Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

True / False

1. Disney has achieved growth and diversification through mergers and acquisitions.
a. True
b. False
ANSWER: False

2. Disney 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. False
ANSWER: True

3. 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. False
ANSWER: False

4. 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. False
ANSWER: True

5. An effective corporate strategy creates, across all of a firm’s businesses, aggregate returns that exceed what those
returns would be without the strategy and contributes to the firm's strategic competitiveness and its ability to earn above-
average returns.
a. True
b. False
ANSWER: True

6. 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. False
ANSWER: False

7. Successful diversification is expected to increase variability in the firm's profitability as earnings are generated from
different business units.
a. True
b. False
ANSWER: False

8. 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.
Copyright Cengage Learning. Powered by Cognero. Page 1
Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

a. True
b. False
ANSWER: False

9. Revenues for United Parcel Service (UPS) are derived 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. The best description of the corporate-level strategy of UPS is unrelated diversification.
a. True
b. False
ANSWER: False

10. Related linked firms share more resources and assets between their businesses than do related constrained firms.
a. True
b. False
ANSWER: False

11. 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. False
ANSWER: True

12. United Technologies Corporation, 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. False
ANSWER: True

13. A firm uses a corporate-level diversification strategy for a variety of reasons, all of which have to do with ways to
create value.
a. True
b. False
ANSWER: False

14. Decisions to expand a firm's portfolio of businesses to reduce managerial risk can have a positive effect on the firm's
value.
a. True
b. False
ANSWER: False

15. Antitrust regulation, tax laws, and low performance are all value-neutral reasons why firms engage in diversification.
a. True
b. False
ANSWER: True

Copyright Cengage Learning. Powered by Cognero. Page 2

Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

16. Procter & Gamble (P&G) has a paper towel and baby diaper business that both use paper products. This is an example
of value created through the sharing of activities.
a. True
b. False
ANSWER: True

17. Economies of scope are cost savings a firm creates by successfully sharing resources and capabilities or transferring
one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses.
a. True
b. False
ANSWER: True

18. In a money-making effort, a small private university has decided to institute consulting services using its business
faculty as consultants whose services would be sold to clients. This university is attempting to use its faculty to gain
economies of scope.
a. True
b. False
ANSWER: True

19. When firms share activities across units, they are often able to achieve increased value.
a. True
b. False
ANSWER: True

20. Firms using the related constrained diversification strategy share activities in order to create value.
a. True
b. False
ANSWER: True

21. 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 business.
a. True
b. False
ANSWER: True

22. Firms seeking to create value through corporate relatedness use the related constrained strategy.
a. True
b. False
ANSWER: False

23. Equator, a U.S. 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. False
ANSWER: True
Copyright Cengage Learning. Powered by Cognero. Page 3
Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

24. Market power exists when a firm is able to sell its products above the existing competitive level or reduce the costs of
its primary and support activities below the competitive level, or both.
a. True
b. False
ANSWER: True

25. Firms using a related diversification strategy may gain market power when successfully using their related constrained
or related linked strategy.
a. True
b. False
ANSWER: True

26. Market power is gained as the firm develops the ability to save on its operations, avoid sourcing and market costs,
improve product quality, possibly protect its technology from imitation by rivals, and potentially exploit underlying
capabilities in the marketplace.
a. True
b. False
ANSWER: True

27. Vertical integration exists when a company produces its own inputs (backward integration) or owns its own source of
output distribution (forward integration).
a. True
b. False
ANSWER: True

28. 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. False
ANSWER: True

29. Many manufacturing firms are reducing vertical integration and moving to independent supplier networks.
a. True
b. False
ANSWER: True

30. Contract manufacturers who manage their customers' entire product lines and offer services ranging from inventory
management to delivery and after-sales services are prime examples of vertical integration.
a. True
b. False
ANSWER: False

31. A company that tries to balance both operational and corporate relatedness and fails risks incurring diseconomies of
scope.
a. True
Copyright Cengage Learning. Powered by Cognero. Page 4
Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

b. False
ANSWER: True

32. It can be difficult for investors to identify the value created by a firm as it shares activities and transfers core
competencies.
a. True
b. False
ANSWER: True

