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

Question 1

Companies with a strong track record of internal new venturing generally excel at research and development.

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

Free cash flow refers to additional funds from a government stimulus program.

Answer 3

False

Question 4

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

Question 5

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

Question 6

Diversification is the process of a company entering new industries distinct from its core industry, using a multibusiness model.

Question 7

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

Question 8

If a company's core skills are highly specialized and have few applications outside the core business, then a company should pursue a related diversification strategy.

Question 9

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

Question 10

If a company generates free cash flow, that money technically belongs to shareholders.

Question 11

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.

Question 12

Firms can create profitable new business units by leveraging their competencies.

Question 13

When a firm does not pay out its free cash flow to its shareholders, the shareholders bear an opportunity cost equal to their next best use of those funds.

Question 14

Economies of scope arise when one or more of a diversified company's business units are able to realize cost-saving or differentiation advantages because it can more effectively pool, share, and utilize resources or capabilities.

Question 15

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

Question 16

An advantage of a joint venture is that it allows a company to quickly gain entry into a new industry where barriers are high.

Question 17

An appropriate reason to diversify is to pool the risk from several business ventures to create a more stable income stream.

Question 18

Transferring competencies across industries involves taking a distinctive competency developed in one industry and implanting it in an existing business unit in another industry.

Question 19

Research finds that the higher the number of business units in a company's portfolio, the easier it is for corporate managers to remain informed about the complexities of each business.

Question 20

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 21

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 22

When McDonald's introduced the McCafe, it began offering a new product that was not available in traditional McDonald's stores. The introduction of the McCafe is an example of which of the following?

A) Transferring competencies
B) Diversification
C) Commonality
D) Economies of scope
E) Bureaucratic costs

Question 23

_____ 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 24

General organizational competencies are found:

A) in the skills of a company's top managers and functional experts.
B) at low levels among workers and other employees in the organization.
C) exclusively among technology professionals.
D) in feedback given by customers.
E) in changes occurring within an industry.

Question 25

Research suggests that companies that acquire many businesses over time become expert in this process and so can generate significant value from their acquisitions.

Question 26

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 in excess of that required to fund investments in the company's industry and to meet any debt commitments.
E) cash borrowed by the company that requires no interest payments.

Question 27

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 has to 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 complexitities of each business.

Question 28

Research suggests that small-scale entry into a new business is the best way for an internal venture to succeed.

Question 29

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 30

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 31

The managers of most companies often consider _____ when they are generating free cash flow.

A) taper integration
B) full integration
C) diversification
D) long-term contracts
E) strategic alliances

Question 32

Internal new ventures can generally be executed far more quickly than acquisitions.

Question 33

Company leaders that base their diversification strategy on transferring competencies tend to acquire new businesses that are ____ to their existing business activities.

A) unrelated
B) not comparable
C) opposed
D) related
E) identical

Question 34

A joint venture allows a company to share the risks and costs associated with establishing a new business unit with another company.

Question 35

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 36

Leveraging competencies involves taking a distinctive competency developed by a business unit in one industry to create:

A) a new business unit in the same industry.
B) a new business unit in a different industry.
C) lower costs in various business units.
D) differentiation in various business units.
E) new customers in the same industry.

Question 37

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 38

Economies of scope can be defined as:

A) competencies that result from the skills of a company's top managers that help every business unit within a company perform at a higher level than it could if it operated as a separate or independent company.
B) some kind of skill or competency that when shared by two or more business units allows them to operate more effectively and create more value for customers.
C) the process of taking a distinctive competency developed by a business unit in one industry and implanting it in a business unit operating in another industry.
D) the process of taking a distinctive competency developed by a business unit in one industry and using it to create a new business unit in a different industry.
E) the synergies that arise when one or more of a diversified company's business units are able to lower costs or increase differentiation because they can more effectively pool, share, and utilize expensive resources or capabilities.

Question 39

Economies of scope typically involve:

A) sharing resources by business units.
B) acquiring resources from outside a company.
C) utilizing resources in limited quantities by specific business units.
D) acquiring resources from another business unit in a company.
E) utilizing resources to develop a new business unit.

Question 40

Which of the following is not a general organizational competency?

A) Entrepreneurial capabilities
B) Capabilities in organizational design
C) Superior strategic capabilities
D) Product bundling
E) Commonality

Question 41

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 42

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 43

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 44

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 45

New ventures are 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 to innovate new kinds of products for related markets.
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 46

Diversification may dissipate value if it is wrongly based on:

A) realizing economies of scope.
B) rescuing core business.
C) transferring competencies.
D) acquisitions and restructuring.
E) leveraging existing competencies.

Question 47

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 48

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 49

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

A) An embryonic industry
B) An industry in its later stages of growth
C) An industry passing through the shakeout stage
D) A mature industry
E) A declining industry

Question 50

The greater the number of business units in a company's portfolio, the ____ it is for corporate managers to understand the complexities of each business.

A) easier
B) more difficult
C) less important
D) less expensive
E) more meaningless 

Question 51

The three main types of diversification strategies are:

A) acquisitions, joint ventures, and divestments.
B) acquisitions, mergers, and buy outs.
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 52

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 53

To be commercially successful, new products must be developed with ____ in mind.

A) manufacturing requirements
B) engineering technology
C) customer requirements
D) sales techniques
E) technical requirements

Question 54

What is the process of transferring resources to and creating a new business unit in a new industry called?

A) External new venturing
B) Exportation of resources
C) Intrapreneuring
D) Risk avoidance
E) Internal new venturing

Question 55

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

A) Large-scale entry into the target industry is designed to build market share, even when entry involves significant short-term losses
B) Cautious small-scale entry into the target industry is used 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 the 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 56

An internal new venture is the most appropriate strategic choice when:

A) an industry is mature.
B) the firm will enter on a small scale.
C) the firm has competencies that can be leveraged.
D) speed of entry is the most important consideration.
E) there is strong pressure for quick profitability.

Question 57

New ventures:

A) should be killed if they don't make a profit within three years.
B) are often preferred by technology-based companies.
C) are more attractive compared to acquisitions when entry barriers are high.
D) are less risky than acquisitions.
E) are best when the company is entering the industry on a small scale.

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

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 60

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 61

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

Question 62

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 63

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

Question 64

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.

Question 65

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

A) A good bidding strategy
B) A 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 66

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 67

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 68

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 69

Joint ventures:

A) are an alternative to new ventures.
B) are attractive when speed is important.
C) are attractive when entry barriers are high.
D) should be done on a small scale.
E) reduce the risk of loss of proprietary knowledge.

Question 70

Acquisitions often fail because of:

A) poor commercialization.
B) pre-acquisition screening that increases the time it takes to enter a market.
C) large-scale entry.
D) differences in corporate culture.
E) slowness in establishing significant market presence.

Question 71

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

Question 72

What 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

At its simplest level, a joint venture may be thought of as:

A) a merger of two companies.
B) an acquisition of a smaller company by a larger company.
C) a form of strategic outsourcing.
D) a sign of weakness on the part of one of the companies.
E) pooling of resources by two or more firms to create new business.