Chapter 7 39613h

Strategic Management & Business Policy, 14e (Wheelen) Chapter 7 Strategy Formulation: Corporate Strategy 1) Corporate strategy deals primarily with the choice of direction for the firm as a whole and the management of its business or product portfolio. Answer: TRUE 2) Corporate parenting is the coordination of cash flow among units. Answer: FALSE 3) The most widely pursued corporate directional strategies are those designed to achieve growth. Answer: TRUE 4) A merger is a transaction involving two or more corporations in which stock is exchanged, but from which only one corporation survives. Answer: TRUE 5) The two basic growth strategies are concentration and strategic alliances. Answer: FALSE 6) Vertical integration is going backward on an industry's value chain. Answer: FALSE 7) Vertical integration is the degree to which a firm operates vertically in multiple locations on an industry's value chain from extracting raw materials to manufacturing to retailing. Answer: TRUE 8) Forward integration is often more profitable than backward integration. Answer: FALSE 9) BP Amoco and Royal Dutch Shell are examples of fully integrated firms because they internally make 100% of their key supplies and completely control their distributors. Answer: TRUE 10) With taper integration, a firm internally makes 100% of its key supplies and completely control its distributors. Answer: FALSE

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11) An example of forward quasi-integration would be a large pharmaceutical firm that acquires part interest in a drugstore chain in order to guarantee that its drugs have access to the distribution channel. Answer: TRUE 12) A long-term contract is considered vertical integration. Answer: FALSE 13) Horizontal growth can be achieved by expanding the firm's products into other geographic locations and/or by increasing the range of products and services offered to current markets. Answer: TRUE 14) Exporting grants rights to another company to open a retail store using the franchiser's name and operating system. Answer: FALSE 15) Forming a t venture between a foreign corporation and a domestic company is the most popular strategy used to enter a new country. Answer: TRUE 16) A relatively quick way to move into an international area is through Greenfield development. Answer: FALSE 17) Turnkey operations are typically contracts for the construction of operating facilities in exchange for a fee. Answer: TRUE 18) Management contracts are common when a host government expropriates part or all of a foreign-owned company's holdings in its country. Answer: TRUE 19) Synergy is the concept that two businesses will generate more profits together than they could separately. Answer: TRUE 20) Concentric diversification is growth into unrelated businesses. Answer: FALSE 21) Conglomerate diversification is diversifying into an industry unrelated to its current one. Answer: TRUE 2 Copyright © 2015 & 2016 Pearson Education, Inc.

22) In of diversification strategies, research suggests that the relationship between relatedness and performance is curvilinear in the shape of an inverted U-shaped curve. Answer: TRUE 23) The stability strategies are really a lack of any strategy. Answer: FALSE 24) Stability strategies can be very useful in the short run, but they can be dangerous if followed for too long. Answer: TRUE 25) When Sony's CEO, Howard Stringer, eliminated 10,000 jobs and closed 11 plants, he was addressing the consolidation phase of the turnaround strategy. Answer: FALSE 26) According to the BCG Growth Share Matrix, cash cows are market leaders typically at the peak of their product life cycle and are usually able to generate enough cash to maintain their high share of the market. Answer: FALSE 27) According to the BCG Growth Share Matrix, dogs should be either sold off or managed carefully for the small amounts of cash they can generate. Answer: TRUE 28) The GE Business Screen is based on long-term industry attractiveness and business strength/competitive position. Answer: TRUE 29) According to the GE Business Screen, the competitive strength of a product is based only on its market share. Answer: FALSE 30) One disadvantage of portfolio analysis is that it provides an illusion of scientific rigor. Answer: TRUE 31) Corporate parenting views the corporation in of resources and capabilities that can be used to build business unit value as well as generate synergies across business units. Answer: TRUE 32) In multipoint competition, large multi-business corporations compete against other large multi-business firms in a number of markets. 3 Copyright © 2015 & 2016 Pearson Education, Inc.

