Chapter.6 Corporate Strategy Complete Test Bank 2nd Edition - Strategic Management Cases 2e Complete Test Bank by Jeffrey H. Dyer. DOCX document preview.
Package Title: Chapter 6, Testbank
Course Title: Dyer, SM 2e
Chapter Number: 6
Question type: Multiple Choice
1) The search for competitive advantage within a single industry, market, or line of business best defines the term _________.
a) complementary service strategy
b) corporate strategy
c) business unit strategy
d) cost advantage strategy
Difficulty: Easy
Section Reference 1: Corporate Versus Business Unit Strategy
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Bloomcode: Knowledge
Standard 1 : AACSB || Analytic
2) Venus Inc. is a large firm that sells several healthcare products such as bathing soaps, shampoos, body creams, and baby products. Each of these products has its own customer base. Individually, each of these products has upheld unique approaches to establish and maintain competitive advantage over its own rival companies that sell similar products. Which of the following strategies does Venus Inc. use for its products?
a) Business unit strategy
b) Global marketing strategy
c) Corporate strategy
d) Economic spending strategy
Difficulty: Hard
Section Reference 1: Corporate Versus Business Unit Strategy
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Bloomcode: Application
Standard 1 : AACSB || Analytic
3) Rest & Sleep Inc. is a mattress manufacturing firm. By manufacturing related products such as bed covers, comforters and quilts, and pillows, it has gained significant competitive advantage as it has managed to create profits in all these markets as well. Rest & Sleep creates a challenge for the other companies in the market by providing unique value through its customer services and warranties. Which of the following terms best describes what Rest & Sleep Inc. is practicing?
a) Market penetration
b) Business unit strategy
c) Corporate strategy
d) Unrelated diversification
Difficulty: Hard
Section Reference 1: Corporate Versus Business Unit Strategy
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Bloomcode: Application
Standard 1 : AACSB || Analytic
4) Movement into adjacent markets by a firm along its own value chain can be best termed _________.
a) vertical integration
b) horizontal specialization
c) horizontal diversification
d) unrelated diversification
Difficulty: Easy
Section Reference 1: Corporate Versus Business Unit Strategy
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Bloomcode: Knowledge
Standard 1 : AACSB || Analytic
5) Brentwood Industries, a furniture company, bought a supplier factory that creates raw materials for the whole range of products Brentwood manufactures. Brentwood has made sure not to look for outside sources for providing the company’s raw materials. Brentwood Industries is practicing _________.
a) market penetration
b) unrelated diversification
c) vertical integration
d) horizontal diversification
Difficulty: Hard
Section Reference 1: Corporate Versus Business Unit Strategy
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Bloomcode: Application
Standard 1 : AACSB || Analytic
6) Pisces Corp. is an apparel manufacturing company. It purchased a few of its raw material suppliers and set up their factories close to the clothing stores so that the company does not have to invest on transportation charges. This is an example of _________.
a) downward diversification
b) forward integration
c) backward integration
d) horizontal diversification
Difficulty: Hard
Section Reference 1: Corporate Versus Business Unit Strategy
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Bloomcode: Application
Standard 1 : AACSB || Analytic
7) Markus United Inc., a soap manufacturing company, maintained strategic advantage over other companies by retaining profits in a unique way. The company bought a few distributors in order to improve efficiency and cut down transportation costs while distributing its products to retail stores. The company generated more profits than its competitors this way. This is an example of _________.
a) horizontal diversification
b) backward integration
c) forward integration
d) horizontal specialization
Difficulty: Hard
Section Reference 1: Corporate Versus Business Unit Strategy
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Bloomcode: Application
Standard 1 : AACSB || Analytic
8) Movement by a firm along its own value chain in the direction of sales, service, or warranty operations is termed _________.
a) horizontal specialization
b) backward integration
c) forward integration
d) horizontal diversification
Difficulty: Easy
Section Reference 1: Corporate Versus Business Unit Strategy
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Bloomcode: Knowledge
Standard 1 : AACSB || Analytic
9) The movement into an adjacent, or unrelated, market that is not along a firm’s own value chain defines the term _________.
