Deck 7: Growth Strategies

Question 1

When a manufacturing ?rm merges with a _____, it is said to following a horizontal growth strategy.

A) ?rm that operates in the retail space
B) ?rm that supplies its raw materials
C) ?rm that operates in a separate product category
D) ?rm at the same stage of the production process

Answer 1

?rm at the same stage of the production process

Question 2

If Honda, a leading automobile manufacturer, decided to merge with Toyota, another automobile manufacturer, what form of growth would this be?

A) Organic growth.
B) Horizontal integration.
C) Vertical integration.
D) Aggregated growth.

Answer 2

Horizontal integration.

Question 3

A ?rm maximizes pro?ts at the level of output where _____.

A) the total revenue curve is rising
B) the total cost curve is horizontal at the market price
C) the distance between the total cost curve and total revenue curve is the greatest
D) the total cost curve and total revenue curve intersect and then continue to fall

Answer 3

the distance between the total cost curve and total revenue curve is the greatest

Question 4

Which of the following is an example of vertical integration?

A) A clothing retailer expands into banking and electronics.
B) A manufacturing ?rm invests in training and development in order to increase labour
C) A supermarket takes over a dairy farm so that it can produce and package its own dairy products.
D) A bank automates its banking processes in order to increase e?ciency.

Question 5

The owner of a chain of ice cream parlours opens an outlet in a new market. This would be classi?ed as a(n) _____ growth strategy.

A) concentration
B) organic
C) conglomerate
D) vertically integrated

Question 6

Price wars are likely to arise in markets where _____.

A) there are economies of scope
B) the number of ?rms in the market is small
C) there are substantial economies of scale
D) there are a large number of substitutes for the good

Question 7

How does an acquisition differ from a merger?

A) An acquisition may also be a hostile takeover while a merger usually involves the companies' mutual consent.
B) A merger is an example of internal expansion while an acquisition is an example of vertical
C) A merger results in economies of scale while an acquisition results in diseconomies of scale.
D) An acquisition is usually between two similar ?rms while a merger is between two ?rms in

Question 8

A ?rm that produces beer decides to take over a ?rm that makes tyres. This type of growth strategy would be called _____.

A) diversi?cation
B) horizontal integration
C) vertical integration
D) organic growth

Question 9

A ?rm grows organically if its sales increase _____.

A) when it is acquired by another ?rm
B) when it expands to an unrelated market
C) from the same or comparable retail space
D) from vertical integration

Question 10

When the number of competitors in a market falls:

A) the demand curve shifts to the left.
B) the elasticity of demand is likely to increase.
C) the price level is likely to increase.
D) the quantity of output supplied to the market increases.

Question 11

Which of the following is an example of a horizontal growth strategy?

A) A manufacturing ?rm acquires a ?rm in the online retailing space
B) A ?rm introduces products in a new product category
C) A ?rm merges with several other ?rms such that it owns consecutive stages of the value chain.
D) An electronics company acquires another electronics ?rm that produces the same

Question 12

Which of the following is an example of rationalization?

A) A ?rm diversi?es into unrelated markets, increasing its level of risk.
B) A ?rm merges with another ?rm and reduces costs by combining managerial functions.
C) One ?rm acquires another smaller ?rm although the managers at the smaller ?rm attempted to resist the takeover.
D) A ?rm uses share-based equity ?nancing for mergers, instead of cash.

Question 13

A ?rm that wants to offset the risk associated with operating in a single product line would:

A) acquire another ?rm that operates in the same stage of the production process.
B) undertake a diversi?cation growth strategy.
C) increase the number of stages in its value chain.
D) merge with ?rms that are at consecutive stages of the vertical chain.

Question 14

Which of the following is an example of diversi?cation by a ?rm?

A) Acquiring the business of a rival ?rm.
B) Operating in more than one industry.
C) Acquiring a ?rm in the value chain.
D) Increasing e?ciency by cutting costs.

Question 15

Horizontal growth takes place when a ?rm _____.

A) streamlines procedures in the organization
B) invests in new capital assets
C) merges with other existing operators
D) downsizes the business which makes it easier to control and coordinate

Question 16

Rationalization in a merger between two companies refers to _____.

A) an expansion in the labour force
B) cutbacks in excess resources
C) duplication of tasks
D) an increase in the scale of operation

Question 17

Mergers and acquisitions are likely to _____ in a market.

