Chapter 10-Corporate-Level Strategy: Related and Unrelated Diversification

Chapter 10—Corporate-Level Strategy: Related and Unrelated Diversification
TRUE/FALSE
1. Diversification is the process of a company entering new industries distinct from its core industry,
using a multibusiness model.
ANS: T PTS: 1 DIF: Easy

OBJ: 1 - Differentiate between multibusiness models based on related and unrelated diversification
NAT: AACSB Analytic | Strategy KEY: Knowledge
2. Free cash flow refers to additional funds from a government stimulus program.
ANS: F PTS: 1 DIF: Easy

NAT: AACSB Analytic | Creation of Value KEY: Knowledge
3. If a company generates free cash flow, that money technically belongs to shareholders.
ANS: T PTS: 1 DIF: Moderate

4. Transferring competencies across industries involves taking a distinctive competency developed in one
industry and implanting it in an existing business unit in another industry.

OBJ: 2 - Explain the five primary ways in which diversification can increase company profitability
5. A 100-year-old industrial giant, 3M serves as an example of how a company can leverage technology
to create successful new business.

NAT: AACSB Technology | Information Technologies KEY: Application
6. If a company's core skills are highly specialized and have few applications outside the core business,
then a company should pursue a related diversification strategy.
ANS: F PTS: 1 DIF: Moderate

OBJ: 3 - Discuss the conditions that lead managers to pursue related diversification versus unrelated
diversification and explain why some companies pursue both strategies
NAT: AACSB Analytic | Strategy KEY: Comprehension
7. A company should pursue related diversification only to enhance the competitive position of its core
business.

8. Economies of scope arise when one or more of a diversified company's business units are able to
realize cost-saving or differentiation advantages because they can more effectively pool, share, and
utilize resources or capabilities.

9. Firms with superior strategic capabilities can create profitable new business units at a much higher rate
than most other companies can.

10. For diversification to increase profitability, a company's top managers must have superior
entrepreneurial capabilities.

11. One way a diversified company can increase its profitability is by acquiring inefficient or poorly
managed companies and then restructuring them to improve their performance.

12. An advantage of related diversification is that it allows a company to quickly gain entry into a new
industry where barriers are high.

13. An advantage of unrelated diversification is that competencies can be shared and leveraged throughout
the value chain activities.

14. An appropriate reason to diversify is to pool the risk from several business ventures in order to create a
more stable income stream.

15. Companies with a strong track record of internal new venturing generally excel at research and
development.

OBJ: 4 - Describe the three methods companies use to enter new industries: internal new venturing,
acquisitions, and joint ventures NAT: AACSB Analytic | Strategy
KEY: Knowledge
16. A company can increase the probability of success of an internal venture by constructing efficient scale
manufacturing facilities ahead of demand.

KEY: Knowledge
17. Internal new ventures can generally be executed far more quickly than acquisitions.

OBJ: 5 - Discuss the advantages and disadvantages associated with each of these methods
18. Reasearch finds that the higher the number of business units in a company's portfolio, the easier it is
for corporate managers to remain informed about the complexities of each business.

19. The coordination required to realize value from a diversification strategy based on transferring,
sharing, or leveraging competencies is a major source of bureaucratic costs.

20. Research evidence suggests that small-scale entry into a new business is the best way for an internal
venture to succeed.

21. Research suggests that companies that acquire many businesses over time become expert in this
process and so can generate significant value from their acquisitions.

22. A joint venture allows a company to share the risks and costs associated with establishing a new
business unit with another company.

