CH-6 Corporate-Level Strategy – Strategic Management: Concepts and Cases: Competitiveness and Globalization : Exam Guide

Chapter 6 Corporate-Level Strategy True/False 1. In the Chapter 6 Opening Case, GE achieved growth and diversification through mergers and acquisitions. A. True B. False Answer: True 2. GE (discussed in the Chapter 6 Opening Case) is an example of a firm that used its corporate strategy to achieve competitive advantage by selecting and managing a group of different businesses competing in different product markets. A. True B. False Answer: False 3. GE (discussed in the Chapter 6 Opening Case) is an example of a firm following the related constrained diversification strategy (i.e., different businesses that are highly related). A. True B. False Answer: False 4. Corporate-level strategies are strategies a firm uses to diversify its operations from a single business competing in a single market into several product markets and, most commonly, into several businesses. A. True B. False Answer: False 5. If the businesses in the corporate portfolio are not worth more under the management of the corporation than they would be under any other ownership, then the corporate-level strategy has failed. A. True B. False Answer: True 6. An effective corporate strategy creates aggregate returns across all businesses that exceed what those returns would be without the strategy and contributes to the firm's strategic competitiveness and ability to earn above- average returns. A. True B. False Answer: True 7. A major advantage of diversification is that overall monitoring costs are reduced, since each separate business comes under the control of corporate headquarters. A. True B. False Answer: False 8. Successful product diversification is expected to increase the variability in the firm's profitability since the earnings are generated from several different business units. A. True B. False Answer: False 9. All of Krispy Kreme's revenues come from its one main product, doughnuts. It can be considered a classic example of a firm following a related constrained strategy. A. True B. False Answer: False 10. Revenues for United Parcel Service (UPS) are derived from the following business segments: 60 percent from U.S. package delivery operations, 22 percent from international package delivery, and 18 percent from non- packaging operations. The best description of the corporate level strategy of UPS is unrelated diversification. A. True B. False Answer: False 11. Related linked firms share more resources and assets between their businesses than do related constrained firms. A. True B. False Answer: False 12. Compared with related constrained firms, related linked firms share fewer resources and assets between their businesses, concentrating instead on transferring knowledge and core competencies between the businesses. A. True B. False Answer: True 13. United Technologies, Textron, Samsung, and Hutchison Whampoa Limited are examples of diversified firms that have no relationships between their businesses. These firms all use the strategy of unrelated diversification. A. True B. False Answer: True 14. A firm uses a corporate-level diversification strategy for a variety of reasons all of which have to do with ways to create value. A. True B. False Answer: False 15. Decisions to expand a firm's portfolio of businesses to reduce managerial risk can have a positive effect on the firm's value. A. True B. False Answer: False 16. Antitrust regulation, tax laws, and low performance are all value-neutral reasons why firms engage in diversification. A. True B. False Answer: True 17. Procter & Gamble (P&G) has a paper towel and baby diaper business that both use paper products. This is an example of value created through the sharing of activities. A. True B. False Answer: True 18. Economies of scope are cost savings resulting from a firm successfully leveraging, either through sharing or transferring, some of its capabilities and competencies developed in one business to another business. A. True B. False Answer: True 19. In a money-making effort, a small private university has decided to institute consulting services using its business faculty as consultants whose services would be sold to clients. This university is attempting to use its faculty to gain economies of scope. A. True B. False Answer: True 20. When firms share activities across units, they are often able to achieve increased value. A. True B. False Answer: True 21. Firms using the related constrained strategy share activities in order to create value. A. True B. False Answer: True 22. Firms that sold off related units in which resource sharing was a possible source of economies of scope have been found to produce lower returns than those that sold off businesses unrelated to the firm's core businesses. A. True B. False Answer: True 23. Firms seeking to create value through corporate relatedness use the related constrained strategy. A. True B. False Answer: False 24. Equator, a U.S. manufacturer of pharmaceuticals, has acquired a firm in the same industry in Ireland. It plans to move one of its key managers from its plant in St. Louis to Ireland. This can be considered a method of transferring corporate-level core competencies. A. True B. False Answer: True 25. Market power exists when a firm is able to sell its products above the existing competitive level or decrease the costs of its primary and support activities below the competitive level, or both. A. True B. False Answer: True 26. Firms using a related diversification strategy may gain market power when successfully using their related constrained or related linked strategy. A. True B. False Answer: True 27. Vertical integration allows the firm to gain market power as the firm develops the ability to save on its operations, avoid market costs, improve product quality, and possibly protect its technology from rivals. A. True B. False Answer: True 28. Vertical integration exists when a company produces its own inputs (forward integration) or owns its own source of output distribution (backward integration). A. True B. False Answer: True 29. Google's diversification could lead the firm toward a related linked strategy and give the firm advantages in multipoint competition with competitors such as Facebook and Microsoft (Chapter 6 Strategic Focus). A. True B. False Answer: True 30. Google increasing use of a vertical integration strategy is in line with the extensive use of that strategy by many manufacturing firms. A. True B. False Answer: False 31. Many manufacturing firms are de-integrating and moving to independent supplier networks. A. True B. False Answer: True 32. Contract manufacturers who manage their customers' entire product line, and offer services ranging from inventory management to delivery and after-sales services are prime examples of vertical integration. A. True B. False Answer: False 33. A company that tries to balance both operational and corporate relatedness and fails risks incurring diseconomies of scope. A. True B. False Answer: True 34. Firms with both operational and corporate relatedness are favorites of investment analysts because the transparency and clarity of their financial