Strategy Chapter 6
improved adjustment to technological changes.
A company pursuing vertical integration can gain market power over its competitors through all of the following EXCEPT
True
A company that tries to balance both operational and corporate relatedness and fails risks incurring diseconomies of scope.
the firm can acquire other firms with innovative products instead of allocating capital to research and development.
A firm practicing unrelated diversification can make better capital allocations to its subsidiary businesses than the external capital market can for all the following reasons EXCEPT
related constrained
A firm that earns less than 70 percent of revenue from its dominant business and has direct connections between its businesses is engaging in _________ diversification.
False
A firm uses a corporate-level diversification strategy for a variety of reasons all of which have to do with ways to create value.
False
A major advantage of diversification is that overall monitoring costs are reduced, since each separate business comes under the control of corporate headquarters.
operational
A noted professional art academy has founded an "artists and friends" travel company specializing in tours for artists to scenic locales, using its faculty as traveling teachers. In addition, the art academy has purchased a framing company to both make frames for academy art works, but also to sell museum-quality framing services to the public. The art academy is engaging in diversification based on _______ relatedness.
True
A significant benefit of an internal capital market is limiting competitors' access to information about the performance of the individual businesses within the corporation.
True
A significant benefit of an internal capital market is that corporate headquarters has access to detailed and accurate information regarding the performance of the company's portfolio and can thus make better capital allocation decisions.
related
Acquisitions to increase market power require that the firm have a(n) __________ diversification strategy.
False
All of Krispy Kreme's revenues come from its one main product, doughnuts. It can be considered a classic example of a firm following a related constrained strategy.
related linked; allocating capital across
Although a(n) _____________ job of _______________ firm, GE (discussed in the Chapter 6 Opening Case) has done an exceptional its four major strategic business units.
changes in antitrust regulations and tax laws.
Among the value-neutral incentives to diversify, some come from the firm's external environment while others are internal to the firm. External incentives to diversify include
through reduced disclosure to outside parties.
An ability to efficiently allocate capital through an internal market may help the firm protect the competitive advantages it develops
True
An effective corporate strategy creates aggregate returns across all businesses that exceed what those returns would be without the strategy and contributes to the firm's strategic competitiveness and ability to earn above- average returns.
achieve economies of scope.
An office management firm has developed a system for efficiently organizing small medical and dental practices both through proprietary software and through unique training programs for staff. It has recently acquired a firm specializing in providing management services for veterinary practices. The office management firm is hoping to
True
An unrelated diversification strategy can create value through two types of financial economies: (1) efficient internal capital allocations, and (2) purchasing other firms, restructuring their assets, and selling them.
True
Antitrust regulation, tax laws, and low performance are all value-neutral reasons why firms engage in diversification.
to overcome and correct its record in environmental issues.
As noted in the Chapter 6 Opening Case, GE is now a major player in the "clean energy" industry such as wind turbines and solar power. A major reason GE moved in this direction was
diversify into less risky environments.
As the threat of corporate failure increases due to relatedness between a firm's business units, firms may decide to a
produces its own inputs.
Backward integration occurs when a company
keep free cash flows for investment in acquisitions.
Because of the tax laws of the 1960s and 1970s, when dividends were taxed more heavily than capital gains, shareholders preferred that corporations
are value-neutral.
Certain regulatory changes (such as antitrust regulation and tax laws) create incentives or disincentives for diversification that
False
Companies creating financial economies through restructuring typically focus on high-technology businesses primarily because these firms are human-resource dependent.
True
Companies in emerging markets frequently use the unrelated diversification strategy because of the absence of a "soft infrastructure" in those markets.
True
Compared to diversification that is grounded in intangible resources, diversification based on financial resources only is more visible to competitors and thus more imitable and less likely to create value on a long-term basis.
more imitable and less likely to create value on a long-term basis.
Compared with diversification based on intangible resources, diversification based on financial resources is
True
Compared with related constrained firms, related linked firms share fewer resources and assets between their businesses, concentrating instead on transferring knowledge and core competencies between the businesses.
False
Contract manufacturers who manage their customers' entire product line, and offer services ranging from inventory management to delivery and after-sales services are prime examples of vertical integration.
False
Corporate tax laws, rather than tax laws affecting individuals, have had the most impact on the firm's use of free cash flows for investment in acquisitions.
False
Corporate-level strategies are strategies a firm uses to diversify its operations from a single business competing in a single market into several product markets and, most commonly, into several businesses.
what product markets and businesses the firm should be in
Corporate-level strategy is concerned with _________ and how to manage these businesses.
False
Decisions to expand a firm's portfolio of businesses to reduce managerial risk can have a positive effect on the firm's value.
