Name:
Class:
Date:
chapter 6
Answer Key
1. False
2. False
3. False
4. True
5. True
6. True
7. True
8. False
9. False
10. True
11. False
12. True
13. True
14. True
15. True
16. True
17. False
18. True
19. True
20. True
21. False
22. False
23. True
24. False
25. False
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26. False
27. True
28. True
29. True
30. True
31. True
32. False
33. True
34. True
35. True
36. True
37. True
38. True
39. False
40. True
41. False
42. True
43. False
44. True
45. False
46. True
47. True
48. False
49. True
50. True
51. True
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chapter 6
52. True
53. False
54. True
55. True
56. True
57. True
58. True
59. True
60. d
61. c
62. b
63. b
64. c
65. c
66. a
67. b
68. b
69. c
70. c
71. b
72. c
73. a
74. b
75. d
76. c
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Page 4
77. b
78. c
79. c
80. a
81. a
82. b
83. a
84. a
85. b
86. a
87. d
88. b
89. c
90. c
91. a
92. d
93. c
94. c
95. b
96. b
97. b
98. a
99. c
100. a
101. a
102. d
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103. b
104. b
105. a
106. b
107. a
108. d
109. d
110. b
111. b
112. a
113. b
114. a
115. a
116. a
117. b
118. d
119. d
120. a
121. a
122. a
123. d
124. b
125. d
127. b
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128. b
129. d
130. b
131. d
132. d
133. c
134. High corporate performance eliminates the need for diversification. Some research shows that low returns are related
to greater levels of diversification. Firms plagued by poor performance often diversify in an effort to become more
profitable. But, continued poor performance following diversification may slow the pace of diversification and may lead
to divestitures and a focus on the core business. In addition, firms that are more broadly diversified compared to their
competitors may have lower overall performance. Figure 6.3 shows that the related constrained diversification strategy is
the highest performing strategy. So poor performing firms that intend to diversify should look at purchasing businesses
that would be suitable for this strategy rather than moving into unrelated diversification or retaining a dominant business
strategy.
135. A top-level manager may be motivated to pursue diversification because diversification leads to greater job security
for executives. In general, greater amounts of diversification reduce managerial risk because if a particular business fails,
the top executive remains employed by the corporation. In addition, diversification increases firm size, and firm size has a
direct effect on executive compensation. Moreover, managing a highly diversified firm is more difficult; thus, managerial
compensation is generally higher in such a firm. Consequently, executives may have selfish motives to diversify the
company in ways which may actually reduce corporate competitiveness.
136. Unrelated diversification can create value through two types of financial economies (cost savings). 1) Unrelated
diversified firms can more efficiently allocate capital among the component businesses than can the external financial
market. This is possible because the corporate-level management has more complete information about the performance
of the component businesses and it can also discipline under-performing management teams. 2) Unrelated diversified
firms can also create value by purchasing other businesses at low prices, restructuring them, and reselling them at a higher
price. This practice is most successful with mature, low-technology businesses, rather than high-technology or service
businesses, which are more dependent on employees who may leave.
137. A business-level strategy determines how a firm will compete in a single industry or product market. When a firm
diversifies beyond a single industry it uses a corporate-level strategy. A diversified company has two levels of strategy:
business-level and corporate-level. Each business unit has a business level strategy. The corporate strategy is concerned
with: 1) what businesses the firm should be in and 2) how the corporate office should manage the group of businesses.
The top management of diversified companies views the firm’s businesses as a portfolio of core competencies that will
generate above-average returns by creating value. An example of a business-level strategy would be whether the firm
targets the mass market and competes on price, or whether it competes on the basis of uniqueness. An example of a
corporate-level strategy would be whether the firm should sell off a poorly performing subsidiary.
138. Firms typically diversify to increase the firm’s value by improving its overall performance. Value-creating
diversification occurs through related or unrelated diversification when the strategy allows the company’s business units to
increase revenues or reduce costs while implementing business level strategies. Alternatively, a firm may diversify to gain
market power over competitors. Value-neutral diversification may occur in response to governmental policies, firm
performance problems, or uncertainties about future cash flows. Finally, managers may have selfish motives to diversify,
such as increased compensation or personal reduced employment risk. These selfish motivations may actually erode the
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7. 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.
a.
True
b.
False
8. Firms seeking to create value through corporate relatedness use the related constrained strategy.
a.
True
b.
False
9. Without strict governance mechanisms, the majority of executives will act in their own self-interest rather than acting
as positive stewards of firm resources.
a.
True
b.
False
10. 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.
a.
True
b.
False
11. A firm uses a corporate-level diversification strategy for a variety of reasons, all of which have to do with ways to
create value.
a.
True
b.
