ESSENTIALS OF STRATEGIC MANAGEMENT, 3RD EDITION
CHAPTER 7
Corporate-Level Strategy and Long-Run
Profitability
Name: __________________________ Date: _____________
1. T F Managers use corporate-level strategy to identify which industries a company should compete
in to maximize long-run profitability.
2. T F An advantage of concentrating on a single industry is that by staying in one industry a firm
can focus its resources and capabilities on competing successfully in just one business.
3. T F A company can choose to enter new industries that may or may not be connected to its
existing industry by pursuing a strategy of diversification.
4. T F When a company stays inside one industry, it may miss out on opportunities to create more
value and increase their profitability by using their resources and capabilities to make and sell
products in other markets or industries.
5. T F Horizontal integration is the process of acquiring or merging with companies up and/or down
the supply chain.
6. T F Concentrating on a single business allows a company to “stick to the knitting” that is, to focus
on doing what is knows best and avoid entering new businesses it knows little about and where it can
create little value.
7. T F A merger occurs when one company uses its capital resources to purchase another company.
8. T F DaimlerChrysler was created by the combination of two firms (Daimler-Benz and Chrysler)
who agreed to blend their firms to create a new company. This is an example of an acquisition.
60 Chapter 7: Corporate-Level Strategy and Long–Run Profitability
9. T F The net result of the recent wave of mergers and acquisitions has been to increase the
fragmentation in a wide range of industries.
10. T F One of the benefits of horizontal integration is that it lowers operating costs.
11. T F Horizontal integration rarely allows companies to realize economies of scale.
12. T F Product bundling occurs when a firm offers a range of products that are sold together at a
single price.
13. T F Horizontal integration can help to reduce industry rivalry.
14. T F One benefit of horizontal integration is industry consolidation, leading to more bargaining
power over buyers and suppliers.
15. T F Antitrust law is primarily concerned with protecting smaller companies from consolidation
brought about by vertical integration.
16. T F Strategic outsourcing is the decision to allow one or more of a company’s value creation
functions to be performed by independent companies on its behalf.
17. T F Mattel hires dozens of small Asian firms to make the plastic Barbie dolls and metal Hot
Wheels cars that are its primary products. Mattel is using outsourcing to manage its manufacturing
function.
18. T F A virtual corporation is a company that outsources most of its functional activities and focuses
on one or a few core value chain functions.
19. T F A company may be able to differentiate its final products better by outsourcing certain
noncore activities to specialists.
Chapter 7: Corporate-Level Strategy and Long–Run Profitability 61
20. T F Vertical integration is a corporate-level strategy that involves a company entering new
industries to increase its long-run profitability.
21. T F A company pursuing a vertical integration strategy expands its operations by acquiring
similar firms in its industry.
22. T F A steel company that established the value chain operations necessary to supply its iron ore
needs from company-owned iron ore mines exemplifies forward integration.
23. T F The risk of holdup refers to the chance of being taken advantage of by a trading partner after
the investment in specialized assets has been made.
24. T F Vertical integration adds value to a company’s core products because entry into new
industries increases the core products’ differentiated appeal.
25. T F Vertical integration can raise costs if, over time, a company continues to purchase inputs from
company-owned suppliers when low-cost independent suppliers that can supply the same inputs exist.
26. T F A company achieves full integration when it produces all of a particular input needed for its
processes or disposes of all of its output through its own operations.
27. T F Taper integration occurs when a company buys from two or more independent suppliers at
the same time.
28. T F Outsourcing promotes a company’s competitive advantage when the company enters into
long-term relationships or alliances with its partners.
29. T F Vertical integration protects product quality, enabling a company to become a differentiated
player in its core business.
30. T F Diversification is the process of a company entering new industries distinct from its core
industry.
62 Chapter 7: Corporate-Level Strategy and Long–Run Profitability
31. T F A diversified company is one that operates in two or more industries to find ways to increase it
long-run profitability.
32. T F Most companies first consider diversification when they are generating financial resources in
excess of those necessary to maintain a competitive advantage in their original business or industry.
33. T F Superior governance revolves around how well top managers can develop strategies that
improve the competitive positioning of its business units in the industries in which they compete.
34. T F Research suggests that the top managers of companies who are successful at creating value
through superior governance seem to make a number of similar kinds of strategic decisions.
35. T F The performance of an acquired company can be improved by replacing the top management
team of the acquired company with a more aggressive top management team.
36. T F Transferring competencies across industries involves taking a distinctive competence
developed in one industry and implanting it in an existing business unit in another industry.
37. T F Economies of scope arise when two or more of a diversified company’s business units are able
to share resources.
38. T F Procter & Gamble’s disposable diaper and paper towel businesses offer one of the best
examples of the successful realization of economies of scope.
39. T F Related diversification is the strategy of operating a business unit in a new industry that is
related to a company’s existing business units through some commonality in their value chains.
