Foundations in strategic management 6th edition harrison test bank

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Chapter 6: Corporate Strategies

Chapter 6 Corporate Strategies TRUE/FALSE QUESTIONS 1.

Direction setting is a major corporate-level strategic management responsibility.

Answer: T

2.

Management of resources is a major corporate-level strategic management responsibility.

Answer: T

3.

Concentration is the most complex corporate-level strategy.

Answer: F

4.

Market saturation is one possible reason for firms to abandon their concentration strategies.

Answer: T

5.

Managers sometimes choose to diversify because they are motivated by power, income, and status.

Answer: T

6.

Transaction cost economics is used primarily to determine when unrelated diversification is appropriate.

Answer: F

7.

Synergy among businesses is created instantly if they are related to each other.

Answer: F

8.

Acquisitions are a common type of merger.

Answer: T

9.

Most acquisitions are financially beneficial to the shareholders of the acquiring firm.

Answer: F

10.

A common criticism that applies to many portfolio models is that they are based on the past instead of the future.

Answer: T

MULTIPLE CHOICE QUESTIONS

Chapter 6: Corporate Strategies

11.

Which of the following is typically a corporate-level strategy formulation responsibility?

A. Establishment of short-term operating goals B. Choice of generic strategy for each business unit C. Selection of businesses in which to compete D. Direct supervision of research and development programs E. None of the above Answer: C

12.

As corporate-level strategies develop, any of the following strategies might be expected to directly follow a concentration strategy except: A. Vertical integration B. Diversification of markets C. Diversification of products/services D. Diversification of resource conversion processes (technologies) E. Restructuring Answer: E

13.

Which of the following is not considered a corporate-level strategy?

A. Differentiation B. Concentration C. Related diversification D. Unrelated diversification E. None of the above. These are all corporate-level strategies Answer: A

14.

Which of the following is a strength of a concentration strategy?

A. Product obsolescence will rarely affect a firm pursuing this strategy B. Executives can develop in-depth knowledge of the business C. Risk of bankruptcy is minimal D. Firms pursuing this strategy are rarely acquired by another firm E. Changes in the environment can dramatically alter profitability Answer: B

15.

Which of the following is a weakness of a concentration strategy?

A. The organization cannot develop a distinctive competence B. Organizational resources are severely strained C. External stakeholders are easily confused by the firm’s strategic agenda D. There is high ambiguity regarding strategic direction E. Uneven cash flow Answer: E

16.

All of the following are reasons that firms pursue vertical integration strategies

Chapter 6: Corporate Strategies

except: A. To obtain better or more complete information about supplies or markets B. Less dependence on one industry C. Increased control over the quality of supplies D. Greater opportunities to differentiate a product E. Reduction of transaction costs Answer: B 17.

In a typical vertical supply chain, the major stage of the industry that immediately follows raw materials extraction is: A. Wholesaling B. Retailing C. Final product manufacturing D. Primary manufacturing E. None of these Answer: D

18.

According to the theory of transaction cost economics, a market is likely to fail if: A. There are a large number of suppliers B. All parties to the transaction have the same level of knowledge C. The future is highly uncertain D. The future is highly certain E. Assets may be used to produce a variety of products or services Answer: C

19.

What has been observed as the relationship between diversification and firm performance?

A. Moderate levels of diversification provide the highest performance B. Low levels of diversification provide the highest performance C. High levels of diversification provide the highest performance D. Moderate levels of diversification provide the lowest performance E. None of these Answer: A

20.

Related diversification differs from unrelated diversification in which of the following ways?

A. Related diversification is connected to the organization’s dominant business; unrelated diversification is not B. Unrelated diversification is connected to the organization’s dominant business; related diversification is not C. Single business firms use related diversification and never use unrelated diversification D. Single business firms use unrelated diversification and never use related

Chapter 6: Corporate Strategies

diversification E. A firm that uses related diversification always uses vertical integration; a firm that uses unrelated diversification never uses vertical integration Answer: A 21.

