Question 1

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

Accepted Answer

The answer of What are the two ways that an...

Question 2

Which of the following is NOT a governance mechanism that may limit managerial tendencies to over-diversify?

Accepted Answer

Surveillance technologies might help in monitoring and limiting managerial tendencies to over-diversify, but it is not considered a formal governance mechanism like the market for corporate control, Board of Directors, and executive compensation practices.

Question 3

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

Accepted Answer

The answer of Differentiate between corporate-level and business-level strategies and...

Question 4

Case Scenario 3: Walt Disney Company.
Walt Disney Company is famed for its creativity, strong global brand, and uncanny ability to take service and experience businesses to a higher level. In the 1970s, the company realized nearly 90% of its revenues from its cartoons and the Disneyland theme park in Anaheim, CA. By the beginning of the 21st Century, Disney had not only opened up more parks and ramped up its output of animated films, it had also diversified into many businesses well beyond its traditional core of high-quality cartoon animation and theme parks. For instance, the Disney empire diversified vertically and horizontally into retail (The Disney Store, since licensed to The Children's Place), cruise lines, theaters, motels, and the Disney Press. It also moved into new product offerings such as sports franchises, TV networks (ABC and ESPN) and stations, Miramax, Broadway shows (Beauty and the Beast), and vacation clubs. International growth included EuroDisney and Hong Kong Disney and new releases of TV shows, videos, and movies worldwide. Indeed, while many of Disney's businesses had some tie to Mickey Mouse, only about 28% of total revenues now came directly from its parks.
-(Refer to Case Scenario 3) What level and type of diversification best characterized Disney in the 1970s?

Accepted Answer

In the 1970s, Disney's revenue sources were primarily focused on its cartoons and the Disneyland theme park, indicating a dominant business diversification strategy.

Question 5

What are the managerial motives to diversify?

Accepted Answer

The answer of What are the managerial motives to diversify?...

Question 6

During the 1990s top executives of Titanic, Inc., followed a pattern of aggressive acquisitions and diversification. Now, Titanic is performing poorly and earning below average returns. Lusitania, a large conglomerate firm, is in the final stages of purchasing Titanic. Lusitania has announced that it will fire Titanic's current top executives. The Titanic executives may not be worried about their impending job loss if they

Accepted Answer

Golden parachutes are a form of executive compensation that includes severance packages and other benefits in the event of a merger, acquisition, or termination. If the Titanic executives have golden parachutes, they will receive a significant amount of money and benefits upon their job loss, so they may not be worried about it. The other options (A, C, D) are unlikely to be applicable or effective in this situation.

Question 7

Case Scenario 2: Jewell Company.
Jewell Company (JC) is a $2 billion diversified manufacturer and marketer of simple household items, cookware, and hardware. In the early 1950s, JC's business consisted solely of manufactured curtain rods that were sold through hardware stores and retailers like Sears. Since the 1960s however, the company has diversified extensively through acquisition into such businesses as paintbrushes, writing pens, pots and pans, and hairbrushes. Over 90 percent of its growth can be attributed to these many small acquisitions, whose performance it improved tremendously through aggressive restructuring and its corporate emphasis on cost-cutting and cost controls. While JC's sixteen different lines of business may appear quite different, they all share the common characteristics of being staple manufactured items and sold primarily through volume retail channels like Wal-Mart, Target, and Kmart. Because JC operates each line of business autonomously (separate manufacturing, R&D, and selling responsibilities for each line), it is perhaps best described as pursuing a related linked diversification strategy. The common linkages are both internal (accounting systems, product merchandising skills, and acquisition competency) and external (distribution channel of volume retailers). JC is presently contemplating the acquisition of Plastico, a $3 billion U.S.-based manufacturer of flexible plastic products like trash cans, reheatable and freezable food containers, and a broad range of other plastic storage containers designed for home and office use. While Plastico has been highly innovative (over 80% of its growth has come from internal new product development), it has had difficulty controlling costs and is losing ground against powerful customers like Wal-Mart. JC believes that the market power it wields with retailers like Wal-Mart will help it turn Plastico's prospects around.
-(Refer to Case Scenario 2) What difficulties might you expect JC to encounter related to its acquisition of Plastico?