a) horizontal diversification
b) vertical specialization
c) forward integration
d) backward integration
Difficulty: Easy
Section Reference 1: Corporate Versus Business Unit Strategy
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Bloomcode: Knowledge
Standard 1 : AACSB || Analytic
10) Marble Cakes Inc., after serving a good number of customers in its home state, has set up business in three other states with additional menu options of cupcakes, donuts, and coffees to generate new customers. This has enabled the company to successfully maintain its corporate strategy. Marble Cakes Inc. is engaging in _________.
a) vertical integration
b) horizontal specialization
c) vertical specialization
d) horizontal diversification
Difficulty: Hard
Section Reference 1: Corporate Versus Business Unit Strategy
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Bloomcode: Application
Standard 1 : AACSB || Analytic
11) Pluto Corp. has been manufacturing hardware materials for its existing customer base for several years. Recently, the company introduced a new line of electronic products to its customers. Pluto Corp. is engaging in _________.
a) vertical integration
b) market penetration
c) value based initiative
d) horizontal diversification
Difficulty: Hard
Section Reference 1: Corporate Versus Business Unit Strategy
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Bloomcode: Application
Standard 1 : AACSB || Analytic
12) Which of the following statements is true of a corporate strategy?
a) It refers to a management strategy that focuses solely on the professional behavior and attitudes of a company’s employees.
b) It entails competing in a core industry or business and also operating in adjacent businesses or markets.
c) It entails competing exclusively with large and well-established firms to increase competitive advantage.
d) It refers to the overall strategy that helps a company recruit the right type of employees for the right type of job.
Difficulty: Medium
Section Reference 1: Corporate Versus Business Unit Strategy
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
13) Which of the following is an example of a horizontal diversification?
a) A new company selling a new product in the market
b) An old company increasing its supply of existing products
c) A company acquiring its raw materials from many parts of the world
d) A new company trying to reintroduce an old product with improved advertising tactics
Difficulty: Medium
Section Reference 1: Corporate Versus Business Unit Strategy
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
14) Which of the following is a defining feature of firms that practice related-constrained diversification?
a) They earn more than 70 percent of their revenues from their main line of business and the rest from businesses located along the value chain.
b) They earn less than 70 percent of their revenues from their main line of business and their other lines of business share product, technological, and distribution linkages with the main business.
c) They operate in related markets, but fewer linkages exist between the new and existing markets than the elements create separately.
d) They earn more than 95 percent of the revenues from a single line of business.
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
15) A dominant vertical business differs from a dominant business in that a dominant business ________.
a) earns 30 percent of its revenue from businesses located along the value chain of its main line of business
b) earns 30 percent of its revenue from business lines across different value chains
c) earns less than 70 percent of its revenue from its main line of business
d) earns more than 95 percent of its revenue from its main line of business
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
16) Which of the following statements is true of a dominant vertical business?
a) It earns less than 70 percent of its revenue from its main line of business.
b) It earns more than 95 percent of revenue from its main line of business.
c) It earns 30 percent of its revenue from business lines across different value chains.
d) It earns 30 percent of its revenue from businesses located along the value chain.
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
17) Sparkle LLC, a beverage industry, earns almost all of its profits only by selling beverages. Sparkle LLC can be best categorized as a _________.
a) single business
b) diversified business
c) dominant vertical business
d) dominant business
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
18) The main focus of Neptune Corp. is to sell apparel, which amounts to 70 percent of its revenue. It also runs warehouses, distribution centers, and logistics as additional businesses that generate the rest of the 30 percent of the earnings. Which level of diversification is followed by Neptune Corp.?
a) Single business
b) Dominant business
c) Related-linked business
d) Dominant vertical business
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
19) Virgo Inc. earns less than 70 percent of its revenue from manufacturing computers. It recently started manufacturing tablets. The company made use of existing technology and materials and decided to distribute the tablets through the same distributors used for its computers. In this scenario, Virgo Inc. chose _________.
a) related-constrained diversification
b) related-linked diversification
c) unrelated-constrained diversification
d) unrelated-linked diversification
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
20) Saturn Inc. is an e-commerce company that sells home appliances. The firm recently started selling its line of packaged food items online. In this scenario, Saturn Inc. chose _________.
