Chapter 6

Question 1

In 2005, P&G, whose products include Crest toothpaste and Tide laundry detergent, purchased Gillette. Gillette itself had multiple businesses, including a range of products including electric toothbrushes, razors and batteries. Which of the following reflects the acquisition?

Answer 1

It is related diversification for P&G because the product lines for both firms are consumer products sold through similar channels.

Question 2

Brinker International operates restaurants in several different segments of the casual dining market. Their brands include Chili’s Grill & Bar, Romano’s Macaroni Grill, and On the Border. Brinker’s corporate level strategy is best described as

Answer 2

an example of product diversification.

Question 3

On the most basic level, corporate-level strategy is concerned with ____ and how to manage these businesses.

Answer 3

what product markets and businesses the firm should be in

Question 4

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

Answer 4

businesses in the portfolio are worth more under the management of the company in question than they would be under any other ownership.

Question 5

The more “constrained” the relatedness of diversification,

Answer 5

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

Question 6

Wm. Wrigley Jr. Company once made only chewing gum. When Wrigley bought Life Savers (a line of candy mints) and Altoids (a line of breadth mints) from Kraft, chewing gum then constituted less than 95 percent of revenues. Thus, Wrigley

Answer 6

was moving away from its traditional single-business strategy toward a dominant strategy.

Question 7

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

Answer 7

95

Question 8

The more direct connections among businesses, the more ____ is the relatedness of the diversification.

Answer 8

constrained

Question 9

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

Answer 9

related constrained

Question 10

Revenues for United Parcel Service (UPS) come from the following business segments: 74 percent from U.S. package delivery operations

Answer 10

Dominant business

Question 11

Which acquisition would be considered the LEAST related?

Answer 11

an upscale “white-tablecloth” restaurant chain acquires a travel agency

Question 12

The lowest level of diversification is the ____ level.

Answer 12

single business

Question 13

main difference between the related constrained level of diversification and the related linked level of diversification is

Answer 13

the level of resources and activities shared among the businesses.

Question 14

term “conglomerates” refers to firms using the ____ diversification strategy.

Answer 14

unrelated

Question 15

GE has recently reorganized from eleven businesses down to six core businesses

Answer 15

increasing corporate relatedness.

Question 16

Which of the following reasons for diversification is most likely to increase the firm’s value?

Answer 16

reducing costs through business restructuring

Question 17

Which of the following is a value-reducing reason for diversification?

Answer 17

expanding the business portfolio in order to reduce managerial employment risk

Question 18

An office management firm has developed a system for efficiently organizing small medical and dental practices

Answer 18

achieve economies of scope.

Question 19

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

Answer 19

economies of scope between business units.

Question 20

Firms seek to create value from economies of scope through all of the following EXCEPT

Answer 20

de-integration.

Question 21

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

Answer 21

the sharing of primary and support activities.

Question 22

Operational relatedness is created by ____ activities within the ____.

Answer 22

sharing; value chain

Question 23

The acquisition of Gillette Co. by Procter & Gamble will probably result in activity sharing because P&G has a reputation for technology transfer: the ability to take technology used in one brand and apply it to another brand. This is an example of

Answer 23

operational relatedness.

Question 24

Which of the following is TRUE?

Answer 24

Related linked firms share more tangible resources and activities between businesses than do related constrained firms.

Question 25

Research has shown that horizontal acquisitions

Answer 25

are able to use activity sharing to successfully create economies of scope.

Question 26

A noted professional art academy has founded an “artists and friends”

Answer 26

operational

Question 27

Dragonfly Publishers of children’s books has purchased White Rabbit

Answer 27

This is a horizontal acquisition.

Question 28

The purchasing of firms in the same industry is called:

Answer 28

horizontal acquisition.

Question 29

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

Answer 29

corporate core competencies

Question 30

The drawbacks to transferring competencies by moving key people into new management positions include all EXCEPT

Answer 30

managerial competencies are not easily transferable to different organizational cultures.

Question 31

Multipoint competition occurs when

Answer 31

diversified firms compete against each other in several markets.

Question 32

One method of facilitating the transfer of competencies between firms is to

Answer 32

transfer key people into new management positions.

Question 33

Xanadu, a U.S. manufacturer of pharmaceuticals

Answer 33

The St. Louis manager may quit Xanadu in order to remain in St. Louis.

Question 34

Acquisitions to increase market power require that the firm have a ____ diversification strategy.

Answer 34

related

Question 35

When diversification results in two companies, such as UPS and FedEx, simultaneously competing in numerous markets, this is called ____ competition.

Answer 35

multipoint

Question 36

Cendant Corporation owns real estate brokerages, relocation services, lodging franchises and online travel services. It follows a ____ corporate strategy.

Answer 36

related linked diversification

Question 37

Historically, steel manufacturers in the U.S. have been involved in multiple facets of steel production. This was centered on the actual mill where steel was produced. Most large steel producers also owned the iron ore and coal mines, which are essential raw materials, and railroads needed to bring the raw materials to the mill and the finished goods to distribution centers. Steel manufactures were

Answer 37

vertically integrated.

Question 38

Whirlpool and Maytag have similar product lines. By acquiring Maytag, Whirlpool sought to

Answer 38

increase scale.

