Foundations of Strategy By Robert M.Grant – Test Bank A+

Description

1. Technology is not very important to established, mature industries.

@Pages and References: Pages 254-256

1. T

*b. F

1. Only digital technology is of interest outside of the science-based industries.

@Pages and References: Pages 254-256

1. T

*b. F

1. Most inventions are based on new technology.

@Pages and References: Pages 261-262

1. T

*b. F

1. Innovation must involve the attempted commercialisation of a new invention, or new idea.

@Pages and References: Pages 261-262

*a. T

1. F

1. An innovation is more likely to diffuse more quickly throughout an industry if it is perceived as worth imitating by competitors.

@Pages and References: Pages 261-262

*a. T

1. F

1. Those firms who spend more on research and development are nearly always more successful at making profit from innovation.

@Pages and References: Pages 262-269

1. T

*b. F

1. An innovation which comes to dominate the market does not always lead to superior profits for the innovator.

@Pages and References: Pages 262-269

*a. T

1. F

1. The “regime of appropriability” refers to the extent to which the innovator can appropriate value ie make a profit.

@Pages and References: Pages 262-269

*a. T

1. F

1. The main factors in determining whether the innovator can make a good profit from an innovation are luck, and good timing.

@Pages and References: Pages 262-269

1. T

*b. F

1. Property rights in innovation mainly include; patents, trademarks and copyright.

@Pages and References: Pages 264-265

*a. T

1. F

1. If a firm or a person secures a patent, then commercial success is assured.

@Pages and References: Pages 264-265

1. T

*b. F

1. Having a patent is not much use if a rival is expert enough to quickly come up with an alternative way to achieve the same thing.

@Pages and References: Pages 264-265

*a. T

1. F

1. The potential to make a profit from an innovation is greatly enhanced if a rival would need 2 or 3 years to copy it.

@Pages and References: Pages 265-266

*a. T

1. F

1. Regarding innovations, complementary resources are all the other things apart from the invention or idea necessary to achieve commercial success.

@Pages and References: Pages 266-267

*a. T

1. F

1. Which exploitation strategy is best for an innovation depends entirely on whether the innovator prefers to licence out the underlying patent or copyright.

@Pages and References: Pages 269-275

1. T

*b. F

1. A major constraint for start-up innovators is that they are unlikely to possess sufficient complementary resources for exploiting their innovation.

@Pages and References: Pages 269-275

*a. T

1. F

1. One major factor to first-mover advantage is how quickly and easily an innovation can be copied.

@Pages and References: Pages 269-275

*a. T

1. F

1. The risk of failure of an innovation is a combination of technological risk and market risk.

@Pages and References: Pages 275-277

*a. T

1. F

1. Close co-operation with a major potential customer during innovation development is inadvisable, in case they copy the innovation themselves.

@Pages and References: Pages 275-277

1. T

*b. F

1. The strongest competitive advantage in technology-based industries is to dominate an industry standard.

@Pages and References: Pages 277-284

1. T

*b. F

1. The most important standards in technology industries are interoperability standards.

@Pages and References: Pages 277-279

*a. T

1. F

1. Industry standard solutions always appear.

@Pages and References: Pages 277-279

1. T

*b. F

1. Network externalities are what cause technical standards to appear in industries where the important thing to a customer is how many other customers he’s connected to.

@Pages and References: Pages 279-281

1. T

*b. F

1. Network externalities lead to positive feedback, so that products tend to rapidly coalesce to an industry standard.

@Pages and References: Pages 279-281

*a. T

1. F

1. It’s wise to manage the creative departments in a firm separately from the operational departments.

@Pages and References: Pages 284-294

*a. T

1. F

1. In the past decade the impact of technology has:

@Pages and References: Pages 254-256

1. Been limited to science-based industries
2. Been limited to digital technologies

*c. Witnessed the pervasive influence of digital electronics technologies

1. Overwhelmingly been social networking services

1. Firms innovate because:

@Pages and References: Pages 260-261

1. The human race is naturally inventive

*b. Competitive advantages tend to erode over time – so new ones need to be found