True
Different incentives to diversify sometimes exist, and the quality of a firm's resources may permit only diversification that is value neutral rather than value creating.
True
Diversification strategies can be used with both value-creating and value-neutral objectives.
This is a horizontal acquisition.
Dragonfly Publishers of children's books has purchased White Rabbit, another publisher of children's books. Both companies' books are sold to the same retail stores and schools. Their content is different, since Dragonfly produces children's literature, whereas White Rabbit focuses on child-level scientific and nature topics. Which of the following statements is probably TRUE about this acquisition?
have golden parachutes.
During the 1990s top executives of Titanic, Inc., followed a pattern of aggressive acquisitions and diversification. Now, Titanic is performing poorly and earning below average returns. Lusitania, a large conglomerate firm, is in the final stages of purchasing Titanic. Lusitania has announced that it will fire Titanic's current top executives. The Titanic executives may not be worried about their impending job loss if they
True
Economies of scope are cost savings resulting from a firm successfully leveraging, either through sharing or transferring, some of its capabilities and competencies developed in one business to another business.
True
Equator, a U.S. manufacturer of pharmaceuticals, has acquired a firm in the same industry in Ireland. It plans to move one of its key managers from its plant in St. Louis to Ireland. This can be considered a method of transferring corporate-level core competencies.
True
Financial economies are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm.
de-integration.
Firms seek to create value from economies of scope through all of the following EXCEPT
False
Firms seeking to create value through corporate relatedness use the related constrained strategy.
economies of scope between business units.
Firms that have selected a related diversification corporate-level strategy seek to exploit
True
Firms that sold off related units in which resource sharing was a possible source of economies of scope have been found to produce lower returns than those that sold off businesses unrelated to the firm's core businesses.
value-diversifying.
Firms use corporate-level diversification strategies for all the following reasons EXCEPT
True
Firms using a related diversification strategy may gain market power when successfully using their related constrained or related linked strategy.
True
Firms using the related constrained strategy share activities in order to create value.
False
Firms with both operational and corporate relatedness are favorites of investment analysts because the transparency and clarity of their financial statements clearly show the value-creation resulting from the combination of multiple businesses.
liquid financial assets for which investments in current businesses are no longer economically viable.
Free cash flows are
is one of the few large diversified large firms that have been successful over time.
GE (Chapter 6 Opening Case) is unusual in that it
related linked
GE (Chapter 6 Opening Case) was diversified and manages businesses that have only a few links between them. This corporate-level strategy is best described as diversification.
False
GE (discussed in the Chapter 6 Opening Case) is an example of a firm following the related constrained diversification strategy (i.e., different businesses that are highly related).
True
GE (discussed in the Chapter 6 Opening Case) is an example of a firm that has used internal capital market allocation as a means of creating value even though it competes using a related linked rather than an unrelated diversification strategy.
False
GE (discussed in the Chapter 6 Opening Case) is an example of a firm that used its corporate strategy to achieve competitive advantage by selecting and managing a group of different businesses competing in different product markets.
True
Golden parachutes protect managers from the negative consequences of over-diversifying a firm.
False
Google increasing use of a vertical integration strategy is in line with the extensive use of that strategy by many manufacturing firms.
True
Google's diversification could lead the firm toward a related linked strategy and give the firm advantages in multipoint competition with competitors such as Facebook and Microsoft (Chapter 6 Strategic Focus).
unrelated
Hutchison Whampoa Limited (HWL) has businesses in ports and related services, telecommunications, property and hotels, retail and manufacturing, and energy and infrastructure. HWL makes no efforts to share activities or transfer core competencies among the businesses. HWL is following a strategy of ____________ diversification.
True
If managers diversify a firm in a way that does not produce value, the firm risks capital market intervention.
True
If the businesses in the corporate portfolio are not worth more under the management of the corporation than they would be under any other ownership, then the corporate-level strategy has failed.
True
In a diversified firm, capital allocation can be adjusted according to more specific criteria than is possible with external market allocation of capital.
True
In a money-making effort, a small private university has decided to institute consulting services using its business faculty as consultants whose services would be sold to clients. This university is attempting to use its faculty to gain economies of scope.
economies of scope
In making a decision to diversify, managers should use value-creating reasons or face the risk that their firms will be acquired and they could lose their jobs. Which of the following is a value-creating reason to diversify?
True
In spite of the challenges associated with it, a number of firms continue to use the unrelated diversification strategy, especially in Europe and in emerging markets.
True
In the Chapter 6 Opening Case, GE achieved growth and diversification through mergers and acquisitions.
higher CEO pay is related to larger organization size.
