Chap 006

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

Answer Key
True / False Questions
1. (p. 204) Whenever an organization diversifies, it represents investing a stockholder's funds in

a way in which the individual investor is unable.
FALSE
Diversification initiatives must be justified by the creation of value for shareholders. But this
is not always the case. Acquiring firms typically pay high premiums when they acquire a
target firm. In contrast, private investors can diversify their portfolio of stocks very cheaply.
AACSB: Analytic
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
2. (p. 204) Diversification that results in strengthening the value chain and increasing
competitive advantages is the best possible example of investing stockholders' funds in a way
that individual investors cannot.
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: Analytic
Blooms: Understand
6-1
3. (p. 205) 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; that is, value creation derived from the
corporate office. Horizontal relationships are the primary benefit of diversification into related
businesses.
AACSB: Analytic
Blooms: Understand
4. (p. 207) A newly acquired business must always have products that are similar to the existing
businesses' products to benefit from the corporation's core competence.
FALSE
It is not essential that the products or services themselves be similar. Rather, at least one
element in the value chain must require similar skills in creating competitive advantage if the
corporation is to capitalize on its core competence.
AACSB: Analytic
Blooms: Understand
Learning Objective: 06-03 How corporations can use related diversification to achieve synergistic benefits through economies of scope and
market power.
Topic: Related Diversification: Economies of Scope and Revenue Enhancement
6-2
5. (p. 208) Sharing activities across business units can provide two primary benefits: cost savings
and revenue enhancements.
TRUE
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: Analytic
Blooms: Understand
market power.
6. (p. 209) Sharing activities among business units can have a negative effect on a given
business's differentiationas in the example of Daimler-Benz's acquisition of Chrysler.
TRUE
Managers must keep in mind that sharing activities among businesses in a corporation can
have a negative effect on a given business's differentiation. For example, with the merger of
Chrysler and Daimler-Benz, many consumers may lower their perceptions of Mercedes's
quality and prestige because they felt that common production components and processes
were being used across the two divisions.
AACSB: Analytic
Blooms: Understand
market power.
6-3
7. (p. 209) Market power refers to cost savings from leveraging core competencies or sharing
activities among the businesses in a corporation.
FALSE
Market power refers to firms' abilities to profit through restricting or controlling supply to a
market or coordinating with other firms to reduce investment.
AACSB: Analytic
Blooms: Remember
market power.
Level of Difficulty: 1 Easy
Topic: Related Diversification: Market Power
8. (p. 209-210) The two principal means by which firms achieve synergy through market power
are pooled negotiating power and corporate parenting.
FALSE
The two principal means by which firms achieve synergy through market power are pooled
negotiating power (the improvement in bargaining position relative to suppliers and
customers) and vertical integration (an expansion or extension of the firm by integrating
preceding or successive production processes).
AACSB: Analytic
Blooms: Remember
market power.
6-4
9. (p. 209) Similar businesses working together or the affiliation of a business with a strong
parent can strengthen a firm's bargaining position relative to suppliers and customers.
TRUE
Similar businesses working together or the affiliation of a business with a strong parent can
strengthen an organization's bargaining position relative to suppliers and customers and
enhance its position vis--vis competitors.
AACSB: Analytic
Blooms: Understand
market power.
10. (p. 210) A firm that incorporates more processes toward the original source of raw materials
is an example of forward integration.
FALSE
Vertical integration occurs when a firm becomes its own supplier or distributor. The firm
incorporates more processes toward the original source of raw materials (backward
integration) or toward the ultimate consumer (forward integration).
AACSB: Analytic
Blooms: Understand
market power.
6-5
11. (p. 210) A publishing company that purchases a chain of bookstores to sell its books is an
example of unrelated diversification.
FALSE
This is an example of vertical integration, when a firm becomes its own supplier or
distributor. Here, the firm incorporates more processes toward the ultimate consumer (forward
integration).
AACSB: Analytic
Blooms: Apply
market power.
Level of Difficulty: 3 Hard
12. (p. 212) One of the risks of vertical integration is that there may be problems associated with
unbalanced capacities or unfilled demands along a firm's value chain.
TRUE
The risks of vertical integration include (1) the costs and expenses associated with increased
overhead and capital expenditures to provide facilities, raw material inputs, and distribution
channels inside the organization; (2) a loss of flexibility resulting from the inability to respond
quickly to changes in the external environment because of the huge investments in vertical
integration activities that generally cannot be easily deployed elsewhere; (3) problems
associated with unbalanced capacities or unfilled demand along the value chain; and (4)
additional administrative costs associated with managing a more complex set of activities. See
Exhibit 6.4.
AACSB: Analytic
Blooms: Understand
market power.
6-6
13. (p. 213) Vertical integration should be undertaken when demand for the organization's
products is very unstable.
FALSE
High demand or sales volatility are not conducive to vertical integration. With the high level
of fixed costs in plant and equipment as well as operating costs that accompany endeavors
toward vertical integration, widely fluctuating sales demand can either strain resources (in
times of high demand) or result in unused capacity (in times of low demand).
AACSB: Analytic
Blooms: Understand
market power.
14. (p. 213) Market transactions do not involve transaction costs.

