Test bank for strategic management competitiveness and globalization 13th by hitt

Test Bank for Strategic Management Competitiveness and Globalization 13th by Hitt

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Chapter 06: Corporate-Level Strategy True / False 1. McIlhenny Company has focused on its family's hot sauce products for seven generations. Its recent partnership with other firms in order to put the Tabasco taste in a variety of food products reflects a new strategy of high-level diversification. a. True b. False ANSWER: False 2. Disney is an example of a company that was successful because its corporate strategy added value across its set of businesses above what the individual businesses could create individually. a. True b. False ANSWER: True 3. 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 4. 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 5. An effective corporate strategy creates, across all of a firm’s businesses, aggregate returns that exceed what those returns would be without the strategy and contributes to the firm's strategic competitiveness and its ability to earn aboveaverage returns. a. True b. False ANSWER: True 6. A major advantage of diversification is that overall monitoring costs are reduced because each separate business comes under the control of corporate headquarters. a. True b. False ANSWER: False 7. Successful diversification is expected to increase variability in the firm's profitability as earnings are generated from different business units. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Corporate-Level Strategy 8. 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 9. 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 10. Related linked firms share more resources and assets between their businesses than do related constrained firms. a. True b. False ANSWER: False 11. 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 12. United Technologies Corporation, Textron, and Samsung 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 13. 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 14. 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 15. Antitrust regulation, tax laws, and low performance are all value-neutral reasons why firms engage in diversification. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Corporate-Level Strategy 16. 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 17. Economies of scope are cost savings a firm creates by successfully sharing resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses. a. True b. False ANSWER: True 18. 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 19. To create economies of scope, tangible resources often must be shared. Less tangible resources can also be shared. a. True b. False ANSWER: True 20. Firms using the related constrained diversification strategy share activities in order to create value. a. True b. False ANSWER: True 21. 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 business. a. True b. False ANSWER: True 22. Activity sharing limits risk because the ties among a firm's businesses create links between outcomes. a. True b. False ANSWER: False 23. Capricorn, a U.S. manufacturer of cleansers, 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Corporate-Level Strategy ANSWER: True 24. Market power exists when a firm is able to sell its products above the existing competitive level or reduce the costs of its primary and support activities below the competitive level, or both. a. True b. False ANSWER: True 25. 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 26. Market power is gained as the firm develops the ability to save on its operations, avoid sourcing and market costs, improve product quality, possibly protect its technology from imitation by rivals, and potentially exploit underlying capabilities in the marketplace. a. True b. False ANSWER: True 27. Vertical integration exists when a company produces its own inputs (backward integration) or owns its own source of output distribution (forward integration). a. True b. False ANSWER: True 28. 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. a. True b. False ANSWER: True 29. Many manufacturing firms are reducing vertical integration and moving to independent supplier networks. a. True b. False ANSWER: True 30. Contract manufacturers who manage their customers' entire product lines 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 31. A company that tries to balance both operational and corporate relatedness and fails risks incurring diseconomies of scope.

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Chapter 06: Corporate-Level Strategy a. True b. False ANSWER: True 32. It can be difficult for investors to identify the value created by a firm as it shares activities and transfers core competencies. a. True b. False ANSWER: True 33. In large diversified firms, corporate headquarters distributes capital to its businesses to create value for the overall corporation. a. True b. False ANSWER: True 34. 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 35. 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 36. Two ways that external parties can try to make changes to a firm are by forcing the firm into bankruptcy or changing the top management team. a. True b. False ANSWER: True 37. In an internal capital market, 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 38. GE 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 strategy rather than an unrelated diversification strategy. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Corporate-Level Strategy 39. In spite of the challenges associated with it, a number of corporations continue to use the unrelated diversification strategy, especially in emerging markets. a. True b. False ANSWER: True 40. 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 41. 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 42. Companies creating financial economies through restructuring typically focus on high-technology businesses primarily because these firms are dependent on human resources. a. True b. False ANSWER: False 43. Diversification strategies can be used with both value-creating and value-neutral objectives. a. True b. False ANSWER: True 44. 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 45. In the 1960s and 1970s, capital gains were taxed more heavily than were dividends. a. True b. False ANSWER: False 46. If the tax code were to be changed so that individual tax rates for dividends were taxed at a higher rate and long-term capital gains were taxed at a lower rate, shareholders would most likely encourage to limit investments into diversification that would significantly increase share value and, instead, increase dividend rates. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Corporate-Level Strategy ANSWER: False 47. Firms that focus on one or few businesses and markets can earn positive returns because they are able to develop capabilities useful for those markets. a. True b. False ANSWER: True 48. Firms using a low-level diversification strategy typically struggle to use their resources efficiently and are disadvantaged by the inability to gain economies of scale. a. True b. False ANSWER: False 49. 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 50. 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 51. Research shows that increased firm size and greater levels of diversification are correlated with increased executive compensation. a. True b. False ANSWER: True 52. Golden parachutes protect managers from the negative consequences of over diversifying a firm. a. True b. False ANSWER: True 53. 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 54. The use of poison pills increases the chance that a poorly performing firm will be taken over. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Corporate-Level Strategy b. False ANSWER: False 55. Knowing that their firms could be acquired if they are not managed successfully encourages executives to use valuecreating diversification strategies. a. True b. False ANSWER: True Multiple Choice 56. 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 that will create above-average returns only after restructuring d. whether to integrate backward or forward ANSWER: b 57. 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 58. The more "constrained" the relatedness of diversification the: a. fewer the linkages between the businesses within the portfolio owned by the firm. b. wider the variation in the portfolio of businesses owned by the firm. c. more links there are among the businesses owned by an organization. d. lower the proportion of total organizational revenue derived from the dominant business.

