As a firm increases in size, it often increases in complexity; however, the ability of
managers to control and operate the firm efficiently are virtually unlimited and
therefore costs do not substantially increase.
Answer:
High volumes of production are also associated with high levels of generality in
employee tasks and as workers become increasingly generalized in accomplishing a
variety of tasks; they can become more effective at these tasks, thereby reducing the
firm’s costs.
Answer:
A firm’s level of vertical integration is the number of steps in its value chain that the
firm accomplishes within its boundaries.
Answer:
Most of the different types of economies of scope cannot be realized by equity holders
on their own.
Answer:
If the different businesses that a single firm pursues are linked on only a couple of
dimensions, or if different sets of businesses are linked along very different dimensions,
that corporate diversification strategy is called related-linked diversification.
Answer:
In the information technology business, interconnectivity is a relatively unimportant
basis of potential product differentiation.
Answer:
Timing-based product differentiation relies solely on being a first mover.
Answer:
A firm’s ability to conceive and implement vertical integration strategies tends to be
highly susceptible to direct duplication.
Answer:
A firm implements a corporate diversification strategy when it operates in multiple
industries or markets simultaneously.
Answer:
The senior executive in an M-form organization has two responsibilities: strategy
formulation and strategy implementation.
Answer:
One study that reviewed 40 empirical merger and acquisition studies in the finance
literature concluded that acquisitions, on average, increased the market value of bidding
firms by about 25 percent and left the market value of the target firms unchanged.
Answer:
One of the strengths of using a hurdle rate to measure the performance of divisions in a
diversified firm is that if the corporation has a single hurdle rate, there is little
ambiguity about the performance objectives of divisions.
Answer:
Suppliers are a greater threat to firms in an industry when suppliers are threatened by
substitutes.
Answer:
The primary purpose of organizing a strategic alliance is to enable partners in the
alliance to gain all the benefits associated with cooperation while minimizing the
probability that cooperating firms will cheat on their cooperative agreements.
Answer:
Hard currencies are currencies that are traded, and thus have value, on international
money markets.
Answer:
One of the central questions that all strategic managers must address, regardless of the
industry they work in, is “How is the industry likely to evolve?”
Answer:
The ability to use organization structure to facilitate coordination among scientific
disciplines to conduct research is known as architectural competence.
Answer:
For the purposes of this book, a firm’s strategy is defined as its theory about how to gain
competitive advantages.
Answer:
Cost-leadership firms are typically characterized by very tight cost control systems;
frequent and detailed cost control reports; an emphasis on quantitative cost goals and
targets; and close supervision of labor, raw materials, inventory, and other costs.
Answer:
Financial risks can be daunting when a firm first begins international operations.
Answer:
A dominant-business firm is pursuing a related diversification strategy and has between
70 and 95 percent of firm revenues from a single business.
Answer:
In general, economies of scale and diseconomies of scale are relatively
easy-to-duplicate bases of cost leadership.
Answer:
For a strategic alliance to be a source of sustained competitive advantage it must be
valuable in that it exploits an opportunity but avoids a threat and it must also be rare
and costly to imitate.
Answer:
Internal capital allocation is an example of less costly-to-duplicate economies of scope.
Answer:
Japanese retail distribution has historically been much more fragmented, and much less
efficient, than the system that exists in either the United States or Western Europe.
Answer:
The interpersonal relations among managers in a firm, a firm’s culture, and a firm’s
reputation among suppliers and customers can all act to make a firm’s resources and
capabilities socially complex.
Answer:
In general, firms will prefer a strategic alliance over “going it alone” when the level of
transaction-specific investment required to complete an exchange is moderate.
Answer:
In network industries with increasing returns to scale where standards are unimportant,
strategic alliances can be used to create a more favorable competitive environment.
Answer:
In a decentralized federation, each country in which the firm operates is organized as a
full profit-and-loss division headed by a division general manager who is typically the
president of the company in a particular country.
