Deck 10: Corporate-Level Strategy: Related and Unrelated Diversification

Question 1

One way a diversified company can increase its profitability is by acquiring inefficient or poorly managed companies and then restructuring them to improve their performance.

Answer 1

True

Question 2

At Burger King, multiple items such as a cheeseburger, french fries, and a drink are combined to create a complete meal. This is an example of diversification.

Answer 2

False

Question 3

The "better off" test evaluates whether the company's diversification strategy makes the company more valuable than before diversification.

Answer 3

True

Question 4

A company's top managers do not need to have entrepreneurial capabilities for diversification to increase profitability.

Question 5

An advantage of unrelated diversification is that competencies can be shared and leveraged throughout the value-chain activities.

Question 6

The use of distinctive competencies in precision mechanics, fine optics, and electronic imaging by Canon to enter into a new business in a new industry to produce laserjet printers is an example of leveraging competencies.

Question 7

In a company with a strategic organizational competency, they are able to create new, profitable business units more quickly than do other companies and this allows them to take advantage of profitable opportunities for diversification.

Question 8

A company can pursue related diversification to enhance the competitive position of its core business.

Question 9

Diversification is the process of entering new industries, distinct from a company's core or original industry, to make new kinds of products that can be sold profitably to customers in these new industries.

Question 10

When business-unit managers inability to remain informed across multiple business units leads them to blame poor performance on difficult competitive conditions, even when it is the result of their inability to craft a successful business model, organizational problems increase. Top managers must spend an enormous amount of time and effort to solve them which increases bureaucratic costs and cancels out the profit-enhancing advantages of pursuing diversification, such as those obtained from sharing or leveraging competencies.

Question 11

A company can increase the probability of success of an internal venture by constructing efficient-scale manufacturing facilities ahead of demand.

Question 12

The coordination required to realize value from a diversification strategy based on transferring, sharing, or leveraging competencies is a major source of bureaucratic costs.

Question 13

Companies with strong track records of success at internal new venturing excel at research and development.

Question 14

Since the free cash flow of a firm technically belongs to the company's owners or its shareholders, in order for diversification to create value, a company's future ROIC must be less than the value shareholders would reap by returning the cash to them.

Question 15

The amount of value that can be created through an internal capital market is directly proportional to the efficiency of the external capital market. This is because an internal capital market strategy makes money as managers cannot make better investment decisions within the firm than the external capital market would, often because they don't have the superior information that the external capital market.

Question 16

Disposable diapers, toilet paper, and paper towels, are all paper-based products that customers value for their ability to absorb fluids without disintegrating. P&G's shares the R&D costs associated with developing and making even more advanced absorbent, paper-based products across these three distinct businesses units. They also use the same sales force to sell its whole array of products to retailers. These strategies allow P&G to obtain economies of scope from the ability to share resources and obtain synergies across business units.

Question 17

Transferring competencies involves taking a distinctive competency developed by a business unit in one industry and implanting it in a business unit operating in another industry.

Question 18

When Philip Morris used its distinctive competencies in product development, consumer marketing, and brand positioning to help develop their new acquisition of Miller Brewing from small brewery to number two in market share, it is called sharing resources and capabilities.

Question 19

Joint ventures allow frequent and close contact between companies, which facilitates learning and transfer of knowledge, but this advantage can also become a risk if it leads to an unintentional leak of proprietary information across companies.

Question 20

Sara Lee Corp., a clothing firm, purchased Platex Apparel Inc. This purchase helped to make Sara Lee Corp. one of the largest makers of women's apparel in the United States. Sara Lee Corp. utilized an acquisition strategy.

Question 21

If a company wants to enter a market that is developing very quickly and does not have the time to develop the required competencies, internal venturing is a better choice than acquisition.

Question 22

Product bundling refers to:

A) preparation of products for shipment.
B) a complete package of related products.
C) a method of stocking products efficiently.
D) an inventory procedure for ensuring effective counting of products.
E) a package of unrelated products.

Question 23

Which diversification strategy is based on the idea that the company creates value by applying the distinctive competencies it developed in one line of business to another business activity?

