Question 1

Vertical integration is attractive when
A) administrative costs are higher than transaction costs.
B) transaction costs are higher than administrative costs.
C) transaction costs and administrative costs are equal.
D) search costs are higher than monitoring costs.

Accepted Answer

If transaction costs are higher than administrative costs, that is, those costs incurred when coordinating the activities elsewhere in the value chain, vertical integration becomes an attractive strategy.

Question 2

For a core competence to be a viable basis for the corporation strengthening a new business unit,there are three requirements.Which one of the following is not one of these requirements?
A) The competence must help the business gain strength relative to its competition.
B) The new business must be similar to existing businesses to benefit from a core competence.
C) The new business must have an established large market share.
D) The collection of competencies should be unique, so that they cannot be easily imitated.

Accepted Answer

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria:the core competence must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and the core competencies must be difficult for competitors to imitate or find substitutes for.

Question 3

Shaw Industries,a giant carpet manufacturer,increases its control over raw materials by producing much of its own polypropylene fiber,a key input into its manufacturing process.This is an example of
A) vertical integration.
B) sharing activities.
C) pooled negotiating power.
D) leveraging core competencies.

Accepted Answer

Shaw Industries, a carpet manufacturer, has attained a dominant position in the industry via a strategy of vertical integration. Shaw has successfully implemented strategies of both forward and backward integration.

Question 4

________ is when a firm tries to find and acquire either poorly performing firms with unrealized potential or firms in industries on the threshold of significant,positive change,thereby creating value within business units.
A) Parenting
B) Leveraging core competencies
C) Restructuring
D) Sharing activities

Accepted Answer

In restructuring, the corporate office tries to find poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change. The parent intervenes, often selling off parts of the business; changing the management; reducing payroll and unnecessary sources of expenses; changing strategies; and infusing the company with new technologies, processes, or reward systems.

Question 5

A firm should consider vertical integration when
A) the competitive situation is highly volatile.
B) customer needs are evolving.
C) the suppliers of raw materials to the firm are unable to maintain quality standards.
D) the suppliers of the firm willingly cooperate with the firm.

Accepted Answer

A firm should consider vertical integration if the company is not satisfied with the quality of the value that its present suppliers and distributors are providing.

Question 6

Casio,a giant electronic products producer,synthesizes it abilities in miniaturization,microprocessor design,material science,and ultrathin precision castings to produce digital watches.It uses the same skills to produce card calculators,digital cameras,and other small electronics.These collective skills are
A) strategic resources.
B) core competencies.
C) shared activities.
D) economies of scope.

Accepted Answer

Core competencies reflect the collective learning in organizations, which is how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services. In some circumstances, a core competence can create value and provide a viable basis for synergy among the businesses in a corporation. Casio, a giant electronic products producer, synthesizes its abilities in miniaturization, microprocessor design, material science, and ultrathin precision castings to produce digital watches. These are the same skills it applies to design and produce its miniature card calculators, digital cameras, pocket electronic dictionaries, and other small electronics.

Question 7

When a firm diversifies into ________ businesses,the primary potential benefits to be derived come from ________ relationships-those businesses that share intangible and tangible resources.
A) related; hierarchical
B) unrelated; hierarchical
C) related; horizontal
D) unrelated; horizontal

Accepted Answer

A firm may diversify into related businesses. Here, the primary potential benefits to be derived come from horizontal relationships, that is, businesses sharing intangible resources (e.g., core competencies such as marketing) and tangible resources (e.g., production facilities, distribution channels).

Question 8

Transaction costs include all the following costs except
A) monitoring costs.
B) negotiating costs.
C) search costs.
D) agency costs.

Accepted Answer

Transaction costs are the sum of search costs, negotiation costs, contracting costs, monitoring costs, and enforcement costs. These transaction costs can be avoided by internalizing the activity, in other words, by producing the input in-house.

Question 9

Microsoft offered in 2016 to buy LinkedIn for 26.2 billion USD which was 50 percent higher than the value for LinkedIn the day before.This high premium offer was necessary for Microsoft to complete ________ initiative.
A) a low cost
B) an internal development
C) a diversification
D) a divestiture

Accepted Answer

Diversification initiatives-whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development-must be justified by the creation of value for shareholders. But this is not always the case. Acquiring firms typically pay high premiums when they acquire a target firm. For example, in 2016, Microsoft offered to buy LinkedIn for 26.2 billion USD, 50 percent higher than the value of LinkedIn the day before.

Question 10

Diversified public corporations such as Berkshire Hathaway and Virgin Group are examples of companies that create value using
A) deconstruction expertise.
B) parenting expertise.
C) excess personnel.
D) increased market positioning.

Accepted Answer

Many firms have successfully diversified their holdings without strong evidence of the more traditional sources of synergy (i.e., horizontally across business units). Diversified public corporations such as Berkshire Hathaway and Virgin Group and leveraged buyout firms such as KKR and Clayton, Dubilier & Rice are a few examples. These parent companies create value through management expertise. They improve plans and budgets and provide especially competent central functions such as legal, financial, human resource management, procurement, and the like. They also help subsidiaries make wise choices in their own acquisitions, divestitures, and new internal development decisions.

Question 11

When a firm diversifies into ________ businesses,the primary potential benefits to be derived come from ________ relationships where value creation is derived from the corporate office.
A) unrelated; hierarchical
B) related; hierarchical
C) related; horizontal
D) unrelated; horizontal

Accepted Answer

A corporation may diversify into unrelated businesses. Here, the primary potential benefits are derived largely from hierarchical relationships, that is, value creation derived from the corporate office.

