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CHAPTER 07

STRATEGY FORMULATION: CORPORATE STRATEGY


True/False
1.
Corporate strategy deals with the choice of direction for the firm as a whole.
Answer: T
2.
Corporate parenting is the coordination of cash flow among units.
Answer: F
3.

A merger is a transaction involving two or more corporations in which stock is exchanged, but
from which only one corporation survives.
Answer: T
4.
Vertical integration is going backward on an industrys value chain.
Answer: F
5.

Forward integration is the degree to which a firm operates vertically in multiple locations on an
industrys value chain from extracting raw materials to manufacturing to retailing.
Answer: T
6.
Conglomerate diversification is diversifying into an industry unrelated to its current one.
Answer: T
7.

Exporting grants rights to another company to open a retail store using the franchisers name and
operating system.
Answer: F
8.

Turnkey operations are typically contracts for the construction of operating facilities in exchange
for a fee.
Answer: T
9.

A no change strategy is a decision to do nothing new in a worsening situation, but instead to act
as though the companys problems are only temporary.
Answer: F
10.

A turnaround strategy emphasizes the improvement of operational efficiency and is probably


more appropriate when a corporations problems are pervasive, but not yet critical.
Answer: T
11.
Bankruptcy is the termination of the firm.
Answer: F
12.

Bankruptcy involves giving up management of the firm to the courts in return for some
settlement of the corporations obligations.
Answer: T
13.
BCG stands for Boston Consulting Group.
Answer: T
14.

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: F
15.
Eventually, cash cows become stars.
Answer: F

179

16.

The GE Business Screen is based on long-term industry attractiveness and business


strength/competitive position.
Answer: T
17.

A companys attractiveness is composed of its market size, the market rate of growth, the extent
and type of government regulation, and economic and political factors.
Answer: T
18.
The competitive strength of a product is based only on its market share.
Answer: F
19.

One advantage of portfolio analysis is that it is not easy to define product/market segments.

Answer: F
20.
One disadvantage of portfolio analysis is that it provides an illusion of scientific rigor.
Answer: T
Multiple Choice
21.
Which strategy specifies the firm's overall direction in terms 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.
b.
c.
d.
e.
22.

Strategies that include the flow of financial and other resources to and from a companys product
lines and business units can be referred to as
a.
b.
c.
d.
e.

23.

portfolio strategy
directional strategy
parenting strategy
cooperative strategy
functional strategy

Which kind of corporate strategy deals with the industries or markets in which the firm competes
through its products and business units?
a.
b.
c.
d.
e.

25.

corporate strategies.
directional strategies.
cooperative strategies.
functional strategies.
business strategies.

Which kind of corporate strategy deals with the firm's overall orientation toward growth?
a.
b.
c.
d.
e.

24.

corporate
functional
divisional
organizational
business

portfolio strategy
directional strategy
parenting strategy
cooperative strategy
functional strategy

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?

180

a.
b.
c.
d.
e.
26.

Which one of the following directional strategies is most frequently used in corporations?
a.
b.
c.
d.
e.

27.

mergers
strategic alliances
diversification
acquisitions
concentration

Which of the following is NOT a reason why the growth strategy is so seductive?
a.
b.
c.
d.
e.

31.

mergers
strategic alliances
diversification
acquisitions
concentration

Which external growth strategy is a partnership of two or more corporations or business units to
achieve mutually beneficial strategic objectives?
a.
b.
c.
d.
e.

30.

mergers
strategic alliances
diversification
acquisitions
concentration

Which external growth strategy occurs when a corporation is completely absorbed as an


operating subsidiary or division of the acquiring firm?
a.
b.
c.
d.
e.

29.

stability
growth
consolidation
retrenchment
expansion

Which external growth strategy involves two or more corporations joining in a stock exchange
and from which only one corporation survives?
a.
b.
c.
d.
e.

28.

portfolio strategy
directional strategy
parenting strategy
cooperative strategy
functional strategy

There are more opportunities for advancement and promotion.


A corporation that experiences successful growth is thought of positively by the
marketplace and potential investors.
A large and growth-oriented corporation has more clout and influence.
A growing firm can cover up mistakes and inefficiencies because of the increase in cash
flow revenue.
A large and growing firm attracts more acquisition offers.

The collection of unused resources of a company is known as


a.
b.
c.
d.
e.

organizational trash.
organizational slack.
organizational capacity.
organizational acquisition.
organizational formula.

181

32.