When an organization can use the same physical resources for multiple purposes, it is taking advantage of: A. Intangible relatedness B. Tangible relatedness C. Limited scope D. Dominant industry relationships E. Goodwill Answer: B

22.

When skills developed in one area can be applied to another area, which of the following results?

A. Intangible relatedness B. Tangible relatedness C. Specialized scope D. Focus E. Goodwill Answer: A

23.

Two organizations or business units have similar management processes, cultures, systems, and structures. These similarities are best described as: A. Synergy B. Managerial hubris C. Business intelligence D. Tangible relatedness E. Organizational fit Answer: E

24.

One of the advantages of internal venturing is that: A. It is a fast way to enter new markets B. It is much less risky than other strategies C. Proprietary information need not be shared with other companies D. Profits are shared with other companies E. None of the above Answer: C

25.

Which of the following is most likely to occur as a result of an acquisition?

A. Increase in financial leverage B. Increase in profitability

Chapter 6: Corporate Strategies

C. Increase in R&D D. Increase in patents E. Both C and D are correct Answer: A 26.

If all of the businesses of an organization are related to a common “core” business, the organization is probably pursuing which corporate strategy?

A. Prospector B. Cost focus C. Vertical integration D. Defender E. Related diversification Answer: E

27.

Mergers are more likely to be successful if: A. They are expensive B. They are friendly C. They involve high premiums D. The managers of the acquired firm leave to make way for new managers E. There is less money spent on R&D during the first year after acquisition Answer: B

28.

Strategic alliances: A. Slow the speed of entry into a new field or market B. Are considered a more risky diversification option than mergers C. Encourage the entry of new competitors D. Are often motivated by the desire to share resources across companies E. Are associated with low levels of administrative costs Answer: D

29.

Strategic alliances: A. Result in complete control by one firm B. Incur low administrative costs C. Entail a risk of opportunism by partners to the venture D. Are desirable in all environments E. Typically result in unfavorable stock market reactions Answer: C

30.

Successful strategic alliances are characterized by all of the following except: A. Careful planning and execution B. Selection of partners with complementary resources C. Effective use of coordinating mechanisms D. Potential for financial economies

Chapter 6: Corporate Strategies

E. Selection of an appropriate governance method Answer: D 31.

What is on the two axes of the Boston Consulting Group Matrix?

A. Stars and cash cows B. Business growth rate and relative competitive position C. Market share and relative competitive position D. Profitability and business growth rate E. Business growth rate and cash flow Answer: B

32.

In the Boston Consulting Group Matrix, cash cows: A. Have high growth rates and low relative market share B. Have low growth rates and high relative market share C. Have low growth rates and low relative market share D. Have high growth rates and high relative market share E. Have low growth rates and low profitability Answer: B

33.

In the Boston Consulting Group Matrix, stars: A. Have high growth rates and low relative market share B. Have low growth rates and high relative market share C. Have low growth rates and low relative market share D. Have high growth rates and high relative market share E. Have low growth rates and low profitability Answer: D

ESSAY QUESTIONS 34.

Discuss the major corporate-level strategy formulation responsibilities. How are they different from business-level strategy formulation responsibilities?

Answer: Corporate-level strategy formulation focuses on the selection of businesses in which the organization will compete and results in a corporate-level statement of domain, as reflected in the organizational mission statement. It is particularly relevant to the management of the entire portfolio of businesses in which the organization may choose to compete. Corporate-level strategy formulation also determines the relationships between business units and the ways in which distinctive competencies may be built based on similarities between the business units. Conversely, business-level strategy formulation focuses on the short- and long-term strategies and growth of a particular business unit or division. Corporate-level strategy formulation responsibilities include direction setting, development of corporate level strategy, selection of businesses and portfolio management, selection of methods for diversification, and restructuring.

Chapter 6: Corporate Strategies

35.

Why might an organization choose to diversify?

