Strategic management creating competitive advantages 8th edition dess test bank

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Chapter 06 Corporate-Level Strategy: Creating Value through Diversification True / False Questions 1. Research shows that the vast majority of acquisitions of public corporations results in value creation rather than value destruction.

True

False

2. The Hewlett-Packard and Autonomy merger in 2011 is an example of a successful merger.

True

False

3. Many acquisitions ultimately result in divestiture.

True

False

4. At times, the only other people who may have benefited from a merger-acquisition were the shareholders of the acquired firms or the investment bankers advising the acquiring firm.

True

False

5. Reasons for acquisition failure include the effective integration of the acquisition.

True

False

6. Corporate-level strategy focuses on gaining short-term revenue through managing operations in multiple businesses.

True

False

7. Sprint and Nextel merged in 2005. The successful merger resulted in a 31 billion USD mergerrelated charge that lead to a 76 percent decrease in its value by late 2012.

True

False

8. In a study of 270 international mergers between 2000 and 2003 it was found that sales growth increased, earnings growth increased, and market valuations increased overall for the merged companies.

True

False

9. One of the reasons that the Cisco acquisition of the Flip product failed is that the core businesses were very different.

True

False

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10. In large, widely diversified firms, decision making can become slow and remote to market conditions thus creating potential difficulties for successful mergers as evidenced by the CiscoFlip failure.

True

False

11. All diversification moves, including those involving mergers and acquisitions, erode performance.

True

False

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

True

False

13. When firms diversify into unrelated businesses, the primary potential benefits are horizontal relationships, i.e., businesses sharing tangible and intangible resources.

True

False

14. When firms diversify into related businesses, the primary potential benefits come from horizontal relationships, which are businesses sharing intangible and tangible resources.

True

False

15. Benefits derived from horizontal and hierarchical relationships are mutually exclusive.

True

False

16. Economies of scope are cost savings from leveraging core competencies or sharing unrelated activities among businesses in a corporation.

True

False

17. Cooper Industries has followed a successful strategy of related diversification. There are few similarities in the products it makes or the industries in which it competes.

True

False

18. ConAgra uses the related diversification vertical integration initiative to enhance market power.

They do this to increase their power over suppliers by centrally purchasing huge quantities of packaging materials for all of its food divisions.

True

False

19. 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 using the related diversification vertical integration initiative to enhance their market power.

True

False

20. Novartis, formerly Ciba-Geigy, uses portfolio management to improve many key activities, including resource allocation and reward and evaluation systems. This is an example of using unrelated diversification corporate restructuring and parenting initiatives to create value.

True

False

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21. Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities.

True

False

22. Economies of scope in a related diversification strategy result from the leveraging of core competencies and the sharing of activities among businesses in the corporation such as production.

True

False

23. Core competencies do not create value in a business.

True

False

24. 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.

True

False

25. Gillette developed the Fusion and Mach 3 shaving systems that created superior customer value as a result of the company core competency in research and development.

True

False

26. One of the criteria for a core competence is that the different businesses in the corporation must be similar in at least one important way related to the core competence.

True

False

27. It is not necessary for a core competence to be difficult to imitate or to be non-substitutable.

True

False

28. IBM leverages its competencies in computing technology to provide health care services. This is an example of a core competence being used across dissimilar businesses within the same corporation.

True

False

29. Sharing activities across business units can provide two primary benefits: cost savings and cost enhancements.

True

False

30. Starbucks acquired the baker chain, La Boulange, with the intention of selling the bakery products at its coffee cafes. The increased market exposure for La Boulange is an example of a revenue enhancing benefit that can arise from the differentiation strategy.

True

False

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31. 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.

True

False

32. Restructuring requires the corporate office to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change.

True

False

33. Portfolio management should be considered as the primary basis for formulating corporate-level strategies.

True

False

34. Portfolio management matrices generally consist of two axes that reflect industry or market growth and the market share of a business.

True

False

35. The acquisition of two or more counter-cyclical businesses is an example of using diversification to reduce risk.

True

False

36. Loews Corporation, a conglomerate with 15 billion USD in revenues, competes across several industries including oil and gas, tobacco, watches, insurance, and hotels. Its related diversification strategy is to buy low and sell high as in the example where they bought six oil tankers for 5 million USD and then sold them eight years later for 50 million USD. True

False

37. 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.

True

False

38. Portfolio models such as the BCG Portfolio matrix are limited in value because they only compare the SBU on four dimensions.

True

False

39. In analyzing the Cabot Corporation portfolio using the BDG matrix, the company decided to shift away from its core competence to unrelated areas of its business. The ensuing decline in assets indicated that it needed to return to its core competence in order to grow.

True

False

40. Risk reduction by itself is usually a means to create shareholder value, regardless of the overall diversification strategy of the firm.

