Deck 8: Corporate Strategy: Vertical Integration and Diversification

Question 1

A firm's overall corporate strategy is most concerned with determining levels of vertical integration as well as levels of diversification.

Answer 1

True
Explanation: A firm's overall corporate strategy concerns both its level of integration along the vertical value chain and its level of diversification.

Question 2

Corporate strategy is concerned with determining the boundaries of the firm among geographic,vertical,and product/service dimensions.This is referred to as:

A) Economic scope.
B) The scope of the firm.
C) Multidimensional mapping.
D) Boundary spanning.

Answer 2

B
Explanation: Corporate strategy concerns the scope of the firm, which determines the boundaries of the firm along the industry value chain, products and services, and geographic dimensions.

Question 3

When it comes to accessing capital and value creation,a diversified firm should always choose its internal capital market over external capital markets.

Answer 3

False
Explanation: Internal capital markets can be a source of value creation in a diversification strategy only if the firm does a more efficient job of allocating capital than what would be achieved in external capital markets.

Question 4

Industry value chains are also called vertical value chains.

Question 5

All of the following are decisions that managers must make when formulating corporate strategy EXCEPT:

A) What stages of the industry value chain to participate in.
B) What range of products and services should be offered.
C) Where globally the company should compete.
D) Whether the company should compete through differentiation or cost leadership.

Question 6

A(n)_____________ is where the transformation of raw materials into finished goods and services occurs along distinct vertical stages.

A) Production value chain
B) Process value chain
C) Industry value chain
D) Business value chain

Question 7

Corporate diversification strategy leads to superior performance only if the individual businesses are worth more under the company's management than if managed individually.

Question 8

Investment in specialized assets is a huge risk of vertical integration.

Question 9

General Electric is an example of a firm that is following the dominant business diversification strategy.

Question 10

Gradually moving an activity from internal to an outside firm is called taper integration.

Question 11

The Indian Tata Group and the Asian software company TCS are firms that make less than 70 percent of revenues from a single business unit and have few,if any,linkages among their businesses.These firms are clearly following an unrelated diversification strategy.

Question 12

Corporate-level strategy involves the decisions made and actions taken while deciding which industries and markets to pursue simultaneously.

Question 13

ChapterCase 8 highlights the corporate-level strategy of General Electric.As noted,CEO Jeffrey Immelt decided to refocus GE's portfolio of businesses and leverage the firm's core competencies in industrial engineering while pursuing future-growth industries.The two industries CEO Immelt had decided will provide strategic importance to the firm are ___________ and ____________.

A) Home appliances; entertainment
B) The green economy; health care
C) Capital markets; information technology
D) Consumer electronics; education

Question 14

A key component to formulating corporate-level strategy is the "make" or "buy" decisions.

Question 15

The most challenging diversification strategy is one in which the firm must create new core competencies while pursuing new market opportunities.

Question 16

In ChapterCase 8,CEO Jeffrey Immelt restructured GE's portfolio partly because its future performance potential was too reliant on the GE Capital division.

Question 17

Managers wishing to diversify the firm must remember that:

A) A single-business diversification strategy generally works best.
B) Forward integration is more successful than is backward integration.
C) Successful diversification must be aligned with and strengthen a firm's business strategy.
D) It is competitively advantageous to shrink the size and scope of most firms.

Question 18

The Boston Consulting Group (BCG)growth-share matrix is a tool used by firms to determine the costs and quality of its offerings.

Question 19

Research indicates that low levels of diversification are generally associated with higher overall firm performance.

Question 20

Although Google is active in many different businesses,more than 95 percent of its revenues come from online advertising.Therefore,Google can be considered a firm pursuing a related-linked strategy.

Question 21

When it would cost the firm less to pursue an activity in-house than obtaining that activity from a supplier in the external market,then the firm should:

A) Enter into a joint venture.
B) Execute a short-term contract.
C) Vertically integrate.
D) Strategically outsource.

Question 22

Applying the ______________ framework helps managers make economic decisions namely; what activities to pursue within the firm and which to obtain from the external market.

A) Transformational analysis
B) Economic investment analysis
C) Appropriation economics
D) Transaction cost economics

Question 23

Vertical integration involves all of the following EXCEPT:

A) The level of ownership by a firm of production or service inputs.
B) The level of ownership by a firm of the channels for the distribution of outputs.
C) The expansion by the firm into different product lines and markets.
D) Being more efficient internally than the external market.

Question 24

Which of the following questions is the most relevant for corporate-level strategy?

A) How to compete?
B) When to compete?
C) Where to compete?
D) Why to compete?

