firm decides to offer determines its level of diversification.
Coastal Pharma and Brainwave Technologies have together invested and created a new organization, InnerView, to focus on developing diagnostic devices. Through this new firm, both companies are attempting to combine their core competencies to innovate and reduce their risks associated with transaction-specific investments. However, the new organization operates independent of Coastal Pharma and Brainwave Technologies. Which of the following alternatives to integration does this scenario best illustrate? A) a joint venture B) a franchisee C) a licensing contract D) a corporate acquisition
Answer: A Explanation: 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.
Nina is in an interview for a sales job that requires no experience. She is trying to portray herself as a highly enthusiastic, energetic person with high-level communication and interpersonal skills. The interviewer is convinced that Nina should be hired as a salesperson in the company. However, in her resume, Nina had not mentioned her previous work experience as she was fired from that job because of her frequent absenteeism. Which of the following does this scenario best illustrate? A) information asymmetry B) principal-agent problem C) experience-curve effect D) learning-curve effect
Answer: A Explanation: 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.
Hiku Inc. developed a superior touch screen technology for tablet computers that enabled multiple users to operate the screen at the same time. The technology was leased to Broadway Technologies, a consumer electronics company, for five years. Which of the following alternatives to integration does this best illustrate? A) licensing B) franchising C) crowdsourcing D) bootlegging
Answer: A Explanation: 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.
Answer: A Explanation: 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.
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
Answer: A Explanation: 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.
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
Answer: B Explanation: 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.
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 entities 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 entities owning a firm.
Answer: B Explanation: An equity alliance involves taking ownership in a partner; a joint venture involves two or more people owning a firm.
Beagle Autos is known for its affordable and reliable brand of consumer vehicles. Because its shareholders expect to see an improved rate of growth in the coming years, Beagle's executives have decided to diversify the company's range of products so that at least 40 percent of the firm's revenue is generated by new business units. However, the company's resources, capabilities, and competencies are limited to producing other forms of motorized vehicles, such as motorcycles and all-terrain vehicles (ATVs). Which type of corporate diversification strategy should Beagle pursue? A) dominant business B) related-constrained C) related-linked D) unrelated
Answer: B Explanation: Beagle Autos should pursue a related-constrained diversification strategy. A firm follows a related-constrained diversification strategy when it derives less than 70 percent of its revenues from a single business activity and obtains revenues from other lines of business related to the primary business activity. Executives engage in a new business opportunity only when they can leverage their existing competencies and resources. Specifically, the choices of alternative business activities are limited—constrained—by the fact that they need to be related through common resources, capabilities, and competencies.
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.
Answer: B Explanation: 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.
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
Answer: B Explanation: 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.
________ 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
Answer: B Explanation: 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.
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.
Answer: B Explanation: In Chapter Case 8, it was 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 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.
Answer: B Explanation: 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.
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 inflationAnswer: B Explanation: 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.
Answer: B Explanation: 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.
Fortress International, a large conglomerate, procures a few component parts from external suppliers and also manufactures some of the key raw materials in its own subsidiaries. Aside from this, the company does not solely depend on outside distributors to reach its customers. In fact, it has its own retail stores to distribute its products. In this scenario, which of the following alternatives to vertical integration is Fortress International applying? A) concentric integration B) taper integration C) horizontal integration D) conglomerate integration
Answer: B Explanation: In this scenario, Fortress International 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.
The core competency of GoGo Motors is its fuel-efficient engine found in its cars. These engines are developed and built in-house. The company realizes that the growing demand for "green" vehicles has created a new market opportunity. Thus, it uses its existing technology to develop an engine that improves the fuel efficiency of recreational motorhomes. In this scenario, GoGo Motors is 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.
Answer: B Explanation: In this scenario, GoGo Motors 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.
________ 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
Answer: B Explanation: 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.
The Martinez Legal Firm (MLF) recently acquired a smaller competitor, Miller and Associates, which specializes in issues not previously covered by MLF, such as land use and intellectual property cases. Given the increase in the firm's size and complexity, it is likely that its internal transaction costs will A) decrease. B) increase. C) become external transaction costs. D) be eliminated.
Answer: B Explanation: 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.
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
Answer: B Explanation: 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).
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.
Answer: B Explanation: 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.
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.
Answer: B Explanation: 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.
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
Answer: B Explanation: 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.
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
Answer: B Explanation: 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.
HealthTech wanted its research partner, an R&D company, to develop a cancer vaccine. However, the project required huge capital investments, and its research partner was not ready to solely face the risks involved. Thus, to gain its partner's confidence and to prove its involvement, HealthTech invested $100 million in the project. This investment made by HealthTech will result in a A) cartel. B) credible commitment. C) corrective action. D) parent-subsidiary relationship.
Answer: B Explanation: The strategic decision made by HealthTech 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.
