Theory of Strategic Management with Cases International Edition by Charles W. L. Hill – Test Bank

Theory of Strategic Management with Cases International Edition by Charles W. L. Hill – Test Bank

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

TRUE/FALSE

1. Diversification is the process of a company entering new industries distinct from its core industry, using a multibusiness model.

ANS: T PTS: 1 DIF: Easy

OBJ: 1 – Differentiate between multibusiness models based on related and unrelated diversification

NAT: AACSB Analytic | Strategy KEY: Knowledge

2. Free cash flow refers to additional funds from a government stimulus program.

ANS: F PTS: 1 DIF: Easy

OBJ: 1 – Differentiate between multibusiness models based on related and unrelated diversification

NAT: AACSB Analytic | Creation of Value KEY: Knowledge

3. If a company generates free cash flow, that money technically belongs to shareholders.

ANS: T PTS: 1 DIF: Moderate

OBJ: 1 – Differentiate between multibusiness models based on related and unrelated diversification

NAT: AACSB Analytic | Creation of Value KEY: Knowledge

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

ANS: T PTS: 1 DIF: Easy

OBJ: 2 – Explain the five primary ways in which diversification can increase company profitability

NAT: AACSB Analytic | Strategy KEY: Knowledge

5. A 100-year-old industrial giant, 3M serves as an example of how a company can leverage technology to create successful new business.

ANS: T PTS: 1 DIF: Moderate

OBJ: 2 – Explain the five primary ways in which diversification can increase company profitability

NAT: AACSB Technology | Information Technologies KEY: Application

6. If a company’s core skills are highly specialized and have few applications outside the core business, then a company should pursue a related diversification strategy.

ANS: F PTS: 1 DIF: Moderate

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Strategy KEY: Comprehension

7. A company should pursue related diversification only to enhance the competitive position of its core business.

ANS: T PTS: 1 DIF: Moderate

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Strategy KEY: Comprehension

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

ANS: T PTS: 1 DIF: Easy

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Creation of Value KEY: Knowledge

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

ANS: F PTS: 1 DIF: Moderate

OBJ: 2 – Explain the five primary ways in which diversification can increase company profitability

NAT: AACSB Analytic | Strategy KEY: Comprehension

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

ANS: F PTS: 1 DIF: Moderate

OBJ: 2 – Explain the five primary ways in which diversification can increase company profitability

NAT: AACSB Analytic | Creation of Value KEY: Knowledge

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

ANS: T PTS: 1 DIF: Easy

OBJ: 2 – Explain the five primary ways in which diversification can increase company profitability

NAT: AACSB Analytic | Creation of Value KEY: Knowledge

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

ANS: T PTS: 1 DIF: Moderate

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Strategy KEY: Knowledge

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

ANS: F PTS: 1 DIF: Moderate

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Strategy KEY: Comprehension

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

ANS: F PTS: 1 DIF: Moderate

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Strategy KEY: Comprehension

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

ANS: T PTS: 1 DIF: Easy

OBJ: 4 – Describe the three methods companies use to enter new industries: internal new venturing, acquisitions, and joint ventures NAT: AACSB Analytic | Strategy

KEY: Knowledge

16. A company can increase the probability of success of an internal venture by constructing efficient scale manufacturing facilities ahead of demand.

ANS: T PTS: 1 DIF: Moderate

OBJ: 4 – Describe the three methods companies use to enter new industries: internal new venturing, acquisitions, and joint ventures NAT: AACSB Analytic | Strategy

KEY: Knowledge

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

ANS: F PTS: 1 DIF: Moderate

OBJ: 5 – Discuss the advantages and disadvantages associated with each of these methods

NAT: AACSB Analytic | Strategy KEY: Knowledge

18. Reasearch finds that the higher the number of business units in a company’s portfolio, the easier it is for corporate managers to remain informed about the complexities of each business.

ANS: F PTS: 1 DIF: Moderate

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Strategy KEY: Comprehension

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

ANS: T PTS: 1 DIF: Moderate

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Creation of Value KEY: Knowledge

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

ANS: F PTS: 1 DIF: Moderate

OBJ: 5 – Discuss the advantages and disadvantages associated with each of these methods

NAT: AACSB Analytic | Strategy KEY: Knowledge

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

ANS: T PTS: 1 DIF: Easy

OBJ: 5 – Discuss the advantages and disadvantages associated with each of these methods

NAT: AACSB Analytic | Strategy KEY: Knowledge

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

ANS: T PTS: 1 DIF: Easy

OBJ: 5 – Discuss the advantages and disadvantages associated with each of these methods

