Business-Level Strategy (Competitive)

each business unit in a diversified firm chooses a business-level strategy as its means of competing in its
individual product markets

Corporate-Level Strategy

specifies actions taken by the firm to gain a competitive advantage by selecting and managing a group of
different businesses competing in different product markets

2 Key Issues for Corporate Strategy

1) in what product markets and businesses should the firm compete in?

2) how should corporate hq manage those business?

Value of Corporate Strategy

the degree to which the businesses in the portfolio worth more under the mgmt of the firm than they
would be under other ownership

Goals of Corporate Strategy

increase the firm's value

increase strategic competitiveness

earn above-average returns

Key Corporate-level Strategies

- market development

- product development

- horizontal integration

- vertical integration

Market Development

moving into different geographic markets

Product Development

developing new products and/or significantly improving existing ones

Horizontal Integration

acquiring competitors who are operating at the same point on the value chain

Vertical Integration

acquiring firms who are operating above or below the firm on the value chain

Diversification

growing into new business areas that are either similar or unrelated to current businesses

operate in multiple different product markets

must have both corporate-level and business-level strategies

each business within a diversified firm must have its own business-level strategy

Benefits of Diversification

firm can reduce variability in profitability as earnings are generated from different businesses

provides flexibility to shift resources and investments to those markets with the greatest returns

ideal diversified portfolio balances the costs and benefits of diversification

Value through Diversification

sharing of resources

transferring of core competencies

managerial motives to diversify can actually hurt some of the firm's value

Levels of Diversification

single-business and dominant-business firms have relatively low levels of diversification

more fully diversified firms are classified by the level of connection between business
(related/unrelated)
Related Diversification

builds links between businesses'...

- products

- technologies

- distribution channels

Related Constrained

firms with businesses that share many links

Unrelated Diversification

firms with businesses that share no common links

LOW Diversification

- single business

- dominant business

Single Business

greater than 95% of revenues come from a single business

ex. Wm. Wrigley Company

Dominant Business

between 70% and 95% of revenue comes from a single business

ex. United Parcel Service (UPS)

MODERATE to HIGH Diversification

- related constrained

- related linked (mixed related and unrelated)

Related Constrained

less than 70% of revenue comes from a single business and all businesses share product, technological
and distribution linkages

ex. Kraft, P&G, Merck

Related Linked
less than 70% of revenue comes from the dominant business, and there are only limited links between
businesses

focus on transfer of knowledge and competencies between businesses (economies of scope)

ex. General Electric

Unrelated Diversification

less than 70% of revenue comes from the dominant business, and there are no common links between
businesses

ex. United Technologies, Samsung, Textron

Market Power

value can be created by either increasing revenues or decreasing costs

create value by building upon or extending...

- resources, capabilities, core competencies

cost savings from economies of scope

Economies of Scope

operational relatedness in sharing activities

corporate relatedness in transferring skills or corporate core competencies among units

Sharing Activities

creates value by sharing either primary activities (manufacturing, distribution) or support activities
(purchasing, finance)

shares strategic control over business units

Tranferring Core Competencies

transfers complex sets of resources through managerial and technological knowledge, experience,
expertise
talent management (moving key people into new mgmt positions)

Backward Integration

a firm produces its own inputs

Forward Integration

a firm operates its own distribution system for delivering its outputs

Multipoint Competition

two or more diversified firms compete in the same product or geographic markets

Complexity

managing operational relatedness and corporate relatedness simultaneously can be very complex and
often fails

Financial Economies

value creation for unrelated diversification

cost savings through improved allocations of financial resources based on investments inside or outside
the firm

restructuring of acquired assets

Corporate Allocation of Capital

corporate has much greater access to detailed info to make capital allocation decisions

external investors have relatively limited access to internal info

corporate hq can fine-tune capital allocation decisions

Conglomerate Discount

many believe that the value of conglomerates (for unrelated diversifiers) is worth less than the sum of
its parts

establish a brand for the parent company to overcome this (ex. United Technologies, Siemens)