23. A laundromat and a pool hall together invest in a new store, where customers can wash their clothes
and play pool while waiting. This is an example of an internal new venture.
ANS: F PTS: 1 DIF: Difficult

acquisitions, and joint ventures NAT: AACSB Reflective Thinking | Strategy
KEY: Application
24. Sara Lee Corp., a baking firm, purchased Platex Apparel Inc. This purchase helped to make Sara Lee
Corp. one of the largest makers of women’s apparel in the United States. Sara Lee Corp. utilized a
diversification strategy
ANS: T PTS: 1 DIF: Difficult

NAT: AACSB Reflective Thinking | Strategy KEY: Application
25. At Burger King, multiple items such as a cheeseburger, french fries, and a drink are combined together
to create a complete meal. This is an example of diversification.
ANS: F PTS: 1 DIF: Difficult

MULTIPLE CHOICE
26. The three main types of diversification strategies are

a. Acquisitions, joint ventures, and divestments.
b. Acquisitions, mergers, and buy outs.
c. Acquisitions, internal new ventures, and joint ventures.
d. Related acquisitions, unrelated acquisitions, and mergers.
e. Joint ventures, strategic alliances, and long-term contracts.
ANS: C PTS: 1 DIF: Easy
27. Free cash flow is defined as

a. money in a company's bank account.
b. government funds given to a company for meeting Environmental Protection Agency
(EPA) regulations.
c. additional funds donated by stockholders.
d. cash in excess of that required to fund investments in the company's industry and to meet
any debt commitments.
e. money borrowed by the company that requires no interest payments.
ANS: D PTS: 1 DIF: Easy
28. Companies that base their diversification strategy on transferring competencies tend to acquire new
businesses that are ____ to their existing business activities.
a. unrelated
b. not comparable
c. opposed
d. related
e. identical
ANS: D PTS: 1 DIF: Moderate
29. Leveraging competencies involves taking a distinctive competency developed by a business unit in one
industry to create
a. a new business unit in the same industry.
b. a new business unit in a different industry.
c. a new industry.
d. a new market segment.
e. new customers in the same industry.
ANS: B PTS: 1 DIF: Moderate
30. Product bundling refers to

a. preparation of products for shipment.
b. a complete package of related products.
c. a method of stocking products efficiently.
d. an inventory procedure for ensuring effective counting of products.
e. a package of unrelated products.
ANS: B PTS: 1 DIF: Easy
31. General organizational competencies refer to competencies

a. existing in individual business units.
b. existing in individual functional units.
c. existing in the industry in which a company operates.
d. that can be procured in the marketplace.
e. that transcend individual functions or business units.
ANS: E PTS: 1 DIF: Moderate
32. What is the process of transferring resources to and creating a new business unit in a new industry
called?
a. External new venturing
b. Exportation of resources
c. Intrapreneuring
d. Risk avoidance
e. Internal new venturing
KEY: Comprehension
33. When a company has cash in excess of the amount needed to maintain a competitive advantage in its
core business, it will most likely pursue
a. taper integration.
b. full integration.
c. diversification.
d. long-term contracts.
e. strategic alliances.
ANS: C PTS: 1 DIF: Moderate
KEY: Comprehension
34. Which diversification strategy is based on the idea that the company creates value by applying the
distinctive competencies it developed in one line of business to another business activity?
a. A technology acquisition strategy
b. Related diversification
c. A restructuring strategy
d. Total diversification
e. A taper diversification strategy
35. Which of the following statements is not generally true of a diversification strategy based on the
realization of economies of scope?
a. The head office evaluates each business unit as a stand-alone operation.
b. The strategy allows a company to realize cost economies from sharing manufacturing
facilities, distribution channels, advertising campaigns, and research and development
costs among business units.
c. The strategy may allow a company to use shared resources more intensively, thereby
realizing economies of scale.
d. Managers must be aware of the costs of coordination.
e. The strategy requires close coordination among different business units.
ANS: A PTS: 1 DIF: Difficult
NAT: AACSB Analytic | Creation of Value KEY: Comprehension
36. Which of the following may be true for a company pursuing a strategy of unrelated diversification
rather than a strategy of related diversification?
a. The company does not have to achieve coordination between business units.
b. The company has broad organizational competencies that can be transferred.
c. The company has superior strategic management and organizational design.
d. All of these
e. None of these
37. A diversification strategy based on resource sharing