a) unrelated-linked diversification
b) related-constrained diversification
c) unrelated-constrained diversification
d) related-linked diversification
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
21) Azure LLC is a toy manufacturing company. The company has recently started manufacturing industrial wiring for construction companies. In this scenario, Azure LLC has chosen _________.
a) related diversification
b) unrelated diversification
c) related-linked diversification
d) related-constrained diversification
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
22) Zia, the CEO of Indigo Corp., states that it is essential to diversify the company into new markets and to create new products. She believes that it is important and profitable to tap new customer bases and challenging markets as this experience will help the company grow financially as well as expand its knowledge base on strategic management. Which of the following statements strengthens Zia’s belief?
a) Moderate diversification pays off but very high levels of diversification will lead to lower levels of performance.
b) The company will not be able to provide the same value and customer satisfaction when segmented.
c) Diversification will create a loss of revenue if the parent company decides to segment itself to different markets.
d) Diversification will reduce the company’s overall cost of producing goods and services.
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Analyze
Standard 1 : AACSB || Reflective Thinking
23) Elegant Meals Inc., a company that owns a chain of restaurants, sells dinnerware to its customers who fancy them. Since their restaurants are known for their interior designs, they also sell home décor products. By selling these products, Elegant Meals Inc. caters to a(n) _________.
a) entertainment market
b) capital market
c) adjacent market
d) global market
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
24) Winter Sources Inc., an apparel manufacturer, recently opened a retail store in its unused office space to sell the excess material produced. In this way, the company generated extra profits. The unused space that was available to Winter Sources Inc. is an example of _________.
a) kanban
b) kaizen
c) hubris
d) slack
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
25) Jupiter LLC is a manufacturer of leather items. The board of directors of Jupiter realized that it is better to produce handbags and shoes together rather than in two separate factories. This way, the company can reduce its production costs. This scenario best illustrates a(n) _________.
a) related-linked diversification
b) unrelated diversification
c) economy of scope
d) economy of scale
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
26) Summer Technologies Inc. is proud of its managerial personnel who have been able to create unique value for the company. These people have been engaged in coming up with strategic activities that enabled Summer Technologies to grow and establish itself as a reliable brand. This set of abilities of the Summer Technologies personnel can most accurately be termed _________.
a) management skill
b) employee expertise
c) collective wisdom
d) explicit knowledge
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
27) Aquarius Corp., a consumer goods company, offers a chain of products that includes food and beverages, beauty care products, apparels, and home décor. By offering these goods, Aquarius creates more value for itself than it would have if it had sold these products individually. This practice by Aquarius Corp. can be referred to as _________.
a) imitation
b) synergy
c) a merger
d) an acquisition
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
28) Spring Resources LLC creates unique value by establishing a learning organization that coordinates various production tactics and assimilates different types of technologies. This knowledge is distributed to the entire organization so that its branches can adapt and perform according to their own markets. These tactics and technologies distributed throughout the organization that create value for Spring Resources LLC are termed _________.
a) inimitability practices
b) prestige development
c) core competencies
d) dominant logic
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
29) Galaxy Corp. is a manufacturing company that aims to provide value to its customers by identifying sources of revenue, the intended customer base, products and processes, and details of financing. This method that Galaxy Corp. wants to adopt is termed _________.
a) a plan of action
b) a business model
c) dominant logic
d) prestige development
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
30) Even though companies offer varied products and provide unique value to their customers, they have similar barriers to face when entering into a host country due to policies set up by the country’s government. The similarities shared by the companies in the way they set up business in the country are an example of a(n) _________.
a) plan of action
b) passive judgment
c) dominant logic
d) imitation
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
31) Which of the following is an ancient Greek word for excessive pride, arrogance, or overconfidence that is used to refer to the actions of managers when they diversify or make acquisitions based on their own experience or gut feelings rather than on solid data and research?
a) Kanban
b) Hubris
c) Agora
d) Kaizen
Difficulty: Easy
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Knowledge
Standard 1 : AACSB || Analytic
32) Stacy works as a manager at Daffodils Corp., a manufacturing firm that has not been performing well. Despite the availability of research materials and databases, she uses her own experience to make acquisitions because she is usually very confident about the success of her plans. This attitude of Stacy can be termed _________.
