114. 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
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.
115. Although a(n)
job of
firm, GE (discussed in the Chapter 6 Opening Case) has done an exceptional
its four major strategic business units.
a. related linked; allocating capital across
b. related constrained; restructuring
c. unrelated; sharing activities across
d. unrelated; transferring core competencies across
116. 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.
117. 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
118. 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.
119. 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.
120. 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.
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.
121. 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
122. 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.
123. 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.
124. 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.
125. 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.
126. 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.
127. 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.
128. 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.
129. 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.
130. 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.
131. 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
132. 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
133. 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.
134. 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.
135. 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.
136. 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
a. plan to take poison pills.
b. have golden parachutes.
c. have silver handcuffs.
d. have ironclad contracts.
137. 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
138. 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
139. 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
Essay
140. Differentiate between corporate-level and business-level strategies and give examples of each.
141. What are the five categories of businesses based on level of diversification?
142. Describe the primary reasons a firm pursues increased diversification.
143. Describe how diversified firms can use activity sharing and transfer of core competencies to create value.
144. What are the two ways that an unrelated diversification strategy can create value?
145. What is the effect of a firm’s low performance on the pursuit of diversification?
146. What are the managerial motives to diversify?
Subjective Short Answer
Case Scenario 1: Syco.
Syco is a diversified company that has six primary lines of business. Fifty percent of its revenues and 18 percent of
its profits come from retailing. Most of its retail outlets are discount department stores that serve as anchor tenants
for large suburban shopping malls. The remaining businesses are broken out as follows: Insurance accounts for 30
percent of revenues and 50 percent of profits; consumer credit card operations are 6 percent of sales and 17
percent of profits; 5 percent of revenues and 6 percent of profits come from its stock brokerage business;
commercial and residential real estate operations generate 4 percent of sales and 8 percent of profits; finally, 5
percent of revenues and 1 percent of profits come from its online portal business. The company’s management
states that all these businesses are essential to its competitive future.
147. (Refer to Case Scenario 1). Why might there be so much variability among the proportion of sales versus
profitability contributed by each of the businesses? Does this mean that Syco is more successful in its insurance
business than in its retail business?
148. Part 1: (Refer to Case Scenario 1). Develop a logical argument that would lead you to describe Syco’s
diversification type as related linked and another logical argument that Syco’s diversification type is related
constrained. For both the related linked and for the related constrained arguments, what product, technological, or
distribution activities might link these businesses together?
Part 2: Would you describe either of the logical arguments you developed in response to Part 1 as a good corporate
strategy?
149. (Refer to Case Scenario 1). What diversification strategy best describes Syco? Assume that retailing, insurance,
consumer credit card, stock brokerages, and online portal businesses allow for some transfer of knowledge about
consumer behavior including buying and bill–paying habits.
A. related constrained diversification strategy
B. related linked diversification strategy
C. unrelated diversification strategy
D. combination diversification strategy
Case Scenario 2: Jewell Company.
Jewell Company (JC) is a $2 billion diversified manufacturer and marketer of simple household items, cookware,
and hardware. In the early 1950s, JC’s business consisted solely of manufactured curtain rods that were sold
through hardware stores and retailers like Sears. Since the 1960s however, the company has diversified extensively
through acquisition into such businesses as paintbrushes, writing pens, pots and pans, and hairbrushes. Over 90
percent of its growth can be attributed to these many small acquisitions, whose performance it improved
tremendously through aggressive restructuring and its corporate emphasis on cost-cutting and cost controls. While
JC‘s sixteen different lines of business may appear quite different, they all share the common characteristics of
being staple manufactured items and sold primarily through volume retail channels like Walmart, Target, and Kmart.
Because JC operates each line of business autonomously (separate manufacturing, R&D, and selling responsibilities
for each line), it is perhaps best described as pursuing a related linked diversification strategy. The common
linkages are both internal (accounting systems, product merchandising skills, and acquisition competency) and
external (distribution channel of volume retailers). JC is presently contemplating the acquisition of Plastico, a $3
billion U.S.-based manufacturer of flexible plastic products like trash cans, reheatable and freezable food
containers, and a broad range of other plastic storage containers designed for home and office use. While Plastico
has been highly innovative (over 80 percent of its growth has come from internal new product development), it has
had difficulty controlling costs and is losing ground against powerful customers like Walmart. JC believes that the
market power it wields with retailers like Walmart will help it turn Plastico‘s prospects around.
150. (Refer to Case Scenario 2). How might JC’s related diversification strategy result in economies of scope and
market power?
151. (Refer to Case Scenario 2). Why would the acquisition of Plastico be good for JC?
152. (Refer to Case Scenario 2). What difficulties might you expect JC to encounter related to its acquisition of
Plastico?
153. (Refer to Case Scenario 2). If Jewell Company is able to transfer its competence in cost-cutting and cost controls
to Plastico (which has had difficulty controlling costs), it will have achieved the primary means whereby a related
linked diversification strategy creates value.
Case Scenario 3: Walt Disney Company.
Walt Disney Company is famed for its creativity, strong global brand, and uncanny ability to take service and
experience businesses to a higher level. In the 1970s, the company realized nearly 90 percent of its revenues from
its cartoons and the Disneyland theme park in Anaheim, CA. By the beginning of the twenty–first century, Disney
had not only opened up more parks and ramped up its output of animated films, it had also diversified into many
businesses well beyond its traditional core of high-quality cartoon animation and theme parks. For instance, the
Disney empire diversified vertically and horizontally into retail (The Disney Store, since licensed to The Children’s
Place), cruise lines, theaters, motels, and the Disney Press. It also moved into new product offerings such as sports
franchises, TV networks (ABC and ESPN) and stations, Miramax, Broadway shows (Beauty and the Beast), and
vacation clubs. International growth included EuroDisney and Hong Kong Disney and new releases of TV shows,
videos, and movies worldwide. Indeed, while many of Disney‘s businesses had some tie to Mickey Mouse, only
about 28 percent of total revenues now came directly from its parks.
154. (Refer to Case Scenario 3). What level and type of diversification best characterized Disney in the 1970s?
A. dominant business
B. related constrained
C. related linked
D. unrelated
155. (Refer to Case Scenario 3). What level and type of diversification best characterized Disney at the beginning of the
21st Century?
A. dominant business
B. related constrained
C. related linked
D. unrelated
156. (Refer to Case Scenario 3). Assume that Disney can benefit from both operational and corporate relatedness.
Which of the following corporate core competencies would provide Disney the greatest opportunity to create value
across all or most of its many businesses?
A. leading-edge animation and live-action film production skills
B. ability to manage creativity and service excellence within financial constraints
C. ability to generate and manage cash-flow surpluses efficiently
D. strong general managers and general management skills