Answer: TRUE 33) Which strategy specifies the firm's overall direction in of its general orientation toward growth, the industries or markets in which it competes, and the manner in which it coordinates activities and transfers resources among business units? A) corporate B) functional C) divisional D) organizational E) business 34) Which kind of corporate strategy deals with the firm's overall orientation toward growth? A) portfolio strategy B) directional strategy C) parenting strategy D) cooperative strategy E) functional strategy 35) Which kind of corporate strategy deals with the manner in which the firm coordinates activities and transfers resources and cultivates capabilities among product lines and business units? A) portfolio strategy B) directional strategy C) parenting strategy D) cooperative strategy E) functional strategy 36) Which one of the following directional strategies is most frequently used in corporations? A) stability B) growth C) consolidation D) retrenchment E) expansion 37) Which external growth strategy involves two or more corporations ing in a stock exchange and from which only one corporation survives? A) mergers B) strategic alliances C) diversification D) acquisitions E) concentration 4 Copyright © 2015 & 2016 Pearson Education, Inc.

38) Which of the following strategies was being used when Allied Corporation and Signal Companies formed Allied Signal? A) mergers B) strategic alliances C) diversification D) acquisitions E) concentration 39) Which external growth strategy was demonstrated when Procter & Gamble completely absorbed Gillette? A) mergers B) strategic alliances C) diversification D) acquisitions E) concentration 40) Which of the following is NOT a reason why the growth strategy is so seductive? A) There are more opportunities for advancement and promotion. B) A corporation that experiences successful growth is thought of positively by the marketplace and potential investors. C) A large and growth-oriented corporation has more clout and influence. D) A growing firm can cover up mistakes and inefficiencies because of the increase in cash flow revenue. E) A large and growing firm attracts more acquisition offers. 41) The most logical growth strategy for a corporation having a strong competitive position possessing a high market share in a highly attractive industry is A) concentration. B) conglomerate integration. C) concentric diversification. D) stability. E) retrenchment. 42) Ford Motor Company's use of company resources to build its River Rouge Plant outside of Detroit so that iron ore could enter into one end of the plant and a finished automobile could exit out of the other end is called A) vertical growth. B) tapered integration. C) horizontal integration. D) external vertical integration. E) quasi-integration. 5 Copyright © 2015 & 2016 Pearson Education, Inc.

43) The purpose of vertical growth is to A) take over a function previously supplied by a former employer. B) take over a function previously provided by a supplier or by a distributor. C) acquire a company of similar objective. D) sell a company encumbered with debt. E) expand to countries with strong trade alliances. 44) The purchase of Carroll's Foods for its hog-growing facilities by Smithfield Foods, the world's largest pork processor, is an example of A) forward integration. B) horizontal integration. C) backward integration. D) transferred integration. E) mass integration. 45) The ability for Nike to manufacture its own shoes and then build stores for distribution is an example of A) forward integration. B) horizontal integration. C) backward integration. D) transferred integration. 46) A disadvantage of vertical integration is that it A) creates exit barriers. B) improves coordination of activities. C) increases the cost of improvement of coordination and control. D) creates entry barriers. E) avoids time consuming tasks. 47) An attempt to explain that vertical integration is more efficient than contracting for goods and services in the marketplace when the transaction costs of buying goods on the open market becomes too great has been proposed by A) population theory. B) institution theory. C) transaction cost economics. D) trickle down economics. E) transaction growth theory. 48) In many cases, ________ integration is more profitable than ________ integration. A) forward, backward B) vertical, backward 6 Copyright © 2015 & 2016 Pearson Education, Inc.

C) backward, vertical D) backward, forward 49) When a firm internally makes 100% of its key supplies and completely controls its distributors, this is known as A) full integration. B) vertical integration. C) mass integration. D) economical integration. E) strategic integration. 50) When Bristol-Myers Squibb purchased 17% of ImClone's common stock to gain access to a new drug, it was using which type of integration? A) full integration B) long-term contracts C) backwards integration D) taper integration E) quasi integration 51) A firm's expansion into other geographic locations and/or increasing the range of products and services offered to current markets is called A) forward vertical growth. B) diversification. C) backward vertical growth. D) captive company strategy. E) horizontal growth. 52) Which strategy did Delta choose when it acquired Northwest Airlines to obtain access to Northwest's Asian markets? A) A retrenchment strategy using horizontal integration through internal means. B) A horizontal integration strategy. C) A stability strategy using concentric diversification. D) A growth strategy using vertical integration through external means. E) A retrenchment strategy using a concentration method. 53) As defined by the text, synergy is the concept A) that involves adding different products or divisions to the corporation. B) that s the acquisition of one corporation by another. C) that two firms can generate more profits together than separately. D) that a corporation can enter one or more businesses that are necessary to manufacture its own product. 7 Copyright © 2015 & 2016 Pearson Education, Inc.