Restructuring of Assets
firm A buys firm B --> restructures firm B's assets to make it more profitable --> firm A sells firm B for a
profit

more successful with mature, low-technology businesses that are less focused on innovative employees

ex. service-based companies (have relatively low asset base to restructure)

Diversification Advantages

related --> economies of scope

unrelated --> financial economies

EXTERNAL Value-Neutral Diversification Incentives

antitrust regulations

tax laws

Antitrust Regulation

60's and 70's - discouraged mergers that created increased market power (horizontal/vertical
integration) and led to more unrelated (conglomerate) mergers

80's - relaxation of antitrust enforcement led to more and larger horizontal mergers

2000's - mergers now more closely scrutinized

Tax Laws

high tax rates on dividends cause a corporate shift from dividends to buying and building companies in
high-performance industries

1986 tax reform act

- reduced income tax rate from 50% to 28%

- treated capital gains as ordinary income

- incentive for shareholders to prefer dividends over acquisitions

INTERNAL Value-Neutral Diversification Incentives

low performance

uncertain future cash flows

synergy and firm risk reduction

Low Performance

acts as incentive for diversification

firms with poor performance often take higher risks (diversification is risky)

Uncertain Future Cash Flows

incentivizes diversification if...

- product line matures

- product line is threatened

- firm is small and in a mature or maturing industry

Synergy

exists when the value created by businesses working together EXCEEDS the value created by them
working independently

creates joint interdependence between business units

Risk Reduction

firm may become risk averse, constrain its level of activity sharing, and forgo potential benefits of
synergy

firm may reduce level of technological change by operating in more certain environments

Executive/Managerial Incentives to Diversify (Value-Reducing)

- diversification of employment risk

- higher compensation (firm size/complexity and compensation are highly correlated)

- diversification of risk

- build personal performance reputation

The purchasing of firms in the same industry is called

horizontal acquisition

a company pursuing vertical integration can gain market power over its competitors through all of the
following EXCEPT

improved adjustment to technological changes

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.

related diversification on projects

What is the similarity between high-technology firms and service-based firms that makes them risky as
restructuring candidates?

They are human-resource dependent

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.

unrelated

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?

dominant business

Multipoint competition occurs when

diversified firms compete against each other in several markets

Firms that have selected a related diversification corporate-level strategy seek to exploit

economies of scope between business units.

One method of facilitating the transfer of competencies between firms is to

transfer key people into new management positions

Acquisitions to increase market power require that the firm have a(n) ___ diversification strategy

related

The basic types of operational economies through which firms seek value from economies of scope are

the sharing of value chain activities and support functions

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.

related constrained

Firms seek to create value from economies of scope through all of the following EXCEPT

de-integration

The more "constrained" the relatedness of diversification,

the more links there are among the businesses owned by an organization

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...

have golden parachutes

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

economies of scope

which of the following is NOT a limitation directly relating to vertical integration?

imitation of core technology by potential competitors

The downside of synergy in a diversified firm is

the loss of flexibility

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.

related constrained

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

backward integration

which of the following reasons for diversification is most likely to increase the firm's value?

reducing costs through business restructuring

GE (Chapter 6 opening case) is unusual in that it

is one of the few large diversified large firms that have been successful over time.

Large diversified businesses often face what is known as the "conglomerate discount." This discount
means that investors

believe that the value of conglomerates is less than the value of the sum of their parts.
Although a(n)______ firm, GE (discussed in the chapter 6 opening case) has done an exceptional job of
__________ its four major strategic business units

related linked; allocating capital across

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?

This is a horizontal acquisition.

Certain regulatory changes (such as antitrust regulation and tax laws) create incentives or disincentives
for diversification that...

are value-neutral.

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

operational

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

Specialty Steel has less flexibility now than if it were not vertically integrated.

Which of the following resources are more likely to create value in the diversification process?

tacit knowledge

The risk for firms that follow the unrelated diversification strategy in developed economies is that

competitors can imitate financial economies more easily than they imitate economies of scope.
Managerial motives to seek diversification include a desire to

increase their compensation

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

to overcome and correct its record in environmental issues.