True

False

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41. An advantage of mergers and acquisitions is that they can enable a firm to rapidly enter new product markets.

True

False

42. Among the advantages of acquisitions are the expensive premiums that are frequently paid to acquire a business.

True

False

43. Through joint ventures, firms can directly acquire the assets and competencies of other firms.

True

False

44. The potential advantages of strategic alliances and joint ventures include entering new markets as well as developing and diffusing new technologies.

True

False

45. One of the obligatory aspects of strategic alliances is the dependence on written contracts to delimit responsibilities and enforce compliance.

True

False

46. An advantage of a firm entering into a strategic alliance is that it does not have to share the wealth with its partners.

True

False

47. An advantage of internal development is that firms do not have to combine activities across the value chains of many companies and merge company cultures.

True

False

48. Divestment is useful to help a firm reverse an earlier acquisition that did not result in successful growth.

True

False

49. Zara, a Spanish clothing company, operates stores in over 70 countries. When entering markets very distant from its home markets, Zara rarely uses local alliance partners to help it negotiate the different cultural and regulatory environments.

True

False

50. Compared to mergers and acquisitions, firms that engage in internal development capture the value created by their own innovative activities by not having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures.

True

False

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

True

False

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52. Greenmail is an offer by a company, threatened by takeover, to offer its stock at a reduced price to a third party.

True

False

53. 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.

True

False

54. Unfriendly or hostile takeovers always occur when the stock of the company becomes undervalued.

True

False

55. Former Merrill Lynch CEO John Thain gave out 4 billion USD in discretionary year-end bonuses just before the company was rescued by Bank of America. This practice demonstrates managerial greed.

True

False

56. Poison pills are used by a company to take away shareholder rights in the event of a takeover by another firm.

True

False

57. Antitakeover defenses are always a management ploy to protect their own self interests.

True

False

58. When Oracle launched a hostile bid for PeopleSoft in 2003, CEO Larry Ellison accused PeopleSoft of launching a poison pill campaign. The outcome of the bitter fight was a better financial reward for PeopleSoft shareholders.

True

False

59. Poison pills always are used to protect the best interests of management.

True

False

60. Managerial behaviors that erode shareholder returns include egotism, antitakeover tactics and controlled growth.

True

False

Multiple Choice Questions

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61. The Cisco acquisition of Pure Digital Technologies, the parent of the Flip video camera, failed because

A. Cisco had valuable competencies.

B. the Flip division of Cisco was slow and less responsive to market pressures.

C. consumers continued to purchase the camera.

D. Cisco had good vision of the market.

62. Which of the following is not a reason for merger and acquisition failures?

A. The acquiring company pays a 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 acquired company assets are poorly integrated into the acquiring company business lines.

D. The acquisition leads to value creation.

63. 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.

64. An acquisition that results in ______________ indicates that expectations were not met.

A. expansion B. divestiture C. cost savings D. increased sales 65. 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. cost savings D. acquisition 66. If a multinational firm is unable to understand how the acquired company's assets would fit with their own lines of business, this can lead to

A. expansion.

B. divestiture.

C. cost savings.

D. acquisition.

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67. If a multinational firm paid too high a premium for the common stock of the company, this can lead to

A. expansion.

B. cost savings.

C. divestiture.

D. acquisition.

68. If a multinational company's motive for the acquisition may have been to enhance executive powers and prestige rather than to improve shareholder return, this can lead to

A. divestiture.

B. cost savings.

C. expansion.

D. acquisition.

69. If a multinational firm fails to effectively integrate their acquisitions, this can result in

A. cost savings.

B. divestiture.

C. expansion.

D. further acquisition.

70. 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.

71. Diversification initiatives include all of the following except

A. mergers and acquisitions.

B. strategic alliances.

C. shareholder development.

D. joint ventures.

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72. 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 of the Polaris operating divisions. This is an example of 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.

73. 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 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 economies of scope by integrating vertically in order to acquire market power.

D. related diversification to acquire market power by integrating vertically.

74. 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 superb human resource practices and budgeting systems. 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 core competencies.

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

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

75. Novartis, formerly Ciba-Geigy, uses portfolio management to improve many key activities, including resource allocation and reward and evaluation systems. This is an example of using

A. related diversification to achieve value by leveraging pooled negotiating power to attain economies of scope.

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

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.

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76. 3M leverages its competencies in adhesives technologies to many industries, including automotive, construction, and telecommunications. This is an example of using

A. related diversification to acquire economies of scope by leveraging pooled negotiating power.

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

C. unrelated diversification to financial synergies through portfolio management.

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

77. 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 78. 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 leveraging pooled negotiating power B. using related diversification to acquire market power by leveraging core competencies C. using unrelated diversification to acquire financial synergies through portfolio management D. using related diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting 79. ConAgra, a diversified food producer, increases its power over suppliers by centrally purchasing huge quantities of packaging materials for all of 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.

