Deck 6: Corporate-Level Strategy

Question 1

Firms sometimes engage in vertical integration in order to increase market power and flexibility.

Answer 1

False

Question 2

Diversification can either increase or reduce a firm's value.

Answer 2

False

Question 3

The prevailing theory of diversification suggests that firms should diversify when they have a minimal level of multiple-use resources, capabilities and core competencies.

Answer 3

False

Question 4

Resource intangibility is one way to create value through corporate relatedness.

Question 5

Market power exists when a firm is able to sell its products above the existing competitive level and/or decrease the costs of its primary and support activities below the competitive level.

Question 6

Firms performing poorly may seek greater levels of diversification because they become more risk-seeking.

Question 7

Although the sharing of tangible resources may induce diversification, intangible resources such as tacit knowledge could encourage even more diversification.

Question 8

Diversification by a firm will likely reduce a manager's executive compensation.

Question 9

An unrelated diversification strategy can create value through two types of financial economies: (1) efficient internal capital allocations and (2) purchasing other corporations and restructuring their assets.

Question 10

A firm is engaged in related constrained diversification when it derives 70-95 per cent of revenue from a single business.

Question 11

When a restructuring strategy is being implemented, success usually calls for a focus on mature, low-technology businesses.

Question 12

A firm is engaged in very high levels of unrelated diversification when less than 70 per cent of revenue comes from the dominant business, and there are no common links between businesses.

Question 13

It is difficult to restructure intangible assets such as human capital and effective relationships.

Question 14

Corporate-level strategy specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets.

Question 15

Economies of scope are cost savings that a firm creates by successfully sharing some of its resources and capabilities or by transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses.

Question 16

When firms share activities across units, they are often able to achieve increased strategic competitiveness and financial returns.

Question 17

The single- and dominant-business categories denote relatively low levels of diversification; more fully diversified firms are classified into related and unrelated categories.

Question 18

Moderate levels of diversification yield lower levels of performance than either limited or extensive diversification.

Question 19

An effective corporate-level strategy creates aggregate returns across all of a firm's businesses that exceed what those returns would be without the strategy and it contributes to the firm's strategic competitiveness.

Question 20

Operational efficiency and corporate efficiency are two ways diversification strategies can create value.

Question 21

Value-creating diversification can be generated through a combination of:

A)strategic action and tactical action
B)competitive actions and competitive responses
C)operational relatedness and corporate relatedness
D)a related constrained scheme and a related linked scheme

Question 22

The ultimate test of the value of a corporate-level strategy is whether:

A)the corporation earns a great deal of money
B)the 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 23

An external governance threat generally restrains the behaviour of managers, providing a sure means of controlling managerial motives for diversification.

Question 24

Usually a company is employing a single-business diversification strategy when revenues generated by the dominant business are greater than:

A)99 per cent
B)95 per cent
C)91 per cent
D)70 per cent

Question 25

Which of the following is not a reason for firms to engage in value-neutral diversification?

A)Risk reduction
B)Uncertain future cash flows
C)Avoiding anti-trust regulation
D)Diversifying managerial employment risks

Question 26

Which one of the following is not a concern when a firm engages in vertical integration?

A)Bureaucratic costs
B)Technology changes
C)Quality
D)Efficiency
E)Flexibility

Question 27

In related linked diversification, related linked firms share ________ actual resources and activities and ________ transfers of knowledge and competencies between units.

A)fewer; fewer
B)more; more
C)more; fewer
D)fewer; more

Question 28

The more links there are among businesses, the more ________ is the relatedness of diversification.

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

Question 29

________ is a key source of value creation through corporate relatedness.

A)Resource sharing
B)Resource intangibility
C)Resource indivisibility
D)Resource dependence

Question 30

For a firm's diversification strategy to be considered related constrained:

A)more than 70 per cent of its revenue must come from the dominant business and all businesses share product, technological and distribution linkages
B)less than 70 per cent of its revenue comes from the dominant business, but the businesses share direct product, technological and distribution linkages
C)70-80 per cent of revenue comes from a single business
D)the firm must be concentrated in a large number of very different industries

Question 31

One means to facilitate the transfer of competencies when engaged in activity sharing is to:

A)divest unrelated entities
B)transfer key people into new management positions
C)utilise strategic competitive actions
D)utilise mutual forbearance

Question 32

Which of the following is not a reason for firms to diversify?