a. entails a company creating value by applying the distinctive competencies it developed in
one line of business to another line of business.
b. requires the development of new business-level strategies.
c. can help a company to realize economies of scope.
d. is a valid way of supporting the generic business-level strategy of differentiation.
e. increases the accountability of units.
NAT: AACSB Analytic | Creation of Value KEY: Comprehension
38. General organizational competencies are found

a. in the skills of a company's top managers and functional experts.
b. at low levels in the organization.
c. among technology professionals.
d. within a company's strategic core.
e. in an organization's tangible resources.
ANS: A PTS: 1 DIF: Moderate
39. Which of the following is not a general organizational competency?

a. Entrepreneurial capabilities
b. Capabilities in organizational design
c. Superior strategic capabilities
d. Product bundling
e. All of these
40. A company should pursue related diversification instead of unrelated diversification when the
company's
a. core skills are applicable to a wide variety of industrial and commercial situations.
b. core skills are highly specialized and have few applications outside the core business.
c. top managers are skilled at acquiring and turning around poorly run enterprises.
d. main objective is to maximize growth.
e. free cash flow is high enough that it has funds available for investment.
41. A company should pursue unrelated diversification instead of related diversification when
a. its core skills are highly specialized and have few applications outside its core business.
b. the company's top managers are skilled at acquiring and turning around poorly run
enterprises.
c. its core technological skills are applicable to a wide variety of industrial and commercial
situations.
d. it wants to maximize growth.
e. the bureaucratic costs of implementation do not exceed the value that can be created by
realizing economies of scope.
42. When one or more components of a company's value chain are applicable to a wide variety of
industrial and commercial situations, which of the following strategies should a company pursue?
a. Unrelated diversification
b. Related diversification
c. A focus strategy
d. Taper integration
e. Backward integration
43. A strategy based on diversification may fail to add value because companies
a. seek to achieve differentiation instead of low cost.
b. diversify into areas in which they have some knowledge and miss out on profitable
opportunities in other areas.
c. make acquisitions rather than develop new technologies on their own.
d. incur bureaucratic costs that exceed the value created by the strategy.
e. seek to achieve cost leadership instead of differentiation.
44. Diversification may dissipate value if it is wrongly based on

a. realizing economies of scope.
b. pooling risks.
c. transferring competencies.
d. acquisitions and restructuring.
e. leveraging existing competencies.
45. In which of the following cases are bureaucratic costs likely to be lowest?
a. A vertically integrated company with five divisions that pursues full integration
b. A company with five divisions that pursues related diversification based on economies of
scope
c. A company with five divisions that pursues related diversification based on transferring
competencies
d. A company with five divisions that pursues unrelated diversification based on acquisitions
and restructuring
e. A company with twenty divisions that pursues taper integration
ANS: D PTS: 1 DIF: Difficult
46. New ventures are likely to be preferred compared to acquisitions when

a. entry barriers are high.
b. exit barriers are high.
c. a company's business model is based on using its technology to innovate new kinds of
products for related markets.
d. the company needs more mega-opportunities.
e. the industry is in the mature stage of the industry life cycle.
acquisitions, and joint ventures NAT: AACSB Technology | Strategy
KEY: Knowledge
47. New ventures

