Question 1

Which of the following is an example of an external transaction cost?
A) the cost of setting up a production unit
B) the cost of searching for a contract manufacturer
C) the cost of recruiting and retaining employees
D) the cost of maintaining plant and machinery

Accepted Answer

When companies transact in the open market, they incur external transaction costs: the costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract.

Question 2

Which of the following motivations for business growth involves principal-agent problems?
A) increasing profits
B) increasing market power
C) reducing risk
D) motivating managers

Accepted Answer

Firms may grow to achieve goals that benefit its managers more than their stockholders. This motivation for managers is called the principal-agent problem.

Question 3

Best Burger is a major fast food chain. Its managers are motivated to grow the firm in order to increase their market power and change the industry structure in their favor. Which of the following strategies is most associated with their motive for growth?
A) employing celebrity spokespeople
B) implementing automated burger-making machinery
C) purchasing competitors
D) increasing executive salaries

Accepted Answer

Best Burger's managers are motivated to achieve growth to increase their market share and with it their market power. To do so, firms often consolidate industries through horizontal mergers and acquisitions (buying competitors), thereby changing the industry structure in their favor. Fewer competitors generally equates to higher industry profitability. Moreover, larger firms have more bargaining power with suppliers and buyers.

Question 4

Firms that pursue extremely high or extremely low levels of diversification perform better than those that pursue moderate levels of diversification.

Accepted Answer

A cumulative body of research indicates an inverted U-shaped relationship between the type of diversification and overall firm performance. High and low levels of diversification are generally associated with lower overall performance, while moderate levels of diversification are associated with higher firm performance. This implies that companies that focus on a single business, as well as companies that pursue unrelated diversification, often fail to achieve additional value creation.

Question 5

Firms are more capable than markets at coordinating highly complex tasks, while markets are more capable of providing high-powered incentives for entrepreneurship.

Accepted Answer

Firms and markets, as different institutional arrangements for organizing economic activity, have their own distinct advantages and disadvantages. The advantages of a firm include the ability to make command-and-control decisions and coordinate highly complex tasks, while the advantages of the market include high-powered incentives and increased flexibility.

Question 6

Decisions relating to the range of products and services a firm will offer determine the firm's
A) level of diversification.
B) geographic scope.
C) vertical integration.
D) absorptive capacity.

Accepted Answer

The range of products and services that a firm decides to offer determines its level of diversification.

Question 7

Not all firms are motivated by a need to grow.

Accepted Answer

Sometimes small-business owners operate a business for convenience, stability, and lifestyle; growth could threaten those goals. In social entrepreneurship, business micro-solutions are often operated outside of capital motives, where the need to solve a social problem outweighs the need of the firm to insure longevity beyond the solution of the problem.

Question 8

Corporate strategy is focused solely on determining the geographic locations in which the firm should compete.

Accepted Answer

Although corporate strategy provides answers to the key question of where to compete, strategic leaders must answer three related questions: In what stages of the industry value chain should the company participate? What range of products and services should the company offer? Where should the company compete geographically in terms of regional, national, or international markets?

Question 9

Sending jobs out of the country to lower costs is known as outsourcing.

Accepted Answer

Outsourcing involves moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain. When outsourced activities take place outside the home country, the correct term is offshoring (or offshore outsourcing).

Question 10

Anita has been named CEO of a popular sports apparel company. As CEO, she is tasked with setting the firm's corporate strategy. Which of the following decisions is Anita most likely to make?
A) whether to pursue a differentiation or cost leadership strategy
B) which customer segments to target
C) how to achieve the highest levels of customer satisfaction
D) what range of products the firm should offer

Accepted Answer

Strategic leaders must determine corporate strategy along three dimensions: vertical integration (in what stages of the industry value chain should the company participate?), diversification (what range of products and services should the company offer?), and geographic scope (where should the company compete geographically in terms of regional, national, or international markets?).

Question 11

A conglomerate receives less than 70 percent of its revenues from any single business and features a number of strategic business units that have little to no relationship with each other.

Accepted Answer

A firm follows an unrelated diversification strategy when less than 70 percent of its revenues comes from a single business and there are few, if any, linkages among its businesses. A company that combines two or more strategic business units under one overarching corporation and follows an unrelated diversification strategy is called a conglomerate.

Question 12

A firm that decides to stop purchasing components from suppliers and start producing them in-house is pursuing backward vertical integration.

Accepted Answer

Moving ownership of activities upstream to the originating (inputs) point of the value chain is known as backward vertical integration.

Question 13

The most challenging diversification strategy is likely to be one that combines new core competencies with new and emerging markets.

Accepted Answer

The upper-right quadrant of the core competence-market matrix combines new core competencies with new market opportunities. Hamel and Prahalad call this combination "mega-opportunities"-those that hold significant future-growth opportunities. At the same time, it is likely the most challenging diversification strategy because it requires building new core competencies to create and compete in future markets.

