Strategic management creating competitive advantages 9th edition dess test bank

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Strategic Management: Text and Cases, 9e (Dess) Chapter 6 Corporate-Level Strategy: Creating Value through Diversification 1) Research shows that most acquisitions of public corporations result in value creation rather than value destruction.

Answer: FALSE Explanation: Research shows that a majority of acquisitions of public corporations result in value destruction rather than value creation.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 2) The Hewlett-Packard and Autonomy merger in 2011 is an example of a successful merger.

Answer: FALSE Explanation: In 2012, Hewlett-Packard wrote off 9 billion USD of the 11 billion USD it paid for Autonomy, a software company that it purchased one year earlier. After the purchase was completed, HP realized that the Autonomy accounting statements were not accurate. This resulted in a nearly 80 percent drop in the value of Autonomy once the accounting irregularities were corrected.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 3) Many acquisitions ultimately result in divestiture.

Answer: TRUE Explanation: Many acquisitions ultimately result in divestiture, that is, an admission that things did not work out as planned. In fact, some years ago, a writer for Fortune lamented that studies show that 33 percent to 50 percent of acquisitions are later divested, giving corporate marriages a divorce rate roughly comparable to that of men and women.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

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4) Diversification initiatives must be justified by the creation of value for shareholders.

Answer: TRUE Explanation: Diversification initiatives, whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development, must be justified by the creation of value for shareholders. They typically are successful when they introduce synergy.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 5) When firms diversify into unrelated businesses, the primary potential benefits are horizontal relationships, i.e., businesses sharing tangible and intangible resources.

Answer: FALSE Explanation: When a corporation diversifies into unrelated businesses, the primary potential benefits are derived largely from hierarchical relationships, which is value creation derived from the corporate office. Horizontal relationships are the primary benefit of diversification into related businesses.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 6) Benefits derived from horizontal and hierarchical relationships are mutually exclusive.

Answer: FALSE Explanation: Benefits derived from horizontal (related diversification) and hierarchical (unrelated diversification) relationships are not mutually exclusive. Many firms that diversify into related areas benefit from information technology expertise in the corporate office. Similarly, unrelated diversifiers often benefit from the best practices of sister businesses even though their products, markets, and technologies may differ dramatically.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

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7) For a core competency to create value and provide a viable basis for synergy among the businesses in a corporation, it must at least create superior customer value and it must be difficult to imitate.

Answer: TRUE Explanation: For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 8) Gillette developed the Fusion and Mach 3 shaving systems. These products created superior customer value as a result of the company core competency in research and development.

Answer: TRUE Explanation: For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it. Every value-chain activity has the potential to provide a viable basis for building on a core competence. At Gillette, scientists developed the Fusion and Mach 3 after the introduction of the tremendously successful Sensor System because of a thorough understanding of several phenomena that underlie shaving. These include the physiology of facial hair and skin, the metallurgy of blade strength and sharpness, the dynamics of a cartridge moving across skin, and the physics of a razor blade severing hair. Such innovations are possible only with an understanding of such phenomena and the ability to combine such technologies into innovative products. Customers are willing to pay more for such technologically differentiated products.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

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9) It is necessary for a core competence to be difficult to imitate and to be non-substitutable.

Answer: TRUE Explanation: For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 10) With unrelated diversification, potential benefits can be gained from vertical or hierarchical relationships; that is, the creation of synergies from the interaction of the corporate office with outside stakeholders.

Answer: FALSE Explanation: With unrelated diversification, potential benefits can be gained from vertical or hierarchical relationships; that is, the creation of synergies from the interaction of the corporate office with the individual business units.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

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11) Restructuring requires the corporate office to find either exceptionally performing firms with realized potential or firms in industries on the threshold of significant, negative change.

Answer: FALSE Explanation: Restructuring is a means by which the corporate office can add value to a business.

Here, the corporate office tries to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change. The parent intervenes, often selling off parts of the business; changing the management; reducing payroll and unnecessary sources of expenses; changing strategies; and infusing the company with new technologies, processes, reward systems, and so forth.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 12) Portfolio management should be considered as the primary basis for formulating corporate-level strategies.

Answer: FALSE Explanation: Portfolio management helps achieve a better understanding of the competitive position of an overall portfolio of businesses, to suggest strategic alternatives for each of the businesses, and to identify priorities for the allocation of resources.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

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13) Diversified public corporations, such as Berkshire Hathaway and Virgin Group, create value through management expertise by improving plans and budgets. This is an example of a related diversification strategy.

Answer: FALSE Explanation: One of the purposes of diversification is to reduce the risk that is inherent in the variability in revenues and profits of a firm over time. If a firm enters new products or markets that are affected differently by seasonal or economic cycles, its performance over time will be more stable. For example, a firm that manufactures lawn mowers may diversify into snow blowers in order to even out its annual sales.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 14) Portfolio models such as the BCG Portfolio matrix are limited in value because they only compare the SBU on four dimensions.

Answer: FALSE Explanation: Despite the potential benefits of portfolio models, there are also some notable downsides. First, they compare SBUs on only two dimensions, making the implicit but erroneous assumption that (1) those are the only factors that really matter and (2) every unit can be accurately compared on that basis.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

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15) A disadvantage of mergers and acquisitions is that they can enable a firm to rapidly enter new product markets.