statements clearly show the value-creation resulting from the combination of multiple businesses. A. True B. False Answer: False 35. It can be difficult for investors to actually observe the value created by a firm (such as Walt Disney) as it shares activities and transfers core competencies. A. True B. False Answer: True 36. Financial economies are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm. A. True B. False Answer: True 37. An unrelated diversification strategy can create value through two types of financial economies: (1) efficient internal capital allocations, and (2) purchasing other firms, restructuring their assets, and selling them. A. True B. False Answer: True 38. A significant benefit of an internal capital market is that corporate headquarters has access to detailed and accurate information regarding the performance of the company's portfolio and can thus make better capital allocation decisions. A. True B. False Answer: True 39. A significant benefit of an internal capital market is limiting competitors' access to information about the performance of the individual businesses within the corporation. A. True B. False Answer: True 40. In a diversified firm, capital allocation can be adjusted according to more specific criteria than is possible with external market allocation of capital. A. True B. False Answer: True 41. GE (discussed in the Chapter 6 Opening Case) is an example of a firm that has used internal capital market allocation as a means of creating value even though it competes using a related linked rather than an unrelated diversification strategy. A. True B. False Answer: True 42. The "conglomerate discount" occurs in large, highly diversified businesses and results from analysts not knowing how to value the vast array of large businesses with complex financial reports. A. True B. False Answer: True 43. In spite of the challenges associated with it, a number of firms continue to use the unrelated diversification strategy, especially in Europe and in emerging markets. A. True B. False Answer: True 44. One advantage of an unrelated diversification strategy in a developed economy is that competitors cannot easily imitate the financial economies, whereas they can easily replicate the value gained through the use of a related diversification strategy. A. True B. False Answer: False 45. Companies in emerging markets frequently use the unrelated diversification strategy because of the absence of a "soft infrastructure" in those markets. A. True B. False Answer: True 46. When implementing a restructuring strategy, a company would do best by focusing on mature, low-technology businesses rather than high-technology or service businesses. A. True B. False Answer: True 47. Companies creating financial economies through restructuring typically focus on high-technology businesses primarily because these firms are human-resource dependent. A. True B. False Answer: False 48. Diversification strategies can be used with both value-creating and value-neutral objectives. A. True B. False Answer: True 49. Different incentives to diversify sometimes exist, and the quality of a firm's resources may permit only diversification that is value neutral rather than value creating. A. True B. False Answer: True 50. Since the 1950s, U.S. government policy regarding antitrust concerns has remained constant. A. True B. False Answer: False 51. Corporate tax laws, rather than tax laws affecting individuals, have had the most impact on the firm's use of free cash flows for investment in acquisitions. A. True B. False Answer: False 52. Low firm performance is associated with increased diversification. A. True B. False Answer: True 53. Performance continues to increase as diversification increases from single business to unrelated diversification. A. True B. False Answer: False 54. Synergy exists when the value created by business units working together exceeds the value that those same units create working independently. A. True B. False Answer: True 55. Compared to diversification that is grounded in intangible resources, diversification based on financial resources only is more visible to competitors and thus more imitable and less likely to create value on a long-term basis. A. True B. False Answer: True 56. Research evidence shows that increased firm size and greater levels of diversification are correlated with increased executive compensation. A. True B. False Answer: True 57. If managers diversify a firm in a way that does not produce value, the firm risks capital market intervention. A. True B. False Answer: True 58. Golden parachutes protect managers from the negative consequences of over-diversifying a firm. A. True B. False Answer: True 59. Without strict governance mechanisms, the majority of executives will act in their own self-interest rather than acting as positive stewards of firm resources. A. True B. False Answer: False 60. The use of poison pills increases the chance that a poorly performing firm will be taken over. A. True B. False Answer: False 61. Knowing that their firms could be acquired if they are not managed successfully encourages executives to use value-creating diversification strategies. A. True B. False Answer: True Multiple Choice 62. GE (Chapter 6 Opening Case) is unusual in that it A. is widely diversified but competes only in manufacturing industries. B. has had an unblemished environmental record. C. is one of the few large diversified large firms that have been successful over time. D. restricted its investments to only developed economies. Answer: C 63. As noted in the Chapter 6 Opening Case, GE is now a major player in the "clean energy" industry such as wind turbines and solar power. A major reason GE moved in this direction was A. to narrow the focus of its portfolio around energy-related industries. B. to overcome and correct its record in environmental issues. C. to further diversify its portfolio away from services. D. the clean energy industry was guaranteed to be profitable for the next several years. Answer: B 64. GE (Chapter 6 Opening Case) was diversified and manages businesses that have only a few links between them. This corporate-level strategy is best described as _________ diversification. A. related constrained B. related linked C. unrelated D. conglomerate Answer: B 65. Corporate-level strategy is concerned with _________ and how to manage these businesses. A. whether the firm should invest in global or domestic businesses B. what product markets and businesses the firm should be in C. whether the portfolio of businesses should generate immediate above-average returns or should be troubled businesses which will create above-average returns only after restructuring D. whether to integrate backward or forward. Answer: B 66. The ultimate test of the value of a corporate-level strategy is whether the A. corporation earns a great deal of money. B. top management team is satisfied with the corporation's performance. C. businesses in the portfolio are worth more under the management of the company in question than they would be under any other ownership. D. businesses in the portfolio increase the firm's financial returns. Answer: C 67. The more "constrained" the relatedness of diversification, A. the fewer the linkages between the businesses within the portfolio owned by the firm. B. the wider the variation in the portfolio of businesses owned by the firm. C. the more links there are among the businesses owned by an organization. D. the lower the proportion of total organizational revenue derived from the dominant business. Answer: C 68. Wm. Wrigley Jr. Company once made only chewing gum. When Wrigley bought Life Savers (a line of candy mints) and Altoids (a line of breath mints) from Kraft, chewing gum then constituted less than 95 percent of revenues. Thus, Wrigley A. was moving away from its traditional single-business strategy toward a dominant strategy. B. was moving away from its traditional dominant strategy toward a related linked strategy. C. became a conglomerate since Life Savers and Altoids are unrelated businesses. D. probably planned to restructure these companies and sell them off. Answer: A 69. Usually a company is classified as a single business firm when revenues generated by the dominant business are greater than _________ percent. A. 99 B. 95 C. 90 D. 70 Answer: B 70. The more sharing of resources and activities among businesses, the more ______ is the relatedness of the diversification. A. linked B. constrained C. integrated D. intense Answer: B 71. A firm that earns less than 70 percent of revenue from its dominant business and has direct connections between its businesses is engaging in _________ diversification. A. unrelated B. related constrained C. related linked D. dominant business Answer: B 72. Revenues for United Parcel Service (UPS) come from the following business segments: 60 percent from U.S. package delivery operations, 22 percent from international package delivery, and 18 percent from non-packaging operations. Which best describes the corporate level strategy of UPS? A. single business B. dominant business C. related constrained D. related linked Answer: B 73. Which acquisition would be considered the LEAST related? A. A candy manufacturer purchases a chemical laboratory specializing in food flavorings. B. A chain of garden centers acquires a landscape architecture firm. C. A hospital acquires a long-term care nursing home. D. An upscale "white-tablecloth" restaurant chain acquires a travel agency. Answer: D 74. The lowest level of diversification is the _________ level. A. single-business B. dominant business C. related constrained D. unrelated Answer: A 75. The main difference between the related constrained level of diversification and the related linked level of diversification is A. the percentage of total organizational profitability that comes from the dominant business. B. the level of resources and activities shared among the businesses. C. whether the diversification is vertical or horizontal. D. whether the diversification is value-creating or value-neutral. Answer: B 76. The Publicis Groupe has three major groups of business (advertising, media, and digital) that share resources and capabilities. Publicis Groupe is using a _________ diversification strategy. A. related linked B. related constrained C. unrelated D. dominant Answer: B 77. The Publicis Groupe uses the digital technology from its digital business to enhance the advertising products in its advertising group. This sharing of activities is characteristic of the _________ diversification strategy. A. related constrained B. related linked C. unrelated D. dominant Answer: A 78. The term "conglomerates" refers to firms using the _________ diversification strategy. A. unrelated B. related constrained C. related linked D. global Answer: A 79. Hutchison Whampoa Limited (HWL) has businesses in ports and related services, telecommunications, property and hotels, retail and manufacturing, and energy and infrastructure. HWL makes no efforts to share activities or transfer core competencies among the businesses. HWL is following a strategy of ________ diversification. A. dominant business B. related constrained C. related linked D. unrelated Answer: D 80. Firms use corporate-level diversification strategies for all the following reasons EXCEPT A. value-creating. B. value-neutral. C. value-reducing. D. value-diversifying. Answer: D 81. Which of the following reasons for diversification is most likely to increase the firm's value? A. increasing managerial compensation B. reducing costs through business restructuring C. taking advantage of changes in tax laws D. conforming to antitrust regulation Answer: B 82. Which of the following is a value-reducing reason for diversification? A. enhancing the strategic competitiveness of the entire company B. expanding the business portfolio in order to diversify managerial employment risk C. gaining market power relative to competitors D. conforming to antitrust regulation Answer: B 83. An office management firm has developed a system for efficiently organizing small medical and dental practices both through proprietary software and through unique training programs for staff. It has recently acquired a firm specializing in providing management services for veterinary practices. The office management firm is hoping to A. achieve economies of scope. B. implement vertical integration. C. achieve financial economies through an unrelated acquisition. D. acquire specialized talent from the veterinary management company. Answer: A 84. Firms that have selected a related diversification corporate-level strategy seek to exploit A. control shared among business-unit managers. B. economies of scope between business units. C. the favorable demand of buyers. D. market power. Answer: B 85. Firms seek to create value from economies of scope through all of the following EXCEPT A. activity sharing. B. skill transfers. C. transfers of corporate core competencies. D. de-integration. Answer: D 86. The basic types of operational economies through which firms seek value from economies of scope are A. synergies between internal and external capital markets. B. the leveraging of individual tangible resources. C. the sharing of value chain activities and support functions. D. joint ventures and outsourcing. Answer: C 87. Operational relatedness is created by _________ of A. sharing; core competencies. B. sharing; activities. C. transferring; core competencies. D. transferring; activities. Answer: B 88. Procter & Gamble (P&G) has a paper towel and baby diaper business, both of which use paper products. The firm's paper production plant produces inputs for both businesses. P&G most likely uses the _________ diversification strategy to create A. related constrained; operational relatedness. B. related linked; corporate relatedness. C. related constrained; corporate relatedness. D. related linked; operational relatedness. Answer: A 89. Which of the following is TRUE? A. Conglomerates no longer exist in the U.S. business scene, but are common in emerging markets. B. Unrelated diversified firms seek to create value through economies of scope. C. The sharing of intangible resources, such as know-how, between firms is a type of operational sharing in related diversifications. D. Related constrained firms share more tangible resources and activities between