False
12. Low firm performance is associated with increased diversification.
a.
True
b.
False
13. Vertical integration exists when a company produces its own inputs (forward integration) or owns its source of output
distribution (backward integration).
a.
True
b.
False
14. 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.
a.
True
b.
False
15. 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.
a.
True
b.
False
16. Diversification strategies can be used with both value-creating and value-neutral objectives.
a.
True
b.
False
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17. The use of poison pills increases the chance that a poorly performing firm will be taken over.
a.
True
b.
False
18. It can be difficult for investors to actually observe the value created by a firm as it shares activities and transfers core
competencies.
a.
True
b.
False
19. Golden parachutes protect managers from the negative consequences of over-diversifying a firm.
a.
True
b.
False
20. Research shows that increased firm size and greater levels of diversification are correlated with increased executive
compensation.
a.
True
b.
False
21. 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.
a.
True
b.
False
22. Decisions to expand a firm’s portfolio of businesses to reduce managerial risk can have a positive effect on the firm’s
value.
a.
True
b.
False
23. 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.
a.
True
b.
False
24. Since the 1950s, U.S. government policy regarding antitrust concerns has remained constant.
a.
True
b.
False
25. Related linked firms share more resources and assets between their businesses than do related constrained firms.
a.
True
b.
False
26. 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.
a.
True
b.
False
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27. 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.
a.
True
b.
False
28. GE 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 strategy rather than an unrelated diversification strategy.
a.
True
b.
False
29. 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.
a.
True
b.
False
30. 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.
a.
True
b.
False
31. Firms using a related diversification strategy may gain market power when successfully using their related constrained
or related linked strategy.
a.
True
b.
False
32. Successful product diversification is expected to increase the variability in the firm’s profitability because the earnings
are generated from several different business units.
a.
True
b.
False
33. 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.
a.
True
b.
False
34. In a diversified firm, capital allocation can be adjusted according to more specific criteria than is possible with
external market allocation of capital.
a.
True
b.
False
35. 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.
a.
True
b.
False
36. A company that tries to balance both operational and corporate relatedness and fails, risks incurring diseconomies of
scope.
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a.
True
b.
False
37. Antitrust regulation, tax laws, and low performance are all value-neutral reasons why firms engage in diversification.
a.
True
b.
False
38. 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.
a.
True
b.
False
39. A major advantage of diversification is that overall monitoring costs are reduced because each separate business
comes under the control of corporate headquarters.
a.
True
b.
False
40. 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.
a.
True
b.
False
41. Performance continues to increase as diversification increases from single business to unrelated diversification.
a.
True
b.
False
42. Synergy exists when the value created by business units working together exceeds the value that those same units
create working independently.
a.
True
b.
False
43. 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.
a.
True
b.
False
44. 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.
a.
True
b.
False
45. 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.
a.
True
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b.
False
46. 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.
a.
True
b.
False
47. If managers diversify a firm in a way that does not produce value, the firm risks capital market intervention.
a.
True
b.
False
48. In the Chapter 6 Opening Case, Disney achieved growth and diversification through mergers and acquisitions.
a.
True
b.
False
49. 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.
a.
True
b.
False
50. When implementing a restructuring strategy, a company would do best by focusing on mature, low-technology
businesses rather than high-technology or service businesses.
a.
True
b.
False
51. When firms share activities across units, they are often able to achieve increased value.
a.
True
b.
False
52. Many manufacturing firms are reducing vertical integration and moving to independent supplier networks.
a.
True
b.
False
53. 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.
a.
True
b.
False
54. Disney (discussed in the Chapter 6 Opening Case) is an example of a company that was successful because its
corporate strategy added value across its set of businesses above what the individual businesses could create individually.
a.
True
b.
False
55. A significant benefit of an internal capital market is limiting competitors’ access to information about the performance
of the individual businesses within the corporation.
a.
True
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b.
False
56. 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.
a.
True
b.
False
57. Knowing that their firms could be acquired if they are not managed successfully encourages executives to use value-
creating diversification strategies.
a.
True
b.
False
58. Companies in emerging markets frequently use the unrelated diversification strategy because of the absence of a “soft
infrastructure” in those markets.
a.
True
b.
False
59. Financial economies are cost savings realized through improved allocations of financial resources based on
investments inside or outside the firm.
a.
True
b.
False
Indicate the answer choice that best completes the statement or answers the question.
60. Managerial motives to seek diversification include a desire to:
a.
improve their marketability to other firms.
b.
effectively use corporate resources.
c.
provide higher returns to corporate stakeholders.
d.
increase their compensation.