Answer:
Flexibility is low when the cost of changing strategic choices is low.
Answer:
Firms should only bring market exchanges within their boundaries when the cost of
vertical integration is more than the cost of opportunism.
Answer:
One of the biggest uncertainties in providing customer service through call centers is
the question of whether the people staffing the phones actually help a firm’s customers.
Answer:
The size of a firm’s competitive advantage is the sum of the economic value a firm is
able to create and the economic value rivals are able to create.
Answer:
In principle, the Federal Trade Commission will allow any acquisition involving firms
with headquarters in the United States that could have the potential for generating
monopoly or oligopoly profits in an industry.
Answer:
Intermediate products or services are those products or services that are produced in one
division of a diversified firm that are used as inputs by another division.
Answer:
Research shows that as many as two-thirds of strategic alliances do not meet the
expectations of at least one alliance partner.
Answer:
Which of the following statements regarding institutional investors is accurate?
A) Institutional investors tend to be more interested in maximizing the short-term value
of their portfolios than in the long-term performance of firms in those portfolios.
B) High levels of institutional ownership are negatively related to the level of R&D in a
firm.
C) High levels of institutional ownership have a strong, positive relationship with the
level of R&D in a firm.
D) High levels of institutional ownership lead firms to sell strategically unrelated
businesses.
Answer:
P&G is a leading consumer goods company in the United States that has grown its
business through a combination of international growth, alliances, acquisitions and
mergers. In 2003, P&G acquired the beauty care company Wella to acquire products
that would complement its current product. In 2004, P&G acquired AG-Hutchison Ltd
to establish a stronger presence in the Chinese consumer goods products market. In
2005, P&G acquired Gillette, another consumer goods company, in a deal worth
approximately $57 billion dollars.
Since both P&G and Gillette are consumer products firms, this acquisition is best
described as a
A) vertical merger.
B) horizontal merger.
C) market extension merger.
D) conglomerate merger.
Answer:
Sematech is a producer of computer chips. To gain an advantage over other computer
chip makers, Sematech focuses on reducing its costs below all of its competitors and
has aligned its value chain accordingly. Recently, several of Sematech’s competitors
have begun to reduce the company’s competitive advantage. In response to this threat,
Sematech has decided to add production capacity in an effort to lower costs. If
Sematech decided to focus on building its technological hardware, it would focus on
elements such as
A) robots.
B) organizational culture.
C) the quality of organizational controls.
D) the quality of relations among labor and management.
Answer:
________ occurs when a firm adopts organizational policies and practices that are
consistent with its strategy.
A) Strategy formulation
B) Strategic choice
C) Strategy implementation
D) Strategic control
Answer:
Although joint ventures between firms in the same industry ________ collusive
implications, research has shown that these kinds of joint ventures are ________.
A) may have; relatively rare
B) are not likely to have; relatively rare
C) may have; relatively common
D) are not likely to have; relatively common
Answer:
Which of the following statements regarding direct duplication and substitutes for
vertical integration is accurate?
A) A firm’s valuable and rare vertical integration choices may be subject to direct
duplication and substitutes.
B) A firm’s valuable and rare vertical integration choices are subject to neither direct
duplication nor substitutes.
C) A firm’s valuable and rare vertical integration choices may be subject to direct
duplication but not to substitutes.
D) A firm’s valuable and rare vertical integration choices may be subject to substitutes
but not to direct duplication.
Answer:
If a firm decided to maintain relationships with several different call center
management companies, each of which have adopted different technological solutions
to the problem of how to use call center employees to assist customers who are using
very complex products, to reduce the uncertainty of whether the people staffing the
phone can help the firm’s customers, this would be consistent with which explanation of
vertical integration?
A) opportunism-based
B) flexibility-based
C) firm capabilities-based
D) alliance-based
Answer:
Firm-specific investments are a type of ________ investments.