E) that two functional areas of a corporation can coordinate their work as a team. 54) Adding a related or complementary product to a corporation's business units is called A) concentration. B) horizontal growth. C) concentric diversification. D) vertical growth. E) conglomerate diversification. 55) Growth through diversification out of an industry into an unrelated industry is called A) concentration. B) horizontal growth. C) concentric diversification. D) vertical growth. E) conglomerate diversification. 56) Which strategy might be the most likely when management realizes that the current industry is unattractive and that the firm lacks outstanding skills that it could easily transfer to related products or services in other industries? A) concentration B) horizontal growth C) concentric diversification D) vertical growth E) conglomerate diversification 57) With conglomerate diversification, the focus is on A) product-market synergy. B) financial considerations. C) employee satisfaction. D) similar product offerings. E) market demand. 58) An MNC uses which international strategy for entering a foreign market by simply shipping goods produced in the company's home country to other countries for marketing to minimize risk and to experiment with a specific product? A) licensing B) t ventures C) production sharing D) exporting E) acquisitions 8 Copyright © 2015 & 2016 Pearson Education, Inc.

59) An MNC uses which international strategy for entering a foreign market by associating itself with a firm in the host country or a government agency in that country to combine resources and expertise needed for the development of a new product or technologies? A) licensing B) t ventures C) production sharing D) exporting E) acquisitions 60) One benefit of a U.S. company entering a t venture with an international firm is that it A) reduces the risks of expropriation. B) enhances the policy of the host country's takeover of the firm. C) promotes skepticism among other countries not involved in the merger. D) encourages competitors to work with the company. E) increases revenues by 20%. 61) An MNC uses which international strategy for entering a foreign market by purchasing another company already operating in the area developing synergistic benefits gained from acquiring strong complementary product lines and a good distribution network? A) licensing B) t ventures C) production sharing D) exporting E) acquisitions 62) In international dealings, green-field development is A) a way in which an MNC may contract with a foreign government or local firm to trade raw materials for certain resources belonging to the MNC. B) a way in which an MNC can take total control of operations by acquiring a firm already established in the host country. C) when a corporation chooses to build a facility from scratch allowing it the freedom to design the plant, choose suppliers, and hire its work force. D) when an MNC has a large amount of management talent available and chooses to use its personnel to assist a firm in a host country for a specified fee and period of time. E) contracting for construction of operating facilities in exchange for a fee. 63) An MNC uses which international strategy for entering a foreign market by combining the higher labor skills and technology available in the developed countries with the lower cost labor available in the developing countries? A) licensing B) t ventures 9 Copyright © 2015 & 2016 Pearson Education, Inc.

C) production sharing D) exporting E) acquisitions 64) In international dealings, turnkey operations are A) a way in which an MNC may contract with a foreign government or local firm to trade raw materials for certain resources belonging to the MNC. B) a way in which an MNC can take total control of operations by either starting a business from scratch or acquiring a firm already established in the host country. C) when a corporation chooses to build a facility from scratch allowing it the freedom to design the plant, choose suppliers, and hire a work force. D) when an MNC has a large amount of management talent available and chooses to use its personnel to assist a firm in a host country for a specified fee and period of time. E) contracting for construction of operating facilities in exchange for a fee. 65) Management contracts are used in international dealings A) as a way in which an MNC may contract with a foreign government or local firm to trade raw materials for certain resources belonging to the MNC. B) as a way in which an MNC can take total control of operations by either starting a business from scratch or acquiring a firm already established in the host country. C) when a corporation chooses to build a facility from scratch allowing it the freedom to design the plant, choose suppliers, and hire a work force. D) when an MNC has a large amount of management talent available and chooses to use its personnel to assist a firm in a host country for a specified fee and period of time. E) when an MNC typically contracts for construction of operating facilities in exchange for a fee. 66) Research comparing concentric with conglomerate diversification concludes that A) conglomerate diversification is always less profitable than concentric diversification. B) concentric diversification is always less profitable than conglomerate diversification. C) the relationship between relatedness and performance is curvilinear. D) neither concentric nor conglomerate diversification are ever profitable. E) for optimum effectiveness both conglomerate and concentric diversification should be utilized in tandem. 67) The controversy surrounding external versus internal growth finds A) external growth appears to be superior financially to internal growth. B) internal growth appears to be superior financially to external growth. C) there appears to be no financial advantage to either. D) acquisitions have a lower survival rate than new internally generated business ventures. E) strategic alliances are superior to both. 10 Copyright © 2015 & 2016 Pearson Education, Inc.

