TRUE/FALSE
1. In 2005, Gillette was acquired by Proctor & Gamble (P&G). This is an example of business level
strategic action initiated by P&G.
4. A major advantage of diversification is that overall monitoring costs are reduced, since each separate
business comes under the control of corporate headquarters.
5. Successful product diversification is expected to increase the variability in the firm’s profitability,
since the earnings are generated from several different business units.
11. Blocking competitors through multipoint competition is a strategy used by related diversified firms to
create value.
12. PepsiCo uses its own distribution system to deliver multiple Pepsi branded beverage products. Pepsi
recently acquired Gatorade and delivers these products using the Pepsi distribution system. This use of Pepsi’s outbound logistics is an example of activity sharing.
13. P&G acquired Gillette Co. and created the Crest Pro-Health label by combining P&G’s Crest with
Gillette’s Oral-B brands. This is an example of achieving synergies through sharing activities.
15. In a money-making effort, a small private university has decided to institute consulting services using
its business faculty as consultants whose services would be sold to clients. This university is attempting to use its faculty to gain economies of scope.
16. When firms share activities across units, they are often able to achieve increased value.
21. Vertical integration exists when a company produces its own inputs (forward integration) or owns its
own source of output distribution (backward integration).
26. Virtual integration tends to erode the relationships between suppliers and customers as personal
contacts are replaced with impersonal electronic communications.
29. An unrelated diversification strategy can create value through two types of financial economies, (1)
efficient internal capital allocations and (2) purchasing other firms, restructuring their assets, and selling them.
32. Unrelated diversification has been the norm for the most successful firms in many industrialized
countries such as Germany, Italy, and France.
35. When implementing a restructuring strategy a company would do best by focusing on mature,
low-technology businesses.
38. Low performance is associated with increased diversification.
39. Performance continues to increase as diversification increases from single business to unrelated
diversification.
41. Related diversification by a firm tends to reduce a manager’s executive compensation, whereas
unrelated diversification tends to increase it because the firm has moved into new industries.MULTIPLE CHOICE
1. In 2005, P&G, whose products include Crest toothpaste and Tide laundry detergent, purchased Gillette.
Gillette itself had multiple businesses, including a range of products including electric toothbrushes, razors and batteries. Which of the following reflects the acquisition?
a. It is unrelated diversification for P&G because Gillette consists of more than one business
unit.
b. It is unrelated diversification for Gillette because P&G consists of more than one business
unit.
c. It is related diversification for P&G because the product lines for both firms are consumer
products sold through similar channels.
d. It is related diversification for Gillette because the product lines for both firms are
consumer products sold through similar channels.
3. On the most basic level, corporate-level strategy is concerned with ____ and how to manage these
businesses.
a. whether the firm should invest in global or domestic businesses b. what product markets and businesses the firm should be in
c. whether the portfolio of businesses should generate immediate above-average returns or
should be troubled businesses which will create above-average returns only after
4.
6.
7.
9.
11.
12.
13.
15.
16.
restructuring
d. whether to integrate backward or forward.
The ultimate test of the value of a corporate-level strategy is whether the a. corporation earns a great deal of money.
b. top management team is satisfied with the corporation's performance.
c. businesses in the portfolio are worth more under the management of the company in
question than they would be under any other ownership.
d. businesses in the portfolio increase the firm’s financial returns.
Wm. Wrigley Jr. Company once made only chewing gum. When Wrigley bought Life Savers (a line of candy mints) and Altoids (a line of breadth mints) from Kraft, chewing gum then constituted less than 95 percent of revenues. Thus, Wrigley
a. was moving away from its traditional single-business strategy toward a dominant strategy. b. was moving away from its traditional dominant strategy toward a related-linked strategy. c. became a conglomerate since Life Savers and Altoids are unrelated businesses. d. probably planned to restructure these companies and sell them off.
Usually a company is classified as a single business firm when revenues generated by the dominant business are greater than ____ percent. a. 99 b. 95 c. 90 d. 70
A firm that earns less than 70% of revenue from its dominant business and has direct connections between its businesses is engaging in ____ diversification. a. unrelated
b. related constrained c. related linked
d. dominant-business
Which acquisition would be considered the LEAST related?
a. a candy manufacturer purchases a chemical laboratory specializing in food flavorings b. a chain of garden centers acquires a landscape architecture firm c. a hospital acquires a long-term care nursing home
d. an upscale “white-tablecloth” restaurant chain acquires a travel agency The lowest level of diversification is the ____ level. a. single business b. dominant-business c. related constrained d. unrelated
The main difference between the related constrained level of diversification and the related linked level of diversification is
a. the percentage of total organizational profitability that comes from the dominant business. b. the level of resources and activities shared among the businesses. c. whether the diversification is vertical or horizontal.
d. whether the diversification is value-creating or value-neutral.
GE has recently reorganized from eleven businesses down to six core businesses. The purpose of this reorganization is to transfer core competencies in different types of technologies among GE’s businesses. This is an example of
a. increasing market power through vertical integration. b. efficient internal capital allocation. c. a focus on financial economies. d. increasing corporate relatedness.
Which of the following reasons for diversification is most likely to increase the firm’s value? a. increasing managerial compensation
b. reducing costs through business restructuring c. taking advantage of changes in tax laws
17.
19.
23.
25.
29.
31.
32.
34.
35.
39.
d. conforming to antitrust regulation
Which of the following is a value-reducing reason for diversification? a. enhancing the strategic competitiveness of the entire company
b. expanding the business portfolio in order to reduce managerial employment risk c. gaining market power relative to competitors d. conforming to antitrust regulation
Firms that have selected a related diversification corporate-level strategy seek to exploit a. control shared among business-unit managers. b. economies of scope between business units. c. the favorable demand of buyers. d. market power.