Answer: FALSE Explanation: Growth through mergers and acquisitions has been critical to many corporations in a wide variety of high-technology and knowledge-intensive industries. Speed (speed to market, speed to positioning, and speed to becoming a viable company) is critical in such industries. For example, in 2010, Apple acquired Siri Inc. so that they could quickly fully integrate the Siri natural language voice recognition software into iOS, the Apple proprietary operating system.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 16) Through joint ventures, firms can directly acquire the assets and competencies of other firms.

Answer: FALSE Explanation: Joint ventures represent a special case of alliances, wherein two (or more) firms contribute equity to form a new legal entity.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 17) The potential advantages of strategic alliances and joint ventures include entering new markets as well as developing and diffusing new technologies.

Answer: TRUE Explanation: Strategic alliances and joint ventures have many potential advantages. Among these are entering new markets, reducing manufacturing (or other) costs in the value chain, and developing and diffusing new technologies.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

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18) In recent years, many high-tech firms such as Priceline.com have suffered from the negative impact of uncontrolled growth.

Answer: TRUE Explanation: In recent years, many high-tech firms have suffered from the negative impact of their uncontrolled growth. Consider, for example, Priceline.com made an ill-fated venture into an online service to offer groceries and gasoline. A myriad of problems, perhaps most importantly a lack of participation by manufacturers, caused the firm to lose more than 5 million USD a week prior to abandoning these ventures.

Difficulty: 2 Medium Topic: Economic Value Creation Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 19) Greenmail is an offer by a company, threatened by takeover, to offer its stock at a reduced price to a third party.

Answer: FALSE Explanation: Greenmail is an effort by the target firm to prevent an impending takeover. When a hostile firm buys a large block of outstanding target company stock and the target company management feels that a tender offer is impending, they offer to buy the stock back from the hostile company at a higher price than the unfriendly company paid for it.

Difficulty: 2 Medium Topic: Economic Value Creation Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 20) A golden parachute is a prearranged contract with managers specifying that, in the event of a hostile takeover, the target company managers will be paid a significant severance package.

Answer: TRUE Explanation: A golden parachute is a prearranged contract with managers specifying that, in the event of a hostile takeover, the target company managers will be paid a significant severance package. Although top managers lose their jobs, the golden parachute provisions protect their income.

Difficulty: 2 Medium Topic: Economic Value Creation Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.

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21) The Coca-Cola acquisition of its bottlers failed because A) Coca-Cola had valuable competencies.

B) the bottling business required too much capital investment and time.

C) consumers consumed less because the distribution channel changed.

D) Coca-Cola spent less money on the distribution of concentrates and syrups.

Answer: B Explanation: Research shows that a majority of acquisitions of public corporations result in value destruction rather than value creation. For decades, Coca-Cola used independent bottlers to distribute Coke products to stores and restaurants. Coke would manufacture the concentrate used to make its soft drinks, but the actual bottling of the product and distribution to end retailers was handled by about 70 regional bottling firms. In 2010, Coca-Cola undertook a major initiative to buy its bottlers and create a national vertically integrated business operation, where Coke would not only manufacture the concentrate but also own its bottling and distribution system. The firm spent 12.3 billion USD to acquire Coca-Cola Enterprises, it largest bottling partner. Coca-Cola reversed course in 2015, announcing that it would sell off all its bottling operations. In the first step of this process, it agreed to sell nine production facilities to three bottling companies for 380 million USD. Additionally, Coke announced it would complete the process of selling off its remaining bottling plants and distribution facilities by the end of 2017. What happened to trigger this rapid change? Coke found that being in the bottling business did not help its financial performance. In the words of Jack Russo, an analyst at Edward Jones Investing—bottling is a low margin, capital-intensive business. As a result, Coke saw its operating margins fall from 20.7 percent in 2009 to 11.4 percent in 2014.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

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22) Which of the following is not a reason for merger and acquisition failures?

A) The acquiring company pays a large premium for the common stock of the target company.

B) Top executives act in their best interests rather than those of the shareholders.

C) The acquisition leads to value creation.

D) The acquired company assets are poorly integrated into the acquiring company business lines.

Answer: C Explanation: Research shows that the vast majority of acquisitions result in value destruction rather than value creation. Many large multinational firms have also failed to effectively integrate their acquisitions, paid too high a premium for the common stock of the target company, or were unable to understand how the assets of the acquired firm would fit with their own lines of business.

At times, top executives may not have acted in the best interests of shareholders. The motive for the acquisition may have been to enhance the power and prestige of the executive rather than to improve shareholder returns.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 23) Corporate-level strategy focuses on A) gaining long-term revenue.

B) gaining short-term profits.

C) decreasing business locations.

D) managing investment bankers and their interests.

Answer: A Explanation: Corporate-level strategy focuses on gaining long-term revenue, profits, and market value through managing operations in multiple businesses.

Difficulty: 2 Medium Topic: Corporate Strategy Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

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24) An acquisition that results in ________ commonly indicates that expectations were not met.

A) expansion B) divestiture C) cost savings D) increased sales Answer: B Explanation: Many acquisitions ultimately result in divestiture, which is an admission that things did not work out as planned. In fact, some years ago, a writer for Fortune lamented that studies show 33 percent to 50 percent of acquisitions are later divested, giving corporate marriages a divorce rate roughly comparable to that of men and women.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 25) In 2012, Microsoft admitted to a major ________ mistake when it wrote off essentially the entire 6.2 billion USD it paid for a digital advertising firm, aQuantive, that it purchased in 2007.