businesses than do related linked firms. Answer: D 90. Research has shown that horizontal acquisitions A. tend to have disappointing financial results in the long run. B. are being replaced by virtual acquisitions. C. result in lower levels of performance than unrelated acquisitions. D. are able to use activity sharing to successfully create economies of scope. Answer: D 91. A noted professional art academy has founded an "artists and friends" travel company specializing in tours for artists to scenic locales, using its faculty as traveling teachers. In addition, the art academy has purchased a framing company to both make frames for academy art works, but also to sell museum-quality framing services to the public. The art academy is engaging in diversification based on _________ relatedness. A. operational B. corporate C. intellectual D. constrained Answer: A 92. Dragonfly Publishers of children's books has purchased White Rabbit, another publisher of children's books. Both companies' books are sold to the same retail stores and schools. Their content is different, since Dragonfly produces children's literature, whereas White Rabbit focuses on child-level scientific and nature topics. Which of the following statements is probably TRUE about this acquisition? A. This is a horizontal acquisition. B. This is an example of virtual integration. C. Dragonfly is beginning to build a conglomerate. D. Economies of scope are unlikely to result from this acquisition. Answer: A 93. The purchasing of firms in the same industry is called A. unrelated diversification. B. vertical integration. C. networking the organization. D. horizontal acquisition. Answer: D 94. The ________ diversification strategy creates value in two ways. First, since the core competence has already been developed in one business, the firm does not have to allocate resources to develop it. Second, since the resource is intangible, competitors cannot easily imitate it. A. related constrained B. unrelated C. related linked D. dominant business Answer: C 95. The drawbacks to transferring competencies by moving key people into new management positions include all EXCEPT A. the people involved may not want to move. B. managerial competencies are not easily transferable to different organizational cultures. C. managers with these skills are expensive. D. top-level managers may resist having these key people transferred. Answer: B 96. Multipoint competition occurs when A. firms have multiple retail outlets. B. firms have multiple products in their primary industry. C. diversified firms compete against each other in several markets. D. firms have diversified portfolios of companies. Answer: C 97. One method of facilitating the transfer of competencies between firms is to A. virtually integrate the two firms. B. transfer key people into new management positions. C. share support activities, such as purchasing practices. D. restructure the weaker firm to mirror the structure of the more successful firm. Answer: B 98. Xanadu, a U.S. manufacturer of pharmaceuticals, has acquired a firm in the same industry in Ireland. It plans to transfer one of its key managers from its plant in St. Louis to Ireland. What is the major threat to Xanadu's plan to transfer competencies from itself to the Irish firm? A. The St. Louis manager may quit Xanadu in order to remain in St. Louis. B. American pharmaceutical manufacturing techniques may not transfer to Ireland. C. Irish managers will refuse to take direction from a foreign executive. D. The cost of transferring U.S. managers overseas is usually not cost-effective. Answer: A 99. Acquisitions to increase market power require that the firm have a(n) _________ diversification strategy. A. unrelated B. related C. dominant-business D. single-business Answer: B 100. When diversification results in two companies, such as UPS and FedEx, simultaneously competing in the same product areas or geographic markets, this is called _________ competition. A. multiple B. multi-portal C. multipoint D. multiplicit Answer: C 101. Virgin Group successfully transfers its marketing core competence across airlines, cosmetics, music, drinks, mobile phones, health clubs, and a number of other businesses. Virgin follows a(n) ______ diversification corporate strategy. A. dominant-business B. related constrained C. related linked D. unrelated Answer: C 102. The Mars acquisition of the Wrigley assets was part of its related constrained diversification and added market share to the Mars/Wrigley integrated firm. It allowed Mars to gain _________ because it could sell its products above the market level or reduce its costs below the market level. A. multipoint competition B. virtual integration C. market power D. vertical integration Answer: C 103. Backward integration occurs when a company A. produces its own inputs. B. owns its own source of distribution of outputs. C. is concentrated in a single industry. D. is divesting unrelated businesses. Answer: A 104. PorkPride Foods produces hams and other meat products. It owns hog raising operations. This is an example of a _________ business. A. de-integrated B. vertically integrated C. totally integrated D. horizontally integrated Answer: B 105. A company pursuing vertical integration can gain market power over its competitors through all of the following EXCEPT A. improved adjustment to technological changes. B. savings on operations costs. C. improved product quality. D. avoidance of market costs. Answer: A 106. Which of the following is NOT a limitation directly relating to vertical integration? A. bureaucratic costs B. the loss of flexibility through investment in specific technologies C. capacity balance and coordination problems from changes in demand D. imitation of core technology by potential competitors Answer: D 107. Specialty Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve the high temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare and only two brick plants in the United States make this type of brick. Specialty Steel has decided to buy one of these brick plants. This is an example of A. backward integration. B. forward integration. C. horizontal integration. D. virtual integration. Answer: A 108. Specialty Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve the high temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare and only two brick plants in the United States make this type of brick. Specialty Steel owns one of these brick plants and buys all of its production. The other brick manufacturer has recently developed an inexpensive new technology whereby ordinary clay can be used to make this fire brick. This significantly reduces the production cost of this type of brick. A. Specialty Steel has less flexibility now than if it were not vertically integrated. B. This is an example of a capacity balance problem. C. This is a result of conflicts of interest between the managers of the brick plant and the executives of Specialty Steel. D. The market power of Specialty Steel has been de-integrated. Answer: A 109. Walt Disney Company has successfully used related diversification to create value by A. sharing activities. B. sharing activities and transferring core