a. should be killed if they don't make a profit within three years.
b. are often preferred by technology-based companies.
c. are preferred compared to acquisitions when entry barriers are high.
d. are less risky than acquisitions.
e. are best when the company is entering the industry on a small scale.
acquisitions, and joint ventures NAT: AACSB Technology | Strategy
KEY: Knowledge
48. Which of the following statements concerning research and development is correct?
a. Exploratory research is more important than development research.
b. Development research is more important than exploratory research.
c. Exploratory research is directed toward commercialization of a new technology.
d. Development research advances basic science.
e. Companies with a strong record of internal new venturing excel at both types of research.
KEY: Comprehension
49. In which of the following industry environments are new ventures most likely to be favored over
acquisitions as a means of entering a new business area?
a. An embryonic industry
b. An industry in its later stages of growth
c. An industry passing through the shakeout stage
d. A mature industry
e. A declining industry
KEY: Comprehension
50. To be commercially successful, new products must be developed with ____ utmost in mind.
a. manufacturing requirements
b. engineering technology
c. customer requirements
d. sales techniques
e. technical requirements
ANS: C PTS: 1 DIF: Easy
KEY: Knowledge
51. If a company is to increase the probability of a new product's commercial success, the company must
foster close links between
a. marketing and sales.
b. engineering and advertising.
c. quality assurance and inventory management.
d. research and development (R&D) and marketing.
e. accounting and industrial engineering.
KEY: Knowledge
52. Which of the following seems to be a major determinant of a new venture's success?
a. Large-scale entry into the target industry designed to build market share, even when such
entry involves significant short-term losses
b. Cautious small-scale entry into the target industry so that the company can assess the
probable outcome of the venture without losing too much money
c. A low level of integration between the marketing and the research and development
functions of the venturing company
d. Supporting many new venture projects in the hope that one will succeed
e. Killing the new venture if it does not show a profit after the end of the third year
53. An internal new venture is the most appropriate strategic choice when
a. an industry is mature.
b. the firm will enter on a small scale.
c. the firm has competencies that can be leveraged.
d. speed of entry is the most important consideration.
e. there is strong pressure for quick profitability.
KEY: Knowledge
54. Which of the following entry strategies should be used when speed is an important consideration?
a. Internal new venture
b. Acquisition
c. Joint venture
d. Unrelated diversification
e. Related diversification
55. A company considering entering an industry that is in the mature stage of its life cycle would generally
prefer which of the following entry strategies?
a. Joint ventures
b. New ventures
c. Acquisitions
d. Long-term contracting
e. Taper integration
56. Acquisitions often fail because of

a. poor commercialization.
b. too much preacquisition screening, which increases the time it takes to enter a market.
c. large-scale entry.
d. differences in corporate culture.
e. slowness in establishing significant market presence.
ANS: D PTS: 1 DIF: Easy
57. Which of the following is not a reason for the failure of an acquisition to generate the gains originally
expected of it?
a. Poor postacquisition integration
b. Overestimation of the potential gains to be derived from synergy
c. The high cost of making acquisitions
d. Lack of preacquisition screening
e. Overestimation of the potential costs of realizing synergies
58. Which of the following is (are) the probable consequence(s) of an inability to integrate two divergent
corporate cultures after an acquisition?
a. High management turnover
b. Damaging political tensions between the management of the acquired and acquiring
companies
c. An inability to realize potential gains from synergies
d. All of these
e. None of these
59. Which of the following is not a guideline for a successful acquisition?

a. Good bidding strategy
b. A clear strategic rationale for making the acquisition
c. Completing the acquisition quickly
d. Thorough preacquisition screening
e. Postacquisition audit to review the process and discuss ways to improve it
KEY: Comprehension
60. Joint ventures

a. are an alternative to new ventures.
b. are attractive when speed is important.
c. are attractive when entry barriers are high.
d. should be done on a small scale.
e. reduce the risk of loss of proprietary knowledge.
ANS: A PTS: 1 DIF: Easy
KEY: Knowledge
61. Which of the following statements is false?

a. Acquisitions are preferable to joint ventures when the new business is unrelated to the
existing business.
b. Acquisitions are preferable to new ventures when speed is important.
c. Joint ventures are generally preferable to acquisitions when entry barriers are high.
d. Acquisitions can be both a reason for corporate decline and part of a turnaround strategy.
e. New ventures are preferable to acquisitions in the embryonic stage of the industry life
cycle.
62. Stanley's services firm wants to enter an embryonic market, but it doesn't have enough cash to
purchase the required assets. Which of the following strategies would you recommend to Stanley?
a. Diversify through acquisition
b. Do not diversify at all
c. Diversify with an internal new venture
d. Diversify with a joint venture
e. Diversify through vertical integration
KEY: Application
63. Economies of scope typically involve