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...

changes in antitrust regulations and tax laws.

The lowest level of diversification is the ____ level

single-business

The curvilinear relationship of corporate performance and diversification indicates that

the highest performing business strategy is related constrained diversification.

Firms use corporate-level diversification strategies for all the following reasons EXCEPT

value-diversifying

Which acquisition would be considered the LEAST related?

An upscale "white-tablecloth" restaurant chain acquires a travel agency.

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.

related linked
Wm. Wrigley Jr. Company once made only chewing gum. When Wringley 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

was moving away from its traditional single-business strategy toward a dominant strategy.

The drawbacks to transferring competencies by moving key people into new management positions
include all EXCEPT

managerial competencies are not easily transferable to different organizational cultures

In the Chapter 6 Opening Case, Disney achieved growth and diversification through mergers and
acquisitions.

False

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.

True

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.

False

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.

True

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.

True

A major advantage of diversification is that overall monitoring costs are reduced because each separate
business comes under the control of corporate headquarters.

False

Successful product diversification is expected to increase the variability in the firm's profitability because
the earnings are generated from several different business units.
False

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.

False

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

False

Related linked firms share more resources and assets between their businesses than do related
constrained firms.

False

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.

True

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.

True

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A firm uses a corporate-level diversification strategy for a variety of reasons, all of which have to do with
ways to create value.

False
Decisions to expand a firm's portfolio of businesses to reduce managerial risk can have a positive effect
on the firm's value.

False

Antitrust regulation, tax laws, and low performance are all value-neutral reasons why firms engage in
diversification

True

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.

True

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.

True

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.

True

When firms share activities across units, they are often able to achieve increased value

True

Firms using the related constrained strategy share activities in order to create value.

True

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.
True

Firms seeking to create value through corporate relatedness use the related constrained strategy

False

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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

True

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

True

Firms using a related diversification strategy may gain market power when successfully using their
related constrained or related linked strategy.

True

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.

True

Vertical integration exists when a company produces its own inputs (forward integration) or owns its
source of output distribution (backward integration)

True

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.
True

Many manufacturing firms are reducing vertical integration and moving to independent supplier
networks

True

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

False

A company that tries to balance both operational and corporate relatedness and fails, risks incurring
diseconomies of scope.

true

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.

False

It can be difficult for investors to actually observe the value created by a firm as it shares activities and
transfers core competencies.

True

Financial economies are cost savings realized through improved allocations of financial resources based
on investments inside or outside the firm.

True

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

True
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

True

A significant benefit of an internal capital market is limiting competitors' access to information about the
performance of the individual businesses within the corporation.

True

In a diversified firm, capital allocation can be adjusted according to more specific criteria than is possible
with external market allocation of capital.

True

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.

True

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.

True

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

True

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.

False
Companies in emerging markets frequently use the unrelated diversification strategy because of the
absence of a "soft infrastructure" in those markets.

True

When implementing a restructuring strategy, a company would do best by focusing on mature, low-
technology businesses rather than high-technology or service businesses.

True

Companies creating financial economies through restructuring typically focus on high-technology

businesses primarily because these firms are dependent on human-resources

True

Diversification strategies can be used with both value-creating and value-neutral objectives

True

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.

True

Since the 1950s, U.S. government policy regarding antitrust concerns has remained constant

False

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.

False

Low firm performance is associated with increased diversification

True

Performance continues to increase as diversification increases from single business to unrelated

diversification
False

Synergy exists when the value created by business units working together exceeds the value that those
same units create working independently.

True

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.

True

Research shows that increased firm size and greater levels of diversification are correlated with
increased executive compensation.

True

If managers diversify a firm in a way that does not produce value, the firm risks capital market
intervention.

True

Golden parachutes protect managers from the negative consequences of over-diversifying a firm

True

Without strict governance mechanisms, the majority of executives will act in their own self-interest
rather than acting as positive stewards of firm resources.

False

The use of poison pills increases the chance that a poorly performing firm will be taken over.

