Question 1

IBM leverages its competencies in computing technology to provide health care services.This is an example of a core competence being used across dissimilar businesses within the same corporation.

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: it 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 it must be difficult for competitors to imitate or find substitutes for it. With Watson, the unique computer developed by IBM that processes natural language, they were able to leverage their computing expertise (core competence) to solve important medical problems and thus become medical experts.

Question 2

According to the transaction cost perspective in analyzing vertical integration,every market transaction involves some transaction cost.

Accepted Answer

One approach that has proved very useful in understanding vertical integration is the transaction cost perspective. According to this perspective, every market transaction involves some transaction costs.

Question 3

If a corporation is to achieve synergy by sharing activities across its business units,it is not important to compromise on the design or performance of an activity that is to be shared.

Accepted Answer

Sharing activities inevitably involve costs that the benefits must outweigh such as the greater coordination required to manage a shared activity. Even more important is the need to compromise on the design or performance of an activity so that it can be shared. For example, a salesperson handling the products of two business units must operate in a way that is usually not what either unit would choose if it were independent. If the compromise erodes unit effectiveness, then sharing may reduce rather than enhance competitive advantage.

Question 4

The main reason that automobile manufacturers have increased the amount of outsourced inputs is because of the importance of boom and bust cycles in the industry.

Accepted Answer

With the high level of fixed costs in plant and equipment as well as operating costs that accompany endeavors toward vertical integration, widely fluctuating sales demand can either strain resources (in times of high demand) or result in unused capacity (in times of low demand). The cycles of boom and bust in the automobile industry are a key reason why the manufacturers have increased the amount of outsourced inputs.

Question 5

One of the risks of vertical integration is that there may be problems associated with unbalanced capacities along the value chain of a firm.

Accepted Answer

The risks of vertical integration include: the costs and expenses associated with increased overhead and capital expenditures; a 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 6

Restructuring requires the corporate office to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant,positive change.

Accepted Answer

Restructuring is a means by which the corporate office can add value to a business. Here, the corporate office tries to find either 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, reward systems, and so forth.

Question 7

Although acquiring related businesses can enhance the bargaining power of a corporation,there is a risk of retaliation by competitors that can result in a diminishing of the desired bargaining power.

Accepted Answer

When PepsiCo diversified into the fast-food industry with its acquisitions of Kentucky Fried Chicken, Taco Bell, and Pizza Hut, it clearly benefited from its position over these units that served as a captive market for its soft-drink products. However, many competitors, such as McDonalds, refused to consider PepsiCo as a supplier of its own soft-drink needs because of competition with Pepsi divisions in the fast-food industry. McDonalds did not want to subsidize the enemy. Thus, although acquiring related businesses can enhance corporation bargaining power, the corporation must be aware of the potential for retaliation.

Question 8

Portfolio management should be considered as the primary basis for formulating corporate-level strategies.

Accepted Answer

Portfolio management helps achieve a better understanding of the competitive position of an overall portfolio of businesses, to suggest strategic alternatives for each of the businesses, and to identify priorities for the allocation of resources.

Question 9

When sharing activities across business units,a company can attain the highest cost savings when it acquires another from the same industry in the same country.

Accepted Answer

Cost savings are generally highest when one company acquires another from the same industry in the same country. Cost savings come from many sources, including the elimination of jobs, facilities, and related expenses that are no longer needed when functions are consolidated, or from economies of scale in purchasing.

Question 10

The two principal means by which firms achieve synergy through market power are pooled negotiating power and corporate parenting.

Accepted Answer

The two principal means by which firms achieve synergy through market power are pooled negotiating power (the improvement in bargaining position relative to suppliers and customers) and vertical integration (an expansion or extension of the firm by integrating preceding or successive production processes).

Question 11

Portfolio management matrices generally consist of two axes that reflect industry or market growth and the market share of a business.

Accepted Answer

The Boston Consulting Group (BCG) growth/share matrix is among the best known of the portfolio management tools. In the BCG approach, each of the strategic business units (SBUs) of the firm is plotted on a two-dimensional grid in which the axes are relative market share and industry growth rate.

Question 12

Market power refers to cost savings from leveraging core competencies or sharing activities among the businesses in a corporation.

Accepted Answer

Market power refers to the ability of the firm to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment.

Question 13

An oil refinery secures land leases and develops its own drilling capacity to ensure a constant supply of crude oil.This is an example of forward integration.

Accepted Answer

This is an example of backward integration. Vertical integration occurs when a firm becomes its own supplier or distributor. The firm incorporates more processes toward the original source of raw materials (backward integration) or toward the ultimate consumer (forward integration).

Question 14

Shared activities among businesses in a corporation do not always have a positive effect on a differentiation strategy of a corporation.

Accepted Answer

Sharing activities among businesses in a corporation can have a negative effect on a corporation. For example, when Ford owned Jaguar, they found that customers had lower perceived value of Jaguar automobiles when they found that the entry-level Jaguar shared its basic design with and was manufactured in the same production plant as the Ford Mondeo, a European midsize car. Perhaps, it is not too surprising that Jaguar was divested by Ford in 2008.

Question 15

Similar businesses working together or the affiliation of a business with a strong parent can strengthen the bargaining position of a company relative to suppliers and customers.

Accepted Answer

Similar businesses working together or the affiliation of a business with a strong parent can strengthen the bargaining position of an organization relative to suppliers and customers and enhance its position relative to its competitors.

Question 16

With unrelated diversification,potential benefits can be gained from vertical or hierarchical relationships; that is,the creation of synergies from the interaction of the corporate office with outside stakeholders.

Accepted Answer

With unrelated diversification, potential benefits can be gained from vertical or hierarchical relationships; that is, the creation of synergies from the interaction of the corporate office with the individual business units.

Question 17

Vertical integration is attractive when market transaction costs are higher than internal administrative costs.

Accepted Answer

Decisions about vertical integration are based on a comparison of transaction costs and administrative costs. If transaction costs are higher than administrative costs, vertical integration becomes an attractive strategy.

Question 18

Starbucks acquired the baker chain,La Boulange,with the intention of selling the bakery products at its coffee cafes.The increased market exposure for La Boulange is an example of a revenue enhancing benefit that can arise from the differentiation strategy.

Accepted Answer

Often an acquiring firm and its target may achieve a higher level of sales growth together than either company could on its own. For example, Starbucks recently acquired a small bakery chain, La Boulange, and intends to sell La Boulange products at Starbucks cafes nationally. In leveraging Starbucks national retail chain, La Boulange will be able to dramatically expand its market exposure and sales much beyond its current 19-store West Coast market.

Question 19

Sharing activities across business units can provide two primary benefits: cost savings and revenue enhancements.

Accepted Answer

Corporations also 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. Sharing activities can provide two primary payoffs: cost savings and revenue enhancements.

Question 20

A car manufacturer controls its own system of dealerships to ensure retail outlets for its products.This is an example of backward integration.

Accepted Answer

This is an example of forward integration. Vertical integration occurs when a firm becomes its own supplier or distributor. The firm incorporates more processes toward the original source of raw materials (backward integration) or toward the ultimate consumer (forward integration).

Quiz 6: Corporate-Level Strategy: Creatingvalue Through Diversification