Chapter 6 Strategic

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.

a. Specialty Steel has less flexibility now than if it were not vertically integrated

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?

a. The St. Louis manager may quit Xanadu in order to remain in St. Louis.

What is the similarity between high-technology firms and service-based firms that makes them risky as restructuring candidates?

a. They are human-resource dependent.

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?

a. This is a horizontal acquisition

An office management firm has developed a system for efficiently organizing small medical and dental practices both through proprietary software and through unique training programs for staff. It has recently acquired a firm specializing in providing management services for veterinary practices. The office management firm is hoping to

a. achieve economies of scope.

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

a. backward integration

The value of the assets of a firm using a diversification strategy to create both operational and corporate relatedness tend to be

a. discounted by investors.

Successful unrelated diversification through restructuring is typically accomplished by .

a. focusing on mature, low-technology businesses.

A company pursuing vertical integration can gain market power over its competitors through all of the following EXCEPT

a. improved adjustment to technological changes.

When a firm simultaneously practices operational relatedness and corporate relatedness,

a. it is difficult for investors to observe the value created by the firm.

Free cash flows are

a. liquid financial assets for which investments in current businesses are no longer economically viable.

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.

a. operational

Backward integration occurs when a company

a. produces its own inputs.

The Publicis Groupe uses the digital technology from its digital business to enhance the advertising products in its advertising group. This sharing of activities is characteristic of the diversification strategy.

a. related constrained

Procter & Gamble (P&G) has a paper towel and baby diaper business, both of which use paper products. The firm's paper production plant produces inputs for both businesses. P&G most likely uses the diversification strategy to create

a. related constrained; operational relatedness.

The lowest level of diversification is the level.

a. single-business

An ability to efficiently allocate capital through an internal market may help the firm protect the competitive advantages it develops

a. through reduced disclosure to outside parties.

The term "conglomerates" refers to firms using the diversification strategy.

a. unrelated

Wm. Wrigley Jr. Company once made only chewing gum. When Wrigley bought Life Savers (a line of candy mints) and Altoids (a line of breath mints) from Kraft, chewing gum then constituted less than 95 percent of revenues. Thus, Wrigley

a. was moving away from its traditional single-business strategy toward a dominant strategy.

Usually a company is classified as a single business firm when revenues generated by the dominant business are greater than percent.

b. 95

Large diversified businesses often face what is known as the "conglomerate discount." This discount means that investors

b. believe that the value of conglomerates is less than the value of the sum of their parts

The more sharing of resources and activities among businesses, the more diversification.

b. constrained

As the threat of corporate failure increases due to relatedness between a firm's business units, firms may decide to

b. diversify into less risky environments

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?

b. dominant business

Firms that have selected a related diversification corporate-level strategy seek to exploit

b. economies of scope between business units.

Which of the following is a value-reducing reason for diversification?

b. expanding the business portfolio in order to diversify managerial employment risk

Because of the tax laws of the 1960s and 1970s, when dividends were taxed more heavily than capital gains, shareholders preferred that corporations

b. keep free cash flows for investment in acquisitions.

The drawbacks to transferring competencies by moving key people into new management positions include all EXCEPT

b. managerial competencies are not easily transferable to different

Which of the following reasons for diversification is most likely to increase the firm's value?

b. reducing costs through business restructuring

Acquisitions to increase market power require that the firm have a(n) diversification strategy.

b. related

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.

b. 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.

b. related constrained

Walt Disney Company has successfully used related diversification to create value by .

b. sharing activities and transferring core competencies.

Operational relatedness is created by of

b. sharing; activities

The curvilinear relationship of corporate performance and diversification indicates that

b. the highest performing business strategy is related constrained diversification

The main difference between the related constrained level of diversification and the related linked level of diversification is.

b. the level of resources and activities shared among the businesses.

One method of facilitating the transfer of competencies between firms is to

b. transfer key people into new management positions.

PorkPride Foods produces hams and other meat products. It owns hog raising operations. This is an example of a business.

b. vertically integrated

Corporate-level strategy is concerned with and how to manage these businesses.

b. what product markets and businesses the firm should be in

Which of the following firms would be the most likely to be a successful candidate for acquisition and restructuring?

c. a tire manufacturer established in 1910

Certain regulatory changes (such as antitrust regulation and tax laws) create incentives or disincentives for diversification that

c. are value-neutral.

The ultimate test of the value of a corporate-level strategy is whether the

c. businesses in the portfolio are worth more under the management of the company in question than they would be under any other ownership.

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

c. changes in antitrust regulations and tax laws.

Multipoint competition occurs when

c. diversified firms compete against each other in several markets

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.

c. multipoint

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.

c. related linked

Of the value-neutral incentives to diversify, all of the following are internal firm incentives EXCEPT

c. stricter interpretation of antitrust laws

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

c. the firm can acquire other firms with innovative products instead of allocating capital to research and development

The more "constrained" the relatedness of diversification,

c. the more links there are among the businesses owned by an organization.

The basic types of operational economies through which firms seek value from economies of scope are

c. the sharing of value chain activities and support functions.

Which type of diversification is most likely to create value through financial economies?

c. unrelated

Which acquisition would be considered the LEAST related?

d. An upscale "white-tablecloth" restaurant chain acquires a travel agency

Which of the following is TRUE?

d. Related constrained firms share more tangible resources and activities between businesses than do related linked firms.

Research has shown that horizontal acquisitions

d. are able to use activity sharing to successfully create economies of scope.

The risk for firms that follow the unrelated diversification strategy in developed economies is that

d. competitors can imitate financial economies more easily than they imitate economies of scope

Firms seek to create value from economies of scope through all of the following EXCEPT

d. de-integration.

The purchasing of firms in the same industry is called

d. horizontal acquisition.

Which of the following is NOT a limitation directly relating to vertical integration?

d. imitation of core technology by potential competitors

The downside of synergy in a diversified firm is

d. the loss of flexibility

Synergy exists when

d. the value created by business units working together exceeds the value the units create when working independently

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.

d. unrelated

Firms use corporate-level diversification strategies for all the following reasons EXCEPT

d. value-diversifying