a. sharing resources by business units.
b. acquiring resources from outside a company.
c. limited utilization of resources by specific business units.
d. all of these choices.
e. none of these choices.
64. The greater the number of business units in a company's portfolio, the ____ it is for corporate
managers to remain informed about the complexities of each business.
a. easier
b. more difficult
c. less important
d. less expensive
e. more simplistic
65. What is perhaps the most important reason why acquisitions made by a company fail?
a. The expense of the acquisition
b. The timing of the acquisition
c. Management's unwillingness to expend the necessary effort to make the acquisition work
effectively
d. Incompetence on the part of workers in the acquired firm
e. Difficulties in coordinating manufacturing activities
ANS: A PTS: 1 DIF: Easy
66. Which of the following reasons can make a diversification strategy an unwise course of action for a
company to pursue?
a. Changing industry conditions
b. Changing firm-specific conditions
c. Diversification for the wrong reasons
d. Increasing bureaucratic costs of diversification
e. All of these
67. Diversification is sometimes pursued by a company for the wrong reasons. Which of the following is a
faulty justification for diversification?
a. Risk pooling
b. Rescuing the core business from difficulty
c. Growth for growth's sake
d. All of the above
e. None of these
68. At its simplest level, a joint venture may be thought of as a(n)

a. merger of two companies.
b. acquisition of a smaller company by a larger company.
c. form of strategic outsourcing.
d. sign of weakness on the part of one of the companies.
e. corporate partnership.
KEY: Comprehension
69. When McDonald’s introduced the McCafe, it began offering a new product that was not available in
traditional McDonald’s stores. The introduction of the McCafe is an example of which of the
following?
a. Transferring competencies
b. Diversification
c. Commonality
d. Economies of scope
e. Bureaucratic costs
ANS: B PTS: 1 DIF: Difficult
70. Miller Brewing was related to Philip Morris’s tobacco business because it was possible to create
important maketing commonalities: both beer and tobacco are mass market consumer goods in which
brand positioning, advertising, and product development skills are crucial to create successful new
products. This is an example of which of the following?
a. Transferring competencies
b. Leveraging competencies
c. General organizational competencies
d. Economies of scope
e. Organizational design skills
71. In 2007, Google bought YouTube. This is an example of which of the following?
a. Partnership
b. Strategic alliance
c. Joint venture
d. Acquisition
e. Merger
KEY: Application
ESSAY
72. Identify and discuss the profitability justifications for pursuing a multibusiness model based on
diversification.
ANS:
Diversification is the process of entering new industries, distinct from a company's core industry, using
a multibusiness model based on finding ways to use the company's distinctive competencies to
increase the value of products in those industries to customers, and thus a company's long-run
profitability.
Diversification can increase profitability when managers transfer competencies between business units
in different industries. This is usually done by companies that acquire others that share some sort of
commonality.
Diversification can increase profitability when managers leverage competencies to create business
units in new industries. This is based on the idea that a source of competitive advantage in one industry
may be a source of competitive advantage in another industry.
Diversification can increase profitability when managers share resources between business units to
realize economies of scope. Sharing resources allows a company to realize cost-saving or
differentiation advantages.
Diversification can increase profitability when managers utilize product bundling. Product bundling
allows a company to expand its product line and offer customers a package of related products.
Diversification can increase profitability when managers use it to reduce rivalry in one or more
industries. This may occur if entry into an industry keeps a competitor in check.
Diversification can increase profitability when managers utilize general organizational competencies
that increase the performance of all of a company's business units. These competencies are found in
top management and transcend businesses; they may include factors such as entrepreneurial skills,
capabilities in organizational design, and strategic capabilities.
PTS: 1 DIF: Difficult