Question 25

A disadvantage to a firm when transacting in the market rather than owning its own production and distribution activities involves the costs associated with searching for and selecting suppliers.These types of costs are referred to as:

A) Search costs.
B) Investigative costs.
C) Resource costs.
D) Exploratory costs.

Question 26

An alternative perspective to the transaction cost economics framework concerning the make-or-buy decision is the _____________ view of the firm,which focuses the firm less on transaction costs and more on its capabilities and knowledge and what it does well.

A) Achievement-based
B) Resource-based
C) Entrepreneurial-based
D) Competitive-based

Question 27

One way to overcome the principal-agent problem is to:

A) Flatten the organization.
B) Micromanage the management team.
C) Make managers owners through stock options.
D) Increase the scope of management's responsibilities.

Question 28

When an employee of a firm follows his or her own interests such as pursuing managerial perks when performing activities on behalf of the owner of the firm,a(n)_______________ problem occurs.

A) Delegation excess
B) Principal-agent
C) Authority-excess
D) Agent efficiency

Question 29

Which of the following is NOT an example of a firm benefiting from economies of scope?

A) Kleenex Corporation using paper products for both its facial tissue and paper towel businesses
B) Anheuser-Busch spreading its fixed costs over millions of gallons of beer produced each year
C) Amazon leveraging its core competencies in IT systems into a wide range of online services, from retailing to cloud computing
D) Honda using flexible manufacturing systems for quick and low-cost switching from one product to another

Question 30

Management of a firm must decide what range of products and services the firm should offer.This determines the firm's horizontal integration,or:

A) Consolidation.
B) Diversification.
C) Categorization.
D) Implementation.

Question 31

Advantages to organizing economic activity within the firm ("make")include all of the following EXCEPT:

A) The coordination of highly complex tasks.
B) The principal-agent problem.
C) Creating an internal community of knowledge.
D) The ability to make command-and-control decisions.

Question 32

Transaction costs:

A) Help determine the scope of the firm.
B) Are all costs associated with an economic exchange.
C) Are both internal and external.
D) Are all of these.

Question 33

The costs associated with searching for economic agents with whom the firm contracts,negotiates,and enforces contracts with are:

A) Transaction costs.
B) Fixed costs.
C) Procedural costs.
D) Implicit costs.

Question 34

Information asymmetries occur when:

A) Certain departments within the firm keep information from other departments.
B) There are gaps in technological skills between employees of a firm.
C) A firm transacts in the market with a seller who has better information about the product or service.
D) All of these.

Question 35

A liquidity event is all of the following EXCEPT:

A) An opportunity for an individual to potentially become financially secure for life.
B) An initial public offering (IPO).
C) An opportunity for the firm to offer low-powered incentives to employees.
D) An incentive for an individual to transact economic activity in the market instead of a firm.

Question 36

When it is cheaper for a firm to produce two or more outputs or services together rather than separately through using the same resources and technology,then _________ occur.

A) Economies of scope
B) Transaction economies
C) Economies of scale
D) Output economies

Question 37

_____________ such as paying salaries and setting up a shop floor are internal transaction costs.

A) Administrative costs
B) Process costs
C) Explicit costs
D) Market costs

Question 38

Under the Transaction Cost Economics framework,when it would cost the firm more to pursue an activity in-house than obtaining that activity in the external market,the firm should:

A) Consider horizontally integrating instead.
B) Perform the activity in-house anyway in order to gain core competencies.
C) Consider options such as short-term contracts or strategic alliances.
D) Divest that particular business.

Question 39

The costs associated with the "make or buy" question when determining the scope of the firm are:

A) Investment costs.
B) Transaction costs.
C) Diversification costs.
D) Scale costs.

Question 40

Markets often provide higher-powered incentives than firms when it comes to employee motivation for economic transaction because:

A) Transacting in the market provides a higher degree of job security.
B) Markets provide incentives like IPOs for individual work efforts.
C) Transacting in the market requires less time and effort than working for a firm.
D) There is typically less economic risk to an individual when they are no longer bound to a firm.

Question 41

All of the following are fundamental elements of an industry value chain EXCEPT:

A) Raw materials.
B) Support activities.
C) Marketing and sales.
D) Final assembly of goods.

Question 42

Each stage of the vertical value chain typically represents:

A) A distinct industry.
B) A type of product.
C) The distinct process being applied.
D) The type of material being used.

Question 43

If a firm wishes to bridge the gap between being fully integrated ("make")and transacting in the marketplace ("buy"),it can enter into a(n)______________,which is a contractual arrangement to obtain inputs for a time period of generally a year or less.

A) Short-term contract
B) Joint venture
C) Equity alliance
D) Licensing agreement

Question 44

____________ allow a firm to enter into a voluntary arrangement with another firm with the intent of sharing knowledge and resources to develop processes,products,or services together.