competencies. C. transferring core competencies. D. efficient internal capital allocation and restructuring. Answer: B 110. The value of the assets of a firm using a diversification strategy to create both operational and corporate relatedness tend to be A. discounted by investors. B. inflated by investors. C. completely ignored by investors. D. highly valued by investors. Answer: A 111. When a firm simultaneously practices operational relatedness and corporate relatedness, A. it is difficult for investors to observe the value created by the firm. B. the firm is likely to be overvalued by investors. C. the firm will suffer from diseconomies of scope that outweigh cost savings generated. D. the firm is seeking to create value through financial economies. Answer: A 112. Which type of diversification is most likely to create value through financial economies? A. related constrained B. operational and corporate relatedness C. unrelated D. related linked Answer: C 113. An ability to efficiently allocate capital through an internal market may help the firm protect the competitive advantages it develops A. through reduced disclosure to outside parties. B. by the ability to not report losses to investors. C. by the ability to increase pay to managers without shareholders being aware. D. through the ability to reinvest cash in dividends to shareholders. Answer: A 114. A firm practicing unrelated diversification can make better capital allocations to its subsidiary businesses than the external capital market can for all the following reasons EXCEPT A. corporate headquarters can allocate capital according to more specific criteria than is possible with external market allocations. B. corporate headquarters has more complete information about the subsidiary businesses than the external capital market. C. the firm can acquire other firms with innovative products instead of allocating capital to research and development. D. corporate headquarters can more effectively discipline underperforming management teams through resource allocation than can the external market. Answer: C 115. Although a(n) ________ firm, GE (discussed in the Chapter 6 Opening Case) has done an exceptional job of __________ its four major strategic business units. A. related linked; allocating capital across B. related constrained; restructuring C. unrelated; sharing activities across D. unrelated; transferring core competencies across Answer: A 116. Large diversified businesses often face what is known as the "conglomerate discount." This discount means that investors A. understand that the financial efficiencies of this strategy automatically make these stocks worth more than their current market valuation. B. believe that the value of conglomerates is less than the value of the sum of their parts. C. increase the expected future earnings of conglomerates. D. have found that over time, conglomerates earn more than the component companies would have earned independently. Answer: B 117. Large diversified businesses often face a _______, which results from analysts not knowing how to value a vast array of large businesses with complex financial reports. A. threat of regulation by the Securities and Exchange Commission B. high CEO turnover C. threat of takeover D. conglomerate discount Answer: D 118. Successful unrelated diversification through restructuring is typically accomplished by A. focusing on mature, low-technology businesses. B. a "random walk" of good luck in picking firms to buy. C. seeking out high technology firms in high-growth industries. D. a top management team that is not constrained by pre-established ideas of how the firm's portfolio should be developed. Answer: A 119. The risk for firms that follow the unrelated diversification strategy in developed economies is that A. external investors tend to dump the stocks of conglomerates during economic downturns. B. conglomerates are typically owned by one powerful entrepreneur and do not survive his/her retirement or death. C. government regulations, especially in Europe, have periodically forced the dissolution of conglomerates. D. competitors can imitate financial economies more easily than they imitate economies of scope. Answer: D 120. What is the similarity between high-technology firms and service-based firms that makes them risky as restructuring candidates? A. They are human-resource dependent. B. They have few tangible assets. C. Both types of firm rely on financial economies. D. The demand for their products is highly sensitive to economic downturns. Answer: A 121. Which of the following firms would be the most likely to be a successful candidate for acquisition and restructuring? A. a medical practice B. a management consulting firm that has a tradition of long term client-consultant relationships C. a tire manufacturer established in 1910 D. a start-up communications technology firm Answer: C 122. Among the value-neutral incentives to diversify, some come from the firm's external environment while others are internal to the firm. External incentives to diversify include A. the fact that other firms in an industry are diversifying. B. pressure from stockholders who are demanding that the firm diversify. C. changes in antitrust regulations and tax laws. D. a firm's low performance. Answer: C 123. Of the value-neutral incentives to diversify, all of the following are internal firm incentives EXCEPT A. overall firm risk reduction. B. uncertain future cash flows. C. stricter interpretation of antitrust laws. D. low performance. Answer: C 124. Because of the tax laws of the 1960s and 1970s, when dividends were taxed more heavily than capital gains, shareholders preferred that corporations A. pay dividends annually. B. keep free cash flows for investment in acquisitions. C. distribute capital gains regularly. D. increase managerial salaries. Answer: B 125. Free cash flows are A. liquid financial assets for which investments in current businesses are no longer economically viable. B. liquid financial assets that for tax purposes must be reinvested in the firm if not distributed as dividends to shareholders. C. the profits resulting after a restructured firm has been sold. D. dividends that have been distributed to shareholders that are taxed as capital gains. Answer: A 126. Certain regulatory changes (such as antitrust regulation and tax laws) create incentives or disincentives for diversification that A. create value. B. reduce value. C. are value-neutral. D. are managerial motives to diversify. Answer: C 127. The curvilinear relationship of corporate performance and diversification indicates that A. dominant-business corporate strategies tend to be higher performing than related constrained or unrelated business strategies. B. the highest performing business strategy is related constrained diversification. C. the less related the businesses acquired, the higher performing the organization. D. none of the strategies consistently outperforms the others. Answer: B 128. As the threat of corporate failure increases due to relatedness between a firm's business units, firms may decide to A. increase the firm's level of retained resources. B. diversify into less risky environments. C. reduce