A) expansion B) divestiture C) acquisition D) cost savings Answer: C Explanation: In 2012, Microsoft admitted to a major acquisition mistake when it wrote off essentially the entire 6.2 billion USD it paid for a digital advertising firm, aQuantive, that it purchased in 2007.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

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26) Yahoo purchased Tumblr for 1.1 billion in 2013 but wrote off 80 percent of the investment by the middle of 2016. They considered this to be a poor A) expansion.

B) divestiture.

C) acquisition.

D) cost savings.

Answer: C Explanation: Yahoo purchased Tumblr for 1.1 billion USD in 2013 but had written off over 80 percent of this value by the middle of 2016. Commentators have noted that repeated failures by Yahoo to extract value from acquisitions is one of the key reasons it was unable to survive as an independent firm.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 27) AOL purchased Time Warner for 114 billion USD in 2001. By 2003, AOL Time Warner had lost 150 billion USD in market valuation. This is an example of a A) good expansion.

B) reasonable divestiture.

C) cost savings strategy.

D) failed acquisition.

Answer: D Explanation: AOL paid 114 billion USD to acquire Time Warner in 2001. Over the next two years, AOL Time Warner lost 150 billion USD in market valuation. This is an example of a failed acquisition.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

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28) If a multinational firm is unable to understand how the assets of the acquired company would fit with their own lines of business, this can lead to A) expansion.

B) divestiture.

C) cost savings.

D) acquisition.

Answer: B Explanation: Research shows that a majority of acquisitions of public corporations result in value destruction rather than value creation. Many large multinational firms have also failed to effectively integrate their acquisitions, paid too high a premium for the common stock of the company, or were unable to understand how the assets of the acquired firm would fit with their own lines of business.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 29) If a multinational firm paid too high a premium for the common stock of the company, this can lead to A) divestiture.

B) expansion.

C) cost savings.

D) acquisition.

Answer: A Explanation: Research shows that a majority of acquisitions of public corporations result in value destruction rather than value creation. Many large multinational firms have also failed to effectively integrate their acquisitions, paid too high a premium for the common stock of the company, or were unable to understand how the assets of the acquired firm would fit with their own lines of business.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation

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30) If a multinational firm fails to effectively integrate their acquisitions, this can result in A) cost savings.

B) further acquisition.

C) expansion.

D) divestiture.

Answer: D Explanation: Research shows that a majority of acquisitions of public corporations result in value destruction rather than value creation. Many large multinational firms have also failed to effectively integrate their acquisitions, paid too high a premium for the common stock of the company, or were unable to understand how the assets of the acquired firm would fit with their own lines of business.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 31) One of the reasons it is said that only the investment banker wins when a company is acquired is that they A) assure the newly acquired company will be successful.

B) continue to work with the two companies involved.

C) collect huge up-front fees regardless of the outcome afterwards.

D) monitor the progress of both companies for long term growth.

Answer: C Explanation: Research shows that a majority of acquisitions of public corporations result in value destruction rather than value creation. At times, the only other people who may have benefited were the shareholders of the acquired firms or the investment bankers who advise the acquiring firm because they collect huge fees up front regardless of what happens afterward.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

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32) Diversification initiatives include all the following except A) mergers and acquisitions.

B) strategic alliances.

C) shareholder development.

D) joint ventures.

Answer: C Explanation: Diversification initiatives, whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development, must be justified by the creation of value for shareholders.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 33) Polaris, a manufacturer of snowmobiles, motorcycles, watercraft, and off-road vehicles, shares manufacturing operations across its businesses. It also has a corporate research and development facility and staff departments that support all the Polaris operating divisions. This is an example of creating value by using A) related diversification to acquire market value by leveraging core competencies.

B) related diversification to acquire economies of scope by sharing.

C) unrelated diversification to acquire financial synergies through portfolio management.

D) related diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting.

Answer: B Explanation: In this case, Polaris uses related diversification to create value by sharing activities in order to create economies of scope.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

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34) Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input to its manufacturing process. This is an example of creating value by using A) related diversification to acquire market power by pooling negotiating power.

B) related diversification to acquire economies of scope by leveraging core competencies.

C) related diversification to acquire market power by integrating vertically.

D) related diversification to acquire economies of scope by integrating vertically to acquire market power.

Answer: C Explanation: In this case, Shaw Industries uses related diversification to achieve value by integrating vertically to acquire market power.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 35) At Cooper Industries, there are few similarities in the products it makes or the industries in which it completes. The corporate office adds value through such activities as improving their accounting activities and centralizing union negotiations. This is an example of creating value by using A) related diversification to acquire economies of scope by leveraging pooled negotiating power.

B) related diversification to acquire market power by leveraging core competencies.

C) unrelated diversification to acquire financial synergies through portfolio management.

D) unrelated diversification to acquire synergies through corporate restructuring and parenting.

Answer: D Explanation: In this case, the corporate office of Cooper Industries adds value to its acquired, unrelated businesses by performing such activities as auditing their manufacturing operations, improving their accounting activities, and centralizing union negotiations. The primary potential benefits of this unrelated diversification strategy are derived largely from hierarchical relationships; that is, value creation derived from the corporate office.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

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36) The corporate office of Novartis, formerly Ciba-Geigy, acts to improve many key activities, including resource allocation and reward and evaluation systems. This is an example of creating value by using A) related diversification to achieve value by leveraging pooled negotiating power to attain economies of scope.