A) Strategic alliances
B) Short-term contracts
C) Fully integrated contracts
D) Networked contracts

Question 45

Which of the following is NOT a strategic advantage of backward integration?

A) Better access to end users
B) Ability to secure critical supplies
C) Ability to produce higher-quality products
D) The potential to reduce costs

Question 46

Equity alliances are forms of strategic alliances that do all of the following EXCEPT:

A) Signal greater commitment to the partnership.
B) Allow one partner to take partial ownership of the other partner's company.
C) Encourage specialized investments for future performance.
D) Temporarily allow one partner to use the other's trademark and business processes.

Question 47

Which of the following is NOT a strategic advantage of forward integration?

A) Better access to end users
B) Ability to secure critical supplies
C) More control of after-sales service
D) Better planning and response to changes in demand

Question 48

All of the following are forms of strategic alliances EXCEPT:

A) Long-term contracts.
B) Equity alliances.
C) Joint ventures.
D) Short-term outsourcing.

Question 49

If a firm wishes to bridge the gap between being fully integrated ("make")and transacting in the marketplace ("buy"),it can enter into a(n)_________ agreement which grants the right to an individual or group to use the firm's trademark and business processes to sell goods and services that carry the firm's brand name.

A) Licensing
B) Franchising
C) Contracting
D) Equity partnership

Question 50

___________ is a form of long-term contracting that is generally used in the manufacturing sector and which enables a firm to commercialize intellectual property like patents.

A) Licensing
B) Franchising
C) Contracting
D) An equity partnership

Question 51

The ________________ relationship is the closest to a firm being fully integrated.In this relationship,transaction costs typically arise from political turf battles between the corporate office and the standalone business.

A) Owner-partner
B) Conglomerate-alliance
C) Parent-subsidiary
D) Business-stakeholder

Question 52

Industry value chains consist of all of the processes that transform raw materials into finished goods and services.These value chains are also called:

A) Horizontal value chains.
B) Vertical value chains.
C) Circular value chains.
D) Flattened value chains.

Question 53

If a firm wants to have more ownership of the activities closer to product inputs or design,then it should:

A) Backward vertically integrate.
B) Forward vertically integrate.
C) Forward horizontally integrate.
D) Use a single-business diversification strategy.

Question 54

If a firm wants to have more ownership of activities closer to the end product or customer,it should:

A) Backward vertically integrate.
B) Forward vertically integrate.
C) Forward horizontally integrate.
D) Use a single-business diversification strategy.

Question 55

Dow Corning is owned jointly by Dow Chemical and Corning.Dow and Corning have entered into a __________,which is a special form of strategic alliance whereby two or more partners create and jointly own a new organization.

A) Conglomerate venture
B) Diversified venture
C) Joint venture
D) Joint contract

Question 56

When a firm is fully vertically integrated:

A) All activities are conducted within the boundaries of the firm.
B) It is a single-business organization.
C) It is a conglomerate.
D) It is still reliant on certain suppliers along the industry value chain.

Question 57

As noted in Strategy Highlight 8.1,when Toyota wanted to secure a long-term supply of lithium,it had to create a bond of trust with the Argentinean firm Orocobre before the company would invest several hundred million dollars in specialized equipment to supply the lithium to Toyota.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 promised to help Orocobre expand its market presence globally.
D) It offered Orocobre franchising opportunities to sell hybrid vehicles.

Question 58

When one firm makes a credible commitment to another firm,it is doing all of the following EXCEPT:

A) Creating trust between the firms.
B) Making a long-term strategic decision.
C) Offering a promise that it will perform in the future.
D) Sharing the risk and costs.

Question 59

Long-term contracts such as licensing and franchising offer an advantage over short-term contracts because:

A) They cost less.
B) The competitive bidding process is extended.
C) There is more incentive for transaction-specific investments.
D) Licensing transfers ownership; short-term contracts do not.

Question 60

A drawback for a firm engaging in a short-term contract is:

A) It usually takes at least a year for processes between organizations to get in sync.
B) The supplying firm has no incentive to make additional transaction-specific investments to increase performance or quality.
C) There is no competitive bidding process with short-term contracts.
D) Short-term contracts offer less planning opportunity than individual market transactions.

Question 61

When a firm uses many links (common resources and competencies)among its businesses,it is engaging in a(n)_________ diversification strategy.

A) Related-constrained
B) Dominant business
C) Linked business
D) Single-business

Question 62

When a firm vertically integrates along the industry supply chain and invests in specific assets in order to support its activities,it has invested in:

A) Fixed assets.
B) Firm assets.
C) Specialized assets.
D) Required assets.

Question 63

The two alternatives to vertical integration that provide similar benefits while reducing the risks to the firm are _________ and ____________.