68) The stability strategy is appropriate for all of the following circumstances EXCEPT A) useful in the short-run but can be dangerous if followed too long. B) most appropriate for reasonably successful corporations in a reasonably predictable environment. C) appropriate when the industry is facing modest or no-growth potential. D) appropriate when the industry is in decline. E) popular with small business owners who have found a niche and are happy with their success. 69) Which strategy is most appropriate as a temporary strategy to enable a corporation to consolidate its resources after prolonged rapid growth in an industry now facing an uncertain future? A) horizontal integration strategy B) no change strategy C) retrenchment strategy D) pause/proceed with caution strategy E) profit strategy 70) Which strategy is most appropriate for a company in an industry in which the future is expected to continue as an extension of the present? A) horizontal integration strategy B) no change strategy C) retrenchment strategy D) pause/proceed with caution strategy E) profit strategy 71) Which of the following describes a turnaround strategy? A) A form of divestment and is appropriate when corporate problems can be traced to the poor performance of an SBU or product line. B) Occurs when the corporation reduces the scope of some of its functional activities and becomes "captive" to another firm. C) Emphasizes improving operational efficiency and is appropriate when a corporation's problems are pervasive, but not yet critical. D) Occurs when a corporation liquidates all its assets. E) Involves adding different products or divisions to the corporation. 72) The strategy which takes place in two basic phases of contraction and consolidation is A) merger. B) liquidation C) integration. D) divestment. E) turnaround. 11 Copyright © 2015 & 2016 Pearson Education, Inc.

73) Which one of the following is NOT a characteristic of a firm that has chosen a captive company strategy? A) Probably most appropriate for a company with a strong competitive position in a growing industry. B) The firm reduces its functional activities to reduce costs. C) The firm gains a certainty of sales and production in return for becoming heavily dependent upon another firm for at least 75% of its sales. D) One of its customers makes up a large percentage of the company's sales and wants the company to keep operating as its supplier. E) Management desperately seeks an "angel" to guarantee the company's continued existence. 74) In which strategy does management hope that another company will have the necessary resources and determination to return the company to profitability? A) sell out B) captive company C) liquidation D) bankruptcy E) all of the above 75) Which strategy involves giving up management of the firm to the courts in return for some settlement of the corporation's obligations? A) liquidation B) bankruptcy C) diversification D) divestment E) consolidation 76) Which strategy did Circuit City use in 2008 when it converted its retail stores to cash? A) liquidation B) bankruptcy C) diversification D) divestment E) consolidation 77) One of the most popular aids to developing corporate strategy in multi-business corporations that views business units in of the cash they generate is called A) PIMS. B) segmentation analysis C) portfolio analysis. D) industry analysis. E) diversification study. 12 Copyright © 2015 & 2016 Pearson Education, Inc.

78) In the Boston Consulting Group's Growth-Share Matrix, the relative competitive position of a product, division, or corporation is defined as A) its market share. B) its gross sales divided by its market share. C) its market share multiplied by that of its nearest competitor. D) its market share divided by that of the smallest other competitor. E) its market share divided by that of the largest other competitor. 79) The growth-share matrix of the Boston Consulting Group suggests that the excess cash being generated by "cash cows" should be used to fund A) "dogs." B) "question marks." C) "stars." D) "white knights." E) "fish." 80) According to the BCG Growth-Share Matrix, market leaders that typically are at the peak of their product life cycle and are usually able to generate enough cash to maintain their high share of the market are called A) cash cows. B) lost leaders. C) dogs. D) question marks. E) stars. 81) Products that typically bring in far more money than is needed for maintenance of their market share are called A) cash cows. B) lost leaders. C) dogs. D) question marks. E) stars. 82) According to the BCG Growth Share Matrix, those products with low market share that do NOT have the potential to bring in much cash are called A) cash cows. B) lost leaders. C) dogs. D) question marks. E) stars. 13 Copyright © 2015 & 2016 Pearson Education, Inc.