a) hubris
b) selfishness
c) solipsism
d) megalomania
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
33) Amber Corp., a jute manufacturing company, wants to diversify into the food industry. In order to do so, the board of directors decides to move some of its existing resources, expertise, and technology to set the base of the food unit. The market analysts at Amber predict that this unit has a high growth potential. Thus, rather than leaving the new food unit to grow on its own, the board decides to invest in it as it this will help increase the corporate value of the company. In this scenario, Amber Corp. is trying to create value by acting as a(n) _________.
a) adjacent market
b) internal capital market
c) external capital market
d) related-constrained market
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
34) A company called Techno Plus LLC experienced a failed acquisition, but the managers of the company were hesitant to end the venture as they had already invested too much time, finances, and effort into it. They presumed that everything would work out with a little more money and time. This attitude of the managers of Techno Plus LLC can be termed _________.
a) hubris
b) arrogance
c) positive thinking
d) sunk cost fallacy
Difficulty: Hard
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Application
Standard 1 : AACSB || Analytic
35) Lee, the CEO of Libra Inc., decided that the best way to diversify this food processing company would be to set up its own small-scale beverage producing unit in a new area where its new products would have high demands. This decision by Lee best reflects a(n) _________.
a) acquisition
b) greenfield entry
c) brownfield entry
d) merger
Difficulty: Hard
Section Reference 1: Methods of Diversification
Learning Objective 1: Use a portfolio management tool to characterize a company’s different business units and to evaluate how well a company manages its portfolio.
Bloomcode: Application
Standard 1 : AACSB || Analytic
36) Neon Colors Corp., a well-established apparel industry, increased its corporate value by purchasing a footwear company as part of its growth strategy. It purchased the footwear company because developing its own operations and processes would be expensive and time consuming. This is an example of a(n) _________.
a) merger
b) brownfield entry
c) acquisition
d) greenfield entry
Difficulty: Hard
Section Reference 1: Methods of Diversification
Learning Objective 1: Use a portfolio management tool to characterize a company’s different business units and to evaluate how well a company manages its portfolio.
Bloomcode: Application
Standard 1 : AACSB || Analytic
37) In order to successfully carry out an acquisition, the managers at Pink Inc. prepared a list of potential target companies that it could purchase. In the next step, the managers evaluated each prospective company in depth to understand their methods of operations, processes, procedures, strengths, and limitations in order to choose the best target company. This process of evaluating the companies is best known as _________.
a) due diligence
b) market intelligence
c) consultation
d) market evaluation
Difficulty: Hard
Section Reference 1: The Acquisition and Integration Process
Learning Objective 1: Explain how a company would choose whether to diversify by greenfield entry or by acquisition. Explain how a company should decide how tightly to integrate an acquisition into its current business portfolio.
Bloomcode: Application
Standard 1 : AACSB || Analytic
38) Blue Work LLC, a software company, purchased an electronics and electrical company and implemented its resources and technologies in the target company. Blue Work changed the entire culture and brand of the target company and introduced its own culture such that the identity of the target company disappeared. Blue Work benefitted from this acquisition and witnessed a significant growth. This type of acquisition is known as a _________.
a) greenfield entry
b) takeover
c) union
d) merger
Difficulty: Hard
Section Reference 1: The Acquisition and Integration Process
Learning Objective 1: Explain how a company would choose whether to diversify by greenfield entry or by acquisition. Explain how a company should decide how tightly to integrate an acquisition into its current business portfolio.
Bloomcode: Application
Standard 1 : AACSB || Analytic
39) BestBrew Corp. and True Coffee Inc. were two leading coffee manufacturing firms. They united and created a whole new firm called True Brew Inc. that used the best customer front-end and operational back-end processes of the two firms. This union is an example of a _________.
a) brownfield entry
b) greenfield entry
c) takeover
d) merger
Difficulty: Hard
Section Reference 1: The Acquisition and Integration Process
Learning Objective 1: Explain how a company would choose whether to diversify by greenfield entry or by acquisition. Explain how a company should decide how tightly to integrate an acquisition into its current business portfolio.