1. Consumers are always looking for the next new gadget
2. It gets boring doing the same old things

1. Inventions are the creation of:

@Pages and References: Pages 261-262

1. New products based on new technology

*b. New products or processes, often based on existing technology and know-how

1. Usually several decades of research
2. Individual scientists or engineers, working alone

1. Competitive advantage and technology are linked by:

@Pages and References: Pages 260-261

*a. Innovation

1. Corporate culture
2. Invention
3. Organizational culture

1. Firms innovate because they are seeking

@Pages and References: Pages 260-261

1. Market share
2. Leadership of the industry

*c. A competitive advantage

1. Lower costs

1. The connection between invention and innovation is:

@Pages and References: Pages 261-262

1. They are exactly the same
2. They have nothing in common

*c. Innovation is the commercialisation of invention

1. Largely a matter of personal opinion

1. An innovation diffuses:

@Pages and References: Pages 261-262

1. Mainly on the supply side
2. By industrial espionage and leaked information

*c. Through the purchase of products by customers and the imitation by competitors

1. Answers b and c

1. The cycle of innovation has recently:

@Pages and References: Pages 261-262

*a. Speed up

1. Slowed down
2. Become more aggressive
3. Become more uncertain

1. Why is innovation no guarantee of success and fortune for the innovator?

@Pages and References: Pages 262-269

1. Success depends on the value created
2. Implementation of innovation may be a failure due to internal organizational factors

*c. Success depends on sufficient value being created and a sufficient portion of that value being appropriated by the innovator

1. Nothing is guaranteed in the corporate world and in life in general

1. The value created by an innovation is:

@Pages and References: Pages 262-269

1. Shared equally among the players
2. Determined by customer loyalty
3. Captured by the player possessing the largest market share of the industry

*d. Distributed amongst the various players involved in no certain way

1. If a strong system of appropriability exists, the innovator:

@Pages and References: Pages 262-269

1. Cannot capture a significant portion of the created value
2. Cannot acquire the property rights of its innovation

*c. Can capture a significant portion of the created value

1. Should try to sell its innovation to a large firm

1. To determine the amount of the value created between players appropriated by the innovator, 4 factors are critical:

@Pages and References: Pages 262-269

1. Complementary resources, tacitness and complexity of technology, corporate culture, and HR management

*b. Property rights, tacitness and complexity of technology, lead-time, and complementary resources

1. Tacitness and complexity of technology, lead-time, excellence of top management teams, and luck
2. Lead-time, complementary resources, relative bargaining power, and structure of the industry

1. The chief examples of property rights concerning innovations are:

@Pages and References: Pages 264-265

*a. Copyrights, patents, and trademarks

1. Patents, goodwill, and trademarks
2. Know-how, skills, and trade secrets
3. Trademarks, copyrights, and tangible assets

1. The effectiveness of the different laws used to protect property rights depends on:

@Pages and References: Pages 264-265

1. The country in which a firm wants to protect its property rights
2. The role of specialized state agencies in that protection
3. The state of the economy

*d. The type of innovation that is being protected

1. The extent to which an innovation can be imitated by a competitor depends on:

@Pages and References: Page 265

1. Whether the competitors’ experts are as clever as our experts
2. Whether a competitor can get a photocopy of the patent details
3. How ruthless the competitor is

*d. How possible it is for the competitors’ experts to comprehend, codify and replicate the technology

1. Complexity of technology relates to lead-time to catch up because:

@Pages and References: Pages 265-266

1. The more complex the design and technology, the longer it will take to replicate
2. Complex products tend to be subject to a long lead-time for delivery
3. It takes even experts a long time to understand complex theory
4. Competitors are reluctant to get involved in complex issues, if they know they’re complex

1. Lead-time in this context refers to:

@Pages and References: Pages 265-266

1. The period of time during which a firm is the leader of an industry
2. The period of time it takes for equipment to arrive after it’s been ordered

*c. The time it takes a follower to catch up

1. The time it takes for a competitor to realise you’ve done something innovative

1. Complementary resources include:

@Pages and References: Pages 266-267

1. Ancillary products
2. Give-away promotional products such as free pens, mouse mats etc.
3. Bundled products. For example, for a PC, what software is included in the package

