Deck 7: Corporate Stategy

Question 1

If the transaction costs associated with buying in a product or service from the market costs more than the firm providing this internally, then the firm will outsource.

Answer 1

False

Question 2

The most sensible corporate strategy is to expand the scope of activities the company is involved in over time.

Answer 2

False

Question 3

"Brand extension" is also a way to achieve an "economy of scope", by using a good reputation built around one product to help sell a different product or service.

Answer 3

True

Question 4

Michael Porter suggests that one test of whether a diversification makes sense is whether the managers will be better off as a result.

Question 5

The usual justification for a diversification strategy is a combination of growth, spreading risk, and creating extra value.

Question 6

Fifty years ago, vertical integration was a fashionable strategy, whereas nowadays the trend is towards de-integration.

Question 7

"Economies of scope" is a more modern expression to replace the old-fashioned term "economies of scale".

Question 8

An argument in favour of diversified companies with a balance of cash-generating and cash-devouring businesses is that it is cheaper and easier to balance capital requirements internally than to source capital in the financial markets.

Question 9

Empirical research indicates there are diminishing profit returns for diversification beyond some threshold.

Question 10

An "economy of scope" is where a firm can spread the fixed cost of a common resource or a shared service across multiple products or activities.

Question 11

A major argument against diversification is that it's more efficient for shareholders to hold diversified share portfolios, than to invest in diversified companies.

Question 12

Whether a proposed diversification is related or NOT depends to some extent on judgement and context.

Question 13

There are three types of diversification; related, unrelated, and concentric.

Question 14

Corporate strategy is concerned with 'where' a firm competes (in which industries it competes), while business strategy is concerned with 'how' a firm competes in a specific industry.

Question 15

Product scope, international scope, and vertical scope are part of corporate level strategy decisions.

Question 16

Cash-rich companies in low-growth, declining industries have to diversify to avoid having to pay huge costly dividends to shareholders.

Question 17

"How profitable do we want to be?" is the starting-point of corporate strategy.

Question 18

Michael Porter suggested that the main indicator that diversification would create value is if the chosen industry is attractive.

Question 19

"The cost of corporate complexity" refers to the fact that firms have to pay managers of complex businesses more money.

Question 20

The scope of which activities a firm chooses to conduct is largely a matter of transaction costs, economies of scope, and the cost of corporate complexity.

Question 21

An "arm's length" customer-supplier relationship is one where there is no element of the relationship which distorts the market price for a transaction.

Question 22

What is the difference between a firm's geographical scope and its vertical scope?

A)The first describes the regions of the world where the firm is present and the second the stages of the industry value chain which the firm performs itself.
B)The first describes the number of countries and the second the number of horizontal businesses where the firm is present.
C)The two are highly inter-related.
D)It's not always clear what the difference is.

Question 23

A major problem with vertical integration is that a downturn in the end market affects the entire integrated value chain, representing possible unacceptably high risk.

Question 24

Backward vertical integration gives a company far more power over the supplier. This is a type of high-powered incentive.

Question 25

Although economies of scope refer to spreading cost, this is NOT the case for brand extension

A)because a brand doesn't cost anything - it's an asset.
B)because although the brand costs money, this does not appear in the accounts.
C)because the brand is to do with the marketing department, not production cost.
D)it is still true for brand extension, since creating and maintaining a brand does cost a lot e.g., in advertising.

Question 26

The starting point for strategy is usually

A)What business(es)are we in?
B)How much profit do we want to make?
C)Who are the customers?
D)Should we be doing something else?

Question 27

Where there is volatile, uncertain demand for a resource, it is more likely that this resource will be outsourced, but NOT in all cases.

Question 28

Highly diversified "conglomerate" firms have gone out of fashion in the past 30 years - except in emerging economies where they tend to dominate.

Question 29

In recent years there has been a trend away from arm's length contracts towards long-term single-supplier contracts.

Question 30

A franchise agreement is an example of an arm's length contract.

Question 31

High transaction-specific investment between two industrial process stages is more likely to lead to vertical integration of these processes.

Question 32

In the past 25 years, there has been a huge trend away from vertical integration towards de-integration, outsourcing, and focusing on core competences.

Question 33

The main concepts to determine the scope of a firm's activities are

A)economies of scope.
B)transaction costs.
C)corporate complexity.
D)all of the above.

Question 34

The existence of economies of scope is likely to lead a company to

A)reduce the number of industries and/or products it's directly involved in.
B)expand the scope of its activities in some relevant way.
C)create a brand.
D)not worry too much about fixed costs.

Question 35

As a firm progresses, it is invariably the case that it expands its scope

A)in terms of its product, geographic and vertical scope.
B)in terms of its geographic and vertical scope.
C)in terms of its geographic and product scope.
D)This is not true. Some firms narrow some aspects of their scope, or voluntarily even break up.

Question 36

Vertical integration secures a higher ratio of added value to input costs for a company.