A) Incremental integration; horizontal integration
B) Taper integration; strategic outsourcing
C) Horizontal integration; outsourcing
D) In-house supplying; intermediate integration

Question 64

Human-asset specificity is the form of an asset that a firm invests in to create the human capital with knowledge about the specific routines and procedures needed to support a firm's vertical integration strategy.These routines and procedures bring competitive value to the firm because:

A) They organize the firm's work processes.
B) They are not transferable to a different employer.
C) They are not easily imitated.
D) All of these.

Question 65

__________ assets are assets like special equipment that are required to be co-located and used by a firm,such as mineral extraction equipment and bauxite mines.

A) Site specificity
B) Channel specificity
C) Process specificity
D) Firm specificity

Question 66

All of the following are reasons why a firm seeks to diversify EXCEPT:

A) Shareholder pressure for continuous growth.
B) To expand the international markets of the firm.
C) To determine how to compete in current markets.
D) To leverage core competencies.

Question 67

Today,many companies use PeopleSoft and EDS to manage their human resources.By doing this,these firms:

A) Are engaging in strategic outsourcing.
B) Are reducing their level of vertical integration.
C) Are leveraging their competencies.
D) Are doing all of these.

Question 68

Which of the following is NOT a risk of vertical integration ("make")?

A) Less exposure to market competition leads to higher costs.
B) Organizational complexity increases with integration.
C) Organizational planning often improves when a firm integrates.
D) Less contact with the external market diminishes learning and experience effects.

Question 69

When a firm is active in several different product markets,it is pursuing a(n)____________ diversification strategy.

A) Market
B) Process
C) Multipoint
D) Product

Question 70

If a firm wishes to expand beyond a single market and grow through being active in several different countries,it is pursuing the _______________ diversification strategy.

A) Geographic
B) Global
C) Multi-country
D) Market expansion

Question 71

A company is considered to be a single-business firm when at least _________ percent of revenues are generated by the dominant business.

A) 50
B) 95
C) 80
D) 99

Question 72

PepsiCo sells a wide variety of beverages and food products in 190 countries.It is clearly engaging in ______________ to achieve continuous growth.

A) Product diversification
B) Geographic diversification
C) Product-market diversification
D) Multimarket diversification

Question 73

A type of specific asset that has physical and engineering properties that were specifically created to satisfy a particular customer (for example,the bottles for PepsiCo)are which form of asset specificity?

A) Human-asset
B) Physical-asset
C) Market-asset
D) Growth-asset

Question 74

The more "constrained" the relatedness of diversification:

A) The fewer the linkages between the businesses owned by the firm.
B) The wider the variation in the portfolio of businesses owned by the firm.
C) The more links there are among the businesses owned by the organization.
D) The higher the proportion of total organizational revenue is derived from the dominant business.

Question 75

Firms use related diversification strategies in order to:

A) Horizontally integrate the firm's operations and processes.
B) Increase revenue from the dominant business of the firm.
C) Benefit from economies of scale and scope.
D) Improve the chances of being acquired by a similar firm.

Question 76

Economies of scope often occur when a firm is using the ______________ diversification strategy because the firm is able to pool resources and leverage competencies.

A) Single-business
B) Related
C) Dominant business
D) Unrelated

Question 77

Which of the following acquisitions would be considered the LEAST related?

A) A baking company purchasing a sugar company
B) A chain of hotels acquiring a golf course
C) A toy manufacturer acquiring a coffee company
D) A steelmaker acquiring a kitchen utensils company

Question 78

Which of the following corporate diversification strategies most closely describes Disney?

A) Single-business
B) Related-constrained
C) Related-linked
D) Unrelated diversification

Question 79

Both Apple and Nike produce their products and own retail outlets.They also rely on independent distributors to sell their offerings.Apple and Nike are utilizing _________ to partially rely on outside-market firms while supporting their forward vertical integration strategy.

A) Strategic alliances
B) Strategic outsourcing
C) Horizontal integration
D) Taper integration

Question 80

As noted in Strategy Highlight 8.3,in 2008 ExxonMobil reported the highest profits ever recorded by any company.Exxon receives the majority of its profits from petroleum-based products.Due to the political and regulatory climate and the global movement toward cleaner energy sources,Exxon purchased the natural gas company XTO Energy in 2009 as a low-carbon alternative to petroleum.Exxon then became the world's largest producer of natural gas.All of the following are true about Exxon's strategic move EXCEPT:

A) Exxon horizontally integrated when it purchased XTO Energy.
B) Exxon is using its core competencies for corporate diversification.
C) Exxon is pursuing an unrelated diversification strategy.
D) Exxon is investing in more ecologically sound resources.