Deck 6: Corporate-Level Strategy

Question 1

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

Answer 1

True

Question 2

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 2

True

Question 3

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.

Answer 3

True

Question 4

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 5

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

Question 6

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

Question 7

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

Question 8

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 9

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.

Question 10

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

Question 11

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 12

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

Question 13

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 14

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 15

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 16

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 17

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

Question 18

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

Question 19

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 20

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 21

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 22

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

Question 23

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 24

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

Question 25

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 26

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 27

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 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

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 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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 35

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 36

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 37

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

Question 38

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 39

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

Question 40

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 41

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

Question 42

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 43

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

Question 44

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 45

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 46

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

Question 47

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

Question 48

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 49

Low firm performance is associated with increased diversification.

Question 50

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

Question 51

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

Question 52

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

Question 53

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

Question 54

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

Question 55

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 56

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

Question 57

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 58

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 59

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

Question 60

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 61

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 62

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 63

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 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

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 66

The lowest level of diversification is the ____ level.

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

Question 67

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 68

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 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

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 71

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 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

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 74

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

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

Question 75

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 76

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 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 best describes the corporate level strategy of UPS?

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

Question 78

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 79

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 80

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