A) increase the level of competition
B) reduce the price elasticity of demand
C) increase the costs of production
D) expand diseconomies of scale

Question 18

Which of the following is an example of related diversi?cation?

A) A brewery buying a hop producer, which supplies inputs to the brewery.
B) A brewery merging with another larger brewery.
C) A brewery buying a construction ?rm.
D) A brewery ?rm acquiring a wine-producing ?rm.

Question 19

A ?rm that makes computers takes over a ?rm that produces microchips, used in the production of computers. This is known as a(n) _____ growth strategy.

A) vertical integration
B) market development
C) concentration
D) organic

Question 20

When a ?rm expands its production facilities to produce more of the same good, it is growing through _____.

A) diversi?cation
B) horizontal integration
C) internal expansion
D) vertical integration

Question 21

When a lecturer begins employment they will ordinarily be placed on probation for perhaps three years. This is an example of using _____ to reduce transaction costs.

A) diversi?cation
B) economies of scope
C) the market
D) a managerial structure

Question 22

A ?rm can exploit the learning effect by:

A) increasing the number of stages in its value chain.
B) diversifying into unrelated markets.
C) growing organically and merging with a rival ?rm.
D) acquiring smaller, ine?cient competitors.

Question 23

It is reasonable to assume that if there were no transaction costs in organizing production, _____.

A) contracts would be incomplete
B) mergers would not add value to ?rms
C) diversi?cation would increase the ?nancial risk of a company
D) ?rms would not need to exist

Question 24

As a ?rm continues to gain from the learning effect, the learning curve is _____.

A) upward sloping
B) downward sloping
C) vertical
D) horizontal

Question 25

Firm X acquires another ?rm, Firm Y, that supplies its raw materials. Raw materials are now transferred to the production division of Firm X. What is the optimum price that the production division at Firm X will pay for the raw materials?

A) The average cost of producing the raw materials.
B) The marginal cost of producing the raw materials.
C) The average cost of acquiring Firm Y.
D) The marginal cost of acquiring Firm Y.

Question 26

Acquiring a monopoly supplier has to be more cost-effective than buying the raw materials from the monopoly supplier. This is because:

A) the internal price of the raw materials will be greater than the average cost.
B) the internal price of the raw materials will be greater than the marginal cost.
C) the monopoly price is always lower than the average cost.
D) the monopoly price is always greater than the marginal cost.

Question 27

A ?rm is faced with a monopoly supplier for its raw materials. If the ?rm wants to achieve economies of scale through vertical integration, what should the ?rm do?

A) Sell goods to new foreign markets.
B) Continue to buy raw materials from the monopoly supplier.
C) Purchase the monopoly supplier.
D) Merge with another ?rm that produces an unrelated good.

Question 28

The costs of organizing a transaction are likely to increase when:

A) the product is highly complex.
B) it is easy to monitor the contract.
C) there is little uncertainty regarding future changes.
D) it is easy to enforce the contract.

Question 29

Transaction costs are likely to be low when:

A) a contract cannot be easily enforced.
B) all aspects of a contract are fully speci?ed.
C) monitoring performance is di?cult.
D) the interpretation of a contract is vague.

Question 30

Which of the following statements is true of the learning curve?

A) The lower the cumulative output, the stronger the learning effect.
B) As cumulative output increases, average costs will fall.
C) Productivity decreases when additional output is produced.
D) A ?rm producing lower output moves down the learning curve faster.

Question 31

When a ?rm's learning curve is ?at, this means that _____.

A) the ?rm has exhausted all the gains from learning
B) the ?rm's average cost is falling signi?cantly
C) the ?rm experiences diminishing returns to a factor
D) the ?rm's cumulative output is very low

Question 32

When is it better for a construction ?rm to hire architects rather than contract them through the market?

A) When the in-house contracts with the architects is complete.
B) When it is di?cult to monitor the performance of the hired architects.
C) When the transaction costs of contracting them through the market are low.
D) When the enforcement of the market contracts is di?cult.

Question 33

_____ takes place when a ?rm outsources a stage of the production process in order to reduce costs.

A) Horizontal disintegration
B) Horizontal integration
C) Vertical disintegration
D) Vertical integration

Question 34

Market-based transactions are enforced _____.

A) through the rule of law
B) by the reduction of competition
C) by bureaucratic procedures
D) through integrated value chains

Question 35

Which of the following is an example of an industrial cluster?