NAT: AACSB Analytic | Strategy KEY: Knowledge

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

ANS: F PTS: 1 DIF: Difficult

OBJ: 4 – Describe the three methods companies use to enter new industries: internal new venturing, acquisitions, and joint ventures NAT: AACSB Reflective Thinking | Strategy

KEY: Application

24. Sara Lee Corp., a baking firm, purchased Platex Apparel Inc. This purchase helped to make Sara Lee Corp. one of the largest makers of women’s apparel in the United States. Sara Lee Corp. utilized a diversification strategy

ANS: T PTS: 1 DIF: Difficult

OBJ: 1 – Differentiate between multibusiness models based on related and unrelated diversification

NAT: AACSB Reflective Thinking | Strategy KEY: Application

25. At Burger King, multiple items such as a cheeseburger, french fries, and a drink are combined together to create a complete meal. This is an example of diversification.

ANS: F PTS: 1 DIF: Difficult

OBJ: 2 – Explain the five primary ways in which diversification can increase company profitability

NAT: AACSB Reflective Thinking | Strategy KEY: Application

MULTIPLE CHOICE

26. The three main types of diversification strategies are

a.

Acquisitions, joint ventures, and divestments.

b.

Acquisitions, mergers, and buy outs.

c.

Acquisitions, internal new ventures, and joint ventures.

d.

Related acquisitions, unrelated acquisitions, and mergers.

e.

Joint ventures, strategic alliances, and long-term contracts.

ANS: C PTS: 1 DIF: Easy

OBJ: 1 – Differentiate between multibusiness models based on related and unrelated diversification

NAT: AACSB Analytic | Strategy KEY: Knowledge

27. Free cash flow is defined as

a.

money in a company’s bank account.

b.

government funds given to a company for meeting Environmental Protection Agency (EPA) regulations.

c.

additional funds donated by stockholders.

d.

cash in excess of that required to fund investments in the company’s industry and to meet any debt commitments.

e.

money borrowed by the company that requires no interest payments.

ANS: D PTS: 1 DIF: Easy

OBJ: 1 – Differentiate between multibusiness models based on related and unrelated diversification

NAT: AACSB Analytic | Creation of Value KEY: Knowledge

28. Companies that base their diversification strategy on transferring competencies tend to acquire new businesses that are ____ to their existing business activities.

a.

unrelated

b.

not comparable

c.

opposed

d.

related

e.

identical

ANS: D PTS: 1 DIF: Moderate

OBJ: 2 – Explain the five primary ways in which diversification can increase company profitability

NAT: AACSB Analytic | Strategy KEY: Knowledge

29. Leveraging competencies involves taking a distinctive competency developed by a business unit in one industry to create

a.

a new business unit in the same industry.

b.

a new business unit in a different industry.

c.

a new industry.

d.

a new market segment.

e.

new customers in the same industry.

ANS: B PTS: 1 DIF: Moderate

OBJ: 2 – Explain the five primary ways in which diversification can increase company profitability

NAT: AACSB Analytic | Strategy KEY: Knowledge

30. Product bundling refers to

a.

preparation of products for shipment.

b.

a complete package of related products.

c.

a method of stocking products efficiently.

d.

an inventory procedure for ensuring effective counting of products.

e.

a package of unrelated products.

ANS: B PTS: 1 DIF: Easy

OBJ: 2 – Explain the five primary ways in which diversification can increase company profitability

NAT: AACSB Analytic | Strategy KEY: Knowledge

31. General organizational competencies refer to competencies

a.

existing in individual business units.

b.

existing in individual functional units.

c.

existing in the industry in which a company operates.

d.

that can be procured in the marketplace.

e.

that transcend individual functions or business units.

ANS: E PTS: 1 DIF: Moderate

OBJ: 2 – Explain the five primary ways in which diversification can increase company profitability

NAT: AACSB Analytic | Strategy KEY: Knowledge

32. What is the process of transferring resources to and creating a new business unit in a new industry called?

a.

External new venturing

b.

Exportation of resources

c.

Intrapreneuring

d.

Risk avoidance

e.

Internal new venturing

ANS: E PTS: 1 DIF: Moderate

OBJ: 4 – Describe the three methods companies use to enter new industries: internal new venturing, acquisitions, and joint ventures NAT: AACSB Analytic | Strategy

KEY: Comprehension

33. When a company has cash in excess of the amount needed to maintain a competitive advantage in its core business, it will most likely pursue

a.

taper integration.

b.

full integration.

c.

diversification.

d.

long-term contracts.

e.

strategic alliances.