*d. Financial, production, sales and marketing resources needed to gain market success

1. If complementary resources eg production and logistics are outsourced, then the level of profit accruing to the innovator:

@Pages and References: Pages 266-267

1. Depends on how reliable the outsource companies are
2. Depends on how commercially aggressive the innovator is

*c. Depends on how non-specialised the outsourced functions can be

1. Depends on a good contracts negotiator, preferably a lawyer

1. A patent is usually the best protection for an innovation.

@Pages and References: Pages 272-273

1. This statement is correct
2. No one can confirm or disprove this statement
3. It depends

*d. This statement is incorrect

1. The main advantage of licensing as a strategy to exploit innovation is:

@Pages and References: Pages 269-275

*a. It requires little involvement in complementary resources by the innovator

1. It’s a way to operate as a virtual company
2. It saves on costs, so is vastly more profitable for the innovator
3. It’s always successful and highly profitable

1. Nowadays, it makes no sense for an innovator to do everything themselves because:

@Pages and References: Pages 269-275

1. This is an outmoded way of operating
2. It’s always cheaper to outsource
3. The world is just too complex in the 21st century

*d. None of the above. It may make every sense

1. The choice of a strategy to exploit innovation depends on two factors:

@Pages and References: Pages 269-275

1. Luck and past experience in the industry
2. Characteristics of the innovation and a firm’s financial resources

*c. Characteristics of the innovation and a firm’s resources and capabilities

1. The nature of the innovation, and how large the firm is

1. One huge potential problem with licensing is:

@Pages and References: Pages 269-275

1. The licensee may seek to imitate the innovation themselves

*b. The innovator is wholly dependent on the licensee’s commitment and effectiveness

1. The innovator cannot issue another licence
2. The licensee may be a bad payer

1. The determinants of the choice between a leader versus a follower strategy are:

@Pages and References: Pages 271-272

1. The extent of protection of the innovation, the nature of the knowledge involved, and the potential to establish a standard
2. The development cost of the innovation, the importance of complementary resources, and the shape of the economy

*c. The extent of protection of the innovation, the potential to establish a standard, and the importance of complementary resources

1. The potential to establish a standard, the relative powers of the other players in the industry, and the development cost of the innovation

1. When complementary resources are critical to the market success of an innovation:

@Pages and References: Pages 271-272

1. The technical risks are relatively unimportant
2. The costs and risks are amplified
3. A larger firm with established complementary resources is better placed than a start-up

*d. Answers b and c

1. Small start-up firms without complementary resources often forge ahead as first-movers anyway because:

@Pages and References: Pages 271-272

1. They are naïve and foolhardy

*b. They often have no choice

1. By definition they are risk-takers
2. They are backed by huge amounts of venture capital funding

1. Risk in emerging industries is created by the following factors:

@Pages and References: Pages 275-277

*a. Market and technological uncertainties

1. Market and cost uncertainties
2. Rivalry and political uncertainties
3. Customer tastes and technology development costs

1. Technological uncertainty means:

@Pages and References: Pages 275-277

1. Uncertainty as to which technical standards will be adopted or emerge
2. The uncertainty from it not being possible to predict how long it may take or even whether a technical problem will be solved
3. The uncertainty of whether a rival is secretly developing the same technology more quickly

*d. All of the above

1. Cooperation with lead users is:

@Pages and References: Pages 275-277

1. A risk because they may imitate the innovation themselves
2. A burden to costs and times the time of key people, so is best avoided unless they insist

*c. Essential in some cases to ensure development follows a path which customers actually want

1. Useful because it makes the customer feel important

1. The only way to cope with true uncertainty is:

@Pages and References: Pages 275-277

*a. To be flexible enough to quickly react to the unexpected

1. Prepare multiple scenario plans
2. To construct a computer model simulation
3. To calculate all the risks and analyse the chances of success in a spreadsheet model

1. Standards are important in an industry because:

Pages and References: Page 277

*a. They underpin interoperability (where relevant) and facilitate industry growth