Question 12

Sharing core competencies is one of the primary potential advantages of diversification.For diversification to be most successful,it is important that the
A) products use similar distribution channels.
B) value chains of the firm be similar enough in at least one way to allow for the leveraging of the core competencies of the firm.
C) target market is the same, even if the products are very different.
D) methods of production are the same.

Accepted Answer

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, different businesses in the corporation must be similar in at least one important way related to the core competence. It is not essential that the products or services themselves be similar, but at least one element in the value chain must require similar skills in creating competitive advantage.

Question 13

________ is when the corporate office helps subsidiaries make wise choices in their own acquisitions,divestures,and new ventures,thereby creating value within business units.
A) Parenting
B) Restructuring
C) Leveraging core competencies
D) Increasing market power

Accepted Answer

Parent companies create value through management expertise. They improve plans and budgets and provide especially competent central functions such as legal, financial, human resource management, and procurement. They also help subsidiaries make wise choices in their own acquisitions, divestitures, and new internal development decisions.

Question 14

Unbalanced capacities that limit cost savings,difficulties in combining specializations,and reduced flexibility are disadvantages associated with
A) strategic alliances.
B) vertical integration.
C) horizontal integration.
D) divestiture.

Accepted Answer

The risks of vertical integration include costs and expenses associated with increased overhead and capital expenditures, loss of flexibility resulting from large investments, problems associated with unbalanced capacities along the value chain, and additional administrative costs associated with managing a more complex set of activities.

Question 15

When management uses common production facilities or purchasing procedures to distribute different but related products,they are
A) building on core competencies.
B) achieving process gains.
C) using portfolio analysis.
D) sharing activities.

Accepted Answer

Corporations can achieve synergy by sharing activities across their business units. These include value-creating activities such as common manufacturing facilities, distribution channels, and sales forces.

Question 16

The risks of vertical integration include all the following except
A) costs and expenses associated with increased overhead and capital expenditures.
B) lack of control over valuable assets.
C) problems associated with unbalanced capacities along the value chain.
D) additional administrative costs associated with managing a more complex set of activities.

Accepted Answer

The risks of vertical integration include costs and expenses associated with increased overhead and capital expenditures, loss of flexibility resulting from large investments, problems associated with unbalanced capacities along the value chain, and additional administrative costs associated with managing a more complex set of activities.

Question 17

According to the text,corporate restructuring includes
A) capital restructuring, asset restructuring, and technology restructuring.
B) capital restructuring, asset restructuring, and management restructuring.
C) management restructuring, financial restructuring, and procurement restructuring.
D) global diversification, capital restructuring, and asset restructuring.

Accepted Answer

Restructuring can involve changes in assets, capital structure, or management.

Question 18

________ diversification is when a firm enters a different business that has little horizontal interaction with other businesses of a firm.
A) Horizontal
B) Synergistic
C) Related
D) Unrelated

Accepted Answer

With unrelated diversification, unlike related diversification, few benefits are derived from horizontal relationships, that is, the leveraging of core competencies or the sharing of activities across business units within a corporation. Instead, potential benefits can be gained from vertical (or hierarchical) relationships which are the creation of synergies from the interaction of the corporate office with the individual business units.

Question 19

Proctor and Gamble is a large multinational organization that has many business sharing distribution resources.Diversification strategies take advantage of the ________ that exist in their organization.
A) costs
B) employees
C) discontinuities
D) synergies

Accepted Answer

Why should companies even bother with diversification initiatives? The answer, in a word, is synergy, derived from the Greek word synergos, which means working together. Firms can also enhance their market power via pooled negotiating power and vertical integration. For example, Procter and Gamble enjoys many synergies from having businesses that share distribution resources.

Question 20

Vertical integration is more likely to be attractive when the end consumer market is
A) volatile.
B) stable.
C) contracting.
D) fragmented.

Accepted Answer

Vertical integration makes more sense when the end consumer market is stable and growing since vertical integration increases the downside for firms if demand declines or is unstable.

Quiz 6: Corporate-level Strategy: Creating Value Through Diversification

Vertical integration is attractive when

For a core competence to be a viable basis for the corporation strengthening a new business unit,there are three requirements.Which one of the following is not one of these requirements?

Shaw Industries,a giant carpet manufacturer,increases its control over raw materials by producing much of its own polypropylene fiber,a key input into its manufacturing process.This is an example of

________ is when a firm tries to find and acquire either poorly performing firms with unrealized potential or firms in industries on the threshold of significant,positive change,thereby creating value within business units.

A firm should consider vertical integration when

When a firm diversifies into businesses,the primary potential benefits to be derived come from relationships-those businesses that share intangible and tangible resources.

Transaction costs include all the following costs except

Microsoft offered in 2016 to buy LinkedIn for 26.2 billion USD which was 50 percent higher than the value for LinkedIn the day before.This high premium offer was necessary for Microsoft to complete ________ initiative.

Diversified public corporations such as Berkshire Hathaway and Virgin Group are examples of companies that create value using

When a firm diversifies into businesses,the primary potential benefits to be derived come from relationships where value creation is derived from the corporate office.

Sharing core competencies is one of the primary potential advantages of diversification.For diversification to be most successful,it is important that the

________ is when the corporate office helps subsidiaries make wise choices in their own acquisitions,divestures,and new ventures,thereby creating value within business units.

Unbalanced capacities that limit cost savings,difficulties in combining specializations,and reduced flexibility are disadvantages associated with

When management uses common production facilities or purchasing procedures to distribute different but related products,they are

The risks of vertical integration include all the following except

According to the text,corporate restructuring includes

________ diversification is when a firm enters a different business that has little horizontal interaction with other businesses of a firm.

Proctor and Gamble is a large multinational organization that has many business sharing distribution resources.Diversification strategies take advantage of the ________ that exist in their organization.

Vertical integration is more likely to be attractive when the end consumer market is