Test 2 Flashcards

Question 1

Q

GE (Chapter 6 Opening Case) is unusual in that it

a. is widely diversified but competes only in manufacturing industries.
b. has had an unblemished environmental record.
c. is one of the few large diversified large firms that have been successful over time.
d. restricted its investments to only developed economies.

Question 2

Q

As noted in the Chapter 6 Opening Case, GE is now a major player in the “clean energy” industry such as wind turbines and solar power. A major reason GE moved in this direction was

a. to narrow the focus of its portfolio around energy-related industries.
b. to overcome and correct its record in environmental issues.
c. to further diversify its portfolio away from services.
d. the clean energy industry was guaranteed to be profitable for the next several years.

Question 3

Q

GE (Chapter 6 Opening Case) was diversified and manages businesses that have only a few links between them.
This corporate-level strategy is best described as diversification.
a. related constrained
b. related linked
c. unrelated
d. conglomerate

Question 4

Q

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 which will create above-average returns only after restructuring
d. whether to integrate backward or forward.

Question 5

Q

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

Question 6

Q

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.

Question 7

Q

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.

Question 8

Q

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

Question 9

Q

The more sharing of resources and activities among businesses, the more_____is the relatedness of the diversification.

a. linked
b. constrained
c. integrated
d. intense

Question 10

Q

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

Question 11

Q

Revenues for United Parcel Service (UPS) come from the following business segments: 60 percent from U.S. 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

Question 12

Q

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.

Question 13

Q

The lowest level of diversification is the ____level.

a. single-business
b. dominant business
c. related constrained
d. unrelated

Question 14

Q

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

a. the percentage of total organizational profitability that comes from the dominant business.
b. the level of resources and activities shared among the businesses.
c. whether the diversification is vertical or horizontal.
d. whether the diversification is value-creating or value-neutral.

Question 15

Q

The Publicis Groupe has three major groups of business (advertising, media, and digital) that share resources and capabilities. Publicis Groupe is using a ____diversification strategy.

a. related linked
b. related constrained
c. unrelated
d. dominant

Question 16

Q

The Publicis Groupe uses the digital technology from its digital business to enhance the advertising products in its advertising group. This sharing of activities is characteristic of the___diversification strategy.

a. related constrained
b. related linked
c. unrelated
d. dominant

Question 17

Q

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

a. unrelated
b. related constrained
c. related linked
d. global

Question 18

Q

Hutchison Whampoa Limited (HWL) has businesses in ports and related services, telecommunications, property and hotels, retail and manufacturing, and energy and infrastructure. HWL makes no efforts to share activities or transfer core competencies among the businesses. HWL is following a strategy of _____ diversification.

a. dominant business
b. related constrained
c. related linked
d. unrelated

Question 19

Q

Firms use corporate-level diversification strategies for all the following reasons EXCEPT

a. value-creating.
b. value-neutral.
c. value-reducing.
d. value-diversifying.

Question 20

Q

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

Question 21

Q

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

Question 22

Q

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.

Question 23

Q

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.
d. market power.

Question 24

Q

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.

Question 25

Q

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

Question 26

Q

Operational relatedness is created by_____ of

a. sharing; core competencies.
b. sharing; activities.
c. transferring; core competencies.
d. transferring; activities.

Question 27

Q

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.

Question 28

Q

Which of the following is TRUE?

a. Conglomerates no longer exist in the U.S. business scene, but are common in emerging markets.
b. Unrelated 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. Related constrained firms share more tangible resources and activities between businesses than do related linked firms.

Question 29

Q

Research has shown that horizontal acquisitions

a. tend to have disappointing financial results in the long run.
b. are being replaced by virtual acquisitions.
c. result in lower levels of performance than unrelated acquisitions.
d. are able to use activity sharing to successfully create economies of scope.

Question 30

Q

A noted professional art academy has founded an “artists and friends” travel company specializing in tours for
artists to scenic locales, using its faculty as traveling teachers. In addition, the art academy has purchased a framing company to both make frames for academy art works, but also to sell museum-quality framing services to the public. The art academy is engaging in diversification based on ____ relatedness.
a. operational
b. corporate
c. intellectual
d. constrained

Question 31

Q

Dragonfly Publishers of children’s books has purchased White Rabbit, another publisher of children’s books. Both companies’ books are sold to the same retail stores and schools. Their content is different, since Dragonfly produces children’s literature, whereas White Rabbit focuses on child-level scientific and nature topics. Which of the following statements is probably TRUE about this acquisition?

a. This is a horizontal acquisition.
b. This is an example of virtual integration.
c. Dragonfly is beginning to build a conglomerate.
d. Economies of scope are unlikely to result from this acquisition.

