Strategic Management 8Th Ed By Dess -Test Bank

Strategic Management 8Th Ed By Dess -Test Bank

Chapter 06

Corporate-Level Strategy: Creating Value through Diversification

True / False Questions

1.

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.