80. 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. synergies D. discontinuities

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81. 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 known as

A. core competencies.

B. strategic resources.

C. shared activities.

D. economies of scope.

82. 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.

83. Sharing core competencies is one of the primary potential advantages of diversification. In order for diversification to be most successful, it is important that the

A. products use similar distribution channels.

B. similarity required for sharing core competencies must be in the value chain.

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

D. methods of production are the same.

84. 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.

85. 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.

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86. The risks of vertical integration include all of 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.

87. 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.

88. 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.

89. Transaction costs include all of the following costs except

A. agency costs.

B. negotiating costs.

C. search costs.

D. monitoring costs.

90. Vertical integration is attractive when

A. internal administrative costs are higher than transaction costs.

B. transaction costs and internal administrative costs are equal.

C. transaction costs are higher than internal administrative costs.

D. search costs are higher than monitoring costs.

91. Creating value within business units can happen when the corporate office helps subsidiaries make wise choices in their own acquisitions, divestures, and new ventures. This is known as

A. parenting.

B. restructuring.

C. leveraging core competencies.

D. increasing market power.

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92. Creating value within business units can happen 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. This action is known as

A. restructuring.

B. leveraging core competencies.

C. parenting.

D. sharing activities.

93. 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.

94. Portfolio management matrices are applied to what level of strategy?

A. departmental level B. business level C. corporate level D. international level 95. When using a BCG matrix, a business that currently holds a large market share in a rapidly growing market and has minimal or negative cash flow would be known as a

A. Star.

B. Dog. C. Cash Cow. D. Question Mark.

96. In the BCG Matrix, a business that has a low market share in an industry characterized by high market growth is termed a

A. Star.

B. Cash Cow. C. Question Mark.

D. Dog. 97. 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.

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98. 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.

99. 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.

100.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.

101.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 102.The downsides or limitations of mergers and acquisitions include all of the following except:

A. It is a slow means to enter new markets and acquire skills and competences.

B. Difficulties exist in integrating the activities and resources of the acquired firm into on-going operations.

C. There can be many cultural issues that can doom an otherwise promising acquisition.

D. Premiums that are frequently paid to acquire a business are expensive.

103.Divesting of businesses can accomplish many different objectives, except

A. enabling managers to focus their efforts more directly on the core businesses of the firm.

B. providing the firm with more resources to spend on more attractive alternatives.

C. raising cash to help fund existing businesses.

D. dispersing manager focus.

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104.IBM, Memorial Sloan Kettering, and Cedars-Sinai have a _________ whereby IBM receives expert medical knowledge that it uses to leverage its technological skills to develop new medical insights.

A. joint diversification B. divestment C. strategic alliance D. global integration 105.Cooperative relationships such as __________ have potential advantages such as entering new markets, reducing manufacturing (or other) costs in the value chain, and developing and diffusing new technologies.

A. franchises B. mergers C. acquisitions D. joint ventures and strategic alliances 106.Which of the following is not part of a good guideline list for managing strategic alliances?

A. establishing a clear understanding between partners B. not shortchanging your partner C. relying primarily on a contract to make the joint venture work D. working hard to ensure a collaborative relationship between partners 107.Which of the following statements regarding internal development as a means of diversification is false?

A. Many companies use internal development to extend their product or service offers.

B. An advantage of internal development is that it is generally faster than other means of diversification and firms can benefit from speed in developing new products and services.

C. The firm is able to capture wealth created without having to share the wealth with alliance partners.

D. Firms can often develop products or services at a lower cost, if they rely on their own resources instead of external funding.

108.Internal development may be time consuming and, therefore, firms may forfeit the benefits of speed that growth through __________ and __________ can provide.

A. strategic alliances; joint ventures B. strategic alliances; mergers C. mergers; acquisitions D. mergers; joint ventures

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109.Firms that choose to diversify through internal development must develop _________ that allow them to move __________ from initial opportunity recognition to market introduction.

A. strategies; slowly B. capabilities; quickly C. capabilities; slowly D. strategies; quickly 110.Lionsgate (a Canadian-American entertainment company) and Alibaba (a Chinese e-commerce company) created _________ to open the Chinese market for the Lionsgate streaming shows and movies. Alibaba profits by getting access to content to increase demand for its own set-top media boxes.

A. a joint venture B. a merger C. an acquisition D. a strategic alliance 111.According to Michael Porter, there is a tremendous allure to _________. It is the big play, the dramatic gesture. With one stroke of the pen you can add billions to size, get a front-page story, and create excitement in markets.