B) unrelated diversification to acquire financial synergies through portfolio management.

C) related diversification to acquire market power by leveraging pooled negotiating power.

D) related diversification to acquire parenting synergies through corporate restructuring and parenting.

Answer: B Explanation: A corporation may diversify into unrelated businesses. Novartis has followed a successful strategy of unrelated diversification. Here, the primary potential benefits are derived largely from hierarchical relationships, that is, value creation derived from the corporate office.

Examples of the latter would include leveraging some of the support activities in the value chain.

Unrelated diversifiers often benefit from the best practices of sister businesses, even though their products, markets, and technologies may differ dramatically.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 37) 3M leverages its competencies in adhesives technologies to many industries, including automotive, construction, and telecommunications. This is an example of creating value by using A) related diversification to acquire economies of scope by leveraging pooled negotiating power.

B) unrelated diversification to financial synergies through portfolio management.

C) related diversification to acquire economies of scope by leveraging core competencies.

D) unrelated diversification to parenting, restructuring, and financial synergies through restructuring and parenting.

Answer: C Explanation: Firms may diversify into related businesses. Here, the primary potential benefits to be derived come from horizontal relationships, that is, businesses sharing intangible resources (e.g., core competencies such as marketing) and tangible resources (e.g., production facilities, distribution channels). In this case, 3M leverages its core competencies in adhesives technologies in many industries to attain economies of scope.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

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38) Many leading high-tech firms such as Google, Apple, and Intel have dramatically enhanced their revenues, profits, and market values through a wide variety of diversification initiatives.

Which of the following is not such an initiative?

A) acquisitions B) strategic alliances C) stockholder enhancement D) joint ventures Answer: C Explanation: Many leading high-tech firms such as Google, Apple, and Intel have dramatically enhanced their revenues, profits, and market values through a wide variety of diversification initiatives, including acquisitions, strategic alliances, and joint ventures, as well as internal development.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 39) Firms have several choices of diversification initiatives that can be used to create value. Which of the following is not one of them?

A) using related diversification to acquire economies of scope B) using related diversification to acquire market power C) using unrelated diversification to acquire financial synergies D) using related diversification to acquire parenting and restructuring synergies Answer: D Explanation: They can use unrelated diversification to acquire parenting, restructuring, and financial synergies.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

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40) ConAgra, a diversified food producer, increases its power over suppliers by centrally purchasing huge quantities of packaging materials for all its food divisions. This is an example of using A) related diversification to acquire economies of scope by leveraging pooled negotiating power.

B) related diversification to acquire market power by leveraging pooled negotiating power.

C) unrelated diversification to acquire financial synergies through portfolio management.

D) unrelated diversification to acquire parenting, restructuring, and financial synergies through restructuring and parenting.

Answer: B Explanation: ConAgra uses pooled negotiating power to enhance market power. They do this to increase their power over suppliers by centrally purchasing huge quantities of packaging materials for all its food divisions.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 41) Proctor and Gamble is a large multinational organization that has many business sharing distribution resources. Diversification strategies take advantage of the ________ that exist in their organization.

A) costs B) employees C) discontinuities D) synergies Answer: D Explanation: Why should companies even bother with diversification initiatives? The answer, in a word, is synergy, derived from the Greek word synergos, which means working together. Firms can also enhance their market power via pooled negotiating power and vertical integration. For example, Procter and Gamble enjoys many synergies from having businesses that share distribution resources.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

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42) Microsoft offered in 2016 to buy LinkedIn for 26.2 billion USD which was 50 percent higher than the value for LinkedIn the day before. This high premium offer was necessary for Microsoft to complete ________ initiative.

A) a low cost B) an internal development C) a diversification D) a divestiture Answer: C Explanation: Diversification initiatives—whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development—must be justified by the creation of value for shareholders. But this is not always the case. Acquiring firms typically pay high premiums when they acquire a target firm. For example, in 2016, Microsoft offered to buy LinkedIn for 26.2 billion USD, 50 percent higher than the value of LinkedIn the day before.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 43) When a firm diversifies into ________ businesses, the primary potential benefits to be derived come from ________ relationships—those businesses that share intangible and tangible resources.

A) related; hierarchical B) unrelated; hierarchical C) related; horizontal D) unrelated; horizontal Answer: C Explanation: A firm may diversify into related businesses. Here, the primary potential benefits to be derived come from horizontal relationships, that is, businesses sharing intangible resources (e.g., core competencies such as marketing) and tangible resources (e.g., production facilities, distribution channels).

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

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44) When a firm diversifies into ________ businesses, the primary potential benefits to be derived come from ________ relationships where value creation is derived from the corporate office.

A) unrelated; hierarchical B) related; hierarchical C) related; horizontal D) unrelated; horizontal Answer: A Explanation: A corporation may diversify into unrelated businesses. Here, the primary potential benefits are derived largely from hierarchical relationships, that is, value creation derived from the corporate office.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-02 How managers can create value through diversification initiatives.

Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 45) Casio, a giant electronic products producer, synthesizes it abilities in miniaturization, microprocessor design, material science, and ultrathin precision castings to produce digital watches. It uses the same skills to produce card calculators, digital cameras, and other small electronics. These collective skills are A) strategic resources.

B) core competencies.

C) shared activities.

D) economies of scope.