Accepted Answer

The answer of Case Scenario 2: Jewell Company.
Jewell Company (JC)...

Question 8

Isidore Crocker, CEO of Gotham Engines, is strongly in favor of acquiring Carolina Textiles, a firm in an unrelated industry. Some members of the board of directors are questioning Crocker's motives for the acquisition. They argue that it is not uncommon for CEOs to push for acquisitions because

Accepted Answer

The answer of Isidore Crocker, CEO of Gotham Engines, is...

Question 9

Case Scenario 2: Jewell Company.
Jewell Company (JC) is a $2 billion diversified manufacturer and marketer of simple household items, cookware, and hardware. In the early 1950s, JC's business consisted solely of manufactured curtain rods that were sold through hardware stores and retailers like Sears. Since the 1960s however, the company has diversified extensively through acquisition into such businesses as paintbrushes, writing pens, pots and pans, and hairbrushes. Over 90 percent of its growth can be attributed to these many small acquisitions, whose performance it improved tremendously through aggressive restructuring and its corporate emphasis on cost-cutting and cost controls. While JC's sixteen different lines of business may appear quite different, they all share the common characteristics of being staple manufactured items and sold primarily through volume retail channels like Wal-Mart, Target, and Kmart. Because JC operates each line of business autonomously (separate manufacturing, R&D, and selling responsibilities for each line), it is perhaps best described as pursuing a related linked diversification strategy. The common linkages are both internal (accounting systems, product merchandising skills, and acquisition competency) and external (distribution channel of volume retailers). JC is presently contemplating the acquisition of Plastico, a $3 billion U.S.-based manufacturer of flexible plastic products like trash cans, reheatable and freezable food containers, and a broad range of other plastic storage containers designed for home and office use. While Plastico has been highly innovative (over 80% of its growth has come from internal new product development), it has had difficulty controlling costs and is losing ground against powerful customers like Wal-Mart. JC believes that the market power it wields with retailers like Wal-Mart will help it turn Plastico's prospects around.
-(Refer to Case Scenario 2) Why would the acquisition of Plastico be good for JC?

Accepted Answer

The answer of Case Scenario 2: Jewell Company.
Jewell Company (JC)...

Question 10

Case Scenario 2: Jewell Company.
Jewell Company (JC) is a $2 billion diversified manufacturer and marketer of simple household items, cookware, and hardware. In the early 1950s, JC's business consisted solely of manufactured curtain rods that were sold through hardware stores and retailers like Sears. Since the 1960s however, the company has diversified extensively through acquisition into such businesses as paintbrushes, writing pens, pots and pans, and hairbrushes. Over 90 percent of its growth can be attributed to these many small acquisitions, whose performance it improved tremendously through aggressive restructuring and its corporate emphasis on cost-cutting and cost controls. While JC's sixteen different lines of business may appear quite different, they all share the common characteristics of being staple manufactured items and sold primarily through volume retail channels like Wal-Mart, Target, and Kmart. Because JC operates each line of business autonomously (separate manufacturing, R&D, and selling responsibilities for each line), it is perhaps best described as pursuing a related linked diversification strategy. The common linkages are both internal (accounting systems, product merchandising skills, and acquisition competency) and external (distribution channel of volume retailers). JC is presently contemplating the acquisition of Plastico, a $3 billion U.S.-based manufacturer of flexible plastic products like trash cans, reheatable and freezable food containers, and a broad range of other plastic storage containers designed for home and office use. While Plastico has been highly innovative (over 80% of its growth has come from internal new product development), it has had difficulty controlling costs and is losing ground against powerful customers like Wal-Mart. JC believes that the market power it wields with retailers like Wal-Mart will help it turn Plastico's prospects around.
-(Refer to Case Scenario 2) How might JC's related diversification strategy result in economies of scope and market power?

