Question 1

Firms using a low-level diversification strategy typically struggle to use their resources efficiently and are disadvantaged by the inability to gain economies of scale.

Accepted Answer

A low-level diversification strategy often allows firms to focus on their core competencies, leading to efficient resource use and potential economies of scale within their primary industry.

Question 2

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

Accepted Answer

Synergy refers to the concept where the combined efforts or collaboration of business units result in a greater outcome than if they operated separately, thus creating additional value.

Question 3

Firms that focus on one or few businesses and markets can earn positive returns because they are able to develop capabilities useful for those markets.

Accepted Answer

Firms that concentrate on specific markets can develop specialized skills and knowledge, leading to competitive advantages and potentially higher returns.

Question 4

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

Accepted Answer

Diversification strategies can aim to create value by leveraging synergies and economies of scope, or they can be value-neutral, focusing on risk reduction or regulatory compliance without necessarily enhancing firm value.

Question 5

If the tax code were to be changed so that individual tax rates for dividends were taxed at a higher rate and long-term capital gains were taxed at a lower rate, shareholders would most likely encourage to limit investments into diversification that would significantly increase share value and, instead, increase dividend rates.

Accepted Answer

If dividends are taxed at a higher rate and long-term capital gains at a lower rate, shareholders would prefer strategies that increase share value over dividends to benefit from the lower tax on capital gains.

Question 6

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.

Accepted Answer

Diversification can be driven by various incentives, such as risk reduction or managerial motives, and the quality of a firm's resources may not always support diversification that enhances value, leading to value-neutral outcomes instead.

Question 7

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

Accepted Answer

The threat of acquisition can motivate executives to pursue diversification strategies that enhance firm value, as successful management and value creation can make the firm less attractive as a takeover target.

Question 8

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

Accepted Answer

Research indicates that larger firms and those with more diversification often have more complex operations, which can justify higher compensation for executives due to the increased responsibilities and skills required.

Question 9

Without strict governance mechanisms, the majority of executives will act in their own self-interest rather than acting as positive stewards of firm resources.

Accepted Answer

The answer of Without strict governance mechanisms, the majority of...

Question 10

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 that will create above-average returns only after restructuring
D) whether to integrate backward or forward

Accepted Answer

Corporate-level strategy focuses on determining which product markets and businesses the firm should compete in and how to manage these businesses to create value.

Question 11

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.

Accepted Answer

Wrigley was moving from a single-business strategy, where it focused solely on chewing gum, to a dominant strategy by diversifying into related products like mints, which are still within the confectionery industry.

Question 12

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

Accepted Answer

Financial economies through restructuring are not limited to high-technology businesses; they can apply to various industries. The focus is on improving financial performance, not solely on human resource dependency.

Question 13

In the 1960s and 1970s, capital gains were taxed more heavily than were dividends.

Accepted Answer

The answer of In the 1960s and 1970s, capital gains...

Question 14

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.

Accepted Answer

The ultimate test of a corporate-level strategy is whether the businesses in the portfolio are more valuable under the company's management than they would be under any other ownership, indicating effective strategic management and synergy.

Question 15

Usually, a company is classified as a single-business firm when revenues generated from its core business area are greater than __________ percent.
A) 99
B) 95
C) 90
D) 70

Accepted Answer

The answer of Usually, a company is classified as a...

Question 16

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

Accepted Answer

Unrelated diversification allows companies in emerging markets to spread risk and capitalize on various opportunities due to the lack of developed infrastructure and institutional support.

Question 17

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.

Accepted Answer

Diversification based on financial resources is more transparent and easier for competitors to replicate, whereas intangible resources like brand reputation or proprietary technology are less visible and harder to imitate, potentially leading to sustainable competitive advantage.

Question 18

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

Accepted Answer

Poison pills are defensive strategies used by companies to prevent or discourage hostile takeovers, making it more difficult or expensive for an acquiring company to take control.

Question 19

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

Accepted Answer

Golden parachutes are agreements that provide executives with significant benefits if they lose their job due to a merger or takeover, potentially reducing their personal risk and incentivizing them to make decisions like over-diversification without fear of personal financial loss.

Question 20

The more "constrained" the relatedness of diversification the:
A) fewer the linkages between the businesses within the portfolio owned by the firm.
B) wider the variation in the portfolio of businesses owned by the firm.
C) more links there are among the businesses owned by an organization.
D) lower the proportion of total organizational revenue derived from the dominant business.

Accepted Answer

Constrained relatedness in diversification implies that the businesses within the portfolio are closely related, leading to more links among them.

Quiz 6: Corporate-Level Strategy