Contemporary Strategic Management An Australasian Perspective 2nd Edition Grant Test Bank

Contemporary Strategic Management
An Australasian Perspective 2nd

Edition Grant Test Bank
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Testbank
to accompany
Contemporary Strategic
Management 2nd edition
by Grant et al
Updated by
Martina Linnenluecke
The University of Queensland
© John Wiley & Sons Australia, Ltd 2014

Testbank to accompany: Contemporary strategic management 2e by Grant et al
Chapter 8:
Corporate-level strategy
True/False Questions
1. Corporate strategy is concerned with "how" a firm competes, whereas business strategy is concerned
with "where" a firm competes.
a. True
*b. False
General Feedback:
Difficulty: Easy
2. Product scope, geographical scope, and vertical scope are part of corporate level strategy decisions.
*a. True
b. False
General Feedback:
Difficulty: Easy
3. Transaction costs are the costs incurred by the parties involved in a market mechanism situation, such
as costs for negotiating and enforcing contracts.
*a. True
b. False
General Feedback:
Difficulty: Medium
4. Despite a large number of empirical studies, no consistent, systematic relationships have emerged
between firm performance and its degree of diversification.
*a. True
b. False
General Feedback:
Difficulty: Medium
2
Chapter 8: Corporate-level strategy
5. Vertical integration is the firm's ownership of horizontally related activities (complementary products
or services).
a. True
*b. False
General Feedback:
Difficulty: Medium
6. Vertical integration can be forward or backward.
*a. True
b. False
General Feedback:
Difficulty: Medium
7. Technical economies traditionally justify vertical integration.
*a. True
b. False
General Feedback:
Difficulty: Medium
8. Vertical integration refers to a company's ownership of vertically related activities.
*a. True
b. False
9. Vertical integration entails compounded risk for the firm because all stages of the value chain become
linked.
*a. True
b. False
General Feedback:
Difficulty: Hard

3
10. The design of a vertical relationship between partners needs to take careful account of the allocation
of risk and the structure of incentives.
*a. True
b. False
General Feedback:
Difficulty: Medium
11. Diversification decisions require analysis of the attractiveness of the industry to be entered and the
firm's potential to establish competitive advantage within that industry.
*a. True
b. False
General Feedback:
Difficulty: Medium
12. For a firm to be successful over the long term, its business scope should not change substantially
over time.
a. True
*b. False
General Feedback:
Difficulty: Medium
13. Primary motives for diversification are growth and risk reduction, despite the fact that neither is
likely provides direct benefit shareholders.
*a. True
b. False
General Feedback:
Difficulty: Medium
14. The attractiveness test, the cost-of-entry test, and the cost-of-exit test are criteria to determine
whether diversification can create shareholder value.
a. True
*b. False
General Feedback:
4
Difficulty: Medium
15. To decide whether diversification creates shareholder value, the attractiveness test of the industry is
insufficient.
*a. True
b. False
General Feedback:
Difficulty: Medium
16. Economies of scope are savings realised due to a firm's large size.
a. True
*b. False
General Feedback:
Difficulty: Easy
17. While a firm can exploit its intangible resources and technological capabilities through contracts
with other firms, exploiting complex general management capabilities through contracts is very difficult.
*a. True
b. False
General Feedback:
Difficulty: Hard
18. Because of information advantages and avoiding the costs of external capital markets, a diversified
form can gain a competitive advantage through the efficiencies of an internal capital market.
*a. True
b. False
General Feedback:
Difficulty: Medium
19. In distinction to acquisitions, in a merger the assets of at least two firms are transferred to a new
company so that only one legal entity remains.
*a. True
b. False
5
General Feedback:
Difficulty: Medium
20. Horizontal mergers occur where two merging companies are in the same general industry, but have
no mutual buyer/customer or supplier relationship.
a. True
*b. False
General Feedback:
Difficulty: Medium
21. A corporate strategy that seeks to reduce the size or diversity of an organisation's operations is
commonly known as retrenchment or divestment strategy.
*a. True
b. False
General Feedback:
Difficulty: Easy
22. Diversification can offer economies of scope by eliminating duplication of tangible resources (e.g.,
distribution networks, sales forces) between businesses through creating a single shared facility.
*a. True
b. False
General Feedback:
Difficulty: Easy
Multiple Choice Questions
23. The scope of corporate strategy refers to:
*a. Vertical, geographical, and product scope

b. Common concepts used in micro-economics
c. Concepts used in the Porter's five forces model of competition
d. Different activities related to the risk they entail
General Feedback:
References: Chapter 8 page 251, Difficulty: Easy
6
24. Vertical integration provides:
*a. Integration up or down a supply chain through which a company will control the production and
distribution of products
b. A larger margin
c. Increased power over rivals in the same industry
d. Superior visibility at different stages of the value chain of an industry
General Feedback:
25. Vertical integration is defined as:
*a. A firm's ownership of vertically integrated activities

b. A firm's ownership of horizontally integrated activities
c. A firm's organisational structure with a high and thin "pyramid"
d. A firm with many decentralised decision centres
General Feedback:
26. Backward vertical integration and forward vertical integration can be respectively defined as a
situation where:
a. A firm takes over activities previously undertaken by its customers

