Quiz on Corporate and Business Strategy

Pages: 15 (3039 words) Published: April 22, 2014
ISCA PROFESSIONAL EXAMINATION
PILOT PAPER
(NOVEMBER 2013)
CORPORATE AND BUSINESS STRATEGY (CBS)
SUGGESTED SOLUTIONS

ISCA PROFESSIONAL EXAMINATION 2013 Term 2
Corporate and Business Strategy – Pilot Paper for Nov 2013

ISCA PROFESSIONAL EXAMINATION
CORPORATE AND BUSINESS STRATEGY (CBS)
15 NOV 2013
SUGGESTED SOLUTIONS

I. True or False questions (Q1 to Q10) (Total: 10 marks)
1. (F) High volume/low cost different from upward differentiation. 2. (F) Also depends on settling operations in low labor cost countries, efficiency, innovation.
3. (F) Due to duplications
4. (F) More than less
5. (F) Should be ‘and’ not ‘or”
6. (F) Should be backward, not forward
7. (F) It is for concentrated markets
8. (F)
9. (F) Mix of products, including questions marks
10. (F) It enables a grouping of specialists.
Multiple choice questions (Q11 to Q20) (Total: 10 marks)
11. A
12. B
13. D
14. E
15. C
16. A
17. C
18. A
19. B
20. A

Page 2 of 10

ISCA PROFESSIONAL EXAMINATION 2013 Term 2
Corporate and Business Strategy – Pilot Paper for Nov 2013

Part II. Open-Ended Essay (Total: 20 marks)
Looking at competitive and cost advantages, how does horizontal acquisition differ from vertical integration?
(20 marks)
In an industry, you can either chose to integrate forward or backward along the value chain. By integrating forward, you try to reach out to the final customers, and thus gain a better understanding of client needs. Moreover, forward integration allows a better tracking of sales. Another objective of forward integration is to capture the margin of the distributors, and reduce their bargaining power. Moreover, if you own or control the distribution, you can also prevent your competitors from reaching the market, a process known as market foreclosure. This can be done by a full acquisition or a quasi-vertical integration (contracting).

Looking at backward integration, it is a recommended strategy to secure an access to a scarce supply or to a supply that is hard to find. If a firm is vertically integrated and own a supplier, it can prevent its competitors from having access to that supply, which gives it a competitive advantage over its competitors. Moreover, backward integration allows the firm to capture the margin of its suppliers.

From a cost perspective, vertical integration allows the firm to eliminate transaction costs that occur when a firm resorts to the market, for instance when it buys from a supplier or sell to a wholesaler/retailer.

Vertical integration is a common strategy in industries where quality is a prime concern. In the case of Starbucks for instance, vertical integration has helped the firm control the quality of the coffee bean and any other ingredients used in the manufacturing process. Vertical integration also facilitates production planning and enables a better scheduling of delivery and timing of shipment to retail outlets. This competitive advantage explains why vertical integration strategies are fairly common in the food segment. For instance, the Lindt company in chocolate-manufacturing and many fast-food chains are vertically integrated. McDonalds owns trucks and food processing centers in Russia and works closely with farmers to ensure quality standards along the value chain. In contrast, a horizontal acquisition refers to a firm that acquires a competitor at the same level of the industry value chain. It allows the firm to increase its market power (competitive advantage) against its suppliers, customers (wholesalers, retailers), not by acquiring them (as in a vertical integration strategy), but by buying or selling more to them, which gives the firm access to greater discounts (cost advantage). Moreover, it gives the firm critical mass (usually, factories and assembly lines are grouped together in a single location) to achieve economies of scale (cost advantage), for instance in a market marked by price/volume competition, or if the firm plans to expand overseas....
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