False

Knowing that their firms could be acquired if they are not managed successfully encourages executives
to use value-creating diversification strategies
True

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.

(B) what product markets and businesses the firm should be in

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.

(C) businesses in the portfolio are worth more under the management of the company in question than
they would be under any other ownership.

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.

(C) the more links there are among the businesses owned by an organization.

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.

(A) was moving away from its traditional single-business strategy toward a dominant strategy

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

(B) 95
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

(B) constrained

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

(B) related constrainedd

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

(B) dominant business

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

(D) An upscale "white-tablecloth" restaurant chain acquires a travel agency

The lowest level of diversification is the ____ level. (A) single-business (B) dominant business (C) related
constrained (D) unrelated

(A) single-business

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

(B) the level of resources and activities shared among the businesses
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

(B) related constraint

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

(A) related constrained

The term "conglomerates" refers to firms using the ____ diversification strategy. (A) unrelated (B)
related constrained (C) related linked (D) global

(A) unrelated

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

(D) unrelated

Firms use corporate-level diversification strategies for all the following reasons EXCEPT (A) value-
creating. (B) value-neutral. (C) value-reducing. (D) value-diversifying

(D) value-diversifying

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

(B) Reducing costs through business restructuring

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
(B) Expanding the business portfolio in order to diversify managerial employment risk

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.

(A) achieve economies of scope

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.

(B) economies of scope between business units

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.

(D) de-integration

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.

(C) the sharing of value chain activities and support functions

Operational relatedness is created by ___________ of ___________. (A) sharing; core competencies (B)
sharing; activities (C) transferring; core competencies (D) transferring; activities

(B) sharing; activities

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
(A) related constrained; operational relatedness

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.

(D) Related constrained firms share more tangible resources and activities between businesses than do
related linked firms

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

(D) are able to use activity sharing to successfully create economies of scope

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

(A) operational

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 childlevel 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.

(A) This is a horizontal acquisition

The purchasing of firms in the same industry is called: (A) unrelated diversification. (B) vertical
integration. (C) networking the organization. (D) horizontal acquisition.

(D) horizontal acquisition

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

(C) related linked

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.

(B) managerial competencies are not easily transferable to different organizational cultures.

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.

(C) diversified firms compete against each other in several markets

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

(B) transfer key people into new management positions.

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.

(A) The St. Louis manager may quit Equator in order to remain in St. Louis.

Acquisitions to increase market power require that the firm have a(n) ____ diversification strategy.

(A) unrelated (B) related (C) dominant-business (D) single-business

(B) related
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

(C) multipoint

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

(C) related linked

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

(C) market power

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

(A) produces its own inputs

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

(B) vertically integrated

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

(A) improved adjustment to technological changes

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

(D) Imitation of core technology by potential competitors

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

(A) backward integration.

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

(A) Specialty Steel has less flexibility now than if it were not vertically integrated.

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

(B) sharing activities and transferring core competencies.

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

(A) discounted by investors

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

(A) it is difficult for investors to observe the value created by the firm

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

(C) unrelated

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

(A) through reduced disclosure to outside parties

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.

(C) the firm can acquire other firms with innovative products instead of allocating capital to research and
development

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.

(B) believe that the value of conglomerates is less than the value of the sum of their parts.

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

(D) conglomerate discount

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.

(A) focusing on mature, low-technology businesses

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

(D) competitors can imitate financial economies more easily than they imitate economies of scope

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

(A) they are dependent on human resources

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

(C) a tire manufacturer established in 1910

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.

(C) changes in antitrust regulations and tax laws

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

(C) stricter interpretation of antitrust laws

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

(B) keep free cash flows for investment in acquisitions

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

(A) liquid financial assets for which investments in current businesses are no longer economically viable

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

(C) are value-neutral

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

(B) the highest performing business strategy is related constrained diversification

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

(B) diversify into less risky environments

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.

(D) the value created by business units working together exceeds the value the units create when
working independently

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.

(D) the loss of flexibility

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

(B) related diversification project

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

(B) tacit knowledge

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

(B) more imitable and less likely to create value on a long-term basis

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.