A) A technology acquisition strategy
B) Related diversification
C) A restructuring strategy
D) Total diversification
E) A taper diversification strategy

Question 24

Over time, while large-scale entry is more profitable in the short-run, small-scale entry becomes more profitable in the long-run.

Question 25

Tom Smith is a top manager at a diversified company that has been tasked to identify inefficient, poorly managed companies in other industries and then acquire and restructure them to improve their performance and increase the profitability of the total corporation. Which of the following would be a strategy Tom might take to increase the performance of one of these newly acquired companies?

A) Top managers of the acquired company are trained in more aggressive management techniques.
B) The new top-management team consolidates assets and terminates staff to reduce the cost structure.
C) The management team recommits to traditional strategies.
D) All bonuses and incentive programs are terminated.
E) The acquiring company uses the established goals to evaluate and review employees at all levels.

Question 26

Miller Brewing, which was acquired by Philip Morris, was related to the parent company's tobacco business because it was possible to create important marketing commonalities: both beer and tobacco are mass market consumer goods in which brand positioning, advertising, and product development skills are crucial to create successful new products. This is an example of which of the following?

A) Transferring competencies
B) Leveraging competencies
C) General organizational competencies
D) Economies of scope
E) Organizational design skills

Question 27

Microsoft's relationships and experiences in the computer industry and expertise in managing industries surrounding external networks led them to create new business units in the video game, online portal, and search engine industries. This is an example of which of the following?

A) Sharing resources and capabilities
B) Leveraging competencies to create a new business
C) Transferring competencies across businesses
D) Utilizing general organizational competencies
E) Economies of scope

Question 28

A laundromat and a pool hall together invest in a new store, where customers can wash their clothes and play pool while waiting. This is an example of an internal new venture.

Question 29

A possible cause for restructuring is that investors see highly diversified companies as less attractive investments and perceive a multibusiness company as being riskier than a company that operates in one industry,

Question 30

Free cash flow is defined as:

A) money in a company's bank account.
B) government funds given to a company for meeting Environmental Protection Agency (EPA) regulations.
C) additional funds donated by stockholders.
D) cash amounts that exceed what is required to fund new investments in the company's current business and meet existing debt commitments.
E) cash borrowed by the company that requires no interest payments.

Question 31

Which of the following is NOT a way to use diversification to increase profitability?

A) The use of general organizational competencies to increase the performance of all a company's business units.
B) Trying to leverage competencies to create business units in new industries.
C) Sharing resources between business units to realize synergies or economies of scope.
D) Transfer competencies between business units in different industries.
E) Evaluate business units to determine which needs to be shut-down to give more time and attention to more successful units.

Question 32

Which of the following describes when diversification to obtain economies of scope is possible?

A) When there are significant commonalities between one or more value-chain functions in a company's different business units or divisions that result in synergies which increase profitability.
B) The sharing of competencies will result in increased costs which will cause a streamlining of one or more of a company's new or existing business units.
C) When the advantages of sharing competencies will exceed the costs and risks created.
D) Product bundling allows a company to satisfy customers' needs for a complete package of related products but makes it more difficult to achieve economies of scope.
E) When the costs of coordination necessary to achieve synergies within a company are higher than the value that can be created by such a strategy.

Question 33

Which of the following statements is NOT generally true of a diversification strategy based on the realization of economies of scope?

A) The strategy requires the head office to evaluate each business unit as a stand-alone operation.
B) The strategy allows a company to realize cost economies among business units.
C) The strategy may allow a company to use shared resources more intensively, thereby realizing economies of scale.
D) The strategy requires managers to be aware of the costs of coordination.
E) The strategy requires close coordination among different business units.

Question 34

Managers who have hard-to-define governance skills that are required to manage different business units in a way that enables these units to perform better than they would if they were independent companies, helps probe business-unit managers for information, and helps them think through strategic problems describes which of the following general organizational competencies?

A) Entrepreneurial capabilities
B) Capabilities in organizational design
C) Superior strategic management capabilities
D) Sharing resources and capabilities
E) Leveraging competencies to create a new business

Question 35

Which of the following involves taking a distinctive competency developed by a business unit in one industry and implanting it in a business unit operating in another industry?

