Disney has achieved growth and diversification through mergers and acquisitions

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True / False

1. In the Chapter 6 Opening Case, Disney achieved growth and diversification through mergers and acquisitions. a. True

b. Fals e

ANSWER: Fals e

1. Disney (discussed in the Chapter 6 Opening Case) is an example of a company that was successful because its corporate strategy added value across its set of businesses above what the individual businesses could create individually. a. True

b. Fals e

ANSWER: True

1. Corporate-level strategies are strategies a firm uses to diversify its operations from a single business competing in a single market into several product markets and, most commonly, into several businesses. a. True

b. Fals e

ANSWER: Fals e

1. If the businesses in the corporate portfolio are not worth more under the management of the corporation than they would be under any other ownership, then the corporate-level strategy has failed. a. True

b. Fals e

ANSWER: True

1. An effective corporate strategy creates aggregate returns across all businesses that exceed what those returns would be without the strategy and contributes to the firm's strategic competitiveness and ability to earn above-average returns. a. True

b. Fals e

ANSWER: True

1. A major advantage of diversification is that overall monitoring costs are reduced because each separate business comes under the control of corporate headquarters. a. True

b. Fals e

ANSWER: Fals e

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Chapter 06: Corporate-Level Strategy

1. Successful product diversification is expected to increase the variability in the firm's profitability because the earnings are generated from several different business units. a. True

b. Fals e

ANSWER: Fals e

1. All of Krispy Kreme's revenues come from its one main product, doughnuts. It can be considered a classic example of a firm following a related constrained strategy. a. True

b. Fals e

ANSWER: Fals e

1. Revenues for United Parcel Service (UPS) are derived from the following business segments: 60 percent from U. package delivery operations, 22 percent from international package delivery, and 18 percent from non-packaging operations. The best description of the corporate level strategy of UPS is unrelated diversification. a. True

b. Fals e

ANSWER: Fals e

1. Related linked firms share more resources and assets between their businesses than do related constrained firms. a. True

b. Fals e

ANSWER: Fals e

1. Compared with related constrained firms, related linked firms share fewer resources and assets between their businesses, concentrating instead on transferring knowledge and core competencies between the businesses. a. True

b. Fals e

ANSWER: True

1. United Technologies, Textron, Samsung, and Hutchison Whampoa Limited are examples of diversified firms that have no relationships between their businesses. These firms all use the strategy of unrelated diversification. a. True

b. Fals e

ANSWER: True

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Chapter 06: Corporate-Level Strategy

b. Fals e

ANSWER: True

1. Firms using the related constrained strategy share activities in order to create value. a. True

b. Fals e

ANSWER: True

1. Firms that sold off related units in which resource sharing was a possible source of economies of scope have been found to produce lower returns than those that sold off businesses unrelated to the firm's core businesses. a. True

b. Fals e

ANSWER: True

1. Firms seeking to create value through corporate relatedness use the related constrained strategy. a. True

b. Fals e

ANSWER: Fals e

1. Equator, a U. manufacturer of pharmaceuticals, has acquired a firm in the same industry in Ireland. It plans to move one of its key managers from its plant in St. Louis to Ireland. This can be considered a method of transferring corporate- level core competencies. a. True

b. Fals e

ANSWER: True

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

b. Fals e

ANSWER: True

1. Firms using a related diversification strategy may gain market power when successfully using their related constrained or related linked strategy. a. True

b. Fals e

ANSWER: True

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Chapter 06: Corporate-Level Strategy

1. Vertical integration allows the firm to gain market power as the firm develops the ability to save on its operations, avoid market costs, improve product quality, and possibly protect its technology from rivals. a. True

b. Fals e

ANSWER: True

1. Vertical integration exists when a company produces its own inputs (forward integration) or owns its source of output distribution (backward integration). a. True

b. Fals e

ANSWER: True

1. Google's diversification could lead the firm toward a related linked strategy and give the firm advantages in multipoint competition with competitors such as Facebook and Microsoft. a. True

b. Fals e

ANSWER: True

1. Many manufacturing firms are reducing vertical integration and moving to independent supplier networks. a. True

b. Fals e

ANSWER: True

1. Contract manufacturers who manage their customers' entire product line, and offer services ranging from inventory management to delivery and after-sales services are prime examples of vertical integration. a. True

b. Fals e

ANSWER: Fals e

1. A company that tries to balance both operational and corporate relatedness and fails, risks incurring diseconomies of scope. a. True

b. Fals e

ANSWER: True

1. Firms with both operational and corporate relatedness are favorites of investment analysts because the transparency and clarity of their financial statements clearly show the value-creation resulting from the combination of multiple businesses. a. True