Isidore Crocker, CEO of Gotham Engines, is strongly in favor of acquiring Carolina Textiles, a firm in an unrelated industry. Some members of the board of directors are questioning Crocker's motives for the acquisition. They argue that it is not uncommon for CEOs to push for acquisitions because
True
It can be difficult for investors to actually observe the value created by a firm (such as Walt Disney) as it shares activities and transfers core competencies.
True
Knowing that their firms could be acquired if they are not managed successfully encourages executives to use value-creating diversification strategies.
conglomerate discount
Large diversified businesses often face a _________________ , which results from analysts not knowing how to value a vast array of large businesses with complex financial reports.
believe that the value of conglomerates is less than the value of the sum of their parts.
Large diversified businesses often face what is known as the "conglomerate discount." This discount means that investors
True
Low firm performance is associated with increased diversification.
increase their compensation.
Managerial motives to seek diversification include a desire to
True
Many manufacturing firms are de-integrating and moving to independent supplier networks.
True
Market power exists when a firm is able to sell its products above the existing competitive level or decrease the costs of its primary and support activities below the competitive level, or both.
diversified firms compete against each other in several markets.
Multipoint competition occurs when
stricter interpretation of antitrust laws.
Of the value-neutral incentives to diversify, all of the following are internal firm incentives EXCEPT
False
One advantage of an unrelated diversification strategy in a developed economy is that competitors cannot easily imitate the financial economies, whereas they can easily replicate the value gained through the use of a related diversification strategy.
transfer key people into new management positions.
One method of facilitating the transfer of competencies between firms is to
sharing; activities.
Operational relatedness is created by ________ of
False
Performance continues to increase as diversification increases from single business to unrelated diversification.
vertically integrated
PorkPride Foods produces hams and other meat products. It owns hog raising operations. This is an example of a ________ business.
True
Procter & Gamble (P&G) has a paper towel and baby diaper business that both use paper products. This is an example of value created through the sharing of activities.
related constrained; operational relatedness.
Procter & Gamble (P&G) has a paper towel and baby diaper business, both of which use paper products. The firm's paper production plant produces inputs for both businesses. P&G most likely uses the ________________ diversification strategy to create
False
Related linked firms share more resources and assets between their businesses than do related constrained firms.
True
Research evidence shows that increased firm size and greater levels of diversification are correlated with increased executive compensation.
are able to use activity sharing to successfully create economies of scope.
Research has shown that horizontal acquisitions
unrelated diversification; related diversification
Research suggests that _______________ has decreased while _______________ has increased possibly due to the restructuring that took place in the 1990s and early twenty-first century.
False
Revenues for United Parcel Service (UPS) are derived from the following business segments: 60 percent from U.S. package delivery operations, 22 percent from international package delivery, and 18 percent from non- packaging operations. The best description of the corporate level strategy of UPS is unrelated diversification.
dominant business
Revenues for United Parcel Service (UPS) come from the following business segments: 60 percent from U.S. package delivery operations, 22 percent from international package delivery, and 18 percent from non-packaging operations. Which best describes the corporate level strategy of UPS?
False
Since the 1950s, U.S. government policy regarding antitrust concerns has remained constant.
backward integration.
Specialty Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve the high temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare and only two brick plants in the United States make this type of brick. Specialty Steel has decided to buy one of these brick plants. This is an example of
Specialty Steel has less flexibility now than if it were not vertically integrated.
Specialty Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve the high temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare and only two brick plants in the United States make this type of brick. Specialty Steel owns one of these brick plants and buys all of its production. The other brick manufacturer has recently developed an inexpensive new technology whereby ordinary clay can be used to make this fire brick. This significantly reduces the production cost of this type of brick.
False
Successful product diversification is expected to increase the variability in the firm's profitability since the earnings are generated from several different business units.
focusing on mature, low-technology businesses.
Successful unrelated diversification through restructuring is typically accomplished by
the value created by business units working together exceeds the value the units create when working independently.
Synergy exists when
True
Synergy exists when the value created by business units working together exceeds the value that those same units create working independently.
True
The "conglomerate discount" occurs in large, highly diversified businesses and results from analysts not knowing how to value the vast array of large businesses with complex financial reports.
related diversification projects.
The Cherrywood Fine Furniture Company finds itself with excess capacity in its plant and equipment for furniture manufacturing. This excess capacity will be useful in
market power
The Mars acquisition of the Wrigley assets was part of its related constrained diversification and added market share to the Mars/Wrigley integrated firm. It allowed Mars to gain ________ the market level or reduce its costs below the market level.
related constrained
The Publicis Groupe has three major groups of business (advertising, media, and digital) that share resources and capabilities. Publicis Groupe is using a _________ diversification strategy.
related constrained
The Publicis Groupe uses the digital technology from its digital business to enhance the advertising products in its advertising group. This sharing of activities is characteristic of the ________ diversification strategy.
related linked
The __________ diversification strategy creates value in two ways. First, since the core competence has already been developed in one business, the firm does not have to allocate resources to develop it. Second, since the resource is intangible, competitors cannot easily imitate it.
the sharing of value chain activities and support functions.