FALSE
One approach that has proved very useful in understanding vertical integration is the
transaction cost perspective. According to this perspective, every market transaction involves
some transaction costs.
AACSB: Analytic
Blooms: Understand
market power.
6-7
15. (p. 214) Vertical integration is attractive when market transaction costs are higher than
internal administrative costs.
TRUE
Decisions about vertical integration are based on a comparison of transaction costs and
administrative costs. If transaction costs are higher than administrative costs, vertical
integration becomes an attractive strategy.
AACSB: Analytic
Blooms: Understand
market power.
16. (p. 214) According to the text, the two main sources of synergy in unrelated diversification
are parenting and financial synergies via portfolio management.
TRUE
With unrelated diversification, potential benefits can be gained from vertical (or hierarchical)
relationships, the creation of synergies from the interaction of the corporate office with the
individual business units. There are two main sources of such synergies, "parenting" and
"financial" synergies.
AACSB: Analytic
Blooms: Remember
Learning Objective: 06-04 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring;
parenting; and portfolio analysis.
Topic: Unrelated Diversification: Financial Synergies and Parenting
6-8
17. (p. 215) 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: Analytic
Blooms: Understand
18. (p. 216, 218) 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 (or family) of businesses, to suggest strategic alternatives for each of the
businesses, and to identify priorities for the allocation of resources, but it does have
limitations such as being overly simplistic.
AACSB: Analytic
Blooms: Understand
6-9
19. (p. 216) 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's (BCG) growth/share matrix is among the best known of the
portfolio management tools. In the BCG approach, each of the firm's strategic business units
(SBUs) is plotted on a two-dimensional grid in which the axes are relative market share and
industry growth rate.
AACSB: Analytic
Blooms: Remember
20. (p. 219) 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 a firm's
variability in revenues and profits over time. That is, 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 manufacturing lawn mowers may diversify into snow
blowers to even out its annual sales.
AACSB: Analytic
Blooms: Understand
6-10
21. (p. 221-222) 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. Speedspeed to market,
speed to positioning, and speed to becoming a viable companyis critical in such industries.
Alex Mandl, AT&T's former president, claimed that getting new cellular technology through
"acquiring is much faster than building."
AACSB: Analytic
Blooms: Understand
Learning Objective: 06-05 The various means of engaging in diversification-mergers and acquisitions; joint ventures/strategic alliances;
and internal development.
Topic: The Means to Achieve Diversification
22. (p. 223) Among the disadvantages of acquisitions are the expensive premiums that are
frequently paid to acquire a business.
TRUE
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: Analytic
Blooms: Understand
6-11
23. (p. 226) 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: Analytic
Blooms: Remember
24. (p. 226) 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: Analytic
Blooms: Understand
25. (p. 226) For strategic alliances to be effective, reliance on written contracts to delimit
responsibilities and enforce compliance is vital.
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: Analytic
Blooms: Understand
6-12
26. (p. 228) 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: Analytic
Blooms: Understand
27. (p. 228) 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: Analytic
Blooms: Understand
6-13
28. (p. 229) 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's 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 a week
prior to abandoning these ventures.
AACSB: Analytic
Blooms: Understand
Learning Objective: 06-06 Managerial behaviors that can erode the creation of value.
Topic: How Managerial Motives Can Erode Value Creation
29. (p. 232) 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 firm's 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: Analytic
Blooms: Remember
6-14
30. (p. 232) A golden parachute is a prearranged contract with managers specifying that, in the
event of a hostile takeover, the target firm's 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 firm's managers will be paid a significant severance package.
Although top managers lose their jobs, the golden parachute provisions protect their income.
AACSB: Analytic
Blooms: Understand
Multiple Choice Questions
31. (p. 201) Corporate-level strategy addresses two related issues:

A. how to compete in a given business; the application of technology.
B. what businesses to compete in; how these businesses can achieve synergy.
C. how to integrate primary activities; increase shareholder wealth.
D. how to improve a firm's infrastructure; how to maintain ethical behavior.
Corporate-level strategy addresses two related issues: (1) what businesses should a
corporation compete in, and (2) how can these businesses be managed so they create
"synergy", that is, more value by working together than if they were freestanding units.
AACSB: Analytic
Blooms: Remember
Learning Objective: 06-01 The reasons for the failure of many diversification efforts.
Topic: Diversification Failures
6-15
32. (p. 204) Individual investors are dependent upon the corporation's managers to
A. diversify the stockholder's investments in order to reduce risk.
B. add value to their investments in a way that the stockholders could not accomplish on their
own.
C. achieve risk reduction at a lower cost than stockholders could obtain on their own.
D. maximize short-term returns in the form of dividends.
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. But this is not always the case. Acquiring firms typically pay high premiums
when they acquire a target firm. In contrast, private investors can diversify their portfolio of
stocks very cheaply.
AACSB: Analytic
Blooms: Understand
33. (p. 205) McKesson, a large distribution company, sells many product lines such as
pharmaceuticals and liquor through its super warehouses. This is an example of
A. achieving economies of scope through related diversification.
B. achieving market power through related diversification.
C. attaining the benefits of restructuring through unrelated diversification.
D. attaining the benefits of parenting through unrelated diversification.
McKesson, a large distribution company, sells many product lines, such as pharmaceuticals
and liquor, through its superwarehouses. According to Exhibit 6.2, this is an example of
related diversification utilizing economies of scope.
Refer to Exhibit 6.2
AACSB: Analytic
Blooms: Understand
6-16
34. (p. 206) Philip Morris bought Miller Brewing and used its marketing expertise to improve
Miller's market share. This justification for diversification is best described as
A. utilizing common infrastructures.
B. capitalizing on core competencies.
C. reducing corporate risk.
D. using portfolio analysis.
Core competencies reflect the collective learning in organizationshow 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.
AACSB: Analytic
Blooms: Apply
market power.
35. (p. 205) The corporate office of Cooper Industries adds value to its acquired businesses by
performing such activities as auditing their manufacturing operations, improving their
accounting activities, and centralizing union negotiations. This is an example of
A. achieving economies of scope through related diversification.
B. achieving market power through related diversification.
C. attaining the benefits of horizontal integration.
D. attaining the benefits of parenting through unrelated diversification.
The corporate office of Cooper Industries adds value to its acquired businesses by performing
such activities as auditing their manufacturing operations, improving their accounting
activities, and centralizing union negotiations. This is an example of unrelated diversification
utilizing corporate restructuring and parenting.
AACSB: Analytic
Blooms: Apply
6-17
36. (p. 206) __________ reflect(s) the collective learning in organizations such as how to
coordinate production skills, integrate multiple streams of technologies, and market and
merchandise diverse products and services.
A. Primary value chain activities
B. Culture
C. Core competencies
D. Horizontal integration
Core competencies reflect the collective learning in organizations, how to coordinate diverse
production skills, integrate multiple streams of technologies, and market diverse products and
services.
AACSB: Analytic
Blooms: Understand
market power.
37. (p. 206-207) 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 collection of competencies should be unique, so that they cannot be easily imitated.
D. The new business must have an established large market share.
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(s) 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.
AACSB: Analytic
Blooms: Remember
market power.
6-18
38. (p. 207) Sharing core competencies is one of the primary potential advantages of
diversification. In order for diversification to be most successful, it is important that
A. the similarity required for sharing core competencies must be in the value chain, not in the
product.
B. the products use similar distribution channels.
C. the target market is the same, even if the products are very different.
D. the 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. Rather, at least one element in the value chain must require
similar skills in creating competitive advantage.
AACSB: Analytic
Blooms: Understand
market power.
39. (p. 208) When management uses common production facilities or purchasing procedures to
distribute different but related products, they are
A. building on core competencies.
B. sharing activities.
C. achieving process gains.
D. using portfolio analysis.
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: Analytic
Blooms: Remember
market power.
6-19
40. (p. 210) 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. leveraging core competencies.
B. sharing activities.
C. vertical integration.
D. pooled negotiating power.
Shaw Industries, a carpet manufacturer that 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. Exhibit 6.3 depicts the stages of Shaw's vertical
integration.
AACSB: Analytic
Blooms: Apply
market power.
41. (p. 212) 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.
AACSB: Analytic
Blooms: Understand
market power.
6-20
42. (p. 212) Unbalanced capacities that limit cost savings, difficulties in combining
specializations, and reduced flexibility are disadvantages associated with
A. strategic alliances.
B. divestment.
C. vertical integration.
D. horizontal integration.
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.
AACSB: Analytic
Blooms: Understand
market power.
43. (p. 213) A firm should consider vertical integration when