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Chapter 06: Corporate-Level Strategy

1. GE is an example of a firm that has used internal capital market allocation as a means of creating value even though it competes using a related linked strategy rather than an unrelated diversification strategy. a. True

b. Fals e

ANSWER: True

1. The "conglomerate discount" occurs in large, highly diversified businesses and results from analysts not knowing how to value the vast array of large businesses with complex financial reports. a. True

b. Fals e

ANSWER: True

1. In spite of the challenges associated with it, a number of firms continue to use the unrelated diversification strategy, especially in Europe and in emerging markets. a. True

b. Fals e

ANSWER: True

1. One advantage of an unrelated diversification strategy in a developed economy is that competitors cannot easily imitate the financial economies, whereas they can easily replicate the value gained through the use of a related diversification strategy. a. True

b. Fals e

ANSWER: Fals e

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

b. Fals e

ANSWER: True

1. When implementing a restructuring strategy, a company would do best by focusing on mature, low-technology businesses rather than high-technology or service businesses. a. True

b. Fals e

ANSWER: True

1. Companies creating financial economies through restructuring typically focus on high-technology businesses

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primarily because these firms are dependent on human-resources. a. True

b. Fals e

ANSWER: Fals e

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

b. Fals e

ANSWER: True

1. 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. a. True

b. Fals e

ANSWER: True

1. Since the 1950s, U. government policy regarding antitrust concerns has remained constant. a. True

b. Fals e

ANSWER: Fals e

1. Corporate tax laws, rather than tax laws affecting individuals, have had the most impact on the firm's use of free cash flows for investment in acquisitions. a. True

b. Fals e

ANSWER: Fals e

1. Low firm performance is associated with increased diversification. a. True

b. Fals e

ANSWER: True

1. Performance continues to increase as diversification increases from single business to unrelated diversification. a. True

b. Fals e

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Chapter 06: Corporate-Level Strategy

b. Fals e

ANSWER: Fals e

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

b. Fals e

ANSWER: True

Multiple Choice

1. Corporate-level strategy is concerned with ____ and how to manage these businesses. a. whether the firm should invest in global or domestic businesses

b 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 which will create above-average returns only after restructuring

d to integrate backward or forward.

ANSWER: b

1. The ultimate test of the value of a corporate-level strategy is whether the: a. corporation earns a great deal of money.

b 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 in the portfolio increase the firm's financial returns.

ANSWER: c

1. The more "constrained" the relatedness of diversification: a. the fewer the linkages between the businesses within the portfolio owned by the firm.

b. the wider the variation in the portfolio of businesses owned by the firm.

c. the more links there are among the businesses owned by an organization.

d. the lower the proportion of total organizational revenue derived from the dominant business.

ANSWER: c

1. 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

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strategy.

c. became a conglomerate since Life Savers and Altoids are unrelated businesses.

d. probably planned to restructure these companies and sell them off.

ANSWER: a

1. Usually a company is classified as a single business firm when revenues generated by the dominant business are greater than ____ percent. a. 99

b. 95

c. 90

d. 70

ANSWER: b

1. The more sharing of resources and activities among businesses, the more ____ is the relatedness of the diversification. a. linked

b. constraine d

c. integrated

d. intense

ANSWER: b

1. A firm that earns less than 70 percent of revenue from its dominant business and has direct connections between its businesses is engaging in ____ diversification. a. unrelated

b. related constrained

c. related linked

d. dominant business

ANSWER: b

1. Revenues for United Parcel Service (UPS) come from the following business segments: 60 percent from U. package delivery operations, 22 percent from international package delivery, and 18 percent from non-packaging operations. Which best describes the corporate level strategy of UPS? a. single business

b. dominant business

c. related constrained

d. related linked

ANSWER: b

1. Which acquisition would be considered the LEAST related? a. A candy manufacturer purchases a chemical laboratory specializing in food flavorings. b. A chain of garden centers acquires a landscape architecture firm.

c. A hospital acquires a long-term care nursing home.

d. An upscale "white-tablecloth" restaurant chain acquires a travel agency.