ANSWER: c 59. 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 60. Usually, a company is classified as a single-business firm when revenues generated from its core business area are greater than __________ percent.

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Chapter 06: Corporate-Level Strategy a. 99 b. 95 c. 90 d. 70 ANSWER: b 61. The more links among businesses, the more __________ is the level of diversification. a. linked b. constrained c. integrated d. intense ANSWER: b 62. 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 63. 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 of the following best describes the corporate-level strategy of UPS? a. Single business b. Dominant business c. Related constrained d. Related linked ANSWER: b 64. Which of the following acquisitions 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 65. The lowest level of diversification is the __________ level. a. single-business b. dominant-business c. related constrained d. unrelated ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Corporate-Level Strategy 66. 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 67. The Publicis Groupe has three major groups of business (advertising, media, and digital) that share resources and activities. The Publicis Groupe is using a(n) __________ diversification strategy. a. related linked b. related constrained c. unrelated d. dominant ANSWER: b 68. 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 69. The term "conglomerates" refers to firms using the __________ diversification strategy. a. unrelated b. related constrained c. related linked d. global ANSWER: a 70. 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 71. Firms use corporate-level diversification strategies for all the following reasons EXCEPT: a. value-creating. b. value-neutral. c. value-reducing.

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Chapter 06: Corporate-Level Strategy d. value-diversifying.

ANSWER: d 72. 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 73. 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 74. 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 75. 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 76. 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 77. 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.

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Chapter 06: Corporate-Level Strategy d. joint ventures and outsourcing.

ANSWER: c 78. Operational relatedness is created by __________ of __________. a. sharing; core competencies b. sharing; activities c. transferring; core competencies d. transferring; activities ANSWER: b 79. 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 80. Which of the following statements 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 81. 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 82. 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 make frames for academy art works, and 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Corporate-Level Strategy 83. Dragonfly, publisher 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 because Dragonfly produces children's literature, whereas White Rabbit focuses on child-level nonfiction 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 84. Ties among a firm's businesses create links between outcomes. This is a: a. benefit of transferring corporate-level core competencies. b. risk associated with transferring corporate-level core competencies. c. benefit of activity sharing d. risk associated with activity sharing.

ANSWER: d 85. The __________diversification strategy creates value in two ways. First, because the core competency has already been developed in one business, the firm does not have to allocate resources to develop it. Second, because the resource is intangible, competitors cannot easily imitate it. a. related constrained b. unrelated c. related linked d. dominant business ANSWER: c 86. The drawbacks to transferring competencies by moving key people into new management positions include all of the following 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 87. 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 88. To ensure the quality of its almond butters, Rally's Roasters owns the almond groves in which all of its almonds are grown. Rally's almond butters are sold in supermarkets as well as specialty food stores throughout the country. Rally's makes use of what type of integration? a. Forward Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Corporate-Level Strategy b. Backward c. Multiple d. Top-down ANSWER: b 89. Equator, 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. Which of the following is the major threat to Equator's plan to transfer competencies from itself to the Irish firm? a. The St. Louis manager may quit Equator 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. Transferring U.S. managers overseas is not usually cost-effective.

ANSWER: a 90. 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 91. Luxury Linens (LL) manufactures a line of luxury bed linens. LL's products can be purchased only through the company's web site. This ownership of output distribution is known as what type of integration? a. Multipoint b. Horizontal c. Forward d. Backward ANSWER: c 92. Virgin Group Ltd. 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 93. 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Corporate-Level Strategy ANSWER: c 94. 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 95. PorkPride Foods produces hams and other meat products. It owns hog raising operations. This is an example of a business that is: a. reducing vertical integration. b. vertically integrated. c. totally integrated. d. horizontally integrated.

ANSWER: b 96. 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 97. 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 98. Advanced 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. Advanced 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 99. Progressive 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. Progressive 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Corporate-Level Strategy make this fire brick. This significantly reduces the production cost of this type of brick. Which of the following statements is true? a. Progressive 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 Progressive Steel. d. The market power of Progressive Steel has been reducing vertical integration.

