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When firms diversify into unrelated businesses, the primary potential benefits are horizontal relationships, i.e., businesses sharing tangible and intangible resources... Market power re

Chapter 06 Corporate-Level Strategy: Creating Value through Diversification

True / False Questions

1 Whenever an organization diversifies, it represents investing a stockholder's funds in a way

in which the individual investor is unable

3 When firms diversify into unrelated businesses, the primary potential benefits are

horizontal relationships, i.e., businesses sharing tangible and intangible resources

7 Market power refers to cost savings from leveraging core competencies or sharing activitiesamong the businesses in a corporation

14 Market transactions do not involve transaction costs

18 Portfolio management should be considered as the primary basis for formulating corporate-level strategies

21 An advantage of mergers and acquisitions is that they can enable a firm to rapidly enter new product markets

25 For strategic alliances to be effective, reliance on written contracts to delimit

responsibilities and enforce compliance is vital

True False

26 An advantage of a firm entering into a strategic alliance is that it does not have to "share the wealth" with its partners

True False

28 In recent years, many high tech firms such as Priceline.com have suffered from the

negative impact of uncontrolled growth

True False

29 Greenmail is an offer by a company, threatened by takeover, to offer its stock at a reduced price to a third party

True False

30 A golden parachute is a prearranged contract with managers specifying that in the event of

a hostile takeover, the target firm's managers will be paid a significant severance package True False

Multiple Choice Questions

31 Corporate-level strategy addresses two related issues:

A how to compete in a given business; the application of technology

B what businesses to compete in; how these businesses can achieve synergy

C how to integrate primary activities; increase shareholder wealth

D how to improve a firm's infrastructure; how to maintain ethical behavior

32 Individual investors are dependent upon the corporation's managers to

A diversify the stockholder's investments in order to reduce risk

B add value to their investments in a way that the stockholders could not accomplish on their own

C achieve risk reduction at a lower cost than stockholders could obtain on their own

D maximize short-term returns in the form of dividends

33 McKesson, a large distribution company, sells many product lines such as pharmaceuticalsand liquor through its super warehouses This is an example of

A achieving economies of scope through related diversification

B achieving market power through related diversification

C attaining the benefits of restructuring through unrelated diversification

D attaining the benefits of parenting through unrelated diversification

34 Philip Morris bought Miller Brewing and used its marketing expertise to improve Miller's market share This justification for diversification is best described as

A utilizing common infrastructures

B capitalizing on core competencies

C reducing corporate risk

D using portfolio analysis

35 The corporate office of Cooper Industries adds value to its acquired businesses by

performing such activities as auditing their manufacturing operations, improving their

accounting activities, and centralizing union negotiations This is an example of

A achieving economies of scope through related diversification

B achieving market power through related diversification

C attaining the benefits of restructuring through unrelated diversification

D attaining the benefits of parenting through unrelated diversification

36 reflect(s) the collective learning in organizations such as how to coordinate production skills, integrate multiple streams of technologies, and market and merchandise diverse products and services

A Primary value chain activities

B Culture

C Core competencies

D Horizontal integration

37 For a core competence to be a viable basis for the corporation strengthening a new

business unit, there are three requirements Which one of the following is not one of these

requirements?

A The competence must help the business gain strength relative to its competition

B The new business must be similar to existing businesses to benefit from a core competence

C The collection of competencies should be unique, so that they cannot be easily imitated

D The new business must have an established large market share

38 Sharing core competencies is one of the primary potential advantages of diversification Inorder for diversification to be most successful, it is important that

A the similarity required for sharing core competencies must be in the value chain, not in the product

B the products use similar distribution channels

C the target market is the same, even if the products are very different

D the methods of production are the same

39 When management uses common production facilities or purchasing procedures to

distribute different but related products, they are

A building on core competencies

B sharing activities

C achieving process gains

D using portfolio analysis

40 Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input into its manufacturing process This is an example of