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Chapter 06: Corporate-Level Strategy

a. dominant business

b. related constrained

c. related linked

d. unrelated

ANSWER: d

1. Firms use corporate-level diversification strategies for all the following reasons EXCEPT: a. value-creating.

b. value-neutral.

c. value-reducing.

d. value- diversifying.

ANSWER: d

1. Which of the following reasons for diversification is most likely to increase the firm's value? a. Increasing managerial compensation

b. Reducing costs through business restructuring c. Taking advantage of changes in tax laws

d. Conforming to antitrust regulation

ANSWER: b

1. Which of the following is a value-reducing reason for diversification? a. Enhancing the strategic competitiveness of the entire company

b. Expanding the business portfolio in order to diversify managerial employment risk

c. Gaining market power relative to competitors

d. Conforming to antitrust regulation

ANSWER: b

1. An office management firm has developed a system for efficiently organizing small medical and dental practices both through proprietary software and through unique training programs for staff. It has recently acquired a firm specializing in providing management services for veterinary practices. The office management firm is hoping to: a. achieve economies of scope.

b. implement vertical integration.

c. achieve financial economies through an unrelated acquisition.

d. acquire specialized talent from the veterinary management company.

ANSWER: a

1. Firms that have selected a related diversification corporate-level strategy seek to exploit: a. control shared among business-unit managers.

b. economies of scope between business units.

c. the favorable demand of buyers.

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Chapter 06: Corporate-Level Strategy

d. market power.

ANSWER: b

1. Firms seek to create value from economies of scope through all of the following EXCEPT: a. activity sharing.

b. skill transfers.

c. transfers of corporate core competencies.

d. de-integration.

ANSWER: d

1. The basic types of operational economies through which firms seek value from economies of scope are: a. synergies between internal and external capital markets.

b. the leveraging of individual tangible resources.

c. the sharing of value chain activities and support functions.

d. joint ventures and outsourcing.

ANSWER: c

1. Operational relatedness is created by ___________ of ___________. a. sharing; core competencies

b. sharing; activities

c. transferring; core competencies

d. transferring; activities

ANSWER: b

1. Procter & Gamble (P&G) has a paper towel and baby diaper business, both of which use paper products. The firm's paper production plant produces inputs for both businesses. P&G most likely uses the _____________ diversification strategy to create ___________. a. related constrained; operational relatedness

b. related linked; corporate relatedness

c. related constrained; corporate relatedness

d. related linked; operational relatedness

ANSWER: a

1. Which of the following is TRUE? a. Conglomerates no longer exist in the U. business scene, but are common in emerging markets.

b diversified firms seek to create value through economies of scope.

c. The sharing of intangible resources, such as know-how, between firms is a type of operational sharing in related diversifications.

d constrained firms share more tangible resources and activities between

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Chapter 06: Corporate-Level Strategy

c. related linked

d. dominant business

ANSWER: c

1. The drawbacks to transferring competencies by moving key people into new management positions include all of these EXCEPT: a. the people involved may not want to move.

b. managerial competencies are not easily transferable to different organizational cultures.

c. managers with these skills are expensive.

d. top-level managers may resist having these key people transferred.

ANSWER: b

1. Multipoint competition occurs when: a. firms have multiple retail outlets.

b. firms have multiple products in their primary industry.

c. diversified firms compete against each other in several markets. d. firms have diversified portfolios of companies.

ANSWER: c

1. One method of facilitating the transfer of competencies between firms is to: a. virtually integrate the two firms.

b. transfer key people into new management positions.

c. share support activities, such as purchasing practices.

d. restructure the weaker firm to mirror the structure of the more successful firm.

ANSWER: b

1. Equator, a U. manufacturer of pharmaceuticals, has acquired a firm in the same industry in Ireland. It plans to transfer one of its key managers from its plant in St. Louis to Ireland. What is the major threat to Equator's plan to transfer competencies from itself to the Irish firm? a. The St. Louis manager may quit Equator in order to remain in St. Louis.

b. American pharmaceutical manufacturing techniques may not transfer to Ireland.

c. Irish managers will refuse to take direction from a foreign executive.

d. The cost of transferring U. managers overseas is usually not cost-effective.