40. T F Selling off a business unit to independent investors is referred to as a spin-off.
Chapter 7: Corporate-Level Strategy and Long–Run Profitability 63
41. Which of the following is not an example of horizontal integration?
a) America Online and Time Warner merge to become AOL Time Warner.
b) Coca Cola buys most of its previously independent bottling firms.
c) Microsoft acquires Rare, Ltd., maker of video games such as Donkey Kong.
d) Georgia Pacific, a wood products firm, is combining operations with another wood products
firm, Louisiana Pacific.
e) Citicorp Bank and Travelers Insurance merge to form Citigroup, a diversified provider of
financial services.
42. Managers who pursue _______________ have decided the best way to increase company profits is to
purchase the resources and assets of industry competitors.
a) horizontal integration
b) vertical integration.
c) strategic alliances
d) franchising.
e) diversification.
43. Adam’s boss tells him that their company is pursuing a strategy of horizontal integration. Which of
the following should Adam expect?
a) His company will acquire one of its suppliers.
b) His company will reorganize into fewer business units.
c) His company will begin to distribute its own products.
d) His company will buy one of its rivals
e) His company will centralize all of its support functions.
44. Observing the pattern of consolidation in U.S. industries over time, one will notice that
a) horizontal integration has never been a very popular strategy.
b) firms that horizontally integrate tend to divest later.
c) horizontal integration has been very popular in the last two decades.
d) while a few industries have consolidated since 1970, most remain fragmented.
e) mergers were very common and acquisitions were rare from 1900 to 1999.
45. Horizontal integration does not help firms
a) lower operating costs.
b) schedule supply chain processes.
c) reduce rivalry within an industry.
d) increase bargaining power over suppliers and buyers.
e) increase product differentiation.
64 Chapter 7: Corporate-Level Strategy and Long–Run Profitability
46. Which of the following is a benefit that firms should expect to gain from the use of horizontal
integration?
a) Expanded control over stages of the supply chain
b) Lower operating costs as a result of economies of scale
c) Shared risk with another firm
d) Reduced risk of holdup
e) Reduced investments in noncore activities
47. Concentrating on a single business allows a company to _____________________.
a) increase profits.
b) lower operating costs.
c) stick to the knitting.
d) increase its competitive advantage.
e) decrease its human resource turnover.
48. A merger is an agreement between _________________ companies to pool their operations and create
a new business entity.
a) three
b) four
c) five
d) two
e) none of the above
49. Antitrust regulation
a) favors large companies.
b) reduces industry competition.
c) is concerned with companies’ abuse of their market power to raise prices for consumers above
the level that would exist in more competitive situations.
d) tends to raise prices for consumers.
e) enables the achievement of market power.
50. Outsourcing occurs when a firm
a) buys one of its rivals.
b) merges with one of its suppliers.
c) enters into a joint venture with a rival.
d) hires another firm to perform value-creation activities on its behalf.
e) enters into contracts with two suppliers simultaneously.
Chapter 7: Corporate-Level Strategy and Long–Run Profitability 65
51. Horizontal integration supports the achievement of a __________ strategy.
a) cost leadership
b) cost leadership and differentiation
c) focus
d) differentiation
e) stuck in the middle
52. Which of the following is not a true statement?
a) A firm should consider outsourcing only its core activities.
b) Outsourcing can encompass an entire function.
c) A firm should consider outsourcing when the supplier can perform the activity more effectively
than the firm itself.
d) A firm should consider outsourcing if the costs will be less than the firm’s cost to perform that
activity.
e) A firm should consider outsourcing if the supplier has a distinctive competency in that activity.
53. Outsourcing
a) eliminates the need for a value chain.
b) moves some value chain activities outside the firm.
c) reorders the steps in a firm’s value chain.
d) reduces the firm’s dependence on its value chain.
e) strengthens the firm’s capabilities in each value chain function.
54. Which of the following is not a potential benefit of outsourcing?
a) Concentrating scarce human, financial, and physical resources to strengthen core competencies
b) Gaining the benefit of the specialist companies expertise in a specialized skill
c) Reducing the need for horizontal integration
d) Reducing costs, because the supplier may be more efficient
e) Enhancing differentiation
55. Which of the following activities should not be outsourced by a virtual corporation?
a) Contract management
b) R&D
c) Materials management
d) Manufacturing
e) Marketing
56. In which of the following is a firm most likely to lose direct control over value-creation activities?
a) Merger
b) Outsourcing
c) Vertical integration
d) Strategic alliance
e) Acquisition
66 Chapter 7: Corporate-Level Strategy and Long–Run Profitability
57. When an intermediate manufacturer moves into final assembly, it is pursuing
a) backward vertical integration.
b) forward vertical integration.
c) taper vertical integration.
d) related vertical differentiation.
e) unrelated vertical differentiation.
