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Indicate whether the statement is true or false.
1. Companies creating financial economies through restructuring typically focus on high-technology businesses primarily
because these firms are dependent on human-resources.
a.
True
b.
False
2. 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
3. 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
4. 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
5. Firms using the related constrained strategy share activities in order to create value.
a.
True
b.
False
6. 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
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
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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
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.
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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
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
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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.
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
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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
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
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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
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
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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.
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.
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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
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:
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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
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.
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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.
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
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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
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
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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
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
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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
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.
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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.
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
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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,
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.
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?
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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.
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.
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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
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.
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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.
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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