33. Financial economies are cost savings realized through improved allocations of financial resources based on
investments inside or outside the firm.
a. True
b. False
ANSWER: True

34. An unrelated diversification strategy can create value through two types of financial economies: (1) efficient internal
capital allocations and (2) purchasing other firms, restructuring their assets, and selling them.
a. True
b. False
ANSWER: True

35. A significant benefit of an internal capital market is that corporate headquarters has access to detailed and accurate
information regarding the performance of the company's portfolio and can thus make better capital allocation decisions.
a. True
b. False
ANSWER: True

36. Compared with corporate office personnel, external investors have relatively limited access to internal information and
can only estimate the performances of individual businesses as well as their future prospects.
a. True
b. False
ANSWER: True

37. In a diversified firm, capital allocation can be adjusted according to more specific criteria than is possible with
external market allocation of capital.
a. True
b. False
ANSWER: True

38. 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. False
ANSWER: True

39. In spite of the challenges associated with it, a number of corporations continue to use the unrelated diversification
Copyright Cengage Learning. Powered by Cognero. Page 5
Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

strategy, especially in Europe and in emerging markets.
a. True
b. False
ANSWER: True

40. 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. False
ANSWER: False

41. Companies in emerging markets frequently use the unrelated diversification strategy because of the absence of a "soft
infrastructure" in those markets.
a. True
b. False
ANSWER: True

42. Companies creating financial economies through restructuring typically focus on high-technology businesses
primarily because these firms are dependent on human resources.
a. True
b. False
ANSWER: False

43. Diversification strategies can be used with both value-creating and value-neutral objectives.
a. True
b. False
ANSWER: True

44. 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. False
ANSWER: True

45. Since the 1950s, U.S. government policy regarding antitrust concerns has remained constant.
a. True
b. False
ANSWER: False

46. 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. False
ANSWER: False

Copyright Cengage Learning. Powered by Cognero. Page 6

Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

47. Low firm performance is associated with increased diversification.
a. True
b. False
ANSWER: True

48. Performance continues to increase as diversification increases from single business to unrelated diversification.
a. True
b. False
ANSWER: False

49. Synergy exists when the value created by business units working together exceeds the value that those same units
create working independently.
a. True
b. False
ANSWER: True

50. 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.
a. True
b. False
ANSWER: True

51. Research shows that increased firm size and greater levels of diversification are correlated with increased executive
compensation.
a. True
b. False
ANSWER: True

52. Golden parachutes protect managers from the negative consequences of over diversifying a firm.
a. True
b. False
ANSWER: True

53. Without strict governance mechanisms, the majority of executives will act in their own self-interest rather than acting
as positive stewards of firm resources.
a. True
b. False
ANSWER: False

54. The use of poison pills increases the chance that a poorly performing firm will be taken over.
a. True
b. False
ANSWER: False

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

Copyright Cengage Learning. Powered by Cognero. Page 7

Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

creating diversification strategies.
a. True
b. False
ANSWER: True

Multiple Choice

56. 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
ANSWER: b

57. 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.
ANSWER: c

58. 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.
ANSWER: c

59. 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.
ANSWER: a

60. 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
Copyright Cengage Learning. Powered by Cognero. Page 8
Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

ANSWER: b

61. The more links among businesses, the more __________ is the level of diversification.
a. linked
b. constrained
c. integrated
d. intense
ANSWER: b

62. 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

63. 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 of the following best describes the corporate-level strategy of UPS?
a. Single business
b. Dominant business
c. Related constrained
d. Related linked
ANSWER: b

64. Which of the following acquisitions 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.
ANSWER: d

65. The lowest level of diversification is the __________ level.

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

66. 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.

