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Companies that concentrate on just one industry may

miss out on opportunities to increase their profitability by

leveraging their distinctive competencies to make and sell
products in new industries.
Diversification is the process of a company entering new
industries distinct from its core industry, using a
multibusiness model.
Free cash flow refers to additional funds from a
government stimulus program.
If a company generates free cash flow, that money
technically belongs to shareholders.
Transferring competencies across industries involves
taking a distinctive competency developed in one industry
and implanting it in an existing business unit in another
A 100-year-old industrial giant, 3M serves as an example
of how a company can leverage technology to create
successful new business.
If a company's core skills are highly specialized and have
few applications outside the core business, then a
company should pursue a related diversification strategy.
Intel is an example of a company that moved from a
related diversification strategy to a concentration strategy.
A company should pursue related diversification only to
enhance the competitive position of its core business.

Economies of scope arise when one or more of a

diversified company's business units are able to realize
cost-saving or differentiation advantages because they
can more effectively pool, share, and utilize resources or
Multipoint competition occurs when companies compete
against each other in different industries.
Firms with superior strategic capabilities can create
profitable new business units at a much higher rate than
most other companies can.
For diversification to increase profitability, a company's
top managers must have superior entrepreneurial
One way a diversified company can increase its
profitability is by acquiring inefficient or poorly managed
companies and then restructuring them to improve their
An advantage of related diversification is that it allows a
company to quickly gain entry into a new industry where
barriers are high.
An advantage of unrelated diversification is that
competencies can be shared and leveraged throughout
the value chain activities.
An appropriate reason to diversify is to pool the risk from
several business ventures in order to create a more
stable income stream.
Companies with a strong track record of internal new
venturing generally excel at research and development.

A company can increase the probability of success of an

internal venture by constructing efficient scale
manufacturing facilities ahead of demand.
Internal new ventures can generally be executed far more
quickly than acquisitions.
The higher the number of business units in a company's
portfolio, the more difficult it is for corporate managers to
remain informed about the complexities of each business.
The coordination required to realize value from a
diversification strategy based on transferring, sharing, or
leveraging competencies is a major source of
bureaucratic costs.
Research evidence suggests that small-scale entry into a
new business is the best way for an internal venture to
Research suggests that companies that acquire many
businesses over time become expert in this process and
so can generate significant value from their acquisitions.
A joint venture allows a company to share the risks and
costs associated with establishing a new business unit
with another company.
A laundromat and a pool hall together invest in a new
store, where customers can wash their clothes and play
pool while waiting. This is an example of an internal new
Much of Tyco's growth in earnings in the early 1990s was
driven by joint venturing.

Critics of Tyco's financial performance in the late 1990s

argued that company officials were inflating the
profitability of Tyco's operating units.
The three main types of diversification strategies are
A. Acquisitions, joint ventures, and divestments.
B. Acquisitions, mergers, and buy outs.
C. Acquisitions, internal new ventures, and joint ventures.
D. Related acquisitions, unrelated acquisitions, and
E. Joint ventures, strategic alliances, and long-term
Free cash flow is defined as
A. money in a company's bank account.
B. government funds given to a company for meeting
Environmental Protection Agency (EPA) regulations.
C. additional funds donated by stockholders.
D. cash in excess of that required to fund investments in
the company's industry and to meet any debt
E. money borrowed by the company that requires no
interest payments.
The role of managers with respect to corporate-level
strategy is to
A. identify which resources provide distinctive capabilities.
B. identify which industries a company should compete in
to maximize long-run profit.
C. identify which of the company's businesses has a
sustainable source of competitive advantage.
D. position the firm within its industry.
E. strengthen a company's core competitive
A focus on using or recombining existing competencies or
building new competencies to enter new markets helps
managers think strategically about how industry
A. tend to remain static over time.