1. Every industry needs a market leader
2. They are imposed by the government and have the force of law behind them
3. Most industries cannot effectively function without standards

1. Public versus private standards are respectively:

@Pages and References: Pages 277-279

1. Standards set by public firms vs. standards established by privately-owned companies
2. Standards established by governments vs. standards set by companies

*c. Standards available for all organizations and industry players versus standards owned by firms or individuals

1. Free standards versus standards users have to pay for

1. De facto standards suffer from the following weakness:

@Pages and References: Pages 277-279

1. They are characterized by uncertainty

*b. They tend to emerge slowly and / or haphazardly

1. They are characterized by high development costs
2. Rivals may not accept them and fight against their adoption by the industry

1. Network externalities exist when:

@Pages and References: Pages 279-281

1. The value of a product for a customer lies in how many others he can connect to

*b. The value of a product for a customer depends significantly on the number of other users of the same product

1. There are large benefits to other customers
2. There are huge drawbacks for other customers

1. A classic example of network externalities, illustrating that the value of a product is a direct function of the number of users, is:

@Pages and References: Pages 279-281

1. Fashion items
2. The automobile

*c. The telephone

1. Public transport, such as the train

1. Network externalities arise not just when users are linked on a network but also when:

@Pages and References: Pages 279-281

1. Much value is gained from compatibility with associated ancillary products and services
2. Downstream costs of switching from a failed alternative candidate standard are high
3. There are clear price and availability advantages to buying the market leader’s product

*d. All of the above

1. Regarding de facto standards, a “tipping point” is when:

@Pages and References: Pages 279-281

*a. A certain threshold of market share is reached, beyond which it just keeps rising irreversibly

1. The market losers basically have to “tip” their excess product away
2. It’s as though the market losers “tip” their market shares into the winners bag
3. Customers finally realise who has the best product

1. Where they exist, network externalities are critical phenomena because:

@Pages and References: Pages 279-281

*a. They create positive feedback which often leads to a winner-takes-all situation

1. They create a winner-takes-all situation which is unfair from a competition standpoint
2. Technological innovations tend to be resilient
3. Governments are more and more concerned with supporting networks

1. To win a standard war, a firm often needs to:

@Pages and References: Pages 281-284

1. First identify the future standard and then assemble allies to win

*b. Share the value created by its technology with third parties

1. Wait, and try to network and lobby the government authorities
2. Increase marketing and advertising

1. The difference between “evolutionary” and “revolutionary” standards strategies is:

@Pages and References: Pages 281-284

1. Revolutionary strategies are more dramatic, and so more effective

*b. Evolutionary strategies maintain compatibility with what went before

1. Revolutionary strategies are more likely to gain investor attention
2. Revolutionary strategies show greater determination and commitment

1. The essence to winning a standards war is:

@Pages and References: Pages 281-284

1. Having the best technology

*b. Building a strong market presence, and some powerful allies – complementers and leading customers

1. Owning the most intellectual property
2. Simply being the first in the market

1. Invention and innovation:

@Pages and References: Page 284

1. Are closely related, so the same ingredients to success are required for both

*b. Are related – but invention requires creativity whereas innovation requires subsequent cross functional collaboration

1. Are best performed by a single, integrated team
2. Are a cultural phenomenon which must be inculcated into the entire workforce

1. The inventing or innovation-initiating team should be managed:

@Pages and References: Page 284

1. With the same discipline that any other company department is subject to

*b. In a way which is probably less restrictive or hierarchical than the rest of the company

1. More strictly than other departments, to prevent creative people losing direction
2. In accordance with a target-driven, methodical philosophy

1. One problem with innovation in large, rigidly procedural firms is that:

@Pages and References: Page 284

*a. Innovation tends to be resisted

1. Innovation is seen as unimportant
2. There is less need to innovate
3. None of the above; large firms are just as innovation-friendly as small ones

Chapter 7

Corporate Strategy

1. 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.

@Pages and References: Pages 308-310

*a. T

1. F

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

@Pages and References: Pages 308-310

*a. T

1. F

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

@Pages and References: Pages 313-315

1. T

*b. F

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

@Pages and References: Pages 313-315

1. T

*b. F

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

@Pages and References: Pages 313-315

*a. T

1. F

1. 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.