The acquisition of Gillette Co. by Procter & Gamble will probably result in activity sharing because P&G has a reputation for technology transfer: the ability to take technology used in one brand and apply it to another brand. This is an example of a. operational relatedness. b. corporate relatedness. c. vertical integration. d. virtual integration.
Research has shown that horizontal acquisitions
a. tend to have disappointing financial results in the long run. b. are being replaced by virtual acquisitions.
c. result in lower levels of performance than unrelated acquisitions.
d. are able to use activity sharing to successfully create economies of scope.
In related linked diversified firms, ____ are a complex set of resources that link the different businesses through managerial and technological knowledge, experience, and expertise. a. corporate core competencies b. strategies
c. support activities d. intangible assets
Multipoint competition occurs when a. firms have multiple retail outlets.
b. firms have multiple products in their primary industry.
c. diversified firms compete against each other in several markets. d. firms have diversified portfolios of companies.
One method of facilitating the transfer of competencies between firms is to a. virtually integrate the two firms.
b. transfer key people into new management positions. c. share support activities, such as purchasing practices. d. restructure the weaker firm to mirror the structure of the more successful firm.
Acquisitions to increase market power require that the firm have a ____ diversification strategy. a. unrelated b. related
c. dominant-business d. single business
When diversification results in two companies, such as UPS and FedEx, simultaneously competing in numerous markets, this is called ____ competition. a. multiple b. multiportal c. multipoint d. mutiplicit
Backward integration occurs when a company a. produces its own inputs.
b. owns its own source of distribution of outputs.
43.
45.
46.
48.
50.
55.
56.
60.
c. is concentrated in a single industry. d. is divesting unrelated businesses.
Specialty Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve the high temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare and only two brick plants in the U.S. make this type of brick. Specialty Steel has decided to buy one of these brick plants. This is an example of a. backward integration. b. forward integration. c. horizontal integration. d. virtual integration.
The use of e-commerce to allow firms to reduce the costs of processing transactions while improving their supply-chain management skills and tightening the control of their inventories is beginning to replace
a. outsourcing.
b. unrelated diversification. c. de-integration. d. vertical integration.
Disney has been successful both in the sharing of activities among divisions and in the transfer of knowledge among divisions. Disney can be said to have created a. dynamic stability.
b. inimitable competencies. c. cross-fertilization. d. synthesis.
Firms are increasingly moving away from ____ integration and toward ____ integration. a. virtual; vertical b. virtual; virtuous c. virtuous; vertical d. vertical; virtual ANS: D PTS: 1 DIF: Medium REF: 163 OBJ: 06-04 TYPE: knowledge
NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control
Which type of diversification is most likely to create value through financial economies? a. related constrained
b. operational and corporate relatedness c. unrelated d. related linked.
Successful unrelated diversification through restructuring is typically accomplished by a. focusing on mature, low-technology businesses.
b. a “random walk” of good luck in picking firms to buy.
c. seeking out high technology firms in high growth industries.
d. a top management team that is not constrained by pre-established ideas of how the firm’s
portfolio should be developed.
The risk for firms that follow the unrelated diversification strategy in developed economies is that a. external investors tend to dump the stocks of conglomerates during economic downturns. b. conglomerates are typically owned by one powerful entrepreneur and do not survive
his/her retirement or death.
c. government regulations, especially in Europe, have periodically forced the dissolution of
conglomerates.
d. competitors can imitate financial economies more easily than they imitate economies of scope.
All of the following are internal firm incentives to diversify EXCEPT
a. overall firm risk reduction. b. uncertain future cash flows.
c. stricter interpretation of antitrust laws. d. low performance. 63. Free cash flows are
a. liquid financial assets for which investments in current businesses are no longer
economically viable.
b. liquid financial assets that for tax purposes must be reinvested in the firm if not distributed
as dividends to shareholders.
c. the profits resulting after a restructured firm has been sold.
d. dividends that have been distributed to shareholders that are taxed as capital gains.
66. As the threat of corporate failure increases due to relatedness between a firm’s business units, firms
may decide to
a. increase the firm’s level of retained resources. b. diversify into less risky environments.
c. reduce the level of diversity in its investments. d. pursue unproven product lines. 67. Synergy exists when
a. cost savings are realized through improved allocations of financial resources based on
investments inside or outside the firm.
b. two units create value by utilizing market power in their respective industries. c. firms utilize constrained related diversification to build an attractive portfolio of
businesses.
d. the value created by business units working together exceeds the value the units create
when working independently.
71. Compared with diversification based on intangible resources, diversification based on financial
resources is
a. less imitable and less likely to create value on a long-term basis. b. more imitable and less likely to create value on a long-term basis c. less imitable and more likely to create value on a long-term basis d. more imitable and more likely to create value on a long-term basis ANS: B PTS: 1 DIF: Hard REF: 171 OBJ: 06-06 TYPE: comprehension
NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing strategy & innovation
72. Personal motives for managers to seek diversification include a desire to
a. improve their marketability to other firms. b. effectively use corporate resources.
c. provide higher returns to corporate stakeholders. d. increase their compensation.
75. Which of the following is NOT a governance mechanism that may limit managerial tendencies to
over-diversify?
a. the market for corporate control b. the Board of Directors c. surveillance technologies d. monitoring by owners ESSAY
1. Differentiate between corporate-level and business-level strategies and give examples of each. 2. What are the five categories of businesses based on level of diversification? 3. Describe the primary reasons a firm pursues increased diversification.
5. What are the two ways that an unrelated diversification strategy can create value? 7. What are the managerial motives to diversify?
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