The most logical strategy for a corporation having a strong competitive position possessing a
high market share in a highly attractive industry is
a.
b.
c.
d.
e.

33.

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.
b.
c.
d.
e.

34.

b.
c.
d.
e.

take over a function previously supplied by a former


employer.
take over a function previously provided by a supplier or by
a distributor.
acquire a company of similar objective.
sell a company encumbered with debt.
expand to countries with strong trade alliances.

A disadvantage of vertical integration is that it


a.
b.
c.
d.
e.

36.

full internal vertical integration.


tapered integration.
horizontal integration.
external vertical integration.
quasi-integration.

The purpose of vertical growth is to


a.

35.

concentration.
conglomerate integration.
concentric diversification.
stability.
retrenchment.

creates exit barriers.


improves coordination of activities.
increases the cost of improvement of coordination and control.
creates entry barriers.
avoids time consuming tasks.

The purchase of Carrolls Foods for its hog-growing facilities by Smithfield Foods, the worlds
largest pork processor, is an example of
a.
b.
c.
d.
e.

forward integration.
horizontal integration.
backward integration.
transferred integration.
mass integration.

182

37.

The ability for Nike to manufacture its own shoes and then build stores for distribution is an
example of
a.
b.
c.
d.
e.

38.

The theory that proposes 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 is known as
a.
b.
c.
d.
e.

39.

population theory.
institution theory.
transaction cost economics.
trickle down economics.
transaction growth theory.

In many cases, _____ integration is more profitable than _____ integration.


a.
b.
c.
d.
e.

40.

forward integration.
horizontal integration.
backward integration.
transferred integration.
mass integration.

forward, backward
vertical, backward
backward, vertical
backward, forward
mass, forward

When a firm internally makes 100% of its key supplies and completely controls its distributors,
this is known as
a.
b.
c.
d.
e.

full integration.
vertical integration.
mass integration.
economical integration.
strategic integration.

41.

A firm that produces part of its own requirements and buys the rest from outside suppliers is what
type of vertical integration?
a.
full integration
b.
long-term contracts
c.
backwards integration
d.
taper integration
e.
quasi integration

42.

A firm which gets most of its requirements from an outside supplier that is under its partial
control is what type of vertical integration?
a.
b.
c.
d.
e.

full integration
long-term contracts
backwards integration
taper integration
quasi integration

183

43.

According to transaction cost economics, which of the following is NOT a reason for a firm to
prefer vertical integration over contracting to purchasing supplies or services in the open market?
a.
b.
c.
d.
e.

44.

A firm's expansion into other geographic locations and/or increasing the range of products and
services offered to current markets is called
a.
b.
c.
d.
e.

45.

long-term contract.
short-term contract.
binding contract.
integrated contract.
outsourced contract.

When resources are purchased from outsiders through long-term contracts instead of being made
in-house, this process is referred to as
a.
b.
c.
d.
e.

48.

drafting a market agreement.


selling a market agreement.
negotiating a market agreement.
safeguarding a market agreement.
settling disputes.

An agreement between two separate firms to provide agreed-upon goods and services to each
other for a specified period of time is known as a(n)
a.
b.
c.
d.
e.

47.

forward vertical growth.


diversification
backward vertical growth.
captive company strategy.
horizontal integration.

All of the following factors reflect transaction costs EXCEPT


a.
b.
c.
d.
e.

46.

a high level of uncertainty surrounds the transaction.


a company's management does not want to rely on outsiders for important raw
materials.
the transaction occurs frequently.
assets involved in the transaction are highly specialized.
all of the above are reasons to favor contracting over vertical integration.

insourcing.
outsourcing.
resource building.
resource placement.
resource allocation.

As defined by the text, synergy is the concept


a.
b.
c.
d.
e.

that involves adding different products or divisions to the corporation.


that supports the acquisition of one corporation by another.
that two firms can generate more profits together than separately.
that a corporation can enter one or more businesses that are necessary to manufacture its
own product.
that two functional areas of a corporation can coordinate their work as a team.

184

49.

Which strategy did KLM choose when it joined forces with Northwest Airlines?
a.
b.
c.
d.
e.

50.

Adding a related or complementary product to a corporation's business units is called


a.
b.
c.
d.
e.

51.

c.
d.
e.

Timing is critical to ensure entry into the industry before competitors.