A) Sharing resources and capabilities
B) Leveraging competencies
C) Transferring competencies
D) Product bundling
E) Strategic management capabilities

Question 36

When Coca-Cola decided to use its successful marketing experience and global distribution network to buy Colombia Pictures and get into the business of making movies, which of the following ways of pursuing a multibusiness model based on diversification was it utilizing?

A) Sharing resources and capabilities
B) Leveraging competencies to create a new business
C) Transferring competencies across businesses
D) Utilizing general organizational competencies
E) Economies of scope

Question 37

How is the acquisition of new business related to existing business activities in situations where company leaders base their diversification strategy on transferring competencies?

A) Unrelated
B) Not comparable
C) Opposed
D) Related
E) Identical

Question 38

Which of the following may be true for a company pursuing a strategy of unrelated diversification rather than a strategy of related diversification?

A) The company must achieve coordination between business units.
B) The company has narrow organizational competencies.
C) The company has superior strategic management and organizational design.
D) The company has no bureaucratic costs that arise from the number of businesses in its portfolio.
E) The company has no difficulty in keeping its corporate managers informed about the complexities of each business.

Question 39

Which of the following is NOT a general organizational competency?

A) Entrepreneurial capabilities
B) Organizational design capabilities
C) Strategic capabilities
D) Product bundling
E) Commonality

Question 40

Research suggests that organizations that acquire many companies over time become expert in this process and can generate significant value from their experience of the acquisition process.

Question 41

Internal venturing is a more attractive strategy than acquisitions when:

A) entry barriers are high.
B) exit barriers are high.
C) a company's business model is based on using its technology or design skills to innovate new kinds of products and enter related markets or industries.
D) it needs to move fast to establish a presence in an industry, commonly an embryonic or growth industry.
E) the company must make the huge investment necessary to develop the set of value-chain activities required to make and sell products in the new industry.

Question 42

A company should pursue unrelated diversification instead of related diversification when:

A) its core skills are highly specialized and have few applications outside its core business.
B) the company's top managers are skilled at acquiring and turning around poorly run enterprises.
C) its core technological skills are applicable to a wide variety of industrial and commercial situations.
D) it wants to maximize growth.
E) the bureaucratic costs of implementation do not exceed the value that can be created by realizing economies of scope.

Question 43

The three main types of diversification strategies are:

A) acquisitions, joint ventures, and divestments.
B) acquisitions, mergers, and buyouts.
C) acquisitions, internal new ventures, and joint ventures.
D) related acquisitions, unrelated acquisitions, and mergers.
E) joint ventures, strategic alliances, and long-term contracts.

Question 44

Which of the following is NOT a reason that explains the relatively high failure rate of internal new ventures?

A) Businesses choose a small-scale entry strategy, which often means they fail to build the market share necessary for long-term success.
B) A company is marketing a product based on a technology for which there is no demand.
C) The company fails to correctly position or differentiate the product in the market to attract customers.
D) A company tries to increase their chances of introducing successful products by establishing too many internal new-venture divisions.
E) Companies are focused on and excel at R&D in which they help to advance basic science and discover important commercial applications for it.

Question 45

In order to make a successful acquisition, which of the following would occur after a detailed assessment of the potential acquisition's strengths and weaknesses?

A) Generation of significant value from the experience of the acquisition process
B) Eliminating any duplication of facilities or functions
C) Integration of the acquired company into its operations and quickly develop a viable multibusiness model
D) Targeting an identification and pre-acquisition screening
E) Developing and initiating a bidding strategy

Question 46

If a company is to increase the probability of a new product's commercial success, the company must foster close links between:

A) marketing and sales.
B) engineering and advertising.
C) quality assurance and inventory management.
D) research and development (R&D) and marketing.
E) accounting and industrial engineering.

Question 47

Which of the following is NOT an effect of an extensively diversified company with multiple business units?

A) It leads managers to base important resource-allocation decisions on a superficial analysis of each business unit's competitive position.
B) It makes it easier for corporate managers to remain informed about the complexities of each business.
C) Managers simply do not have the time to assess the business model of each unit.
D) The distance from the day-to-day operations may catch corporate managers unaware of information that is hidden by business-unit managers who want to protect their own jobs.
E) As organizational problems increase, the time and effort spent by top managers to solve them increases bureaucratic costs and cancels out the profit-enhancing advantages of pursuing diversification.