Answer: B Explanation: Core competencies reflect the collective learning in organizations, which is how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services. In some circumstances, a core competence can create value and provide a viable basis for synergy among the businesses in a corporation. Casio, a giant electronic products producer, synthesizes its abilities in miniaturization, microprocessor design, material science, and ultrathin precision castings to produce digital watches. These are the same skills it applies to design and produce its miniature card calculators, digital cameras, pocket electronic dictionaries, and other small electronics.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

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46) For a core competence to be a viable basis for the corporation strengthening a new business unit, there are three requirements. Which one of the following is not one of these requirements?

A) The competence must help the business gain strength relative to its competition.

B) The new business must be similar to existing businesses to benefit from a core competence.

C) The new business must have an established large market share.

D) The collection of competencies should be unique, so that they cannot be easily imitated.

Answer: C Explanation: For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: the core competence must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and the core competencies must be difficult for competitors to imitate or find substitutes for.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 47) Sharing core competencies is one of the primary potential advantages of diversification. For diversification to be most successful, it is important that the A) products use similar distribution channels.

B) value chains of the firm be similar enough in at least one way to allow for the leveraging of the core competencies of the firm.

C) target market is the same, even if the products are very different.

D) methods of production are the same.

Answer: B Explanation: For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, different businesses in the corporation must be similar in at least one important way related to the core competence. It is not essential that the products or services themselves be similar, but at least one element in the value chain must require similar skills in creating competitive advantage.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

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48) When management uses common production facilities or purchasing procedures to distribute different but related products, they are A) building on core competencies.

B) achieving process gains.

C) using portfolio analysis.

D) sharing activities.

Answer: D Explanation: Corporations can achieve synergy by sharing activities across their business units.

These include value-creating activities such as common manufacturing facilities, distribution channels, and sales forces.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 49) Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input into its manufacturing process. This is an example of A) vertical integration.

B) sharing activities.

C) pooled negotiating power.

D) leveraging core competencies.

Answer: A Explanation: Shaw Industries, a carpet manufacturer, has attained a dominant position in the industry via a strategy of vertical integration. Shaw has successfully implemented strategies of both forward and backward integration.

Difficulty: 3 Hard Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation

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50) The risks of vertical integration include all the following except A) costs and expenses associated with increased overhead and capital expenditures.

B) lack of control over valuable assets.

C) problems associated with unbalanced capacities along the value chain.

D) additional administrative costs associated with managing a more complex set of activities.

Answer: B Explanation: The risks of vertical integration include costs and expenses associated with increased overhead and capital expenditures, loss of flexibility resulting from large investments, problems associated with unbalanced capacities along the value chain, and additional administrative costs associated with managing a more complex set of activities.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 51) Unbalanced capacities that limit cost savings, difficulties in combining specializations, and reduced flexibility are disadvantages associated with A) strategic alliances.

B) vertical integration.

C) horizontal integration.

D) divestiture.

Answer: B Explanation: The risks of vertical integration include costs and expenses associated with increased overhead and capital expenditures, loss of flexibility resulting from large investments, problems associated with unbalanced capacities along the value chain, and additional administrative costs associated with managing a more complex set of activities.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation

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52) A firm should consider vertical integration when A) the competitive situation is highly volatile.

B) customer needs are evolving.

C) the suppliers of raw materials to the firm are unable to maintain quality standards.

D) the suppliers of the firm willingly cooperate with the firm.

Answer: C Explanation: A firm should consider vertical integration if the company is not satisfied with the quality of the value that its present suppliers and distributors are providing.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 53) Transaction costs include all the following costs except A) monitoring costs.

B) negotiating costs.

C) search costs.

D) agency costs.

Answer: D Explanation: Transaction costs are the sum of search costs, negotiation costs, contracting costs, monitoring costs, and enforcement costs. These transaction costs can be avoided by internalizing the activity, in other words, by producing the input in-house.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

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54) Vertical integration is attractive when A) administrative costs are higher than transaction costs.

B) transaction costs are higher than administrative costs.

C) transaction costs and administrative costs are equal.

D) search costs are higher than monitoring costs.

Answer: B Explanation: If transaction costs are higher than administrative costs, that is, those costs incurred when coordinating the activities elsewhere in the value chain, vertical integration becomes an attractive strategy.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 55) Vertical integration is more likely to be attractive when the end consumer market is A) volatile.

B) stable.

C) contracting.

D) fragmented.

Answer: B Explanation: Vertical integration makes more sense when the end consumer market is stable and growing since vertical integration increases the downside for firms if demand declines or is unstable.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation

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56) ________ diversification is when a firm enters a different business that has little horizontal interaction with other businesses of a firm.

A) Horizontal B) Synergistic C) Related D) Unrelated Answer: D Explanation: With unrelated diversification, unlike related diversification, few benefits are derived from horizontal relationships, that is, the leveraging of core competencies or the sharing of activities across business units within a corporation. Instead, potential benefits can be gained from vertical (or hierarchical) relationships which are the creation of synergies from the interaction of the corporate office with the individual business units.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 57) ________ is when the corporate office helps subsidiaries make wise choices in their own acquisitions, divestures, and new ventures, thereby creating value within business units.

A) Parenting B) Restructuring C) Leveraging core competencies D) Increasing market power Answer: A Explanation: Parent companies create value through management expertise. They improve plans and budgets and provide especially competent central functions such as legal, financial, human resource management, and procurement. They also help subsidiaries make wise choices in their own acquisitions, divestitures, and new internal development decisions.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

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58) Diversified public corporations such as Berkshire Hathaway and Virgin Group are examples of companies that create value using A) deconstruction expertise.