A. the competitive situation is highly volatile.
B. customer needs are evolving.
C. the firm's suppliers willingly cooperate with the firm.
D. the firm's suppliers of raw materials are often unable to maintain quality standards.
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.
AACSB: Analytic
Blooms: Understand
market power.
6-21
44. (p. 214) It may be advantageous to vertically integrate when

A. lower transaction costs and improved coordination are vital and achievable through vertical
integration.
B. the minimum efficient scales of two corporations are different.
C. flexibility is reduced, providing a more stationary position in the competitive environment.
D. various segregated specializations will be combined.
If transaction costs are higher than administrative costs, those incurred when coordinating the
activities previously elsewhere in the value chain, vertical integration becomes an attractive
strategy.
AACSB: Analytic
Blooms: Understand
market power.
45. (p. 213) Transaction costs include all of the following costs EXCEPT
A. search costs.
B. negotiating costs.
C. monitoring costs.
D. agency costs.
Transaction costs are thus 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.
AACSB: Analytic
Blooms: Remember
market power.
6-22
46. (p. 214) Vertical integration is attractive when

A. transaction costs are higher than internal administrative costs.
B. internal administrative costs are higher than transaction costs.
C. transaction costs and internal administrative costs are equal.
D. search costs are higher than monitoring costs.
If transaction costs are higher than administrative costs, those incurred when coordinating the
activities previously elsewhere in the value chain, vertical integration becomes an attractive
strategy.
AACSB: Analytic
Blooms: Understand
market power.
47. (p. 214-215) __________ is when a firm's corporate office helps subsidiaries make wise
choices in their own acquisitions, divestures, and new ventures.
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.
AACSB: Analytic
Blooms: Remember
6-23
48. (p. 215) __________ is 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.
A. Parenting
B. Restructuring
C. Leveraging core competencies
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.
AACSB: Analytic
Blooms: Remember
49. (p. 215) According to the text, corporate restructuring includes

A. capital restructuring, asset restructuring, and technology restructuring.
B. global diversification, capital restructuring, and asset restructuring.
C. management restructuring, financial restructuring, and procurement restructuring.
D. capital restructuring, asset restructuring, and management restructuring.
Restructuring can involve changes in assets, capital structure, or management.

