Deck 7: Corporate-Level Strategy and Long-Run Profitability

Question 1

Vertical integration is a corporate-level strategy that involves a company entering new industries to increase its long-run profitability.

Answer 1

True

Question 2

When a company stays inside one industry, it may miss out on opportunities to create more value and increase their profitability by using their resources and capabilities to make and sell products in other markets or industries.

Answer 2

True

Question 3

A virtual corporation is a company that outsources most of its functional activities and focuses on one or a few core value chain functions.

Answer 3

True

Question 4

Mattel hires dozens of small Asian firms to make the plastic Barbie dolls and metal Hot Wheels cars that are its primary products. Mattel is using outsourcing to manage its manufacturing function.

Question 5

Concentrating on a single business allows a company to "stick to the knitting" that is, to focus on doing what is knows best and avoid entering new businesses it knows little about and where it can create little value.

Question 6

A company may be able to differentiate its final products better by outsourcing certain noncore activities to specialists.

Question 7

Managers use corporate-level strategy to identify which industries a company should compete in to maximize long-run profitability.

Question 8

Antitrust law is primarily concerned with protecting smaller companies from consolidation brought about by vertical integration.

Question 9

A company can choose to enter new industries that may or may not be connected to its existing industry by pursuing a strategy of diversification.

Question 10

Horizontal integration rarely allows companies to realize economies of scale.

Question 11

Horizontal integration is the process of acquiring or merging with companies up and/or down the supply chain.

Question 12

A merger occurs when one company uses its capital resources to purchase another company.

Question 13

Horizontal integration can help to reduce industry rivalry.

Question 14

DaimlerChrysler was created by the combination of two firms (Daimler-Benz and Chrysler) who agreed to blend their firms to create a new company. This is an example of an acquisition.

Question 15

Product bundling occurs when a firm offers a range of products that are sold together at a single price.

Question 16

One benefit of horizontal integration is industry consolidation, leading to more bargaining power over buyers and suppliers.

Question 17

An advantage of concentrating on a single industry is that by staying in one industry a firm can focus its resources and capabilities on competing successfully in just one business.

Question 18

One of the benefits of horizontal integration is that it lowers operating costs.

Question 19

Strategic outsourcing is the decision to allow one or more of a company's value creation functions to be performed by independent companies on its behalf.

Question 20

The net result of the recent wave of mergers and acquisitions has been to increase the fragmentation in a wide range of industries.

Question 21

Research suggests that the top managers of companies who are successful at creating value through superior governance seem to make a number of similar kinds of strategic decisions.

Question 22

The risk of holdup refers to the chance of being taken advantage of by a trading partner after the investment in specialized assets has been made.

Question 23

Taper integration occurs when a company buys from two or more independent suppliers at the same time.

Question 24

Selling off a business unit to independent investors is referred to as a spin-off.

Question 25

Superior governance revolves around how well top managers can develop strategies that improve the competitive positioning of its business units in the industries in which they compete.

Question 26

Diversification is the process of a company entering new industries distinct from its core industry.

Question 27

Related diversification is the strategy of operating a business unit in a new industry that is related to a company's existing business units through some commonality in their value chains.

Question 28

The performance of an acquired company can be improved by replacing the top management team of the acquired company with a more aggressive top management team.

Question 29

Economies of scope arise when two or more of a diversified company's business units are able to share resources.

Question 30

A company pursuing a vertical integration strategy expands its operations by acquiring similar firms in its industry.

Question 31

Vertical integration protects product quality, enabling a company to become a differentiated player in its core business.

Question 32

A diversified company is one that operates in two or more industries to find ways to increase it long-run profitability.

Question 33

Vertical integration can raise costs if, over time, a company continues to purchase inputs from company-owned suppliers when low-cost independent suppliers that can supply the same inputs exist.

Question 34

Outsourcing promotes a company's competitive advantage when the company enters into long-term relationships or alliances with its partners.

Question 35

Transferring competencies across industries involves taking a distinctive competence developed in one industry and implanting it in an existing business unit in another industry.

Question 36

Vertical integration adds value to a company's core products because entry into new industries increases the core products' differentiated appeal.

Question 37

Most companies first consider diversification when they are generating financial resources in excess of those necessary to maintain a competitive advantage in their original business or industry.

Question 38

Procter & Gamble's disposable diaper and paper towel businesses offer one of the best examples of the successful realization of economies of scope.

Question 39

A steel company that established the value chain operations necessary to supply its iron ore needs from company-owned iron ore mines exemplifies forward integration.

Question 40

A company achieves full integration when it produces all of a particular input needed for its processes or disposes of all of its output through its own operations.

Question 41

Adam's boss tells him that their company is pursuing a strategy of horizontal integration. Which of the following should Adam expect?

A) His company will acquire one of its suppliers.
B) His company will reorganize into fewer business units.
C) His company will begin to distribute its own products.
D) His company will buy one of its rivals
E) His company will centralize all of its support functions.

