Strategic Management 8Th Ed By Dess -Test Bank +A

$35.00
Strategic Management 8Th Ed By Dess -Test Bank +A

Strategic Management 8Th Ed By Dess -Test Bank +A

$35.00
Strategic Management 8Th Ed By Dess -Test Bank +A

Research shows that the vast majority of acquisitions of public corporations results in value creation rather than value destruction.

True False

2.The Hewlett-Packard and Autonomy merger in 2011 is an example of a successful merger.

True False

3.Many acquisitions ultimately result in divestiture.

True False

4.At times, the only other people who may have benefited from a merger-acquisition were the shareholders of the acquired firms or the investment bankers advising the acquiring firm.

True False

5.Reasons for acquisition failure include the effective integration of the acquisition.

True False

6.Corporate-level strategy focuses on gaining short-term revenue through managing operations in multiple businesses.

True False

7.Sprint and Nextel merged in 2005. The successful merger resulted in a 31 billion USD merger-related charge that lead to a 76 percent decrease in its value by late 2012.

True False

8.In a study of 270 international mergers between 2000 and 2003 it was found that sales growth increased, earnings growth increased, and market valuations increased overall for the merged companies.

True False

9.One of the reasons that the Cisco acquisition of the Flip product failed is that the core businesses were very different.

True False

10.In large, widely diversified firms, decision making can become slow and remote to market conditions thus creating potential difficulties for successful mergers as evidenced by the Cisco-Flip failure.

True False

11.All diversification moves, including those involving mergers and acquisitions, erode performance.

True False

12.Diversification initiatives must be justified by the creation of value for shareholders.

True False

13.When firms diversify into unrelated businesses, the primary potential benefits are horizontal relationships, i.e., businesses sharing tangible and intangible resources.

True False

14.When firms diversify into related businesses, the primary potential benefits come from horizontal relationships, which are businesses sharing intangible and tangible resources.

True False

15.Benefits derived from horizontal and hierarchical relationships are mutually exclusive.

True False

16.Economies of scope are cost savings from leveraging core competencies or sharing unrelated activities among businesses in a corporation.

True False

17.Cooper Industries has followed a successful strategy of related diversification. There are few similarities in the products it makes or the industries in which it competes.

True False

18.ConAgra uses the related diversification vertical integration initiative to enhance market power. They do this to increase their power over suppliers by centrally purchasing huge quantities of packaging materials for all of its food divisions.

True False

19.Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input to its manufacturing process. This is an example of using the related diversification vertical integration initiative to enhance their market power.

True False

20.Novartis, formerly Ciba-Geigy, uses portfolio management to improve many key activities, including resource allocation and reward and evaluation systems. This is an example of using unrelated diversification corporate restructuring and parenting initiatives to create value.

True False

21.Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities.

True False

22.Economies of scope in a related diversification strategy result from the leveraging of core competencies and the sharing of activities among businesses in the corporation such as production.

True False

23.Core competencies do not create value in a business.

True False

24.For a core competency to create value and provide a viable basis for synergy among the businesses in a corporation, it must at least create superior customer value and it must be difficult to imitate.

True False

25.Gillette developed the Fusion and Mach 3 shaving systems that created superior customer value as a result of the company core competency in research and development.

True False

26.One of the criteria for a core competence is that the different businesses in the corporation must be similar in at least one important way related to the core competence.

True False

27.It is not necessary for a core competence to be difficult to imitate or to be non-substitutable.

True False

28.IBM leverages its competencies in computing technology to provide health care services. This is an example of a core competence being used across dissimilar businesses within the same corporation.

True False

29.Sharing activities across business units can provide two primary benefits: cost savings and cost enhancements.

True False

30.Starbucks acquired the baker chain, La Boulange, with the intention of selling the bakery products at its coffee cafes. The increased market exposure for La Boulange is an example of a revenue enhancing benefit that can arise from the differentiation strategy.

True False

31.With unrelated diversification, potential benefits can be gained from vertical or hierarchical relationships; that is, the creation of synergies from the interaction of the corporate office with outside stakeholders.

True False

32.Restructuring requires the corporate office to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change.

True False

33.Portfolio management should be considered as the primary basis for formulating corporate-level strategies.

True False

34.Portfolio management matrices generally consist of two axes that reflect industry or market growth and the market share of a business.

True False

35.The acquisition of two or more counter-cyclical businesses is an example of using diversification to reduce risk.

True False

36.Loews Corporation, a conglomerate with 15 billion USD in revenues, competes across several industries including oil and gas, tobacco, watches, insurance, and hotels. Its related diversification strategy is to buy low and sell high as in the example where they bought six oil tankers for 5 million USD and then sold them eight years later for 50 million USD.

True False

37.Diversified public corporations, such as Berkshire Hathaway and Virgin Group, create value through management expertise by improving plans and budgets. This is an example of a related diversification strategy.

True False

38.Portfolio models such as the BCG Portfolio matrix are limited in value because they only compare the SBU on four dimensions.

True False

39.In analyzing the Cabot Corporation portfolio using the BDG matrix, the company decided to shift away from its core competence to unrelated areas of its business. The ensuing decline in assets indicated that it needed to return to its core competence in order to grow.

True False

40.Risk reduction by itself is usually a means to create shareholder value, regardless of the overall diversification strategy of the firm.

True False

41.An advantage of mergers and acquisitions is that they can enable a firm to rapidly enter new product markets.

True False

42.Among the advantages of acquisitions are the expensive premiums that are frequently paid to acquire a business.

True False

43.Through joint ventures, firms can directly acquire the assets and competencies of other firms.

True False

44.The potential advantages of strategic alliances and joint ventures include entering new markets as well as developing and diffusing new technologies.

True False

45.One of the obligatory aspects of strategic alliances is the dependence on written contracts to delimit responsibilities and enforce compliance.

True False

46.An advantage of a firm entering into a strategic alliance is that it does not have to share the wealth with its partners.

True False

47.An advantage of internal development is that firms do not have to combine activities across the value chains of many companies and merge company cultures.

True False

48.Divestment is useful to help a firm reverse an earlier acquisition that did not result in successful growth.

True False

49.Zara, a Spanish clothing company, operates stores in over 70 countries. When entering markets very distant from its home markets, Zara rarely uses local alliance partners to help it negotiate the different cultural and regulatory environments.

True False

50.Compared to mergers and acquisitions, firms that engage in internal development capture the value created by their own innovative activities by not having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures.

True False

51.In recent years, many high tech firms such as Priceline.com have suffered from the negative impact of uncontrolled growth.

True False

52.Greenmail is an offer by a company, threatened by takeover, to offer its stock at a reduced price to a third party.

True False

53.A golden parachute is a prearranged contract with managers specifying that, in the event of a hostile takeover, the target company managers will be paid a significant severance package.

True False

54.Unfriendly or hostile takeovers always occur when the stock of the company becomes undervalued.

True False

55.Former Merrill Lynch CEO John Thain gave out 4 billion USD in discretionary year-end bonuses just before the company was rescued by Bank of America. This practice demonstrates managerial greed.

True False

56.Poison pills are used by a company to take away shareholder rights in the event of a takeover by another firm.

True False

57.Antitakeover defenses are always a management ploy to protect their own self interests.

True False

58.When Oracle launched a hostile bid for PeopleSoft in 2003, CEO Larry Ellison accused PeopleSoft of launching a poison pill campaign. The outcome of the bitter fight was a better financial reward for PeopleSoft shareholders.

True False

59.Poison pills always are used to protect the best interests of management.

True False

60.Managerial behaviors that erode shareholder returns include egotism, antitakeover tactics and controlled growth.

True False

Multiple Choice Questions

61.The Cisco acquisition of Pure Digital Technologies, the parent of the Flip video camera, failed because

A.Cisco had valuable competencies.

B.the Flip division of Cisco was slow and less responsive to market pressures.

C.consumers continued to purchase the camera.

D.Cisco had good vision of the market.

62.Which of the following is not a reason for merger and acquisition failures?

A.The acquiring company pays a premium for the common stock of the target company.

B.Top executives act in their best interests rather than those of the shareholders.

C.The acquired company assets are poorly integrated into the acquiring company business lines.

D.The acquisition leads to value creation.

63.Corporate-level strategy focuses on

A.gaining long-term revenue.

B.gaining short-term profits.

C.decreasing business locations.

D.managing investment bankers and their interests.

64.An acquisition that results in ______________ indicates that expectations were not met.

A.expansion

B.divestiture

C.cost savings

D.increased sales

65.In 2012, Microsoft admitted to a major _________ mistake when it wrote off essentially the entire 6.2 billion USD it paid for a digital advertising firm, aQuantive, that it purchased in 2007.

A.expansion

B.divestiture

C.cost savings

D.acquisition

66.If a multinational firm is unable to understand how the acquired company’s assets would fit with their own lines of business, this can lead to

A.expansion.

B.divestiture.

C.cost savings.

D.acquisition.

67.If a multinational firm paid too high a premium for the common stock of the company, this can lead to

A.expansion.

B.cost savings.

C.divestiture.

D.acquisition.

68.If a multinational company’s motive for the acquisition may have been to enhance executive powers and prestige rather than to improve shareholder return, this can lead to

A.divestiture.

B.cost savings.

C.expansion.

D.acquisition.

69.If a multinational firm fails to effectively integrate their acquisitions, this can result in

A.cost savings.

B.divestiture.

C.expansion.

D.further acquisition.

70.One of the reasons it is said that only the investment banker wins when a company is acquired is that they

A.assure the newly acquired company will be successful.

B.continue to work with the two companies involved.

C.collect huge up-front fees regardless of the outcome afterwards.

D.monitor the progress of both companies for long term growth.

71.Diversification initiatives include all of the following except

A.mergers and acquisitions.

B.strategic alliances.

C.shareholder development.

D.joint ventures.

72.Polaris, a manufacturer of snowmobiles, motorcycles, watercraft, and off-road vehicles, shares manufacturing operations across its businesses. It also has a corporate research and development facility and staff departments that support all of the Polaris operating divisions. This is an example of using

A.related diversification to acquire market value by leveraging core competencies.

B.related diversification to acquire economies of scope by sharing.

C.unrelated diversification to acquire financial synergies through portfolio management.

D.related diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting.

73.Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input to its manufacturing process. This is an example of using

A.related diversification to acquire market power by pooling negotiating power.

B.related diversification to acquire economies of scope by leveraging core competencies.

C.related diversification to acquire economies of scope by integrating vertically in order to acquire market power.

D.related diversification to acquire market power by integrating vertically.

74.At Cooper Industries, there are few similarities in the products it makes or the industries in which it completes. The corporate office adds value through such activities as superb human resource practices and budgeting systems. This is an example of using

A.related diversification to acquire economies of scope by leveraging pooled negotiating power.

B.related diversification to acquire market power by leveraging core competencies.

C.unrelated diversification to acquire financial synergies through portfolio management.

D.unrelated diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting.

75.Novartis, formerly Ciba-Geigy, uses portfolio management to improve many key activities, including resource allocation and reward and evaluation systems. This is an example of using

A.related diversification to achieve value by leveraging pooled negotiating power to attain economies of scope.

