Chapter 6 Review Questions

1. Whenever an organization diversifies, it represents investing a stockholder’s funds in a way in which the individual investor is unable. True (p. 198)2. When firms diversify into unrelated businesses, the primary potential benefits are horizontal relationships, i.e., businesses sharing tangible and intangible resources. False (p. 198)3. Similar businesses working together or the affiliation of a business with a strong parent can strengthen a firm’s bargaining position relative to suppliers and customers. True (p. 203 – 204)

4. A publishing company that purchases a chain of bookstores to sell its books is an example of unrelated diversification. True (p. 206)5. One of the risks of vertical integration is that there may be problems associated with unbalanced capacities or unfilled demands along a firm’s value chain. True (p. 206 – 207)6. Vertical integration is attractive when market transaction costs are higher than internal administrative costs. True (p. 208)7. According to the text, the two main sources of synergy in unrelated diversification are parenting and financial synergies via portfolio management. False (p. 209 – 211)8. Portfolio management should be considered as the primary basis forformulating corporate-level strategies. True (p. 211)9. An advantage of mergers and acquisitions is that they can enable a firm to rapidly enter new product markets. True False (p. 215 – 216)10. A golden parachute is a prearranged contract with managers specifying that in the event of a hostile takeover, the target firm’s managers will be paid a significant severance package. True (p. 225)

11. The potential advantages of strategic alliances and joint ventures include entering new markets as well as developing and diffusing new technologies. True (p. 220 – 222)12. Corporate-level strategy addresses two related issues: (p. 195)

C. How to integrate primary activities; increase shareholder wealth..

13. __________ reflect(s) the collective learning in organizations such as how to coordinate production skills, integrate multiple streams of technologies, and market and merchandise diverse products and services. (p. 200)

C. Core competencies

14. The risks of vertical integration include all of the following except (p. 207)

B. Lack of control over valuable assets.

15. A firm should consider vertical integration when (p. 207 – 208)

D. The firm’s suppliers of raw materials are often unable to maintain qualitystandards.16. __________ is when a firm tries to find and acquire either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change. (p. 207 – 208)

B. Restructuring

17. According to the text, corporate restructuring includes . (p. 210)

D. Capital restructuring, asset restructuring, and management restructuring.18. Portfolio management frameworks (e.g., BCG matrix) share which of the following characteristics? A. Grid dimensions are based on external environments and internal capabilities/market positions.

19. The three primary means by which a firm can diversify are: (p. 214 – 215) A. Mergers and acquisitions; joint ventures and strategic alliances; internal development..20. The downsides or limitations of mergers and acquisitions include all of the following except: . (p. 217 – 218)

C. It is a slow means to enter new markets and acquire skills and competences.

21. __________ may be time consuming and, therefore, firms may forfeit the benefits of speed that growth through __________ and __________ can provide. (p. 222)

C. Strategic alliances; mergers; joint ventures22. McKesson, a large distribution company, sells many product lines such as pharmaceuticals and liquor through its super warehouses. This is an example of (p. 199)

D. Attaining the benefits of parenting through unrelated diversification.23. For a core competence to be a viable basis for the corporation strengthening a new business unit, there are three requirements. Which one of the following is not one of these requirements? (p. 200 – 201)

D. The new business must have an established large market share.24. Portfolio management matrices are applied to what level of strategy? (p. 211)

C. Corporate level

25. In the Boston Consulting Group’s (BCG) Growth Share Matrix, the suggested strategy for “stars” is to (p. 212)

B. Invest large sums to gain a good market share.

26. Strategic alliances are arrangements in which two firms join forces and form a cooperative partnership. Discuss the advantages and disadvantages of strategic alliances as well as guidelines for reducing conflict between the partners. (p. 220 – 222)

There are many specific advantages of a strategic alliance. You can get instant market access, or at least speed your entry into a new market. Exploit new opportunities to strengthen your position in a market where you already have a foothold. Increase sales. Gain new skills and technology. Develop new products at a profit. Share fixed costs and resources. Enlarge your distribution channels. Broaden your business and political contact base. Gain greater knowledge of international customs and culture. Enhance your image in the world marketplace.

There are also some disadvantages of a strategic alliance. Weaker management involvement or less equity stake. Fear of market insulation due to local partner’s presence. Less efficient communication. Poor resource allocation. Difficult to keep objectives on target over time. Loss of control over such important issues as product quality, operating costs, employees, etc.

Partners must be compatible and willing to trust each other. Unfortunately, often little attention is given to nurturing the close working relationships and interpersonal connections that bring together the partnering organizations.

27. Summarize the advantages and disadvantages of mergers and acquisitions as a means of diversification. . (p. 215 – 218) Some of the benefits of mergers and acquisitions obtain valuable resources that can help an organization expand its product offerings. Provide the opportunity for firms to attain three bases of synergy: leveraging core competencies, sharing activities, and building market power. Lead to consolidation within an industry and force other players to merge. Enter new market segments.

Some of the disadvantages or limitations of mergers and acquisitions: takeover premiums paid for acquisitions are typically very high. Competing firms often can imitate any advantages or copy synergies that result from the merger or acquisition. Managers’ egos sometimes get in the way of sound business decisions. Cultural issues may doom the intended benefits from M&A endeavors.

28. What are the primary benefits and risks associated with unrelated diversification? (p. 211 – 213) The primary benefit from this is that an entrepreneur is spared from risking all his capital towards one business scheme. With the unrelated diversification, one expands the business using a different marketing plan. This is like hitting two birds in one stone.

The business will grow hand in hand with each other for will boost the other. This is very advisable for a business that is experiencing economic crisis too. Instead of continuing to sell the products that are not so demandable yet, one can resort to drastic product change to aid the business for economic survival. Outsmarting of the competition through this unrelated diversification is successful. The reason is that a business with this kind of scheme has a fair advantage to the other.

29. What are some of the key issues to take into account when considering whether or not to vertically integrate? (p. 207 – 208) Some of the key advantages of considering vertical integration are a secure source of raw materials or distribution channels. Protection of and control over valuable assets. Access to new business opportunities. Simplified procurement and administrative procedures.

Some of the key disadvantages of considering whether or nor to vertically integrate are costs and expenses associated with increased overhead and capital expenditures. Loss of flexibility resulting from large investments. Problems associated with unbalanced capacities along the value chain. Additional administrative costs associated with managing a more complex set of activities.

30. What are the primary benefits and risks associated with related diversification? . (p. 199 – 209)

Some the advantages of related diversification: Spreading the risk by way of producing similar and/or related goods, offering similar or complementing services, or penetrating similar markets; In the majority of cases the companies use existing, available resources and experience; If the company starts producing part of the raw materials (components) for its main production line, it guarantees better quality, lower prices and regular supplies;

Strategic goals can be combined and, as a result, opportunities arising throughout the “production chain” can be shared and fully utilized; Better usage of opportunities to share technologies, skills and expertise, common distribution channels, similar management techniques and adapting resources;

Economies of scale can be achieved through the elimination or significant reduction of certain expenses when more than one business activity is developed in a common company and also because of the opportunities to use any internal connections arising along the business chain; Synergy effect – when two activities are integrated, the result is greater than the sum of the results of two individual activities.