Sm Exam 3 - Part 1

Where a firm chooses to compete i.e. in which industries

How a firm chooses to compete in a specific industry

Why a firm chooses to compete or not

Answers a and b

The scope of a firm's products

The scope of a firm's activities

The scope of a firm's structure and corporate governance system

The firm's geographical scope

The first describes the regions of the world where the firm is present and the second the stages of the industry value chain which the firm performs itself

The first describes the number of countries and the second the number of horizontal businesses where the firm is present

The two are highly inter-related

It's not always clear what the difference is

What business(es) are we in?

How much profit do we want to make?

Who are the customers?

Should we be doing something else?

In terms of its product, geographic and vertical scope

In terms of its geographic and vertical scope

In terms of its geographic and product scope

This is not true. Some firms narrow some aspects of their scope, or voluntarily even break up

Economies of scope

Transaction costs

Corporate complexity

All of the above

Economies of scale refer to cost-advantage from higher volume of a single product

Economies of scope refer to cost-advantage from spreading a common cost over multiple products

Answers a and b

None of the above

Reduce the number of industries and/or products it's directly involved in

Expand the scope of its activities in some relevant way

Create a brand

Not worry too much about fixed costs

Because a brand doesn't cost anything - it's an asset

Because although the brand costs money, this does not appear in the accounts

Because the brand is to do with the marketing department, not production cost

It IS still true for brand extension, since creating and maintaining a brand does cost a lot e.g. in advertising

Economy of scale through better use of fixed assets

Potential for economy of scope based on organisational or managerial capability

Potential for economy of scope based on intangible resources

No potential for economy of scope

A necessary evil

The invisible hand

The visible hand

The iron fist in the velvet glove

Whether the transaction costs of buying in the activity in the market exceed the administrative cost of doing it themselves

Whether transaction costs in the market of buying in the activity exceed the administrative cost buying it in

How reliable their workforce is, compared with an external supplier's reliability

None of the above

The need for managers to understand a wider range of businesses

The need for managers to operate differently to succeed in different businesses

The extent of the linkages between the various businesses

All of the above

Always a mistake

Likely to be less risky than related diversification

Not always as unrelated as it may seem e.g. the businesses may share some common attributes which can be exploited

Always the last resort

Growth, risk reduction and value creation

Risk reduction and economies of scope

Value creation and cost reduction

Cash balancing and risk reduction

Shareholders expect managers to go for growth

Low growth does not look good for managers with an eye on their next job

Managers must do something positive

They are often advised to do so by business consultants

Managers do not have sufficient understanding of other industries

Diversification is simply a poor strategy

Shareholders can invest in other industries themselves, achieving risk-reduction more efficiently

All of the above

They believe that shareholders expect it of them, to show dynamism

It sharpens their managerial skills

Many managers are attracted to the extra complexity of diversification

The experience may reduce risk, and secure their job; and if not it looks dynamic for securing their next job

The linkages or synergies between the businesses concerned

Risk reduction through balancing of counter-cyclical businesses

Getting a price reduction when purchasing common resource inputs

Balancing of cash generation, reducing the need to obtain investment finance externally

A company must internally expand its scope

A company must usually enter into a licence arrangement

A company must usually acquire a company who is expert in an additional business

The firm is be able to spread common cost somehow, either by performing the additional activity internally, or by licensing the resource

A diversified company sets up a finance firm as one of its businesses

Enough cash generated by one set of internal firms is used by other internal firms in need of cash

A subsidiary starts a money-lending business, offering loans to other subsidiaries

External sources of capital become too expensive

Despite the cost-savings, poor investment decisions tend to be made

They deny banks much-needed business

They are illegal in some countries

The money should have been given to shareholders as dividends

There's a saving on advertising costs

There's no commission payable to the internal Human Resources department

Employees can be transferred rather than hired / fired, and the firm knows these people well

The firm does not need to invest so much in training new recruits

See that the barriers to entry to that industry are low

Be able to see a way to make superior profits in that industry

Also consider how unattractive their existing industry is, by comparison

See that some firms in that industry have left, leaving space for newcomers

None. They are all equally important

The "attractiveness" test

The "cost of entry" test

The "better-off" test

Tends to be particularly unsuccessful

Tends to be particularly quickly successful, hence the frequency of this method

Is advisable, because it's a relatively low-cost entry method

Is preferred by shareholders, hence the frequency of this method

A trend for highly diversified groups to dominate industries

A trend for diversified firms to refocus and reduce their diversification

Reduced opportunity for firms to further diversify

A deliberate move to avoid copying the strategy of firms in emerging economies

It buys a direct competitor

Its management and staff are better aligned

It moves to own more stages of the value chain, either upstream or downstream of its core activity

It owns only some activities on the upstream or supply-side of its foremost activity

Increased vertical integration

Decreased horizontal integration

De-integration or disaggregation

Answers b and c

Because those industries are old-fashioned and behind-the-times

Because in some industries the conditions favouring further vertical integration outweigh the benefits of focusing and outsourcing

Because those industries have probably sought no advice from academics, or taken no notice of the advice

Answers a and c

A saving which is only theoretically feasible

A cost-saving arising from the technicalities of performing integrated processes

An economy based on technology

One which is not worth the effort of gaining

There can no longer be a market operating between them for the item concerned

There can be an adversarial relationship as each tries to gain advantage

There can be strategic benefit, so long as the partners try to jointly maximise their profit in the downstream market

All of the above

The firms failing, when an inevitable dispute occurs, and one holds the other to ransom

The customer having to accept a higher price to pay for the investment

Vertical integration of the processes involved

Suppliers refusing to get involved with such unreasonable demands

The lack of a market removes the high-powered incentive of market forces to keep costs low

Costs are certainly lower because the firm now knows what profit the supplier was making

The supplier will now offer a better service, since it's owned by its customer

It can close the purchasing department and save costs