B.related diversification to acquire market power by leveraging pooled negotiating power.

C.unrelated diversification to acquire financial synergies through portfolio management.

D.related diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting.

76.3M leverages its competencies in adhesives technologies to many industries, including automotive, construction, and telecommunications. This is an example of using

A.related diversification to acquire economies of scope by leveraging pooled negotiating power.

B.related diversification to acquire economies of scope by leveraging core competencies.

C.unrelated diversification to financial synergies through portfolio management.

D.unrelated diversification to parenting, restructuring, and financial synergies through restructuring and parenting.

77.Many leading high-tech firms such as Google, Apple, and Intel have dramatically enhanced their revenues, profits, and market values through a wide variety of diversification initiatives. Which of the following is not such an initiative?

A.acquisitions

B.strategic alliances

C.stockholder enhancement

D.joint ventures

78.Firms have several choices of diversification initiatives that can be used to create value. Which of the following is not one of them?

A.using related diversification to acquire economies of scope leveraging pooled negotiating power

B.using related diversification to acquire market power by leveraging core competencies

C.using unrelated diversification to acquire financial synergies through portfolio management

D.using related diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting

79.ConAgra, a diversified food producer, increases its power over suppliers by centrally purchasing huge quantities of packaging materials for all of its food divisions. This is an example of using

A.related diversification to acquire economies of scope by leveraging pooled negotiating power.

B.related diversification to acquire market power by leveraging pooled negotiating power.

C.unrelated diversification to acquire financial synergies through portfolio management.

D.unrelated diversification to acquire parenting, restructuring, and financial synergies through restructuring and parenting.

80.Proctor and Gamble is a large multinational organization that has many business sharing distribution resources. Diversification strategies take advantage of the __________ that exist in their organization.

A.costs

B.employees

C.synergies

D.discontinuities

81.Casio, a giant electronic products producer, synthesizes it abilities in miniaturization, microprocessor design, material science, and ultrathin precision castings to produce digital watches. It uses the same skills to produce card calculators, digital cameras, and other small electronics. These collective skills are known as

A.core competencies.

B.strategic resources.

C.shared activities.

D.economies of scope.

82.For a core competence to be a viable basis for the corporation strengthening a new business unit, there are three requirements. Which one of the following is not one of these requirements?

A.The competence must help the business gain strength relative to its competition.

B.The new business must be similar to existing businesses to benefit from a core competence.

C.The new business must have an established large market share.

D.The collection of competencies should be unique, so that they cannot be easily imitated.

83.Sharing core competencies is one of the primary potential advantages of diversification. In order for diversification to be most successful, it is important that the

A.products use similar distribution channels.

B.similarity required for sharing core competencies must be in the value chain.

C.target market is the same, even if the products are very different.

D.methods of production are the same.

84.When management uses common production facilities or purchasing procedures to distribute different but related products, they are

A.building on core competencies.

B.achieving process gains.

C.using portfolio analysis.

D.sharing activities.

85.Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input into its manufacturing process. This is an example of

A.vertical integration.

B.sharing activities.

C.pooled negotiating power.

D.leveraging core competencies.

86.The risks of vertical integration include all of the following except

A.costs and expenses associated with increased overhead and capital expenditures.

B.lack of control over valuable assets.

C.problems associated with unbalanced capacities along the value chain.

D.additional administrative costs associated with managing a more complex set of activities.

87.Unbalanced capacities that limit cost savings, difficulties in combining specializations, and reduced flexibility are disadvantages associated with

A.strategic alliances.

B.vertical integration.

C.horizontal integration.

D.divestiture.

88.A firm should consider vertical integration when

A.the competitive situation is highly volatile.

B.customer needs are evolving.

C.the suppliers of raw materials to the firm are unable to maintain quality standards.

D.the suppliers of the firm willingly cooperate with the firm.

89.Transaction costs include all of the following costs except

A.agency costs.

B.negotiating costs.

C.search costs.

D.monitoring costs.

90.Vertical integration is attractive when

A.internal administrative costs are higher than transaction costs.

B.transaction costs and internal administrative costs are equal.

C.transaction costs are higher than internal administrative costs.

D.search costs are higher than monitoring costs.

91.Creating value within business units can happen when the corporate office helps subsidiaries make wise choices in their own acquisitions, divestures, and new ventures. This is known as

A.parenting.

B.restructuring.

C.leveraging core competencies.

D.increasing market power.

92.Creating value within business units can happen when a firm tries to find and acquire either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change. This action is known as

A.restructuring.

B.leveraging core competencies.

C.parenting.

D.sharing activities.

93.According to the text, corporate restructuring includes

A.capital restructuring, asset restructuring, and technology restructuring.

B.capital restructuring, asset restructuring, and management restructuring.

C.management restructuring, financial restructuring, and procurement restructuring.

D.global diversification, capital restructuring, and asset restructuring.

94.Portfolio management matrices are applied to what level of strategy?

A.departmental level

B.business level

C.corporate level

D.international level

95.When using a BCG matrix, a business that currently holds a large market share in a rapidly growing market and has minimal or negative cash flow would be known as a

A.Star.

B.Dog.

C.Cash Cow.

D.Question Mark.

96.In the BCG Matrix, a business that has a low market share in an industry characterized by high market growth is termed a

A.Star.

B.Cash Cow.

C.Question Mark.

D.Dog.

97.Portfolio management frameworks, such as the BCG matrix, share which of the following characteristics?

A.Businesses are plotted on a 3-dimensional grid.

B.Grid dimensions are based on external environments and internal capabilities-market positions.

C.Position in the matrix suggests a need for sharing synergies.

D.They are most helpful in helping businesses develop types of competitive advantage.

98.A Cash Cow, in the BCG framework, refers to a business that has

A.high market growth and relatively high market share.

B.relatively low market share and low market growth.

C.relatively low market share and high market growth.

D.low market growth and relatively high market share.

99.In managing the corporate portfolio, the BCG matrix would suggest that

A.Dogs should be invested in to increase market share and become Cash Cows.

B.Stars are in low growth markets and can provide excess cash to fund other opportunities.

C.Cash Cows require substantial cash outlays to maintain market share.

D.Question Marks can represent future Stars if their market share is increased.

100.In the BCG Growth Share Matrix, the suggested strategy for Stars is to

A.milk them to finance other businesses.

B.invest large sums to gain a good market share.

C.maintain position and after the market growth slows use the business to provide cash flow.

D.not invest in them and to shift cash flow to other businesses.

101.The primary means by which a firm can diversify are __________, _________, and ________.

A.mergers and acquisitions; differentiation; overall cost leadership

B.mergers and acquisitions; joint ventures and strategic alliances; internal development

C.joint ventures and strategic alliances; integration of value chain activities; acquiring human capital

D.mergers and acquisitions; internal development; differentiation

102.The downsides or limitations of mergers and acquisitions include all of the following except:

A.It is a slow means to enter new markets and acquire skills and competences.

B.Difficulties exist in integrating the activities and resources of the acquired firm into on-going operations.

C.There can be many cultural issues that can doom an otherwise promising acquisition.

D.Premiums that are frequently paid to acquire a business are expensive.

103.Divesting of businesses can accomplish many different objectives, except

A.enabling managers to focus their efforts more directly on the core businesses of the firm.

B.providing the firm with more resources to spend on more attractive alternatives.

C.raising cash to help fund existing businesses.

D.dispersing manager focus.

104.IBM, Memorial Sloan Kettering, and Cedars-Sinai have a _________ whereby IBM receives expert medical knowledge that it uses to leverage its technological skills to develop new medical insights.

A.joint diversification

B.divestment

C.strategic alliance

D.global integration

105.Cooperative relationships such as __________ have potential advantages such as entering new markets, reducing manufacturing (or other) costs in the value chain, and developing and diffusing new technologies.

A.franchises

B.mergers

C.acquisitions

D.joint ventures and strategic alliances

106.Which of the following is not part of a good guideline list for managing strategic alliances?

A.establishing a clear understanding between partners

B.not shortchanging your partner

C.relying primarily on a contract to make the joint venture work

D.working hard to ensure a collaborative relationship between partners

107.Which of the following statements regarding internal development as a means of diversification is false?

A.Many companies use internal development to extend their product or service offers.

B.An advantage of internal development is that it is generally faster than other means of diversification and firms can benefit from speed in developing new products and services.

C.The firm is able to capture wealth created without having to share the wealth with alliance partners.

D.Firms can often develop products or services at a lower cost, if they rely on their own resources instead of external funding.

108.Internal development may be time consuming and, therefore, firms may forfeit the benefits of speed that growth through __________ and __________ can provide.

A.strategic alliances; joint ventures

B.strategic alliances; mergers

C.mergers; acquisitions

D.mergers; joint ventures

109.Firms that choose to diversify through internal development must develop _________ that allow them to move __________ from initial opportunity recognition to market introduction.

A.strategies; slowly

B.capabilities; quickly

C.capabilities; slowly

D.strategies; quickly

110.Lionsgate (a Canadian-American entertainment company) and Alibaba (a Chinese e-commerce company) created _________ to open the Chinese market for the Lionsgate streaming shows and movies. Alibaba profits by getting access to content to increase demand for its own set-top media boxes.

A.a joint venture

B.a merger

C.an acquisition

D.a strategic alliance

111.According to Michael Porter, there is a tremendous allure to _________. It is the big play, the dramatic gesture. With one stroke of the pen you can add billions to size, get a front-page story, and create excitement in markets.

A.strategic alliances and joint ventures

B.internal development

C.mergers and acquisitions

D.differentiation strategies

112.The antitakeover tactic, _______, is when a firm offers to buy shares of their stock from a company (or individual) planning to acquire their firm at a higher price than the unfriendly company paid for it.

A.golden parachute

B.poison pill

C.greenmail

D.scorched earth

113.An antitakeover tactic in which existing shareholders have the option to buy additional shares of stock at a discount to the current market price is called ______.

A.greenmail

B.a golden parachute

C.a poison pill

D.scorched earth

114.The term golden parachute refers to

A.a clause requiring that huge dividend payments be made upon takeover.

B.pay given to executives fired because of a takeover.

C.financial inducements offered by a threatened firm to stop a hostile suitor from acquiring it.

D.managers of a firm in a hostile takeover approaching a third party about making the acquisition.

115.Antitakeover tactics include all of the following except

A.greenmail.

B.poison pills.

C.golden parachutes.

D.golden handcuffs.

Chapter 06 Corporate-Level Strategy: Creating Value through Diversification Answer Key

True / False Questions

1.Research shows that the vast majority of acquisitions of public corporations results in value creation rather than value destruction.

FALSE

Research shows that the vast majority of acquisitions of public corporations result in value destruction rather than value creation.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

2.The Hewlett-Packard and Autonomy merger in 2011 is an example of a successful merger.

FALSE

In 2012, Hewlett-Packard wrote off 9 billion USD of the 11 billion USD it paid for Autonomy, a software company that it purchased one year earlier. After the purchase was completed, HP realized that the Autonomy accounting statements were not accurate. This resulted in a nearly 80 percent drop in the value of Autonomy once the accounting irregularities were corrected.

AACSB: Analytical Thinking
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Blooms: Understand
Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

3.Many acquisitions ultimately result in divestiture.