Copyright Cengage Learning. Powered by Cognero. Page 9

Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

c. whether the diversification is vertical or horizontal.
d. whether the diversification is value-creating or value-neutral.
ANSWER: b

67. The Publicis Groupe has three major groups of business (advertising, media, and digital) that share resources and
capabilities. The Publicis Groupe is using a(n) __________ diversification strategy.
a. related linked
b. related constrained
ANSWER: a

68. 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
ANSWER: a

69. The term "conglomerates" refers to firms using the __________ diversification strategy.
a. unrelated
b. related constrained
c. related linked
d. global
ANSWER: a

70. 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
ANSWER: d

71. 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

72. 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

Copyright Cengage Learning. Powered by Cognero. Page 10

Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

c. Taking advantage of changes in tax laws
d. Conforming to antitrust regulation
ANSWER: b

73. 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

74. 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

75. 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.
ANSWER: b

76. 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

77. 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

78. Operational relatedness is created by __________ of __________.

a. sharing; core competencies
b. sharing; activities
Copyright Cengage Learning. Powered by Cognero. Page 11
Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

c. transferring; core competencies
d. transferring; activities
ANSWER: b

79. 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

80. Which of the following statements 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.
ANSWER: d

81. 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.
ANSWER: d

82. 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
make frames for academy art works, and 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
ANSWER: a

83. Dragonfly, publisher 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 because Dragonfly produces
children's literature, whereas White Rabbit focuses on child-level nonfiction 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.
Copyright Cengage Learning. Powered by Cognero. Page 12
Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

c. Dragonfly is beginning to build a conglomerate.
d. Economies of scope are unlikely to result from this acquisition.
ANSWER: a

84. The purchasing of firms in the same industry is called:

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

85. The __________diversification strategy creates value in two ways. First, because the core competency has already
been developed in one business, the firm does not have to allocate resources to develop it. Second, because the resource is
intangible, competitors cannot easily imitate it.
a. related constrained
b. unrelated
c. related linked
d. dominant business
ANSWER: c

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

87. 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

88. One method of facilitating the transfer of corporate-level core 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

89. Equator, 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. Which of the following is the major threat to
Equator's plan to transfer competencies from itself to the Irish firm?
Copyright Cengage Learning. Powered by Cognero. Page 13
Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

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. Transferring U.S. managers overseas is not usually cost-effective.
ANSWER: a

90. Acquisitions to increase market power require that the firm have a(n) __________ diversification strategy.
a. unrelated
b. related
c. dominant-business
d. single-business
ANSWER: b

91. 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

92. Virgin Group Ltd. 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

93. 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

94. 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.

Copyright Cengage Learning. Powered by Cognero. Page 14

Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

ANSWER: a

95. 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.
ANSWER: b

96. 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.
ANSWER: a

97. 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
ANSWER: d

98. 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.
ANSWER: a

99. 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. Which of the following statements
is true?
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 reducing vertical integration.
Copyright Cengage Learning. Powered by Cognero. Page 15
Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

ANSWER: a

100. The 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.
ANSWER: b

101. 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

102. When a firm simultaneously practices operational relatedness and corporate relatedness:
a. it is difficult for investors to identify 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 the cost savings generated.
d. the firm is seeking to create value through financial economies.
ANSWER: a

103. Which of the following types 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

104. 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

105. 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.
Copyright Cengage Learning. Powered by Cognero. Page 16
Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

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.
ANSWER: c

106. 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 preestablished ideas of how the firm's portfolio should be
developed.
ANSWER: a

107. 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 can replicate the value gained from the
economies of scope developed through operational relatedness and corporate relatedness.
ANSWER: d

108. Which of the following makes high-technology firms and service-based firms risky as restructuring candidates?
a. They are dependent on human resources.
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.
ANSWER: a

109. Which of the following firms would MOST likely be a successful candidate for acquisition and restructuring?
a. Medical practice
b. Management consulting firm that has a tradition of long-term, client-consultant relationships
c. Tire manufacturer established in 1910
d. Start-up communications technology firm
ANSWER: c

110. 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.
ANSWER: c

Copyright Cengage Learning. Powered by Cognero. Page 17

Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

111. 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.
ANSWER: c

112. 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.
ANSWER: b

113. 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 distributed to shareholders that are taxed as capital gains.
ANSWER: a

114. Certain regulatory changes (such as antitrust regulation and tax laws) create incentives or disincentives for
diversification that:
a. create value.
b. reduce value.
c. are value-neutral.
d. are managerial motives to diversify.
ANSWER: c

115. The curvilinear relationship of corporate performance and diversification indicates that:
a. dominant-business corporate strategies tend to be higher performing than related constrained or unrelated
business strategies.
b. the highest performing business strategy is related constrained diversification.
c. the less related the businesses acquired, the higher performing the organization.
d. none of the strategies consistently outperforms the others.
ANSWER: b

116. As the threat of corporate failure increases due to relatedness between a firm's business units, the firm may decide to:
a. increase its level of retained resources.
b. diversify into less risky environments.
c. reduce the level of diversity in its investments.
d. pursue unproven product lines.