the level of diversity in its investments. D. pursue unproven product lines. Answer: B 129. Synergy exists when A. cost savings are realized through improved allocations of financial resources based on investments inside or outside the firm. B. two units create value by utilizing market power in their respective industries. C. firms utilize constrained related diversification to build an attractive portfolio of businesses. D. the value created by business units working together exceeds the value the units create when working independently. Answer: D 130. The downside of synergy in a diversified firm is A. increasing independence of businesses. B. the reduction of activity sharing. C. excessive focus on risky innovation. D. the loss of flexibility. Answer: D 131. The Cherrywood Fine Furniture Company finds itself with excess capacity in its plant and equipment for furniture manufacturing. This excess capacity will be useful in A. unrelated diversification. B. related diversification projects. C. corporate restructuring. D. multipoint competition Answer: B 132. Which of the following resources are more likely to create value in the diversification process? A. plant and equipment B. tacit knowledge C. excess capacity D. financial resources Answer: B 133. Compared with diversification based on intangible resources, diversification based on financial resources is A. less imitable and less likely to create value on a long-term basis. B. more imitable and less likely to create value on a long-term basis. C. less imitable and more likely to create value on a long-term basis. D. more imitable and more likely to create value on a long-term basis. Answer: B 134. Managerial motives to seek diversification include a desire to A. improve their marketability to other firms. B. effectively use corporate resources. C. provide higher returns to corporate stakeholders. D. increase their compensation. Answer: D 135. Isidore Crocker, CEO of Gotham Engines, is strongly in favor of acquiring Carolina Textiles, a firm in an unrelated industry. Some members of the board of directors are questioning Crocker's motives for the acquisition. They argue that it is not uncommon for CEOs to push for acquisitions because A. a successful acquisition will increase the CEO's power over the board of directors. B. making an acquisition is an easier route to increased firm value than is improving the firm's core competencies. C. higher CEO pay is related to larger organization size. D. CEOs nearing retirement seek to create empires to continue their legacy. Answer: C 136. During the 1990s top executives of Titanic, Inc., followed a pattern of aggressive acquisitions and diversification. Now, Titanic is performing poorly and earning below average returns. Lusitania, a large conglomerate firm, is in the final stages of purchasing Titanic. Lusitania has announced that it will fire Titanic's current top executives. The Titanic executives may not be worried about their impending job loss if they A. plan to take poison pills. B. have golden parachutes. C. have silver handcuffs. D. have ironclad contracts. Answer: B 137. Which of the following is NOT a governance mechanism that may limit managerial tendencies to over-diversify? A. the market for corporate control B. the Board of Directors C. surveillance technologies D. executive compensation practices Answer: C 138. In making a decision to diversify, managers should use value-creating reasons or face the risk that their firms will be acquired and they could lose their jobs. Which of the following is a value-creating reason to diversify? A. economies of scope B. desire for increased compensation C. reduced managerial risk D. low performance Answer: A 139. Research suggests that ______ has decreased while _______ has increased possibly due to the restructuring that took place in the 1990s and early twenty-first century. A. forward vertical integration; backward vertical integration B. backward vertical integration; forward vertical integration C. related diversification; unrelated diversification D. unrelated diversification; related diversification Answer: D Essay 140. Differentiate between corporate-level and business-level strategies and give examples of each. Answer: A business-level strategy determines how a firm will compete in a single industry or product market. When a firm diversifies beyond a single industry it uses a corporate- level strategy. A diversified company has two levels of strategy: business-level and corporate-level. Each business unit has a business level strategy. The corporate strategy is concerned with: 1) what businesses the firm should be in and 2) how the corporate office should manage the group of businesses. The top management of diversified companies views the firm's businesses as a portfolio of core competencies that will generate above-average returns by creating value. An example of a business-level strategy would be whether the firm targets the mass market and competes on price, or whether it competes on the basis of uniqueness. An example of a corporate-level strategy would be whether the firm should sell off a poorly performing subsidiary. 141. What are the five categories of businesses based on level of diversification? Answer: The five categories of businesses determined by level of diversification are as follows: (1) Single business (more than 95 percent of revenues from a single business), (2) Dominant business (between 70 percent and 95 percent of revenue from a single business), (3) Related constrained (a diversified organization earning less than 70 percent of revenue from the dominant business, and all the component businesses share product, technological, and distribution linkages), (4) Related linked (a diversified organization earning less than 70 percent of revenues from the dominant business with only limited links among the component businesses), and (5) Unrelated (diversified organizations earning less than 70 percent of revenues from the dominant business with no common links among the businesses). 142. Describe the primary reasons a firm pursues increased diversification. Answer: Firms typically diversify to increase the firm's value by improving its overall performance. Value-creating diversification occurs through related or unrelated diversification when the strategy allows the company's business units to increase revenues or reduce costs while implementing business level strategies. Alternatively, a firm may diversify to gain market power over competitors. Value-neutral diversification may occur in response to governmental policies, firm performance problems, or uncertainties about future cash flows. Finally, managers may have selfish motives to diversify, such as increased compensation or personal reduced employment risk. These selfish motivations may actually erode the firm's competitiveness, and can be value-reducing diversifications. 