CH06 Testbank HIH9e MC

Chapter 6Corporate-Level Strategy
MULTIPLE CHOICE
1. In the chapter Opening Case, the sharing of marketing and distribution in the beer and wine business at
Fosters Group was intended to create _______________.
a. financial economies
b. vertical integration
c. economies of scope
d. conglomerate discount
ANS: C
PTS: 1
DIF: Medium
REF: 157
OBJ: 06-01 TYPE: application
NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff &
Rubin: Managing strategy & innovation
2. As noted in the Opening Case, in order to create synergy between its wine and beer business, Fosters
Group used the same sales force to sell mass market beer, cheap spirits, and premium wine. The
sharing of these activities resulted in __________.
a. increased profits
b. failure
c. financial economies
d. unrelated diversification
ANS: B
PTS: 1
DIF: Medium
REF: 157
3. In the Opening Case, Fosters Group was diversified and managed businesses that were highly related.
The corporate-level strategy is best described as ________diversification.
a. related constrained
b. related linked
c. unrelated
d. conglomerate
ANS: A
PTS: 1
DIF: Medium
REF: 157
4. Corporate-level strategy is concerned with ____ and how to manage these businesses.
a. whether the firm should invest in global or domestic businesses
b. what product markets and businesses the firm should be in
c. whether the portfolio of businesses should generate immediate above-average returns or
should be troubled businesses which will create above-average returns only after
restructuring
d. whether to integrate backward or forward.
ANS: B
PTS: 1
DIF: Medium
REF: 158
OBJ: 06-01 TYPE: knowledge
NOT: AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff
& Rubin: Managing strategy & innovation

5. The ultimate test of the value of a corporate-level strategy is whether the
a. corporation earns a great deal of money.
b. top management team is satisfied with the corporation's performance.
c. businesses in the portfolio are worth more under the management of the company in
question than they would be under any other ownership.
d. businesses in the portfolio increase the firms financial returns.
ANS: C
PTS: 1
DIF: Medium
REF: 158
OBJ: 06-01 TYPE: comprehension
6. The more constrained the relatedness of diversification,
a. the fewer the linkages between the businesses within the portfolio owned by the firm.
b. the wider the variation in the portfolio of businesses owned by the firm.
c. the more links there are among the businesses owned by an organization.
d. the lower the proportion of total organizational revenue derived from the dominantbusiness.
ANS: C
PTS: 1
DIF: Hard
REF: 160
7. Wm. Wrigley Jr. Company once made only chewing gum. When Wrigley bought Life Savers (a line of
candy mints) and Altoids (a line of breadth mints) from Kraft, chewing gum then constituted less than
95 percent of revenues. Thus, Wrigley
a. was moving away from its traditional single-business strategy toward a dominant strategy.
b. was moving away from its traditional dominant strategy toward a related linked strategy.
c. became a conglomerate since Life Savers and Altoids are unrelated businesses.
d. probably planned to restructure these companies and sell them off.
ANS: A
PTS: 1
DIF: Medium
REF: 159
8. Usually a company is classified as a single business firm when revenues generated by the dominant
business are greater than ____ percent.
a. 99
b. 95
c. 90
d. 70
ANS: B
PTS: 1
DIF: Medium
REF: 160 (Figure 6.1)
9. The more sharing of resources and activities among businesses, the more ____ is the relatedness of the
diversification.
a. linked
b. constrained
c. integrated
d. intense
ANS: B
PTS: 1
DIF: Hard
REF: 160
& Rubin: Strategic & systems skills
10. A firm that earns less than 70% of revenue from its dominant business and has direct connections
between its businesses is engaging in ____ diversification.
a. unrelated
b. related constrained
c. related linked
d. dominant business
ANS: B
PTS: 1
DIF: Medium
11. Revenues for United Parcel Service (UPS) come from the following business segments: 61 percent
from U.S. package delivery operations, 22 percent from international package delivery, and 17 percent
from non-packaging operations. Which best describes the corporate level strategy of UPS?
a. Single business
b. Dominant business
c. Related constrained
d. Related linked
ANS: B
PTS: 1
DIF: Hard
12. Which acquisition would be considered the LEAST related?
a. a candy manufacturer purchases a chemical laboratory specializing in food flavorings
b. a chain of garden centers acquires a landscape architecture firm
c. a hospital acquires a long-term care nursing home
d. an upscale white-tablecloth restaurant chain acquires a travel agency
ANS: D
PTS: 1
DIF: Easy
REF: 159-161
13. The lowest level of diversification is the ____ level.
a. single business
b. dominant business
c. related constrained
d. unrelated
ANS: A
PTS: 1
DIF: Easy
REF: 159-161 | 160 (Table 6.1)
14. The main difference between the related constrained level of diversification and the related linked
level of diversification is
a. the percentage of total organizational profitability that comes from the dominant business.
b. the level of resources and activities shared among the businesses.
c. whether the diversification is vertical or horizontal.
d. whether the diversification is value-creating or value-neutral.
ANS: B
PTS: 1
DIF: Hard
REF: 160
15. One of the challenges facing Fosters Group in the Opening Case were problems in implementing the
sharing of activities between the beer and wine businesses. This is a common risk for firms using the
______________diversification strategy.
a. related linked
c. unrelated
d. dominant
ANS: B
PTS: 1
DIF: Hard
REF: 157-158
16. The term conglomerates refers to firms using the ____ diversification strategy.
a. unrelated
c. related linked
d. global
ANS: A
PTS: 1
DIF: Medium
REF: 161
17. Hutchison Whampoa Limited (HWL) has businesses in ports and related services,
telecommunications, property and hotels, retail and manufacturing, and energy and infrastructure.
HWL makes no efforts to share activities or transfer core competencies among the businesses. HWL is
following a strategy of__________diversification.
a. dominant business
c. related linked
d. unrelated
ANS: D
PTS: 1
DIF: Medium
REF: 161
18. Firms use corporate-level diversification strategies for all the following reasons EXCEPT
a. value-creating
b. value-neutral
c. value-reducing
d. value-diversifying
ANS: D
PTS: 1
DIF: Medium
REF: 161 (Table 6.1)
19. Which of the following reasons for diversification is most likely to increase the firms value?
a. increasing managerial compensation
b. reducing costs through business restructuring
c. taking advantage of changes in tax laws
d. conforming to antitrust regulation
ANS: B
PTS: 1
DIF: Medium
20. Which of the following is a value-reducing reason for diversification?
a. enhancing the strategic competitiveness of the entire company
b. expanding the business portfolio in order to diversify managerial employment risk
c. gaining market power relative to competitors
d. conforming to antitrust regulation
ANS: B
PTS: 1
DIF: Medium
21. An office management firm has developed a system for efficiently organizing small medical and dental
practices both through proprietary software and through unique training programs for staff. It has
recently acquired a firm specializing in providing management services for veterinary practices. The
office management firm is hoping to
a. achieve economies of scope.
b. implement vertical integration.
c. achieve financial economies through an unrelated acquisition.
d. acquire specialized talent from the veterinary management company.
ANS: A
PTS: 1
DIF: Medium
REF: 163
22. Firms that have selected a related diversification corporate-level strategy seek to exploit
a. control shared among business-unit managers.
b. economies of scope between business units.
c. the favorable demand of buyers.
d. market power.
ANS: B
PTS: 1
DIF: Medium
REF: 163
23. Firms seek to create value from economies of scope through all of the following EXCEPT
a. activity sharing.
b. skill transfers.
c. transfers of corporate core competencies.
d. de-integration.
ANS: D
PTS: 1
DIF: Easy
REF: 163
24. The basic types of operational economies through which firms seek value from economies of scope are
a. synergies between internal and external capital markets.
b. the leveraging of individual tangible resources.
c. the sharing of primary and support activities.
d. joint ventures and outsourcing.
ANS: C
PTS: 1
DIF: Medium
REF: 163
25. Operational relatedness is created by ___________of___________.
a. sharing; core competencies
b. sharing; activities
c. transferring; core competencies
d. transferring; activities
ANS: B
PTS: 1
DIF: Medium
REF: 163
26. In the Opening Case, Fosters Group sought to create ___________between the beer and wine
businesses.
a. corporate relatedness
b. operational relatedness
c. transferring core competencies
d. financial economies
ANS: B
PTS: 1
DIF: Medium
REF: 163
27. Procter & Gamble (P&G) has a paper towel and baby diaper business, both of which use paper
products. The firms paper production plant produces inputs for both businesses. P&G most likely
uses the _______________diversification strategy to create ____________.
a. related constrained; operational relatedness.
b. related linked; corporate relatedness.
c. related constrained; corporate relatedness
d. related linked; operational relatedness
ANS: A
PTS: 1
DIF: Hard
REF: 163
28. Oracle has been diversifying in the software industry through acquisition of firms such as PeopleSoft
as described in the Strategic Focus. There are very close linkages between Oracle and the various units
and for the strategy to work, Oracle must develop mechanisms to share activities. Oracle is clearly
following a _____________________diversification strategy.
b. unrelated
c. related linked
ANS: C
PTS: 1
DIF: Hard
REF: 165
29. Which of the following is TRUE?
a. Conglomerates no longer exist in the U.S. business scene, but are common in emerging
markets.
b. Unrelated diversified firms seek to create value through economies of scope.
c. The sharing of intangible resources, such as know-how, between firms is a type of
operational sharing in related diversifications.
d. Related constrained firms share more tangible resources and activities between businesses
than do related linked firms.
ANS: D
PTS: 1
DIF: Hard
REF: 163-164
30. Research has shown that horizontal acquisitions
a. tend to have disappointing financial results in the long run.
b. are being replaced by virtual acquisitions.
c. result in lower levels of performance than unrelated acquisitions.
d. are able to use activity sharing to successfully create economies of scope.
ANS: D
PTS: 1
DIF: Medium
REF: 164
31. A noted professional art academy has founded an artists and friends travel company specializing in
tours for artists to scenic locales, using its faculty as traveling teachers. In addition, the art academy
has purchased a framing company to both make frames for academy art works, but also to sell
museum-quality framing services to the public. The art academy is engaging in diversification based
on ____ relatedness.
a. operational
b. corporate
c. intellectual
d. constrained
ANS: A
PTS: 1
DIF: Hard
REF: 163
32. Dragonfly Publishers of childrens books has purchased White Rabbit, another publisher of childrens
books. Both companies books are sold to the same retail stores and schools. Their content is different,
since Dragonfly produces childrens literature, whereas White Rabbit focuses on child-level scientific
and nature topics. Which of the following statements is probably TRUE about this acquisition?
a. This is a horizontal acquisition.
b. This is an example of virtual integration.
c. Dragonfly is beginning to build a conglomerate.
d. Economies of scope are unlikely to result from this acquisition.
ANS: A
PTS: 1
DIF: Medium
REF: 163-164
33. The purchasing of firms in the same industry is called:
a. unrelated diversification.
b. vertical integration.
c. networking the organization.
d. horizontal acquisition.
ANS: D
PTS: 1
DIF: Easy
REF: 163-164
34. The _________________diversification strategy creates value in two ways. First, since the core
competence has already been developed in one business, the firm does not have to allocate resources to
develop it. Second, since the resource is intangible, competitors cannot easily imitate it.
b. unrelated
c. related linked
ANS: C
PTS: 1
DIF: Hard
REF: 164
35. The drawbacks to transferring competencies by moving key people into new management positions
include all EXCEPT
a. the people involved may not want to move.
b. managerial competencies are not easily transferable to different organizational cultures.
c. managers with these skills are expensive.
d. top-level managers may resist having these key people transferred.
ANS: B
PTS: 1
DIF: Medium
REF: 161
Rubin: Managing human capital
36. Multipoint competition occurs when
a. firms have multiple retail outlets.
b. firms have multiple products in their primary industry.
c. diversified firms compete against each other in several markets.
d. firms have diversified portfolios of companies.
ANS: C
PTS: 1
DIF: Medium
REF: 161
NOT: AACSB: Business Knowledge & Analytical Skills | Management: Environmental Influence |
Dierdorff & Rubin: Managing the task environment
37. One method of facilitating the transfer of competencies between firms is to
a. virtually integrate the two firms.
b. transfer key people into new management positions.
c. share support activities, such as purchasing practices.
d. restructure the weaker firm to mirror the structure of the more successful firm.
ANS: B
PTS: 1
DIF: Medium
REF: 161
38. Xanadu, a U.S. manufacturer of pharmaceuticals, has acquired a firm in the same industry in Ireland. It
plans to transfer one of its key managers from its plant in St. Louis to Ireland. What is the major threat
to Xanadus plan to transfer competencies from itself to the Irish firm?
a. The St. Louis manager may quit Xanadu in order to remain in St. Louis.
b. American pharmaceutical manufacturing techniques may not transfer to Ireland.
c. Irish managers will refuse to take direction from a foreign executive.
d. The cost of transferring U.S. managers overseas is usually not cost-effective.
ANS: A
PTS: 1
DIF: Medium
REF: 164
39. Acquisitions to increase market power require that the firm have a ____ diversification strategy.
a. unrelated
b. related
c. dominant business
d. single business
ANS: B
PTS: 1
DIF: Hard
REF: 166
40. When diversification results in two companies, such as UPS and FedEx, simultaneously competing in
the same product areas or geographic markets, this is called ____ competition.
a. multiple
b. multiportal
c. multipoint
d. multiplicit
ANS: C
PTS: 1
DIF: Easy
REF: 166
Rubin: Managing the task environment
41. Virgin Group successfully transfers its marketing core competence across airlines, cosmetics, music,
drinks, mobile phones, health clubs and a number of other businesses. Virgin follows a ____
diversification corporate strategy.
a. dominant business
c. related linked
d. unrelated
ANS: C
PTS: 1
DIF: Hard
REF: 164
42. CVSs recent merger with Caremark, a large pharmaceutical benefits manager broadens CVSs
business from retail into health care management. This strategy is __________ and allows CVS to
gain __________.
a. unrelated diversification; operational relatedness
b. related diversification; financial economies
c. forward vertical integration; market power
d. virtual integration; market power
ANS: C
PTS: 1
DIF: Hard
REF: 167
43. The Mars acquisition of the Wrigley assets was part of its related constrained diversification and added
market share to the Mars/Wrigley integrated firm. It allowed Mars to gain _______because it could
sell its products above the market level or reduce its costs below the market level.
a. multipoint competition
b. virtual integration
c. market power
d. vertical integration.
ANS: C
PTS: 1
DIF: Easy
REF: 166
44. Backward integration occurs when a company
a. produces its own inputs.
b. owns its own source of distribution of outputs.
c. is concentrated in a single industry.
d. is divesting unrelated businesses.
ANS: A
PTS: 1
DIF: Medium
REF: 166
45. PorkPride Foods produces hams and other meat products. It owns hog raising operations. This is an
example of a ____ business.
a. de-integrated
b. vertically integrated
c. totally integrated
d. horizontally integrated
ANS: B
PTS: 1
DIF: Medium
REF: 166
46. A company pursuing vertical integration can gain market power over its competitors through all of the
following EXCEPT
a. improved process innovation.
b. savings on operations costs.
c. improved product quality.
d. avoidance of market costs.
ANS: A
PTS: 1
DIF: Hard
REF: 166
47. Which of the following is NOT a limitation directly relating to vertical integration?
a. bureaucratic costs
b. the loss of flexibility through investment in specific technologies
c. capacity balance and coordination problems from changes in demand
d. imitation of core technology by potential competitors
ANS: D
PTS: 1
DIF: Hard
REF: 166-167
48. Specialty Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve the high
temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare
and only two brick plants in the U.S. make this type of brick. Specialty Steel has decided to buy one of
these brick plants. This is an example of
a. backward integration.
b. forward integration.
c. horizontal integration.
d. virtual integration.
ANS: A
PTS: 1
DIF: Medium
REF: 166
49. Specialty Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve the high
temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare
and only two brick plants in the U.S. make this type of brick. Specialty Steel owns one of these brick
plants and buys all of its production. The other brick manufacturer has recently developed an
inexpensive new technology whereby ordinary clay can be used to make this fire brick. This
significantly reduces the production cost of this type of brick.
a. Specialty Steel has less flexibility now than if it were not vertically integrated.
b. This is an example of a capacity balance problem.
c. This is a result of conflicts of interest between the managers of the brick plant and the
executives of Specialty Steel.
d. The market power of Specialty Steel has been de-integrated.
ANS: A
PTS: 1
DIF: Medium
REF: 166-167
50. The use of e-commerce to allow firms to reduce the costs of processing transactions while improving
their supply-chain management skills and tightening the control of their inventories is beginning to
replace
a. outsourcing.
b. unrelated diversification.
c. de-integration.
d. vertical integration.
ANS: D
PTS: 1
DIF: Medium
REF: 167
51. Walt Disney Company and Johnson & Johnson are examples of companies that have successfully used
related diversification to create value by ________________.
a. sharing activities
b. sharing activities and transferring core competencies
c. transferring core competencies
d. efficient internal capital allocation and restructuring
ANS: B
PTS: 1
DIF: Hard
REF: 167-170
52. The value of the assets of a firm using a diversification strategy to create both operational and
corporate relatedness tend to be
a. discounted by investors.
b. inflated by investors.
c. completely ignored by investors.
d. highly valued by investors.
ANS: A
PTS: 1
DIF: Hard
REF: 163
53. Firms are increasingly moving away from ____ integration and toward ____ integration.
a. virtual; vertical
b. virtual; virtuous
c. virtuous; vertical
d. vertical; virtual
ANS: D
PTS: 1
DIF: Medium
REF: 167
Rubin: Managing administration & control
54. When a firm simultaneously practices operational relatedness and corporate relatedness,
a.
b.
c.
d.
it is difficult for investors to observe the value created by the firm.

the firm is likely to be overvalued by investors.
the firm will suffer from diseconomies of scope which outweigh cost savings generated.
the firm is seeking to create value through financial economies.
ANS: A
PTS: 1
DIF: Hard
REF: 168
55. Which type of diversification is most likely to create value through financial economies?
b. operational and corporate relatedness
c. unrelated
d. related linked.
ANS: C
PTS: 1
DIF: Easy
REF: 168
56. As noted in the Strategic Focus, Illinois Tool Works acquires small, low-margin but mature industrial
businesses and restructures these businesses in order to improve profits. Illinois Tool Works is
following a strategy of ____________ diversification.
b. related linked
c. unrelated
ANS: C
PTS: 1
DIF: Medium
REF: 172
57. An ability to efficiently allocate capital through an internal market may help the firm protect the
competitive advantages it develops
a. through reduced disclosure to outside parties.
b. by the ability to not report losses to investors.
c. by the ability to increase pay to managers without shareholders being aware.
d. through the ability to reinvest cash in dividends to shareholders.
ANS: A
PTS: 1
DIF: Hard
REF: 170
58. A firm practicing unrelated diversification can make better capital allocations to its subsidiary
businesses than the external capital market can for all the following reasons EXCEPT
a. corporate headquarters can allocate capital according to more specific criteria than is
possible with external market allocations.
b. corporate headquarters has more complete information about the subsidiary businesses
than the external capital market.
c. the firm can acquire other firms with innovative products instead of allocating capital to
research and development.
d. corporate headquarters can more effectively discipline underperforming management
teams through resource allocation than can the external market.

ANS: C
PTS: 1
DIF: Hard
REF: 170
59. Large diversified businesses often face what is known as the conglomerate discount. This discount
means that investors
a. understand that the financial efficiencies of this strategy automatically make these stocks
worth more than their current market valuation.
b. believe that the value of conglomerates is less than the value of the sum of their parts.
c. increase the expected future earnings of conglomerates.
d. have found that over time, conglomerates earn more than the component companies would
have earned independently.
ANS: B
PTS: 1
DIF: Hard
REF: 170-171
60. Large diversified businesses often face a _______________which results from analysts not knowing
how to value a vast array of large businesses with complex financial reports.
a. threat of regulation by the Securities and Exchange Commission
b. high CEO turnover
c. threat of takeover
d. conglomerate discount
ANS: D
PTS: 1
DIF: Hard
REF: 170-171
61. To overcome the conglomerate discount, many conglomerates have sought to establish ____________
for the parent company.
a. a lobbying group
b. organizational slack
c. a brand
d. a strong CEO
ANS: C
PTS: 1
DIF: Hard
REF: 170-171
62. Successful unrelated diversification through restructuring is typically accomplished by
a. focusing on mature, low-technology businesses.
b. a random walk of good luck in picking firms to buy.
c. seeking out high technology firms in high growth industries.
d. a top management team that is not constrained by pre-established ideas of how the firms
portfolio should be developed.
ANS: A
PTS: 1
DIF: Easy
REF: 171

63. The risk for firms that follow the unrelated diversification strategy in developed economies is that
a. external investors tend to dump the stocks of conglomerates during economic downturns.
b. conglomerates are typically owned by one powerful entrepreneur and do not survive
his/her retirement or death.
c. government regulations, especially in Europe, have periodically forced the dissolution of
conglomerates.
d. competitors can imitate financial economies more easily than they imitate economies of
scope.
ANS: D
PTS: 1
DIF: Hard
REF: 171
64. What is the similarity between high-technology firms and service-based firms that makes them risky as
restructuring candidates?
a. They are human-resource dependent.
b. They have few tangible assets.
c. Both types of firm rely on financial economies.
d. The demand for their products is highly sensitive to economic downturns.
ANS: A
PTS: 1
DIF: Medium
REF: 171
65. Which of the following firms would be the most likely to be a successful candidate for acquisition and
restructuring?
a. a medical practice
b. a management consulting firm that has a tradition of long term client-consultant
relationships
c. a tire manufacturer established in 1910
d. a start-up communications technology firm
ANS: C
PTS: 1
DIF: Hard
REF: 171
66. Among the value-neutral incentives to diversify, some come from the firms external environment
while others are internal to the firm. External incentives to diversify include
a. the fact that other firms in an industry are diversifying.
b. pressure from stockholders who are demanding that the firm diversify.
c. changes in antitrust regulations and tax laws.
d. a firms low performance.
ANS: C
PTS: 1
DIF: Easy
REF: 173
Dierdorff & Rubin: Managing strategy & innovation
67. Of the value-neutral incentives to diversify, all of the following are internal firm incentives EXCEPT
a. overall firm risk reduction.
b. uncertain future cash flows.

c. stricter interpretation of antitrust laws.
d. low performance.
ANS: C
PTS: 1
DIF: Easy
REF: 173-175
& Rubin: Strategic & systems skills
68. Because of the tax laws of the 1960s and 1970s, when dividends were taxed more heavily than capital
gains, shareholders preferred that corporations
a. pay dividends annually.
b. keep free cash flows for investment in acquisitions.
c. distribute capital gains regularly.
d. increase managerial salaries.
ANS: B
PTS: 1
DIF: Medium
REF: 173
69. Free cash flows are
a. liquid financial assets for which investments in current businesses are no longer
economically viable.
b. liquid financial assets that for tax purposes must be reinvested in the firm if not distributed
as dividends to shareholders.
c. the profits resulting after a restructured firm has been sold.
d. dividends that have been distributed to shareholders that are taxed as capital gains.
ANS: A
PTS: 1
DIF: Medium
REF: 173
70. Certain regulatory changes (such as antitrust regulation and tax laws) create incentives or disincentives
for diversification that _________________.
a. create value
b. reduce value
c. are value-neutral
d. are managerial motives to diversify
ANS: C
PTS: 1
DIF: Medium
REF: 173
71. The curvilinear relationship of corporate performance and diversification indicates that
a. dominant-business corporate strategies tend to be higher performing than related
constrained or unrelated business strategies.
b. the highest performing business strategy is related constrained diversification.
c. the less related the businesses acquired, the higher performing the organization.
d. none of the strategies consistently outperforms the others.
ANS: B
PTS: 1
DIF: Hard
72. As the threat of corporate failure increases due to relatedness between a firms business units, firms
may decide to
a. increase the firms level of retained resources.
b. diversify into less risky environments.
c. reduce the level of diversity in its investments.
d. pursue unproven product lines.
ANS: B
PTS: 1
DIF: Hard
REF: 176
73. Synergy exists when
a. cost savings are realized through improved allocations of financial resources based on
investments inside or outside the firm.
b. two units create value by utilizing market power in their respective industries.
c. firms utilize constrained related diversification to build an attractive portfolio of
businesses.
d. the value created by business units working together exceeds the value the units create
when working independently.
ANS: D
PTS: 1
DIF: Medium
REF: 175
74. The downside of synergy in a diversified firm is
a. increasing independence of businesses.
b. the reduction of activity sharing.
c. excessive focus on risky innovation.
d. the loss of flexibility.
ANS: D
PTS: 1
DIF: Medium
REF: 175
75. The Cherrywood Fine Furniture Company finds itself with excess capacity in its plant and equipment
for furniture manufacturing. This excess capacity will be useful in
a. unrelated diversification.
b. related diversification projects.
c. corporate restructuring.
d. multipoint competition
ANS: B
PTS: 1
DIF: Medium
REF: 176
76. Which of the following resources are more likely to create value in the diversification process?
a. Plant and equipment.
b. Tacit knowledge.
c. Excess capacity.
d. Financial resources.
ANS: B
PTS: 1
DIF: Hard
REF: 176
77. Compared with diversification based on intangible resources, diversification based on financial
resources is
a. less imitable and less likely to create value on a long-term basis.
b. more imitable and less likely to create value on a long-term basis.
c. less imitable and more likely to create value on a long-term basis.
d. more imitable and more likely to create value on a long-term basis.
ANS: B
PTS: 1
DIF: Hard
REF: 176
78. Managerial motives to seek diversification include a desire to
a. improve their marketability to other firms.
b. effectively use corporate resources.
c. provide higher returns to corporate stakeholders.
d. increase their compensation.
ANS: D
PTS: 1
DIF: Easy
REF: 177
NOT: AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles |
Dierdorff & Rubin: Learning, motivation, & leadership
79. Isidore Crocker, CEO of Gotham Engines, is strongly in favor of acquiring Carolina Textiles, a firm in
an unrelated industry. Some members of the board of directors are questioning Crockers motives for
the acquisition. They argue that it is not uncommon for CEOs to push for acquisitions because
a. a successful acquisition will increase the CEOs power over the board of directors.
b. making an acquisition is an easier route to increased firm value than is improving the
firms core competencies.
c. higher CEO pay is related to larger organization size.
d. CEOs nearing retirement seek to create empires to continue their legacy.
ANS: C
PTS: 1
DIF: Medium
REF: 177
80. During the 1990s top executives of Titanic, Inc., followed a pattern of aggressive acquisitions and
diversification. Now, Titanic is performing poorly and earning below average returns. Lusitania, a
large conglomerate firm, is in the final stages of purchasing Titanic. Lusitania has announced that it
will fire Titanics current top executives. The Titanic executives may not be worried about their
impending job loss if they
a. plan to take poison pills.
b. have golden parachutes.
c. have silver handcuffs.
d. have ironclad contracts.
ANS: B
PTS: 1
DIF: Medium
REF: 177
81. Which of the following is NOT a governance mechanism that may limit managerial tendencies to overdiversify?
a. the market for corporate control
b. the Board of Directors
c. surveillance technologies
d. executive compensation practices
ANS: C
PTS: 1
DIF: Easy
REF: 177
Dierdorff & Rubin: Managing administration & control
82. In making a decision to diversify, managers should use value-creating reasons or face the risk that their
firms will be acquired and they could lose their jobs. Which of the following is a value-creating
reason to diversify?
a. economies of scope
b. desire for increased compensation
c. reduced managerial risk
d. low performance
ANS: A
PTS: 1
DIF: Medium
REF: 174 | 177
83. Research suggests that _______________has decreased while ___________has increased possibly due
to the restructuring that took place in the 1990s and early twenty-first century.
a. forward vertical integration; backward vertical integration
b. backward vertical integration; forward vertical integration
c. related diversification; unrelated diversification
d. unrelated diversification; related diversification
ANS: D
PTS: 1
DIF: Medium
REF: 178-179

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Chapter 6Corporate-Level Strategy

& Rubin: Managing strategy & innovation

it is difficult for investors to observe the value created by the firm.

teams through resource allocation than can the external market.

& Rubin: Managing strategy & innovation

b. uncertain future cash flows.

REF: 175 (Figure 6.3)

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