A) A large group of automobile manufacturers that are located in the same region.
B) A group of manufacturing ?rms that decide to collude and set prices in the market.
C) All the ?rms in an industry that form a special-interest group to lobby the government.
D) A conglomerate that is broken up into a large number of smaller ?rms.

Question 36

A contract is said to be complete when:

A) all aspects of the contractual arrangement are fully speci?ed.
B) it is enforced by a court of law.
C) two parties verbally agree to ful?ll the obligations pertaining to the contract.
D) the enforcement of the contract is at the discretion of one party.

Question 37

As a contract becomes more incomplete:

A) the complexity of the product reduces.
B) monitoring the output and performance of the provider becomes easier.
C) greater discretion is handed to the provider of the good or service.
D) the level of uncertainty in the implementation of the contract falls.

Question 38

Which of the following correctly describes a transaction cost?

A) A transaction cost is the cost associated with organizing the transaction of goods or services.
B) A transaction cost is the rent paid to capital used in production.
C) A transaction cost is the wage paid to labour, a factor of production.
D) A transaction cost of an activity is the cost of the next best alternative that was given up.

Question 39

Which of the following contracts is most likely to be an incomplete contract?

A) A contract for the purchase of a car.
B) A contract for the purchase of an air ticket.
C) A contract for the sale of books on the Internet.
D) A contract for the services of a lawyer.

Question 40

When a ?rm grows organically, _____.

A) its cumulative output will contract
B) it will move to the ?at portion on the learning curve
C) it remains at a ?xed point on the learning curve
D) it can exploit the learning effect sooner than its rivals

Question 41

A ?rm that faces a hold-up problem for an input will grow vertically along the vertical chain as _____.

A) the ?rm can exploit economies of scope
B) few ?rms will be willing to supply the input to the market
C) the ?rm will face a single buyer for its ?nal product
D) the demand for the ?rm's goods will be inelastic

Question 42

If the cost of producing two or more outputs jointly is less than the cost of producing the outputs separately, _____.

A) economies of scope are said to exist
B) the ?rm's managers would not want to allow portfolio diversi?cation
C) economies of scale are said to exist
D) the ?rm's shareholders would not want to allow portfolio diversi?cation

Question 43

The cost leader in network supply in the telecommunications market is Huawei, a Chinese ?rm. Given this information, which of the following could be true?

A) Firms in the telecommunications market earn supernormal pro?ts.
B) Huawei is likely to have gained economies of scale by cutting costs.
C) Other ?rms in the telecommunications market are likely to compete with Huawei on price.
D) Huawei is likely to report falling revenues and negative cash ?ows.

Question 44

The term nexus of contracts is used to refer to the _____.

A) government
B) market
C) legal system
D) ?rm

Question 45

The investment activities of UK companies in Asia and Africa have been quite resilient even in the face of the ?nancial crisis of 2007. This indicates that _____.

A) the fact that UK companies are unable to access ?nance for mergers
B) Asia and Africa do not provide any growth opportunities
C) there are robust growth opportunities in Asia and Africa
D) cash is a popular method of ?nancing mergers in the UK

Question 46

An organization exploits economies of scope when it _____.

A) expands into uncorrelated business operations
B) grows vertically along the value chain
C) launches different products under the same brand name
D) subcontracts various activities to different vendors

Question 47

The evidence on mergers suggests that the share price of target ?rms tends to _____.

A) stagnate post a merger
B) fall post a merger
C) rise prior to a merger
D) fall prior to a merger

Question 48

One way of enforcing incomplete contracts with employees is for ?rms to _____.

A) grant them permanent employment within the ?rm
B) review their performance periodically
C) implement a system of promotions based on seniority
D) provide them with fringe bene?ts

Question 49

The hold-up problem increases a ?rm's transaction costs because _____.

A) the scarcity of raw materials increases the costs of production
B) labour unions hold-up production in order to bargain for higher wages
C) the ?rm is dependent upon one buying relationship
D) the assets involved in a hold-up problem are general in nature

Question 50

Which of the following would explain why Madonna stopped working with music producer Warner's and signed with tour promoter Live Nation?