A. strategic alliances and joint ventures B. internal development C. mergers and acquisitions D. differentiation strategies 112.The antitakeover tactic, _______, is when a firm offers to buy shares of their stock from a company (or individual) planning to acquire their firm at a higher price than the unfriendly company paid for it.

A. golden parachute B. poison pill C. greenmail D. scorched earth 113.An antitakeover tactic in which existing shareholders have the option to buy additional shares of stock at a discount to the current market price is called ______.

A. greenmail B. a golden parachute C. a poison pill D. scorched earth

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114.The term golden parachute refers to

A. a clause requiring that huge dividend payments be made upon takeover.

B. pay given to executives fired because of a takeover.

C. financial inducements offered by a threatened firm to stop a hostile suitor from acquiring it.

D. managers of a firm in a hostile takeover approaching a third party about making the acquisition.

115.Antitakeover tactics include all of the following except

A. greenmail.

B. poison pills.

C. golden parachutes.

D. golden handcuffs.

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Chapter 06 Corporate-Level Strategy: Creating Value through Diversification Answer Key True / False Questions 1.

Research shows that the vast majority of acquisitions of public corporations results in value creation rather than value destruction.

FALSE Research shows that the vast majority of acquisitions of public corporations result in value destruction rather than value creation.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

2.

The Hewlett-Packard and Autonomy merger in 2011 is an example of a successful merger.

FALSE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

3.

Many acquisitions ultimately result in divestiture.

TRUE 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 magazine 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

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4.

At times, the only other people who may have benefited from a merger-acquisition were the shareholders of the acquired firms or the investment bankers advising the acquiring firm.

TRUE 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 upfront regardless of what happens afterward.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

5.

Reasons for acquisition failure include the effective integration of the acquisition.

FALSE 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 acquired firm, or were unable to understand how the assets of the acquired firm would fit with their own lines of business.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

6.

Corporate-level strategy focuses on gaining short-term revenue through managing operations in multiple businesses.

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

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

7.

Sprint and Nextel merged in 2005. The successful merger resulted in a 31 billion USD mergerrelated charge that lead to a 76 percent decrease in its value by late 2012.

FALSE This is an example of an unsuccessful merger. The stock price continued to be an issue when SoftBank announced that it would purchase Sprint Nextel in 2012 and found that its own stock price dropped 20 percent the week after announcing its acquisition intentions.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand 6-19 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

8.

In a study of 270 international mergers between 2000 and 2003 it was found that sales growth increased, earnings growth increased, and market valuations increased overall for the merged companies.

FALSE A study investigated 270 mergers that took place between 2000 and 2003 in multiple countries and regions. It found that after a merger, sales growth decreased by 6 percent, earnings growth dropped 9.4 percent, and market valuations declined 2.5 percent (figures are adjusted for industry trends and refer to three years pre- or postmerger).

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

9.

One of the reasons that the Cisco acquisition of the Flip product failed is that the core businesses were very different.

TRUE Cisco was unable to avoid failure with Flip for two reasons. First, Cisco core business operations are in business networking equipment and software. Flip business was selling video cameras to individual customers. This is a very different business, where the Cisco knowledge and other competencies were of little value. While Cisco has some success extending into the consumer market, such as with its acquisition of Linksys, this success has come in the home networking business, a market to which Cisco can transfer some of its business networking competencies.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

10.

In large, widely diversified firms, decision making can become slow and remote to market conditions thus creating potential difficulties for successful mergers as evidenced by the Cisco-Flip failure.

TRUE Cisco was unable to avoid failure with Flip for two reasons. One of these is that its nearly 60 decision-making groups with many layers of responsibility made it difficult for Cisco to be responsive to market pressures on the Flip product. This just was not a priority since the Flip division had a mere 400 million USD in annual sales, representing only 1 percent of the overall sales of Cisco.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts 6-20 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11.

All diversification moves, including those involving mergers and acquisitions, erode performance.

FALSE Not all diversification moves, including those involving mergers and acquisitions, erode performance. For example, acquisitions in the oil industry, such as the British Petroleum purchases of Amoco and Arco, are performing well as is the Exxon-Mobil merger. MetLife was able to dramatically expand its global footprint by acquiring Alico, a global player in the insurance business from AIG in 2010 when AIG was in financial distress.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

12.

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

TRUE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

13.

When firms diversify into unrelated businesses, the primary potential benefits are horizontal relationships, i.e., businesses sharing tangible and intangible resources.

FALSE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

6-21 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

14.

When firms diversify into related businesses, the primary potential benefits come from horizontal relationships, which are businesses sharing intangible and tangible resources.

TRUE 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).

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

15.

Benefits derived from horizontal and hierarchical relationships are mutually exclusive.

FALSE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

16.

