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83. The lowest level of diversification is the ____ level.
a.
single-business
b.
dominant business
c.
related constrained
d.
unrelated
84. Successful unrelated diversification through restructuring is typically accomplished by:
a.
focusing on mature, low-technology businesses.
b.
a “random walk” of good luck in picking firms to buy.
c.
seeking out high technology firms in high-growth industries.
d.
a top management team that is not constrained by pre-established ideas of how the firm’s portfolio should be
developed.
85. Which of the following reasons for diversification is most likely to increase the firm’s value?
a.
Increasing managerial compensation
b.
Reducing costs through business restructuring
c.
Taking advantage of changes in tax laws
d.
Conforming to antitrust regulation
86. Backward integration occurs when a company:
a.
produces its own inputs.
b.
owns its own source of distribution of outputs.
c.
is concentrated in a single industry.
d.
is divesting unrelated businesses.
87. Synergy exists when:
a.
cost savings are realized through improved allocations of financial resources based on investments inside or
outside the firm.
b.
two units create value by utilizing market power in their respective industries.
c.
firms utilize constrained related diversification to build an attractive portfolio of businesses.
d.
the value created by business units working together exceeds the value the units create when working
independently.
88. Compared with diversification based on intangible resources, diversification based on financial resources is:
a.
less imitable and less likely to create value on a long-term basis.
b.
more imitable and less likely to create value on a long-term basis.
c.
less imitable and more likely to create value on a long-term basis.
d.
more imitable and more likely to create value on a long-term basis.
89. 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:
a.
corporate headquarters can allocate capital according to more specific criteria than is possible with external
market allocations.
b.
corporate headquarters has more complete information about the subsidiary businesses than the external
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capital market.
c.
the firm can acquire other firms with innovative products instead of allocating capital to research and
development.
d.
corporate headquarters can more effectively discipline underperforming management teams through resource
allocation than can the external market.
90. Which type of diversification is most likely to create value through financial economies?
a.
Related constrained
b.
Operational and corporate relatedness
c.
Unrelated
d.
Related linked
91. 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
b.
related linked; corporate relatedness
c.
related constrained; corporate relatedness
d.
related linked; operational relatedness
92. Which of the following is NOT a limitation directly relating to vertical integration?
a.
Bureaucratic costs
b.
The loss of flexibility through investment in specific technologies
c.
Capacity balance and coordination problems from changes in demand
d.
Imitation of core technology by potential competitors
93. 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:
a.
a successful acquisition will increase the CEO’s power over the Board of Directors.
b.
making an acquisition is an easier route to increased firm value than is improving the firm’s core
competencies.
c.
higher CEO pay is related to larger organization size.
d.
CEOs nearing retirement seek to create empires to continue their legacy.
94. Multipoint competition occurs when:
a.
firms have multiple retail outlets.
b.
firms have multiple products in their primary industry.
c.
diversified firms compete against each other in several markets.
d.
firms have diversified portfolios of companies.
95. 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?
a.
single business
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b.
dominant business
c.
related constrained
d.
related linked
96. Operational relatedness is created by ___________ of ___________.
a.
sharing; core competencies
b.
sharing; activities
c.
transferring; core competencies
d.
transferring; activities
97. 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:
a.
unrelated diversification.
b.
related diversification projects.
c.
corporate restructuring.
d.
multipoint competition
98. A company pursuing vertical integration can gain market power over its competitors through all of the following
EXCEPT:
a.
improved adjustment to technological changes.
b.
savings on operations costs.
c.
improved product quality.
d.
avoidance of market costs.
99. 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.
a.
multiple
b.
multiportal
c.
multipoint
d.
multiplicit
100. 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 because Dragonfly produces
children’s literature, whereas White Rabbit focuses on child-level nonfiction scientific and nature topics. Which of the
following statements is probably TRUE about this acquisition?
a.
This is a horizontal acquisition.
b.
This is an example of virtual integration.
c.
Dragonfly is beginning to build a conglomerate.
d.
Economies of scope are unlikely to result from this acquisition.
101. The term “conglomerates” refers to firms using the ____ diversification strategy.
a.
unrelated
b.
related constrained
c.
related linked
d.
global
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102. Firms use corporate-level diversification strategies for all the following reasons EXCEPT:
a.
value-creating.
b.
value-neutral.
c.
value-reducing.
d.
value-diversifying.
103. The main difference between the related constrained level of diversification and the related linked level of
diversification is:
a.
the percentage of total organizational profitability that comes from the dominant business.
b.
the level of resources and activities shared among the businesses.
c.
whether the diversification is vertical or horizontal.
d.
whether the diversification is value-creating or value-neutral.
104. The more sharing of resources and activities among businesses, the more ____ is the relatedness of the
diversification.
a.
linked
b.
constrained
c.
integrated
d.
intense
105. 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?
a.
Economies of scope
b.
Desire for increased compensation
c.
Reduced managerial risk
d.
Low performance
106. 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.
a.
unrelated
b.
related constrained
c.
related linked
d.
dominant business
107. What is the similarity between high-technology firms and service-based firms that makes them risky as restructuring
candidates?
a.
They are dependent on human resources.
b.
They have few tangible assets.
c.
Both types of firm rely on financial economies.
d.
The demand for their products is highly sensitive to economic downturns.
108. 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.
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a.
dominant business
b.
related constrained
c.
related linked
d.
unrelated
109. Which of the following is TRUE?
a.
Conglomerates no longer exist in the U.S. business scene, but are common in emerging markets.
b.
Unrelated diversified firms seek to create value through economies of scope.
c.
The sharing of intangible resources, such as know-how, between firms is a type of operational sharing in
related diversifications.
d.
Related constrained firms share more tangible resources and activities between businesses than do related
linked firms.
110. Which of the following is a value-reducing reason for diversification?
a.
Enhancing the strategic competitiveness of the entire company
b.
Expanding the business portfolio in order to diversify managerial employment risk
c.
Gaining market power relative to competitors
d.
Conforming to antitrust regulation
111. Large diversified businesses often face what is known as the “conglomerate discount.” This discount means that
investors:
a.
understand that the financial efficiencies of this strategy automatically make these stocks worth more than
their current market valuation.
b.
believe that the value of conglomerates is less than the value of the sum of their parts.
c.
increase the expected future earnings of conglomerates.
d.
have found that over time, conglomerates earn more than the component companies would have earned
independently.
112. 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.
b.
by the ability to not report losses to investors.
c.
by the ability to increase pay to managers without shareholders being aware.
d.
through the ability to reinvest cash in dividends to shareholders.
113. The drawbacks to transferring competencies by moving key people into new management positions include all of
these EXCEPT:
a.
the people involved may not want to move.
b.
managerial competencies are not easily transferable to different organizational cultures.
c.
managers with these skills are expensive.
d.
top-level managers may resist having these key people transferred.
114. 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,
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a.
was moving away from its traditional single-business strategy toward a dominant strategy.
b.
was moving away from its traditional dominant strategy toward a related linked strategy.
c.
became a conglomerate since Life Savers and Altoids are unrelated businesses.
d.
probably planned to restructure these companies and sell them off.
115. 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
make frames for academy art works, and to sell museum-quality framing services to the public. The art academy is
engaging in diversification based on ____ relatedness.
a.
operational
b.
corporate
c.
intellectual
d.
constrained
116. Equator, 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 Equator’s plan to transfer
competencies from itself to the Irish firm?
a.
The St. Louis manager may quit Equator in order to remain in St. Louis.
b.
American pharmaceutical manufacturing techniques may not transfer to Ireland.
c.
Irish managers will refuse to take direction from a foreign executive.
d.
The cost of transferring U.S. managers overseas is usually not cost-effective.
117. Usually a company is classified as a single business firm when revenues generated by the dominant business are
greater than ____ percent.
a.
99
b.
95
c.
90
d.
70
118. Firms seek to create value from economies of scope through all of the following EXCEPT:
a.
activity sharing.
b.
skill transfers.
c.
transfers of corporate core competencies.
d.
de-integration.