83) According to the BCG Growth-Share Matrix, the key to success is A) effective management. B) competitive positioning. C) innovative initiative. D) industry leadership. E) market share. 84) Which of the following is NOT one of the limitations of the BCG Growth Share Matrix? A) It is too simplistic. B) The link between market share and profitability is questionable. C) Growth rate is only one aspect of industry attractiveness. D) There are too many aspects of overall competitive position included. E) Small competitors with fast-growing market share are ignored. 85) Which of the following is NOT defined by GE as one of the variables forming industry attractiveness? A) market share B) market size C) market growth rate D) pricing practices E) industry profitability 86) The GE Business Screen has been criticized because A) it is based on the product life cycle. B) the categories are too few. C) it can get quite complicated and cumbersome. D) it is a primitive version of the BCG Growth Share Matrix. E) it is only appropriate for new products or SBUs in developing industries. 87) Which of the following is NOT one of the advantages of portfolio analysis? A) The graphic depiction facilitates communication. B) It provides the basis for impartial objectivity from which to make decisions. C) It encourages top management to evaluate each of the corporation's businesses individually. D) It raises the issue of cash flow availability for use in expansion and growth. E) It stimulates the use of externally oriented data to supplement management's judgment. 88) Which of the following is NOT one of the limitations of portfolio analysis? A) It contains value-laden terminology that can lead to self-fulfilling prophecies. B) It is not easy to define product/market segments. C) It relies too heavily on objective judgments. D) It suggests the use of standard strategies which may be impractical or may miss potential 14 Copyright © 2015 & 2016 Pearson Education, Inc.

opportunities. E) It provides an illusion of scientific rigor. 89) Corporate parenting generates corporate strategy by focusing on A) the core competencies of the parent corporation and on the value created from the relationship between the parent and its units. B) the cash flow among its business units. C) whether a business unit should be growing, stabilizing, or retrenching. D) acquiring distinctive competencies in the marketplace. E) differentiating its activities into separate units and integrating these activities through complex integrating mechanisms. 90) According to the text, 75% of a company's market value is derived from its A) employees. B) intangible assets. C) plant assets. D) t ventures. E) licensing agreements. 91) According to Campbell, Goold, and Alexander in their parenting-fit matrix when parent companies create more value than any of their rivals would if they owned the same businesses, they have A) multi-point competition. B) parenting advantage. C) corporate parenting. D) portfolio analysis. E) no real advantage. 92) A corporate strategy that cuts across divisional boundaries to build synergy across business units to improve the competitive position of one or more business units is called A) vertical strategy. B) horizontal strategy. C) hierarchical strategy. D) portfolio strategy. E) pyramid strategy. 93) When P & G, Kimberly-Clark, and Scott Paper compete with each other in varying combinations of consumer paper products, they are said to be engaging in A) oligopolistic competition. B) strategic competition. C) multipoint competition. 15 Copyright © 2015 & 2016 Pearson Education, Inc.

D) laissez-faire competition. E) horizontal competition. 94) What are the three key issues that corporate strategy deals with? Corporate strategy deals with three key issues: 1. the firm's overall orientation toward growth, stability, and retrenchment (directional strategy). 2. the industries or markets in which the firm competes through its products and business units (portfolio strategy) 3. the manner in which management coordinates activities and transfers resources and cultivates capabilities among product lines and business units (parenting strategy). 95) Discuss the three general orientations comprising directional strategy? The three general orientations comprising directional strategy are growth, stability and retrenchment. Growth strategies expand the company's activities. Stability strategies make no change to the company's current activities. Retrenchment strategies reduce the company's level of activities. 96) Why is growth a very attractive strategy? Growth is a very attractive strategy for two key reasons. First, growth based on increasing market demand may mask flaws in a company. Second, a growing firm offers more opportunities for advancement, promotion, and interesting jobs. Growth itself is exciting and ego-enhancing for CEOs. 97) Discuss the two basic growth strategies. The two basic growth strategies are concentration on the current product line in one industry and diversification into other product lines in other industries. If a company's product lines have real growth potential, concentration of resources on those product lines makes sense as a strategy for growth. Companies begin thinking about diversification when their growth has plateaued and opportunities for growth in the original business have been depleted. 98) What are the more popular options for international entry? There are several popular options for international entry. Exporting is a good way to minimize risk and experiment with a specific product. Exporting involves shipping goods produced in the company's home country to other countries for marketing. Under a 16 Copyright © 2015 & 2016 Pearson Education, Inc.