@Pages and References: Pages 313-315

*a. T

1. F

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

@Pages and References: Pages 315-319

1. T

*b. F

1. 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.

@Pages and References: Pages 315-319

*a. T

1. F

1. “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.

@Pages and References: Pages 315-319

*a. T

1. F

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.

@Pages and References: Pages 315-319

1. T

*b. F

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

@Pages and References: Pages 315-319

1. T

*b. F

1. There are 3 types of diversification; related, unrelated and concentric.

@Pages and References: Pages 324-333

1. T

*b. F

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

@Pages and References: Pages 324-333

*a. T

1. F

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

@Pages and References: Pages 325-329

*a. T

1. F

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

@Pages and References: Pages 325-329

1. T

*b. F

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

@Pages and References: Pages 325-329

*a. T

1. F

1. 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.

@Pages and References: Pages 325-329

*a. T

1. F

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

@Pages and References: Pages 329-313

1. T

*b. F

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

@Pages and References: Pages 329-313

1. T

*b. F

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

@Pages and References: Pages 331-332

*a. T

1. F

1. Highly diversified “conglomerate” firms have gone out of fashion in the past 30 years – except in emerging economies where they tend to dominate.

@Pages and References: Page 333

*a. T

1. F

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

@Pages and References: Page 333

*a. T

1. F

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

@Pages and References: Page 334

*a. T

1. F

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

@Pages and References: Pages 334-338

*a. T

1. F

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

@Pages and References: Pages 334-338

1. T

*b. F

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

@Pages and References: Page 338

*a. T

1. F

1. 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.

@Pages and References: Page 338

*a. T

1. F

1. 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.

@Pages and References: Page 339

*a. T

1. F

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

@Pages and References: Page 339

1. T

*b. F

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

@Pages and References: Pages 341-345

*a. T

1. F

1. Corporate strategy is concerned with:

@Pages and References: Pages 308-310

*a. Where a firm chooses to compete i.e. in which industries

1. How a firm chooses to compete in a specific industry
2. Why a firm chooses to compete or not
3. Answers a and b

1. Corporate strategy is concerned with:

@Pages and References: Pages 308-310

1. The scope of a firm’s products

*b. The scope of a firm’s activities

1. The scope of a firm’s structure and corporate governance system
2. The firm’s geographical scope

1. What is the difference between a firm’s geographical scope and its vertical scope?

@Pages and References: Pages 308-310

*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

1. The first describes the number of countries and the second the number of horizontal businesses where the firm is present
2. The two are highly inter-related
3. It’s not always clear what the difference is

1. The starting point for strategy is usually:

@Pages and References: Pages 313-315

*a. What business(es) are we in?

1. How much profit do we want to make?
2. Who are the customers?
3. Should we be doing something else?

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

@Pages and References: Pages 313-315

1. In terms of its product, geographic and vertical scope
2. In terms of its geographic and vertical scope
3. 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

1. The main concepts to determine the scope of a firm’s activities are:

@Pages and References: Page 315

1. Economies of scope
2. Transaction costs
3. Corporate complexity

*d. All of the above

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

@Pages and References: Pages 315-319

1. Economies of scale refer to cost-advantage from higher volume of a single product
2. Economies of scope refer to cost-advantage from spreading a common cost over multiple products

*c. Answers a and b

1. None of the above

1. The existence of economies of scope are likely to lead a company to:

@Pages and References: Pages 315-319

1. Reduce the number of industries and/or products it’s directly involved in

*b. Expand the scope of its activities in some relevant way

1. Create a brand
2. Not worry too much about fixed costs

1. Although economies of scope refer to spreading cost, this is not the case for brand extension:

@Pages and References: Pages 315-319

1. Because a brand doesn’t cost anything – it’s an asset
2. Because although the brand costs money, this does not appear in the accounts
3. 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

1. A company in a mature industry which is good at cost-reduction is exhibiting:

@Pages and References: Pages 315-319

1. Economy of scale through better use of fixed assets

*b. Potential for economy of scope based on organisational or managerial capability

