Strategic Management Chapter 6 MC Quiz

Questions and Answers

When a firm simultaneously practices operational relatedness and corporate relatedness, what is likely to happen?

The firm is seeking to create value through financial economies.

It is difficult for investors to observe the value created by the firm. (correct)

The firm will suffer from diseconomies of scope that outweigh cost savings generated.

The firm is likely to be overvalued by investors.

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

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

By the ability to not report losses to investors.

Through the ability to reinvest cash in dividends to shareholders.

Through reduced disclosure to outside parties. (correct)

By the ability to increase pay to managers without shareholders being aware.

A firm practicing unrelated diversification can make better capital allocations to its subsidiary businesses than the external capital market can for all the following reasons EXCEPT:

The firm can acquire other firms with innovative products instead of allocating capital to research and development. Signup and view all the answers

Although a(n) job of firm, GE has done an exceptional __ its four major strategic business units.

related linked; allocating capital across Signup and view all the answers

Large diversified businesses often face what is known as the 'conglomerate discount.' What does this discount mean?

Investors believe that the value of conglomerates is less than the value of the sum of their parts. Signup and view all the answers

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.

conglomerate discount; accurately Signup and view all the answers

Successful unrelated diversification through restructuring is typically accomplished by:

Focusing on mature, low-technology businesses. Signup and view all the answers

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

Competitors can imitate financial economies more easily than they imitate economies of scope. Signup and view all the answers

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

They are human-resource dependent. Signup and view all the answers

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

A tire manufacturer established in 1910. Signup and view all the answers

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:

Changes in antitrust regulations and tax laws. Signup and view all the answers

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

Stricter interpretation of antitrust laws. Signup and view all the answers

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

Keep free cash flows for investment in acquisitions. Signup and view all the answers

Free cash flows are:

Liquid financial assets for which investments in current businesses are no longer economically viable. Signup and view all the answers

Certain regulatory changes (such as antitrust regulation and tax laws) create incentives or disincentives for diversification that:

Are value-neutral. Signup and view all the answers

The curvilinear relationship of corporate performance and diversification indicates that:

The highest performing business strategy is related constrained diversification. Signup and view all the answers

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

Diversify into less risky environments. Signup and view all the answers

Synergy exists when:

The value created by business units working together exceeds the value the units create when working independently. Signup and view all the answers

The downside of synergy in a diversified firm is:

The loss of flexibility. Signup and view all the answers

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

Related diversification projects. Signup and view all the answers

Which of the following resources are more likely to create value in the diversification process?

Tacit knowledge. Signup and view all the answers

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

More imitable and less likely to create value on a long-term basis. Signup and view all the answers

Managerial motives to seek diversification include a desire to:

Increase their compensation. Signup and view all the answers

Isidore Crocker, CEO of Gotham Engines, is strongly in favor of acquiring Carolina Textiles, a firm in an unrelated industry. Some members of the board of directors are questioning Crocker's motives for the acquisition. They argue that it is not uncommon for CEOs to push for acquisitions because:

Higher CEO pay is related to larger organization size. Signup and view all the answers

During the 1990s, top executives of Titanic, Inc., followed a pattern of aggressive acquisitions and diversification. Now, Titanic is performing poorly and earning below average returns. Lusitania, a large conglomerate firm, is in the final stages of purchasing Titanic. Lusitania has announced that it will fire Titanic's current top executives. The Titanic executives may not be worried about their impending job loss if they:

Have golden parachutes. Signup and view all the answers

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

Surveillance technologies. Signup and view all the answers

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?

Economies of scope. Signup and view all the answers

Research suggests that [blank] has decreased while [blank] has increased possibly due to the [blank] restructuring that took place in the 1990s and early twenty-first century.