WellMade Manufacturing is a large conglomerate that operates only in its home country. The company competes in industries like the consumer electronics, health care, hotel, airlines, education, and steel industries. Which of the following diversification strategies does this best illustrate? A) process diversification B) product diversification C) geographic diversification D) market diversification
Answer: B Explanation: WellMade Manufacturing is pursuing a product diversification strategy. A firm that is active in several different product markets is pursuing a product diversification strategy.
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
Answer: B Explanation: 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.
Gold Leaf Computers sources the components for its laptops from various suppliers on the market. The firm pays $100 for processors, $35 for disk drives, $50 for screens, $10 for memory, and $40 for graphics and wireless internet cards. Gold Leaf has determined that it would cost $200 per unit to produce all of the necessary components in its in-house manufacturing facility. In this scenario, Gold Leaf should A) continue to outsource production. B) vertically integrate. C) exit the laptop industry. D) diversify its activities.
Answer: B Explanation: When the costs of pursuing an activity in-house are less than the costs of transacting for that activity in the market, then the firm should vertically integrate by owning production of the needed inputs or the channels for the distribution of outputs. In other words, when firms are more efficient in organizing economic activity than are markets, which rely on contracts among many independent actors, firms should vertically integrate.
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
Answer: C Explanation: Although many managers have input to this important decision-making process, the responsibility for corporate strategy ultimately rests with the CEO.
Banana Computers has decided to procure processing chips required for its laptops from external suppliers instead of manufacturing them in their own facilities. How will this decision affect the firm? 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.
Answer: C Explanation: Banana Computers 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.
Best Burger is a major fast food chain. Its managers are motivated to grow the firm in order to increase their market power and change the industry structure in their favor. Which of the following strategies is most associated with their motive for growth? A) employing celebrity spokespeople B) implementing automated burger-making machinery C) purchasing competitors D) increasing executive salaries
Answer: C Explanation: Best Burger's managers are motivated to achieve growth to increase their market share and with it their market power. To do so, firms often consolidate industries through horizontal mergers and acquisitions (buying competitors), thereby changing the industry structure in their favor. Fewer competitors generally equates to higher industry profitability. Moreover, larger firms have more bargaining power with suppliers and buyers.
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.
Answer: C Explanation: 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.
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.
Answer: C Explanation: 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.
Groundswell Industries, a U.S.-based large conglomerate, competes in the hospitality, education, telecommunications, entertainment, airlines, and chemical industries. It currently operates in about 30 nations, and is planning to expand its portfolio by investing in rapidly developing countries. Which of the following strategies is Groundswell Industries pursuing? A) zone pricing B) niche marketing C) product-market diversification strategy D) process diversification strategy
Answer: C Explanation: Groundswell 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.
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.
Answer: C Explanation: 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.
Revolution Watches, a Swiss-based premium watch brand, has recently started selling its watches through company-owned retail outlets in major cities of developing nations. Which of the following types of diversification strategies is the firm pursuing? A) product diversification strategy B) process diversification strategy C) geographic diversification strategy D) product-market diversification strategy
Answer: C Explanation: Revolution Watches is pursuing a geographic diversification strategy. A firm that is active in several different countries is pursuing a geographic diversification strategy.
Royal Motor Corp. generates a major portion of its revenues by manufacturing luxury sports cars. However, the company also derives an insignificant percent of its annual revenues by selling its sports merchandise that includes apparel, shoes, and other accessories under the same brand name. Which of the following terms best describes Royal Motor Corp.? A) a conglomerate B) a subsidiary C) a dominant-business firm D) a single-business firm
Answer: C Explanation: Royal Motor Corp. 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.
Skylark Sodas has been a market leader in the soft drink industry for several decades. However, its market research shows that consumer tastes have begun to shift to sugar-free flavored seltzer waters, a product that Skylark is capable of producing with minimal changes to its facilities and production processes. Based on your knowledge of the core competence-market matrix, which diversification strategy should Skylark pursue? A) Leverage existing core competencies to improve current market position. B) Build new core competencies to protect and extend current market position. C) Redeploy and recombine existing core competencies to compete in markets of the future. D) Build new core competencies to create and compete in markets of the future.
Answer: C Explanation: Skylark Sodas wants to use its existing resources and capabilities (the ability to produce sugary carbonated beverages) to attack an emerging market (unsweetened carbonated beverages). This corresponds with the lower-right quadrant of the core competence-market matrix, in which firms redeploy and recombine existing core competencies to compete in markets of the future.
________ 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
Answer: C Explanation: 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.
Answer: C Explanation: 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.