*b. A firm takes over activities producing its own inputs, and takes over activities previously undertaken
by its customers
c. A firm takes control of one of its rivals, and a firm takes control of one of its suppliers
d. A firm takes control of most of its suppliers, and of a few of its customers
General Feedback:
References: Chapter 8 page 268, Difficulty: Medium
27. The classic justification of vertical integration relies on the fact that:
a. The co-location of plants enables each owner to avoid being bound to the other partner for its strategic
decisions
*b. The physical integration of two processes, for example linking the two stages of production in a
single location, results in cost savings
c. The physical location of two processes on the same site does not explain why there is not just one
owner
d. Each process owner realises saving by exploiting its assets in an alliance framework
7
General Feedback:
28. In the case of steel producers and steel strip producers, which statement best describes their
relationship:
a. Each steel strip producer is tied to its adjacent steel producer

b. The relationship can be called "bilateral monopoly"
c. Their relative bargaining power is central to their relationship
*d. All of the above
General Feedback:
References: Chapter 8 page 269, Difficulty: Hard
29. In an analysis of the relationship between steel producers and steel strip producers, which element
appears to be the basis of the relationship?
*a. Technical economies of vertical integration

b. Producers' resources and competencies
c. Risk-free investments
d. All of the above
General Feedback:
30. In a relationship similar to the one between steel producers and steel strip producers, vertical
integration is the best form of organisation, because:
a. Nonmarket relationship is always the best organisational form for technology-intensive processes
b. Vertical integration allows more control of the two production processes
*c. Vertical integration avoids associated transaction costs that would result from a market
d. Market form of organisation would be too easy to manage
General Feedback:
31. A firm specialised in a few activities can develop distinctive capabilities in those activities. Under
which assumption is this statement true?
a. The independence of activities

*b. The independence of capabilities between different vertical activities
c. The dependence of capabilities between different vertical activities
8
d. The dependence of activities
General Feedback:
32. Managing vertically related but strategically different businesses is:
a. Easy and not an issue for top managers

b. Not easy, but top managers are able to make it
*c. Not easy, and requires different strategic planning systems, different approaches to control and
human resource management, and different top management skills to manage these related activities
d. Part of the overall job of corporate managers, and does not require any specific attention
General Feedback:
33. A shared service organisation is an internal entity that:
*a. Supplies corporate services, while competing with external suppliers

b. Supplies corporate services, with no other alternatives for its internal customers
c. Is a joint venture between large firms, which provides each of them with corporate services
d. Is a not-for-profit organisation that shares its services between communities for free
General Feedback:
34. Vertical integration may make independent suppliers and customers less willing to do business with
the vertically integrated firm, because:
a. They believe that the firm cannot excel at all stages of the value chain
*b. They may fear the firm's power all along the value chain
c. They would see the firm as a producer of complementary products
d. They do not like large integrated firms
General Feedback:
35. Vertical integration and market transactions are:
*a. Different with regards to different types of flexibility

b. Exactly the same
c. They do not respond to flexibility
d. Only the market form of organisation responds to flexibility
9
General Feedback:
36. Vertical integration can compound risk because:
a. Top managers have a complete knowledge of the entire value chain

b. The capital invested is much higher for a vertically integrated firm
*c. A problem at one stage diffuses to all stages of the value chain
d. No firm can really master all the stages of a value chain
General Feedback:
37. With regard to vertical integration, the diffusion of the internet leads to:
a. Increased propensity to vertically integrate

b. Increased size of a potential market
c. Increased risk of transactions
*d. Decreased transaction costs
General Feedback:
38. Can-making and caning products industries, oil refining and petrochemical production, steel and
steel strip production illustrates:
a. Technological innovations at the interface of these activities

b. The value chain of these industries
c. Technology-intensive and process-based industries
*d. The technical economies stemming from the physical integration of processes
General Feedback:
39. Which issues are critical considerations in the decision to diversify?
*a. Attractiveness of the industry a firm wants to enter, and the potential competitive advantage that a
firm might have in that new industry
b. The intensity of competition of the industry a firm wants to enter, and the level of commitment of its
managers
c. The conditions of local demand, and a firm's available resources and capabilities
d. Shape of the national economy in comparison to the international economy
10
General Feedback:
40. Synergies can be defined as:
a. Savings realised on production across several businesses within a diversified firm