Bloomcode: Application
Standard 1 : AACSB || Analytic
40) Two firms recently had a bolt-on acquisition. Martha, the managing director of one of these firms, claims that an integration team is required to decide which tactical elements and operational functions of the two firms should be strategically integrated and implemented. She believes having this team will enable fair decisions to be made, thus inculcating a friendly atmosphere in the new firm. Which of the following statements strengthens Martha’s claim?
a) Having the team may consume the company’s time and effort, but in the long run, it may help the company grow.
b) The team members of the two firms may be biased toward their own firms, preventing fair implementation.
c) The team always makes sound decisions that are based on the integration templates that managers in the acquiring firm choose.
d) The team helps in deciding which culture will be incorporated in the new entity.
Difficulty: Hard
Section Reference 1: The Acquisition and Integration Process
Learning Objective 1: Explain how a company would choose whether to diversify by greenfield entry or by acquisition. Explain how a company should decide how tightly to integrate an acquisition into its current business portfolio.
Bloomcode: Analyze
Standard 1 : AACSB || Reflective Thinking
41) Which of the following statements best describes corporate strategy?
a) It is an approach for creating competitive advantage within a single industry, market, or line of business.
b) It refers to a firm's strategy of selling existing products to new customers.
c) It refers to a firm's strategy of selling new services to new customers.
d) It is an approach for creating value and competitive advantages through participation in several different industries and markets.
Difficulty: Medium
Section Reference 1: Corporate Versus Business Unit Strategy
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
42) Which of the following statements defines a dominant business?
a) A firm earning more than 95 percent of the revenues from a single line of business
b) A firm that earns more than 70 percent of its revenue from its main line of business and the rest from businesses located along the value chain
c) A firm that earns more than 70 percent of its revenue from its main line of business and the remainder from other lines across different value chains
d) A firm that operates in related markets, but fewer linkages exist between the new and existing markets than the elements create separately
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
43) Which of the following statements represents related-constrained diversification?
a) A firm earning more than 95 percent of the revenues from a single line of business
b) A firm that earns more than 70 percent of its revenue from its main line of business and the rest from businesses located along the value chain
c) A firm that earns less than 70 percent of its revenue from its main line of business and whose other lines of business share product, technological, and distribution linkages with the main business
d) A firm that earns more than 70 percent of its revenue from its main line of business and the remainder from other lines across different value chains
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
44) Diversification adds value if ________.
a) the combined businesses deliver the same value every time to new or existing customers as before diversification
b) the combined businesses reduce the firm's overall cost of producing goods or services
c) expansion into an adjacent business requires fewer resources and capabilities
d) expansion into an adjacent business requires reducing the existing production capacity
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
45) Slack refers to _________.
a) a lag in the production
b) unused resource capacity
c) reduced production capacity
d) a lack of adequate resources
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
46) Which of the following statements is true of slack?
a) Employing slack usually creates value through exploitation.
b) Slack adds value in the form of economies of scale.
c) Slack destroys value through expansion of resources.
d) It refers to the lag in production due to inadequate resources.
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
47) In the context of the six Ss, synergy occurs when ________.
a) managers of a company conceptualize the business and make critical human resource allocation decisions
b) different elements of a system interact in a way that creates more value together than the elements create separately
c) the combined business delivers the same value every time to new or existing customers as it did before diversification
d) a company acquires unused redundant resources during an acquisition that expands slack
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
48) Under which of the following circumstances does diversification destroy value?
a) When high-powered incentives for managers are provided
b) When resource commonality between the lines of business exists
c) When the new line of business expands the company's capabilities
d) When the new line of business fails to exploit the company's resources
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
49) Which of the following statements is true of the sunk cost fallacy?
a) It refers to the decisions made by managers to diversify their corporation because their competitor diversified first.
b) It is based on the belief of firm managers about the potential of their company's ability to create value in the adjacent market.
c) It refers to the excessive pride, arrogance, or overconfidence of managers that leads to poor decisions while making acquisitions.
d) It is the belief of managers that investment in a failed acquisition must continue because significant amounts have already been invested.