Unrelated diversification; related diversification. Signup and view all the answers

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

Is one of the few large diversified firms that have been successful over time. Signup and view all the answers

A major reason GE moved into the 'clean energy' industry was:

To overcome and correct its record in environmental issues. Signup and view all the answers

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:

Related linked Signup and view all the answers

Corporate-level strategy is concerned with what product markets and businesses the firm should be in:

What product markets and businesses the firm should be in. Signup and view all the answers

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

Businesses in the portfolio are worth more under the management of the company than under any other ownership. Signup and view all the answers

The more 'constrained' the relatedness of diversification:

The more links there are among the businesses owned by an organization. Signup and view all the answers

Wm. Wrigley Jr. Company once made only chewing gum. When Wrigley bought Life Savers and Altoids, it was moving away from its traditional single-business strategy toward:

A dominant strategy. Signup and view all the answers

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

95 Signup and view all the answers

The more sharing of resources and activities among businesses, the more diversification:

Constrained Signup and view all the answers

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:

Related constrained Signup and view all the answers

Revenues for UPS come from various segments: 60 percent from U.S. package delivery, 22 percent from international package delivery, and 18 percent from non-packaging operations. Which best describes UPS's corporate level strategy?

Dominant business Signup and view all the answers

Which acquisition would be considered the LEAST related?

An upscale restaurant chain acquires a travel agency. Signup and view all the answers

The lowest level of diversification is the level:

Single-business Signup and view all the answers

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

The level of resources and activities shared among the businesses. Signup and view all the answers

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

Related constrained Signup and view all the answers

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

Related constrained Signup and view all the answers

The term 'conglomerates' refers to firms using the diversification strategy:

Unrelated Signup and view all the answers

Hutchison Whampoa Limited (HWL) has various businesses but makes no efforts to share activities among them. HWL is following a strategy of diversification:

Unrelated Signup and view all the answers

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

Value-reducing. Signup and view all the answers

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

Reducing costs through business restructuring. Signup and view all the answers

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

Expanding the business portfolio to diversify managerial employment risk. Signup and view all the answers

An office management firm hopes to achieve economies of scope by acquiring a firm specializing in veterinary management services. This aims to:

Achieve economies of scope. Signup and view all the answers

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

Economies of scope between business units. Signup and view all the answers

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

De-integration. Signup and view all the answers

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

The sharing of value chain activities and support functions. Signup and view all the answers

Operational relatedness is created by:

Sharing activities. Signup and view all the answers

Procter & Gamble (P&G) employs a diversification strategy that allows for operational relatedness. This is most likely a:

Related constrained; operational relatedness. Signup and view all the answers

Which of the following is TRUE?

Related constrained firms share more tangible resources and activities between businesses than do related linked firms. Signup and view all the answers

Research has shown that horizontal acquisitions:

Are able to use activity sharing to successfully create economies of scope. Signup and view all the answers

A noted professional art academy has founded an 'artists and friends' travel company. This engagement in diversification is based on:

Operational. Signup and view all the answers

Dragonfly Publishers has purchased White Rabbit. Which of the following statements is probably TRUE about this acquisition?

This is a horizontal acquisition. Signup and view all the answers

Purchasing firms in the same industry is called:

Horizontal acquisition. Signup and view all the answers

The diversification strategy creates value in two ways. First:

Related constrained. Signup and view all the answers

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

Managerial competencies are not easily transferable to different organizational cultures. Signup and view all the answers

Multipoint competition occurs when:

Diversified firms compete against each other in several markets. Signup and view all the answers

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

Transfer key people into new management positions. Signup and view all the answers

Xanadu, a U.S. manufacturer of pharmaceuticals, plans to transfer one of its key managers to its Irish acquisition. What is the major threat to this plan?

The St. Louis manager may quit Xanadu to remain in St. Louis. Signup and view all the answers

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

Related. Signup and view all the answers

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:

Multipoint. Signup and view all the answers

Virgin Group successfully transfers its marketing core competence across multiple businesses. Virgin follows a(n) diversification corporate strategy:

Related linked. Signup and view all the answers

The Mars acquisition of the Wrigley assets added market share to the integrated firm. It allowed Mars to gain market power or reduce costs below market level:

Market power. Signup and view all the answers

Backward integration occurs when a company:

Produces its own inputs. Signup and view all the answers

PorkPride Foods, which owns hog raising operations, is an example of a business:

Vertically integrated. Signup and view all the answers

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

Improved adjustment to technological changes. Signup and view all the answers

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

Imitation of core technology by potential competitors. Signup and view all the answers

Specialty Steel, Inc. decided to buy a brick plant due to the rarity of the material needed for production. This is an example of:

Backward integration. Signup and view all the answers

Specialty Steel owns one of its brick plants and buys all production from it. Recently, a technological advancement allowed another company to reduce production costs. What does this indicate?