ANSWER: a

1. Acquisitions to increase market power require that the firm have a(n) ____ diversification strategy. a. unrelated

b. related

c. dominant- business

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d. single-business

ANSWER: b

1. When diversification results in two companies, such as UPS and FedEx, simultaneously competing in the same product areas or geographic markets, this is called ____ competition. a. multiple

b. multiportal

c. multipoint

d. multiplicit

ANSWER: c

1. Virgin Group successfully transfers its marketing core competence across airlines, cosmetics, music, drinks, mobile phones, health clubs, and a number of other businesses. Virgin follows a(n) ____ diversification corporate strategy. a. dominant-business

b. related constrained

c. related linked

d. unrelated

ANSWER: c

1. The Mars acquisition of the Wrigley assets was part of its related constrained diversification and added market share to the Mars/Wrigley integrated firm. It allowed Mars to gain _______because it could sell its products above the market level or reduce its costs below the market level. a. multipoint competition

b. virtual integration

c. market power

d. vertical integration

ANSWER: c

1. Backward integration occurs when a company: a. produces its own inputs.

b. owns its own source of distribution of outputs.

c. is concentrated in a single industry.

d. is divesting unrelated businesses.

ANSWER: a

1. PorkPride Foods produces hams and other meat products. It owns hog raising operations. This is an example of a business that is: a. reducing vertical integration. b. vertically integrated.

c. totally integrated.

d. horizontally integrated.

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Chapter 06: Corporate-Level Strategy

d. efficient internal capital allocation and restructuring.

ANSWER: b

1. The value of the assets of a firm using a diversification strategy to create both operational and corporate relatedness tend to be: a. discounted by investors.

b. inflated by investors.

c. completely ignored by investors.

d. highly valued by investors.

ANSWER: a

1. When a firm simultaneously practices operational relatedness and corporate relatedness: a. it is difficult for investors to observe the value created by the firm.

b. the firm is likely to be overvalued by investors.

c. the firm will suffer from diseconomies of scope that outweigh cost savings generated.

d. the firm is seeking to create value through financial economies.

ANSWER: a

1. Which type of diversification is most likely to create value through financial economies? a. Related constrained

b. Operational and corporate relatedness c. Unrelated

d. Related linked

ANSWER: c

1. An ability to efficiently allocate capital through an internal market may help the firm protect the competitive advantages it develops: a. through reduced disclosure to outside parties.

b. by the ability to not report losses to investors.

c. by the ability to increase pay to managers without shareholders being aware.

d. through the ability to reinvest cash in dividends to shareholders.

ANSWER: a

1. A firm practicing unrelated diversification can make better capital allocations to its subsidiary businesses than the external capital market can for all the following reasons EXCEPT: a. corporate headquarters can allocate capital according to more specific criteria than is possible with external market allocations.

b headquarters has more complete information about the subsidiary businesses than the external capital market. c. the firm can acquire other firms with innovative products instead of allocating capital to research and development.

d headquarters can more effectively discipline underperforming management

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teams through resource allocation than can the external market.

ANSWER: c

1. Large diversified businesses often face what is known as the "conglomerate discount." This discount means that investors: a. understand that the financial efficiencies of this strategy automatically make these stocks worth more than their current market valuation.

b that the value of conglomerates is less than the value of the sum of their parts.

c. increase the expected future earnings of conglomerates.

d found that over time, conglomerates earn more than the component companies would have earned independently.

ANSWER: b

1. Large diversified businesses often face a _______________, which results from analysts not knowing how to value a vast array of large businesses with complex financial reports. a. threat of regulation by the Securities and Exchange Commission

b. high CEO turnover

c. threat of takeover

d. conglomerate discount

ANSWER: d

1. Successful unrelated diversification through restructuring is typically accomplished by: a. focusing on mature, low-technology businesses.

b "random walk" of good luck in picking firms to buy.

c. seeking out high technology firms in high-growth industries.

d top management team that is not constrained by pre-established ideas of how the firm's portfolio should be developed.

ANSWER: a

1. The risk for firms that follow the unrelated diversification strategy in developed economies is that: a. external investors tend to dump the stocks of conglomerates during economic downturns.

b. conglomerates are typically owned by one powerful entrepreneur and do not survive his/her retirement or death.

c. government regulations, especially in Europe, have periodically forced the dissolution of conglomerates. d. competitors can imitate financial economies more easily than they imitate economies of scope.

ANSWER: d

1. What is the similarity between high-technology firms and service-based firms that makes them risky as restructuring candidates? a. They are dependent on human resources.

b. They have few tangible assets.

Was Disney's diversification successful?

How does Disney use diversification strategy?

Does Disney use related diversification?

Which reason for diversification does not create value?