Question 32

Q

The purchasing of firms in the same industry is called

a. unrelated diversification.
b. vertical integration.
c. networking the organization.
d. horizontal acquisition.

Question 33

Q

The ________ diversification strategy creates value in two ways. First, since the core competence has already been developed in one business, the firm does not have to allocate resources to develop it. Second, since the resource is intangible, competitors cannot easily imitate it.

a. related constrained b. unrelated
c. related linked
d. dominant business

Question 34

Q

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

Question 35

Q

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.

Question 36

Q

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.

Question 37

Q

Xanadu, a U.S. 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 Xanadu’s plan to transfer competencies from itself to the Irish firm?

a. The St. Louis manager may quit Xanadu 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.S. managers overseas is usually not cost-effective.

Question 38

Q

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

a. unrelated
b. related
c. dominant-business
d. single-business

Question 39

Q

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

Question 40

Q

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

Question 41

Q

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

Question 42

Q

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.

Question 43

Q

PorkPride Foods produces hams and other meat products. It owns hog raising operations. This is an example of a
\_\_\_\_\_\_\_ business. 
a. de-integrated
b. vertically integrated 
c. totally integrated
d. horizontally integrated

Question 44

Q

A company pursuing vertical integration can gain market power over its competitors through all of the following
EXCEPT
a. improved adjustment to technological changes.
b. savings on operations costs.
c. improved product quality.
d. avoidance of market costs.

Question 45

Q

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

a. bureaucratic costs
b. the loss of flexibility through investment in specific technologies
c. capacity balance and coordination problems from changes in demand
d. imitation of core technology by potential competitors

Question 46

Q

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 United States make this type of brick. Specialty Steel has decided to buy one of these brick plants. This is an example of

a. backward integration.
b. forward integration.
c. horizontal integration.
d. virtual integration.

Question 47

Q

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 United States 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.
a. Specialty Steel has less flexibility now than if it were not vertically integrated.
b. This is an example of a capacity balance problem.
c. This is a result of conflicts of interest between the managers of the brick plant and the executives of
Specialty Steel.
d. The market power of Specialty Steel has been de-integrated.

Question 48

Q

Walt Disney Company has successfully used related diversification to create value by

a. sharing activities.
b. sharing activities and transferring core competencies.
c. transferring core competencies.
d. efficient internal capital allocation and restructuring.

Question 49

Q

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.

Question 50

Q

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.

Question 51

Q

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

Question 52

Q

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.

Question 53

Q

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. corporate 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. corporate headquarters can more effectively discipline underperforming management teams through resource allocation than can the external market.

Question 54

Q

Although a(n)________ job of firm, GE (discussed in the Chapter 6 Opening Case) has done an exceptional job of _____ its four major strategic business units.

a. related linked; allocating capital across
b. related constrained; restructuring
c. unrelated; sharing activities across
d. unrelated; transferring core competencies across

Question 55

Q

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

Question 56

Q

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

Question 57

Q

Successful unrelated diversification through restructuring is typically accomplished by

a. focusing on mature, low-technology businesses.
b. a “random walk” of good luck in picking firms to buy.
c. seeking out high technology firms in high-growth industries.
d. a top management team that is not constrained by pre-established ideas of how the firm’s portfolio should be developed.

Question 58

Q

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.

Question 59

Q

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

a. They are human-resource dependent.
b. They have few tangible assets.
c. Both types of firm rely on financial economies.
d. The demand for their products is highly sensitive to economic downturns.

Question 60

Q

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

a. a medical practice
b. a management consulting firm that has a tradition of long term client-consultant relationships
c. a tire manufacturer established in 1910
d. a start-up communications technology firm

Question 61

Q

Among the value-neutral incentives to diversify, some come from the firm’s external environment while others are internal to the firm. External incentives to diversify include

a. the fact that other firms in an industry are diversifying.
b. pressure from stockholders who are demanding that the firm diversify.
c. changes in antitrust regulations and tax laws.
d. a firm’s low performance.

Question 62

Q

Of the value-neutral incentives to diversify, all of the following are internal firm incentives EXCEPT

a. overall firm risk reduction.
b. uncertain future cash flows.
c. stricter interpretation of antitrust laws.
d. low performance.

Question 63

Q

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

a. pay dividends annually.
b. keep free cash flows for investment in acquisitions.
c. distribute capital gains regularly.
d. increase managerial salaries.

Question 64

Q

Free cash flows are

a. liquid financial assets for which investments in current businesses are no longer economically viable.
b. liquid financial assets that for tax purposes must be reinvested in the firm if not distributed as dividends to shareholders.
c. the profits resulting after a restructured firm has been sold.
d. dividends that have been distributed to shareholders that are taxed as capital gains.

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Test 2 Flashcards

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