AACSB: Analytic
Blooms: Remember
6-24
50. (p. 216) 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: (1) what businesses should a
corporation compete in, and (2) 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.
AACSB: Analytic
Blooms: Understand
51. (p. 217) When using a BCG matrix, a business that currently holds a large market share in a
rapidly growing market and that has minimal or negative cash flow would be known as a
A. cow.
B. dog.
C. problem child.
D. star.
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.
AACSB: Analytic
Blooms: Remember
6-25
52. (p. 217) In the BCG (Boston Consulting Group) Matrix, a business that has a low market
share in an industry characterized by high market growth is termed a
A. star.
B. question mark.
C. cash cow.
D. dog.
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.
AACSB: Analytic
Blooms: Remember
53. (p. 219) Portfolio management frameworks (e.g., BCG matrix) share which of the following
characteristics?
A. Grid dimensions are based on external environments and internal capabilities/market
positions.
B. Businesses are plotted on a 3-dimensional grid.
C. Position in the matrix suggests a need for, or ability to share, infrastructures or build on
core competences.
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.
AACSB: Analytic
Blooms: Remember
6-26
54. (p. 217) A "cash cow," referred to in the Boston Consulting Group Portfolio management
technique, refers to a business that has
A. low 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. high market growth and relatively high market share.
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."
AACSB: Analytic
Blooms: Remember
55. (p. 217) In managing a firm's 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. "question marks" can represent future "stars" if their market share is increased.
D. "cash cows" require substantial cash outlays to maintain market share.
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".
AACSB: Analytic
Blooms: Understand
6-27
56. (p. 217) In the Boston Consulting Group's (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. not invest in them and to shift cash flow to other businesses.
D. maintain position and after the market growth slows use the business to provide cash flow.
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.
AACSB: Analytic
Blooms: Understand
57. (p. 218) All of the following are limitations (or downsides) of the BCG (Boston Consulting
Group) matrix EXCEPT
A. every business cannot be accurately measured and compared on the two dimensions.
B. it views each business as a stand-alone entity and ignores the potential for synergies across
businesses.
C. it takes a dynamic view of competition which can lead to overly complex analyses.
D. while easy to comprehend, the BCG matrix can lead to some troublesome and overly
simplistic prescriptions.
There are some notable downsides to portfolio models. They compare SBUs on only two
dimensions, making the erroneous assumption that (1) those are the only factors that really
matter and (2) every unit can be accurately compared on that basis. The approach views each
SBU as a stand-alone entity, ignoring the promise for synergies across business units. The
process can become mechanical, substituting an oversimplified graphical model for the
important contributions of management judgment. Reliance on "strict rules" regarding
resource allocation across SBUs can be detrimental to a firm's long-term viability. While easy
to comprehend, the imagery of the BCG matrix can lead to some troublesome, overly
simplistic prescriptions.
AACSB: Analytic
Blooms: Understand
6-28
58. (p. 220) The three primary means by which a firm can diversify are:
A. mergers and acquisitions; joint ventures and strategic alliances; internal development.
B. mergers and acquisitions; differentiation; overall cost leadership.
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 a firm's 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.
AACSB: Analytic
Blooms: Remember
59. (p. 223-224) The downsides or limitations of mergers and acquisitions include all of the
following EXCEPT:
A. expensive premiums that are frequently paid to acquire a business.
B. difficulties in integrating the activities and resources of the acquired firm into a
corporation's on-going operations.
C. it is a slow means to enter new markets and acquire skills and competences.
D. there can be many cultural issues that can doom an otherwise promising acquisition.
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, managers' egos
sometimes get in the way of sound business decisions, and cultural issues may doom the
intended benefits from M&A endeavors.
AACSB: Analytic
Blooms: Understand
6-29
60. (p. 225) Divesting businesses can accomplish many different objectives, including
A. enabling managers to focus their efforts more directly on the firm's core businesses.
B. providing the firm with more resources to spend on more attractive alternatives.
C. raising cash to help fund existing businesses.
D. all of these.
Divesting a business can accomplish many different objectives including: (1) enabling
managers to focus their efforts more directly on the firm's core businesses, (2) providing the
firm with more resources to spend on more attractive alternatives, and (3) raising cash to help
fund existing businesses.
AACSB: Analytic
Blooms: Understand
61. (p. 227) A company offering local telecommunications service combines resources with an
international company that manufactures digital switching equipment to research a new type
of telecommunications technology. This is an example of
A. joint diversification.
B. strategic alliance.
C. divestment.
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.
AACSB: Analytic
Blooms: Understand
6-30
62. (p. 226) Cooperative relationships such as __________ have the potential advantages such as
A. joint ventures
B. mergers and acquisitions
C. strategic alliances
D. both joint ventures and strategic alliances
Strategic alliances and joint ventures have many potential advantages. Among these are
AACSB: Analytic
Blooms: Understand
63. (p. 228) All of the following are guidelines for managing strategic alliances EXCEPT
A. establishing a clear understanding between partners.
B. relying primarily on a contract to make the joint venture work.
C. not shortchanging your partner.
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.
AACSB: Analytic
Blooms: Understand
6-31
64. (p. 228) 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 lines or add to their
service offerings.
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 the 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.
There are potential disadvantages to internal development. It may be time consuming; firms
may forfeit the benefits of speed that growth through mergers can provide. This may be
important among high-tech or knowledge-based organizations in fast-paced environments
where being an early mover is critical.
AACSB: Analytic
Blooms: Understand
65. (p. 228) __________ may be time consuming and, therefore, firms may forfeit the benefits of
speed that growth through __________ and __________ can provide.
A. Strategic alliances; joint ventures; internal development
B. Internal development; mergers; acquisitions
C. Strategic alliances; mergers; joint ventures
D. Mergers; internal development; strategic alliances
There are potential disadvantages to internal development. It may be time consuming; firms
may forfeit the benefits of speed that growth through mergers can provide. This may be
important among high-tech or knowledge-based organizations in fast-paced environments
where being an early mover is critical.
AACSB: Analytic
Blooms: Understand
6-32
66. (p. 229) According to Michael Porter: "There's a tremendous allure to __________. It's 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. mergers and acquisitions
C. internal development
D. differentiation strategies
There is an excitement and associated recognition of making a major acquisition. As noted by