TRUE

Many acquisitions ultimately result in divestiture, that is, an admission that things did not work out as planned. In fact, some years ago, a writer for Fortune magazine lamented that studies show that 33 percent to 50 percent of acquisitions are later divested, giving corporate marriages a divorce rate roughly comparable to that of men and women.

AACSB: Analytical Thinking
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Blooms: Understand
Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

4.At times, the only other people who may have benefited from a merger-acquisition were the shareholders of the acquired firms or the investment bankers advising the acquiring firm.

TRUE

At times, the only other people who may have benefited were the shareholders of the acquired firms or the investment bankers who advise the acquiring firm, because they collect huge fees upfront regardless of what happens afterward.

AACSB: Analytical Thinking
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Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

5.Reasons for acquisition failure include the effective integration of the acquisition.

FALSE

Research shows that the vast majority of acquisitions result in value destruction rather than value creation. Many large multinational firms have also failed to effectively integrate their acquisitions, paid too high a premium for the common stock of the acquired firm, or were unable to understand how the assets of the acquired firm would fit with their own lines of business.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

6.Corporate-level strategy focuses on gaining short-term revenue through managing operations in multiple businesses.

FALSE

Corporate-level strategy focuses on gaining long-term revenue, profits, and market value through managing operations in multiple businesses.

AACSB: Analytical Thinking
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Blooms: Understand
Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

7.Sprint and Nextel merged in 2005. The successful merger resulted in a 31 billion USD merger-related charge that lead to a 76 percent decrease in its value by late 2012.

FALSE

This is an example of an unsuccessful merger. The stock price continued to be an issue when SoftBank announced that it would purchase Sprint Nextel in 2012 and found that its own stock price dropped 20 percent the week after announcing its acquisition intentions.

AACSB: Analytical Thinking
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Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

8.In a study of 270 international mergers between 2000 and 2003 it was found that sales growth increased, earnings growth increased, and market valuations increased overall for the merged companies.

FALSE

A study investigated 270 mergers that took place between 2000 and 2003 in multiple countries and regions. It found that after a merger, sales growth decreased by 6 percent, earnings growth dropped 9.4 percent, and market valuations declined 2.5 percent (figures are adjusted for industry trends and refer to three years pre- or postmerger).

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Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

9.One of the reasons that the Cisco acquisition of the Flip product failed is that the core businesses were very different.

TRUE

Cisco was unable to avoid failure with Flip for two reasons. First, Cisco core business operations are in business networking equipment and software. Flip business was selling video cameras to individual customers. This is a very different business, where the Cisco knowledge and other competencies were of little value. While Cisco has some success extending into the consumer market, such as with its acquisition of Linksys, this success has come in the home networking business, a market to which Cisco can transfer some of its business networking competencies.

AACSB: Analytical Thinking
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Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

10.In large, widely diversified firms, decision making can become slow and remote to market conditions thus creating potential difficulties for successful mergers as evidenced by the Cisco-Flip failure.

TRUE

Cisco was unable to avoid failure with Flip for two reasons. One of these is that its nearly 60 decision-making groups with many layers of responsibility made it difficult for Cisco to be responsive to market pressures on the Flip product. This just was not a priority since the Flip division had a mere 400 million USD in annual sales, representing only 1 percent of the overall sales of Cisco.

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Blooms: Understand
Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

11.All diversification moves, including those involving mergers and acquisitions, erode performance.

FALSE

Not all diversification moves, including those involving mergers and acquisitions, erode performance. For example, acquisitions in the oil industry, such as the British Petroleum purchases of Amoco and Arco, are performing well as is the Exxon-Mobil merger. MetLife was able to dramatically expand its global footprint by acquiring Alico, a global player in the insurance business from AIG in 2010 when AIG was in financial distress.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

12.Diversification initiatives must be justified by the creation of value for shareholders.

TRUE

Diversification initiatives, whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development, must be justified by the creation of value for shareholders. They typically are successful when they introduce synergy.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

13.When firms diversify into unrelated businesses, the primary potential benefits are horizontal relationships, i.e., businesses sharing tangible and intangible resources.

FALSE

When a corporation diversifies into unrelated businesses, the primary potential benefits are derived largely from hierarchical relationships, which is value creation derived from the corporate office. Horizontal relationships are the primary benefit of diversification into related businesses.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

14.When firms diversify into related businesses, the primary potential benefits come from horizontal relationships, which are businesses sharing intangible and tangible resources.

TRUE

A firm may diversify into related businesses. Here, the primary potential benefits to be derived come from horizontal relationships; that is, businesses sharing intangible resources (e.g., core competencies such as marketing) and tangible resources (e.g., production facilities, distribution channels).

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

15.Benefits derived from horizontal and hierarchical relationships are mutually exclusive.

FALSE

Benefits derived from horizontal (related diversification) and hierarchical (unrelated diversification) relationships are not mutually exclusive. Many firms that diversify into related areas benefit from information technology expertise in the corporate office. Similarly, unrelated diversifiers often benefit from the best practices of sister businesses even though their products, markets, and technologies may differ dramatically.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

16.Economies of scope are cost savings from leveraging core competencies or sharing unrelated activities among businesses in a corporation.

FALSE

Economies of scope are cost savings from leveraging core competencies or sharing related activities among businesses in a corporation.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

17.Cooper Industries has followed a successful strategy of related diversification. There are few similarities in the products it makes or the industries in which it competes.

FALSE

Cooper Industries has followed a successful strategy of unrelated diversification. There are few similarities in the products it makes or the industries in which it competes; however, the corporate office adds value through such activities as superb human resource practices and budgeting systems.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

18.ConAgra uses the related diversification vertical integration initiative to enhance market power. They do this to increase their power over suppliers by centrally purchasing huge quantities of packaging materials for all of its food divisions.

FALSE

ConAgra uses pooled negotiating power to enhance market power. They do this to increase their power over suppliers by centrally purchasing huge quantities of packaging materials for all of its food divisions.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

19.Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input to its manufacturing process. This is an example of using the related diversification vertical integration initiative to enhance their market power.

TRUE

First, a firm may diversify into related businesses. Here, the primary potential benefits to be derived come from horizontal relationships, that is, businesses sharing intangible resources (e.g., core competencies such as marketing) and tangible resources (e.g., production facilities, distribution channels). Firms can also enhance their market power via pooled negotiating power and vertical integration.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

20.Novartis, formerly Ciba-Geigy, uses portfolio management to improve many key activities, including resource allocation and reward and evaluation systems. This is an example of using unrelated diversification corporate restructuring and parenting initiatives to create value.

FALSE

A corporation may diversify into unrelated businesses. Novartis has followed a successful strategy of unrelated diversification. Here, the primary potential benefits are derived largely from hierarchical relationships, that is, value creation derived from the corporate office. Examples of the latter would include leveraging some of the support activities in the value chain. Unrelated diversifiers often benefit from the best practices of sister businesses, even though their products, markets, and technologies may differ dramatically.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

21.Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities.

TRUE

Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities (e.g., production and distribution facilities). This enables a corporation to benefit from economies of scope.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 1 Easy
Topic: Related Diversification through Economies of Scope and Revenue Enhancement

22.Economies of scope in a related diversification strategy result from the leveraging of core competencies and the sharing of activities among businesses in the corporation such as production.

TRUE

Related diversification enables a firm to benefit from economies of scope, which are cost savings that are derived from leveraging core competencies or sharing related activities among businesses in a corporation. A firm can also enjoy greater revenues if two businesses attain higher levels of sales growth combined than either company could attain independently.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 1 Easy
Topic: Related Diversification through Economies of Scope and Revenue Enhancement

23.Core competencies do not create value in a business.

FALSE

Core competencies may also be viewed as the glue that binds existing businesses together or as the engine that fuels new business growth. They reflect the collective learning in organizations such as how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Economies of Scope and Revenue Enhancement

24.For a core competency to create value and provide a viable basis for synergy among the businesses in a corporation, it must at least create superior customer value and it must be difficult to imitate.

TRUE

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Economies of Scope and Revenue Enhancement

25.Gillette developed the Fusion and Mach 3 shaving systems that created superior customer value as a result of the company core competency in research and development.

TRUE

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it. Every value-chain activity has the potential to provide a viable basis for building on a core competence. At Gillette, scientists developed the Fusion and Mach 3 after the introduction of the tremendously successful Sensor System because of a thorough understanding of several phenomena that underlie shaving. These include the physiology of facial hair and skin, the metallurgy of blade strength and sharpness, the dynamics of a cartridge moving across skin, and the physics of a razor blade severing hair. Such innovations are possible only with an understanding of such phenomena and the ability to combine such technologies into innovative products. Customers are willing to pay more for such technologically differentiated products.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Economies of Scope and Revenue Enhancement

26.One of the criteria for a core competence is that the different businesses in the corporation must be similar in at least one important way related to the core competence.

TRUE

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Economies of Scope and Revenue Enhancement

27.It is not necessary for a core competence to be difficult to imitate or to be non-substitutable.

FALSE

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Economies of Scope and Revenue Enhancement

28.IBM leverages its competencies in computing technology to provide health care services. This is an example of a core competence being used across dissimilar businesses within the same corporation.

TRUE

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it. With Watson, the unique computer developed by IBM that processes natural language, they were able to leverage their computing expertise (core competence) to solve important medical problems and thus become medical experts.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Economies of Scope and Revenue Enhancement

29.Sharing activities across business units can provide two primary benefits: cost savings and cost enhancements.

FALSE

Corporations also can achieve synergy by sharing activities across their business units. These include value-creating activities such as common manufacturing facilities, distribution channels, and sales forces. Sharing activities can provide two primary payoffs: cost savings and revenue enhancements.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Economies of Scope and Revenue Enhancement

30.Starbucks acquired the baker chain, La Boulange, with the intention of selling the bakery products at its coffee cafes. The increased market exposure for La Boulange is an example of a revenue enhancing benefit that can arise from the differentiation strategy.

TRUE

Often an acquiring firm and its target may achieve a higher level of sales growth together than either company could on its own. For example, Starbucks recently acquired a small bakery chain, La Boulange, and intends to sell La Boulange products at Starbucks cafes nationally. In leveraging Starbucks national retail chain, La Boulange will be able to dramatically expand its market exposure and sales much beyond its current 19-store West Coast market.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Economies of Scope and Revenue Enhancement

31.With unrelated diversification, potential benefits can be gained from vertical or hierarchical relationships; that is, the creation of synergies from the interaction of the corporate office with outside stakeholders.

FALSE

With unrelated diversification, potential benefits can be gained from vertical or hierarchical relationships; that is, the creation of synergies from the interaction of the corporate office with the individual business units.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
Level of Difficulty: 2 Medium
Topic: Unrelated Diversification through Financial Synergies and Parenting

32.Restructuring requires the corporate office to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change.

TRUE

Restructuring is a means by which the corporate office can add value to a business. Here, the corporate office tries to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change. The parent intervenes, often selling off parts of the business; changing the management; reducing payroll and unnecessary sources of expenses; changing strategies; and infusing the company with new technologies, processes, reward systems, and so forth.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
Level of Difficulty: 2 Medium
Topic: Unrelated Diversification through Financial Synergies and Parenting

33.Portfolio management should be considered as the primary basis for formulating corporate-level strategies.