Indicated when managers are primarily concerned with the criterion of return on
investment.
Emphasis is on financial synergy rather than on the product-market synergy.
Appropriate for companies wishing to take advantage of their competitive position
strengths as they diversify out of an unattractive industry.
May be appropriate corporate strategy when a firm's competitive position is only average
and industry attractiveness is low.

With conglomerate diversification, the focus is on


a.
b.
c.
d.
e.

54.

concentration.
horizontal growth.
concentric diversification.
vertical growth.
conglomerate diversification.

Which of the following is NOT descriptive of the characteristics of conglomerate diversification?


a.
b.

53.

concentration.
horizontal growth.
concentric diversification.
vertical growth.
conglomerate diversification.

Growth through diversification out of an industry into an unrelated industry is called


a.
b.
c.
d.
e.

52.

A retrenchment strategy using horizontal integration through internal means.


A horizontal integration strategy.
A stability strategy using concentric diversification.
A growth strategy using vertical integration through external means.
A retrenchment strategy using a concentration method.

product-market synergy.
financial considerations.
employee satisfaction.
similar product offerings.
market demand.

With concentric diversification, the focus is on


a.
b.
c.
d.
e.

product-market synergy.
market demand.
financial considerations.
diverse product offerings.
economic indicators.

185

55.

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.
b.
c.
d.
e.

56.

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.
b.
c.
d.
e.

57.

5%
7%
17%
27%
37%

One benefit of a U.S. company entering a joint venture with an international firm is the joint
venture
a.
b.
c.
d.
e.

59.

licensing
joint ventures
production sharing
exporting
acquisitions

The rate of joint venture formation between U.S. companies and international partners has been
growing _____ annually since 1985.
a.
b.
c.
d.
e.

58.

licensing
joint ventures
production sharing
exporting
acquisitions

reduces the risks of expropriation.


enhances the policy of the host countrys takeover of the
firm.
promotes skepticism among other countries not involved
in the merger.
encourages competitors to work with the company.
increases revenues by 20%.

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.
b.
c.
d.
e.

licensing
joint ventures
production sharing
exporting
acquisitions

186

60.

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.
b.
c.
d.
e.

61.

In international dealings, green-field development is/are


a.
b.
c.
d.
e.

62.

b.
c.
d.
e.

b.
c.
d.
e.

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.
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.
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.
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.
when an MNC typically contracts for construction of operating facilities in exchange for
a fee.

One study of various growth projects revealed that the most successful growth strategy was
a.
b.
c.
d.
e.

65.

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.
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.
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.
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.
typically contracts for construction of operating facilities in exchange for a fee.

Management contracts are used in international dealings


a.

64.

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.
a way in which an MNC can take total control of operations by acquiring a firm already
established in the host country.
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.
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.
typically contracts for construction of operating facilities in exchange for a fee.

In international dealings, turnkey operations are


a.

63.

licensing
joint ventures
production sharing
exporting
acquisitions

vertical growth.
horizontal growth.
concentric diversification.
conglomerate diversification.
a combination of vertical growth and conglomerate diversification.

Research comparing concentric with conglomerate diversification concludes that

187

a.
b.
c.
d.
e.
66.

The controversy surrounding external versus internal growth finds


a.
b.
c.
d.
e.

67.

c.
d.
e.

horizontal integration strategy


no change strategy
retrenchment strategy
pause/proceed with caution strategy
profit strategy

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.
b.
c.
d.
e.

70.

Useful in the short-run but can be dangerous if followed too long.


Most appropriate for reasonably successful corporations in a reasonably predictable
environment.
Appropriate when the industry is facing modest or no-growth potential.
Appropriate when the industry is in decline.
Key environmental forces are in the process of unpredictable change.

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.
b.
c.
d.
e.

69.

external growth appears to be superior financially to internal growth.


internal growth appears to be superior financially to external growth.
there appears to be no financial advantage to either.
acquisitions have a lower survival rate than new internally generated business ventures.
strategic alliances are superior to both.

The stability strategy is appropriate for all BUT ONE of the following circumstances?
a.
b.

68.

conglomerate diversification is always less profitable than concentric diversification.


concentric diversification is always less profitable than conglomerate diversification.
the relationship between relatedness and performance is curvilinear.
neither concentric or conglomerate diversification are ever profitable.
for optimum effectiveness both conglomerate and concentric diversification should be
utilized in tandem.

horizontal integration strategy


no change strategy
retrenchment strategy
pause/proceed with caution strategy
profit strategy

Which strategy is descriptive of a corporation in a mature industry facing a drop in its


attractiveness, opting to decrease short-term discretionary expenses to maintain profits at a
certain level?
a.
b.
c.
d.
e.

horizontal integration strategy


no change strategy
retrenchment strategy
pause/proceed with caution strategy
profit strategy

188

71.