143. Describe how diversified firms can use activity sharing and transfer of core competencies to create value. Answer: In related diversification, a firm seeks to exploit economies of scope between its business units. Economies of scope are cost savings created by transferring some of its capabilities and competencies developed in another business to a new business. Firms create value through economies of scope two ways: the sharing of activities (operational relatedness) and the transferring of core competencies (corporate relatedness). Both primary and support activities may be shared, including marketing and production. This activity sharing can result in cost reductions and improve financial returns. The sharing of core competencies allows the firm to create value two ways: 1) it eliminates the need for the second unit to allocate resources to develop the competence, and 2) transferring intangible resources internally makes it hard for competitors to understand and to imitate the resource. 144. What are the two ways that an unrelated diversification strategy can create value? Answer: Unrelated diversification can create value through two types of financial economies (cost savings). 1) Unrelated diversified firms can more efficiently allocate capital among the component businesses than can the external financial market. This is possible because the corporate-level management has more complete information about the performance of the component businesses and it can also discipline under- performing management teams. 2) Unrelated diversified firms can also create value by purchasing other businesses at low prices, restructuring them, and reselling them at a higher price. This practice is most successful with mature, low-technology businesses, rather than high-technology or service businesses, which are more dependent on employees who may leave. 145. What is the effect of a firm's low performance on the pursuit of diversification? Answer: High corporate performance eliminates the need for diversification. Some research shows that low returns are related to greater levels of diversification. Firms plagued by poor performance often diversify in an effort to become more profitable. But, continued poor performance following diversification may slow the pace of diversification and may lead to divestitures and a focus on the core business. In addition, firms that are more broadly diversified compared to their competitors may have lower overall performance. Figure 6.3 shows that the related constrained diversification strategy is the highest performing strategy. So poor performing firms that intend to diversify should look at purchasing businesses that would be suitable for this strategy rather than moving into unrelated diversification or retaining a dominant business strategy. 146. What are the managerial motives to diversify? Answer: A top-level manager may be motivated to pursue diversification because diversification leads to greater job security for executives. In general, greater amounts of diversification reduce managerial risk because if a particular business fails, the top executive remains employed by the corporation. In addition, diversification increases firm size, and firm size has a direct effect on executive compensation. Moreover, managing a highly diversified firm is more difficult; thus, managerial compensation is generally higher in such a firm. Consequently, executives may have selfish motives to diversify the company in ways which may actually reduce corporate competitiveness. Subjective Short Answer Case Scenario 1: Syco. Syco is a diversified company that has six primary lines of business. Fifty percent of its revenues and 18 percent of its profits come from retailing. Most of its retail outlets are discount department stores that serve as anchor tenants for large suburban shopping malls. The remaining businesses are broken out as follows: Insurance accounts for 30 percent of revenues and 50 percent of profits; consumer credit card operations are 6 percent of sales and 17 percent of profits; 5 percent of revenues and 6 percent of profits come from its stock brokerage business; commercial and residential real estate operations generate 4 percent of sales and 8 percent of profits; finally, 5 percent of revenues and 1 percent of profits come from its online portal business. The company's management states that all these businesses are essential to its competitive future. 147. (Refer to Case Scenario 1). Why might there be so much variability among the proportion of sales versus profitability contributed by each of the businesses? Does this mean that Syco is more successful in its insurance business than in its retail business? Answer: The best answers to this question will start out by noting that industries vary in their profit structures. That is the margins in retailing are typically very low, while those in insurance are relatively much higher. Beyond this, the statement tells us nothing about how well Syco is actually doing in each business, since you would need to compare business-level performance against that of competitors on a business-by-business basis. [Note to the instructor: The above scenario is based loosely on Sears in the mid-1980s. At that time its lines of business were Sears Department Store, Allstate Insurance, Discover Card, Dean Witter Stock Brokerage, Coldwell Banker Real Estate Brokers, and Prodigy Online. Sears eventually divested all but its department stores and, at one time, was near bankruptcy under the weight of its diverse operations and failing retail business (under-maintained mall properties became a core rigidity).] 148. Part 1: (Refer to Case Scenario 1). Develop a logical argument that would lead you to describe Syco's diversification type as related linked and another logical argument that Syco's diversification type is related constrained. For both the related linked and for the related constrained arguments, what product, technological, or distribution activities might link these businesses together? Part 2: Would you describe either of the logical arguments you developed in response to Part 1 as a good corporate strategy? Answer: Part 1: The purpose of this exercise is to give students an opportunity to view the diversified firm from the perspective of the top management team. The best answers will start with related linked strategies and note that superficial linkages can be provided by global brandings (i.e., all businesses under one name), one-stop shopping (i.e., all businesses under one roof), and shared accounting systems (i.e., centralized accounting, cash allocation, and planning). The best answers to the related constrained questions will offer more complex linkages beyond those noted above like shared customer lists, active cross-selling, and rotation of key personnel. Because the businesses are so different, however, the students should begin to see that more complex linkages may be difficult to achieve. Part 2: Based on the challenges of developing answers for Part 1, this question forces students to stand back and criticize the strategies that they created. Since there are many possible approaches to Part 1, it should become clear to students that each of these competing arguments has significant drawbacks. Ultimately, students should reach the point where they may agree that offering a bundle of services is desirable, although there is no reason that Syco has to own all of these offerings. This discussion also provides a nice way to foreshadow the role and importance of strategic alliances which are covered in Chapter 9. 