A) operational
B) contingent
C) transaction-specific
D) horizontal
Answer:
P&G is a leading consumer goods company in the United States that has grown its
business through a combination of international growth, alliances, acquisitions and
mergers. In 2003, P&G acquired the beauty care company Wella to acquire products
that would complement its current product. In 2004, P&G acquired AG-Hutchison Ltd
to establish a stronger presence in the Chinese consumer goods products market. In
2005, P&G acquired Gillette, another consumer goods company, in a deal worth
approximately $57 billion dollars.
P&G’s purchase of AG-Hutchison Ltd in 2004 is an example of a
A) conglomerate merger.
B) vertical merger.
C) market extension merger.
D) conglomerate acquisition.
Answer:
At the beginning of 2001, Peach Computers competed exclusively in the computer
industry and generated approximately 96% of its revenue from the sales of computers
and computer-related software and approximately 4% of its revenues were generated
from sales of other peripherals. Further, of these revenues, 60% was from sales in the
U.S., 30% was from sales in Europe, 7% was from sales in Asia and 3% was from other
areas. In October 2001, Peach entered the personal electronics industry by introducing a
new MP3 player known as the PeachPit. In developing and selling the PeachPit, Peach
Computers was able to use many of the same R&D facilities, suppliers, production
facilities, and distribution and sales outlets as the computers and software Peach
Computers traditionally sold. By 2003, the PeachPit MP3 Player, accessories for the
unit, and sales of songs on Peach Computers’ NectarTunes website accounted for 35%
of Peach Computers’ revenues.
If one of the reasons that Peach Computers entered into the electronics industry was to
offset weakness in the computer industry because when the computer industry was
weak, the electronics industry was strong, and vice versa, Peach Computers would be
pursuing which economy of scope?
A) core competencies
B) multipoint competition
C) tax advantages
D) risk reduction
Answer:
If TechnoGeek and VarsityBlue compete in the same market for the same customer and
TechnoGeek generates $900 of economic value each time it sells a product or service
while VarsityBlue generates $400 of economic value each time it sells a product or
service, TechnoGeek has a(n) ________ of $500.
A) perceived benefit
B) economic value
C) cost advantage
D) competitive advantage
Answer:
Firms pursuing ________ have between 70% and 95% of their sales in a single product
market.
A) dominant-business diversification
B) single-business diversification
C) related-constrained diversification
D) related-linked diversification
Answer:
________ exists when two or more diversified firms simultaneously compete in
multiple markets.
A) Multipoint competition
B) Dynamic competition
C) Multipoint cooperation
D) Dynamic cooperation
Answer:
Which of the following statements regarding the learning curve and economies of scale
is accurate?
A) Just as diseconomies of scale are presumed to exist if a firm gets too large, there is a
corresponding increase in costs in the learning-curve model as the cumulative volume
of production grows.
B) Where diseconomies of scale are presumed to exist if a firm gets too large, there is
no corresponding increase in costs in the learning-curve model as the cumulative
volume of production grows.
C) Where diseconomies of scale are presumed to exist if a firm gets too small, there is
no corresponding increase in costs in the learning-curve model as the cumulative
volume of production grows.
D) Just as diseconomies of scale are presumed to exist if a firm gets too small, there is a
corresponding increase in costs in the learning-curve model as the cumulative volume
of production grows.
Answer:
Compared to two very risky businesses that have cash flows that are not highly
correlated over time and that are operating separately, the risk of a diversified firm
operating in those same two businesses simultaneously is
A) somewhat higher.
B) lower.
C) the same.
D) substantially higher.
Answer:
Firms that generate less economic value than their rivals experience a competitive
A) advantage.
B) parity.
C) disadvantage.
D) perceived benefit.