*b. Value creating linkages between different businesses within a diversified firm
c. Stakeholders' connections outside a diversified firm
d. The connections between different organisational units within a diversified firm
General Feedback:
References: Chapter 8 pages 252, Difficulty: Medium
41. Conglomerates are:
a. Large bureaucracies serving multiple related businesses

b. Large firms characterised by inefficiencies and large corporate staff
*c. Highly diversified firms, generally created around multiple and unrelated acquisitions
d. Large firms, but with no specific meaning beyond a common expression
General Feedback:
References: Chapter 8, Difficulty: Medium
42. Diversification tends to be motivated by three major goals:
a. Stakeholders' greed, top managers' will, and risk reduction

*b. Profitability, risk reduction, and growth
c. Profitability, international competition, and stakeholders' greed
d. Opportunities, availability of resources, and luck
General Feedback:
43. Bringing different businesses under a single ownership:
a. Creates value for shareholders

*b. Does not create value for shareholders, by itself
c. Has no impact on the creation of shareholders' value, by itself
d. Creates value for shareholders if the cash flows of the businesses are not correlated
General Feedback:
11
44. Porter proposes to test:
a. What the level of risk is for a potential diversification

*b. If diversification is likely to create shareholders' value
c. If top managers will benefit from diversification
d. How the financial markets would react to a diversification
General Feedback:
45. Cost-of-entry test tries to:
*a. Evaluate whether the attractiveness of the industry to be entered by diversification is offset by the
costs of entry
b. Assess the cost of entry for other firms if the focal firm is already in the industry
c. Determine which revenues would be generated by the entry
d. All of the above
General Feedback:
46. The better-off test addresses:
a. The extent of the potential retaliation from incumbents

b. The effect of the combination of the R&D activities together
c. The effect of the combination of the production activities together
*d. The potential for several businesses under common ownership to be more profitable than if they
were owned and operated independently
General Feedback:
47. The primary means for creating competitive advantage from diversification is to:
*a. Share resources and capabilities across businesses

b. Share resources across related businesses only
c. Erect strong barriers to entry around each business
d. Be able to strongly retaliate against any rival's attack
General Feedback:

12
48. Economies of scale and economies of scope are:
a. The same concepts

*b. Close concepts, applied in different contexts
c. Completely different concepts
d. Concepts borrowed from different disciplines
General Feedback:
49. Regarding tangible and intangible resources:
*a. Both offer economies of scope

b. Only tangible resources offer economies of scope
c. Only intangible resources offer economies of scope
d. Neither offer economies of scope
General Feedback:
50. Economies of scope in administrative and support services lead to:
a. Bureaucratisation within firms

b. The adoption of multidivisional (or "M-form") structures
*c. "Shared service" organisational units
d. The re-emergence of large firms organised around functional structures
General Feedback:
51. To provide a rationale for diversification, economies of scope must be accompanied by:
a. Top managers' high levels of awareness

b. An absence of transaction costs
*c. Transactions costs
d. Perfect factor markets
General Feedback:
52. Operating an internal labour market offers an advantage to diversified firms because:

13
a. There is less need to lay off employees during cyclical downturns

*b. Individual businesses can appoint employees form elsewhere in the firm on the basis of better
information and lower costs than through the external labour market
c. Individuals prefer to work for large diversified firms because they offer more secure employment
opportunities
d. Economies of scale and scope in human resource management
General Feedback:
53. Canon, General Electric, Unilever, and Nestle are examples of diversified companies:
a. That should be broken up in order to release shareholder value

*b. Which are able to attract high quality entry-level graduates because of the varied career paths they
can offer
c. That have built their success through adopting Prahalad and Hamel's ideas about "core competence"
d. Whose combination of size and broad business scope offers competitive advantage within each of the
business in which they are active
General Feedback:
54. After several decades of research, the relationship between diversification and performance:
a. Has changed: diversification no longer offers the same advantages it did during the 1960s and 70s
appears mixed
b. Is largely negative: higher levels of diversification are typically associated with lower profitability
*c. Is inconsistent
d. Are meaningless unless they distinguish between related and unrelated diversification
General Feedback:
55. Distinguishing related and unrelated businesses within a firm requires:
a. Establishing whether the businesses fall within the same 2-digit SIC code
b. Whether the businesses share common customers or common technologies
*c. Whether the businesses have the potential to share common resources and capabilities
d. All of the above
General Feedback:

14
56. Many companies engage into mergers and acquisitions to seek better financial performance. All of
the following are common reasons, except:
a. Increase return on investment

b. Economies of Scale
*c. Reducing the size or diversity of operations to increase organisational flexibility
d. Tax benefits
General Feedback:
57. A merger of two companies in the same industry with similar product lines and markets can be
classified as:
a. Vertical merger
b. Concentric merger
c. Acquisition
*d. Horizontal merger
General Feedback:
58. Typically, asset acquisitions:
*a. Involve the liquidation of the target company's assets leaving the latter as an empty shell
b. Are followed by a strategic plan to return the acquired company to acceptable levels of profitability
and long-term growth
c. Both a and b
d. None of the above
General Feedback:
59. The following are major activities that characterise turnaround and retrenchment:
a. Restructuring
b. Divestment
c. Tie to a large company
*d. All of the above
General Feedback:

15
Short Answer/Essay Questions
60. How can one assess the efficiency of the administrative costs of internalisation vs. transactions costs?
Correct Answer:
Difficulty: Medium-Hard. When a firm is vertically integrated, administrative costs are incurred. These
costs are driven by several factors, which may result in the choice of the market form, if transaction
costs prove to be lower.
i) Differences in optimal scales between different stages of the value chain may be an obstacle for
vertical integration (Federal Express does not manufacture its fleet of vans, but purchases them from a
specialised manufacturer who benefits from a sufficient scale of production).
ii) The development of capabilities is critical in many businesses. A "critical mass" effect could
discourage potential candidates for vertical integration because reaching the critical mass in terms of
competencies would be daunting.
iii) Strategic dissimilarities between businesses in the same value chain are a reality to be considered
when making a decision about vertical integration vs. market. Managing such businesses could be a
strain on top management, and requires too many capabilities.
iv) The incentive problem: within a market, the players have high-powered incentives for efficiency,
whereas within a firm (with vertical integration), the components of that firm have only low-powered
incentives, which delay and reduce consequences of inefficiency.
v) Depending on the type of flexibility needed, one form may be superior to the other one: if flexibility
requires a quick response to rapid changes in the environment, then the market proves to be the best
choice. Conversely, vertical integration could be a better answer to system-wide requirements for
flexibility.
vi) Risks are compounded in vertical integration because any problems might have repercussions at all
stages of the value chain.
61. How can small businesses benefit from vertical integration?
Correct Answer:
Difficulty: Hard. Small businesses have generally modest resources in comparison to those of larger
organisations, and focus only on one business because they cannot grow enough to enlarge the scope of
their activities. Other obstacles exist, such as the difficulty of managing different stages of the value
chain, because this requires coordination and skills in different areas. A critical mass could be difficult
to achieve, but generally small businesses do not try to compete with larger firms on that dimension.
However, the same advantages could exist for small businesses in regard to vertical integration: savings
on processes, more control over a value chain, more value created and extracted security of supply or
distribution, optimisation of technical flows throughout the value chain, and the technical process.
Vertical integration exists for small businesses on a smaller scale, and allows them to own different
stages of their value chain.
62. Why is diversification such an important component of a firm's strategy?
Correct Answer:
16
Difficulty: Medium. Diversification is basically about the question of "what business we are in". It is a
conundrum, because diversification can prove to be a very valuable strategy for achieving success or,
conversely, for decreasing stockholder value. The decision to diversify or not should be based on two
fundamental questions: (1) How attractive is the industry in which a firm would like to enter? (2) Can a
firm establish a competitive advantage in that new industry?
Therefore, a decision regarding diversification may be justified by a potential superior profit of the
industry to be entered, or by the ability of a firm to create a competitive advantage, which largely relies
on the fit between the industry environment and a firm's resources and competencies.
To determine if diversification would create shareholder value, Porter proposes three tests:
i) The attractiveness test, where the new industry must be attractive (level of competition, growth, profit,
etc.)
ii) The cost-of-entry test, which assesses the cost for entry, taking into consideration the barriers to entry
and
iii) The better-off test, which evaluates the extent to which the entry into a new industry will benefit
existing businesses, and the extent to which the new business will benefit from a firm's existing
businesses. In other words, each one must benefit from the other, and the addition of that new business
must generate synergies within the firm.
63. Does a firm need to diversify across different businesses in order to benefit from economies of scope?
Correct Answer:
Difficulty: Hard. Economies of scope are defined as cost savings from using a resource in multiple
activities carried out in combination, rather than carrying out those activities independently. In fact,
economies of scope can be exploited simply by selling or licensing the use of a resource or capability to
another firm.
Tangible and intangible resources can be shared across different businesses through market transactions.
For example, Starbucks has extended its brand to other products through licensing, Pepsi produces and
distributes Starbucks Frappuccino, and Walt Disney exploits the huge value of its copyrights, trademarks,
and characters partly through diversification into theme parks, live theatre, cruise ships, and hotels. To
determine whether the economies of scope are better exploited internally within the firm through
diversification, or externally through market contracts with independent companies, a critical factor is
"relative efficiency": what are the transaction costs of market contracts, as compared to the
administrative costs of a diversified firm?
Another factor to consider is the nature of the asset or capability. If they are complex and deeply
embedded in a firm's managerial systems and corporate culture, it is very likely that the best way to
generate value is via the internal market, because exploiting these assets through market contracts would
be very difficult.
64. Does diversification confer market power?
Correct Answer:
Difficulty: Medium. The increase of market power and the elimination of competition through
diversification is a concern for anti-trust authorities. Some authors claim that large diversified firms can
exercise market power through four mechanisms:
i) Predatory pricing
17
Large diversified firms can discipline or even drive out the market competitors by cutting their own
prices below the level of rivals' costs. Cross subsidisation is a practice that allows them to transfer
profits from one business to another.
ii) Bundling
Bundling two products together contributes to an extension of the monopoly of a diversified firm from
one business to the other ones.
iii) Reciprocal dealing
Reciprocal buying arrangements can be a source of pressure on a weak player relative to a large
diversified firm, obligating it to accept a deal, which mostly benefits the diversified firm.
iv) Mutual forbearance
If two diversified firms are competing in different markets, they have an incentive to adopt a live-and-
let-live strategy, designed to stabilise the whole structure of the competitive relationship. Game theory
suggests that multimarket competition is likely to inhibit attacks in any one market for fear of starting
retaliation and a generalised warfare.

