Q&A Hero

Q: 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

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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

Q: 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

Q: 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

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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

Q: 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.

Q: Financial economies are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

Q: 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

Q: 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

Q: 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

Q: 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

Q: Disney (discussed in the Chapter 6 Opening Case) is an example of a company that was successful because its corporate strategy added value across its set of businesses above what the individual businesses could create individually. a. True b. False

Q: 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

Q: Many manufacturing firms are reducing vertical integration and moving to independent supplier networks. a. True b. False

Q: When firms share activities across units, they are often able to achieve increased value. a. True b. False

Q: 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

Q: 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

Q: In the Chapter 6 Opening Case, Disney achieved growth and diversification through mergers and acquisitions. a. True b. False

Q: If managers diversify a firm in a way that does not produce value, the firm risks capital market intervention. a. True b. False

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: Performance continues to increase as diversification increases from single business to unrelated diversification. a. True b. False

Q: 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

Q: A major advantage of diversification is that overall monitoring costs are reduced because each separate business comes under the control of corporate headquarters. a. True b. False

Q: 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

Q: Antitrust regulation, tax laws, and low performance are all value-neutral reasons why firms engage in diversification. a. True b. False

Q: A company that tries to balance both operational and corporate relatedness and fails, risks incurring diseconomies of scope. a. True b. False

Q: 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

Q: 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

Q: 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

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

Q: Firms using a related diversification strategy may gain market power when successfully using their related constrained or related linked strategy. a. True b. False

Q: 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

Q: 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

Q: GE is an example of a firm that has used internal capital market allocation as a means of creating value even though it competes using a related linked strategy rather than an unrelated diversification strategy. a. True b. False

Q: 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

Q: 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

Q: Related linked firms share more resources and assets between their businesses than do related constrained firms. a. True b. False

Q: Since the 1950s, U.S. government policy regarding antitrust concerns has remained constant. a. True b. False

Q: 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

Q: 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

Q: 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

Q: Research shows that increased firm size and greater levels of diversification are correlated with increased executive compensation. a. True b. False

Q: Golden parachutes protect managers from the negative consequences of over-diversifying a firm. a. True b. False

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

Q: The use of poison pills increases the chance that a poorly performing firm will be taken over. a. True b. False

Q: Diversification strategies can be used with both value-creating and value-neutral objectives. a. True b. False

Q: 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

Q: 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

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

Q: Low firm performance is associated with increased diversification. a. True b. False

Q: 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

Q: 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

Q: 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

Q: Firms seeking to create value through corporate relatedness use the related constrained strategy. a. True b. False

Q: Google's diversification could lead the firm toward a related linked strategy and give the firm advantages in multipoint competition with competitors such as Facebook and Microsoft. a. True b. False

Q: 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

Q: Firms using the related constrained strategy share activities in order to create value. a. True b. False

Q: 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

Q: 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

Q: 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

Q: Companies creating financial economies through restructuring typically focus on high-technology businesses primarily because these firms are dependent on human-resources. a. True b. False

Q: The more dependent a firm is on its market, the more aggressively it will defend it from another competitor. a. True b. False

Q: Firms with high market commonality and highly similar resources are direct and mutually acknowledged competitors. a. True b. False

Q: What are the advantages and disadvantages of being a first mover, second mover, and late mover?

Q: Define competitors, competitive rivalry, competitive behavior, and competitive dynamics.