FALSE

Portfolio management helps achieve a better understanding of the competitive position of an overall portfolio of businesses, to suggest strategic alternatives for each of the businesses, and to identify priorities for the allocation of resources.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
Level of Difficulty: 2 Medium
Topic: Unrelated Diversification through Financial Synergies and Parenting

34.Portfolio management matrices generally consist of two axes that reflect industry or market growth and the market share of a business.

TRUE

The Boston Consulting Group (BCG) growth-share matrix is among the best known of the portfolio management tools. In the BCG approach, each of the strategic business units (SBUs) of the firm is plotted on a two-dimensional grid in which the axes are relative market share and industry growth rate.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
Level of Difficulty: 1 Easy
Topic: Unrelated Diversification through Financial Synergies and Parenting

35.The acquisition of two or more counter-cyclical businesses is an example of using diversification to reduce risk.

TRUE

One of the purposes of diversification is to reduce the risk that is inherent in the variability in revenues and profits of a firm over time. If a firm enters new products or markets that are affected differently by seasonal or economic cycles, its performance over time will be more stable. For example, a firm that manufactures lawn mowers may diversify into snow blowers in order to even out its annual sales.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
Level of Difficulty: 2 Medium
Topic: Unrelated Diversification through Financial Synergies and Parenting

36.Loews Corporation, a conglomerate with 15 billion USD in revenues, competes across several industries including oil and gas, tobacco, watches, insurance, and hotels. Its related diversification strategy is to buy low and sell high as in the example where they bought six oil tankers for 5 million USD and then sold them eight years later for 50 million USD.

FALSE

With unrelated diversification, few benefits are derived from horizontal relationships (the leveraging of core competencies or the sharing of activities across business units within a corporation). Instead, potential benefits can be gained from vertical (or hierarchical) relationships in which synergies are created from the interaction of the corporate office with the individual business units. There are two main sources of such synergies. First, the corporate office can contribute to parenting and restructuring of (often acquired) businesses. Second, the corporate office can add value by viewing the entire corporation as a family or portfolio of businesses and allocating resources to optimize corporate goals of profitability, cash flow, and growth.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
Level of Difficulty: 2 Medium
Topic: Unrelated Diversification through Financial Synergies and Parenting

37.Diversified public corporations, such as Berkshire Hathaway and Virgin Group, create value through management expertise by improving plans and budgets. This is an example of a related diversification strategy.

FALSE

One of the purposes of diversification is to reduce the risk that is inherent in the variability in revenues and profits of a firm over time. If a firm enters new products or markets that are affected differently by seasonal or economic cycles, its performance over time will be more stable. For example, a firm that manufactures lawn mowers may diversify into snow blowers in order to even out its annual sales.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
Level of Difficulty: 2 Medium
Topic: Unrelated Diversification through Financial Synergies and Parenting

38.Portfolio models such as the BCG Portfolio matrix are limited in value because they only compare the SBU on four dimensions.

FALSE

Despite the potential benefits of portfolio models, there are also some notable downsides. First, they compare SBUs on only two dimensions, making the implicit but erroneous assumption that (1) those are the only factors that really matter and (2) every unit can be accurately compared on that basis.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
Level of Difficulty: 2 Medium
Topic: Unrelated Diversification through Financial Synergies and Parenting

39.In analyzing the Cabot Corporation portfolio using the BDG matrix, the company decided to shift away from its core competence to unrelated areas of its business. The ensuing decline in assets indicated that it needed to return to its core competence in order to grow.

TRUE

Cabot Corporation supplies carbon black for the rubber, electronics, and plastics industries. Following the BCG matrix, Cabot moved away from its cash cow, carbon black, and diversified into stars such as ceramics and semiconductors in a seemingly overaggressive effort to create more revenue growth for the corporation. The company return on assets declined as the firm shifted away from its core competence to unrelated areas. The portfolio model failed because it pointed the company in the wrong direction (away from its core business) in an effort to spur growth. Recognizing its mistake, Cabot Corporation returned to its mainstay carbon black manufacturing and divested unrelated businesses. Today the company is a leader in its field with 3.6 billion USD in revenues in 2014.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
Level of Difficulty: 2 Medium
Topic: Unrelated Diversification through Financial Synergies and Parenting

40.Risk reduction by itself is usually a means to create shareholder value, regardless of the overall diversification strategy of the firm.

FALSE

Risk reduction in and of itself is rarely viable as a means to create shareholder value. It must be undertaken with a view of the overall diversification strategy of the firm.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
Level of Difficulty: 2 Medium
Topic: Unrelated Diversification through Financial Synergies and Parenting

41.An advantage of mergers and acquisitions is that they can enable a firm to rapidly enter new product markets.

TRUE

Growth through mergers and acquisitions has been critical to many corporations in a wide variety of high-technology and knowledge-intensive industries. Speed (speed to market, speed to positioning, and speed to becoming a viable company) is critical in such industries. For example, in 2010, Apple acquired Siri Inc. so that they could quickly fully integrate the Siri natural language voice recognition software into iOS, the Apple proprietary operating system.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.
Level of Difficulty: 2 Medium
Topic: The Means to Achieve Diversification

42.Among the advantages of acquisitions are the expensive premiums that are frequently paid to acquire a business.

FALSE

There are many potential drawbacks or limitations to merger activity. For example, the takeover premium that is paid for an acquisition typically is very high. Two times out of three, the stock price of the acquiring company falls once the deal is made public. Since the acquiring firm often pays a 30 percent or higher premium for the target company, the acquirer must create synergies and scale economies that result in sales and market gains exceeding the premium price.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.
Level of Difficulty: 2 Medium
Topic: The Means to Achieve Diversification

43.Through joint ventures, firms can directly acquire the assets and competencies of other firms.

FALSE

Joint ventures represent a special case of alliances, wherein two (or more) firms contribute equity to form a new legal entity.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.
Level of Difficulty: 2 Medium
Topic: The Means to Achieve Diversification

44.The potential advantages of strategic alliances and joint ventures include entering new markets as well as developing and diffusing new technologies.

TRUE

Strategic alliances and joint ventures have many potential advantages. Among these are entering new markets, reducing manufacturing (or other) costs in the value chain, and developing and diffusing new technologies.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.
Level of Difficulty: 2 Medium
Topic: The Means to Achieve Diversification

45.One of the obligatory aspects of strategic alliances is the dependence on written contracts to delimit responsibilities and enforce compliance.

FALSE

A strategic alliance is a cooperative relationship between two (or more) firms. Alliances may be either informal or formal, one involving a written contract.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.
Level of Difficulty: 2 Medium
Topic: The Means to Achieve Diversification

46.An advantage of a firm entering into a strategic alliance is that it does not have to share the wealth with its partners.

FALSE

Firms that engage in internal development (like corporate entrepreneurship) capture the value created by their own innovative activities without having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.
Level of Difficulty: 2 Medium
Topic: The Means to Achieve Diversification

47.An advantage of internal development is that firms do not have to combine activities across the value chains of many companies and merge company cultures.

TRUE

Firms that engage in internal development (like corporate entrepreneurship) capture the value created by their own innovative activities without having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.
Level of Difficulty: 2 Medium
Topic: The Means to Achieve Diversification

48.Divestment is useful to help a firm reverse an earlier acquisition that did not result in successful growth.

TRUE

Divestments, the exit of a business from the company portfolio, are quite common. One study found that large, prestigious U.S. companies divested more acquisitions than they kept. Divesting a business can accomplish many different objectives. It can be used to help a firm reverse an earlier acquisition that did not work out as planned.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.
Level of Difficulty: 2 Medium
Topic: The Means to Achieve Diversification

49.Zara, a Spanish clothing company, operates stores in over 70 countries. When entering markets very distant from its home markets, Zara rarely uses local alliance partners to help it negotiate the different cultural and regulatory environments.

FALSE

Zara, a Spanish clothing company, operates stores in over 70 countries. Still, when entering markets very distant from its home markets, Zara often uses local alliance partners to help it negotiate the different cultural and regulatory environments. Entering new markets requires financial resources, requisite market expertise to understand local customer needs, know how to promote the product, and access to the proper distribution channels. These are reasons that a company is likely to use local alliance partners when it first enters a new market distant from its own.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.
Level of Difficulty: 2 Medium
Topic: The Means to Achieve Diversification

50.Compared to mergers and acquisitions, firms that engage in internal development capture the value created by their own innovative activities by not having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures.

TRUE

Compared to mergers and acquisitions, firms that engage in internal development capture the value created by their own innovative activities without having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.
Level of Difficulty: 2 Medium
Topic: The Means to Achieve Diversification

51.In recent years, many high tech firms such as Priceline.com have suffered from the negative impact of uncontrolled growth.

TRUE

In recent years many high-tech firms have suffered from the negative impact of their uncontrolled growth. Consider, for example, Priceline.com made an ill-fated venture into an online service to offer groceries and gasoline. A myriad of problems, perhaps most importantly a lack of participation by manufacturers, caused the firm to lose more than 5 million USD a week prior to abandoning these ventures.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.
Level of Difficulty: 2 Medium
Topic: How Managerial Motives Can Erode Value Creation

52.Greenmail is an offer by a company, threatened by takeover, to offer its stock at a reduced price to a third party.

FALSE

Greenmail is an effort by the target firm to prevent an impending takeover. When a hostile firm buys a large block of outstanding target company stock and the target company management feels that a tender offer is impending, they offer to buy the stock back from the hostile company at a higher price than the unfriendly company paid for it.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.
Level of Difficulty: 1 Easy
Topic: How Managerial Motives Can Erode Value Creation

53.A golden parachute is a prearranged contract with managers specifying that, in the event of a hostile takeover, the target company managers will be paid a significant severance package.

TRUE

A golden parachute is a prearranged contract with managers specifying that, in the event of a hostile takeover, the target company managers will be paid a significant severance package. Although top managers lose their jobs, the golden parachute provisions protect their income.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.
Level of Difficulty: 2 Medium
Topic: How Managerial Motives Can Erode Value Creation

54.Unfriendly or hostile takeovers always occur when the stock of the company becomes undervalued.

FALSE

Unfriendly or hostile takeovers can occur when the stock of the company becomes undervalued. The risk is that leadership engages in antitakeover tactics to preserve their wealth or power.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.
Level of Difficulty: 2 Medium
Topic: How Managerial Motives Can Erode Value Creation

55.Former Merrill Lynch CEO John Thain gave out 4 billion USD in discretionary year-end bonuses just before the company was rescued by Bank of America. This practice demonstrates managerial greed.

TRUE

A healthy ego helps make a leader confident, clearheaded, and able to cope with change. CEOs, by their very nature, are intensely competitive people in the office as well as on the tennis court or golf course. But sometimes when pride is at stake, individuals will go to great lengths to win. Few executives are exempt from the potential downside of excessive egos and greed.

AACSB: Analytical Thinking
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Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.
Level of Difficulty: 2 Medium
Topic: How Managerial Motives Can Erode Value Creation

56.Poison pills are used by a company to take away shareholder rights in the event of a takeover by another firm.