Question 42

Observing the pattern of consolidation in U.S. industries over time, one will notice that

A) horizontal integration has never been a very popular strategy.
B) firms that horizontally integrate tend to divest later.
C) horizontal integration has been very popular in the last two decades.
D) while a few industries have consolidated since 1970, most remain fragmented.
E) mergers were very common and acquisitions were rare from 1900 to 1999.

Question 43

Which of the following is a benefit that firms should expect to gain from the use of horizontal integration?

A) Expanded control over stages of the supply chain
B) Lower operating costs as a result of economies of scale
C) Shared risk with another firm
D) Reduced risk of holdup
E) Reduced investments in noncore activities

Question 44

Which of the following is not a true statement?

A) A firm should consider outsourcing only its core activities.
B) Outsourcing can encompass an entire function.
C) A firm should consider outsourcing when the supplier can perform the activity more effectively than the firm itself.
D) A firm should consider outsourcing if the costs will be less than the firm's cost to perform that activity.
E) A firm should consider outsourcing if the supplier has a distinctive competency in that activity.

Question 45

Which of the following is not a benefit of vertical integration?

A) Facilitating investments in specialized assets
B) Increasing cost structure
C) Improved scheduling
D) Protects product quality
E) Builds barriers to entry

Question 46

Horizontal integration does not help firms

A) lower operating costs.
B) schedule supply chain processes.
C) reduce rivalry within an industry.
D) increase bargaining power over suppliers and buyers.
E) increase product differentiation.

Question 47

The strategy of ___________ involves choosing the value-added stages of the raw-material-to-consumer chain in which to compete.

A) diversification based on economies of scope
B) diversification based on acquisition and restructuring
C) cost leadership
D) differentiation
E) vertical integration

Question 48

Which of the following is not a potential benefit of outsourcing?

A) Concentrating scarce human, financial, and physical resources to strengthen core competencies
B) Gaining the benefit of the specialist companies expertise in a specialized skill
C) Reducing the need for horizontal integration
D) Reducing costs, because the supplier may be more efficient
E) Enhancing differentiation

Question 49

In which of the following is a firm most likely to lose direct control over value-creation activities?

A) Merger
B) Outsourcing
C) Vertical integration
D) Strategic alliance
E) Acquisition

Question 50

Antitrust regulation

A) favors large companies.
B) reduces industry competition.
C) is concerned with companies' abuse of their market power to raise prices for consumers above the level that would exist in more competitive situations.
D) tends to raise prices for consumers.
E) enables the achievement of market power.

Question 51

Managers who pursue _______________ have decided the best way to increase company profits is to purchase the resources and assets of industry competitors.

A) horizontal integration
B) vertical integration.
C) strategic alliances
D) franchising.
E) diversification.

Question 52

Which of the following activities should not be outsourced by a virtual corporation?

A) Contract management
B) R&D
C) Materials management
D) Manufacturing
E) Marketing

Question 53

Outsourcing occurs when a firm

A) buys one of its rivals.
B) merges with one of its suppliers.
C) enters into a joint venture with a rival.
D) hires another firm to perform value-creation activities on its behalf.
E) enters into contracts with two suppliers simultaneously.

Question 54

Horizontal integration supports the achievement of a __________ strategy.

A) cost leadership
B) cost leadership and differentiation
C) focus
D) differentiation
E) stuck in the middle

Question 55

Concentrating on a single business allows a company to _____________________.

A) increase profits.
B) lower operating costs.
C) stick to the knitting.
D) increase its competitive advantage.
E) decrease its human resource turnover.

Question 56

A merger is an agreement between _________________ companies to pool their operations and create a new business entity.

A) three
B) four
C) five
D) two
E) none of the above

Question 57

Which of the following is not an example of horizontal integration?

A) America Online and Time Warner merge to become AOL Time Warner.
B) Coca Cola buys most of its previously independent bottling firms.
C) Microsoft acquires Rare, Ltd., maker of video games such as Donkey Kong.
D) Georgia Pacific, a wood products firm, is combining operations with another wood products firm, Louisiana Pacific.
E) Citicorp Bank and Travelers Insurance merge to form Citigroup, a diversified provider of financial services.

Question 58

Under which of the following circumstances is vertical integration hazardous?

A) When a company has to purchase high-cost inputs from company-owned suppliers, even though low-cost external sources exist
B) When vertical integration involves moving downstream into retailing
C) When the value added by successive stages of production is declining
D) When the industries involved are undergoing rapid expansion
E) When the company's competitors are also following a strategy of vertical integration

Question 59

When an intermediate manufacturer moves into final assembly, it is pursuing

A) backward vertical integration.
B) forward vertical integration.
C) taper vertical integration.
D) related vertical differentiation.
E) unrelated vertical differentiation.