Question 48

A strategy based on diversification may fail to add value because companies:

A) seek to achieve differentiation instead of low cost.
B) diversify into areas in which they have some knowledge and miss out on profitable opportunities in other areas.
C) make acquisitions rather than develop new technologies on their own.
D) incur bureaucratic costs that exceed the value created by the strategy.
E) seek to achieve a low-cost position instead of differentiation.

Question 49

Which of the following reasons can make a diversification strategy an unwise course of action for a company to pursue?

A) Steady industry conditions
B) Varying firm-specific conditions
C) Diversification for pooling risks
D) Decreasing bureaucratic costs
E) Greater differentiation of products

Question 50

Which of the following is a justification that a business adopts to justify diversification?

A) The strategy would allow a company to save themselves from the drawbacks of risk pooling.
B) Entry into new industries will rescue the core business and lead to long-term growth and profitability.
C) It decreases the range of threats the company encounters, and gives more time to managers had to spend dealing with these threats.
D) Business cycles of different industries are inherently easy to predict, so it is likely that a diversified company will find that an economic downturn affects only one of its business units.
E) Growth creates value for stockholders and growth is the objective of a diversification strategy.

Question 51

Which of the following is considered a negative effect of sharing the risks and costs of developing a new business in a joint venture?

A) The main risk is that there is rarely an established leading company in an emerging industry.
B) If one partner's skills are more important than the other partner's skills, the partner with more valuable skills may feel they might "give away" profits to the other party because of the 50/50 agreement.
C) Partners may have different business models or time horizons which can cause conflict about how the business is run.
D) There is a risk of giving away important, company-specific knowledge to its partner, which might then use it to compete with its other partner in the future.
E) Conflict can sour the working relationship between the partners and cause the venture to disintegrate.

Question 52

Which of the following entry strategies should be used when speed is an important consideration?

A) Internal new venture
B) Acquisition
C) Joint venture
D) Unrelated diversification
E) Related diversification

Question 53

A company should pursue related diversification instead of unrelated diversification when the company's:

A) core skills are applicable to a wide variety of industrial and commercial situations.
B) core skills are highly specialized and have few applications outside the core business.
C) top managers are skilled at acquiring and turning around poorly run enterprises.
D) main objective is to maximize its growth.
E) free cash flow is high enough that it has funds available for investment.

Question 54

Bob's Running Shoes has acquired Fleet Feet about six months ago. Due to the differences in processes and cultures of the two companies, it has taken a long time to adopt a common management and financial control system. They share information and personnel but have had difficulty in creating a common culture. Management is threatening to leave because the employees do not like the acquiring company's way of operating. Which of the following acquisition pitfalls does this scenario describe?

A) Integrating the acquired company
B) Overestimating economic benefits
C) The expense of acquisitions
D) Inadequate pre-acquisition screening
E) Agency problems

Question 55

When one or more components of a company's value chain are applicable to a wide variety of industrial and commercial situations, which of the following strategies should a company pursue?

A) Unrelated diversification
B) Related diversification
C) A focus strategy
D) Taper integration
E) Backward integration

Question 56

Which of the following seems to be a major determinant of a new venture's success?

A) Large-scale entry into the target industry designed to build market share
B) Cautious small-scale entry into the target industry so that the company can assess the probable outcome of the venture without losing too much money
C) A low level of integration between the marketing and research and development functions of the venturing company
D) Supporting many new venture projects in the hope that one will succeed
E) Killing the new venture if it does not show a profit after the end of the third year

Question 57

A company considering entering an industry that is in the mature stage of its life cycle would generally prefer which of the following entry strategies?

A) Joint ventures
B) New ventures
C) Acquisitions
D) Long-term contracting
E) Taper integration

Question 58

In which of the following cases are bureaucratic costs likely to be lowest?

A) A vertically integrated company with five divisions that pursues full integration
B) A company with five divisions that pursues related diversification based on economies of scope
C) A company with five divisions that pursues related diversification based on transferring competencies
D) A company with five divisions that pursues unrelated diversification based on acquisitions and restructuring
E) A company with twenty divisions that pursues taper integration

Question 59

In which of the following industry environments are acquisitions MOST likely to be favored over new ventures?