Which strategy is most appropriate for a corporation having a weak competitive position
regardless of the industry's attractiveness, resulting in poor performance, decreased sales and
lost profits?
a.
b.
c.
d.
e.

72.

What is a turnaround strategy?


a.
b.
c.
d.
e.

73.

merger.
liquidation
integration.
divestment.
turnaround.

Which one of the following is NOT a characteristic of a firm that has chosen a captive company
strategy?
a.
b.
c.
d.
e.

75.

A form of divestment and is appropriate when corporate problems can be traced to the
poor performance of an SBU or product line.
Occurs when the corporation reduces the scope of some of its functional activities and
becomes "captive" to another firm.
Emphasizes improving operational efficiency and is appropriate when a
corporation's problems are pervasive, but not yet critical.
Occurs when a corporation liquidates all its assets.
It involves adding different products or divisions to the corporation.

The strategy which takes place in two basic phases of contraction and consolidation is
a.
b.
c.
d.
e.

74.

proceed with caution strategy


no change strategy
retrenchment strategy
pause strategy
profit strategy

Probably most appropriate for a company with a strong competitive position in a


growing industry.
The firm reduces its functional activities to reduce costs.
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.
One of its customers makes up a large percentage of the company's sales and wants the
company to keep operating as its supplier.
Management desperately seeks an "angel" to guarantee the company's continued
existence.

Which strategy involves giving up management of the firm to the courts in return for some
settlement of the corporation's obligations?
a.
b.
c.
d.
e.

liquidation
bankruptcy
diversification
divestment
consolidation

189

76.
Which strategy is the termination of the firm because it is in an unattractive industry and the
company is too weak to be sold as a growing concern?
a.
b.
c.
d.
e.
77.

One of the most popular aids to developing corporate strategy in multibusiness corporations
views business units in terms of the cash they generate and is called
a.
b.
c.
d.
e.

78.

market leader.
largest competitor.
market challenger.
market lagger.
smallest competitor.

The line separating areas of high and low relative competitive position as gained from the BCG
growth-share matrix method, is set at
a.
b.
c.
d.
e.

81.

its market share.


its gross sales divided by its market share.
its market share multiplied by that of its nearest competitor.
its market share divided by that of the smallest other competitor.
its market share divided by that of the largest other competitor.

A market share ratio above 1.0, calculated by the Boston Consulting Group's growth-share matrix
method, belongs to the
a.
b.
c.
d.
e.

80.

PIMS.
segmentation analysis
portfolio analysis.
industry analysis.
diversification study.

In the Boston Consulting Group's growth-share matrix, the relative competitive position of a
product, division, or corporation is defined as
a.
b.
c.
d.
e.

79.

liquidation
bankruptcy
diversification
divestment
consolidation

.5.
1.0.
1.5.
2.0.
2.5.

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.
b.
c.
d.
e.

"dogs."
"question marks."
"stars."
"white knights."
"buckets."

190

82.

New products which are typically introduced in a fast-growing industry are called
a.
b.
c.
d.
e.

83.

Market leaders typically at the peak of their product life cycle and usually able to generate
enough cash to maintain their high share of the market are called
a.
b.
c.
d.
e.

84.

cash cows.
lost leaders.
dogs.
question marks.
stars.

According to the BCG growth-share matrix, the key to success is


a.
b.
c.
d.
e.

87.

cash cows.
lost leaders.
dogs.
question marks.
stars.

Those products with low market share that do NOT have the potential to bring in much cash are
called
a.
b.
c.
d.
e.

86.

cash cows.
lost leaders.
dogs.
question marks.
stars.

Products that typically bring in far more money than is needed for maintenance of their market
share are called
a.
b.
c.
d.
e.

85.

cash cows.
lost leaders.
dogs.
question marks.
stars.

effective management.
competitive positioning.
innovative initiative.
industry leadership.
market share.

The BCG growth-share matrix has been criticized because


a.
b.
c.
d.
e.

it emphasizes marketing expenditures over profits.


it uses too many categories.
it fails to operationalize industry attractiveness and business strength/competitive
position.
high growth markets may not always be the best markets.
product quality is only one aspect of overall competitive position.

191

88.

Which of the following is NOT defined by GE as one of the variables forming industry
attractiveness?
a.
b.
c.
d.
e.