61. 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 _______because it could sell its products above the market
level or reduce its costs below the market level.
a.
multipoint competition
b.
virtual integration
c.
market power
d.
vertical integration
62. One method of facilitating the transfer of competencies between firms is to:
a.
virtually integrate the two firms.
b.
transfer key people into new management positions.
c.
share support activities, such as purchasing practices.
d.
restructure the weaker firm to mirror the structure of the more successful firm.
63. The Walt Disney Company has successfully used related diversification to create value by:
a.
sharing activities.
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b.
sharing activities and transferring core competencies.
c.
transferring core competencies.
d.
efficient internal capital allocation and restructuring.
64. The basic types of operational economies through which firms seek value from economies of scope are:
a.
synergies between internal and external capital markets.
b.
the leveraging of individual tangible resources.
c.
the sharing of value chain activities and support functions.
d.
joint ventures and outsourcing.
65. Of the value-neutral incentives to diversify, all of the following are internal firm incentives EXCEPT:
a.
overall firm risk reduction.
b.
uncertain future cash flows.
c.
stricter interpretation of antitrust laws.
d.
low performance.
66. 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.
b.
This is an example of a capacity balance problem.
c.
This is a result of conflicts of interest between the managers of the brick plant and the executives of Specialty
Steel.
d.
The market power of Specialty Steel has been reducing vertical integration.
67. 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.
a.
related linked
b.
related constrained
c.
unrelated
d.
dominant
68. Which of the following resources are more likely to create value in the diversification process?
a.
Plant and equipment
b.
Tacit knowledge
c.
Excess capacity
d.
Financial resources
69. Which of the following firms would be the most likely to be a successful candidate for acquisition and restructuring?
a.
A medical practice
b.
A management consulting firm that has a tradition of long term client-consultant relationships
c.
A tire manufacturer established in 1910
d.
A start-up communications technology firm
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70. The more “constrained” the relatedness of diversification:
a.
the fewer the linkages between the businesses within the portfolio owned by the firm.
b.
the wider the variation in the portfolio of businesses owned by the firm.
c.
the more links there are among the businesses owned by an organization.
d.
the lower the proportion of total organizational revenue derived from the dominant business.
71. Because of the tax laws of the 1960s and 1970s, when dividends were taxed more heavily than capital gains,
shareholders preferred that corporations:
a.
pay dividends annually.
b.
keep free cash flows for investment in acquisitions.
c.
distribute capital gains regularly.
d.
increase managerial salaries.
72. Certain regulatory changes (such as antitrust regulation and tax laws) create incentives or disincentives for
diversification that:
a.
create value.
b.
reduce value.
c.
are value-neutral.
d.
are managerial motives to diversify.
73. 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.
b.
implement vertical integration.
c.
achieve financial economies through an unrelated acquisition.
d.
acquire specialized talent from the veterinary management company.
74. The curvilinear relationship of corporate performance and diversification indicates that:
a.
dominant-business corporate strategies tend to be higher performing than related constrained or unrelated
business strategies.
b.
the highest performing business strategy is related constrained diversification.
c.
the less related the businesses acquired, the higher performing the organization.
d.
none of the strategies consistently outperforms the others.
75. The downside of synergy in a diversified firm is:
a.
increasing independence of businesses.
b.
the reduction of activity sharing.
c.
excessive focus on risky innovation.
d.
the loss of flexibility.
76. 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.
a.
dominant-business
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b.
related constrained
c.
related linked
d.
unrelated
77. Acquisitions to increase market power require that the firm have a(n) ____ diversification strategy.
a.
unrelated
b.
related
c.
dominant-business
d.
single-business
78. 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:
a.
the fact that other firms in an industry are diversifying.
b.
pressure from stockholders who are demanding that the firm diversify.
c.
changes in antitrust regulations and tax laws.
d.
a firm’s low performance.
79. The _________________diversification strategy creates value in two ways. First, because the core competency has
already been developed in one business, the firm does not have to allocate resources to develop it. Second, because the
resource is intangible, competitors cannot easily imitate it.
a.
related constrained
b.
unrelated
c.
related linked
d.
dominant business
80. Free cash flows are:
a.
liquid financial assets for which investments in current businesses are no longer economically viable.
b.
liquid financial assets that for tax purposes must be reinvested in the firm if not distributed as dividends to
shareholders.
c.
the profits resulting after a restructured firm has been sold.
d.
dividends that have been distributed to shareholders that are taxed as capital gains.
81. 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
b.
related linked
c.
unrelated
d.
dominant
82. Corporate-level strategy is concerned with ____ and how to manage these businesses.
a.
whether the firm should invest in global or domestic businesses
b.
what product markets and businesses the firm should be in
c.
whether the portfolio of businesses should generate immediate above-average returns or should be troubled
businesses which will create above-average returns only after restructuring
d.
whether to integrate backward or forward.