A)Sharing activities
B)Efficiently allocating internal capital
C)Increasing managerial compensation
D)Capturing more market share

Question 33

Firms following an unrelated diversification strategy can reduce their overall risk when:

A)resources are allocated among many businesses with different risk profiles
B)they limit their growth by acquiring only successful companies
C)synergies are developed among the business units
D)management refuses to purchase businesses outside their sphere of expertise or knowledge

Question 34

The basic types of operational economies through which firms seek value from economies of scope are:

A)buyer and supplier relationships
B)concentric diversification and joint ventures
C)sharing activities and transferring skills or corporate core competencies
D)joint ventures and the selling of skills

Question 35

With which two key issues is corporate-level strategy concerned?

A)What single business a firm should be in and how it should maintain a competitive advantage with a differentiation strategy in that business
B)What businesses a firm should be in and how the corporate office should manage its group of businesses
C)How to maximise power over buyers and suppliers
D)Which tactical and strategic competitive actions to pursue

Question 36

The essence of the prevailing theory of diversification is that firms diversify when they:

A)have excess resources, capabilities and core competencies with multiple uses
B)have market power in their industry and are market leaders
C)have control of tactical and strategic competitive actions
D)are market followers and have a secure niche

Question 37

Firms that have selected a related diversification corporate-level strategy seek to exploit:

A)control shared among business-unit managers
B)market power
C)the favourable demands of buyers
D)economies of scope between business units

Question 38

A related constrained diversified firm would be expected to ________ a number of resources and activities between its businesses.

A)eliminate
B)share
C)not be able to share
D)not want to share

Question 39

Financial economies are cost savings realised by:

A)laying off employees
B)transferring core competencies
C)improving financial resource allocations based on investments inside or outside the firm
D)the supplier firm cutting costs

Question 40

In diversified firms, ________ are a complex set of resources that link the different businesses through managerial and technological knowledge, experience and expertise.

A)strategies
B)competitive links
C)assets
D)corporate-level core competencies

Question 41

Which one of the following statements is correct?

A)Technological resources should have a stronger relationship to the extent of diversification than either financial or intangible resources.
B)Financial resources should have a stronger relationship to the extent of diversification than either tangible or intangible resources.
C)Intangible resources should have a stronger relationship to the extent of diversification than either tangible or financial resources.
D)Technological resources should have a stronger relationship to the extent of diversification than either tangible or intangible resources.

Question 42

Define vertical integration.Why is vertical integration commonly used in the firm's core business?

Question 43

Describe how diversified firms can use activity sharing and transfer of core competencies to create value.

Question 44

What are the five categories of businesses based on level of diversification?

Question 45

A situation in which executives may diversify a firm to the point that it fails to earn even average returns results from:

A)the firm's poor performance
B)the implementation of only related diversification
C)the firm's weak governance mechanisms
D)market uncertainty

Question 46

What are the managerial motives to diversify?

Question 47

Often, firms plagued by poor performance will:

A)avoid risks whenever possible
B)increase their level of borrowing funds
C)increase their level of new product innovation
D)increase their level of diversification

Question 48

As the threat of corporate failure increases due to relatedness between a firm's business units, a firm may decide to:

A)increase its level of retained resources
B)operate in more certain environments and/or constrain the level of activity sharing
C)forego the benefits of synergy and divest business units
D)pursue unproven product lines

Question 49

External incentives to diversify include:

A)the fact that other firms in an industry are diversifying
B)pressure from stockholders who are demanding that the firm diversify
C)the government's antitrust and tax laws
D)a firm's low performance

Question 50

What are the two ways in which an unrelated diversification strategy can create value?

Question 51

Describe the primary reasons why a firm pursues increased value-creating diversification.

Question 52

Successful unrelated diversification through restructuring is typically accomplished by:

A)restructuring a target firm's assets by selling underperforming divisions and placing the remaining divisions under rigorous financial controls
B)a 'random walk' of good luck in picking firms to buy
C)seeking out high-technology firms in high growth industries
D)a top management team that is not constrained by pre-established ideas of how the firm's portfolio should be developed

Question 53

Differentiate between corporate-level and business-level strategies, and give examples of each.

Question 54

What are corporate-level core competencies? In what two ways does the related linked diversification strategy help firms to create value?

Question 55

Which one of the following is not an internal incentive to diversify?

A)Uncertain future cash flows
B)Reduction of risk
C)The government's antitrust and tax laws
D)Low performance

Question 56

Synergy exists when:

A)two units are combined into one
B)two units create value by utilising market power in their respective industries
C)firms utilise constrained related diversification to build an attractive portfolio of businesses
D)the value created by business units working together exceeds the value the units create when working independently

Question 57

Synergy produces joint interdependence between businesses, which constrains a firm's flexibility to respond.What kinds of decisions does a firm face in such circumstances?

Question 58

The relationship between diversification and performance is illustrated by what type of graph?

A)Intermediate
B)Negative linear
C)Curvilinear
D)Linear