B) parenting expertise.

C) excess personnel.

D) increased market positioning.

Answer: B Explanation: Many firms have successfully diversified their holdings without strong evidence of the more traditional sources of synergy (i.e., horizontally across business units). Diversified public corporations such as Berkshire Hathaway and Virgin Group and leveraged buyout firms such as KKR and Clayton, Dubilier & Rice are a few examples. These parent companies create value through management expertise. They improve plans and budgets and provide especially competent central functions such as legal, financial, human resource management, procurement, and the like.

They also help subsidiaries make wise choices in their own acquisitions, divestitures, and new internal development decisions.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 59) ________ is when a firm tries to find and acquire either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change, thereby creating value within business units.

A) Parenting B) Leveraging core competencies C) Restructuring D) Sharing activities Answer: C Explanation: In restructuring, the corporate office tries to find poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change. The parent intervenes, often selling off parts of the business; changing the management; reducing payroll and unnecessary sources of expenses; changing strategies; and infusing the company with new technologies, processes, or reward systems.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

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60) According to the text, corporate restructuring includes A) capital restructuring, asset restructuring, and technology restructuring.

B) capital restructuring, asset restructuring, and management restructuring.

C) management restructuring, financial restructuring, and procurement restructuring.

D) global diversification, capital restructuring, and asset restructuring.

Answer: B Explanation: Restructuring can involve changes in assets, capital structure, or management.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 61) Asset restructuring involves the sale of ________ assets, or even whole lines of businesses that are peripheral.

A) productive B) efficient C) unproductive D) inefficient Answer: C Explanation: Asset restructuring involves the sale of unproductive assets, or even whole lines of businesses that are peripheral. In some cases, it may even involve acquisitions that strengthen the core business.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

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62) Capital restructuring involves changing the ________ mix.

A) cash B) human resource C) debt-equity D) management Answer: C Explanation: Capital restructuring involves changing the debt-equity mix, or the mix between different classes of debt or equity. Although the substitution of equity with debt is more common in buyout situations, occasionally the parent may provide additional equity capital.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 63) Management restructuring typically involves changes in the composition of the ________, organizational structure, and reporting relationships.

A) middle management team B) top management team C) lower management team D) board of directors Answer: B Explanation: Management restructuring typically involves changes in the composition of the top management team, organizational structure, and reporting relationships.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

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64) Common steps in management restructuring include all the following except A) tight financial control.

B) rewards based on meeting short- to medium-term performance goals.

C) penalties for missing short- to medium-term performance goals.

D) reduction in the number of middle-level managers.

Answer: C Explanation: Tight financial control, rewards based strictly on meeting short- to medium-term performance goals, and reduction in the number of middle-level managers are common steps in management restructuring.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 65) Portfolio management matrices are applied to what level of strategy?

A) departmental level B) business level C) corporate level D) international level Answer: C Explanation: Corporate-level strategy addresses two related issues: what businesses should a corporation compete in and how can these businesses be managed so they create synergy. Portfolio management matrices can be used to improve understanding of the competitive position of a portfolio (or family) of businesses, to suggest strategic alternatives, and to identify priorities for the allocation of resources.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

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66) Research shows that a key competence of high-performance diversified firms is the ability to A) hide excess capital.

B) efficiently dispose of excess capital.

C) effectively allocate financial capital.

D) invest internationally.

Answer: C Explanation: Research suggests that many firms do not adjust their capital allocations in response to changes in the performance of units or the attractiveness of the markets in which units of the corporation compete. Instead, allocations are fairly consistent from year to year. However, firms that assess the attractiveness of markets in which the firm competes and the capabilities of each division and then choose allocations of corporate resources based on these assessments exhibit higher levels of corporate survival, overall corporate performance, stock market performance, and the performance of individual business units within the corporation. These effects have also been shown to be stronger when firms compete in more competitive markets and in times of economic distress. These findings have shown that the ability to effectively allocate financial capital is a key competence of high-performance diversified firms.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 67) Portfolio models are used to assist a firm in A) achieving a portfolio of businesses.

B) unbalancing its portfolio of businesses.

C) achieving a balanced portfolio of businesses.

D) generating excess cash.

Answer: C Explanation: Portfolio management is a method of (a) assessing the competitive position of a portfolio of businesses within a corporation, (b) suggesting strategic alternatives for each business, and (c) identifying priorities for the allocation of resources across the businesses. The key purpose of portfolio models is to assist a firm in achieving a balanced portfolio of businesses. This consists of businesses whose profitability, growth, and cash flow characteristics complement each other and adds up to a satisfactory overall corporate performance. Imbalance, for example, could be caused either by excessive cash generation with too few growth opportunities or by insufficient cash generation to fund the growth requirements in the portfolio.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

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68) When using a BCG matrix, a ________ is a business that currently holds a large market share in a rapidly growing market and has minimal or negative cash flow.

A) star B) dog C) cash cow D) question mark Answer: A Explanation: Each of the four quadrants of the BCG Portfolio grid has different implications for the SBUs that fall into that category. Stars are SBUs competing in high-growth industries with relatively high market shares. These firms have long-term growth potential and should continue to receive substantial investment funding.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 69) In the BCG Matrix, a ________ is a business that has a low market share in an industry characterized by high market growth.