FALSE

Poison pills are used by a company to give shareholders certain rights in the event of a takeover by another firm. They are also known as shareholder rights plans.

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Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.
Level of Difficulty: 2 Medium
Topic: How Managerial Motives Can Erode Value Creation

57.Antitakeover defenses are always a management ploy to protect their own self interests.

FALSE

Antitakeover defenses represent a gray area, because management can often legitimately argue that such actions are not there solely to benefit themselves. Rather, they can benefit other stakeholders, such as employees, customers, and the community.

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Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.
Level of Difficulty: 2 Medium
Topic: How Managerial Motives Can Erode Value Creation

58.When Oracle launched a hostile bid for PeopleSoft in 2003, CEO Larry Ellison accused PeopleSoft of launching a poison pill campaign. The outcome of the bitter fight was a better financial reward for PeopleSoft shareholders.

TRUE

In December 2004, Oracle struck a deal to buy PeopleSoft, ending a bitter 18-month hostile takeover battle. The Oracle 10.3 billion USD acquisition valued the firm at 26.50 USD a share, which was an increase of 66 percent over its initial offer of 16 USD a share.

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Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.
Level of Difficulty: 2 Medium
Topic: How Managerial Motives Can Erode Value Creation

59.Poison pills always are used to protect the best interests of management.

FALSE

On moral grounds, some antitakeover defenses are not undertaken to entrench and protect management, but often they are. When such defenses are used simply to keep management in power, they are wrong. However, when they are used to defend the long-term financial health of the company and to protect broader stakeholder interests, they will be morally permissible.

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Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.
Level of Difficulty: 2 Medium
Topic: How Managerial Motives Can Erode Value Creation

60.Managerial behaviors that erode shareholder returns include egotism, antitakeover tactics and controlled growth.

FALSE

Some managerial behaviors may serve to erode shareholder returns. Among these are growth for the sake of growth, egotism, and antitakeover tactics.

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Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.
Level of Difficulty: 2 Medium
Topic: How Managerial Motives Can Erode Value Creation

Multiple Choice Questions

61.The Cisco acquisition of Pure Digital Technologies, the parent of the Flip video camera, failed because

A.Cisco had valuable competencies.

B.the Flip division of Cisco was slow and less responsive to market pressures.

C.consumers continued to purchase the camera.

D.Cisco had good vision of the market.

In large, widely diversified firms, decision making can become slow and remote to market conditions. Cisco competes in a wide range of markets and had nearly 60 decision making groups in its structure, with several layers separating John Chambers, the CEO of Cisco, from the individual markets. In such a large and diversified firm, the decision making in a small division with only 400 million USD in sales, 1 percent of the overall sales of Cisco, was not the top priority of corporate managers. Stephen Baker, an analyst with NPD Group, said that Cisco was never really committed to the product. As a result, Flip was slower and less responsive to market pressures than it was when it was an entrepreneurial firm.

AACSB: Analytical Thinking
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Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

62.Which of the following is not a reason for merger and acquisition failures?

A.The acquiring company pays a premium for the common stock of the target company.

B.Top executives act in their best interests rather than those of the shareholders.

C.The acquired company assets are poorly integrated into the acquiring company business lines.

D.The acquisition leads to value creation.

Research shows that the vast majority of acquisitions result in value destruction rather than value creation. Many large multinational firms have also failed to effectively integrate their acquisitions, paid too high a premium for the common stock of the target company, or were unable to understand how the assets of the acquired firm would fit with their own lines of business. At times, top executives may not have acted in the best interests of shareholders. The motive for the acquisition may have been to enhance the power and prestige of the executive rather than to improve shareholder returns.

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Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

63.Corporate-level strategy focuses on

A.gaining long-term revenue.

B.gaining short-term profits.

C.decreasing business locations.

D.managing investment bankers and their interests.

Corporate-level strategy focuses on gaining long-term revenue, profits, and market value through managing operations in multiple businesses.

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Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

64.An acquisition that results in ______________ indicates that expectations were not met.

A.expansion

B.divestiture

C.cost savings

D.increased sales

Many acquisitions ultimately result in divestiture, which is an admission that things did not work out as planned. In fact, some years ago, a writer for Fortune magazine lamented that studies show 33 percent to 50 percent of acquisitions are later divested, giving corporate marriages a divorce rate roughly comparable to that of men and women.

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Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

65.In 2012, Microsoft admitted to a major _________ mistake when it wrote off essentially the entire 6.2 billion USD it paid for a digital advertising firm, aQuantive, that it purchased in 2007.

A.expansion

B.divestiture

C.cost savings

D.acquisition

In 2012, Microsoft admitted to a major acquisition mistake when it wrote off essentially the entire 6.2 billion USD it paid for a digital advertising firm, aQuantive, that it purchased in 2007.

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Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

66.If a multinational firm is unable to understand how the acquired company’s assets would fit with their own lines of business, this can lead to

A.expansion.

B.divestiture.

C.cost savings.

D.acquisition.

Research shows that a majority of acquisitions of public corporations result in value destruction rather than value creation. Many large multinational firms have also failed to effectively integrate their acquisitions, paid too high a premium for the common stock of the company, or were unable to understand how the assets of the acquired firm would fit with their own lines of business.

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Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

67.If a multinational firm paid too high a premium for the common stock of the company, this can lead to

A.expansion.

B.cost savings.

C.divestiture.

D.acquisition.

Research shows that a majority of acquisitions of public corporations result in value destruction rather than value creation. Many large multinational firms have also failed to effectively integrate their acquisitions, paid too high a premium for the common stock of the company, or were unable to understand how the assets of the acquired firm would fit with their own lines of business.

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Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

68.If a multinational company’s motive for the acquisition may have been to enhance executive powers and prestige rather than to improve shareholder return, this can lead to

A.divestiture.

B.cost savings.

C.expansion.

D.acquisition.

Research shows that a majority of acquisitions of public corporations result in value destruction rather than value creation. Top executives may not have acted in the best interests of shareholders. That is, the motive for the acquisition may have been to enhance executive powers and prestige rather than to improve shareholder returns.

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Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

69.If a multinational firm fails to effectively integrate their acquisitions, this can result in

A.cost savings.

B.divestiture.

C.expansion.

D.further acquisition.

Research shows that a majority of acquisitions of public corporations result in value destruction rather than value creation. Many large multinational firms have also failed to effectively integrate their acquisitions, paid too high a premium for the common stock of the company, or were unable to understand how the assets of the acquired firm would fit with their own lines of business.

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Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

70.One of the reasons it is said that only the investment banker wins when a company is acquired is that they

A.assure the newly acquired company will be successful.

B.continue to work with the two companies involved.

C.collect huge up-front fees regardless of the outcome afterwards.

D.monitor the progress of both companies for long term growth.

Research shows that a majority of acquisitions of public corporations result in value destruction rather than value creation. At times, the only other people who may have benefited were the shareholders of the acquired firms or the investment bankers who advise the acquiring firm, because they collect huge fees up front regardless of what happens afterward.

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Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Level of Difficulty: 2 Medium
Topic: The Reasons for the Failure of Many Diversification Efforts

71.Diversification initiatives include all of the following except

A.mergers and acquisitions.

B.strategic alliances.

C.shareholder development.

D.joint ventures.

Diversification initiatives, whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development, must be justified by the creation of value for shareholders.

AACSB: Analytical Thinking
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Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

72.Polaris, a manufacturer of snowmobiles, motorcycles, watercraft, and off-road vehicles, shares manufacturing operations across its businesses. It also has a corporate research and development facility and staff departments that support all of the Polaris operating divisions. This is an example of using

A.related diversification to acquire market value by leveraging core competencies.

B.related diversification to acquire economies of scope by sharing.

C.unrelated diversification to acquire financial synergies through portfolio management.

D.related diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting.

In this case, Polaris uses related diversification to create value by sharing activities in order to create economies of scope.

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Blooms: Understand
Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

73.Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input to its manufacturing process. This is an example of using

A.related diversification to acquire market power by pooling negotiating power.

B.related diversification to acquire economies of scope by leveraging core competencies.

C.related diversification to acquire economies of scope by integrating vertically in order to acquire market power.

D.related diversification to acquire market power by integrating vertically.

In this case, Shaw Industries uses related diversification to achieve value by integrating vertically in order to acquire market power.

AACSB: Analytical Thinking
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Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

74.At Cooper Industries, there are few similarities in the products it makes or the industries in which it completes. The corporate office adds value through such activities as superb human resource practices and budgeting systems. This is an example of using

A.related diversification to acquire economies of scope by leveraging pooled negotiating power.

B.related diversification to acquire market power by leveraging core competencies.

C.unrelated diversification to acquire financial synergies through portfolio management.

D.unrelated diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting.

In this case, the corporate office of Cooper Industries adds value to its acquired, unrelated businesses by performing such activities as auditing their manufacturing operations, improving their accounting activities, and centralizing union negotiations. The primary potential benefits of this unrelated diversification strategy are derived largely from hierarchical relationships; that is, value creation derived from the corporate office.

AACSB: Analytical Thinking
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Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

75.Novartis, formerly Ciba-Geigy, uses portfolio management to improve many key activities, including resource allocation and reward and evaluation systems. This is an example of using

A.related diversification to achieve value by leveraging pooled negotiating power to attain economies of scope.

B.related diversification to acquire market power by leveraging pooled negotiating power.

C.unrelated diversification to acquire financial synergies through portfolio management.

D.related diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting.

A corporation may diversify into unrelated businesses. Novartis has followed a successful strategy of unrelated diversification. Here, the primary potential benefits are derived largely from hierarchical relationships, that is, value creation derived from the corporate office. Examples of the latter would include leveraging some of the support activities in the value chain. Unrelated diversifiers often benefit from the best practices of sister businesses, even though their products, markets, and technologies may differ dramatically.

AACSB: Analytical Thinking
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Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

76.3M leverages its competencies in adhesives technologies to many industries, including automotive, construction, and telecommunications. This is an example of using

A.related diversification to acquire economies of scope by leveraging pooled negotiating power.

B.related diversification to acquire economies of scope by leveraging core competencies.

C.unrelated diversification to financial synergies through portfolio management.

D.unrelated diversification to parenting, restructuring, and financial synergies through restructuring and parenting.

Firms may diversify into related businesses. Here, the primary potential benefits to be derived come from horizontal relationships, that is, businesses sharing intangible resources (e.g., core competencies such as marketing) and tangible resources (e.g., production facilities, distribution channels). In this case EM leverages its core competencies in adhesives technologies in many industries in order to attain economies of scope.

AACSB: Analytical Thinking
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Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

77.Many leading high-tech firms such as Google, Apple, and Intel have dramatically enhanced their revenues, profits, and market values through a wide variety of diversification initiatives. Which of the following is not such an initiative?

A.acquisitions

B.strategic alliances

C.stockholder enhancement

D.joint ventures

Many leading high-tech firms such as Google, Apple, and Intel have dramatically enhanced their revenues, profits, and market values through a wide variety of diversification initiatives, including acquisitions, strategic alliances, and joint ventures, as well as internal development.

AACSB: Analytical Thinking
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Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

78.Firms have several choices of diversification initiatives that can be used to create value. Which of the following is not one of them?