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
50) According to the Boston Consulting Group's growth share matrix, cash cows are business units that _________.
a) have high relative market share but a low growth rate and which can generate large cash flows
b) combine high share with high growth and which require heavy investments
c) require significant investment and effective strategic management
d) have low share and low growth and which add little profitability to a company
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Use a portfolio management tool to characterize a company’s different business units and to evaluate how well a company manages its portfolio.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
51) According to the Boston Consulting Group's growth share matrix, which of the following is true of stars?
a) They are business units that have high share but low growth and which can generate large cash flows that can be used to fund growth businesses.
b) They are business units that combine high share with high growth and smart managers should invest heavily in these units to improve their position over time.
c) They are business units that require significant investment and effective strategic management.
d) They are business units that have low share and low growth and add little profitability to a company’s overall portfolio businesses.
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Use a portfolio management tool to characterize a company’s different business units and to evaluate how well a company manages its portfolio.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
52) Identify a limitation of the Boston Consulting group’s growth share matrix.
a) It is complex and difficult to understand.
b) It does not help in evaluating a firm's current portfolio.
c) It does not provide any guidance to the managers of firms about which business units to invest in and which business units to divest.
d) It says almost nothing about whether a business unit will help the corporation exploit or expand a company’s resources and capabilities.
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Use a portfolio management tool to characterize a company’s different business units and to evaluate how well a company manages its portfolio.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
53) Under which of the following conditions should a firm ideally choose greenfield entry?
a) When access to channels is difficult and expensive
b) When a rapid entry is needed to capture an opportunity
c) When the company's brands are not well-known in a new market
d) When the customers in a new market are similar to existing customers
Difficulty: Medium
Section Reference 1: Methods of Diversification
Learning Objective 1: Explain how a company would choose whether to diversify by greenfield entry or by acquisition. Explain how a company should decide how tightly to integrate an acquisition into its current business portfolio.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
54) Under which of the following conditions should a firm ideally choose the acquisition mode of entry?
a) When it can afford to enter new arenas slowly
b) When its industry favors competitors with small scale
c) When its industry is characterized by a steep learning or experience curve
d) When its industry demands standardized knowledge and skills that can be easily gained
Difficulty: Medium
Section Reference 1: Methods of Diversification
Learning Objective 1: Explain how a company would choose whether to diversify by greenfield entry or by acquisition. Explain how a company should decide how tightly to integrate an acquisition into its current business portfolio.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
55) Acquisitions may fail to create value because of _________.
a) low acquisition price
b) poor strategic fit
c) loose integration
d) complete due diligence
Difficulty: Medium
Section Reference 1: The Acquisition and Integration Process
Learning Objective 1: Explain how a company would choose whether to diversify by greenfield entry or by acquisition. Explain how a company should decide how tightly to integrate an acquisition into its current business portfolio.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
Question type: Text Entry
56) In vertical integration, movement in the direction of raw materials is ___.
Difficulty: Easy
Section Reference 1: Corporate Versus Business Unit Strategy
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Bloomcode: Knowledge
Standard 1 : AACSB || Analytic
57) A firm earning more than 95 percent of the revenues from a single line of business is known as a ___.
Difficulty: Easy
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Knowledge
Standard 1 : AACSB || Analytic
Question type: Essay
58) What are the mechanisms that help companies in exploiting and/or expanding their resources and capabilities?
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
Solution: Exploiting and/or expanding the resources and capabilities usually come through one of six mechanisms. A mnemonic device of the six Ss helps one remember these important elements: employing slack, creating synergy, leveraging shared knowledge, utilizing similar models for success, spreading human and financial capital to its best use, or providing a stepping stone for the company to a completely new business sector.
59) What does the term adjacent market mean?
Difficulty: Medium
Section Reference 1: Corporate Versus Business Unit Strategy
Section Reference 2: Creating Value Through Diversification
Learning Objective 1: Describe how a corporate strategy differs from a business unit level strategy.
Learning Objective 2: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
Solution: An adjacent market is a market or industry that is closely related to markets or industries a firm currently competes in. The adjacent market may mean selling the firm’s existing products to new customer groups, bringing new products and services to existing customers, or selling new products and services to new customers.
60) How does diversification help exploit existing customer-facing resources?