Question 60

Outsourcing

A) eliminates the need for a value chain.
B) moves some value chain activities outside the firm.
C) reorders the steps in a firm's value chain.
D) reduces the firm's dependence on its value chain.
E) strengthens the firm's capabilities in each value chain function.

Question 61

Companies invest in specialized assets because these assets allow them to ______________ of value creation and/or to better differentiate their products from those of competitors.

A) increase the costs
B) keep the cost level
C) lower the costs
D) double the costs
E) none of the above

Question 62

_____________ refers to the process of companies divesting themselves of diversified activities and downsizing in order to concentrate on fewer businesses.

A) Industry positioning
B) Competitive alignment
C) Strategic decomposition
D) Vertical integration
E) Restructuring

Question 63

_____________ refers to the process of entering new industries, distinct from a company's core industry.

A) Horizontal integration
B) Value reconstruction
C) Vertical integration
D) Diversification
E) Vertical specialization

Question 64

_____________________ can be a major disadvantage when operating costs increase.

A) Horizontal integration
B) Protecting product quality
C) Forward integration
D) Vertical integration
E) Backward integration

Question 65

Vertical integration can be disadvantageous when

A) industry technology is changing rapidly.
B) demand is stable.
C) competitors are vertically integrated.
D) technology is changing slowly.
E) competitors are vertically integrated and industry technology changes rapidly.

Question 66

When one or more components of a company's value chain are applicable to a wide variety of industrial and commercial situations, which of the following strategies should a company pursue?

A) Unrelated diversification
B) Backward integration
C) A focus strategy
D) Taper integration
E) Related diversification

Question 67

Diversification based on transferring competencies

A) requires the existence of significant commonalities between one or more of the value-creation functions.
B) requires that acquisitions be made in the same industry as the company's core business area.
C) allows a company to achieve the advantage of risk pooling.
D) allows a company to reduce bureaucratic costs.
E) requires both the existence of significant commonalities between one or more of the value-creation functions and that acquisitions be made in the same industry as the company's core business area.

Question 68

Compare the benefits and risks associated with horizontal and vertical integration. Under what circumstances would a firm prefer one to the other?

Question 69

_____________ refers to the fact that the stock of highly diversified companies is valued lower, relative to their earnings, than the stock of less diversified enterprises.

A) Market inefficiencies
B) Systematic market effect
C) Diversification discount
D) Diversification value effect
E) Inefficient market theory

Question 70

A diversification strategy based on resource sharing

A) entails a company creating value by applying the distinctive competencies it developed in one line of business to another line of business.
B) requires the development of new business-level strategies.
C) can help a company to realize economies of scope.
D) is a valid way of supporting the generic business-level strategy of differentiation.
E) increases the accountability of units.

Question 71

A company should pursue related diversification instead of unrelated diversification when

A) the company's core skills create value by resource sharing and by transferring competencies between businesses.
B) the company's core skills are highly specialized and have few applications outside the core business.
C) the company's top management is skilled at acquiring and turning around poorly run enterprises.
D) the company's main objective is to maximize growth.
E) the company's free cash flow is high enough to have funds available for investment.

Question 72

Consider the case of a manufacturing firm that purchases subassemblies from a supplier, creates a finished product, and then sells that product to a wholesale distributor. What advantages might this firm gain from forward integration? From backward integration? What potential pitfalls of vertical integration might the firm face?

Question 73

___________ arise when one or more of a diversified company's business unites are able to realize cost-saving or differentiation advantages because they can share resources or capabilities.

A) Economies of scope
B) Competitive advantages
C) Economies of scale
D) Distinctive competencies
E) Multi-point business models

Question 74

When a company is generating financial resources in excess of the amount needed to maintain a competitive advantage in its core business, it will most likely pursue

A) taper integration.
B) full integration.
C) strategic alliances.
D) long-term contracts.
E) diversification.

Question 75

Identify and discuss the profitability justifications for pursuing a multi-business model based on diversification.

Question 76

Which of the following is not a rationale for restructuring?

A) The existence of a diversification discount
B) Response to a failed acquisition
C) Innovations in management processes and strategy have diminished the advantages of diversification.
D) Increased product differentiation
E) All of these are rationales for restructuring.

Question 77

How can strategic outsourcing strengthen a company's business model and increase its profitability?

Question 78

What is meant by the terms "related diversification" and "unrelated diversification" and how should a company choose between them.

Question 79

A _________________ involves halting investment in a unit in order to maximize short-to-medium-term cash flow from that unit.

A) management buyout
B) liquidation strategy
C) spin-off
D) harvest strategy
E) corporate restructuring

Question 80

A company should pursue unrelated diversification instead of related diversification when

A) its core skills are highly specialized and have few applications outside core business.
B) the company's top management is skilled at acquiring and turning around poorly run enterprises.
C) its core technological skills are applicable to a wide variety of industrial and commercial situations.
D) it wants to maximize growth.
E) the bureaucratic costs of implementation do not exceed the value that can be created by realizing economies of scope.