A.using related diversification to acquire economies of scope leveraging pooled negotiating power

B.using related diversification to acquire market power by leveraging core competencies

C.using unrelated diversification to acquire financial synergies through portfolio management

D.using related diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting

They can use unrelated diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting.

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Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

79.ConAgra, a diversified food producer, increases its power over suppliers by centrally purchasing huge quantities of packaging materials for all of its food divisions. This is an example of using

A.related diversification to acquire economies of scope by leveraging pooled negotiating power.

B.related diversification to acquire market power by leveraging pooled negotiating power.

C.unrelated diversification to acquire financial synergies through portfolio management.

D.unrelated diversification to acquire parenting, restructuring, and financial synergies through restructuring and parenting.

ConAgra uses pooled negotiating power to enhance market power. They do this to increase their power over suppliers by centrally purchasing huge quantities of packaging materials for all of its food divisions.

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Blooms: Understand
Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

80.Proctor and Gamble is a large multinational organization that has many business sharing distribution resources. Diversification strategies take advantage of the __________ that exist in their organization.

A.costs

B.employees

C.synergies

D.discontinuities

Why should companies even bother with diversification initiatives? The answer, in a word, is synergy, derived from the Greek word synergos, which means working together. Firms can also enhance their market power via pooled negotiating power and vertical integration. For example, Procter and Gamble enjoys many synergies from having businesses that share distribution resources.

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Blooms: Understand
Learning Objective: 06-02 How managers can create value through diversification initiatives.
Level of Difficulty: 2 Medium
Topic: Making Diversification Work: An Overview

81.Casio, a giant electronic products producer, synthesizes it abilities in miniaturization, microprocessor design, material science, and ultrathin precision castings to produce digital watches. It uses the same skills to produce card calculators, digital cameras, and other small electronics. These collective skills are known as

A.core competencies.

B.strategic resources.

C.shared activities.

D.economies of scope.

Core competencies reflect the collective learning in organizations, which is how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services. In some circumstances, a core competence can create value and provide a viable basis for synergy among the businesses in a corporation. Casio, a giant electronic products producer, synthesizes its abilities in miniaturization, microprocessor design, material science, and ultrathin precision castings to produce digital watches. These are the same skills it applies to design and produce its miniature card calculators, digital cameras, pocket electronic dictionaries, and other small electronics.

AACSB: Analytical Thinking
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Blooms: Understand
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Economies of Scope and Revenue Enhancement

82.For a core competence to be a viable basis for the corporation strengthening a new business unit, there are three requirements. Which one of the following is not one of these requirements?

A.The competence must help the business gain strength relative to its competition.

B.The new business must be similar to existing businesses to benefit from a core competence.

C.The new business must have an established large market share.

D.The collection of competencies should be unique, so that they cannot be easily imitated.

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: the core competence must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and the core competencies must be difficult for competitors to imitate or find substitutes for.

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Blooms: Understand
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Economies of Scope and Revenue Enhancement

83.Sharing core competencies is one of the primary potential advantages of diversification. In order for diversification to be most successful, it is important that the

A.products use similar distribution channels.

B.similarity required for sharing core competencies must be in the value chain.

C.target market is the same, even if the products are very different.

D.methods of production are the same.

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, different businesses in the corporation must be similar in at least one important way related to the core competence. It is not essential that the products or services themselves be similar, but at least one element in the value chain must require similar skills in creating competitive advantage.

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Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Economies of Scope and Revenue Enhancement

84.When management uses common production facilities or purchasing procedures to distribute different but related products, they are

A.building on core competencies.

B.achieving process gains.

C.using portfolio analysis.

D.sharing activities.

Corporations can achieve synergy by sharing activities across their business units. These include value-creating activities such as common manufacturing facilities, distribution channels, and sales forces.

AACSB: Analytical Thinking
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Blooms: Understand
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Economies of Scope and Revenue Enhancement

85.Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input into its manufacturing process. This is an example of

A.vertical integration.

B.sharing activities.

C.pooled negotiating power.

D.leveraging core competencies.

Shaw Industries, a carpet manufacturer, has attained a dominant position in the industry via a strategy of vertical integration. Shaw has successfully implemented strategies of both forward and backward integration.

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Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 3 Hard
Topic: Related Diversification through Market Power

86.The risks of vertical integration include all of the following except

A.costs and expenses associated with increased overhead and capital expenditures.

B.lack of control over valuable assets.

C.problems associated with unbalanced capacities along the value chain.

D.additional administrative costs associated with managing a more complex set of activities.

The risks of vertical integration include costs and expenses associated with increased overhead and capital expenditures, loss of flexibility resulting from large investments, problems associated with unbalanced capacities along the value chain, and additional administrative costs associated with managing a more complex set of activities.

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Blooms: Understand
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Market Power

87.Unbalanced capacities that limit cost savings, difficulties in combining specializations, and reduced flexibility are disadvantages associated with

A.strategic alliances.

B.vertical integration.

C.horizontal integration.

D.divestiture.

The risks of vertical integration include costs and expenses associated with increased overhead and capital expenditures, loss of flexibility resulting from large investments, problems associated with unbalanced capacities along the value chain, and additional administrative costs associated with managing a more complex set of activities.

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Blooms: Understand
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Market Power

88.A firm should consider vertical integration when

A.the competitive situation is highly volatile.

B.customer needs are evolving.

C.the suppliers of raw materials to the firm are unable to maintain quality standards.

D.the suppliers of the firm willingly cooperate with the firm.

A firm should consider vertical integration if the company is not satisfied with the quality of the value that its present suppliers and distributors are providing.

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Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Market Power

89.Transaction costs include all of the following costs except

A.agency costs.

B.negotiating costs.

C.search costs.

D.monitoring costs.

Transaction costs are the sum of search costs, negotiation costs, contracting costs, monitoring costs, and enforcement costs. These transaction costs can be avoided by internalizing the activity, in other words, by producing the input in-house.

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Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 1 Easy
Topic: Related Diversification through Market Power

90.Vertical integration is attractive when

A.internal administrative costs are higher than transaction costs.

B.transaction costs and internal administrative costs are equal.

C.transaction costs are higher than internal administrative costs.

D.search costs are higher than monitoring costs.

If transaction costs are higher than administrative costs, that is, those costs incurred when coordinating the activities elsewhere in the value chain, vertical integration becomes an attractive strategy.

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Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Level of Difficulty: 2 Medium
Topic: Related Diversification through Market Power

91.Creating value within business units can happen when the corporate office helps subsidiaries make wise choices in their own acquisitions, divestures, and new ventures. This is known as

A.parenting.

B.restructuring.

C.leveraging core competencies.

D.increasing market power.

Parent companies create value through management expertise. They improve plans and budgets and provide especially competent central functions such as legal, financial, human resource management, and procurement. They also help subsidiaries make wise choices in their own acquisitions, divestitures, and new internal development decisions.

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Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
Level of Difficulty: 2 Medium
Topic: Unrelated Diversification through Financial Synergies and Parenting

92.Creating value within business units can happen when a firm tries to find and acquire either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change. This action is known as

A.restructuring.

B.leveraging core competencies.

C.parenting.

D.sharing activities.

In restructuring, the corporate office tries to find poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change. The parent intervenes, often selling off parts of the business; changing the management; reducing payroll and unnecessary sources of expenses; changing strategies; and infusing the company with new technologies, processes, or reward systems.

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Blooms: Understand
Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
Level of Difficulty: 2 Medium
Topic: Unrelated Diversification through Financial Synergies and Parenting

93.According to the text, corporate restructuring includes

A.capital restructuring, asset restructuring, and technology restructuring.

B.capital restructuring, asset restructuring, and management restructuring.

C.management restructuring, financial restructuring, and procurement restructuring.

D.global diversification, capital restructuring, and asset restructuring.

Restructuring can involve changes in assets, capital structure, or management.

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Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
Level of Difficulty: 2 Medium
Topic: Unrelated Diversification through Financial Synergies and Parenting

94.Portfolio management matrices are applied to what level of strategy?

A.departmental level

B.business level

C.corporate level

D.international level

Corporate-level strategy addresses two related issues: what businesses should a corporation compete in and how can these businesses be managed so they create synergy. Portfolio management matrices can be used to improve understanding of the competitive position of a portfolio (or family) of businesses, to suggest strategic alternatives, and to identify priorities for the allocation of resources.

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Blooms: Understand
Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
Level of Difficulty: 2 Medium
Topic: Unrelated Diversification through Financial Synergies and Parenting

95.When using a BCG matrix, a business that currently holds a large market share in a rapidly growing market and has minimal or negative cash flow would be known as a

A.Star.

B.Dog.

C.Cash Cow.

D.Question Mark.

Each of the four quadrants of the BCG Portfolio grid has different implications for the SBUs that fall into that category. Stars are SBUs competing in high-growth industries with relatively high market shares. These firms have long-term growth potential and should continue to receive substantial investment funding.

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Level of Difficulty: 1 Easy
Topic: Unrelated Diversification through Financial Synergies and Parenting

96.In the BCG Matrix, a business that has a low market share in an industry characterized by high market growth is termed a

A.Star.

B.Cash Cow.

C.Question Mark.

D.Dog.

Each of the four quadrants of the BCG Portfolio grid has different implications for the SBUs that fall into that category. Question Marks are SBUs competing in high-growth industries but having relatively weak market shares. Resources should be invested in them to enhance their competitive positions.

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Topic: Unrelated Diversification through Financial Synergies and Parenting

97.Portfolio management frameworks, such as the BCG matrix, share which of the following characteristics?

A.Businesses are plotted on a 3-dimensional grid.

B.Grid dimensions are based on external environments and internal capabilities-market positions.

C.Position in the matrix suggests a need for sharing synergies.

D.They are most helpful in helping businesses develop types of competitive advantage.

Portfolio models are overly simplistic, consisting of only two dimensions (growth and market share). They view each business as separate, ignoring potential synergies across businesses.

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Topic: Unrelated Diversification through Financial Synergies and Parenting

98.A Cash Cow, in the BCG framework, refers to a business that has

A.high market growth and relatively high market share.

B.relatively low market share and low market growth.

C.relatively low market share and high market growth.

D.low market growth and relatively high market share.

Each of the four quadrants of the BCG Portfolio grid has different implications for the SBUs that fall into that category. Cash Cows are SBUs with high market shares in low-growth industries. These units have limited long-run potential but represent a source of current cash flows to fund investments in Stars and Question Marks.

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Topic: Unrelated Diversification through Financial Synergies and Parenting

99.In managing the corporate portfolio, the BCG matrix would suggest that

A.Dogs should be invested in to increase market share and become Cash Cows.

B.Stars are in low growth markets and can provide excess cash to fund other opportunities.

C.Cash Cows require substantial cash outlays to maintain market share.

D.Question Marks can represent future Stars if their market share is increased.

Each of the four quadrants of the BCG Portfolio grid has different implications for the SBUs that fall into that category. Question Marks are SBUs competing in high-growth industries but having relatively weak market shares. Resources should be invested in them to enhance their competitive positions, potentially making them Stars.

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Topic: Unrelated Diversification through Financial Synergies and Parenting

100.In the BCG Growth Share Matrix, the suggested strategy for Stars is to

A.milk them to finance other businesses.