Harvard's Michael Porter, "There's a tremendous allure to mergers and acquisitions. It's 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."
AACSB: Analytic
Blooms: Apply
67. (p. 232) An antitakeover tactic called (a) __________ 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. greenmail
C. poison pill
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 firm's 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: Analytic
Blooms: Remember
6-33
68. (p. 232) 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 poison pill.
C. a golden parachute.
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, such as this stock discount example. They are also
known as shareholder rights plans.
AACSB: Analytic
Blooms: Remember
69. (p. 232) The term "golden parachutes" refers to

A. a clause requiring that huge dividend payments be made upon takeover.
B. financial inducements offered by a threatened firm to stop a hostile suitor from acquiring it.
C. managers of a firm involved in a hostile takeover approaching a third party about making
the acquisition.
D. pay given to executives fired because of a takeover.
A golden parachute is a prearranged contract with managers specifying that, in the event of a
hostile takeover, the target firm's managers will be paid a significant severance package.
AACSB: Analytic
Blooms: Remember
6-34
70. (p. 232) Antitakeover tactics include all of the following EXCEPT
A. greenmail.
B. golden parachutes.
C. golden handcuffs.
D. poison pills.
Antitakeover tactics are common, including greenmail, golden parachutes, and poison pills.
AACSB: Analytic
Blooms: Remember
Essay Questions
71. (p. 206-214) What are the primary benefits and risks associated with related diversification?
Answers will vary.
AACSB: Analytic
Blooms: Understand
market power.
72. (p. 210-212) Briefly explain the advantages and disadvantages of vertical integration.
Answers will vary.
AACSB: Analytic
Blooms: Understand
market power.
6-35
73. (p. 212-213) What are some of the key issues to take into account when considering whether
or not to vertically integrate?
Answers will vary.
AACSB: Analytic
Blooms: Understand
market power.
74. (p. 213-214) Explain how transaction cost analysis can provide insights into vertical
integration decisions.
Answers will vary.
AACSB: Analytic
Blooms: Understand
market power.
75. (p. 214-220) What are the primary benefits and risks associated with unrelated
diversification?
Answers will vary.
AACSB: Analytic
Blooms: Understand
6-36
76. (p. 216-218) Explain the uses and limitations of portfolio management matrices such as the
growth-share matrix developed by the Boston Consulting Group (BCG).
Answers will vary.
AACSB: Analytic
Blooms: Understand
77. (p. 220-224) Summarize the advantages and disadvantages of mergers and acquisitions as a
means of diversification.
Answers will vary.
AACSB: Analytic
Blooms: Understand
78. (p. 224-226) Discuss some of the potential benefits of divestment.
Answers will vary.
AACSB: Analytic
Blooms: Understand
6-37
79. (p. 226-228) Strategic alliances are arrangements in which two firms join forces and form a
cooperative partnership. Discuss the advantages and disadvantages of strategic alliances as
well as guidelines for reducing conflict between the partners.
Answers will vary.
AACSB: Analytic
Blooms: Understand
80. (p. 228-232) Discuss how the potential benefits of diversification may be adversely affected by
conflicts between managers' interests and stockholders' interests. Hint: Egotism, growth for
growth's sake, antitakeover tactics.
Answers will vary.
AACSB: Analytic
Blooms: Understand
6-38

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

Chapter 06 Corporate-Level Strategy: Creating Value through Diversification

True / False Questions

1. (p. 204) Whenever an organization diversifies, it represents investing a stockholder's funds in

14. (p. 213) Market transactions do not involve transaction costs.

Portfolio management helps achieve a better understanding of the competitive position of an

Multiple Choice Questions

31. (p. 201) Corporate-level strategy addresses two related issues:

Core competencies reflect the collective learning in organizationshow to coordinate diverse

43. (p. 213) A firm should consider vertical integration when

44. (p. 214) It may be advantageous to vertically integrate when

46. (p. 214) Vertical integration is attractive when

49. (p. 215) According to the text, corporate restructuring includes

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

There is an excitement and associated recognition of making a major acquisition. As noted by

69. (p. 232) The term "golden parachutes" refers to

Answers will vary.

Answers will vary.

Answers will vary.

Answers will vary.

Answers will vary.

Answers will vary.

Answers will vary.

78. (p. 224-226) Discuss some of the potential benefits of divestment.

Answers will vary.

Answers will vary.

Answers will vary.

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