Phoenix Guitars is interested in pursuing backward integration to take greater ownership of the extraction of raw materials and production of components used in its signature line of guitars. Although this approach would lower the overall cost of producing a guitar, the costs associated with producing electronic pickups for sound amplification are far greater than those associated with sourcing pickups from a reliable supplier. Which of the following approaches is likely to produce superior results? A) Invest in vertical integration despite the cost of producing pickups. B) Abandon the idea of vertical integration entirely. C) Pursue taper integration. D) Introduce a budget line of guitars to diversify the firm's offerings.
Answer: C Explanation: 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. By pursuing a taper integration strategy, Phoenix Guitars could take ownership of most of the upstream value chain activities while sourcing pickups from a lower-cost supplier. Firms that pursue taper integration achieve superior performance in both innovation and financial performance when compared with firms that rely more on vertical integration or strategic outsourcing.
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.
Answer: C Explanation: 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.
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) competitive strategy.
Answer: C Explanation: 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.
True Tomato Inc. makes organic ketchup. To promote its products, this firm decided to make bottles in the shape of tomatoes. To accomplish this, True Tomato worked with its bottle manufacture to create a set of unique molds for its bottles. Which of the following specialized assets does this example demonstrate? A) site specificity B) research specificity C) physical-asset specificity D) human-asset specificity
Answer: C Explanation: 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.
Incline Electronics relied on a large chain of consumer electronics stores to sell its tablet computers, cell phones, and televisions and also to provide customer service and technical support. However, that retailer outsourced its service departments, and customers began to complain that they could not get reliable tech support for Incline products. In response, Incline Electronics decided to set up its own tech support department, and it also began to investigate opening its own brand-based retail stores. What does this scenario best illustrate? A) crowdsourcing B) new product development C) forward vertical integration D) conglomerate diversification
Answer: C Explanation: This scenario best illustrates forward vertical integration. Forward vertical integration involves moving ownership of activities closer to the end customer.
Mondo Tacos, a fast food restaurant, operates through a business model in which individuals can buy the rights to set up Mondo Taco stores and sell the company's food 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 offer a menu approved by 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
Answer: C Explanation: 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.
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.
Answer: C Explanation: 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.
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.
Answer: C Explanation: 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.
________ 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
Answer: C Explanation: 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?
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
Answer: D Explanation: 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.
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
Answer: D Explanation: 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.
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.
Answer: D Explanation: According to the BCG growth matrix, TimeEnough is a question mark. Question marks have low, unstable earnings that might be growing.
Argus Inc. is a large multinational company owned by two partners, is active in the petroleum, capital market, chemicals, steel, beverages, hospitality, airlines, education, automobiles, and consumer electronics industries. The company has multiple brands and a large product portfolio under its banner. Which of the following terms would best describe this company? A) a flagship brand B) a single-business firm C) a dominant-business firm D) a conglomerate
Answer: D Explanation: Argus Inc. 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 motivations for business growth involves principal-agent problems? A) increasing profits B) increasing market power C) reducing risk D) motivating managers
Answer: D Explanation: Firms may grow to achieve goals that benefit its managers more than their stockholders. This motivation for managers is called the principal-agent problem.
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.
Answer: D Explanation: 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.
Ancho Corp. is an automobile company whose core competency lies in manufacturing petrol- and diesel-based cars. The company realizes that more of its potential customers are switching to electric cars. The R&D department of the company acquires competencies in developing electric cars and launches its first hybrid car, which uses both gas and electricity. In this scenario, Ancho is primarily 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.
Answer: D Explanation: In this scenario, Ancho 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.
Nocturnal Products started as a luxury brand for designer apparel. Soon, the company expanded by launching its own line of premium perfumes, watches, bags, and home furnishings. This expansion allowed the businesses under the company to share a few of the common competencies in products, services, technology, and distribution. Which of the following corporate strategies is Nocturnal pursuing in this scenario? A) taper integration strategy B) niche marketing strategy C) related-constrained strategy D) related-linked strategy
Answer: D Explanation: Nocturnal 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.
Anita has been named CEO of a popular sports apparel company. As CEO, she is tasked with setting the firm's corporate strategy. Which of the following decisions is Anita most likely to make? A) whether to pursue a differentiation or cost leadership strategy B) which customer segments to target C) how to achieve the highest levels of customer satisfaction D) what range of products the firm should offer
Answer: D Explanation: Strategic leaders must determine corporate strategy along three dimensions: vertical integration (in what stages of the industry value chain should the company participate?), diversification (what range of products and services should the company offer?), and geographic scope (where should the company compete geographically in terms of regional, national, or international markets?).
Bulldog Holdings is a U.S.-based consumer electronics company. It owns smaller firms in Japan and Taiwan where most of its cell phone technology is developed and manufactured before being released worldwide. Which of the following alternatives to integration does this best illustrate? A) venture capitalism B) franchising C) joint venture D) parent-subsidiary relationship
Answer: D Explanation: 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.
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.
Answer: D Explanation: 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.
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
Answer: D Explanation: 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.