The basic types of operational economies through which firms seek value from economies of scope are
the highest performing business strategy is related constrained diversification.
The curvilinear relationship of corporate performance and diversification indicates that
the loss of flexibility.
The downside of synergy in a diversified firm is
managerial competencies are not easily transferable to different organizational cultures.
The drawbacks to transferring competencies by moving key people into new management positions include all EXCEPT
single-business
The lowest level of diversification is the _______ level.
the level of resources and activities shared among the businesses.
The main difference between the related constrained level of diversification and the related linked level of diversification is
the more links there are among the businesses owned by an organization.
The more "constrained" the relatedness of diversification,
constrained
The more sharing of resources and activities among businesses, the more ________ is the relatedness of the diversification.
horizontal acquisition.
The purchasing of firms in the same industry is called
competitors can imitate financial economies more easily than they imitate economies of scope.
The risk for firms that follow the unrelated diversification strategy in developed economies is that
unrelated
The term "conglomerates" refers to firms using the _________ diversification strategy.
businesses in the portfolio are worth more under the management of the company in question than they would be under any other ownership.
The ultimate test of the value of a corporate-level strategy is whether the
False
The use of poison pills increases the chance that a poorly performing firm will be taken over.
discounted by investors.
The value of the assets of a firm using a diversification strategy to create both operational and corporate relatedness tend to be
True
United Technologies, Textron, Samsung, and Hutchison Whampoa Limited are examples of diversified firms that have no relationships between their businesses. These firms all use the strategy of unrelated diversification.
95
Usually a company is classified as a single business firm when revenues generated by the dominant business are greater than ________ percent.
True
Vertical integration allows the firm to gain market power as the firm develops the ability to save on its operations, avoid market costs, improve product quality, and possibly protect its technology from rivals.
True
Vertical integration exists when a company produces its own inputs (forward integration) or owns its own source of output distribution (backward integration).
related linked
Virgin Group successfully transfers its marketing core competence across airlines, cosmetics, music, drinks, mobile phones, health clubs, and a number of other businesses. Virgin follows a(n) _________ diversification corporate strategy.
sharing activities and transferring core competencies.
Walt Disney Company has successfully used related diversification to create value by
They are human-resource dependent.
What is the similarity between high-technology firms and service-based firms that makes them risky as restructuring candidates?
it is difficult for investors to observe the value created by the firm.
When a firm simultaneously practices operational relatedness and corporate relatedness,
multipoint
When diversification results in two companies, such as UPS and FedEx, simultaneously competing in the same product areas or geographic markets, this is called competition.
True
When firms share activities across units, they are often able to achieve increased value.
True
When implementing a restructuring strategy, a company would do best by focusing on mature, low-technology businesses rather than high-technology or service businesses.
An upscale "white-tablecloth" restaurant chain acquires a travel agency.
Which acquisition would be considered the LEAST related?
a tire manufacturer established in 1910
Which of the following firms would be the most likely to be a successful candidate for acquisition and restructuring?
rveillance technologies
Which of the following is NOT a governance mechanism that may limit managerial tendencies to over-diversify?
imitation of core technology by potential competitors
Which of the following is NOT a limitation directly relating to vertical integration?
Related constrained firms share more tangible resources and activities between businesses than do related linked firms.
Which of the following is TRUE?
expanding the business portfolio in order to diversify managerial employment risk
Which of the following is a value-reducing reason for diversification?
reducing costs through business restructuring
Which of the following reasons for diversification is most likely to increase the firm's value?
tacit knowledge
Which of the following resources are more likely to create value in the diversification process?
unrelated
Which type of diversification is most likely to create value through financial economies?
False
Without strict governance mechanisms, the majority of executives will act in their own self-interest rather than acting as positive stewards of firm resources.
was moving away from its traditional single-business strategy toward a dominant strategy.
Wm. Wrigley Jr. Company once made only chewing gum. When Wrigley bought Life Savers (a line of candy mints) and Altoids (a line of breath mints) from Kraft, chewing gum then constituted less than 95 percent of revenues. Thus, Wrigley
The St. Louis manager may quit Xanadu in order to remain in St. Louis.
Xanadu, a U.S. manufacturer of pharmaceuticals, has acquired a firm in the same industry in Ireland. It plans to transfer one of its key managers from its plant in St. Louis to Ireland. What is the major threat to Xanadu's plan to transfer competencies from itself to the Irish firm?