A leveraging core competencies

B sharing activities

C vertical integration

D pooled negotiating power

41 The risks of vertical integration include all of the following except

A costs and expenses associated with increased overhead and capital expenditures

B lack of control over valuable assets

C problems associated with unbalanced capacities along the value chain

D additional administrative costs associated with managing a more complex set of activities

42 Unbalanced capacities that limit cost savings, difficulties in combining specializations, and reduced flexibility are disadvantages associated with

A strategic alliances

B divestment

C vertical integration

D horizontal integration

43 A firm should consider vertical integration when

A the competitive situation is highly volatile

B customer needs are evolving

C the firm's suppliers willingly cooperate with the firm

D the firm's suppliers of raw materials are often unable to maintain quality standards

44 It may be advantageous to vertically integrate when

A lower transaction costs and improved coordination are vital and achievable through verticalintegration

B the minimum efficient scales of two corporations are different

C flexibility is reduced, providing a more stationary position in the competitive environment

D various segregated specializations will be combined

45 Transaction costs include all of the following costs except

A search costs

46 Vertical integration is attractive when

A transaction costs are higher than internal administrative costs

B internal administrative costs are higher than transaction costs

C transaction costs and internal administrative costs are equal

D search costs are higher than monitoring costs

47 is when a firm's corporate office helps subsidiaries make wise choices in their own acquisitions, divestures, and new ventures

A Parenting

B Restructuring

C Leveraging core competencies

D Increasing market power

48 is when a firm tries to find and acquire either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change

A Parenting

B Restructuring

C Leveraging core competencies

D Sharing activities

49 According to the text, corporate restructuring includes

A capital restructuring, asset restructuring, and technology restructuring

B global diversification, capital restructuring, and asset restructuring

C management restructuring, financial restructuring, and procurement restructuring

D capital restructuring, asset restructuring, and management restructuring

50 Portfolio management matrices are applied to what level of strategy?

A Departmental level

B Business level

C Corporate level

D International level

51 When using a BCG matrix, a business that currently holds a large market share in a rapidly growing market and that has minimal or negative cash flow would be known as a

A cow

B dog

C problem child

D star

52 In the BCG (Boston Consulting Group) Matrix, a business that has a low market share in

an industry characterized by high market growth is termed a

B Businesses are plotted on a 3-dimensional grid

C Position in the matrix suggests a need for, or ability to share, infrastructures or build on core competences

D They are most helpful in helping businesses develop types of competitive advantage

54 A "cash cow," referred to in the Boston Consulting Group Portfolio management

technique, refers to a business that has

A low market growth and relatively high market share

B relatively low market share and low market growth

C relatively low market share and high market growth

D high market growth and relatively high market share

55 In managing a firm's portfolio, the BCG matrix would suggest that

A "dogs" should be invested in to increase market share and become cash cows

B "stars" are in low growth markets and can provide excess cash to fund other opportunities

C "question marks" can represent future "stars" if their market share is increased

D "cash cows" require substantial cash outlays to maintain market share

56 In the Boston Consulting Group's (BCG) Growth Share Matrix, the suggested strategy for

"stars" is to

A milk them to finance other businesses

B invest large sums to gain a good market share

C not invest in them and to shift cash flow to other businesses

D maintain position and after the market growth slows use the business to provide cash flow

57 All of the following are limitations (or downsides) of the BCG (Boston Consulting Group)

matrix except

A every business cannot be accurately measured and compared on the two dimensions

B it views each business as a stand-alone entity and ignores the potential for synergies across businesses

C it takes a dynamic view of competition which can lead to overly complex analyses

D while easy to comprehend, the BCG matrix can lead to some troublesome and overly simplistic prescriptions

58 The three primary means by which a firm can diversify are:

A mergers and acquisitions; joint ventures and strategic alliances; internal development

B mergers and acquisitions; differentiation; overall cost leadership

C joint ventures and strategic alliances; integration of value chain activities; acquiring humancapital

D mergers and acquisitions; internal development; differentiation

59 The downsides or limitations of mergers and acquisitions include all of the following

except:

A expensive premiums that are frequently paid to acquire a business

B difficulties in integrating the activities and resources of the acquired firm into a

corporation's on-going operations

C it is a slow means to enter new markets and acquire skills and competences

D there can be many cultural issues that can doom an otherwise promising acquisition

60 Divesting businesses can accomplish many different objectives These include

A enabling managers to focus their efforts more directly on the firm's core businesses

B providing the firm with more resources to spend on more attractive alternatives

C raising cash to help fund existing businesses

D all of the above

61 A company offering local telecommunications service combines resources with an international company that manufactures digital switching equipment to research a new type

of telecommunications technology This is an example of

A joint ventures

B mergers and acquisitions

C strategic alliances

D A and C

63 All of the following are guidelines for managing strategic alliances except

A establishing a clear understanding between partners

B relying primarily on a contract to make the joint venture work

C not shortchanging your partner

D working hard to ensure a collaborative relationship between partners

64 Which of the following statements regarding internal development as a means of

A Strategic alliances; joint ventures, internal development

B Internal development; mergers; acquisitions

C Strategic alliances; mergers; joint ventures

D Mergers; internal development; strategic alliances

66 According to Michael Porter: "There's a tremendous allure to It's the big play, the dramatic gesture With one stroke of the pen you can add billions to size, get a front page story, and create excitement in markets."

A strategic alliances and joint ventures

B mergers and acquisitions

C internal development

D differentiation strategies

67 An antitakeover tactic called (a) is when a firm offers to buy shares of their stock from a company (or individual) planning to acquire their firm at a higher price than the unfriendly company paid for it

69 The term "golden parachutes" refers to

A a clause requiring that huge dividend payments be made upon takeover

B financial inducements offered by a threatened firm to stop a hostile suitor from acquiring it

C managers of a firm involved in a hostile takeover approaching a third party about making the acquisition

D pay given to executives fired because of a takeover

70 Antitakeover tactics include all of the following except

A greenmail

B golden parachutes

C golden handcuffs

D poison pills

Essay Questions

71 What are the primary benefits and risks associated with related diversification?

72 Briefly explain the advantages and disadvantages of vertical integration

73 What are some of the key issues to take into account when considering whether or not to vertically integrate?

74 Explain how transaction cost analysis can provide insights into vertical integration decisions

75 What are the primary benefits and risks associated with unrelated diversification?

76 Explain the uses and limitations of portfolio management matrices such as the share matrix developed by the Boston Consulting Group (BCG)

growth-77 Summarize the advantages and disadvantages of mergers and acquisitions as a means of diversification

78 Discuss some of the potential benefits of divestment

79 Strategic alliances are arrangements in which two firms join forces and form a cooperativepartnership Discuss the advantages and disadvantages of strategic alliances as well as

guidelines for reducing conflict between the partners

80 Discuss how the potential benefits of diversification may be adversely affected by

conflicts between managers' interests and stockholders' interests Hint: Egotism, growth for growth's sake, antitakeover tactics

Chapter 06 Corporate-Level Strategy: Creating Value through Diversification Answer Key

True / False Questions

a way in which the individual investor is unable

competitive advantages is the best possible example of investing stockholders' funds in a way that individual investors cannot

horizontal relationships, i.e., businesses sharing tangible and intangible resources

FALSE

4. (p 200) A newly acquired business must always have products that are similar to the existing businesses' products to benefit from the corporation's core competence

savings and revenue enhancements

business's differentiation—as in the example of Daimler-Benz's acquisition of Chrysler

activities among the businesses in a corporation

8. (p 203) The two principal means by which firms achieve synergy through market power are: pooled negotiating power and corporate parenting

parent can strengthen a firm's bargaining position relative to suppliers and customers

is an example of forward integration

example of unrelated diversification

FALSE

12. (p 206 - 207) One of the risks of vertical integration is that there may be problems associated with unbalanced capacities or unfilled demands along a firm's value chain

products is very unstable

internal administrative costs