licensing agreement, the licensing firm grants rights to another firm in the host country to produce and/or sell a product. The licensee pays compensation to the licensing firm in return for technical expertise. Under a franchising agreement, the franchiser grants rights to another company to open a retail store using the franchiser's name and operating system. In exchange, the franchisee pays the franchiser a percentage of its sales as a royalty. Forming a t venture between a foreign corporation and a domestic company is the most popular strategy used to enter a new country. Companies often form t ventures to combine the resources and expertise needed to develop new products or technologies. A relatively quick way to move into an international area is through acquisitions - purchasing another company already operating in that area. If a company doesn't want to purchase another company's problems along with its assets, it may choose green-field development - building its own manufacturing plant and distribution system. Production sharing is the process of combining the higher labor skills and technology available in the developed countries with the lower-cost labor available in developing countries. Turnkey operations are typically contracts for the construction of operating facilities in exchange for a fee. The BOT (Build, Operate, Transfer) concept is a variation of the turnkey operation. Instead of turning the facility over to the host country when completed, the company operates the facility for a fixed period of time during which it earns back its investment, plus a profit. Management contracts offer a means through which a corporation may use some of its personnel to assist a firm in a host country for a specified fee and period of time. 99) Discuss the more popular stability strategies. The more popular stability strategies include the pause-proceed with caution, no change, and profit strategies. A pause - proceed with caution - strategy is, in effect, a timeout - an opportunity to rest before continuing a growth or retrenchment strategy. A no change strategy is a decision to do nothing new - a choice to continue current operations and policies for the foreseeable future. A profit strategy is a decision to do nothing new in a worsening situation but instead to act as though the company's problems are only temporary. 100) Define a retrenchment strategy. Discuss the more popular options. A retrenchment strategy may be used when a company has a weak competitive position in some or all of its product lines resulting in poor performance - sales are down and profits are becoming losses. The more popular options are turnaround, becoming a captive company, selling out, bankruptcy, and liquidation. Turnaround strategy emphasizes the improvement of operational efficiency and is probably most appropriate when a corporation's problems are pervasive, but not yet critical. The two basic phases of a turnaround strategy are contraction and consolidation. A captive company strategy is the 17 Copyright © 2015 & 2016 Pearson Education, Inc.

giving up of independence in exchange for security. If a corporation with a weak competitive position in this industry is unable either to pull itself up by its bootstraps or to find a customer to which it can become a captive company, it may have no choice but to sell out. Bankruptcy involves giving up management of the firm to the courts in return for some settlement of the corporation's obligations. Liquidation is the termination of the firm. 101) What is portfolio analysis? In portfolio analysis, top management views its product lines and business units as a series of investments from which it expects a profitable return. The product lines/business units from a portfolio of investments that top management must constantly juggle to ensure the best return of the corporation's invested money. 102) Describe the four categories of the BCG Growth Share Matrix. The four categories of the BCG Growth Share Matrix are question marks, stars, cash cows, and dogs. Question marks are new products with the potential for success, but they need a lot of case for development. Stars are market leaders typically at the peak of their product life cycle and are usually able to generate enough cash to maintain their high share of the market. Cash cows typically bring in far more money than is needed to maintain their market share. In this declining stage of their life cycle, these products are "milked" for cash that will be invested in new question marks. Dogs have low market share and do not have the potential to bring in much cash. Dogs should be either sold off or managed carefully for the small amount of cash they can generate. 103) Define corporate parenting. Corporate parenting views the corporation in of resources and capabilities that can be used to build business unit value as well as generate synergies across business units. Corporate parenting generates corporate strategy by focusing on the core competencies of the parent corporation and on the value created from the relationship between the parent and its businesses.

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