119. Research suggests that _______________has decreased while ___________has increased possibly due to the
restructuring that took place in the 1990s and early twenty-first century.
a.
forward vertical integration; backward vertical integration
b.
backward vertical integration; forward vertical integration
c.
related diversification; unrelated diversification
d.
unrelated diversification; related diversification
120. 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.
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b.
inflated by investors.
c.
completely ignored by investors.
d.
highly valued by investors.
121. When a firm simultaneously practices operational relatedness and corporate relatedness:
a.
it is difficult for investors to observe the value created by the firm.
b.
the firm is likely to be overvalued by investors.
c.
the firm will suffer from diseconomies of scope that outweigh cost savings generated.
d.
the firm is seeking to create value through financial economies.
122. 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.
b.
forward integration.
c.
horizontal integration.
d.
virtual integration.
123. The purchasing of firms in the same industry is called:
a.
unrelated diversification.
b.
vertical integration.
c.
networking the organization.
d.
horizontal acquisition.
124. As the threat of corporate failure increases due to relatedness between a firm’s business units, firms may decide to:
a.
increase the firm’s level of retained resources.
b.
diversify into less risky environments.
c.
reduce the level of diversity in its investments.
d.
pursue unproven product lines.
125. The risk for firms that follow the unrelated diversification strategy in developed economies is that:
a.
external investors tend to dump the stocks of conglomerates during economic downturns.
b.
conglomerates are typically owned by one powerful entrepreneur and do not survive his/her retirement or
death.
c.
government regulations, especially in Europe, have periodically forced the dissolution of conglomerates.
d.
competitors can imitate financial economies more easily than they imitate economies of scope.
126. Which of the following is NOT a governance mechanism that may limit managerial tendencies to over-diversify?
a.
The market for corporate control
b.
The Board of Directors
c.
Surveillance technologies
d.
Executive compensation practices
127. 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
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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:
a.
plan to take poison pills.
b.
have golden parachutes.
c.
have silver handcuffs.
d.
have ironclad contracts.
128. Firms that have selected a related diversification corporate-level strategy seek to exploit:
a.
control shared among business-unit managers.
b.
economies of scope between business units.
c.
the favorable demand of buyers.
d.
market power.
129. Which acquisition would be considered the LEAST related?
a.
A candy manufacturer purchases a chemical laboratory specializing in food flavorings.
b.
A chain of garden centers acquires a landscape architecture firm.
c.
A hospital acquires a long-term care nursing home.
d.
An upscale “white-tablecloth” restaurant chain acquires a travel agency.
130. PorkPride Foods produces hams and other meat products. It owns hog raising operations. This is an example of a
business that is:
a.
reducing vertical integration.
b.
vertically integrated.
c.
totally integrated.
d.
horizontally integrated.
131. 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.
a.
threat of regulation by the Securities and Exchange Commission
b.
high CEO turnover
c.
threat of takeover
d.
conglomerate discount
132. Research has shown that horizontal acquisitions
a.
tend to have disappointing financial results in the long run.
b.
are being replaced by virtual acquisitions.
c.
result in lower levels of performance than unrelated acquisitions.
d.
are able to use activity sharing to successfully create economies of scope.
133. The ultimate test of the value of a corporate-level strategy is whether the:
a.
corporation earns a great deal of money.
b.
top management team is satisfied with the corporation’s performance.
c.
businesses in the portfolio are worth more under the management of the company in question than they would
be under any other ownership.
d.
businesses in the portfolio increase the firm’s financial returns.
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134. What is the effect of a firm’s low performance on the pursuit of diversification?
135. What are the managerial motives to diversify?
136. What are the two ways that an unrelated diversification strategy can create value?
137. Differentiate between corporate-level and business-level strategies and give examples of each.
138. Describe the primary reasons a firm pursues increased diversification.
139. What are the five categories of businesses based on level of diversification?
140. Describe how diversified firms can use activity sharing and transfer of core competencies to create value.
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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
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
51. True
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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
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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
102. d
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103. b
104. b
106. b
107. a
109. d
110. b
112. a
113. b
115. a
116. a
119. d
122. a
123. d
125. d
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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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