ANS: C PTS: 1 DIF: Moderate

OBJ: 4 – Describe the three methods companies use to enter new industries: internal new venturing, acquisitions, and joint ventures NAT: AACSB Analytic | Strategy

KEY: Comprehension

34. Which diversification strategy is based on the idea that the company creates value by applying the distinctive competencies it developed in one line of business to another business activity?

a.

A technology acquisition strategy

b.

Related diversification

c.

A restructuring strategy

d.

Total diversification

e.

A taper diversification strategy

ANS: B PTS: 1 DIF: Moderate

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Strategy KEY: Comprehension

35. Which of the following statements is not generally true of a diversification strategy based on the realization of economies of scope?

a.

The head office evaluates each business unit as a stand-alone operation.

b.

The strategy allows a company to realize cost economies from sharing manufacturing facilities, distribution channels, advertising campaigns, and research and development costs among business units.

c.

The strategy may allow a company to use shared resources more intensively, thereby realizing economies of scale.

d.

Managers must be aware of the costs of coordination.

e.

The strategy requires close coordination among different business units.

ANS: A PTS: 1 DIF: Difficult

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Creation of Value KEY: Comprehension

36. Which of the following may be true for a company pursuing a strategy of unrelated diversification rather than a strategy of related diversification?

a.

The company does not have to achieve coordination between business units.

b.

The company has broad organizational competencies that can be transferred.

c.

The company has superior strategic management and organizational design.

d.

All of these

e.

None of these

ANS: D PTS: 1 DIF: Moderate

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Strategy KEY: Comprehension

37. A diversification strategy based on resource sharing

a.

entails a company creating value by applying the distinctive competencies it developed in one line of business to another line of business.

b.

requires the development of new business-level strategies.

c.

can help a company to realize economies of scope.

d.

is a valid way of supporting the generic business-level strategy of differentiation.

e.

increases the accountability of units.

ANS: C PTS: 1 DIF: Moderate

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Creation of Value KEY: Comprehension

38. General organizational competencies are found

a.

in the skills of a company’s top managers and functional experts.

b.

at low levels in the organization.

c.

among technology professionals.

d.

within a company’s strategic core.

e.

in an organization’s tangible resources.

ANS: A PTS: 1 DIF: Moderate

OBJ: 2 – Explain the five primary ways in which diversification can increase company profitability

NAT: AACSB Analytic | Strategy KEY: Knowledge

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

a.

Entrepreneurial capabilities

b.

Capabilities in organizational design

c.

Superior strategic capabilities

d.

Product bundling

e.

All of these

ANS: D PTS: 1 DIF: Moderate

OBJ: 2 – Explain the five primary ways in which diversification can increase company profitability

NAT: AACSB Analytic | Strategy KEY: Comprehension

40. A company should pursue related diversification instead of unrelated diversification when the company’s

a.

core skills are applicable to a wide variety of industrial and commercial situations.

b.

core skills are highly specialized and have few applications outside the core business.

c.

top managers are skilled at acquiring and turning around poorly run enterprises.

d.

main objective is to maximize growth.

e.

free cash flow is high enough that it has funds available for investment.

ANS: A PTS: 1 DIF: Difficult

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Strategy KEY: Comprehension

41. A company should pursue unrelated diversification instead of related diversification when

a.

its core skills are highly specialized and have few applications outside its core business.

b.

the company’s top managers are skilled at acquiring and turning around poorly run enterprises.

c.

its core technological skills are applicable to a wide variety of industrial and commercial situations.

d.

it wants to maximize growth.

e.

the bureaucratic costs of implementation do not exceed the value that can be created by realizing economies of scope.

ANS: A PTS: 1 DIF: Difficult

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Strategy KEY: Comprehension

42. When one or more components of a company’s value chain are applicable to a wide variety of industrial and commercial situations, which of the following strategies should a company pursue?

a.

Unrelated diversification

b.

Related diversification

c.

A focus strategy

d.

Taper integration

e.

Backward integration

ANS: B PTS: 1 DIF: Moderate

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Strategy KEY: Comprehension

43. A strategy based on diversification may fail to add value because companies

a.

seek to achieve differentiation instead of low cost.

b.

diversify into areas in which they have some knowledge and miss out on profitable opportunities in other areas.

c.

make acquisitions rather than develop new technologies on their own.

d.

incur bureaucratic costs that exceed the value created by the strategy.

e.

seek to achieve cost leadership instead of differentiation.