A) Embryonic industry
B) Industry in its later stages of growth
C) Industry passing through the shakeout stage
D) Mature industry
E) Declining industry

Question 60

Which of the following statements concerning research and development is correct?

A) Exploratory research is more important than development research.
B) Development research is more important than exploratory research.
C) Exploratory research is directed toward commercialization of a new technology.
D) Development research advances basic science.
E) Exploratory research and development research are needed for internal new venturing.

Question 61

Stanley's services firm wants to enter an embryonic market, but it doesn't have enough cash to purchase the required assets. Which of the following strategies would you recommend to Stanley?

A) Diversify through acquisition.
B) Do not diversify at all.
C) Diversify with an internal new venture.
D) Diversify with a joint venture.
E) Diversify through vertical integration.

Question 62

Which of the following is the main reason for a company to restructure?

A) The stock market has valued the stock the stock of less-diversified companies.
B) Innovations in strategic management have diminished the advantages of vertical integration or diversification.
C) Fulfilling the need to exit industries to increase profitability split existing businesses into separate, independent companies.
D) It is an attempt to boost returns to shareholders by splitting up a multibusiness company into separate, independent parts.
E) Diversification has reduced profitability.

Question 63

In 2007, Google bought YouTube. This is an example of which of the following?

A) Partnership
B) Strategic alliance
C) Joint venture
D) Acquisition
E) Merger

Question 64

Which of the following is NOT necessary for a successful acquisition?

A) Good bidding strategy
B) Clear strategic rationale for making the acquisition
C) Quick completion of the acquisition
D) Thorough pre-acquisition screening
E) Post-acquisition audit to review the process and discuss ways to improve it

Question 65

Which of the following is NOT a reason for the failure of an acquisition to generate the gains originally expected of it?

A) Poor post-acquisition integration
B) Overestimation of the potential gains to be derived from synergy
C) The high cost of making acquisitions
D) Lack of pre-acquisition screening
E) Overestimation of the potential costs of realizing synergies

Question 66

Differentiate between internal new venture, joint venture and acquisition as a method to enter new industries. Discuss the advantages and disadvantages associated with each.

Question 67

Identify and discuss the profitability justifications for pursuing a multibusiness model based on diversification.

Question 68

In which of the following stages of successful acquisition is timing an essential component?

A) Learning from experience
B) Identification and screening
C) Bidding strategy
D) Integration
E) Elimination of any duplication of facilities or functions

Question 69

What are the two general types of diversification, and when would one be preferred over the other?

Question 70

What would cause a business model based on diversification to lead to a loss of competitive advantage?

Question 71

Which of the following is instrumental in increasing the probability of a joint venture's success?

A) When the companies share complementary skills or distinctive competencies
B) The companies bidding strategy is well-developed and timed correctly
C) The duplication of facilities or functions are eliminated, and any unwanted business units are divested
D) Companies have a strong competency in the R&D unit and devote funding for continuing research
E) Large-scale entry

Question 72

Which of the following is perhaps the MOST important reason why acquisitions fail?

A) The expense of the acquisition
B) The timing of the acquisition
C) Management's unwillingness to make the necessary effort to make the acquisition work effectively
D) Incompetence on the part of workers in the acquired firm
E) Difficulties in coordinating manufacturing activities

Question 73

Which of the following is the probable consequence of a company's inability to integrate two divergent corporate cultures after an acquisition?

A) Low management turnover
B) Poor commercialization of the product
C) An inability to realize potential gains from synergies
D) The stock of highly diversified companies is valued lower
E) Risks are shared by all

Question 74

Which of the following statements is false?

A) Joint ventures are preferable to acquisitions when the new business is related to the existing business.
B) Acquisitions are preferable to new ventures when speed is important.
C) Joint ventures are generally preferable to acquisitions when entry barriers are high.
D) Acquisitions can be both a reason for corporate decline and part of a turnaround strategy.
E) New ventures are preferable to acquisitions in the embryonic stage of the industry life cycle.