(D) increase their compensation

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.

(C) higher CEO pay is related to larger organization size

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.

(B) have golden parachutes

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

(C) Surveillance technologies

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

(A) Economies of scope

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

(D) unrelated diversification; related diversification

In the Chapter 6 Opening Case, GE achieved growth and diversification through mergers and
acquisitions.

a. True

b. False

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

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

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

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

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

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

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

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

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

Related linked firms share more resources and assets between their businesses than do related
constrained firms.

a. True

b. False

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

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

a
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

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

Antitrust regulation, tax laws, and low performance are all value-neutral reasons why firms engage in
diversification.

a. True

b. False

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

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

a
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

When firms share activities across units, they are often able to achieve increased value.

a. True

b. False

Firms using the related constrained strategy share activities in order to create value.

a. True

b. False

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

Firms seeking to create value through corporate relatedness use the related constrained strategy.

a. True

b. False

b
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

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

Firms using a related diversification strategy may gain market power when successfully using their
related constrained or related linked strategy.

a. True

b. False

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

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

a
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

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

Many manufacturing firms are de-integrating and moving to independent supplier networks.

a. True

b. False

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

A company that tries to balance both operational and corporate relatedness and fails risks incurring
diseconomies of scope.

a. True

b. False

a
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

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

Financial economies are cost savings realized through improved allocations of financial resources based
on investments inside or outside the firm.

a. True

b. False

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

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
a

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

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

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

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

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
a

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

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

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

Companies creating financial economies through restructuring typically focus on high-technology

businesses primarily because these firms are human-resource dependent.

a. True

b. False

Diversification strategies can be used with both value-creating and value-neutral objectives.

a. True

b. False
a

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

Since the 1950s, U.S. government policy regarding antitrust concerns has remained constant.

a. True

b. False

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

Low firm performance is associated with increased diversification.

a. True

b. False

Performance continues to increase as diversification increases from single business to unrelated

diversification.

a. True

b. False

b
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

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

Research evidence shows that increased firm size and greater levels of diversification are correlated with
increased executive compensation.

a. True

b. False

If managers diversify a firm in a way that does not produce value, the firm risks capital market
intervention.

a. True

b. False

Golden parachutes protect managers from the negative consequences of over-diversifying a firm.

a. True

b. False

a
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

The use of poison pills increases the chance that a poorly performing firm will be taken over.

a. True

b. False

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

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.

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.

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

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.

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.

c
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.

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.

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

b
The more sharing of resources and activities among businesses, the more diversification.

a. linked

b. constrained

c. integrated

d. intense

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

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

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.

The lowest level of diversification is the ______ level.

a. single-business

b. dominant business

c. related constrained

d. unrelated

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.

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
b

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

The term "conglomerates" refers to firms using the ______ diversification strategy.

a. unrelated

b. related constrained

c. related linked

d. global

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

d
Firms use corporate-level diversification strategies for all the following reasons EXCEPT

a. value-creating.

b. value-neutral.

c. value-reducing.

d. value-diversifying

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

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

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.

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.

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

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.

c
Operational relatedness is created by ______ of

a. sharing; core competencies.

b. sharing; activities.

c. transferring; core competencies.

d. transferring; activities.

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.

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.

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.

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

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.

The purchasing of firms in the same industry is called

a. unrelated diversification.

b. vertical integration.

c. networking the organization.

d. horizontal acquisition.

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

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.

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.

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.

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.

Acquisitions to increase market power require that the firm have a(n) ______ diversification strategy.

a. unrelated

b. related

c. dominant-business

d. single-business
b

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

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

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

c
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.

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

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.

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

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

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.

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.

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.

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.

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

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.

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.

Although a(n) ______ firm, GE (discussed in the Chapter 6 Opening Case) has done an exceptional job of
______ 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

a

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

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

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.

a
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.

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.

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

c
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.

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

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.

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.

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.

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.

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.

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

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

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

b
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

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.

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.

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.

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.

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

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

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