Economies of scope are cost savings from leveraging core competencies or sharing unrelated activities among businesses in a corporation.

FALSE Economies of scope are cost savings from leveraging core competencies or sharing related activities among businesses in a corporation.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

17.

Cooper Industries has followed a successful strategy of related diversification. There are few similarities in the products it makes or the industries in which it competes.

FALSE Cooper Industries has followed a successful strategy of unrelated diversification. There are few similarities in the products it makes or the industries in which it competes; however, the corporate office adds value through such activities as superb human resource practices and budgeting systems.

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Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

18.

ConAgra uses the related diversification vertical integration initiative to enhance market power.

They do this to increase their power over suppliers by centrally purchasing huge quantities of packaging materials for all of its food divisions.

FALSE 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 of its food divisions.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

19.

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 using the related diversification vertical integration initiative to enhance their market power.

TRUE First, 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). Firms can also enhance their market power via pooled negotiating power and vertical integration.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

20.

Novartis, formerly Ciba-Geigy, uses portfolio management to improve many key activities, including resource allocation and reward and evaluation systems. This is an example of using unrelated diversification corporate restructuring and parenting initiatives to create value.

FALSE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

6-23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

21.

Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities.

TRUE Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities (e.g., production and distribution facilities). This enables a corporation to benefit from economies of scope.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Level of Difficulty: 1 Easy Topic: Related Diversification through Economies of Scope and Revenue Enhancement

22.

Economies of scope in a related diversification strategy result from the leveraging of core competencies and the sharing of activities among businesses in the corporation such as production.

TRUE Related diversification enables a firm to benefit from economies of scope, which are cost savings that are derived from leveraging core competencies or sharing related activities among businesses in a corporation. A firm can also enjoy greater revenues if two businesses attain higher levels of sales growth combined than either company could attain independently.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Level of Difficulty: 1 Easy Topic: Related Diversification through Economies of Scope and Revenue Enhancement

23.

Core competencies do not create value in a business.

FALSE Core competencies may also be viewed as the glue that binds existing businesses together or as the engine that fuels new business growth. They reflect the collective learning in organizations such as how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Level of Difficulty: 2 Medium Topic: Related Diversification through Economies of Scope and Revenue Enhancement

6-24 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

24.

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.

TRUE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Level of Difficulty: 2 Medium Topic: Related Diversification through Economies of Scope and Revenue Enhancement

25.

Gillette developed the Fusion and Mach 3 shaving systems that created superior customer value as a result of the company core competency in research and development.

TRUE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Level of Difficulty: 2 Medium Topic: Related Diversification through Economies of Scope and Revenue Enhancement

26.

One of the criteria for a core competence is that the different businesses in the corporation must be similar in at least one important way related to the core competence.

TRUE 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.

AACSB: Analytical Thinking 6-25 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Level of Difficulty: 2 Medium Topic: Related Diversification through Economies of Scope and Revenue Enhancement

27.

It is not necessary for a core competence to be difficult to imitate or to be non-substitutable.

FALSE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Level of Difficulty: 2 Medium Topic: Related Diversification through Economies of Scope and Revenue Enhancement

28.

IBM leverages its competencies in computing technology to provide health care services. This is an example of a core competence being used across dissimilar businesses within the same corporation.

TRUE 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. With Watson, the unique computer developed by IBM that processes natural language, they were able to leverage their computing expertise (core competence) to solve important medical problems and thus become medical experts.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Level of Difficulty: 2 Medium Topic: Related Diversification through Economies of Scope and Revenue Enhancement

29.

Sharing activities across business units can provide two primary benefits: cost savings and cost enhancements.

FALSE Corporations also 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. Sharing activities can provide two primary payoffs: cost savings and revenue enhancements.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand 6-26 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Level of Difficulty: 2 Medium Topic: Related Diversification through Economies of Scope and Revenue Enhancement

30.

Starbucks acquired the baker chain, La Boulange, with the intention of selling the bakery products at its coffee cafes. The increased market exposure for La Boulange is an example of a revenue enhancing benefit that can arise from the differentiation strategy.

TRUE Often an acquiring firm and its target may achieve a higher level of sales growth together than either company could on its own. For example, Starbucks recently acquired a small bakery chain, La Boulange, and intends to sell La Boulange products at Starbucks cafes nationally. In leveraging Starbucks national retail chain, La Boulange will be able to dramatically expand its market exposure and sales much beyond its current 19-store West Coast market.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

Level of Difficulty: 2 Medium Topic: Related Diversification through Economies of Scope and Revenue Enhancement

31.

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.

FALSE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Level of Difficulty: 2 Medium Topic: Unrelated Diversification through Financial Synergies and Parenting

32.

Restructuring requires the corporate office to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change.