Specialty Steel has less flexibility now than if it were not vertically integrated. Signup and view all the answers

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

Sharing activities and transferring core competencies. Signup and view all the answers

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

Highly valued by investors. Signup and view all the answers

Study Notes

General Electric (GE) Case

GE is unusually successful among large diversified firms over time.
Transitioned significantly towards clean energy, including wind and solar power, to address environmental concerns.
GE's diversification includes businesses with few interconnections, categorized as a related linked strategy.

Corporate-Level Strategy

Corporate-level strategy revolves around which markets and businesses a firm should enter.
A successful corporate strategy is assessed based on whether a portfolio of businesses is more valuable under its management than others.

Types of Diversification

Related constrained diversification involves strong interlinkage and resource sharing between businesses.
Related linked diversification also contains connections, but these are less intense than in constrained diversification.
Unrelated diversification occurs without significant links among businesses, often leading to conglomerates.

Market Power and Competition

Companies like UPS demonstrate dominant business strategies when a large percentage of revenue comes from one main area, whereas others engage in related constrained strategies for market expansion.
Multipoint competition refers to firms like UPS and FedEx competing across multiple markets simultaneously.

Value Creation Strategies

Economies of scope arise when businesses leverage shared resources and activities.
Activity sharing and transferring core competencies are mechanisms through which firms create value.
A diversification strategy can be financially beneficial but can also reduce value if not executed strategically.

Vertical Integration

Backward integration involves owning suppliers to ensure inputs are available for production.
Firms gain market power through vertical integration by reducing costs, improving product quality, and increasing operational efficiency.

Resource Allocation and Management

Effective management of competencies can facilitate the transfer of skills between firms; however, transferability may face challenges due to cultural differences or managerial resistance.
Unrelated diversification strategies allow better internal capital allocation than external markets can, provided managers have sufficient information and control.

Acquisitions and Operational Efficiency

Horizontal acquisitions occur when firms in the same industry merge, often to enhance market position.
Value can be created from operational efficiency when firms minimize costs while maximizing synergy within their diversified portfolio.

Drawbacks and Limitations

Risks associated with diversification include loss of focus, bureaucratic inefficiencies, and challenges in managing diversified operations.
Vertical integration may limit flexibility and provoke conflicts among different management teams within the firm.

Investor Perception

Firms that articulate their diversified strategies clearly may experience different valuations based on how investors perceive the created value from operational and corporate relatedness.
Investors may view firms engaging in unrelated diversification as less valuable due to perceived risk and complexity.

Examples from the Industry

Procter & Gamble exemplifies related constrained strategy through sharing resources between its paper towel and baby diaper businesses.
Walt Disney efficiently creates value through sharing capabilities across various segments within its diversified operations.

Conclusion

Understanding the nuances of corporate-level strategies and diversification types is critical for firms aiming to enhance competitiveness and value creation.
Efficient management practices and strategic acquisitions are vital for sustaining growth and navigating market challenges effectively.### Conglomerate Discount
Large diversified businesses often experience a "conglomerate discount," meaning their market value is perceived as lower than the individual parts of their portfolio.
Investors tend to believe that the overall value of conglomerates is less than the sum of their individual business units.

Unrelated Diversification

Successful unrelated diversification is often achieved through a management team that is open to new ideas for portfolio development.
External pressures influencing diversification can include changes in antitrust laws and tax regulations.

Corporate Performance and Diversification

The curvilinear relationship in corporate performance indicates that related constrained diversification tends to perform better than unrelated diversification strategies.
As the risk of corporate failure rises, firms might opt to diversify into less risky environments rather than increasing diversity.

Synergy and Its Downsides

Synergy occurs when combined business units generate more value together than separately.
However, the downside to achieving synergy in diversified firms can be a loss of operational flexibility.

Resources and Diversification Value

Intangible resources, like tacit knowledge, are more likely to create sustainable value in the diversification process compared to financial resources, which are easier to imitate.