149. (Refer to Case Scenario 1). What diversification strategy best describes Syco? Assume that retailing, insurance, consumer credit card, stock brokerages, and online portal businesses allow for some transfer of knowledge about consumer behavior including buying and bill-paying habits. A. related constrained diversification strategy B. related linked diversification strategy C. unrelated diversification strategy D. combination diversification strategy Answer: B Case Scenario 2: Jewell Company. Jewell Company (JC) is a $2 billion diversified manufacturer and marketer of simple household items, cookware, and hardware. In the early 1950s, JC's business consisted solely of manufactured curtain rods that were sold through hardware stores and retailers like Sears. Since the 1960s however, the company has diversified extensively through acquisition into such businesses as paintbrushes, writing pens, pots and pans, and hairbrushes. Over 90 percent of its growth can be attributed to these many small acquisitions, whose performance it improved tremendously through aggressive restructuring and its corporate emphasis on cost-cutting and cost controls. While JC's sixteen different lines of business may appear quite different, they all share the common characteristics of being staple manufactured items and sold primarily through volume retail channels like Walmart, Target, and Kmart. Because JC operates each line of business autonomously (separate manufacturing, R&D, and selling responsibilities for each line), it is perhaps best described as pursuing a related linked diversification strategy. The common linkages are both internal (accounting systems, product merchandising skills, and acquisition competency) and external (distribution channel of volume retailers). JC is presently contemplating the acquisition of Plastico, a $3 billion U.S.-based manufacturer of flexible plastic products like trash cans, reheatable and freezable food containers, and a broad range of other plastic storage containers designed for home and office use. While Plastico has been highly innovative (over 80 percent of its growth has come from internal new product development), it has had difficulty controlling costs and is losing ground against powerful customers like Walmart. JC believes that the market power it wields with retailers like Walmart will help it turn Plastico's prospects around. 150. (Refer to Case Scenario 2). How might JC's related diversification strategy result in economies of scope and market power? Answer: For the question of efficiencies, the best answers will observe that JC is able to leverage its accounting systems, product merchandising skills, acquisition competency, and distribution channel of volume retailers across all its businesses (economies of scope). These scope economies, in turn, provide JC the opportunity to build scale economies in these resources and value chain activities. The market power dimension comes into play in terms of the scope economies it realizes within the channel—for instance, JC's multi-product portfolio is likely to give it more power with regard to Walmart than would be possessed by a single product firm like Plastico. 151. (Refer to Case Scenario 2). Why would the acquisition of Plastico be good for JC? Answer: The best answers will note that JC has likely created some market power with respect to the large retailers so another staple consumer product makes sense. JC can leverage its existing market presence, selling contacts, distribution system, and merchandising skills for plastic consumer products as well. And since Plastico is having trouble controlling its costs, JC can bring to it more sophisticated financial management skills and accounting systems. 152. (Refer to Case Scenario 2). What difficulties might you expect JC to encounter related to its acquisition of Plastico? Answer: The best answers will begin by quickly noting that Plastico is much bigger than JC, which itself is likely to create problems (a nice lead-in to chapter 7, Merger and Acquisition Strategies). And while JC has grown through acquisition, it has primarily made small ones, which suggests that the firm may be ill- prepared for the enormous challenge of taking control of such a large firm. And even though Plastico appears to be in trouble controlling costs, a more subtle observation is that JC's cost control emphasis may be too extreme for Plastico's historic competency in innovation and, ultimately, undermine this valuable resource. 153. (Refer to Case Scenario 2). If Jewell Company is able to transfer its competence in cost-cutting and cost controls to Plastico (which has had difficulty controlling costs), it will have achieved the primary means whereby a related linked diversification strategy creates value. Answer: True Case Scenario 3: Walt Disney Company. Walt Disney Company is famed for its creativity, strong global brand, and uncanny ability to take service and experience businesses to a higher level. In the 1970s, the company realized nearly 90 percent of its revenues from its cartoons and the Disneyland theme park in Anaheim, CA. By the beginning of the twenty-first century, Disney had not only opened up more parks and ramped up its output of animated films, it had also diversified into many businesses well beyond its traditional core of high-quality cartoon animation and theme parks. For instance, the Disney empire diversified vertically and horizontally into retail (The Disney Store, since licensed to The Children's Place), cruise lines, theaters, motels, and the Disney Press. It also moved into new product offerings such as sports franchises, TV networks (ABC and ESPN) and stations, Miramax, Broadway shows (Beauty and the Beast), and vacation clubs. International growth included EuroDisney and Hong Kong Disney and new releases of TV shows, videos, and movies worldwide. Indeed, while many of Disney's businesses had some tie to Mickey Mouse, only about 28 percent of total revenues now came directly from its parks. 154. (Refer to Case Scenario 3). What level and type of diversification best characterized Disney in the 1970s? A. dominant business B. related constrained C. related linked D. unrelated Answer: A 155. (Refer to Case Scenario 3). What level and type of diversification best characterized Disney at the beginning of the 21st Century? A. dominant business B. related constrained C. related linked D. unrelated Answer: B 156. (Refer to Case Scenario 3). Assume that Disney can benefit from both operational and corporate relatedness. Which of the following corporate core competencies would provide Disney the greatest opportunity to create value across all or most of its many businesses? A. leading-edge animation and live-action film production skills B. ability to manage creativity and service excellence within financial constraints C. ability to generate and manage cash-flow surpluses efficiently D. strong general managers and general management skills Answer: B Test Bank for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781285425177, 9780538753098, 9781133495239, 9780357033838, 9781305502208, 9781305502147