Copyright Cengage Learning. Powered by Cognero. Page 18

Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

ANSWER: b

117. Synergy exists when:

a. cost savings are realized through improved allocations of financial resources based on investments inside or
outside the firm.
b. two units create value by utilizing market power in their respective industries.
c. firms utilize constrained related diversification to build an attractive portfolio of businesses.
d. the value created by business units working together exceeds the value that those same units create when
working independently.
ANSWER: d

118. The downside of synergy in a diversified firm is:

a. increasing independence of businesses.
b. the reduction of activity sharing.
c. excessive focus on risky innovation.
d. the loss of flexibility.
ANSWER: d

119. Cherrywood Fine Furniture Company finds itself with excess capacity in its plant and equipment for furniture
manufacturing. This excess capacity will be useful in:
a. unrelated diversification.
b. related diversification projects.
c. corporate restructuring.
d. multipoint competition.
ANSWER: b

120. Which of the following resources is more likely to create value in the diversification process?
a. Plant and equipment
b. Tacit knowledge
c. Excess capacity
d. Financial resources
ANSWER: b

121. Compared with diversification based on intangible resources, diversification based on financial resources is:
a. less imitable and less likely to create value on a long-term basis.
b. more imitable and less likely to create value on a long-term basis.
c. less imitable and more likely to create value on a long-term basis.
d. more imitable and more likely to create value on a long-term basis.
ANSWER: b

122. Managerial motives to seek diversification include a desire to:

a. improve their marketability to other firms.
b. effectively use corporate resources.
c. provide higher returns to corporate stakeholders.

Copyright Cengage Learning. Powered by Cognero. Page 19

Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

d. increase their compensation.
ANSWER: d

123. 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:
a. a successful acquisition will increase the CEO's power over the board of directors.
b. making an acquisition is an easier route to increased firm value than is improving the firm's core
competencies.
c. higher CEO pay is related to larger organization size.
d. CEOs nearing retirement seek to create empires to continue their legacy.
ANSWER: c

124. 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:
a. plan to take poison pills.
b. have golden parachutes.
c. have silver handcuffs.
d. have ironclad contracts.
ANSWER: b

125. Which of the following is NOT a governance mechanism that may limit managerial tendencies to over diversify?
a. Market for corporate control
b. Board of directors
c. Surveillance technologies
d. Executive compensation practices
ANSWER: c

126. In making a decision to diversify, managers should use value-creating reasons or face the risk that their firms will be
acquired and they could lose their jobs. Which of the following is a value-creating reason to diversify?
a. Economies of scope
b. Desire for increased compensation
c. Reduced managerial risk
d. Low performance
ANSWER: a

127. Research suggests that __________ has decreased while __________ has increased, possibly due to the restructuring
that continued in the 1990s through the early twenty-first century.
a. forward vertical integration; backward vertical integration
b. backward vertical integration; forward vertical integration
c. related diversification; unrelated diversification
d. unrelated diversification; related diversification
ANSWER: d
Copyright Cengage Learning. Powered by Cognero. Page 20
Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

Essay

128. Differentiate between corporate- and business-level strategies and give examples of each.
ANSWER: A business-level strategy determines how a firm will compete in a single industry or product market. When a
firm diversifies beyond a single industry, it uses a corporate-level strategy. A diversified company has two
levels of strategy: business-level and corporate-level. Each business unit has a business-level strategy. The
corporate strategy is concerned with: (1) what businesses the firm should be in and (2) how the corporate
office should manage the group of businesses. The top management of diversified companies views the firm's
businesses as a portfolio of core competencies that will generate above-average returns by creating value. An
example of a business-level strategy would be whether the firm targets the mass market and competes on
price, or whether it competes on the basis of uniqueness. An example of a corporate-level strategy would be
whether the firm should sell off a poorly performing subsidiary.