18

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Contemporary Strategic Management

An Australasian Perspective 2nd

© John Wiley & Sons Australia, Ltd 2014

6. Vertical integration can be forward or backward.

7. Technical economies traditionally justify vertical integration.

8. Vertical integration refers to a company's ownership of vertically related activities.

© John Wiley & Sons Australia, Ltd 2014

Multiple Choice Questions

23. The scope of corporate strategy refers to:

*a. Vertical, geographical, and product scope

24. Vertical integration provides:

25. Vertical integration is defined as:

*a. A firm's ownership of vertically integrated activities

a. A firm takes over activities previously undertaken by its customers

a. Each steel strip producer is tied to its adjacent steel producer

*a. Technical economies of vertical integration

a. The independence of activities

d. The dependence of activities

32. Managing vertically related but strategically different businesses is:

a. Easy and not an issue for top managers

33. A shared service organisation is an internal entity that:

*a. Supplies corporate services, while competing with external suppliers

35. Vertical integration and market transactions are:

*a. Different with regards to different types of flexibility

36. Vertical integration can compound risk because:

a. Top managers have a complete knowledge of the entire value chain

a. Increased propensity to vertically integrate

a. Technological innovations at the interface of these activities

39. Which issues are critical considerations in the decision to diversify?

40. Synergies can be defined as:

a. Savings realised on production across several businesses within a diversified firm

41. Conglomerates are:

a. Large bureaucracies serving multiple related businesses

42. Diversification tends to be motivated by three major goals:

a. Stakeholders' greed, top managers' will, and risk reduction

43. Bringing different businesses under a single ownership:

a. Creates value for shareholders

44. Porter proposes to test:

a. What the level of risk is for a potential diversification

45. Cost-of-entry test tries to:

46. The better-off test addresses:

a. The extent of the potential retaliation from incumbents

*a. Share resources and capabilities across businesses

© John Wiley & Sons Australia, Ltd 2014

48. Economies of scale and economies of scope are:

a. The same concepts

49. Regarding tangible and intangible resources:

*a. Both offer economies of scope

50. Economies of scope in administrative and support services lead to:

a. Bureaucratisation within firms

a. Top managers' high levels of awareness

© John Wiley & Sons Australia, Ltd 2014

a. There is less need to lay off employees during cyclical downturns

a. That should be broken up in order to release shareholder value

55. Distinguishing related and unrelated businesses within a firm requires:

© John Wiley & Sons Australia, Ltd 2014

a. Increase return on investment

58. Typically, asset acquisitions: