Deck 6: Corporate-Level Strategy: Creating Value Through Diversification

Question 1

ConAgra uses the related diversification vertical integration initiative to enhance market power. They do this to increase their power over suppliers by centrally purchasing huge quantities of packaging materials for all of its food divisions.

Answer 1

False
Explanation: ConAgra uses pooled negotiating power to enhance market power. They do this to increase their power over suppliers by centrally purchasing huge quantities of packaging materials for all of its food divisions.

Question 2

At times, the only other people who may have benefited from a merger-acquisition were the shareholders of the acquired firms or the investment bankers advising the acquiring firm.

Answer 2

True
Explanation: At times, the only other people who may have benefited were the shareholders of the acquired firms or the investment bankers who advise the acquiring firm, because they collect huge fees upfront regardless of what happens afterward.

Question 3

Many acquisitions ultimately result in divestiture.

Answer 3

True
Explanation: Many acquisitions ultimately result in divestiture, that is, an admission that things did not work out as planned. In fact, some years ago, a writer for Fortune magazine lamented that studies show that 33 percent to 50 percent of acquisitions are later divested, giving corporate marriages a divorce rate roughly comparable to that of men and women.

Question 4

When firms diversify into unrelated businesses, the primary potential benefits are horizontal relationships, i.e., businesses sharing tangible and intangible resources.

Question 5

All diversification moves, including those involving mergers and acquisitions, erode performance.

Question 6

Diversification initiatives must be justified by the creation of value for shareholders.

Question 7

Economies of scope are cost savings from leveraging core competencies or sharing unrelated activities among businesses in a corporation.

Question 8

The Hewlett-Packard and Autonomy merger in 2011 is an example of a successful merger.

Question 9

Reasons for acquisition failure include the effective integration of the acquisition.

Question 10

Novartis, formerly Ciba-Geigy, uses portfolio management to improve many key activities, including resource allocation and reward and evaluation systems. This is an example of using unrelated diversification corporate restructuring and parenting initiatives to create value.

Question 11

One of the reasons that the Cisco acquisition of the Flip product failed is that the core businesses were very different.

Question 12

Benefits derived from horizontal and hierarchical relationships are mutually exclusive.

Question 13

Sprint and Nextel merged in 2005. The successful merger resulted in a 31 billion USD merger-related charge that lead to a 76 percent decrease in its value by late 2012.

Question 14

Cooper Industries has followed a successful strategy of related diversification. There are few similarities in the products it makes or the industries in which it competes.

Question 15

Corporate-level strategy focuses on gaining short-term revenue through managing operations in multiple businesses.

Question 16

Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input to its manufacturing process. This is an example of using the related diversification vertical integration initiative to enhance their market power.

Question 17

In a study of 270 international mergers between 2000 and 2003 it was found that sales growth increased, earnings growth increased, and market valuations increased overall for the merged companies.

Question 18

When firms diversify into related businesses, the primary potential benefits come from horizontal relationships, which are businesses sharing intangible and tangible resources.

Question 19

In large, widely diversified firms, decision making can become slow and remote to market conditions thus creating potential difficulties for successful mergers as evidenced by the Cisco-Flip failure.

Question 20

Research shows that the vast majority of acquisitions of public corporations results in value creation rather than value destruction.

Question 21

Starbucks acquired the baker chain, La Boulange, with the intention of selling the bakery products at its coffee cafes. The increased market exposure for La Boulange is an example of a revenue enhancing benefit that can arise from the differentiation strategy.

Question 22

It is not necessary for a core competence to be difficult to imitate or to be non-substitutable.

Question 23

For a core competency to create value and provide a viable basis for synergy among the businesses in a corporation, it must at least create superior customer value and it must be difficult to imitate.

Question 24

Portfolio models such as the BCG Portfolio matrix are limited in value because they only compare the SBU on four dimensions.

Question 25

In analyzing the Cabot Corporation portfolio using the BDG matrix, the company decided to shift away from its core competence to unrelated areas of its business. The ensuing decline in assets indicated that it needed to return to its core competence in order to grow.

Question 26

Portfolio management matrices generally consist of two axes that reflect industry or market growth and the market share of a business.

Question 27

Loews Corporation, a conglomerate with 15 billion USD in revenues, competes across several industries including oil and gas, tobacco, watches, insurance, and hotels. Its related diversification strategy is to buy low and sell high as in the example where they bought six oil tankers for 5 million USD and then sold them eight years later for 50 million USD.

Question 28

Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities.

Question 29

The acquisition of two or more counter-cyclical businesses is an example of using diversification to reduce risk.

Question 30

Diversified public corporations, such as Berkshire Hathaway and Virgin Group, create value through management expertise by improving plans and budgets. This is an example of a related diversification strategy.

Question 31

Portfolio management should be considered as the primary basis for formulating corporate-level strategies.

Question 32

Risk reduction by itself is usually a means to create shareholder value, regardless of the overall diversification strategy of the firm.

Question 33

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.

Question 34

With unrelated diversification, potential benefits can be gained from vertical or hierarchical relationships; that is, the creation of synergies from the interaction of the corporate office with outside stakeholders.

Question 35

Economies of scope in a related diversification strategy result from the leveraging of core competencies and the sharing of activities among businesses in the corporation such as production.

Question 36

One of the criteria for a core competence is that the different businesses in the corporation must be similar in at least one important way related to the core competence.

Question 37

Sharing activities across business units can provide two primary benefits: cost savings and cost enhancements.

Question 38

IBM leverages its competencies in computing technology to provide health care services. This is an example of a core competence being used across dissimilar businesses within the same corporation.

Question 39

Core competencies do not create value in a business.

Question 40

Gillette developed the Fusion and Mach 3 shaving systems that created superior customer value as a result of the company core competency in research and development.

Question 41

Among the advantages of acquisitions are the expensive premiums that are frequently paid to acquire a business.

Question 42

The potential advantages of strategic alliances and joint ventures include entering new markets as well as developing and diffusing new technologies.

Question 43

A golden parachute is a prearranged contract with managers specifying that, in the event of a hostile takeover, the target company managers will be paid a significant severance package.

Question 44

Compared to mergers and acquisitions, firms that engage in internal development capture the value created by their own innovative activities by not having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures.

Question 45

When Oracle launched a hostile bid for PeopleSoft in 2003, CEO Larry Ellison accused PeopleSoft of launching a poison pill campaign. The outcome of the bitter fight was a better financial reward for PeopleSoft shareholders.

Question 46

Greenmail is an offer by a company, threatened by takeover, to offer its stock at a reduced price to a third party.

Question 47

One of the obligatory aspects of strategic alliances is the dependence on written contracts to delimit responsibilities and enforce compliance.

Question 48

Antitakeover defenses are always a management ploy to protect their own self interests.

Question 49

Divestment is useful to help a firm reverse an earlier acquisition that did not result in successful growth.

Question 50

Poison pills always are used to protect the best interests of management.

Question 51

Unfriendly or hostile takeovers always occur when the stock of the company becomes undervalued.

Question 52

Through joint ventures, firms can directly acquire the assets and competencies of other firms.

Question 53

In recent years, many high tech firms such as Priceline.com have suffered from the negative impact of uncontrolled growth.

Question 54

Former Merrill Lynch CEO John Thain gave out 4 billion USD in discretionary year-end bonuses just before the company was rescued by Bank of America. This practice demonstrates managerial greed.

Question 55

Poison pills are used by a company to take away shareholder rights in the event of a takeover by another firm.

Question 56

An advantage of mergers and acquisitions is that they can enable a firm to rapidly enter new product markets.

Question 57

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.

Question 58

Managerial behaviors that erode shareholder returns include egotism, antitakeover tactics and controlled growth.

Question 59

Zara, a Spanish clothing company, operates stores in over 70 countries. When entering markets very distant from its home markets, Zara rarely uses local alliance partners to help it negotiate the different cultural and regulatory environments.

Question 60

An advantage of a firm entering into a strategic alliance is that it does not have to share the wealth with its partners.

Question 61

At Cooper Industries, there are few similarities in the products it makes or the industries in which it completes. The corporate office adds value through such activities as superb human resource practices and budgeting systems. This is an example of using

A)related diversification to acquire economies of scope by leveraging pooled negotiating power.
B)related diversification to acquire market power by leveraging core competencies.
C)unrelated diversification to acquire financial synergies through portfolio management.
D)unrelated diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting.

Question 62

Diversification initiatives include all of the following except

A)mergers and acquisitions.
B)strategic alliances.
C)shareholder development.
D)joint ventures.

Question 63

Firms have several choices of diversification initiatives that can be used to create value. Which of the following is not one of them?

A)using related diversification to acquire economies of scope leveraging pooled negotiating power
B)using related diversification to acquire market power by leveraging core competencies
C)using unrelated diversification to acquire financial synergies through portfolio management
D)using related diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting

Question 64

The Cisco acquisition of Pure Digital Technologies, the parent of the Flip video camera, failed because

A)Cisco had valuable competencies.
B)the Flip division of Cisco was slow and less responsive to market pressures.
C)consumers continued to purchase the camera.
D)Cisco had good vision of the market.

Question 65

If a multinational firm paid too high a premium for the common stock of the company, this can lead to

A)expansion.
B)cost savings.
C)divestiture.
D)acquisition.

Question 66

Casio, a giant electronic products producer, synthesizes it abilities in miniaturization, microprocessor design, material science, and ultrathin precision castings to produce digital watches. It uses the same skills to produce card calculators, digital cameras, and other small electronics. These collective skills are known as

A)core competencies.
B)strategic resources.
C)shared activities.
D)economies of scope.

Question 67

Novartis, formerly Ciba-Geigy, uses portfolio management to improve many key activities, including resource allocation and reward and evaluation systems. This is an example of using
A.related diversification to achieve value by leveraging pooled negotiating power to attain economies of scope.
B.related diversification to acquire market power by leveraging pooled negotiating power.
C.unrelated diversification to acquire financial synergies through portfolio management.
D.related diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting.

Question 68

Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input to its manufacturing process. This is an example of using

A)related diversification to acquire market power by pooling negotiating power.
B)related diversification to acquire economies of scope by leveraging core competencies.
C)related diversification to acquire economies of scope by integrating vertically in order to acquire market power.
D)related diversification to acquire market power by integrating vertically.

Question 69

Which of the following is not a reason for merger and acquisition failures?

A)The acquiring company pays a premium for the common stock of the target company.
B)Top executives act in their best interests rather than those of the shareholders.
C)The acquired company assets are poorly integrated into the acquiring company business lines.
D)The acquisition leads to value creation.

Question 70

One of the reasons it is said that only the investment banker wins when a company is acquired is that they

A)assure the newly acquired company will be successful.
B)continue to work with the two companies involved.
C)collect huge up-front fees regardless of the outcome afterwards.
D)monitor the progress of both companies for long term growth.

Question 71

If a multinational firm fails to effectively integrate their acquisitions, this can result in

A)cost savings.
B)divestiture.
C)expansion.
D)further acquisition.

Question 72

An acquisition that results in ______________ indicates that expectations were not met.

A)expansion
B)divestiture
C)cost savings
D)increased sales

Question 73

If a multinational company's motive for the acquisition may have been to enhance executive powers and prestige rather than to improve shareholder return, this can lead to

A)divestiture.
B)cost savings.
C)expansion.
D)acquisition.

Question 74

If a multinational firm is unable to understand how the acquired company's assets would fit with their own lines of business, this can lead to

A)expansion.
B)divestiture.
C)cost savings.
D)acquisition.

Question 75

Corporate-level strategy focuses on

A)gaining long-term revenue.
B)gaining short-term profits.
C)decreasing business locations.
D)managing investment bankers and their interests.

Question 76

Many leading high-tech firms such as Google, Apple, and Intel have dramatically enhanced their revenues, profits, and market values through a wide variety of diversification initiatives. Which of the following is not such an initiative?

A)acquisitions
B)strategic alliances
C)stockholder enhancement
D)joint ventures

Question 77

ConAgra, a diversified food producer, increases its power over suppliers by centrally purchasing huge quantities of packaging materials for all of its food divisions. This is an example of using

A)related diversification to acquire economies of scope by leveraging pooled negotiating power.
B)related diversification to acquire market power by leveraging pooled negotiating power.
C)unrelated diversification to acquire financial synergies through portfolio management.
D)unrelated diversification to acquire parenting, restructuring, and financial synergies through restructuring and parenting.

Question 78

Proctor and Gamble is a large multinational organization that has many business sharing distribution resources. Diversification strategies take advantage of the __________ that exist in their organization.

A)costs
B)employees
C)synergies
D)discontinuities

Question 79

Polaris, a manufacturer of snowmobiles, motorcycles, watercraft, and off-road vehicles, shares manufacturing operations across its businesses. It also has a corporate research and development facility and staff departments that support all of the Polaris operating divisions. This is an example of using

A)related diversification to acquire market value by leveraging core competencies.
B)related diversification to acquire economies of scope by sharing.
C)unrelated diversification to acquire financial synergies through portfolio management.
D)related diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting.

Question 80

In 2012, Microsoft admitted to a major _________ mistake when it wrote off essentially the entire 6.2 billion USD it paid for a digital advertising firm, aQuantive, that it purchased in 2007.

A)expansion
B)divestiture
C)cost savings
D)acquisition