Deck 6: Corporate-Level Strategy

Question 1

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.

Answer 1

True

Question 2

An effective corporate strategy creates, across all of a firm's businesses, aggregate returns that exceed what those returns would be without the strategy and contributes to the firm's strategic competitiveness and its ability to earn above-average returns.

Answer 2

True

Question 3

To create economies of scope, tangible resources often must be shared.Less tangible resources can also be shared.

Answer 3

True

Question 4

Disney 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.

Question 5

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

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

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

Question 8

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.

Question 9

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

Question 10

Economies of scope are cost savings a firm creates by successfully sharing resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses.

Question 11

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

Question 12

McIlhenny Company has focused on its family's hot sauce products for seven generations.Its recent partnership with other firms in order to put the Tabasco taste in a variety of food products reflects a new strategy of high-level diversification.

Question 13

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.

Question 14

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

Question 15

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.

Question 16

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

Question 17

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 18

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.

Question 19

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

Question 20

United Technologies Corporation, Textron, and Samsung are examples of diversified firms that have no relationships between their businesses.These firms all use the strategy of unrelated diversification.

Question 21

In spite of the challenges associated with it, a number of corporations continue to use the unrelated diversification strategy, especially in emerging markets.

Question 22

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

Question 23

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

Question 24

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

Question 25

Two ways that external parties can try to make changes to a firm are by forcing the firm into bankruptcy or changing the top management team.

Question 26

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.

Question 27

In large diversified firms, corporate headquarters distributes capital to its businesses to create value for the overall corporation.

Question 28

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.

Question 29

Market power exists when a firm is able to sell its products above the existing competitive level or reduce the costs of its primary and support activities below the competitive level, or both.

Question 30

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

Question 31

Market power is gained as the firm develops the ability to save on its operations, avoid sourcing and market costs, improve product quality, possibly protect its technology from imitation by rivals, and potentially exploit underlying capabilities in the marketplace.

Question 32

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

Question 33

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 34

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

Question 35

Activity sharing limits risk because the ties among a firm's businesses create links between outcomes.

Question 36

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 37

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 38

Capricorn, a U.S.manufacturer of cleansers, 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 39

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 business.

Question 40

Contract manufacturers who manage their customers' entire product lines and offer services ranging from inventory management to delivery and after-sales services are prime examples of vertical integration.

Question 41

Firms using a low-level diversification strategy typically struggle to use their resources efficiently and are disadvantaged by the inability to gain economies of scale.

Question 42

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

Question 43

Firms that focus on one or few businesses and markets can earn positive returns because they are able to develop capabilities useful for those markets.

Question 44

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

Question 45

If the tax code were to be changed so that individual tax rates for dividends were taxed at a higher rate and long-term capital gains were taxed at a lower rate, shareholders would most likely encourage to limit investments into diversification that would significantly increase share value and, instead, increase dividend rates.

Question 46

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 47

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

Question 48

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

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

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 that will create above-average returns only after restructuring
D) whether to integrate backward or forward

Question 51

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.

Question 52

Companies creating financial economies through restructuring typically focus on high-technology businesses primarily because these firms are dependent on human resources.

Question 53

In the 1960s and 1970s, capital gains were taxed more heavily than were dividends.

Question 54

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 55

Usually, a company is classified as a single-business firm when revenues generated from its core business area are greater than __________ percent.

A) 99
B) 95
C) 90
D) 70

Question 56

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

Question 57

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 58

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

Question 59

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

Question 60

The more "constrained" the relatedness of diversification the:

A) fewer the linkages between the businesses within the portfolio owned by the firm.
B) wider the variation in the portfolio of businesses owned by the firm.
C) more links there are among the businesses owned by an organization.
D) lower the proportion of total organizational revenue derived from the dominant business.

Question 61

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

Question 62

The more links among businesses, the more __________ is the level of diversification.

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

Question 63

Which of the following acquisitions 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 64

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

Question 65

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 66

The Publicis Groupe has three major groups of business (advertising, media, and digital) that share resources and activities.The Publicis Groupe is using a(n) __________ diversification strategy.

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

Question 67

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

Question 68

The lowest level of diversification is the __________ level.

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

Question 69

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

Question 70

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 71

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

A) value-creating.
B) value-neutral.
C) value-reducing.
D) value-diversifying.

Question 72

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 73

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

Question 74

Which of the following statements 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.

Question 75

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

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

Question 76

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 77

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 of the following best describes the corporate-level strategy of UPS?

A) Single business
B) Dominant business
C) Related constrained
D) Related linked

Question 78

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 79

Operational relatedness is created by __________ of __________.

A) sharing; core competencies
B) sharing; activities
C) transferring; core competencies
D) transferring; activities

Question 80

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.