Deck 7: Corporate-Level Strategy Emea Edition

Question 1

In the Opening Case, Foster's Group's sharing of marketing and distribution in its beer and wine businesses was intended to create economies of scope.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

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.

Question 5

Revenues for United Parcel Service (UPS) are derived from the following business segments: 61 percent from U.S. package delivery operations, 22 percent from international package delivery, and 17 percent from non-packaging operations. The best description of the corporate level strategy of UPS is unrelated diversification .

Question 6

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

Question 7

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

Question 8

According to the chapter Opening Case about Foster's Group, the use of a single sales force to sell mass market and premium products was highly successful.

Question 9

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

Question 10

As indicated in the Strategic Focus, Johnson & Johnson is an example of a firm that has created value through both operational (sharing activities) and corporate (transferring core competencies) relatedness.

Question 11

For Campbell Soup, Procter & Gamble, and Merck & Company, the businesses are related and the links between the businesses are direct. This is an example of a related linked diversification strategy.

Question 12

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 13

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 14

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 15

Extensive outsourcing contributes to the firm's core competencies and helps the firm transfer those competencies to other business units in the diversified firm.

Question 16

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.

Question 17

The success of Oracle's related constrained strategy as discussed in the Strategic Focus has been limited by the difficulty of implementing sharing of activities across its major acquisitions.

Question 18

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 19

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

Question 20

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

Question 21

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.

Question 22

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 23

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.

Question 24

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

Question 25

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 26

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 27

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.

Question 28

Low performance is associated with increased diversification.

Question 29

In the Opening Case, Foster's Group was diversified and managed businesses that were highly related. The corporate-level strategy is best described as ________diversification.

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

Question 30

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

Question 31

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 32

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

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

Question 33

In the Opening Case, Foster's Group sought to create ___________between the beer and wine businesses.

A) corporate relatedness
B) operational relatedness
C) transferring core competencies
D) financial economies

Question 34

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

Question 35

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 36

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 37

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.

Question 38

In the chapter Opening Case, the sharing of marketing and distribution in the beer and wine business at Foster's Group was intended to create _______________.

A) financial economies
B) vertical integration
C) economies of scope
D) conglomerate discount

Question 39

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

Question 40

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 41

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

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

Question 42

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.

Question 43

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.

Question 44

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 ____ diversification corporate strategy.

A) dominant business
B) related constrained
C) related linked
D) unrelated

Question 45

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.

Question 46

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.

Question 47

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

A) improved process innovation.
B) savings on operations costs.
C) improved product quality.
D) avoidance of market costs.

Question 48

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.

Question 49

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.

Question 50

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.

Question 51

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.

Question 52

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

Question 53

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.

Question 54

Walt Disney Company and Johnson & Johnson are examples of companies that have 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

Question 55

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.

Question 56

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.

Question 57

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.

Question 58

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.

Question 59

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.

Question 60

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

Question 61

What are the managerial motives to diversify?

Question 62

What is the effect of a firm's low performance on the pursuit of diversification?

Question 63

Differentiate between corporate-level and business-level strategies and give examples of each.

Question 64

Describe the primary reasons a firm pursues increased diversification.

Question 65

What are the five categories of businesses based on level of diversification?