TRUE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Level of Difficulty: 2 Medium 6-27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Topic: Unrelated Diversification through Financial Synergies and Parenting

33.

Portfolio management should be considered as the primary basis for formulating corporatelevel strategies.

FALSE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Level of Difficulty: 2 Medium Topic: Unrelated Diversification through Financial Synergies and Parenting

34.

Portfolio management matrices generally consist of two axes that reflect industry or market growth and the market share of a business.

TRUE The Boston Consulting Group (BCG) growth-share matrix is among the best known of the portfolio management tools. In the BCG approach, each of the strategic business units (SBUs) of the firm is plotted on a two-dimensional grid in which the axes are relative market share and industry growth rate.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Level of Difficulty: 1 Easy Topic: Unrelated Diversification through Financial Synergies and Parenting

35.

The acquisition of two or more counter-cyclical businesses is an example of using diversification to reduce risk.

TRUE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Level of Difficulty: 2 Medium Topic: Unrelated Diversification through Financial Synergies and Parenting

6-28 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

36.

Loews Corporation, a conglomerate with 15 billion USD in revenues, competes across several industries including oil and gas, tobacco, watches, insurance, and hotels. Its related diversification strategy is to buy low and sell high as in the example where they bought six oil tankers for 5 million USD and then sold them eight years later for 50 million USD. FALSE With unrelated diversification, few benefits are derived from horizontal relationships (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 in which synergies are created from the interaction of the corporate office with the individual business units. There are two main sources of such synergies. First, the corporate office can contribute to parenting and restructuring of (often acquired) businesses.

Second, the corporate office can add value by viewing the entire corporation as a family or portfolio of businesses and allocating resources to optimize corporate goals of profitability, cash flow, and growth.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Level of Difficulty: 2 Medium Topic: Unrelated Diversification through Financial Synergies and Parenting

37.

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.

FALSE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Level of Difficulty: 2 Medium Topic: Unrelated Diversification through Financial Synergies and Parenting

38.

Portfolio models such as the BCG Portfolio matrix are limited in value because they only compare the SBU on four dimensions.

FALSE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

6-29 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Level of Difficulty: 2 Medium Topic: Unrelated Diversification through Financial Synergies and Parenting

39.

In analyzing the Cabot Corporation portfolio using the BDG matrix, the company decided to shift away from its core competence to unrelated areas of its business. The ensuing decline in assets indicated that it needed to return to its core competence in order to grow.

TRUE 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. The company return on assets declined as the firm shifted away from its core competence to unrelated areas. The portfolio model failed because it pointed the company in the wrong direction (away from its core business) in an effort to spur growth. 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 3.6 billion USD in revenues in 2014.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Level of Difficulty: 2 Medium Topic: Unrelated Diversification through Financial Synergies and Parenting

40.

Risk reduction by itself is usually a means to create shareholder value, regardless of the overall diversification strategy of the firm.

FALSE Risk reduction in and of itself is rarely viable as a means to create shareholder value. It must be undertaken with a view of the overall diversification strategy of the firm.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.

Level of Difficulty: 2 Medium Topic: Unrelated Diversification through Financial Synergies and Parenting

41.

An advantage of mergers and acquisitions is that they can enable a firm to rapidly enter new product markets.

TRUE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Level of Difficulty: 2 Medium Topic: The Means to Achieve Diversification 6-30 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

42.

Among the advantages of acquisitions are the expensive premiums that are frequently paid to acquire a business.

FALSE There are many potential drawbacks or limitations to merger activity. For example, the takeover premium that is paid for an acquisition typically is very high. Two times out of three, the stock price of the acquiring company falls once the deal is made public. Since the acquiring firm often pays a 30 percent or higher premium for the target company, the acquirer must create synergies and scale economies that result in sales and market gains exceeding the premium price.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Level of Difficulty: 2 Medium Topic: The Means to Achieve Diversification

43.

Through joint ventures, firms can directly acquire the assets and competencies of other firms.

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

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Level of Difficulty: 2 Medium Topic: The Means to Achieve Diversification

44.

The potential advantages of strategic alliances and joint ventures include entering new markets as well as developing and diffusing new technologies.

TRUE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Level of Difficulty: 2 Medium Topic: The Means to Achieve Diversification

6-31 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

45.

One of the obligatory aspects of strategic alliances is the dependence on written contracts to delimit responsibilities and enforce compliance.

FALSE A strategic alliance is a cooperative relationship between two (or more) firms. Alliances may be either informal or formal, one involving a written contract.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Level of Difficulty: 2 Medium Topic: The Means to Achieve Diversification

46.

An advantage of a firm entering into a strategic alliance is that it does not have to share the wealth with its partners.