A) star B) cash cow C) question mark D) dog Answer: C Explanation: Each of the four quadrants of the BCG Portfolio grid has different implications for the SBUs that fall into that category. Question marks are SBUs competing in high-growth industries but having relatively weak market shares. Resources should be invested in them to enhance their competitive positions.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

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70) Portfolio management frameworks, such as the BCG matrix, share which of the following characteristics?

A) Businesses are plotted on a 3-dimensional grid.

B) Grid dimensions are based on external environments and internal capabilities-market positions.

C) Position in the matrix suggests a need for sharing synergies.

D) They are most helpful in helping businesses develop types of competitive advantage.

Answer: B Explanation: Portfolio models are overly simplistic, consisting of only two dimensions (growth and market share). They view each business as separate, ignoring potential synergies across businesses.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 71) A cash cow, in the BCG framework, refers to a business that has A) high market growth and relatively high market share.

B) relatively low market share and low market growth.

C) relatively low market share and high market growth.

D) low market growth and relatively high market share.

Answer: D Explanation: Each of the four quadrants of the BCG Portfolio grid has different implications for the SBUs that fall into that category. Cash cows are SBUs with high market shares in low-growth industries. These units have limited long-run potential but represent a source of current cash flows to fund investments in stars and question marks.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

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72) In managing the corporate portfolio, the BCG matrix would suggest that A) dogs should be invested in to increase market share and become cash cows.

B) stars are in low growth markets and can provide excess cash to fund other opportunities.

C) cash cows require substantial cash outlays to maintain market share.

D) question marks can represent future stars if their market share is increased.

Answer: D Explanation: Each of the four quadrants of the BCG Portfolio grid has different implications for the SBUs that fall into that category. Question marks are SBUs competing in high-growth industries but having relatively weak market shares. Resources should be invested in them to enhance their competitive positions, potentially making them stars.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 73) In the BCG Growth Share Matrix, the suggested strategy for stars is to A) milk them to finance other businesses.

B) invest large sums to gain a good market share.

C) maintain position and after the market growth slows use the business to provide cash flow.

D) not invest in them and to shift cash flow to other businesses.

Answer: C Explanation: Stars are SBUs competing in high-growth industries with relatively high market shares. These firms have long-term growth potential and should continue to receive substantial investment funding. When growth slows, they may become cash cows themselves.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

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74) Which of the following is not a way a corporation tries to create shareholder value in using portfolio strategy approaches?

A) Portfolio analysis provides a snapshot of the businesses in the portfolio of the corporation.

B) The expertise and analytical resources in the corporate office provide guidance in determining firm attractiveness for acquisition.

C) The corporate office is not able to provide financial resources to the business units on favorable terms.

D) The corporate office can provide high-quality review and coaching for the individual businesses.

Answer: C Explanation: In using portfolio strategy approaches, a corporation tries to create shareholder value in a number of ways. First, portfolio analysis provides a snapshot of the businesses in the corporation portfolio. Therefore, the corporation is in a better position to allocate resources among the business units according to prescribed criteria (e.g., use cash flows from the cash cows to fund promising stars). Second, the expertise and analytical resources in the corporate office provide guidance in determining what firms may be attractive (or unattractive) acquisitions. Third, the corporate office is able to provide financial resources to the business units on favorable terms that reflect the overall ability of the corporation to raise funds. Fourth, the corporate office can provide high-quality review and coaching for the individual businesses. Fifth, portfolio analysis provides a basis for developing strategic goals and reward/evaluation systems for business managers.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

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75) Which of the following is not a downside of portfolio models used to assist a firm in balancing its portfolio of businesses?

A) Portfolio models compare SBUs on only two dimensions under the assumption that these are the only factors that matter.

B) Portfolio models view each SBU as a stand-alone entity.

C) Portfolio models rely on loose rules regarding resource allocation across the SBUs. D) The evaluation process risks becoming mechanical and oversimplified.

Answer: C Explanation: First, they compare SBUs on only two dimensions, making the implicit but erroneous assumption that (1) those are the only factors that really matter and (2) every unit can be accurately compared on that basis. Second, the approach views each SBU as a stand-alone entity, ignoring common core business practices and value-creating activities that may hold promise for synergies across business units. Third, unless care is exercised, the process becomes largely mechanical, substituting an oversimplified graphical model for the important contributions of the CEOs (and other corporate managers) experience and judgment. Fourth, the reliance on strict rules regarding resource allocation across SBUs can be detrimental to the long-term viability of a firm.

Finally, while colorful and easy to comprehend, the imagery of the BCG matrix can lead to some troublesome and overly simplistic prescriptions.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

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76) When Cabot Corporation used the BCG matrix to evaluate its carbon black manufacturing business, the model led them to move away from ________ and to diversify into unrelated businesses listed as stars by the model. This resulted in a decline on return on assets. They eventually returned to carbon black manufacturing and divested the unrelated businesses; their 2016 revenue was 2.4 billion USD. A) the dog quadrant B) its core market C) the question mark quadrant D) semiconductor manufacturing Answer: B Explanation: Cabot Corporation supplies carbon black for the rubber, electronics, and plastics industries. Following the BCG matrix, Cabot moved away from its cash cow, carbon black, and diversified into stars such as ceramics and semiconductors in a seemingly overaggressive effort to create more revenue growth for the corporation. Predictably, the Cabot return on assets declined as the firm shifted away from its core competence to unrelated areas. The portfolio model failed by pointing the company in the wrong direction in an effort to spur growth, away from its core business. Recognizing its mistake, Cabot Corporation returned to its mainstay carbon black manufacturing and divested unrelated businesses. Today the company is a leader in its field with 2.4 billion USD in revenues in 2016.