129. What are the five categories of businesses based on level of diversification?
ANSWER: The five categories of businesses determined by level of diversification are as follows:
1. Single business (95 percent or more of revenue comes from a single business)
2. Dominant business (between 70 percent and 95 percent of revenue comes from a single business)
3. Related constrained (a diversified organization earning less than 70 percent of revenue from the dominant
business, and all businesses share product, technological, and distribution linkages)
4. Related linked (a diversified organization earning less than 70 percent of revenue from the dominant
business with only limited links between businesses)
5. Unrelated (a diversified organization earning less than 70 percent of revenue from the dominant business
with no common links between businesses)

130. Describe the primary reasons a firm pursues increased diversification.

ANSWER: Firms typically diversify to increase their value by improving their overall performance. Value is created
either through related diversification or through unrelated diversification when the strategy allows a company's
businesses to increase revenues or reduce costs while implementing their business-level strategies.
Alternatively, a firm may diversify to gain market power over competitors. Value-neutral diversification may
occur in response to governmental policies, firm performance problems, or uncertainties about future cash
flows. Finally, managers may have selfish motives to diversify, such as increased compensation or personal
reduced employment risk. These selfish motivations may actually erode the firm's competitiveness and can be
value-reducing diversifications.

131. Describe how diversified firms can use activity sharing and transfer of core competencies to create value.
ANSWER: In related diversification, a firm seeks to exploit economies of scope between its business units. Economies of
scope are cost savings a firm creates by successfully sharing resources and capabilities or transferring one or
more corporate-level core competencies that were developed in one of its businesses to another of its
businesses. Firms create value through economies of scope two ways: sharing activities (operational
relatedness) and transferring corporate-level core competencies (corporate relatedness). Both primary and
support activities may be shared, including marketing and production. This activity sharing can result in cost
reductions and improve financial returns. The sharing of core competencies allows the firm to create value two
ways: (1) it eliminates the need for the second unit to allocate resources to develop the competence, and (2)
transferring intangible resources internally makes it hard for competitors to understand and to imitate the
resource.

132. What are the two ways that an unrelated diversification strategy can create value?
ANSWER: Unrelated diversification can create value through two types of financial economies (cost savings):
Copyright Cengage Learning. Powered by Cognero. Page 21
Name: Class: Date:

Chapter 06 - Corporate-Level Strategy

1. Unrelated diversified firms can more efficiently allocate capital among the component businesses than can
the external financial market. This is possible because the corporate-level management has more complete
information about the performance of the component businesses and it can also discipline underperforming
management teams.
2. Unrelated diversified firms can also create value by purchasing other businesses at low prices, restructuring
them, and reselling them at a higher price. This practice is most successful with mature, low-technology
businesses, rather than high-technology or service businesses, which are more dependent on employees who
may leave.

133. What is the effect of a firm's low performance on the pursuit of diversification?
ANSWER: High corporate performance eliminates the need for diversification. Some research shows that low returns are
related to greater levels of diversification. Firms plagued by poor performance often diversify in an effort to
become more profitable. But, continued poor performance following diversification may slow the pace of
diversification and may lead to divestitures and a focus on the core business. In addition, firms that are more
broadly diversified compared to their competitors may have lower overall performance. The related
constrained diversification strategy is the highest performing strategy. So poor performing firms that intend to
diversify should look at purchasing businesses that would be suitable for this strategy rather than moving into
unrelated diversification or retaining a dominant-business strategy.

134. What are the managerial motives to diversify?

ANSWER: A top-level manager may be motivated to pursue diversification because diversification leads to greater job
security for executives. In general, greater amounts of diversification reduce managerial risk because if a
particular business fails, the top executive remains employed by the corporation. In addition, diversification
increases firm size, and firm size has a direct effect on executive compensation. Moreover, managing a highly
diversified firm is more difficult; thus, managerial compensation is generally higher in such a firm.
Consequently, executives may have selfish motives to diversify the company in ways that may actually reduce
corporate competitiveness.

Copyright Cengage Learning. Powered by Cognero. Page 22