B. might change over time.

C. completely disappear over five-year spans.
D. are not important.
E. none of these choices.
Companies that base their diversification strategy on
transferring competencies tend to acquire new
businesses that are ____ to their existing business
A. unrelated
B. not comparable
C. opposed
D. related
E. identical
Leveraging competencies involves taking a distinctive
competency developed by a business unit in one industry
to create
A. a new business unit in the same industry.
B. a new business unit in a different industry.
C. a new industry.
D. a new market segment.
E. new customers in the same industry.
Product bundling refers to
A. preparation of products for shipment.
B. a complete package of related products.
C. a method of stocking products efficiently.
D. an inventory procedure for ensuring effective counting
of products.
E. a package of unrelated products.
General organizational competencies refer to
A. existing in individual business units.
B. existing in individual functional units.
C. existing in the industry in which a company operates.
D. that can be procured in the marketplace.
E. that transcend individual functions or business units.

What is the process of transferring resources to and

creating a new business unit in a new industry called?
A. External new venturing
B. Exportation of resources
C. Intrapreneuring
D. Risk avoidance
E. Internal new venturing
When a company has cash in excess of the amount
needed to maintain a competitive advantage in its core
business, it will most likely pursue
A. taper integration.
B. full integration.
C. diversification.
D. long-term contracts.
E. strategic alliances.
Which diversification strategy is based on the idea that
the company creates value by applying the distinctive
competencies it developed in one line of business to
another business activity?
A. A technology acquisition strategy
B. Related diversification
C. A restructuring strategy
D. Total diversification
E. A taper diversification strategy
Which of the following statements is not generally true of
a diversification strategy based on the realization of
economies of scope?
A. The head office evaluates each business unit as a
stand-alone operation.
B. The strategy allows a company to realize cost
economies from sharing manufacturing facilities,
distribution channels, advertising campaigns, and
research and development costs among business units.
C. The strategy may allow a company to use shared
resources more intensively, thereby realizing economies
of scale.
D. Managers must be aware of the costs of coordination.
E. The strategy requires close coordination among
different business units.

Which of the following may be true for a company
pursuing a strategy of unrelated diversification rather than
a strategy of related diversification?
A. The company does not have to achieve coordination
between business units.
B. The company has broad organizational competencies
that can be transferred.
C. The company has superior strategic management and
organizational design.
D. All of these choices.
E. None of these choices.
A company pursuing a multibusiness model based on
diversification may justify this strategy for what
A. Transfer competencies
B. Reserve competencies
C. Resource sharing
D. Product bundling
E. All of these choices
A diversification strategy based on resource sharing
A. entails a company creating value by applying the
distinctive competencies it developed in one line of
business to another line of business.
B. requires the development of new business-level
C. can help a company to realize economies of scope.
D. is a valid way of supporting the generic business-level
strategy of differentiation.
E. increases the accountability of units.
General organizational competencies are found
A. in the skills of a company's top managers and
functional experts.
B. at low levels in the organization.
C. among technology professionals.
D. within a company's strategic core.
E. in an organization's tangible resources.

Which of the following is not a general organizational

A. Entrepreneurial capabilities
B. Capabilities in organizational design
C. Superior strategic capabilities
D. Product bundling
E. All of these choices
A company should pursue related diversification instead
of unrelated diversification when the company's
A. core skills are applicable to a wide variety of industrial
and commercial situations.
B. core skills are highly specialized and have few
applications outside the core business.
C. top managers are skilled at acquiring and turning
around poorly run enterprises.
D. main objective is to maximize growth.
E. free cash flow is high enough that it has funds
available for investment.
A company should pursue unrelated diversification
instead of related diversification when
A. its core skills are highly specialized and have few
applications outside its core business.
B. the company's top managers are skilled at acquiring
and turning around poorly run enterprises.
C. its core technological skills are applicable to a wide
variety of industrial and commercial situations.
D. it wants to maximize growth.
E. the bureaucratic costs of implementation do not
exceed the value that can be created by realizing
economies of scope.
When one or more components of a company's value
chain are applicable to a wide variety of industrial and
commercial situations, which of the following strategies
should a company pursue?
A. Unrelated diversification
B. Related diversification
C. A focus strategy