Question 37

Corporate strategy is concerned with

A)the scope of a firm's products.
B)the scope of a firm's activities.
C)the scope of a firm's structure and corporate governance system.
D)the firm's geographical scope.

Question 38

A company in a mature industry which is good at cost reduction is exhibiting

A)economy of scale through better use of fixed assets.
B)potential for economy of scope based on organisational or managerial capability.
C)potential for economy of scope based on intangible resources.
D)no potential for economy of scope.

Question 39

Economies of scope and economies of scale both relate to lower average cost but

A)economies of scale refer to cost-advantage from higher volume of a single product.
B)economies of scope refer to cost-advantage from spreading a common cost over multiple products.
C)a and b.
D)none of the above.

Question 40

Corporate strategy is concerned with

A)Where a firm chooses to compete i.e., in which industries.
B)How a firm chooses to compete in a specific industry.
C)Why a firm chooses to compete or not.
D)a and b.

Question 41

Increased corporate complexity because of expanded scope is caused by

A)the need for managers to understand a wider range of businesses.
B)the need for managers to operate differently to succeed in different businesses.
C)the extent of the linkages between the various businesses.
D)all of the above.

Question 42

A significant determining factor on whether a firm conducts an activity internally is

A)whether the transaction costs of buying in the activity in the market exceed the administrative cost of doing it themselves.
B)whether transaction costs in the market of buying in the activity exceed the administrative cost buying it in.
C)how reliable their workforce is, compared with an external supplier's reliability.
D)none of the above.

Question 43

The managers of firms in low-growth, cash-generative industries often opt for diversification because

A)shareholders expect managers to go for growth.
B)low growth does not look good for managers with an eye on their next job.
C)managers must do something positive.
D)they are often advised to do so by business consultants.

Question 44

Of Michael Porter's three tests of whether a proposed diversification will create value, the most important one is usually

A)none. They are all equally important.
B)the "attractiveness" test.
C)the "cost of entry" test.
D)The "better-off" test.

Question 45

A major reason why managers are attracted to diversification is

A)they believe that shareholders expect it of them, to show dynamism.
B)it sharpens their managerial skills.
C)many managers are attracted to the extra complexity of diversification.
D)the experience may reduce risk, and secure their job; and if not it looks dynamic for securing their next job.

Question 46

Michael Porter's "attractiveness test" means that a firm considering diversifying into another industry should

A)see that the barriers to entry to that industry are low.
B)be able to see a way to make superior profits in that industry.
C)also consider how unattractive their existing industry is, by comparison.
D)see that some firms in that industry have left, leaving space for newcomers.

Question 47

Gaining the advantage from economies of scope requires that

A)a company must internally expand its scope.
B)a company must usually enter into a licence arrangement.
C)a company must usually acquire a company who is expert in an additional business.
D)the firm is be able to spread common cost somehow, either by performing the additional activity internally, or by licensing the resource.

Question 48

A "technical economy" is

A)a saving which is only theoretically feasible.
B)a cost-saving arising from the technicalities of performing integrated processes.
C)an economy based on technology.
D)one which is not worth the effort of gaining.

Question 49

One common argument against diversification strategies is

A)managers do not have sufficient understanding of other industries.
B)diversification is simply a poor strategy.
C)shareholders can invest in other industries themselves, achieving risk-reduction more efficiently.
D)all of the above.

Question 50

The most often-cited benefits of diversification are

A)growth, risk reduction and value creation.
B)risk reduction and economies of scope.
C)value creation and cost reduction.
D)cash balancing and risk reduction.

Question 51

Adam Smith, the famous economist, called the market mechanism

A)a necessary evil.
B)the invisible hand.
C)the visible hand.
D)the iron fist in the velvet glove.

Question 52

The primary source of value creation from diversification is likely to be

A)the linkages or synergies between the businesses concerned.
B)risk reduction through balancing of counter-cyclical businesses.
C)getting a price reduction when purchasing common resource inputs.
D)balancing of cash generation, reducing the need to obtain investment finance externally.

Question 53

Over the past 30 years, the tendency in the USA and Europe has been

A)a trend for highly diversified groups to dominate industries.
B)a trend for diversified firms to refocus and reduce their diversification.
C)reduced opportunity for firms to further diversify.
D)a deliberate move to avoid copying the strategy of firms in emerging economies.

Question 54

An internal capital market occurs when

A)a diversified company sets up a finance firm as one of its businesses.
B)enough cash generated by one set of internal firms is used by other internal firms in need of cash.
C)a subsidiary starts a money-lending business, offering loans to other subsidiaries.
D)external sources of capital become too expensive.

Question 55

Outsourcing is a form of

A)increased vertical integration.
B)decreased horizontal integration.
C)de-integration or disaggregation.
D)b and c.

Question 56

The move over the past 25 years to refocus and de-integrate has NOT been universal; some industries have further vertically integrated

A)because those industries are old-fashioned and behind-the-times.
B)because in some industries the conditions favouring further vertical integration outweigh the benefits of focusing and outsourcing.
C)because those industries have probably sought no advice from academics, or taken no notice of the advice.
D)a and c.