89.

Which of the following is defined by GE as one of the variables forming business


strength/competitive position?
a.
b.
c.
d.
e.

90.

0.0 (weak) to 10.0 (strong).


1.00 (strong) to 5.0 (weak).
0.0 (strong) to 10.0 (weak).
1.0 (weak) to 7.0 (strong).
1.00 (weak) to 5.0 (strong).

The GE Business Screen has been criticized because


a.
b.
c.
d.
e.

93.

Use the growth rate as the criteria measurement for success.


Assess industry attractiveness.
Plot the firm's future portfolio.
Assess business strength/competitive position.
Plot each SBU's current position.

The range of scores for the business strength axis of the GE Business Screen is from
a.
b.
c.
d.
e.

92.

industry profitability
competitive diversity
market growth rate
market size
market share

Which one of the following is NOT one of the four steps recommended for plotting of products or
SBUs on the GE Business Screen?
a.
b.
c.
d.
e.

91.

market share
market size
market growth rate
pricing practices
industry profitability

it is based on the product life cycle.


the categories are too few.
it can get quite complicated and cumbersome.
it is a primitive version of the Directional Policy Matrix.
it is only appropriate for new products or SBUs in developing industries.

The international product portfolio summarizes a host of data on


a.
b.
c.
d.
e.

opportunities and risks.


local partner selection.
economic and political factors.
a country's attractiveness and a product's competitive strength.
MNC/host country relationship.

192

94.

Which of the following is NOT one of the advantages of portfolio analysis?


a.
b.
c.
d.
e.

95.

Which of the following is NOT one of the limitations of portfolio analysis?


a.
b.
c.
d.
e.

96.

b.
c.
d.
e.

the employees.
organizational knowledge.
plant assets.
joint ventures.
licensing agreements.

The summary of various judgments regarding corporate/business unit fit for the corporation as a
whole is referred to as
a.
b.
c.
d.
e.

99.

the core competencies of the parent corporation and on the value created from the
relationship between the parent and its units.
the cash flow among its business units.
whether a business unit should be growing, stabilizing, or retrenching.
acquiring distinctive competencies in the marketplace.
differentiating its activities into separate units and integrating these activities through
complex integrating mechanisms.

According to the text, 75% of a companys value is derived from


a.
b.
c.
d.
e.

98.

It contains value-laden terminology.


It is not easy to define product/market segments.
It relies too heavily on objective judgments.
It suggests the use of standard strategies which may be impractical or may miss potential
opportunities.
It provides an illusion of scientific rigor.

Corporate parenting generates corporate strategy by focusing on


a.

97.

The graphic depiction facilitates communication.


It provides the basis for impartial objectivity from which to make decisions.
It encourages top management to evaluate each of the corporation's businesses
individually.
It raises the issue of cash flow availability for use in expansion and growth.
It stimulates the use of externally oriented data to supplement management's judgment.

business-unit fit matrix.


multiple-unit fit matrix.
parenting-unit fit matrix.
joint venture fit matrix.
vertical integration fit matrix.

According to Campbell, Goold, and Alexander in their parenting-fit matrix, those businesses
which are opportunities for improvement by the parent and the parent clearly understands their
critical success factors well are called
a.
b.
c.
d.
e.

ballast businesses.
heartland businesses.
edge-of-heartland businesses.
alien territory businesses.
value trap businesses.

193

100.

According to the parenting-fit matrix, those businesses which fit very comfortably with the parent
corporation, but contain very few opportunities to be improved by the parent are called
a.
b.
c.
d.
e.

101.

According to Campbell, Goold, and Alexander in their parenting-fit matrix, those businesses
which fit well with parenting opportunities, but are a misfit with the parent's understanding of
the unit's critical success factors are called
a.
b.
c.
d.
e.

102.

ballast businesses.
heartland businesses.
edge-of-heartland businesses.
alien territory businesses.
value trap businesses.

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.
b.
c.
d.
e.

103.

ballast businesses.
heartland businesses.
edge-of-heartland businesses.
alien territory businesses.
value trap businesses.

vertical strategy.
horizontal strategy.
hierarchical strategy.
portfolio strategy.
pyramid strategy.

Business firms that compete with each other not only in one business unit, but in a number of
related business units are said to be engaging in
a.
b.
c.
d.
e.

oligopolistic competition.
strategic competition.
multipoint competition.
laissez-faire competition.
horizontal competition.

194