Answer:
eBay, the online auction company, has an impressive portfolio of cooperative
agreements. This portfolio includes an agreement with the U.S. Postal Service to
facilitate the shipping of goods purchased through eBay auctions, an agreement to allow
MBNA to use eBay’s name on a credit card, and an agreement in an online auction
company in Korea that is supplemented with an investment by eBay in the Korean
partner. In addition, at one time eBay had formed an independent firm, called eBay
Australia and New Zealand, with an Australian company known as ecorp.
eBay’s agreement with the U.S. Postal Service is most accurately classified as a(n)
A) joint venture.
B) equity agreement.
C) licensing agreement.
D) nonequity agreement.
Answer:
Two common agency problems include
A) managers investing some of a firm’s capital in managerial perquisites that do not add
economic value to a firm and managerial risk aversion.
B) managers not investing enough of a firm’s capital in managerial perquisites and
managerial risk aversion.
C) managers investing some of a firm’s capital in managerial perquisites that do not add
economic value to a firm and managerial risk seeking.
D) managers not investing enough of a firm’s capital in managerial perquisites and
managerial risk seeking.
Answer:
Agrestal Cosmetics, Inc. is a leading U.S. manufacturer of natural, herb-based cosmetic
products. It started out purely as a domestic company but in 1983 established operations
in India primarily to gain access to that country’s abundant supply of hibiscus, a plant
that provided important raw materials to the company’s products. In 2009, Agrestal did
business in 29 countries around the world. It has factories in Malaysia and Taiwan to
use the low labor cost in those countries in making its labor-intensive products. In the
late 1990s, it had to close it operations in a foreign country when, due to a change in the
country’s leadership, all foreign companies had to cease doing business there. During
the Brazilian financial crisis, Agrestal adopted the practice of using revenues generated
in Brazil to buy orange concentrate locally and sell that concentrate in the United
States. Agrestal’s corporate finance department aggressively uses hedging in all the
countries where it operates. In a few select countries, Agrestal licenses its brand names
and know-how to local licensees. Currently, Agrestal is organized whereby all strategic
and operational decisions are made at its Princeton, New Jersey headquarters.
An important economy of scope for Agrestal in pursuing international opportunities is
A) technology.
B) access to raw materials.
C) organizational learning.
D) synergy.
Answer:
When a firm is able to create more economic value than rival firms it is said to have
a(n)
A) comparative advantage.
B) competitive advantage.
C) residual advantage.
D) economic advantage.
Answer:
In 1937, which Nobel Prize-winning economist first articulated the question of vertical
integration, i.e., which stages of the value chain should be included within a firm’s
boundaries and why?
A) Ronald Coase
B) Adam Smith
C) David Ricardo
D) Milton Freidman
Answer:
Sematech is a producer of computer chips. To gain an advantage over other computer
chip makers, Sematech focuses on reducing its costs below all of its competitors and
has aligned its value chain accordingly. Recently, several of Sematech’s competitors
have begun to reduce the company’s competitive advantage. In response to this threat,
Sematech has decided to add production capacity in an effort to lower costs. If
Sematech’s expansion plans did not produce the desired cost savings but the company
decided to continue production expansion in an effort to capture cost reductions, this
would be an example of
A) economies of scale.
B) escalation of commitment.
C) diseconomies of scale.
D) managerial diseconomies.
Answer:
Tacit cooperation is only a viable strategy when
A) an industry is perfectly competitive.
B) an industry is heterogeneous with respect to the products it sells and their cost
structure.
C) there is a strong market share leader in the industry.
D) there are low entry barriers in the industry.
Answer:
Factors such as BidBuy’s feedback rating system that are valuable to the company’s
customers but which are not useful on other online auction sites are examples of
A) first-mover advantages.
B) complementors.
C) substitutes.
D) customer-switching costs.
Answer:
Different ________ standards can require a firm pursuing international opportunities to
change its current products or services to sell them into a nondomestic market.