Question 57

A firm becomes more vertically integrated when

A)it buys a direct competitor.
B)its management and staff are better aligned.
C)it moves to own more stages of the value chain, either upstream or downstream of its core activity.
D)it owns only some activities on the upstream or supply-side of its foremost activity.

Question 58

A major problem associated with internal capital markets is

A)despite the cost-savings, poor investment decisions tend to be made.
B)they deny banks much-needed business.
C)they are illegal in some countries.
D)the money should have been given to shareholders as dividends.

Question 59

An advantage of diversification is a better internal labour market because

A)there's a saving on advertising costs.
B)there's no commission payable to the internal human resources department.
C)employees can be transferred rather than hired / fired, and the firm knows these people well.
D)the firm does not need to invest so much in training new recruits.

Question 60

A strategy of unrelated diversification is

A)always a mistake.
B)likely to be less risky than related diversification.
C)not always as unrelated as it may seem e.g. the businesses may share some common attributes which can be exploited.
D)always the last resort.

Question 61

One huge problem with vertical integration of activities with only one major sellable output is

A)the company will be too large to manage efficiently.
B)the entire integrated value-chain is subject to the same single market risk.
C)upstream stages are isolated from market forces.
D)it's no longer possible to use external suppliers.

Question 62

Full vertical integration compounds risk because

A)top managers have a complete knowledge of the entire value chain.
B)the capital invested and the fixed costs are often much higher for a vertically integrated firm.
C)a decline in sales and profits in the end market affects all stages simultaneously.
D)b and c.

Question 63

A major limitation of the BCG Growth-Share Matrix is

A)it's only based on one variable to judge market attractiveness.
B)it's only based on one variable to assess competitive strength.
C)it presumes a portfolio of businesses which have little synergy or mutual dependence.
D)all of the above.

Question 64

Large transaction-specific investments tend to lead to

A)the firms failing, when an inevitable dispute occurs, and one holds the other to ransom.
B)the customer having to accept a higher price to pay for the investment.
C)vertical integration of the processes involved.
D)suppliers refusing to get involved with such unreasonable demands.

Question 65

To make a choice between vertical integration or external sourcing, which statement is true?

A)It depends on the specific factors prevailing.
B)Vertical integration is preferable in a technology-intensive industry.
C)Market sourcing is preferable when the industry is very fragmented.
D)It is simply a matter of managerial preference.

Question 66

There was a fashionable trend towards "virtual companies" in recent years, who make the largest profits in a value chain by co-ordinating all the other aspects. The risk with this plan is

A)a virtual company has little control, so suppliers may collude to drive prices up.
B)such a company may find it loses the ability to understand the industry it is in.
C)a group of suppliers and/or customers may decide to co-ordinate themselves, and isolate the virtual company.
D)b and c.

Question 67

When a customer and a supplier choose to, or are technically obliged to, integrate their processes,

A)there can no longer be a market operating between them for the item concerned.
B)there can be an adversarial relationship as each tries to gain advantage.
C)there can be strategic benefit, so long as the partners try to jointly maximise their profit in the downstream market.
D)all of the above.

Question 68

A hybrid vertical relationship is one which

A)attempts to secure optimum benefits from close collaboration whilst preserving some form of market transaction.
B)attempts a relationship where for some products the supplier is integrated, whereas for others it is a competitor.
C)is similar to a virtual vertical relationship.
D)is a combination of two or more vertical relationships.

Question 69

Once a firm buys its supplier in order to vertically integrate a process,

A)the lack of a market removes the high-powered incentive of market forces to keep costs low.
B)costs are certainly lower because the firm now knows what profit the supplier was making.
C)the supplier will now offer a better service, since it's owned by its customer.
D)it can close the purchasing department and save costs.

Question 70

When increased flexibility is required,

A)it is always best to source inputs from the open market.
B)it is always best to integrate key inputs, to maintain full control.
C)it is best to operate with a mix of both options.
D)it depends very much on the circumstances whether it's best to source from the market or vertically integrate.

Question 71

High-powered incentives and low-powered incentives respectively generally apply to

A)externally and internally sourced inputs.
B)internally and externally sourced inputs.
C)market and alliance sourced inputs.
D)joint venture and alliance sourced inputs.

Question 72

In the GE/McKinsey Matrix, the industry attractiveness axis combines

A)market growth rate and market size.
B)market profitability, cyclicality, inflation recovery and international potential.
C)profit and vertical integration.
D)a and b.

Question 73

Which of these choices is NOT an example of a vertical relationship?

A)a franchise agreement
B)an exclusive single-supplier agreement
C)a long-term agreement with competitors to fix the market price for a commodity product
D)a joint development group between a supplier and a customer

Question 74

Vertical integration may afford flexibility in responding to uncertain demand when

A)the firm has built a capability to respond speedily in a coordinated fashion.
B)the firm maintains spare capacity, and can bear spare capacity.
C)the market cannot respond as quickly, or capacity is unavailable.
D)all of the above.