Question 39

Backward integration occurs when a company

Answer 39

produces its own inputs.

Question 40

PorkPride Foods produces hams and other meat products. It owns hog raising operations. This is an example of a ____ business.

Answer 40

vertically integrated

Question 41

A company pursuing vertical integration can gain market power over its competitors through all of the following EXCEPT

Answer 41

improved process innovation.

Question 42

Which of the following is NOT a limit directly relating to vertical integration?

Answer 42

imitation of core technology by potential competitors

Question 43

Specialty Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve the high temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare and only two brick plants in the U.S. make this type of brick. Specialty Steel has decided to buy one of these brick plants. This is an example of

Answer 43

backward integration.

Question 44

Specialty Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve the high temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare and only two brick plants in the U.S. make this type of brick. Specialty Steel owns one of these brick plants and buys all of its production. The other brick manufacturer has recently developed an inexpensive new technology whereby ordinary clay can be used to make this fire brick. This significantly reduces the production cost of this type of brick.

Answer 44

Specialty Steel has less flexibility now than if it were not vertically integrated.

Question 45

The use of e-commerce to allow firms to reduce the costs of processing transactions while improving their supply-chain management skills and tightening the control of their inventories is beginning to replace

Answer 45

vertical integration.

Question 46

Disney has been successful both in the sharing of activities among divisions and in the transfer of knowledge among divisions. Disney can be said to have created

Answer 46

inimitable competencies.

Question 47

The value of the assets of a firm using a diversification strategy to create both operational and corporate relatedness tend to be

Answer 47

discounted by investors.

Question 48

Firms are increasingly moving away from ____ integration and toward ____ integration.

Answer 48

vertical; virtual

Question 49

When a firm simultaneously practices operational relatedness and corporate relatedness,

Answer 49

it is difficult for investors to observe the value created by the firm.

Question 50

Which type of diversification is most likely to create value through financial economies?

Answer 50

unrelated

Question 51

Luxottica is a sunglass manufacturer which has traditionally served the fashion segment. Luxottica recently purchased Oakley, Inc., a manufacturer of sunglasses in the sportswear segment. The potential synergies from this acquisition include

Answer 51

Both operational and corporate relatedness.

Question 52

An ability to efficiently allocate capital through an internal market may help the firm protect the competitive advantages it develops

Answer 52

through reduced disclosure to outside parties.

Question 53

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

Answer 53

the firm can acquire other firms with innovative products instead of allocating capital to research and development.

Question 54

Stock markets apply a “conglomerate discount” of 20% on unrelated diversified firms. This means that investors

Answer 54

believe that the value of conglomerates is 20% less than the value of the sum of their parts.

Question 55

Successful unrelated diversification through restructuring is typically accomplished by

Answer 55

focusing on mature, low-technology businesses.

Question 56

The risk for firms that follow the unrelated diversification strategy in developed economies is that

Answer 56

competitors can imitate financial economies more easily than they imitate economies of scope.

Question 57

What is the similarity between high-technology firms and service-based firms that makes them risky as restructuring candidates?

Answer 57

They are human-resource dependent.

Question 58

Which of the following firms would be the most likely to be a successful candidate for acquisition and restructuring?

Answer 58

a tire manufacturer established in 1910

Question 59

External incentives to diversify include

Answer 59

changes in antitrust regulations and tax laws.

Question 60

All of the following are internal firm incentives to diversify EXCEPT

Answer 60

stricter interpretation of antitrust laws.

Question 61

The trend among conglomerates is to

Answer 61

decrease their level of diversification.

Question 62

Because of the tax laws of the 1960s and 1970s, when dividends were taxed more heavily than capital gains, shareholders preferred that corporations

Answer 62

keep free cash flows for investment in acquisitions.

Question 63

Free cash flows are

Answer 63

liquid financial assets for which investments in current businesses are no longer economically viable.

Question 64

Industry-specific deregulation has affected each of the following industries EXCEPT

Answer 64

grocery stores.

Question 65

The curvilinear relationship of corporate performance and diversification indicates that

Answer 65

the highest performing business strategy is related constrained diversification.

Question 66

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

Answer 66

diversify into less risky environments.

Question 67

Synergy exists when

Answer 67

the value created by business units working together exceeds the value the units create when working independently.

Question 68

The downside of synergy in a diversified firm is

Answer 68

the loss of flexibility.

Question 69

The Cherrywood Fine Furniture Company finds itself with excess capacity in its plant and equipment for furniture manufacturing. This excess capacity will be useful in

Answer 69

related diversification projects.

Question 70

Intangible resources

Answer 70

are more flexible than tangible assets.

Question 71

Compared with diversification based on intangible resources, diversification based on financial resources is

Answer 71

more imitable and less likely to create value on a long-term basis

Question 72

Personal motives for managers to seek diversification include a desire to

Answer 72

increase their compensation.

Question 73

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

Answer 73

higher CEO pay is related to larger organization size.

Question 74

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

Answer 74

have golden parachutes.

Question 75

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

Answer 75

surveillance technologies

Question 76

Which of a firm’s resources is the most flexible and should have the strongest relationship to the extent of diversification?

Answer 76

financial

Question 77

The trend in diversification is a(an)

Answer 77

increase in related diversification.