A) Electronic storage and online delivery of music CDs are extremely lucrative businesses.
B) Warner's is the leading ?rm in the music production industry.
C) Unlike music CDs, the supply of concerts can be controlled by Live Nation and Madonna.
D) With free online downloads of music, the pro?ts of music producers like Warner have been

Question 51

Studies on merger activity across industries suggest that:

A) the stock price for the buying ?rm rises sharply post a merger.
B) almost all ?rms and industries have a tendency to deliver post-merger bene?ts.
C) mergers are relatively risk-free strategies for ?rms.
D) mergers increase ?rm size and can boost managers' pay.

Question 52

Firm X produces a widget that is supplied as an input to several unrelated industries. In other words, Firm X is producing a(n) _____ asset.

A) general
B) intangible
C) speci?c
D) depreciating

Question 53

When is a ?rm likely to face a hold-up problem?

A) When it produces speci?c assets.
B) When it makes its own raw materials.
C) When there are many buyers for its product.
D) When it has no competitors.

Question 54

Telecommunications giant Ericsson has been tough to beat in spite of mergers between various makers of telecommunications networks. This is because Ericsson has managed to achieve economies of scale by _____.

A) diversifying its product portfolio into unrelated markets
B) producing on the ?at portion of its learning curve
C) increasing the number of stages in the vertical chain of production
D) investing heavily in research and development and acquiring patents

Question 55

Following the ?nancial crisis of 2007, companies in the UK had shifted to using _____ to ?nance mergers and acquisitions.

A) cash from money markets
B) borrowings from banks
C) subsidized funding from the central bank
D) share-based equity ?nancing

Question 56

Diversi?cation of a ?rm's product portfolio is in the interests of the _____ of the ?rm.

A) managers
B) shareholders
C) consumers
D) workers

Question 57

Amazon, a leading online retailer, began by offering books for sale online. This was quickly expanded into music and movies. Currently, Amazon also sells toys, electronics, health and beauty and jewellery items. In other words, this represents _____.

A) economies of scope
B) horizontal growth by merger
C) a hold-up problem
D) vertical disintegration

Question 58

When the transaction costs of operating through the market are too high:

A) ?rms are more likely to grow vertically up or down the vertical chain.
B) ?rms are less likely to internalize its transactions.
C) ?rms will move from producing general assets to speci?c assets.
D) contracts speci?ed by the ?rm are more likely to be complete.

Question 59

Diversi?cation into unrelated businesses can add value for shareholders if:

A) the brand is licensed to other users.
B) retaining control of the economies of scope reduces transaction costs.
C) the unrelated businesses have a high risk component.
D) managers' pay is linked to the size of the ?rm and not pro?ts.

Question 60

When a big brand like Virgin diversi?es into unrelated markets, it _____.

A) grows organically
B) is divesting control of parts of the vertical chain
C) retains control over the use of the brand
D) reduces value for shareholders

Question 61

In a monopoly, prices and profits are likely to be relatively lower than in perfect competition.

Question 62

Rationalization is a process that increases costs and duplication of tasks.

Question 63

As a firm increases in size, it is more likely to experience diseconomies of scale.

Question 64

Mergers and acquisitions are likely to increase the level of competition in an industry.

Question 65

As a firm's cumulative output expands, its learning curve slopes upward.

Question 66

Firms that grow organically will only use retained profits as a source of funds.

Question 67

The fees paid to a lawyer for drawing up a contract is an example of a transaction cost.

Question 68

Profit-maximizing firms will gain from increases in total revenues and/or decreases in total costs.

Question 69

Sourcing, production and distribution together constitute the horizontal chain of production.

Question 70

It is relatively easy to transfer the cumulative learning experiences between organizations when they merge.

Question 71

Cartels with a large number of firms are likely to be more successful than cartels with a smaller number of firms.

Question 72

Horizontal growth takes place when the company grows by merging its activities with those of an existing operator.

Question 73

Contracts used by universities to hire lecturing services are likely to be incomplete.

Question 74

Incomplete contracts involve low or zero transaction costs.

Question 75

The managerial structure of a firm is organized to reduce transaction costs.

Question 76

As the product or service becomes more complex, the more incomplete the contract becomes.

Question 77

The firm as a nexus of contracts will reduce in size along its vertical chain when it can use the market to control its transactions.

Question 78

Since it is almost impossible to write complete contracts for surgeons, hospitals hire surgeons rather than transacting through the market.

Question 79

A merger usually involves one firm trying to take over another smaller firm, whose management attempts to resist the takeover.

Question 80

A bank operating in the clothing retail sector is an example of diversification.