A) financial
B) operational
C) fiscal
D) physical
Answer:
Sematech is a producer of computer chips. To gain an advantage over other computer
chip makers, Sematech focuses on reducing its costs below all of its competitors and
has aligned its value chain accordingly. Recently, several of Sematech’s competitors
have begun to reduce the company’s competitive advantage. In response to this threat,
Sematech has decided to add production capacity in an effort to lower costs. If Lucy
Sullivan were a Sematech manager who oversaw the finance operations in the
company’s functional structure, Lucy would be considered a
A) chief executive officer.
B) divisional manager.
C) chief operating officer.
D) functional manager.
Answer:
If firms that do not possess valuable and rare resources or capabilities face a cost
disadvantage in obtaining these resources or capabilities compared to the firms that
already possess them, these resources and capabilities are termed
A) rare.
B) valuable.
C) imperfectly imitable.
D) perfectly imitable.
Answer:
________ currencies are currencies that are traded, and thus have value, on
international money markets.
A) Soft
B) Variable
C) Operational
D) Hard
Answer:
Through which bases of competitive advantage do firms attempt to alter the perceptions
of current and potential customers, whether or not specific attributes of a firm’s
products or services are altered?
A) reputation
B) location
C) product customization
D) consumer marketing
Answer:
The M-form structure is designed to create checks and balances for managers that
increase the probability that a diversified firm will be managed in ways consistent with
A) the interests of all of its stakeholders.
B) an exclusively short-term perspective.
C) an exclusively long-term perspective.
D) the interests of its equity holders.
Answer:
Which one of the following structural options combines a high level of both global
integration and local responsiveness?
A) centralized hub
B) decentralized hub
C) transnational structure
D) coordinated federation
Answer:
Identify the three potential sources of strategic relatedness between bidding and target
firms that were detailed by Lubatkin in 1983 and the four general reasons why bidding
firms might want to engage in merger and acquisitions as detailed by Jensen and
Ruback in 1983.
Answer:
Describe the multidivisional, or M-form structure, and how it is used to implement a
corporate diversification strategy.
Answer:
Define what constitutes an agency relationship and the roles of the principal and the
agent; discuss how the agency relationship is reflected in the context of corporate
diversification and when the agency relationship can be effective; and identify two
common agency problems.
Answer:
Identify the six interrelated elements that comprise a firm’s general environment.
Answer:
How are poison pills different from shark repellents?
Answer:
Identify the three fundamental explanations of how vertical integration can create value
and discuss how value is created under each.
Answer:
Describe the relationship between international strategy and other corporate strategies.
Answer:
Describe the difference between resources and capabilities.
Answer:
Specify the two conditions that a corporate diversification strategy must meet in order
to create economic value.
Answer:
Describe and discuss five reasons why bidding firms might still engage in acquisitions
even if, on average, they do not create value for a bidding firm’s stockholders.
Answer:
Identify and clearly distinguish between the four strategic options available to firms in a
declining industry.
Answer:
Discuss the conditions under which a firm’s diversification strategy will be rare.
Answer:
Discuss the four structural options for firms pursuing international strategies.
Answer:
Describe the nature and role of the board of directors in an M-form organization and
discuss who generally serves on the board, the role of outside members on a board of
directors and when the roles of CEO and chairman of the board should be combined or
separated.
Answer:
What are customer-switching costs?
Answer:
Discuss when a firm is implementing a corporate diversification strategy and
differentiate between a product diversification strategy, a geographic market
diversification strategy and a product-market diversification strategy.
Answer:
Identify and distinguish between the five different levels of diversification discussed in
Chapter 7.
Answer:
Identify the types of compensation policies that are appropriate for firms pursuing a
cost-leadership strategy.
Answer:
Identify the organizational structure that is used to implement a vertical integration
strategy and why from a CEO’s perspective coordinating functional specialists to
implement a vertical integration strategy almost always involves conflict resolution and
how this conflict can be resolved.
Answer:
Why is it important to understand a firm’s strategy, even if you are not a senior manager
in a firm?
Answer: