61. 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
Multiple Choice
62. GE (Chapter 6 Opening Case) is unusual in that it
a. is widely diversified but competes only in manufacturing industries.
b. has had an unblemished environmental record.
c. is one of the few large diversified large firms that have been successful over time.
d. restricted its investments to only developed economies.
63. As noted in the Chapter 6 Opening Case, GE is now a major player in the “clean energy” industry such as wind
turbines and solar power. A major reason GE moved in this direction was
a. to narrow the focus of its portfolio around energy-related industries.
b. to overcome and correct its record in environmental issues.
c. to further diversify its portfolio away from services.
d. the clean energy industry was guaranteed to be profitable for the next several years.
64. GE (Chapter 6 Opening Case) was diversified and manages businesses that have only a few links between them.
This corporate-level strategy is best described as diversification.
a. related constrained
b. related linked
c. unrelated
d. conglomerate
65. 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.
66. 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.
67. 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.
68. 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.
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.
69. 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
70. The more sharing of resources and activities among businesses, the more
diversification.
a. linked
b. constrained
c. integrated
d. intense
is the relatedness of the
71. 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
72. 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
b. dominant business
c. related constrained
d. related linked
73. 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.
74. The lowest level of diversification is the level.
a. single-business
b. dominant business
c. related constrained
d. unrelated
75. 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.
76. 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
77. 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
78. The term “conglomerates” refers to firms using the diversification strategy.
a. unrelated
b. related constrained
c. related linked
d. global
79. 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.
a. dominant business
b. related constrained
c. related linked
d. unrelated
80. Firms use corporate–level diversification strategies for all the following reasons EXCEPT
a. value-creating.
b. value-neutral.
c. value-reducing.
d. value-diversifying.
81. 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
82. 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
83. 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.
84. 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.
85. 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.
86. 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.
87. Operational relatedness is created by of
a. sharing; core competencies.
b. sharing; activities.
c. transferring; core competencies.
d. transferring; activities.
88. 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.
89. 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.
90. 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.
91. 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
b. corporate
c. intellectual
d. constrained
92. 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.
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.
93. The purchasing of firms in the same industry is called
a. unrelated diversification.
b. vertical integration.
c. networking the organization.
d. horizontal acquisition.
94. The diversification strategy creates value in two ways. First, since the core competence has
already been developed in one business, the firm does not have to allocate resources to develop it. Second, since
the resource is intangible, competitors cannot easily imitate it.
a. related constrained
b. unrelated
c. related linked
d. dominant business
95. The drawbacks to transferring competencies by moving key people into new management positions include all
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.
96. 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.
97. 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.
98. 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.
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.
99. Acquisitions to increase market power require that the firm have a(n) diversification strategy.
a. unrelated
b. related
c. dominant-business
d. single-business
100. 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
101. 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
b. related constrained
c. related linked
d. unrelated
102. 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
the market level or reduce its costs below the market level.
a. multipoint competition
b. virtual integration
c. market power
d. vertical integration
because it could sell its products above
103. 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.
104. PorkPride Foods produces hams and other meat products. It owns hog raising operations. This is an example of a
business.
a. de-integrated
b. vertically integrated
c. totally integrated
d. horizontally integrated
105. 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.
106. 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
107. 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.
108. 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 de–integrated.
109. Walt Disney Company has successfully used related diversification to create value by
a. sharing activities.
b. sharing activities and transferring core competencies.
c. transferring core competencies.
d. efficient internal capital allocation and restructuring.
110. 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.
b. inflated by investors.
c. completely ignored by investors.
d. highly valued by investors.
111. 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.
112. 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
113. 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.