Deck 6: Corporate Level Strategy

Question 1

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

Answer 1

False

Question 2

In the Chapter 6 Strategic Focus, the Publicis Groupe has three major groups of businesses, each in a highly related but unique market area: advertising, media, and digital. This form of diversification strategy is known as related linked.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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 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

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 7

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

Question 8

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 9

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 10

GE (discussed in the Chapter 6 Opening Case) is an example of a firm following the related constrained diversification strategy (i.e., different businesses that are highly related).

Question 11

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

Question 12

In the Chapter 6 Opening Case, GE achieved growth and diversification through mergers and acquisitions.

Question 13

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 14

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 15

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 16

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 17

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

Question 18

GE (discussed in the Chapter 6 Opening Case) is an example of a firm that used its corporate strategy to achieve competitive advantage by selecting and managing a group of different businesses competing in different product markets.

Question 19

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 20

In the Chapter 6 Strategic Focus, the Publicis Groupe creates value across its three groups not by sharing resources and assets, but rather by transferring knowledge and core competencies.

Question 21

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 22

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

Question 23

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 24

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 25

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 26

Google increasing use of a vertical integration strategy is in line with the extensive use of that strategy by many manufacturing firms.

Question 27

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

Question 28

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 29

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

Question 30

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 31

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

Question 32

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 33

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

Question 34

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

Question 35

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 36

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

Question 37

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.

Question 38

Google's diversification could lead the firm towards a related linked strategy and give the firm advantages in multipoint competition with competitors such as Facebook and Microsoft (Chapter 6 Strategic Focus).

Question 39

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

Question 40

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 41

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 42

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

Question 43

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 44

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

Question 45

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

Question 46

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

Question 47

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 48

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 49

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

Question 50

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

Question 51

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

Question 52

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 53

GE (discussed in the Chapter 6 Opening Case) 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 rather than an unrelated diversification strategy.

Question 54

When implementing a restructuring strategy, a company would do best by focusing on mature, low-technology businesses rather than high-technology or service businesses.

Question 55

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 56

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 57

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 58

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

Question 59

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

Question 60

Low firm performance is associated with increased diversification.

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

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 63

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

Question 64

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

Question 65

The lowest level of diversification is the ____ level.

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

Question 66

The Publicis Groupe (Chapter 6 Strategic Focus) has three major groups of business (advertising, media, and digital) which share resources and capabilities. Publicis Groupe is using a _____________ diversification strategy.

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

Question 67

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 68

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 69

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 best describes the corporate level strategy of UPS?

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

Question 70

The Publicis Groupe (Chapter 6 Strategic Focus) 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 71

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 72

GE (Chapter 6 Opening Case) was diversified and manages businesses that have only a few links between them. This corporate-level strategy is best described as ________diversification.

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

Question 73

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 74

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 75

As noted in the Chapter 6 Opening Case, GE is now a major player in the "clean energy" industry such as wind turbines and solar power. A major reason GE moved in this direction was_____________________________.

A) to narrow the focus of its portfolio around energy-relted industries.
B) to overcome and correct its record in environmental issues.
C) to further diversify its portfolio away from services.
D) the clean energy industry was guaranteed to be profitable for the next severl years.

Question 76

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 77

GE (Chapter 6 Opening Case) is unusual in that it __________________ _______________.

A) is widely diversified but competes only in manufacturing industries.
B) has had an unblemished environmental record.
C) is one of the few large diversified large firms that have been successful over time.
D) restricted its investments to only developed economies.

Question 78

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 79

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 80

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