Accepted Answer

The answer of Case Scenario 2: Jewell Company.
Jewell Company (JC)...

Question 11

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

Accepted Answer

The answer of What are the five categories of businesses...

Question 12

Case Scenario 2: Jewell Company.
Jewell Company (JC) is a $2 billion diversified manufacturer and marketer of simple household items, cookware, and hardware. In the early 1950s, JC's business consisted solely of manufactured curtain rods that were sold through hardware stores and retailers like Sears. Since the 1960s however, the company has diversified extensively through acquisition into such businesses as paintbrushes, writing pens, pots and pans, and hairbrushes. Over 90 percent of its growth can be attributed to these many small acquisitions, whose performance it improved tremendously through aggressive restructuring and its corporate emphasis on cost-cutting and cost controls. While JC's sixteen different lines of business may appear quite different, they all share the common characteristics of being staple manufactured items and sold primarily through volume retail channels like Wal-Mart, Target, and Kmart. Because JC operates each line of business autonomously (separate manufacturing, R&D, and selling responsibilities for each line), it is perhaps best described as pursuing a related linked diversification strategy. The common linkages are both internal (accounting systems, product merchandising skills, and acquisition competency) and external (distribution channel of volume retailers). JC is presently contemplating the acquisition of Plastico, a $3 billion U.S.-based manufacturer of flexible plastic products like trash cans, reheatable and freezable food containers, and a broad range of other plastic storage containers designed for home and office use. While Plastico has been highly innovative (over 80% of its growth has come from internal new product development), it has had difficulty controlling costs and is losing ground against powerful customers like Wal-Mart. JC believes that the market power it wields with retailers like Wal-Mart will help it turn Plastico's prospects around.
-(Refer to Case Scenario 2) If Jewell Company is able to transfer its competence in cost-cuting and cost controls to Plastico (which has had difficulty controlling costs), it will have achieved the primary means whereby a related linked diversification strategy creates value.

Accepted Answer

The primary means of creating value in a related linked diversification strategy is through sharing or transferring of resources and capabilities among the different businesses. In this case, if Jewell Company is able to transfer its competence in cost-cutting and cost controls to Plastico, it will help improve its performance and control costs, which will create value for the overall company. Therefore, the statement is true.

Question 13

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

Accepted Answer

The answer of Describe how diversified firms can use activity...

Question 14

Case Scenario 1: Syco.
Syco is a diversified company that has six primary lines of business. Fifty percent of its revenues and 18 percent of its profits come from retailing. Most of its retail outlets are discount department stores that serve as anchor tenants for large suburban shopping malls. The remaining businesses are broken out as follows: Insurance accounts for 30 percent of revenues and 50 percent of profits; consumer credit card operations are 6 percent of sales and 17 percent of profits; 5 percent of revenues and 6 percent of profits come from its stock brokerage business; commercial and residential real estate operations generate 4 percent of sales and 8 percent of profits; finally, 5 percent of revenues and 1 percent of profits come from its online portal business. The company's management states that all these businesses are essential to its competitive future.
-Part 1: (Refer to Case Scenario 1) Develop a logical argument that would lead you to describe Syco's diversification type as related linked and another logical argument that Syco's diversification type is related constrained. For both the related linked and for the related constrained arguments, what product, technological, or distribution activities might link these businesses together?
Part 2: Would you describe either of the logical arguments you developed in response to Part 1 as a good corporate strategy?

Accepted Answer

The answer of Case Scenario 1: Syco.
Syco is a diversified...

Question 15

Research suggests that _______________has decreased while ___________has increased possibly due to the restructuring that took place in the 1990s and early twenty-first century.

