Deck 6: Corporate-Level Strategy

Question 1

Revenues for United Parcel Service (UPS) are derived from the following business segments: 74 percent from U.S. package delivery operations, 17 percent from international package delivery, and 9 percent from non-packaging operations. The best description of the corporate level strategy of UPS is unrelated diversification.

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

Lapworth Industries diversifies by buying companies in unrelated industries. Lapworth probably has a strategy to create value through organizational synergy.

Question 5

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

Question 6

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.

Question 7

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 constrained strategy.

Question 8

In 2005, Gillette was acquired by Proctor & Gamble (P&G). This is an example of business level strategic action initiated by P&G.

Question 9

A high number of opportunities to share activities among companies in a diversified organization is called high operational relatedness.

Question 10

P&G acquired Gillette Co. and created the Crest Pro-Health label by combining P&G's Crest with Gillette's Oral-B brands. This is an example of achieving synergies through sharing activities.

Question 11

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

Question 12

As product markets become worldwide, we can expect that multipoint competition will decrease.

Question 13

A business-level strategy indicates product markets and businesses in which the firm should compete.

Question 14

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.

Question 15

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.

Question 16

PepsiCo uses its own distribution system to deliver multiple Pepsi branded beverage products. Pepsi recently acquired Gatorade and delivers these products using the Pepsi distribution system. This use of Pepsi's outbound logistics is an example of activity sharing.

Question 17

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

Question 18

Blocking competitors through multipoint competition is a strategy used by related diversified firms to create value.

Question 19

Corporate level core competencies are resources and capabilities held within specific business units within the corporate portfolio.

Question 20

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.

Question 21

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

Question 22

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

Question 23

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.

Question 24

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.

Question 25

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.

Question 26

Unrelated diversification has been the norm for the most successful firms in many industrialized countries such as Germany, Italy, and France.

Question 27

Low performance is associated with increased diversification.

Question 28

Partial vertical integration is not practical because it involves excessive levels of coordination between internal company units and outside contractors.

Question 29

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

Question 30

When implementing a restructuring strategy a company would do best by focusing on mature, low-technology businesses.

Question 31

Virtual integration tends to erode the relationships between suppliers and customers as personal contacts are replaced with impersonal electronic communications.

Question 32

One limitation of an unrelated diversification strategy is that synergies gained from internal financial economies can be matched in all markets, both developed and developing.

Question 33

Companies in emerging markets prefer to use related constrained diversification because it allows the firm to concentrate on a few core competencies which it can share among the sister organizations.

Question 34

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

Question 35

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

Question 36

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

Question 37

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 virtual integration.

Question 38

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

Question 39

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

Question 40

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.

Question 41

GE has recently reorganized from eleven businesses down to six core businesses. The purpose of this reorganization is to transfer core competencies in different types of technologies among GE's businesses. This is an example of

A) increasing market power through vertical integration.
B) efficient internal capital allocation.
C) a focus on financial economies.
D) increasing corporate relatedness.

Question 42

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.

Question 43

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

Question 44

A firm that earns less than 70% 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

Question 45

Wm. Wrigley Jr. Company once made only chewing gum. When Wrigley bought Life Savers (a line of candy mints) and Altoids (a line of breadth 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.

Question 46

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

Question 47

Revenues for United Parcel Service (UPS) come from the following business segments: 74 percent from U.S. package delivery operations, 17 percent from international package delivery, and 9 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

Question 48

Brinker International operates restaurants in several different segments of the casual dining market. Their brands include Chili's Grill & Bar, Romano's Macaroni Grill, and On the Border. Brinker's corporate level strategy is best described as

A) a relatively high level of diversification.
B) an example of product diversification.
C) an example of unrelated diversification.
D) an example of a corporate entity that should manage its firms using the efficient internal capital market allocation approach.

Question 49

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

Question 50

The lowest level of diversification is the ____ level.

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

Question 51

The more direct connections among businesses, the more ____ is the relatedness of the diversification.

A) linked
B) constrained
C) integrated
D) intense

Question 52

Related diversification by a firm tends to reduce a manager's executive compensation, whereas unrelated diversification tends to increase it because the firm has moved into new industries.

Question 53

On the most basic level, 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.

Question 54

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

A) unrelated
B) related constrained
C) related linked
D) global

Question 55

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.

Question 56

In 2005, P&G, whose products include Crest toothpaste and Tide laundry detergent, purchased Gillette. Gillette itself had multiple businesses, including a range of products including electric toothbrushes, razors and batteries. Which of the following reflects the acquisition?

A) It is unrelated diversification for P&G because Gillette consists of more than one business unit.
B) It is unrelated diversification for Gillette because P&G consists of more than one business unit.
C) It is related diversification for P&G because the product lines for both firms are consumer products sold through similar channels.
D) It is related diversification for Gillette because the product lines for both firms are consumer products sold through similar channels.

Question 57

Boards of directors have been shown to be ineffective governance mechanisms and are being replaced by the market for corporate control.

Question 58

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

Question 59

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.

Question 60

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

Question 61

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.

Question 62

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 reduce managerial employment risk
C) gaining market power relative to competitors
D) conforming to antitrust regulation

Question 63

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.

Question 64

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.

Question 65

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 primary and support activities.
D) joint ventures and outsourcing.

Question 66

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

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

Question 67

The acquisition of Gillette Co. by Procter & Gamble will probably result in activity sharing because P&G has a reputation for technology transfer: the ability to take technology used in one brand and apply it to another brand. This is an example of

A) operational relatedness.
B) corporate relatedness.
C) vertical integration.
D) virtual integration.

Question 68

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.

Question 69

In related linked diversified firms, ____ are a complex set of resources that link the different businesses through managerial and technological knowledge, experience, and expertise.

A) corporate core competencies
B) strategies
C) support activities
D) intangible assets

Question 70

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.

Question 71

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.

Question 72

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.

Question 73

Operational relatedness is created by ____ activities within the ____.

A) sharing; value chain
B) sharing; value chain
C) transferring; value chain
D) transferring; capabilities

Question 74

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.

Question 75

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

Question 76

The purchasing of firms in the same industry is called:

A) unrelated diversification.
B) vertical integration.
C) networking the organization.
D) horizontal acquisition.

Question 77

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 linked firms share more tangible resources and activities between businesses than do related constrained firms.

Question 78

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

Question 79

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.

Question 80

When diversification results in two companies, such as UPS and FedEx, simultaneously competing in numerous markets, this is called ____ competition.

A) multiple
B) multiportal
C) multipoint
D) mutiplicit