Question 14

Decisions relating to "what stages of the industry value chain to participate in" determine a firm's
A) level of diversification.
B) geographic scope.
C) vertical integration.
D) competitive strategy.

Accepted Answer

The industry value chain describes the transformation of raw materials into finished goods and services along distinct vertical stages. This decision determines the firm's vertical integration.

Question 15

The internal and external costs associated with an economic exchange are known as interaction costs.

Accepted Answer

The costs associated with an economic exchange are known as transaction costs. Applying the logic of transaction cost economics enables managers to answer the question of whether it is cost-effective for their firm to expand its boundaries through vertical integration or diversification.

Question 16

Which of the following stakeholders of a company would most likely be responsible for formulating a corporate strategy?
A) the first-line employees
B) the creditors
C) the chief executive officer
D) the middle manager

Accepted Answer

Although many managers have input to this important decision-making process, the responsibility for corporate strategy ultimately rests with the CEO.

Question 17

There are many reasons why firms need to grow. Which of the following reasons is strongly influenced by economies of scale?
A) increasing profits
B) lowering costs
C) reducing risk
D) motivating managers

Accepted Answer

Firms are motivated to grow in order to lower their cost. A larger firm may benefit from economies of scale, thus driving down average costs as their output increases.

Question 18

Amazon.com has decided to enter the college bookstore market. The goal of "Amazon Campus" is to offer co-branded university-specific web sites that offer textbooks and paraphernalia, such as logo sweaters and baseball hats. This development shows Amazon's relentless pursuit of
A) geographic diversification.
B) product diversification.
C) vertical integration.
D) horizontal integration.

Accepted Answer

In Chapter Case 8, it was discussed how Amazon.com, lead by Jeff Bezos, has developed from an online bookseller into an online company that sells a wide variety of goods and services. Recently, Amazon has announced plans to enter the college bookstore market, which is an example of how the company has relentlessly pursued product diversification.

Question 19

Managers have exactly two choices when determining the boundaries of the firm: produce goods and services in-house ("make") or purchase them externally ("buy").

Accepted Answer

The "make" and "buy" choices anchor each end of a continuum from markets to firms. Several alternative hybrid arrangements are available between these two extremes. Moving from transacting in the market ("buy") to full integration ("make"), alternatives include short-term contracts as well as various forms of strategic alliances (long-term contracts, equity alliances, and joint ventures) and parent-subsidiary relationships.

Question 20

The managers at Camphor Plastics decided that their firm needed to diversify because of overall falling sales and lower performance in one sector. How does diversifying compensate for the lackluster performance in this sector?
A) by having higher performance in another sector
B) by sharing their market power
C) by increasing the firm's risk in another sector
D) by motivating managers

Accepted Answer

Firms often attempt to reduce risk by diversifying their product and service portfolio through competing in a number of different industries. The rationale behind these diversification moves is that falling sales and lower performance in one sector might be compensated by higher performance in another.

Quiz 8: Corporate Strategy: Vertical Integration and Diversification

Which of the following is an example of an external transaction cost?

Which of the following motivations for business growth involves principal-agent problems?

Best Burger is a major fast food chain. Its managers are motivated to grow the firm in order to increase their market power and change the industry structure in their favor. Which of the following strategies is most associated with their motive for growth?

Firms that pursue extremely high or extremely low levels of diversification perform better than those that pursue moderate levels of diversification.

Firms are more capable than markets at coordinating highly complex tasks, while markets are more capable of providing high-powered incentives for entrepreneurship.

Decisions relating to the range of products and services a firm will offer determine the firm's

Not all firms are motivated by a need to grow.

Corporate strategy is focused solely on determining the geographic locations in which the firm should compete.

Sending jobs out of the country to lower costs is known as outsourcing.

Anita has been named CEO of a popular sports apparel company. As CEO, she is tasked with setting the firm's corporate strategy. Which of the following decisions is Anita most likely to make?

A conglomerate receives less than 70 percent of its revenues from any single business and features a number of strategic business units that have little to no relationship with each other.

A firm that decides to stop purchasing components from suppliers and start producing them in-house is pursuing backward vertical integration.

The most challenging diversification strategy is likely to be one that combines new core competencies with new and emerging markets.

Decisions relating to "what stages of the industry value chain to participate in" determine a firm's

The internal and external costs associated with an economic exchange are known as interaction costs.

Which of the following stakeholders of a company would most likely be responsible for formulating a corporate strategy?

There are many reasons why firms need to grow. Which of the following reasons is strongly influenced by economies of scale?

Amazon.com has decided to enter the college bookstore market. The goal of "Amazon Campus" is to offer co-branded university-specific web sites that offer textbooks and paraphernalia, such as logo sweaters and baseball hats. This development shows Amazon's relentless pursuit of

Managers have exactly two choices when determining the boundaries of the firm: produce goods and services in-house ("make") or purchase them externally ("buy").

The managers at Camphor Plastics decided that their firm needed to diversify because of overall falling sales and lower performance in one sector. How does diversifying compensate for the lackluster performance in this sector?