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
Solution: Diversification allows companies to exploit their existing customer-facing resources by adding new operational resources and capabilities.
61) Explain the ways in which diversification adds value.
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
Solution: Diversification adds value when it allows the combined businesses to deliver greater value and utility to new or existing customers than a firm could without being diversified. Diversification also adds value if the combined businesses reduce the firm’s overall cost of producing goods or services. Diversification adds value when expansion into an adjacent business either exploits the firm’s core and valuable resources and capabilities or diversification enhances and grows the resource base. Diversification allows companies to exploit their existing customer-facing resources by adding new operational resources and capabilities. Diversification also creates value when it helps a company expand its existing set of resources and capabilities or diversification enables it to prepare for the future.
62) What is a greenfield entry? When should a company use it?
Difficulty: Medium
Section Reference 1: Methods of Diversification
Learning Objective 1: Use a portfolio management tool to characterize a company’s different business units and to evaluate how well a company manages its portfolio.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
Solution: A greenfield entry is defined as entry into an adjacent market by a firm that opens its own operation. Greenfield entry makes sense, first and foremost, when companies have the front-end and back-end resources and capabilities they can immediately exploit to create value. Greenfield also makes sense when companies can afford to enter new arenas slowly and at small to moderate investment.
63) What are the two challenges related to acquisition premium that an acquiring firm faces when acquiring a target firm?
Difficulty: Easy
Section Reference 1: The Acquisition and Integration Process
Learning Objective 1: Explain how a company would choose whether to diversify by greenfield entry or by acquisition. Explain how a company should decide how tightly to integrate an acquisition into its current business portfolio.
Bloomcode: Knowledge
Standard 1 : AACSB || Analytic
Solution: Acquirers must pay a premium to acquire a target; the premium represents a bet by the acquirer on its ability to create value through the acquisition. The acquisition premium creates two challenges for the acquiring firm. First, the larger the premium, the more value they must actually create to justify the acquisition. Second, given the time value of money, the larger the premium, the quicker the acquirer must create that value.
64) How does a related-constrained diversification differ from a related-linked diversification?
Difficulty: Medium
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Comprehension
Standard 1 : AACSB || Analytic
Solution: A related-constrained diversification occurs when a firm earns less than 70 percent of its revenue from its main line of business and its other lines of business share product, technological, and distribution linkages with the main business. A related-linked diversification occurs when a firm operates in related markets, but fewer linkages exist between the new and existing markets than the elements create separately.
65) Mention the factors that lead to destroying value through diversification. Explain any three of them.
Difficulty: Easy
Section Reference 1: Creating Value Through Diversification
Learning Objective 1: Identify the six ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified company’s ability to create value using one or more of these sources.
Bloomcode: Knowledge
Standard 1 : AACSB || Analytic
Solution: Value usually gets destroyed in one of five ways: excessive pride; sunk cost fallacy; imitative diversification; poor governance and incentives; or the lack of resource commonality between the lines of business. (Students’ answers may vary.)
Hubris: Managers may diversify based on their own beliefs about the potential of their company’s ability to create value in the adjacent market. Hubris is an ancient Greek word for excessive pride, arrogance, or overconfidence. Managers act with hubris when they diversify or make acquisitions based on their own experience or their gut feelings rather than on solid data and research.
Sunk Cost Fallacy: Closely related to hubris as a reason why diversification fails is the sunk cost fallacy, whereby managers believe that their investment in a failed acquisition just needs more incremental investment in order to succeed. Executives are often reluctant to abandon a project in which they have already invested so much time and capital; they often move forward under the assumption that things will turn around with a little more investment.
Imitation: Managers sometimes feel pressure to diversify their corporation when a competitor diversifies first. The competitor has done due diligence and selected an attractive target for acquisition, or made a greenfield entry after careful research and planning. Caught off-guard, a firm might quickly look for a similar acquisition target or hurry to create a similar line of business. In their rush to respond, managers fail to consider how attractive the target really is, or if they have the resources and capabilities that make the new market a value adding adjacency.
Document Information
Connected Book
Strategic Management Cases 2e Complete Test Bank
By Jeffrey H. Dyer