Answer: Organizations diversify for both strategic and personal reasons of top managers. The personal reasons are connected to the concept of empire building. The larger an organization becomes, the more lofty the power and status of its leader. Diversification can be used to rapidly expand the organization and thus expand the power and status of its executives. As power and status increase, salaries and bonuses for these top executives will also likely increase. These internal motives do not have to be purely personal. An executive may crave a more interesting and challenging environment, believe that he or she has mastered the current environment, and see diversification as a way to increase the value of the firm by expanding its operating environment.

The strategic reasons for diversification are more complex. Organizations may wish to reduce risk by investing in dissimilar businesses. They may wish to stabilize or improve earnings or growth. If the cash generated in the firm is greater than that needed for profitable investment in the firm, the managers may look outside the firm for investment opportunities and thus increase the value of the firm. Excess debt capacity may also lead managers to pursue the application of skills to related areas or to the possible generation of synergy and economies of scope. In general, organizations may diversify to reduce risk, expand opportunities, take advantage of slack resources, or satisfy managers’ personal goals.

36.

What are the requirements for achieving synergy through the combination of businesses?

Answer: The requirements are some form of relatedness and both strategic and organizational fit. Tangible relatedness means that the organization has the opportunity to use the same physical resources for multiple purposes. Tangible relatedness can lead to synergy through resource sharing. For example, if two similar products are manufactured in the same plant, then they can benefit from operating synergy. Other examples of synergy resulting from tangible relatedness include (1) using the same marketing or distribution channels for multiple related products, (2) buying similar raw materials for related products through a centralized purchasing office to gain purchasing economies, (3) providing corporate training programs to employees from different divisions who are all engaged in the same type of work, (4) advertising multiple products simultaneously and (5) manufacturing in the same plants. Intangible relatedness occurs any time capabilities developed in one area can be applied to another area. When executed properly, intangible relatedness can result in managerial synergy.

Two types of fit facilitate the creation of synergy: strategic fit and organizational fit.

Strategic fit refers to the effective matching of strategic organizational capabilities. For example, if two organizations in two related businesses combine their resources, but they are both strong in the same areas and weak in the same areas, then the potential for synergy is diminished. Once combined, they will continue to exhibit the same capabilities. However, if

Chapter 6: Corporate Strategies

one of the organizations is strong in R&D but lacks marketing power, while the other organization is weak in R&D but strong in marketing, then there is real potential for both organizations to be better off—if managed properly. Organizational fit occurs when two organizations or business units have similar management processes, cultures, systems, and structures. Organizational fit makes organizations compatible, which facilitates resource sharing, communication, and transference of knowledge and skills. Strategic fit and organizational fit dramatically increase the likelihood that synergy will be created between two related businesses.

The benefits from synergy have to exceed the costs of creating it. Increasing coordination costs have the potential to offset potential synergistic gains from related diversification.

37.

Which factors have been found to lead to unsuccessful mergers and acquisitions?

Which factors are related to success?

Answer: Researchers have been able to identify factors that seem to be associated with successful and unsuccessful mergers. Unsuccessful mergers are associated with a large amount of debt, overconfident or incompetent managers, poor ethics, changes in top management or the structure of the acquiring organization, inadequate analysis prior to the deal (due diligence), and diversification away from the core area in which the acquiring firm is strongest.

Successful mergers are related to low-to-moderate amounts of debt, a high level of relatedness leading to synergy, friendly negotiations (no resistance), a continued focus on the core business, careful selection of and negotiations with the acquired firm (due diligence), use of cash as opposed to stock to make the acquisition, and a strong financial position going into the deal. In addition, researchers have discovered that the largest shareholder gains from mergers occur when the cultures and the top management styles of the two companies are similar (organizational fit). Also, sharing resources and activities has been found to be important to post-merger success. In fact, one study found that it was not until acquiring firms restructured themselves to take maximum advantage of synergies available through combining their acquisitions that their true competitive potential was released.