ANS: D PTS: 1 DIF: Moderate

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Strategy KEY: Knowledge

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

a.

realizing economies of scope.

b.

pooling risks.

c.

transferring competencies.

d.

acquisitions and restructuring.

e.

leveraging existing competencies.

ANS: B PTS: 1 DIF: Moderate

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Strategy KEY: Knowledge

45. In which of the following cases are bureaucratic costs likely to be lowest?

a.

A vertically integrated company with five divisions that pursues full integration

b.

A company with five divisions that pursues related diversification based on economies of scope

c.

A company with five divisions that pursues related diversification based on transferring competencies

d.

A company with five divisions that pursues unrelated diversification based on acquisitions and restructuring

e.

A company with twenty divisions that pursues taper integration

ANS: D PTS: 1 DIF: Difficult

OBJ: 3 – Discuss the conditions that lead managers to pursue related diversification versus unrelated diversification and explain why some companies pursue both strategies

NAT: AACSB Analytic | Strategy KEY: Comprehension

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

a.

entry barriers are high.

b.

exit barriers are high.

c.

a company’s business model is based on using its technology to innovate new kinds of products for related markets.

d.

the company needs more mega-opportunities.

e.

the industry is in the mature stage of the industry life cycle.

ANS: C PTS: 1 DIF: Moderate

OBJ: 4 – Describe the three methods companies use to enter new industries: internal new venturing, acquisitions, and joint ventures NAT: AACSB Technology | Strategy

KEY: Knowledge

47. New ventures

a.

should be killed if they don’t make a profit within three years.

b.

are often preferred by technology-based companies.

c.

are preferred compared to acquisitions when entry barriers are high.

d.

are less risky than acquisitions.

e.

are best when the company is entering the industry on a small scale.

ANS: B PTS: 1 DIF: Easy

OBJ: 4 – Describe the three methods companies use to enter new industries: internal new venturing, acquisitions, and joint ventures NAT: AACSB Technology | Strategy

KEY: Knowledge

48. Which of the following statements concerning research and development is correct?

a.

Exploratory research is more important than development research.

b.

Development research is more important than exploratory research.

c.

Exploratory research is directed toward commercialization of a new technology.

d.

Development research advances basic science.

e.

Companies with a strong record of internal new venturing excel at both types of research.

ANS: E PTS: 1 DIF: Moderate

OBJ: 4 – Describe the three methods companies use to enter new industries: internal new venturing, acquisitions, and joint ventures NAT: AACSB Analytic | Strategy

KEY: Comprehension

49. In which of the following industry environments are new ventures most likely to be favored over acquisitions as a means of entering a new business area?

a.

An embryonic industry

b.

An industry in its later stages of growth

c.

An industry passing through the shakeout stage

d.

A mature industry

e.

A declining industry

ANS: A PTS: 1 DIF: Moderate

OBJ: 4 – Describe the three methods companies use to enter new industries: internal new venturing, acquisitions, and joint ventures NAT: AACSB Analytic | Strategy

KEY: Comprehension

50. To be commercially successful, new products must be developed with ____ utmost in mind.

a.

manufacturing requirements

b.

engineering technology

c.

customer requirements

d.

sales techniques

e.

technical requirements

ANS: C PTS: 1 DIF: Easy

OBJ: 4 – Describe the three methods companies use to enter new industries: internal new venturing, acquisitions, and joint ventures NAT: AACSB Analytic | Strategy

KEY: Knowledge

51. If a company is to increase the probability of a new product’s commercial success, the company must foster close links between

a.

marketing and sales.

b.

engineering and advertising.

c.

quality assurance and inventory management.

d.

research and development (R&D) and marketing.

e.

accounting and industrial engineering.

ANS: D PTS: 1 DIF: Moderate

OBJ: 4 – Describe the three methods companies use to enter new industries: internal new venturing, acquisitions, and joint ventures NAT: AACSB Analytic | Strategy

KEY: Knowledge

52. Which of the following seems to be a major determinant of a new venture’s success?

a.

Large-scale entry into the target industry designed to build market share, even when such entry involves significant short-term losses

b.

Cautious small-scale entry into the target industry so that the company can assess the probable outcome of the venture without losing too much money

c.

A low level of integration between the marketing and the research and development functions of the venturing company

d.

Supporting many new venture projects in the hope that one will succeed

e.

Killing the new venture if it does not show a profit after the end of the third year

ANS: A PTS: 1 DIF: Difficult

OBJ: 5 – Discuss the advantages and disadvantages associated with each of these methods

NAT: AACSB Analytic | Strategy KEY: Comprehension