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

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.

Answer 2

False

Question 3

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.

Answer 3

True

Question 4

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

Question 5

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 6

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 7

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.

Question 8

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

Question 9

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 10

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 11

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

Question 12

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.

Question 13

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 14

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

Question 15

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.

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

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

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 19

Foster's Group discussed in the Opening Case is an example of a firm following the related constrained diversification strategy (i.e., different businesses that are highly related).

Question 20

As noted in the Opening Case, Foster's Group sought to create corporate relatedness through the sharing activities across its beer and wine businesses.

Question 21

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

Question 22

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 23

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

Question 24

Oracle has been diversifying in the software industry through acquisition of firms such as PeopleSoft as described in the Strategic Focus. There are very close linkages between Oracle and the various units and for the strategy to work, Oracle must develop mechanisms to share activities. Oracle is clearly following a related linked diversification strategy.

Question 25

One of the challenges facing Foster's Group in the Opening Case were problems in sharing activities between the beer and wine businesses. This is a common risk for firms using the related constrained strategy.

Question 26

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 27

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

Question 28

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 29

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

Question 30

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

Question 31

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

Question 32

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 33

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 34

Some evidence suggests that virtual integration rather than vertical integration may be a more common source of market power.

Question 35

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 36

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 37

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

Question 38

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.

Question 39

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 40

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

Question 41

Low performance is associated with increased diversification.

Question 42

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.

Question 43

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 44

Financial economies are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm.

Question 45

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

Question 46

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 47

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

Question 48

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 49

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

Question 50

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 51

It can be difficult for investors to actually observe the value created by a firm (such as Walt Disney) as it shares activities and transfers core competencies.

Question 52

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 53

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 54

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

Question 55

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

Question 56

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 57

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

Question 58

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

Question 59

According to the chapter Strategic Focus, companies creating financial economies through restructuring typically focus on high-technology businesses primarily because these firms are human-resource dependent.

Question 60

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.

Question 61

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 62

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 63

As noted in the Opening Case, in order to create synergy between its wine and beer business, Foster's Group used the same sales force to sell mass market beer, cheap spirits, and premium wine. The sharing of these activities resulted in __________.

A) increased profits
B) failure
C) financial economies
D) unrelated diversification

Question 64

The more sharing of resources and activities among businesses, the more ____ is the relatedness of the diversification.

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

Question 65

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 66

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 67

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

Question 68

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

Question 69

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 70

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 71

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 72

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 73

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

Question 74

Revenues for United Parcel Service (UPS) come 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. Which best describes the corporate level strategy of UPS?

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

Question 75

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 76

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 77

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 78

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

Question 79

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

Question 80

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.