B.invest large sums to gain a good market share.

C.maintain position and after the market growth slows use the business to provide cash flow.

D.not invest in them and to shift cash flow to other businesses.

Stars are SBUs competing in high-growth industries with relatively high market shares. These firms have long-term growth potential and should continue to receive substantial investment funding. When growth slows, they may become Cash Cows themselves.

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Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
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Topic: Unrelated Diversification through Financial Synergies and Parenting

101.The primary means by which a firm can diversify are __________, _________, and ________.

A.mergers and acquisitions; differentiation; overall cost leadership

B.mergers and acquisitions; joint ventures and strategic alliances; internal development

C.joint ventures and strategic alliances; integration of value chain activities; acquiring human capital

D.mergers and acquisitions; internal development; differentiation

There are three basic means of diversification: First, through acquisitions or mergers, corporations can directly acquire company assets and competencies. Second, corporations may agree to pool the resources of other companies with their resource base, commonly known as a joint venture or strategic alliance. Third, corporations may diversify into new products, markets, and technologies through internal development.

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Level of Difficulty: 2 Medium
Topic: The Means to Achieve Diversification

102.The downsides or limitations of mergers and acquisitions include all of the following except:

A.It is a slow means to enter new markets and acquire skills and competences.

B.Difficulties exist in integrating the activities and resources of the acquired firm into on-going operations.

C.There can be many cultural issues that can doom an otherwise promising acquisition.

D.Premiums that are frequently paid to acquire a business are expensive.

There are several limitations of mergers and acquisitions including that takeover premiums paid for acquisitions are typically very high, competing firms often can imitate any advantages or copy synergies that result from the merger or acquisition, manager egos sometimes get in the way of sound business decisions, and cultural issues may doom the intended benefits from M and A endeavors.

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Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.
Level of Difficulty: 2 Medium
Topic: The Means to Achieve Diversification

103.Divesting of businesses can accomplish many different objectives, except

A.enabling managers to focus their efforts more directly on the core businesses of the firm.

B.providing the firm with more resources to spend on more attractive alternatives.

C.raising cash to help fund existing businesses.

D.dispersing manager focus.

Divesting a business can accomplish many different objectives including: enabling managers to focus their efforts more directly on the core businesses of the firm, providing the firm with more resources to spend on more attractive alternatives, and raising cash to help fund existing businesses.

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Topic: The Means to Achieve Diversification

104.IBM, Memorial Sloan Kettering, and Cedars-Sinai have a _________ whereby IBM receives expert medical knowledge that it uses to leverage its technological skills to develop new medical insights.

A.joint diversification

B.divestment

C.strategic alliance

D.global integration

Strategic alliances may be used to build jointly on the technological expertise of two or more companies. This may enable then to develop products technologically beyond the capability of the companies acting independently.

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Topic: The Means to Achieve Diversification

105.Cooperative relationships such as __________ have potential advantages such as entering new markets, reducing manufacturing (or other) costs in the value chain, and developing and diffusing new technologies.

A.franchises

B.mergers

C.acquisitions

D.joint ventures and strategic alliances

Strategic alliances and joint ventures have many potential advantages. Among these are entering new markets, reducing manufacturing (or other) costs in the value chain, and developing and diffusing new technologies.

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Level of Difficulty: 2 Medium
Topic: The Means to Achieve Diversification

106.Which of the following is not part of a good guideline list for managing strategic alliances?

A.establishing a clear understanding between partners

B.not shortchanging your partner

C.relying primarily on a contract to make the joint venture work

D.working hard to ensure a collaborative relationship between partners

Strategic alliances and joint ventures should ensure the strengths contributed by the partners are unique; thus synergies created can be more easily sustained over the longer term. The goal is to develop synergies between partner contributions, resulting in a win-win situation. Moreover, the partners must be compatible and willing to trust each other. These partnerships may be undertaken with or without a contract.

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Topic: The Means to Achieve Diversification

107.Which of the following statements regarding internal development as a means of diversification is false?

A.Many companies use internal development to extend their product or service offers.

B.An advantage of internal development is that it is generally faster than other means of diversification and firms can benefit from speed in developing new products and services.

C.The firm is able to capture wealth created without having to share the wealth with alliance partners.

D.Firms can often develop products or services at a lower cost, if they rely on their own resources instead of external funding.

Potential disadvantages to internal development include that it may be time consuming and that firms may forfeit the benefits of speed that growth through mergers can provide. This may be important to high-tech or a knowledge-based organization in fast-paced environments in which being an early mover is critical.

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Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.
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Topic: The Means to Achieve Diversification

108.Internal development may be time consuming and, therefore, firms may forfeit the benefits of speed that growth through __________ and __________ can provide.

A.strategic alliances; joint ventures

B.strategic alliances; mergers

C.mergers; acquisitions

D.mergers; joint ventures

There are potential disadvantages to internal development. It may be time consuming; firms may forfeit the benefits of speed that growth through mergers or acquisitions can provide. This may be important among high-tech or a knowledge-based organization in fast-paced environments, where being an early mover is critical.

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Topic: The Means to Achieve Diversification

109.Firms that choose to diversify through internal development must develop _________ that allow them to move __________ from initial opportunity recognition to market introduction.

A.strategies; slowly

B.capabilities; quickly

C.capabilities; slowly

D.strategies; quickly

Firms that choose to diversify through internal development must develop capabilities that allow them to move quickly from initial opportunity recognition to market introduction.

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Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.
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Topic: The Means to Achieve Diversification

110.Lionsgate (a Canadian-American entertainment company) and Alibaba (a Chinese e-commerce company) created _________ to open the Chinese market for the Lionsgate streaming shows and movies. Alibaba profits by getting access to content to increase demand for its own set-top media boxes.

A.a joint venture

B.a merger

C.an acquisition

D.a strategic alliance

A strategic alliance is a cooperative relationship between two (or more) firms. Alliances may be either informal or formal. Such cooperative relationships have many potential advantages, including entering new markets and diffusing new technologies.

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Learning Objective: 06-05 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development.
Level of Difficulty: 2 Medium
Topic: The Means to Achieve Diversification

111.According to Michael Porter, there is a tremendous allure to _________. It is the big play, the dramatic gesture. With one stroke of the pen you can add billions to size, get a front-page story, and create excitement in markets.

A.strategic alliances and joint ventures

B.internal development

C.mergers and acquisitions

D.differentiation strategies

There is an excitement and associated recognition of making a major acquisition. Michael Porter of Harvard University noted that there is a tremendous allure to mergers and acquisitions. It is the big play, the dramatic gesture. With one stroke of the pen you can add billions to size, get a front-page story, and create excitement in markets.

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Level of Difficulty: 3 Hard
Topic: How Managerial Motives Can Erode Value Creation

112.The antitakeover tactic, _______, is when a firm offers to buy shares of their stock from a company (or individual) planning to acquire their firm at a higher price than the unfriendly company paid for it.

A.golden parachute

B.poison pill

C.greenmail

D.scorched earth

Greenmail is an effort by the target firm to prevent an impending takeover. When a hostile firm buys a large block of outstanding target company stock and the target company management feels that a tender offer is impending, they offer to buy the stock back from the hostile company at a higher price than the unfriendly company paid for it.

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Topic: How Managerial Motives Can Erode Value Creation

113.An antitakeover tactic in which existing shareholders have the option to buy additional shares of stock at a discount to the current market price is called ______.

A.greenmail

B.a golden parachute

C.a poison pill

D.scorched earth

Poison pills are an antitakeover tactic used by a company to give shareholders certain rights in the event of a takeover by another firm. They are also known as shareholder rights plans.

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Topic: How Managerial Motives Can Erode Value Creation

114.The term golden parachute refers to

A.a clause requiring that huge dividend payments be made upon takeover.

B.pay given to executives fired because of a takeover.

C.financial inducements offered by a threatened firm to stop a hostile suitor from acquiring it.

D.managers of a firm in a hostile takeover approaching a third party about making the acquisition.

A golden parachute is a prearranged contract with managers specifying that, in the event of a hostile takeover, the target company managers will be paid a significant severance package.

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Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.
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115.Antitakeover tactics include all of the following except

A.greenmail.

B.poison pills.

C.golden parachutes.

D.golden handcuffs.

Antitakeover tactics are common, including greenmail, golden parachutes, and poison pills.

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Chapter 07

International Strategy: Creating Value in Global Markets

True / False Questions

1.The trend towards worldwide markets makes it easier to predict where competitors will spring up.

True False

2.Because many countries are investing in countries other than their own, each country is becoming more autonomous and independent.

True False

3.Increasing international exchange in goods and services can run into the difficulty of having one offer that meets the needs of customers at differing income levels.

True False

4.By 2015, it is predicted that trade within nations will exceed trade across nations.

True False

5.There are risks associated with the Bottom of the Pyramid strategy. One of them is that the new low-cost products that are developed may cannibalize the sales of the core products of the company using the strategy.

True False

6.Emerging markets are growing slower than developed markets, thus shifting the structure of the global economy.

True False

7.Multinational companies, like GE, take advantage of globalization to tap into talent around the world in order to build products.

True False

8.The shift in the global automobile market over the past several years, in which China supplanted the U.S. at the largest market for automobiles in 2009, is an example of how the structure of the global economy is unchanging.

True False

9.According to The Economist article explained in Exhibit 7.1 in the textbook, the rate of GDP growth is the highest in the European Union and the United States.

True False

10.Globalization is a term used to mean the growing dissimilarity of laws, rules, norms, values and ideas across countries.

True False

11.The Michael Porter Diamond of National Advantage is a framework that explains why countries foster successful multinational corporations based on factor endowments and demand conditions only.

True False

12.The factor endowments of a country are inherited and cannot be created.

True False

13.With regard to factor conditions, the pool of resources that a firm (or nation) has is much more important than the speed and efficiency with which these resources are deployed.

True False

14.Demanding domestic consumers tend to push firms to move ahead of companies in other countries where consumers are less demanding and more complacent.

True False

15.High levels of environmental awareness in Denmark have led to a decline in Danish industrial competitiveness in the international marketplace.

True False

16.Countries with a strong supplier base benefit by adding efficiency to downstream activities.

True False

17.Typically, intense rivalry in domestic markets does not force firms to look outside their national boundaries for new markets.

True False

18.Rivalry is particularly intense in nations with conditions of strong consumer demand, strong supplier bases, and high new-entrant potential from related industries.

True False

19.The Indian software industry has become one of the leading global markets for software. The industry has grown to over 60 billion USD, and Indian IT firms provide software and services to over half the Fortune 500 firms. This success is being driven by factor endowments such as a large, growing market with sophisticated customers.

True False

20.The Indian software industry has become one of the leading global markets for software. The industry has grown to over 60 billion USD, and Indian IT firms provide software and services to over half the Fortune 500 firms. This success is being driven by related and supporting industries such as a large network of public and private educational institutions.

True False

21.Many international firms are increasing their efforts to market their products and services to countries such as India and China as the ranks of their middle class continue to increase.

True False

22.Expanding the global presence of a firm automatically increases its scale of operations.