Difficulty: 2 Medium Topic: Related Diversification vs. Unrelated Diversification Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation

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77) The primary means by which a firm can diversify are ________, ________, and ________.

A) mergers and acquisitions; differentiation; overall cost leadership B) mergers and acquisitions; joint ventures and strategic alliances; internal development C) joint ventures and strategic alliances; integration of value chain activities; acquiring human capital D) mergers and acquisitions; internal development; differentiation Answer: B Explanation: There are three basic means of diversification: First, through acquisitions or mergers, corporations can directly acquire company assets and competencies. Second, corporations may agree to pool the resources of other companies with their resource base, commonly known as a joint venture or strategic alliance. Third, corporations may diversify into new products, markets, and technologies through internal development.

Difficulty: 2 Medium Topic: Corporate Diversification and Competitive Advantage Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 78) ________ is when one firm buys another through a stock purchase, cash or the issuance of debt.

A) An acquisition B) A merger C) An unrelated diversification D) A related diversification Answer: A Explanation: With acquisitions, one firm buys another through a stock purchase, cash, or the issuance of debt.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation

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79) ________ is when a new legal entity is formed by a combination or consolidation of two firms.

A) An acquisition B) A merger C) An unrelated diversification D) A related diversification Answer: B Explanation: Mergers entail a combination or consolidation of two firms to form a new legal entity.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 80) The Marriott International purchase of Starwood Hotels for 13.6 billion USD is an example of a(n) A) acquisition.

B) divestiture.

C) unrelated diversification.

D) related diversification.

Answer: A Explanation: The most visible and often costly means to diversify is through acquisitions. Over the past several years, several large acquisitions were announced. These include the Marriott International purchase of Starwood Hotels for 13.6 billion USD. Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation

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81) According to BNP Paribas chief economist, Julia Coronado, when businesses feel confident about the future they are more aggressive in looking for ways to grow and expand their operations.

You would expect the volume of mergers and acquisitions to ________ during this period.

A) decrease B) remain stagnant C) increase D) fluctuate downward Answer: C Explanation: Exhibit 6.5 illustrates the volatility in worldwide mergers and acquisitions activity over the last several years. Several factors influence mergers and acquisitions activity. Julia Coronado, the chief economist at the investment bank BNP Paribas, highlights two of the key determinants, stating that when mergers and acquisitions pick up, that is a good sign that businesses are feeling confident enough about the future that they are willing to become aggressive, look for deals, look for ways to grow and expand their operations.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation

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82) Factors that directly affect the merger and acquisition environment include all the following except A) general economic conditions.

B) level of optimism about the future.

C) currency fluctuations.

D) managerial style.

Answer: D Explanation: The general economic conditions and level of optimism about the future influence manager willingness to take on the risk of acquisitions. Additionally, the availability of financing can influence acquisition activity. During boom periods, financing is typically widely available. In contrast, during recessionary periods, potential acquirers typically find it difficult to borrow money to finance acquisitions. Governmental policies such as regulatory actions and tax policies can also make the environment of mergers and acquisitions more or less favorable. For example, increased antitrust enforcement will decrease the ability of firms to acquire their competitors or possibly firms in closely related markets. In contrast, increased regulatory pressures for good corporate governance may leave boards of directors more open to acquisition offers. Finally, currency fluctuations can influence the rate of cross-border acquisitions, with firms in countries with stronger currencies being in a stronger position to acquire.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation

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83) Cisco Systems, a computer networking firm, has undertaken over 80 acquisitions in the last decade. It uses these acquisitions to acquire ________ that will permit it to expand its product offerings and services through the addition of the acquired technologies.

A) trend information B) the global presence C) a reputation D) valuable resources Answer: D Explanation: Cisco Systems, a computer networking firm, has undertaken over 80 acquisitions in the last decade. Cisco uses these acquisitions to quickly add new technology to its product offerings to meet changing customer needs. Then it uses its excellent sales force to market the new technology to its corporate customers. Cisco also provides strong incentives to the staff of acquired companies to stay on. To realize the greatest value from its acquisitions, Cisco also has learned to integrate acquired companies efficiently and effectively.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 84) In 2014, Apple purchased Beats Electronics for billion USD. While Apple valued the product portfolio of Beats, its primary aim was to pull the founders of Beats, Jimmy Iovine and Dr. Dre (aka Andrew Young), into the Apple family. This is an example of acquiring firms using acquisitions to acquire A) critical financial resources.

B) critical human capital.

C) critical reputation.

D) critical land resources.

Answer: B Explanation: In 2014, Apple purchased Beats Electronics for 3 billion USD. While Apple valued the product portfolio of Beats, its primary aim was to pull the founders of Beats, Jimmy Iovine and Dr. Dre (aka Andrew Young), into the Apple family. With the Apple iTunes business having hit a wall in growth, experiencing a 1 percent decline in 2013, Apple wanted to acquire new management talent to turn this business around.

Difficulty: 2 Medium Topic: Acquisitions and Mergers Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation

43 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.