Accepted Answer

The answer of Research suggests that _______________has decreased while ___________has...

Question 16

What is the effect of a firm's low performance on the pursuit of diversification?

Accepted Answer

The answer of What is the effect of a firm's...

Question 17

Describe the primary reasons a firm pursues increased diversification.

Accepted Answer

The answer of Describe the primary reasons a firm pursues...

Question 18

Case Scenario 1: Syco.
Syco is a diversified company that has six primary lines of business. Fifty percent of its revenues and 18 percent of its profits come from retailing. Most of its retail outlets are discount department stores that serve as anchor tenants for large suburban shopping malls. The remaining businesses are broken out as follows: Insurance accounts for 30 percent of revenues and 50 percent of profits; consumer credit card operations are 6 percent of sales and 17 percent of profits; 5 percent of revenues and 6 percent of profits come from its stock brokerage business; commercial and residential real estate operations generate 4 percent of sales and 8 percent of profits; finally, 5 percent of revenues and 1 percent of profits come from its online portal business. The company's management states that all these businesses are essential to its competitive future.
-(Refer to Case Scenario 1) Why might there be so much variability among the proportion of sales versus profitability contributed by each of the businesses? Does this mean that Syco is more successful in its insurance business than in its retail business?

Accepted Answer

The answer of Case Scenario 1: Syco.
Syco is a diversified...

Question 19

In making a decision to diversify, managers should use value-creating reasons or face the risk that their firms will be acquired and they could lose their jobs. Which of the following is a value-creating reason to diversify?

Accepted Answer

Economies of scope is a value-creating reason to diversify as it allows the company to share resources and capabilities among different business units, reducing costs and increasing efficiency. Desire for increased compensation and reduced managerial risk can be personal motivations that do not necessarily benefit the company, while low performance is not a reason to diversify but rather a consequence of ineffective management.

Question 20

Case Scenario 1: Syco.
Syco is a diversified company that has six primary lines of business. Fifty percent of its revenues and 18 percent of its profits come from retailing. Most of its retail outlets are discount department stores that serve as anchor tenants for large suburban shopping malls. The remaining businesses are broken out as follows: Insurance accounts for 30 percent of revenues and 50 percent of profits; consumer credit card operations are 6 percent of sales and 17 percent of profits; 5 percent of revenues and 6 percent of profits come from its stock brokerage business; commercial and residential real estate operations generate 4 percent of sales and 8 percent of profits; finally, 5 percent of revenues and 1 percent of profits come from its online portal business. The company's management states that all these businesses are essential to its competitive future.
-(Refer to Case Scenario 1) What diversification strategy best describes Syco? Assume that retailing, insurance, consumer credit card, stock brokerages, and online portal businesses allow for some transfer of knowledge about consumer behavior including buying and bill-paying habits.

Accepted Answer

Syco's various businesses allow for some transfer of knowledge about consumer behavior including buying and bill-paying habits, indicating a related linked diversification strategy. The businesses are related through this transfer of knowledge, but they are not necessarily related to each other in terms of their products or services.

Quiz 6: Corporate-Level Strategy

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

Which of the following is NOT a governance mechanism that may limit managerial tendencies to over-diversify?

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

What are the managerial motives to diversify?

Isidore Crocker, CEO of Gotham Engines, is strongly in favor of acquiring Carolina Textiles, a firm in an unrelated industry. Some members of the board of directors are questioning Crocker's motives for the acquisition. They argue that it is not uncommon for CEOs to push for acquisitions because

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

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

Research suggests that _____has decreased while _has increased possibly due to the restructuring that took place in the 1990s and early twenty-first century.

What is the effect of a firm's low performance on the pursuit of diversification?

Describe the primary reasons a firm pursues increased diversification.

In making a decision to diversify, managers should use value-creating reasons or face the risk that their firms will be acquired and they could lose their jobs. Which of the following is a value-creating reason to diversify?