1. Potential for economy of scope based on intangible resources
2. No potential for economy of scope

1. Adam Smith, the famous economist, called the market mechanism:

@Pages and References: Pages 319-323

1. A necessary evil

*b. The invisible hand

1. The visible hand
2. The iron fist in the velvet glove

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

@Pages and References: Pages 319-323

*a. Whether the transaction costs of buying in the activity in the market exceed the administrative cost of doing it themselves

1. Whether transaction costs in the market of buying in the activity exceed the administrative cost buying it in
2. How reliable their workforce is, compared with an external supplier’s reliability
3. None of the above

1. Increased corporate complexity because of expanded scope is caused by:

@Pages and References: Pages 323-324

1. The need for managers to understand a wider range of businesses
2. The need for managers to operate differently to succeed in different businesses
3. The extent of the linkages between the various businesses

*d. All of the above

1. A strategy of unrelated diversification is:

@Pages and References: Page 324

1. Always a mistake
2. 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

1. Always the last resort

1. The most often cited benefits of diversification are:

@Pages and References: Pages 325-329

*a. Growth, risk reduction and value creation

1. Risk reduction and economies of scope
2. Value creation and cost reduction
3. Cash balancing and risk reduction

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

@Pages and References: Pages 325-329

1. Shareholders expect managers to go for growth

*b. Low growth does not look good for managers with an eye on their next job

1. Managers must do something positive
2. They are often advised to do so by business consultants

1. One common argument against diversification strategies is:

@Pages and References: Pages 325-329

1. Managers do not have sufficient understanding of other industries
2. Diversification is simply a poor strategy

*c. Shareholders can invest in other industries themselves, achieving risk-reduction more efficiently

1. All of the above

1. A major reason why managers are attracted to diversification is:

@Pages and References: Pages 325-329

1. They believe that shareholders expect it of them, to show dynamism
2. It sharpens their managerial skills
3. 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

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

@Pages and References: Pages 325-329

*a. The linkages or synergies between the businesses concerned

1. Risk reduction through balancing of counter-cyclical businesses
2. Getting a price reduction when purchasing common resource inputs
3. Balancing of cash generation, reducing the need to obtain investment finance externally

1. Gaining the advantage from economies of scope requires that:

@Pages and References: Pages 325-329

1. A company must internally expand its scope
2. A company must usually enter into a licence arrangement
3. 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

1. An internal capital market occurs when:

@Pages and References: Pages 325-329

1. 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

1. A subsidiary starts a money-lending business, offering loans to other subsidiaries
2. External sources of capital become too expensive

1. A major problem associated with internal capital markets is:

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*a. Despite the cost-savings, poor investment decisions tend to be made

1. They deny banks much-needed business
2. They are illegal in some countries
3. The money should have been given to shareholders as dividends

1. An advantage of diversification is a better internal labour market because:

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1. There’s a saving on advertising costs
2. 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

1. The firm does not need to invest so much in training new recruits

1. Michael Porter’s “attractiveness test” means that a firm considering diversifying into another industry should:

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1. 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

1. Also consider how unattractive their existing industry is, by comparison
2. See that some firms in that industry have left, leaving space for newcomers

1. Of Michael Porter’s 3 tests of whether a proposed diversification will create value, the most important one is usually:

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1. None. They are all equally important
2. The “attractiveness” test
3. The “cost of entry” test

*d. The “better-off” test

1. Mergers and acquisitions are frequent. Diversifying into another industry this way:

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*a. Tends to be particularly unsuccessful

1. Tends to be particularly quickly successful, hence the frequency of this method
2. Is advisable, because it’s a relatively low-cost entry method
3. Is preferred by shareholders, hence the frequency of this method

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

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1. A trend for highly diversified groups to dominate industries

*b. A trend for diversified firms to refocus and reduce their diversification

1. Reduced opportunity for firms to further diversify
2. A deliberate move to avoid copying the strategy of firms in emerging economies

1. A firm becomes more vertically integrated when:

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1. It buys a direct competitor
2. 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