Managerial Motives

Managers may pursue diversification for personal motivations, such as securing higher compensation linked to larger organization sizes.
Governance mechanisms like boards of directors and market controls help limit managerial tendencies to over-diversify, but technologies for surveillance do not serve this purpose.

Economic Context and Diversification Trends

There has been a noted shift from unrelated to related diversification in the aftermath of significant corporate restructuring throughout the late 20th and early 21st centuries.
Managers prioritizing value-creating reasons, such as economies of scope, are likelier to succeed in diversification efforts.

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Test your knowledge with this quiz focusing on Chapter 6 of Strategic Management. The questions cover key concepts and cases related to General Electric (GE) and its strategic maneuvers in the market. Perfect for students looking to reinforce their understanding of strategic management principles.

Strategic Management Chapter 6 MC Quiz

Questions and Answers

When a firm simultaneously practices operational relatedness and corporate relatedness, what is likely to happen?

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

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

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:

Although a(n) ______ job of ______ firm, GE has done an exceptional ______ its four major strategic business units.

Large diversified businesses often face what is known as the 'conglomerate discount.' What does this discount mean?

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.

Successful unrelated diversification through restructuring is typically accomplished by:

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

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

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

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:

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

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

Free cash flows are:

Certain regulatory changes (such as antitrust regulation and tax laws) create incentives or disincentives for diversification that:

The curvilinear relationship of corporate performance and diversification indicates that:

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

Synergy exists when:

The downside of synergy in a diversified firm is:

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

Which of the following resources are more likely to create value in the diversification process?

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

Managerial motives to seek diversification include a desire to:

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:

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

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?

Research suggests that [blank] has decreased while [blank] has increased possibly due to the [blank] restructuring that took place in the 1990s and early twenty-first century.

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

A major reason GE moved into the 'clean energy' industry was:

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:

Corporate-level strategy is concerned with what product markets and businesses the firm should be in:

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

The more 'constrained' the relatedness of diversification:

Wm. Wrigley Jr. Company once made only chewing gum. When Wrigley bought Life Savers and Altoids, it was moving away from its traditional single-business strategy toward:

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

The more sharing of resources and activities among businesses, the more diversification:

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:

Revenues for UPS come from various segments: 60 percent from U.S. package delivery, 22 percent from international package delivery, and 18 percent from non-packaging operations. Which best describes UPS's corporate level strategy?

Which acquisition would be considered the LEAST related?

The lowest level of diversification is the level:

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

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

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

The term 'conglomerates' refers to firms using the diversification strategy:

Hutchison Whampoa Limited (HWL) has various businesses but makes no efforts to share activities among them. HWL is following a strategy of diversification:

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

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

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

An office management firm hopes to achieve economies of scope by acquiring a firm specializing in veterinary management services. This aims to:

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

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

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

Operational relatedness is created by:

Procter & Gamble (P&G) employs a diversification strategy that allows for operational relatedness. This is most likely a:

Which of the following is TRUE?

Research has shown that horizontal acquisitions:

A noted professional art academy has founded an 'artists and friends' travel company. This engagement in diversification is based on:

Dragonfly Publishers has purchased White Rabbit. Which of the following statements is probably TRUE about this acquisition?

Purchasing firms in the same industry is called:

The diversification strategy creates value in two ways. First:

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

Multipoint competition occurs when:

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

Xanadu, a U.S. manufacturer of pharmaceuticals, plans to transfer one of its key managers to its Irish acquisition. What is the major threat to this plan?

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

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:

Virgin Group successfully transfers its marketing core competence across multiple businesses. Virgin follows a(n) diversification corporate strategy:

The Mars acquisition of the Wrigley assets added market share to the integrated firm. It allowed Mars to gain market power or reduce costs below market level:

Backward integration occurs when a company:

PorkPride Foods, which owns hog raising operations, is an example of a business:

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

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

Specialty Steel, Inc. decided to buy a brick plant due to the rarity of the material needed for production. This is an example of:

Specialty Steel owns one of its brick plants and buys all production from it. Recently, a technological advancement allowed another company to reduce production costs. What does this indicate?

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

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

Study Notes

Although a(n) job of firm, GE has done an exceptional __ its four major strategic business units.

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.