FALSE Firms that engage in internal development (like corporate entrepreneurship) capture the value created by their own innovative activities without having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Level of Difficulty: 2 Medium Topic: The Means to Achieve Diversification

47.

An advantage of internal development is that firms do not have to combine activities across the value chains of many companies and merge company cultures.

TRUE Firms that engage in internal development (like corporate entrepreneurship) capture the value created by their own innovative activities without having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Level of Difficulty: 2 Medium Topic: The Means to Achieve Diversification

6-32 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

48.

Divestment is useful to help a firm reverse an earlier acquisition that did not result in successful growth.

TRUE Divestments, the exit of a business from the company portfolio, are quite common. One study found that large, prestigious U.S. companies divested more acquisitions than they kept.

Divesting a business can accomplish many different objectives. It can be used to help a firm reverse an earlier acquisition that did not work out as planned.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Level of Difficulty: 2 Medium Topic: The Means to Achieve Diversification

49.

Zara, a Spanish clothing company, operates stores in over 70 countries. When entering markets very distant from its home markets, Zara rarely uses local alliance partners to help it negotiate the different cultural and regulatory environments.

FALSE Zara, a Spanish clothing company, operates stores in over 70 countries. Still, when entering markets very distant from its home markets, Zara often uses local alliance partners to help it negotiate the different cultural and regulatory environments. Entering new markets requires financial resources, requisite market expertise to understand local customer needs, know how to promote the product, and access to the proper distribution channels. These are reasons that a company is likely to use local alliance partners when it first enters a new market distant from its own.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Level of Difficulty: 2 Medium Topic: The Means to Achieve Diversification

50.

Compared to mergers and acquisitions, firms that engage in internal development capture the value created by their own innovative activities by not having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures.

TRUE Compared to mergers and acquisitions, firms that engage in internal development capture the value created by their own innovative activities without having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.

Level of Difficulty: 2 Medium Topic: The Means to Achieve Diversification

6-33 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

51.

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

TRUE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.

Level of Difficulty: 2 Medium Topic: How Managerial Motives Can Erode Value Creation

52.

Greenmail is an offer by a company, threatened by takeover, to offer its stock at a reduced price to a third party.

FALSE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.

Level of Difficulty: 1 Easy Topic: How Managerial Motives Can Erode Value Creation

53.

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.

TRUE 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.

Level of Difficulty: 2 Medium Topic: How Managerial Motives Can Erode Value Creation

6-34 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

54.

Unfriendly or hostile takeovers always occur when the stock of the company becomes undervalued.

FALSE Unfriendly or hostile takeovers can occur when the stock of the company becomes undervalued. The risk is that leadership engages in antitakeover tactics to preserve their wealth or power.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.

Level of Difficulty: 2 Medium Topic: How Managerial Motives Can Erode Value Creation

55.

Former Merrill Lynch CEO John Thain gave out 4 billion USD in discretionary year-end bonuses just before the company was rescued by Bank of America. This practice demonstrates managerial greed.

TRUE A healthy ego helps make a leader confident, clearheaded, and able to cope with change.

CEOs, by their very nature, are intensely competitive people in the office as well as on the tennis court or golf course. But sometimes when pride is at stake, individuals will go to great lengths to win. Few executives are exempt from the potential downside of excessive egos and greed.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.

Level of Difficulty: 2 Medium Topic: How Managerial Motives Can Erode Value Creation

56.

Poison pills are used by a company to take away shareholder rights in the event of a takeover by another firm.

FALSE Poison pills are used by a company to give shareholders certain rights in the event of a takeover by another firm. They are also known as shareholder rights plans.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.

Level of Difficulty: 2 Medium Topic: How Managerial Motives Can Erode Value Creation

57.

Antitakeover defenses are always a management ploy to protect their own self interests.

FALSE Antitakeover defenses represent a gray area, because management can often legitimately argue that such actions are not there solely to benefit themselves. Rather, they can benefit other stakeholders, such as employees, customers, and the community.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation 6-35 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Understand Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.

Level of Difficulty: 2 Medium Topic: How Managerial Motives Can Erode Value Creation

58.

When Oracle launched a hostile bid for PeopleSoft in 2003, CEO Larry Ellison accused PeopleSoft of launching a poison pill campaign. The outcome of the bitter fight was a better financial reward for PeopleSoft shareholders.

TRUE In December 2004, Oracle struck a deal to buy PeopleSoft, ending a bitter 18-month hostile takeover battle. The Oracle 10.3 billion USD acquisition valued the firm at 26.50 USD a share, which was an increase of 66 percent over its initial offer of 16 USD a share.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.

Level of Difficulty: 2 Medium Topic: How Managerial Motives Can Erode Value Creation

59.

Poison pills always are used to protect the best interests of management.