True False

23.Arbitrage opportunities are simple trading opportunities and therefore account for little of the success Walmart experiences.

True False

24.Arbitrage opportunities in global financial markets are more attractive to global companies than local corporations, because they enable them to buy in huge volume and therefore increase their bargaining power with suppliers.

True False

25.International expansion can extend the life cycle of a product that is in its maturity stage in the company home country.

True False

26.A disadvantage of international expansion is that it can enable a firm to optimize the location of every activity in its value chain.

True False

27.The laws and the enforcement of laws associated with the protection of intellectual property rights represent a significant currency and management risk to multinational firms.

True False

28.Reverse innovation occurs when a company develops a product that meets the needs of a developed country and then adapts it to the needs of the developing country.

True False

29.The World Bank publishes the Euromoney magazine Country Risk Rating semiannual report. In the text, the January 2013 sampling of these ratings indicates that Norway is the best country in which to invest in terms of its expected level of risk based on the evaluation of its political, economic and structural risks and debt indicators and access to capital.

True False

30.Firms can lessen political instability and adverse government actions risks by: competing in a range of geographic markets, developing stakeholder coalitions, cultivating relationships with key influences, and including key public-private stakeholders in their boards.

True False

31.Two opposing pressures that managers face when they compete in foreign markets are cost reduction and adaptation to foreign markets.

True False

32.Theodore Levitt, a marketing strategist, argued that people around the world are willing to sacrifice preferences in product features, functions, and design for lower prices and lower quality.

True False

33.Among the assumptions of Theodore Levitt that would favor a global strategy is that consumers around the world are becoming less price-sensitive.

True False

34.Within a worldwide market, the most effective strategies are neither purely multidomestic nor purely global.

True False

35.Customer needs and interests are becoming increasingly divergent worldwide, according to Theodore Levitt.

True False

36.The Nestle line of pizzas marketed in the United Kingdom includes cheese with ham and pineapple topping on a French bread crust. This is an example of company adaptation to global markets.

True False

37.In addition to responding to pressures to lower costs, managers must strive to be responsive to global pressures in order to tailor their products to the demand of the local market in which they do business.

True False

38.Since the strategies and tactics to differentiate products and services to local markets can involve additional expenses, company costs will tend to fall.

True False

39.In choosing one of the four basic strategies for competing in the global marketplace (international, global, multidomestic, transnational), the strategy that a company selects depends upon the degree of pressure that it is facing for revenues.

True False

40.As the pressure to lower costs increases, firms move toward selecting global and transnational strategies for competing in the global marketplace.

True False

41.Industries in which proportionally more value is added in upstream activities are more likely to benefit from a global strategy than those in which more value is added downstream (closer to the customer).

True False

42.In a global strategy a firm operates all of its businesses under a single common strategy, regardless of location.

True False

43.A multidomestic strategy is the most appropriate strategy for international operations, because it drives economies of scale as far as possible and provides a middle-of-the-road product that appeal to the largest number of consumers in every market.

True False

44.The need to attain economies of scale encourages multinational firms to operate under a multidomestic strategy.

True False

45.Corporations with multiple foreign operations that act very independently of one another are following a multidomestic strategy.

True False

46.A multidomestic strategy would likely include the use of high volume, centralized production facilities to maximize economies of scale.

True False

47.A limitation of a multidomestic strategy is that it may lead to over-adaptation as conditions change.

True False

48.Multinational firms following a transnational strategy strive to optimize the trade-offs associated with efficiency, local adaptation, and learning.

True False

49.A key tenet of a transnational strategy is improved adaptation to all competitive situations as well as flexibility by capitalizing on communication and knowledge flows throughout the organization.

True False

50.Panasonic needed to change its strategy in the 1980s in order to respond to demographic and economic changes in China. As the Chinese middle class began to emerge, local companies responded with competitive products. Panasonic then changed its strategy from a transnational strategy to a global strategy.

True False

51.According to studies by Rugman and Verbeke, most of the 500 largest companies in the world are global.

True False

52.Trading blocs and free trade zones promote the rise of international expansion.

True False

53.Traditionally, company globalization is measured in terms of its foreign sales as a percentage of total sales, but this can be confused with regionalization.

True False

54.A U.S. firm expands into China and Canada at exactly the same sales volume. The physical distance is the only factor that affects the true distance between the countries.

True False

55.The U.S. and Australia have common language and culture and yet the true distance is great.

True False

56.The U.S. and Mexico are close geographically and so is the true distance.

True False

57.Major Western hemisphere trade blocs include NAFTA, Mercosur, and ASEAN.

True False

58.A natural regional trade bloc based upon language affinity is the region from Algeria and Morocco to Oman and Yemen.

True False

59.Central and South America are not part of a natural regional bloc because they only share language, religion, and colonization history.

True False

60.The European Union is a trading bloc that eases trade restrictions, taxes, and tariffs for its members.

True False

61.A franchise generally expires after a few years, whereas a license is designed to last into perpetuity.

True False

62.Typically, joint ventures involve less control and risk than franchising.

True False

63.Typically, the least risky method of entry into a foreign market is through the establishment of a wholly owned foreign subsidiary so that the parent organization can maintain a high level of control.

True False

64.Exporting is an expensive way to enter foreign markets.

True False

65.When considering the exporting decision, companies should consider that the ability to tailor their products to meet local market needs typically is very limited.

True False

66.When considering the export decision, firms should not partner with local distributors because many foreign markets are nationally regulated.

True False

67.Licensing is a contractual arrangement that involves a long period of time and includes factors such as monitoring of operations, training, and advertising.

True False

68.In international markets, a disadvantage of licensing is that the firm granting a license incurs little risk, since it does not have to invest any significant resources into the country itself.

True False

69.Wholly owned subsidiaries are least appropriate where a firm already has the appropriate knowledge and capabilities that it can leverage rather easily through multiple locations.

True False

70.Wholly owned subsidiaries are typically the most expensive and risky entry mode. The risk is shared, however, with the company partners.

True False

Multiple Choice Questions

71.Which of the following is not a risk normally associated with Bottom of the Pyramid strategies?

A.A low-end version of a brand may detract from the overall brand attractiveness.

B.The new low-cost products they develop may cannibalize the sales of their core products.

C.Entrenched competitors can impact the ability of the new firm to enter the market successfully.

D.New products may be perceived as exploiting the privileged customer with substandard products.

72.Multinational firms are constantly faced with the dilemma of choosing between _______ and __________.

A.local adaptation; local integration

B.local adaptation; global integration

C.global adaptation; local integration

D.global adaptation; global integration

73.The rise of _________ capitalism around the world creates tremendous business opportunities for multinational corporations.

A.social

B.multinational

C.market

D.democratic

74.According to Exhibit 7.1 in the textbook, the country experiencing the highest rate of growth in GDP from 2001-2011 was

A.the United States.

B.Japan.

C.China.

D.India.

75.According to Exhibit 7.1 in the textbook, the country experiencing the lowest rate of growth in GDP from 2001-2011 was

A.the United States.

B.China.

C.India.

D.Japan.

76.Globalization opens the doors for companies to attract new customers. One of the challenges is to determine how to meet the needs of these customers who have

A.different income levels.

B.low income levels.

C.high income levels.

D.steady income levels.

77.The trade among nations has increased dramatically in recent years, and it is estimated that by 2015 the trade ________ nations will exceed the trade _______ nations.

A.within; across

B.across; within

C.with; outside of

D.above; within

78.When the GE wind energy business tapped into world-wide talent, it was able to expand using a(n) _________________ strategy.

A.focus

B.diversification

C.unrelated

D.generic

79.Statistics indicate that over half of the world output now comes from emerging markets. This is leading to a(n) ___________ of living standards across the globe and is changing the face of business.

A.divergence

B.convergence

C.expansion

D.contraction

80.According to the textbook, globalization involves international exchange. Included in this exchange is trade in goods and services as well as the exchange of __________, __________, and _________ across countries.

A.habits; values; ideas

B.traditions; legal systems; history

C.money; ideas; information

D.statistics; personnel; purchasing power

81.In the Porter Diamond of National Advantage framework, which of the following factors does not affect nation competitiveness?

A.The position of the nation in factors of production necessary to compete in a given industry.

B.The presence or absence in the nation of internationally competitive supplier industries.

C.The conditions in the nation governing the nature of foreign rivalry.

D.The nature of home-market demand of the products or services of the industry.

82.Rivalry is intense in nations with conditions of __________ consumer demand, __________ supplier bases, and __________ new entrant potential from related industries.

A.weak; weak; high

B.strong; strong; low

C.weak; weak; low

D.strong; strong; high

83.According to Michael Porter, firms that have experienced intense domestic competition are

A.unlikely to have the time or resources to compete abroad.

B.more likely to demand protection from their governments.

C.most likely to design strategies aimed primarily at the domestic market.

D.more likely to design strategies that will allow them to successfully compete abroad.

84.Which of the factors below has not made the software services industry in India extremely competitive on a global scale?

A.large pool of skilled workers

B.large, growing market and sophisticated customers

C.tax and antitrust legislation that protects the dominant players in the industry

D.large network of public and private educational institutions

85.In reviewing the Indian Software industry and the diamond of national advantage, which of the following is a growing detractor to the national competitive advantage in this industry?

A.large pool of skilled workers

B.eroding cost advantage of Indian firms

C.rapidly improving communications infrastructure

D.large, growing market and sophisticated customers

86.In reviewing the Indian Software industry and the diamond of national advantage, which of the following is a growing detractor to the national competitive advantage in this industry?

A.English-language capability

B.growing market and sophisticated, customers

C.duty-free access to imported computers and software

D.rise of competing low-labor-cost countries

87.In reviewing the Indian Software industry and the diamond of national advantage, which of the following is a relatively weak set of factors in the national competitive advantage in this industry?

A.U.S. demand conditions

B.Factor endowments

C.Domestic rivalry

D.Domestic demand conditions

88.Countries with demanding consumers, like environmentally-concerned Denmark, drive __________ to meet the demand.

A.worldwide innovation

B.in-country innovation

C.foreign manufacturing

D.global exchange

89.Related industries create the probability that new companies will enter the market. This ________ competition and forces existing firms to improve ___________.

A.decreases, innovation

B.decreases, efficiency

C.increases, efficiency

D.increases, sales

90.Which of these points on the Porter diamond of national advantage is the strongest indicator of global competitive success?

A.foreign rivalry

B.domestic rivalry

C.global rivalry

D.international rivalry

91.Which of the following is not a motivation for a company to pursue international expansion?

A.It wishes to increase the size of the potential markets for its products and services.

B.It wishes to take advantage of arbitrage opportunities in order to increase profit.

C.It wishes to optimize value-chain activities to enhance performance, reduce costs, and reduce risk.

D.It wishes to increase foreign market penetration by developing products for the home market.

92.If a company is considering optimizing the physical location for every activity in the value chain, which of the following is not a possible strategic advantage for that decision?

A.Performance enhancement

B.Cost reduction

C.Political risk reduction

D.Life-cycle enhancement

93.The sale of Boeing commercial aircraft and Microsoft operating systems in many countries enables these companies to benefit from

A.higher prices in their domestic markets.

B.reducing their exposure to currency risks.
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