OBJ: 1 - Differentiate between multibusiness models based on related and unrelated diversification;
2 - Explain the five primary ways in which diversification can increase company profitability
NAT: AACSB Analytic | Strategy KEY: Synthesis
73. Under what conditions should a firm that is facing the need to diversify consider the use of an internal
new venture strategy, an acquisition strategy, or a joint venture strategy?
ANS:
Internal new ventures are preferable when:
 the company has valuable skills that could be leveraged further.
 the skills needed for the new business are proprietary and are science- or technology-
based.
 an industry is so new that appropriate acquisition targets and joint venture partners have
not yet emerged.
 the firm is not under strong pressure to enter quickly or reach profitability quickly.
 the company lacks important competencies and existing firms have those competencies.
 the company wants to enter quickly or reach profitability quickly.
 the company prefers more certainty than can be obtained with an internal venture or joint
venture.
 an industry is mature, with strong established competitors and high entry barriers.
 an industry is newly emerging and the company wants to share the risks associated with
uncertainty.
 the company possesses some but not all of the critical skills.
 the company lacks the resources to enter an industry on its own.

KEY: Anaylsis
74. What are the two general types of diversification and when would one be preferred over the other?
ANS:
Diversification can take one of two forms: related or unrelated. Related diversification refers to
establishing a business unit in a new industry that is related to a company's existing business units by
some kind of linkage or commonality between one or more components of each business unit's value
chain. Unrelated diversification refers to the movement into new industries to capture the profit-
enhancing advantages of implanting general organizational competencies in new business units and
perhaps to capture the benefits of multipoint competition.
A company would pursue related diversification if the company's competencies can be applied across a
greater number of industries and the company has superior strategic capabilities that allow it to keep
bureaucratic costs under control. A company would pursue unrelated diversification when each
business unit's functional competencies have few useful applications across industries but its top
management has superior strategic capabilities and good organizational design skills to build
distinctive competencies and keep bureaucratic costs under control.

NAT: AACSB Analytic | Strategy KEY: Analysis
75. Differentiate between joint venture and aquisition as a method to enter new industries. Discuss the
advatages and disadvanatges associated with each.
ANS:
Aqusisition is when a compaies uses its capital resources to purchase another company whereas joint
venture refers to two or more companies agree to pool their resources to create new business.
Advantages of aquisition-
-quicker way for a comapny to establish significant market presence
-less risk than internal new ventures
-attractive way to enter an industry that is protected by high barriers
Disadvantages of aquisistion-
- companies frequently experience management problems when they attempt to
integrate a different copanys organizational structure and culture into their own
- companies often overestimate the potential economic benefits
-tend to be so expensive that they do nroe increase future profitablitly
-compamies are opften negligen in screening squisition targets
Advantages of joint venture-
-allows companies to share the risk and costs
Disadvanatges of joint venture-
-must share the profits
-can create bad working relationships because of unequal effort but the same proftis are shared
-two companies may have different business models or time horizons
-may give away new or significant knowledge to their partner that could become a competitor
in the future.

OBJ: 5 - Discuss the advantages and disadvantages associated with joint ventures and aquisitions
NAT: AACSB Analytic | Strategy KEY: Analysis

Chapter 10-Corporate-Level Strategy: Related and Unrelated Diversification

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Chapter 10—Corporate-Level Strategy: Related and Unrelated Diversification

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26. The three main types of diversification strategies are

27. Free cash flow is defined as

30. Product bundling refers to

31. General organizational competencies refer to competencies

37. A diversification strategy based on resource sharing

38. General organizational competencies are found

39. Which of the following is not a general organizational competency?

44. Diversification may dissipate value if it is wrongly based on

46. New ventures are likely to be preferred compared to acquisitions when

47. New ventures

56. Acquisitions often fail because of

59. Which of the following is not a guideline for a successful acquisition?

60. Joint ventures

61. Which of the following statements is false?

63. Economies of scope typically involve

68. At its simplest level, a joint venture may be thought of as a(n)

PTS: 1 DIF: Difficult

PTS: 1 DIF: Difficult

PTS: 1 DIF: Difficult

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