Chapter 6 Flashcards
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?
It is related diversification for P&G because the product lines for both firms are consumer products sold through similar channels.
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
an example of product diversification.
On the most basic level, corporate-level strategy is concerned with ____ and how to manage these businesses.
what product markets and businesses the firm should be in
The ultimate test of the value of a corporate-level strategy is whether the
businesses in the portfolio are worth more under the management of the company in question than they would be under any other ownership.
The more “constrained” the relatedness of diversification,
the more links there are among the businesses owned by an organization.
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
was moving away from its traditional single-business strategy toward a dominant strategy.
Usually a company is classified as a single business firm when revenues generated by the dominant business are greater than ____ percent.
95
The more direct connections among businesses, the more ____ is the relatedness of the diversification.
constrained
A firm that earns less than 70% of revenue from its dominant business and has direct connections between its businesses is engaging in ____ diversification.
related constrained
Revenues for United Parcel Service (UPS) come from the following business segments: 74 percent from U.S. package delivery operations
Dominant business
Which acquisition would be considered the LEAST related?
an upscale “white-tablecloth” restaurant chain acquires a travel agency
The lowest level of diversification is the ____ level.
single business
main difference between the related constrained level of diversification and the related linked level of diversification is
the level of resources and activities shared among the businesses.
term “conglomerates” refers to firms using the ____ diversification strategy.
unrelated
GE has recently reorganized from eleven businesses down to six core businesses
increasing corporate relatedness.
Which of the following reasons for diversification is most likely to increase the firm’s value?
reducing costs through business restructuring
Which of the following is a value-reducing reason for diversification?
expanding the business portfolio in order to reduce managerial employment risk
An office management firm has developed a system for efficiently organizing small medical and dental practices
achieve economies of scope.
Firms that have selected a related diversification corporate-level strategy seek to exploit
economies of scope between business units.
Firms seek to create value from economies of scope through all of the following EXCEPT
de-integration.
The basic types of operational economies through which firms seek value from economies of scope are
the sharing of primary and support activities.
Operational relatedness is created by ____ activities within the ____.
sharing; value chain
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
operational relatedness.
Which of the following is TRUE?
Related linked firms share more tangible resources and activities between businesses than do related constrained firms.
Research has shown that horizontal acquisitions
are able to use activity sharing to successfully create economies of scope.
A noted professional art academy has founded an “artists and friends”
operational
Dragonfly Publishers of children’s books has purchased White Rabbit
This is a horizontal acquisition.
The purchasing of firms in the same industry is called:
horizontal acquisition.
In related linked diversified firms, ____ are a complex set of resources that link the different businesses through managerial and technological knowledge, experience, and expertise.
corporate core competencies
The drawbacks to transferring competencies by moving key people into new management positions include all EXCEPT
managerial competencies are not easily transferable to different organizational cultures.
Multipoint competition occurs when
diversified firms compete against each other in several markets.
One method of facilitating the transfer of competencies between firms is to
transfer key people into new management positions.
Xanadu, a U.S. manufacturer of pharmaceuticals
The St. Louis manager may quit Xanadu in order to remain in St. Louis.
Acquisitions to increase market power require that the firm have a ____ diversification strategy.
related
When diversification results in two companies, such as UPS and FedEx, simultaneously competing in numerous markets, this is called ____ competition.
multipoint
Cendant Corporation owns real estate brokerages, relocation services, lodging franchises and online travel services. It follows a ____ corporate strategy.
related linked diversification
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
vertically integrated.
Whirlpool and Maytag have similar product lines. By acquiring Maytag, Whirlpool sought to
increase scale.
Backward integration occurs when a company
produces its own inputs.
PorkPride Foods produces hams and other meat products. It owns hog raising operations. This is an example of a ____ business.
vertically integrated
A company pursuing vertical integration can gain market power over its competitors through all of the following EXCEPT
improved process innovation.
Which of the following is NOT a limit directly relating to vertical integration?
imitation of core technology by potential competitors
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
backward integration.
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.
Specialty Steel has less flexibility now than if it were not vertically integrated.
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
vertical integration.
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
inimitable competencies.
The value of the assets of a firm using a diversification strategy to create both operational and corporate relatedness tend to be
discounted by investors.
Firms are increasingly moving away from ____ integration and toward ____ integration.
vertical; virtual
When a firm simultaneously practices operational relatedness and corporate relatedness,
it is difficult for investors to observe the value created by the firm.
Which type of diversification is most likely to create value through financial economies?
unrelated
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
Both operational and corporate relatedness.
An ability to efficiently allocate capital through an internal market may help the firm protect the competitive advantages it develops
through reduced disclosure to outside parties.
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
the firm can acquire other firms with innovative products instead of allocating capital to research and development.
Stock markets apply a “conglomerate discount” of 20% on unrelated diversified firms. This means that investors
believe that the value of conglomerates is 20% less than the value of the sum of their parts.
Successful unrelated diversification through restructuring is typically accomplished by
focusing on mature, low-technology businesses.
The risk for firms that follow the unrelated diversification strategy in developed economies is that
competitors can imitate financial economies more easily than they imitate economies of scope.
What is the similarity between high-technology firms and service-based firms that makes them risky as restructuring candidates?
They are human-resource dependent.
Which of the following firms would be the most likely to be a successful candidate for acquisition and restructuring?
a tire manufacturer established in 1910
External incentives to diversify include
changes in antitrust regulations and tax laws.
All of the following are internal firm incentives to diversify EXCEPT
stricter interpretation of antitrust laws.
The trend among conglomerates is to
decrease their level of diversification.
Because of the tax laws of the 1960s and 1970s, when dividends were taxed more heavily than capital gains, shareholders preferred that corporations
keep free cash flows for investment in acquisitions.
Free cash flows are
liquid financial assets for which investments in current businesses are no longer economically viable.
Industry-specific deregulation has affected each of the following industries EXCEPT
grocery stores.
The curvilinear relationship of corporate performance and diversification indicates that
the highest performing business strategy is related constrained diversification.
As the threat of corporate failure increases due to relatedness between a firm’s business units, firms may decide to
diversify into less risky environments.
Synergy exists when
the value created by business units working together exceeds the value the units create when working independently.
The downside of synergy in a diversified firm is
the loss of flexibility.
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
related diversification projects.
Intangible resources
are more flexible than tangible assets.
Compared with diversification based on intangible resources, diversification based on financial resources is
more imitable and less likely to create value on a long-term basis
Personal motives for managers to seek diversification include a desire to
increase their compensation.
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
higher CEO pay is related to larger organization size.
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
have golden parachutes.
Which of the following is NOT a governance mechanism that may limit managerial tendencies to over-diversify?
surveillance technologies
Which of a firm’s resources is the most flexible and should have the strongest relationship to the extent of diversification?
financial
The trend in diversification is a(an)
increase in related diversification.