D. Taper integration
E. Backward integration
A strategy based on diversification may fail to add value
because companies
A. seek to achieve differentiation instead of low cost.
B. diversify into areas in which they have some
knowledge and miss out on profitable opportunities in
other areas.
C. make acquisitions rather than develop new
technologies on their own.
D. incur bureaucratic costs that exceed the value created
by the strategy.
E. seek to achieve cost leadership instead of
Diversification may dissipate value if it is wrongly based
A. realizing economies of scope.
B. pooling risks.
C. transferring competencies.
D. acquisitions and restructuring.
E. leveraging existing competencies.
In which of the following cases are bureaucratic costs
likely to be lowest?
A. A vertically integrated company with five divisions that
pursues full integration
B. A company with five divisions that pursues related
diversification based on economies of scope
C. A company with five divisions that pursues related
diversification based on transferring competencies
D. A company with five divisions that pursues unrelated
diversification based on acquisitions and restructuring
E. A company with twenty divisions that pursues taper
New ventures are likely to be preferred compared to
acquisitions when
A. entry barriers are high.
B. exit barriers are high.

C. a company's business model is based on using its

technology to innovate new kinds of products for related
D. the company needs more mega-opportunities.
E. the industry is in the mature stage of the industry life
New ventures
A. should be killed if they don't make a profit within three
B. are often preferred by technology-based companies.
C. are preferred compared to acquisitions when entry
barriers are high.
D. are less risky than acquisitions.
E. are best when the company is entering the industry on
a small scale.
Which of the following statements concerning research
and development is correct?
A. Exploratory research is more important than
development research.
B. Development research is more important than
exploratory research.
C. Exploratory research is directed toward
commercialization of a new technology.
D. Development research advances basic science.
E. Companies with a strong record of internal new
venturing excel at both types of research.
In which of the following industry environments are new
ventures most likely to be favored over acquisitions as a
means of entering a new business area?
A. An embryonic industry
B. An industry in its later stages of growth
C. An industry passing through the shakeout stage
D. A mature industry
E. A declining industry
To be commercially successful, new products must be
developed with ____ utmost in mind
A. manufacturing requirements

B. engineering technology
C. customer requirements
D. sales techniques
E. technical requirements
If a company is to increase the probability of a new
product's commercial success, the company must foster
close links between
A. marketing and sales.
B. engineering and advertising.
C. quality assurance and inventory management.
D. research and development (R&D) and marketing.
E. accounting and industrial engineering.
Which of the following seems to be a major determinant
of a new venture's success?
A. Large-scale entry into the target industry designed to
build market share, even when such entry involves
significant short-term losses
B. Cautious small-scale entry into the target industry so
that the company can assess the probable outcome of
the venture without losing too much money
C. A low level of integration between the marketing and
the research and development functions of the venturing
D. Supporting many new venture projects in the hope that
one will succeed
E. Killing the new venture if it does not show a profit after
the end of the third year
An internal new venture is the most appropriate strategic
choice when
A. an industry is mature.
B. the firm will enter on a small scale.
C. the firm has competencies that can be leveraged.
D. speed of entry is the most important consideration.
E. there is strong pressure for quick profitability.
Which of the following entry strategies should be used
when speed is an important consideration?
A. Internal new venture

