True / False
1. In the Chapter 6 Opening Case, GE achieved growth and diversification through mergers and acquisitions.
a. True
b. False
2. 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.
a. True
b. False
3. 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).
a. True
b. False
4. 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
5. 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.
a. True
b. False
6. 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
7. A major advantage of diversification is that overall monitoring costs are reduced, since each separate business
comes under the control of corporate headquarters.
a. True
b. False
8. Successful product diversification is expected to increase the variability in the firm’s profitability since the earnings
are generated from several different business units.
a. True
b. False
9. 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.
a. True
b. False
10. 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
11. Related linked firms share more resources and assets between their businesses than do related constrained firms.
a. True
b. False
12. 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
13. 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
14. 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
15. 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
16. Antitrust regulation, tax laws, and low performance are all value-neutral reasons why firms engage in
diversification.
a. True
b. False
17. 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
18. 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
19. 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
20. When firms share activities across units, they are often able to achieve increased value.
a. True
b. False
21. Firms using the related constrained strategy share activities in order to create value.
a. True
b. False
22. 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.
a. True
b. False
23. Firms seeking to create value through corporate relatedness use the related constrained strategy.
a. True
b. False
24. 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
25. 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
26. Firms using a related diversification strategy may gain market power when successfully using their related
constrained or related linked strategy.
a. True
b. False
27. 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
28. Vertical integration exists when a company produces its own inputs (forward integration) or owns its own source of
output distribution (backward integration).
a. True
b. False
29. 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).
a. True
b. False
30. Google increasing use of a vertical integration strategy is in line with the extensive use of that strategy by many
manufacturing firms.
a. True
b. False
31. Many manufacturing firms are de–integrating and moving to independent supplier networks.
a. True
b. False
32. 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
33. A company that tries to balance both operational and corporate relatedness and fails risks incurring diseconomies of
scope.
a. True
b. False
34. 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
b. False
35. 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.
a. True
b. False
36. Financial economies are cost savings realized through improved allocations of financial resources based on
investments inside or outside the firm.
a. True
b. False
37. 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
38. 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
39. 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
b. False
40. 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
41. 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.
a. True
b. False
42. 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
43. 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
44. 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.
a. True
b. False
45. 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
46. 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
47. Companies creating financial economies through restructuring typically focus on high–technology businesses
primarily because these firms are human-resource dependent.
a. True
b. False
48. Diversification strategies can be used with both value-creating and value-neutral objectives.
a. True
b. False
49. 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
50. Since the 1950s, U.S. government policy regarding antitrust concerns has remained constant.
a. True
b. False
51. 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
52. Low firm performance is associated with increased diversification.
a. True
b. False
53. Performance continues to increase as diversification increases from single business to unrelated diversification.
a. True
b. False
54. 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
55. 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
56. Research evidence shows that increased firm size and greater levels of diversification are correlated with increased
executive compensation.
a. True
b. False
57. If managers diversify a firm in a way that does not produce value, the firm risks capital market intervention.
a. True
b. False
58. Golden parachutes protect managers from the negative consequences of over-diversifying a firm.
a. True
b. False
59. 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
60. The use of poison pills increases the chance that a poorly performing firm will be taken over.
a. True
b. False