58. The strategy of ___________ involves choosing the value-added stages of the raw-material–to–
consumer chain in which to compete.
a) diversification based on economies of scope
b) diversification based on acquisition and restructuring
c) cost leadership
d) differentiation
e) vertical integration
59. Which of the following is not a benefit of vertical integration?
a) Facilitating investments in specialized assets
b) Increasing cost structure
c) Improved scheduling
d) Protects product quality
e) Builds barriers to entry
60. Under which of the following circumstances is vertical integration hazardous?
a) When a company has to purchase high-cost inputs from company-owned suppliers, even though
low-cost external sources exist
b) When vertical integration involves moving downstream into retailing
c) When the value added by successive stages of production is declining
d) When the industries involved are undergoing rapid expansion
e) When the company’s competitors are also following a strategy of vertical integration
61. Companies invest in specialized assets because these assets allow them to ______________ of value
creation and/or to better differentiate their products from those of competitors.
a) increase the costs
b) keep the cost level
c) lower the costs
d) double the costs
e) none of the above
Chapter 7: Corporate-Level Strategy and Long–Run Profitability 67
62. Vertical integration can be disadvantageous when
a) industry technology is changing rapidly.
b) demand is stable.
c) competitors are vertically integrated.
d) technology is changing slowly.
e) competitors are vertically integrated and industry technology changes rapidly.
63. _____________________ can be a major disadvantage when operating costs increase.
a) Horizontal integration
b) Protecting product quality
c) Forward integration
d) Vertical integration
e) Backward integration
64. _____________ refers to the process of entering new industries, distinct from a company’s core
industry.
a) Horizontal integration
b) Value reconstruction
c) Vertical integration
d) Diversification
e) Vertical specialization
65. When a company is generating financial resources in excess of the amount needed to maintain a
competitive advantage in its core business, it will most likely pursue
a) taper integration.
b) full integration.
c) strategic alliances.
d) long-term contracts.
e) diversification.
66. Diversification based on transferring competencies
a) requires the existence of significant commonalities between one or more of the value-creation
functions.
b) requires that acquisitions be made in the same industry as the company’s core business area.
c) allows a company to achieve the advantage of risk pooling.
d) allows a company to reduce bureaucratic costs.
e) requires both the existence of significant commonalities between one or more of the value–
creation functions and that acquisitions be made in the same industry as the company’s core
business area.
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67. ___________ arise when one or more of a diversified company’s business unites are able to realize
cost-saving or differentiation advantages because they can share resources or capabilities.
a) Economies of scope
b) Competitive advantages
c) Economies of scale
d) Distinctive competencies
e) Multi-point business models
68. A diversification strategy based on resource sharing
a) entails a company creating value by applying the distinctive competencies it developed in one
line of business to another line of business.
b) requires the development of new business-level strategies.
c) can help a company to realize economies of scope.
d) is a valid way of supporting the generic business-level strategy of differentiation.
e) increases the accountability of units.
69. A company should pursue related diversification instead of unrelated diversification when
a) the company‘s core skills create value by resource sharing and by transferring competencies
between businesses.
b) the company‘s core skills are highly specialized and have few applications outside the core
business.
c) the company’s top management is skilled at acquiring and turning around poorly run
enterprises.
d) the company‘s main objective is to maximize growth.
e) the company’s free cash flow is high enough to have funds available for investment.
70. A company should pursue unrelated diversification instead of related diversification when
a) its core skills are highly specialized and have few applications outside core business.
b) the company‘s top management is skilled at acquiring and turning around poorly run
enterprises.
c) its core technological skills are applicable to a wide variety of industrial and commercial
situations.
d) it wants to maximize growth.
e) the bureaucratic costs of implementation do not exceed the value that can be created by
realizing economies of scope.
71. When one or more components of a company’s value chain are applicable to a wide variety of
industrial and commercial situations, which of the following strategies should a company pursue?
a) Unrelated diversification
b) Backward integration
c) A focus strategy
d) Taper integration
e) Related diversification
Chapter 7: Corporate-Level Strategy and Long–Run Profitability 69
72. _____________ refers to the process of companies divesting themselves of diversified activities and
downsizing in order to concentrate on fewer businesses.
a) Industry positioning
b) Competitive alignment
c) Strategic decomposition
d) Vertical integration
e) Restructuring
73. _____________ refers to the fact that the stock of highly diversified companies is valued lower,
relative to their earnings, than the stock of less diversified enterprises.
a) Market inefficiencies
b) Systematic market effect
c) Diversification discount
d) Diversification value effect
e) Inefficient market theory
74. Which of the following is not a rationale for restructuring?
a) The existence of a diversification discount
b) Response to a failed acquisition
c) Innovations in management processes and strategy have diminished the advantages of
diversification.
d) Increased product differentiation
e) All of these are rationales for restructuring.
75. A _________________ involves halting investment in a unit in order to maximize short-to–medium-
term cash flow from that unit.
a) management buyout
b) liquidation strategy
c) spin-off
d) harvest strategy
e) corporate restructuring
76. Identify and discuss the profitability justifications for pursuing a multi-business model based on
diversification.
70 Chapter 7: Corporate-Level Strategy and Long–Run Profitability
77. Compare the benefits and risks associated with horizontal and vertical integration. Under what
circumstances would a firm prefer one to the other?
78. How can strategic outsourcing strengthen a company’s business model and increase its profitability?
79. Consider the case of a manufacturing firm that purchases subassemblies from a supplier, creates a
finished product, and then sells that product to a wholesale distributor. What advantages might this
firm gain from forward integration? From backward integration? What potential pitfalls of vertical
integration might the firm face?
80. What is meant by the terms “related diversification” and “unrelated diversification” and how should
a company choose between them.