ANSWER: a 100. The Walt Disney Company has successfully used related diversification to create value by: a. diversifying managerial employment risk. b. sharing activities and transferring core competencies. c. reducing risk and securing future cash flow. d. allocating internal capital efficiently and restructuring.

ANSWER: b 101. 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 102. When a firm simultaneously practices operational relatedness and corporate relatedness: a. it is difficult for investors to identify 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 the cost savings generated. d. the firm is seeking to create value through financial economies.

ANSWER: a 103. Which of the following types 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 104. 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.

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Chapter 06: Corporate-Level Strategy ANSWER: a 105. 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 106. 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 preestablished ideas of how the firm's portfolio should be developed.

ANSWER: a 107. 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 can replicate the value gained from the economies of scope developed through operational relatedness and corporate relatedness.

ANSWER: d 108. Which of the following makes high-technology firms and service-based firms risky as restructuring candidates? a. They are dependent on human resources. b. They have few intangible assets. c. Both types of firm rely on financial economies. d. The demand for their products is highly sensitive to economic downturns.

ANSWER: a 109. Which of the following firms would MOST likely be a successful candidate for acquisition and restructuring? a. Medical practice b. Management consulting firm that has a tradition of long-term, client-consultant relationships c. Tire manufacturer established in 1910 d. Start-up communications technology firm ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Corporate-Level Strategy 110. 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. uncertain future cash flows. 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 111. S&E is a financial services firm with a reputation for its management ability. It has recently diversified into several additional service businesses without first acquiring an established brand-name business. This type of diversification strategy is known as what type of venture? a. Vertical b. Synergistic c. Greenfield d. Multipoint ANSWER: c 112. 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 113. 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 distributed to shareholders that are taxed as capital gains.

ANSWER: a 114. 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 115. 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.

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Chapter 06: Corporate-Level Strategy c. the less related the businesses acquired, the higher performing the organization. d. none of the strategies consistently outperforms the others.

ANSWER: b 116. As the threat of corporate failure increases due to relatedness between a firm's business units, the firm may decide to: a. increase its level of retained resources. b. operate in environments that are more certain. c. promote additional technological change. d. pursue unproven product lines.

ANSWER: b 117. 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 that those same units create when working independently.

ANSWER: d 118. During a financial downturn, a firm may consider diversification as a value-neutral defensive strategy to protect itself against what? a. Loss of market power b. Managerial employment risk c. Inefficient internal capital allocation d. Uncertain future cash flows ANSWER: d 119. 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 120. Which of the following resources is more likely to create value in the diversification process? a. Plant and equipment b. Tacit knowledge c. Excess capacity d. Financial resources ANSWER: b 121. Compared with diversification based on intangible resources, diversification based on financial resources is: Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Corporate-Level Strategy 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 122. Managerial motives to seek diversification beyond value-creating and value-neutral levels include a desire to: a. improve marketability to other firms. b. effectively use corporate resources. c. provide higher returns to corporate stakeholders. d. increase compensation.

ANSWER: d 123. 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 124. 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 125. Which of the following is NOT a governance mechanism that may limit managerial tendencies to over diversify? a. Market for corporate control b. Board of directors c. Surveillance technologies d. Executive compensation practices ANSWER: c 126. 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Corporate-Level Strategy d. Low performance ANSWER: a 127. Research suggests that __________ has decreased while __________ has increased, possibly due to the restructuring that continued in the 1990s through the 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 128. Differentiate between corporate- 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.

129. What are the five categories of businesses based on level of diversification? How are they defined?

ANSWER: The five categories of businesses determined by level of diversification are as follows: 1. Single business (95 percent or more of revenue comes from a single business) 2. Dominant business (between 70 percent and 95 percent of revenue comes from a single business) 3. Related constrained (a diversified organization earning less than 70 percent of revenue from the dominant business, and all businesses share product, technological, and distribution linkages) 4. Related linked (a diversified organization earning less than 70 percent of revenue from the dominant business with only limited links between businesses) 5. Unrelated (a diversified organization earning less than 70 percent of revenue from the dominant business with no common links between businesses) 130. Describe the primary reasons a firm pursues increased diversification.

ANSWER: Firms typically diversify to increase their value by improving their overall performance. Value is created either through related diversification or through unrelated diversification when the strategy allows a company's businesses to increase revenues or reduce costs while implementing their 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.

131. 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 a firm creates by successfully sharing resources and capabilities or transferring one or Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Corporate-Level Strategy more corporate-level core competencies that were developed in one of its businesses to another of its businesses. Firms create value through economies of scope two ways: sharing activities (operational relatedness) and transferring corporate-level 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.

132. 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 underperforming 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.

133. 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. 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.

134. What are the managerial motives to diversify, even if that diversification is value-reducing?

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 that may actually reduce corporate competitiveness.

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