B. Acquisition
C. Joint venture
D. Unrelated diversification
E. Related diversification
A company considering entering an industry that is in the
mature stage of its life cycle would generally prefer which
of the following entry strategies?
A. Joint ventures
B. New ventures
C. Acquisitions
D. Long-term contracting
E. Taper integration
Acquisitions often fail because of
A. poor commercialization.
B. too much preacquisition screening, which increases
the time it takes to enter a market.
C. large-scale entry.
D. differences in corporate culture.
E. slowness in establishing significant market presence.
Which of the following is not a reason for the failure of an
acquisition to generate the gains originally expected of
A. Poor postacquisition integration
B. Overestimation of the potential gains to be derived
from synergy
C. The high cost of making acquisitions
D. Lack of preacquisition screening
E. Overestimation of the potential costs of realizing
Which of the following is (are) the probable
consequence(s) of an inability to integrate two divergent
corporate cultures after an acquisition?
A. High management turnover
B. Damaging political tensions between the management
of the acquired and acquiring companies
C. An inability to realize potential gains from synergies

D. All of these choices

E. None of these choices
What accounts for the high failure rate of all new products
that reach the marketplace?
A. Market entry on too small a scale
B. Poor commercialization of the new-venture product
C. Poor corporate management of the new-venture unit
D. All of these choices
E. None of these choices
Which of the following is not a guideline for a successful
A. Good bidding strategy
B. A clear strategic rationale for making the acquisition
C. Completing the acquisition quickly
D. Thorough preacquisition screening
E. Postacquisition audit to review the process and
discuss ways to improve it
Joint ventures
A. are an alternative to new ventures.
B. are attractive when speed is important.
C. are attractive when entry barriers are high.
D. should be done on a small scale.
E. reduce the risk of loss of proprietary knowledge.
Which of the following statements is false?
A. Acquisitions are preferable to joint ventures when the
new business is unrelated to the existing business.
B. Acquisitions are preferable to new ventures when
speed is important.
C. Joint ventures are generally preferable to acquisitions
when entry barriers are high.
D. Acquisitions can be both a reason for corporate decline
and part of a turnaround strategy.
E. New ventures are preferable to acquisitions in the
embryonic stage of the industry life cycle.

Stanley's services firm wants to enter an embryonic

market, but it doesn't have enough cash to purchase the
required assets. Which of the following strategies would
you recommend to Stanley?
A. Diversify through acquisition
B. Do not diversify at all
C. Diversify with an internal new venture
D. Diversify with a joint venture
E. Diversify through vertical integration
In the joint venture between Stephanie's dressmaking
shop and Kevin's fabric factory, the partners argue
constantly about how to schedule tasks and reward
workers. Which of the following disadvantages is
Stephanie and Kevin's joint venture experiencing?
A. Joint ventures risk the loss of proprietary information to
a partner.
B. Joint venture partners must split the profits of the
C. Joint venture partners must share control and
decision-making power.
D. Joint ventures are slower to reach profitability than are
E. Joint ventures require less up-front investment than do
internal new ventures.
Economies of scope typically involve
A. sharing resources by business units.
B. acquiring resources from outside a company.
C. limited utilization of resources by specific business
D. all of these choices.
E. none of these choices.
The greater the number of business units in a company's
portfolio, the ____ it is for corporate managers to remain
informed about the complexities of each business.
A. easier
B. more difficult
C. less important
D. less expensive
E. more simplistic

What is perhaps the most important reason why
acquisitions made by a company fail?
A. The expense of the acquisition
B. The timing of the acquisition
C. Management's unwillingness to expend the necessary
effort to make the acquisition work effectively
D. Incompetence on the part of workers in the acquired
E. Difficulties in coordinating manufacturing activities
Which of the following reasons can make a diversification
strategy an unwise course of action for a company to
A. Changing industry conditions
B. Changing firm-specific conditions
C. Diversification for the wrong reasons
D. Increasing bureaucratic costs of diversification
E. All of these choices
Diversification is sometimes pursued by a company for
the wrong reasons. Which of the following is a faulty
justification for diversification?
A. Risk pooling
B. Rescuing the core business from difficulty
C. Growth for growth's sake
D. All of the above
E. None of these choices
At its simplest level, a joint venture may be thought of as
A. merger of two companies.
B. acquisition of a smaller company by a larger company.
C. form of strategic outsourcing.
D. sign of weakness on the part of one of the companies.
E. corporate partnership.