FALSE On moral grounds, some antitakeover defenses are not undertaken to entrench and protect management, but often they are. When such defenses are used simply to keep management in power, they are wrong. However, when they are used to defend the long-term financial health of the company and to protect broader stakeholder interests, they will be morally permissible.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.

Level of Difficulty: 2 Medium Topic: How Managerial Motives Can Erode Value Creation

60.

Managerial behaviors that erode shareholder returns include egotism, antitakeover tactics and controlled growth.

FALSE Some managerial behaviors may serve to erode shareholder returns. Among these are growth for the sake of growth, egotism, and antitakeover tactics.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.

Level of Difficulty: 2 Medium Topic: How Managerial Motives Can Erode Value Creation

Multiple Choice Questions

6-36 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

61.

The Cisco acquisition of Pure Digital Technologies, the parent of the Flip video camera, failed because

A. Cisco had valuable competencies.

B. the Flip division of Cisco was slow and less responsive to market pressures.

C. consumers continued to purchase the camera.

D. Cisco had good vision of the market.

In large, widely diversified firms, decision making can become slow and remote to market conditions. Cisco competes in a wide range of markets and had nearly 60 decision making groups in its structure, with several layers separating John Chambers, the CEO of Cisco, from the individual markets. In such a large and diversified firm, the decision making in a small division with only 400 million USD in sales, 1 percent of the overall sales of Cisco, was not the top priority of corporate managers. Stephen Baker, an analyst with NPD Group, said that Cisco was never really committed to the product. As a result, Flip was slower and less responsive to market pressures than it was when it was an entrepreneurial firm.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

62.

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

A. The acquiring company pays a 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 acquired company assets are poorly integrated into the acquiring company business lines.

D. The acquisition leads to value creation.

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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

6-37 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

63.

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.

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

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

64.

An acquisition that results in ______________ indicates that expectations were not met.

A. expansion B. divestiture C. cost savings D. increased sales 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 magazine 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

65.

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. cost savings D. acquisition 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts 6-38 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

66.

If a multinational firm is unable to understand how the acquired company's assets would fit with their own lines of business, this can lead to

A. expansion.

B. divestiture.

C. cost savings.

D. acquisition.

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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

67.

If a multinational firm paid too high a premium for the common stock of the company, this can lead to

A. expansion.

B. cost savings.

C. divestiture.

D. acquisition.

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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

6-39 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

68.

If a multinational company's motive for the acquisition may have been to enhance executive powers and prestige rather than to improve shareholder return, this can lead to

A. divestiture.

B. cost savings.

C. expansion.

D. acquisition.

Research shows that a majority of acquisitions of public corporations result in value destruction rather than value creation. Top executives may not have acted in the best interests of shareholders. That is, the motive for the acquisition may have been to enhance executive powers and prestige rather than to improve shareholder returns.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

69.

If a multinational firm fails to effectively integrate their acquisitions, this can result in

A. cost savings.

B. divestiture.

C. expansion.

D. further acquisition.

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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

70.

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.

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.

AACSB: Analytical Thinking 6-40 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-01 The reasons for the failure of many diversification efforts.

Level of Difficulty: 2 Medium Topic: The Reasons for the Failure of Many Diversification Efforts

71.

Diversification initiatives include all of the following except

A. mergers and acquisitions.

B. strategic alliances.

C. shareholder development.

D. joint ventures.

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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

72.

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 of the Polaris operating divisions.

This is an example of 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.

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

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

6-41 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

73.

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 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 economies of scope by integrating vertically in order to acquire market power.

D. related diversification to acquire market power by integrating vertically.

In this case, Shaw Industries uses related diversification to achieve value by integrating vertically in order to acquire market power.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

74.

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 superb human resource practices and budgeting systems. 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 core competencies.

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

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

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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

6-42 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

75.

Novartis, formerly Ciba-Geigy, uses portfolio management to improve many key activities, including resource allocation and reward and evaluation systems. This is an example of using

A. related diversification to achieve value by leveraging pooled negotiating power to attain economies of scope.

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

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.

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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

76.

3M leverages its competencies in adhesives technologies to many industries, including automotive, construction, and telecommunications. This is an example of using

A. related diversification to acquire economies of scope by leveraging pooled negotiating power.

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

C. unrelated diversification to financial synergies through portfolio management.

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

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 EM leverages its core competencies in adhesives technologies in many industries in order to attain economies of scope.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

6-43 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

77.

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 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.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

78.

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 leveraging pooled negotiating power B. using related diversification to acquire market power by leveraging core competencies C. using unrelated diversification to acquire financial synergies through portfolio management D. using related diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting They can use unrelated diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 06-02 How managers can create value through diversification initiatives.

Level of Difficulty: 2 Medium Topic: Making Diversification Work: An Overview

6-44 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.