1. It owns only some activities on the upstream or supply-side of its foremost activity

1. Outsourcing is a form of:

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1. Increased vertical integration
2. Decreased horizontal integration

*c. De-integration or disaggregation

1. Answers b and c

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

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1. 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

1. Because those industries have probably sought no advice from academics, or taken no notice of the advice
2. Answers a and c

1. A “technical economy” is:

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1. A saving which is only theoretically feasible

*b. A cost-saving arising from the technicalities of performing integrated processes

1. An economy based on technology
2. One which is not worth the effort of gaining

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

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1. There can no longer be a market operating between them for the item concerned
2. There can be an adversarial relationship as each tries to gain advantage
3. 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

1. Large transaction-specific investments tend to lead to:

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1. The firms failing, when an inevitable dispute occurs, and one holds the other to ransom
2. The customer having to accept a higher price to pay for the investment

*c. Vertical integration of the processes involved

1. Suppliers refusing to get involved with such unreasonable demands

1. Once a firm buys its supplier in order to vertically integrate a process:

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*a. The lack of a market removes the high-powered incentive of market forces to keep costs low

1. Costs are certainly lower because the firm now knows what profit the supplier was making
2. The supplier will now offer a better service, since it’s owned by its customer
3. It can close the purchasing department and save costs

1. High powered-incentives and low-powered incentives respectively generally apply to:

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*a. Externally and internally sourced inputs

1. Internally and externally sourced inputs
2. Market and alliance sourced inputs
3. Joint venture and alliance sourced inputs

1. When increased flexibility is required:

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1. It is always best to source inputs from the open market
2. It is always best to integrate key inputs, to maintain full control
3. 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

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

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1. The company will be too large to manage efficiently

*b. The entire integrated value-chain is subject to the same single market risk

1. Upstream stages are isolated from market forces
2. It’s no longer possible to use external suppliers

1. Vertical integration may afford flexibility in responding to uncertain demand when:

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1. The firm has built a capability to respond speedily in a coordinated fashion
2. The firm maintains spare capacity, and can bear spare capacity
3. The market cannot respond as quickly, or capacity is unavailable

*d. All of the above

1. Full vertical integration compounds risk because:

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1. Top managers have a complete knowledge of the entire value chain
2. The capital invested and the fixed costs are often much higher for a vertically integrated firm
3. A decline in sales and profits in the end market affects all stages simultaneously

*d. Answers b and c

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

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*a. It depends on the specific factors prevailing

1. Vertical integration is preferable in a technology-intensive industry
2. Market sourcing is preferable when the industry is very fragmented
3. Is simply a matter of managerial preference

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

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1. A franchise agreement
2. An exclusive single-supplier agreement

*c. A long-term agreement with competitors to fix the market price for a commodity product

1. A joint development group between a supplier and a customer

1. A hybrid vertical relationship is one which:

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*a. Attempts to secure optimum benefits from close collaboration whilst preserving some form of market transaction

1. Attempts a relationship where for some products the supplier is integrated, whereas for others it is a competitor
2. Is similar to a virtual vertical relationship
3. Is a combination of two or more vertical relationships

1. 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:

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1. A virtual company has little control, so suppliers may collude to drive prices up
2. Such a company may find it loses the ability to understand the industry it is in
3. A group of suppliers and/or customers may decide to co-ordinate themselves, and isolate the virtual company

*d. Answers b and c

1. Which of these is NOT a factor to be included in “industry attractiveness” in the GE/McKinsey Matrix:

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1. Stage of industry life-cycle
2. International or globalisation potential
3. Entry and exit barriers

*d. Relative market share

1. A major limitation of the BCG Growth-Share Matrix is:

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1. It’s only based on one variable to judge market attractiveness
2. It’s only based on one variable to assess competitive strength
3. It presumes a portfolio of businesses which have little synergy or mutual dependence

*d. All of the above

1. A key message for corporate bosses is to recognise that diversification is:

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1. Always very risky, so should only be attempted when there’s no other option

*b. Inherently risky, but at some stage necessary – so should be based on sound analysis

1. Well-known to be primarily about empire building – so is to be discouraged
2. Only works in emerging economies nowadays