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Exam 6: Corporate-Level Strategy

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Question 1

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United Technologies, Textron, Samsung, and Hutchison Whampoa Limited are examples of diversified firms that have no relationships between their businesses. These firms all use the strategy of unrelated diversification.

A) True
B) False

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Question 2

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The "conglomerate discount" occurs in large, highly diversified businesses and results from analysts not knowing how to value the vast array of large businesses with complex financial reports.

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B) False

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Golden parachutes protect managers from the negative consequences of over-diversifying a firm.

Corporate-level strategy is concerned with ____ and how to manage these businesses.

Research has shown that horizontal acquisitions

Equator, a U.S. manufacturer of pharmaceuticals, has acquired a firm in the same industry in Ireland. It plans to move one of its key managers from its plant in St. Louis to Ireland. This can be considered a method of transferring corporate-level core competencies.

Case Scenario 2: Jewell Company. Jewell Company (JC) is a $2 billion diversified manufacturer and marketer of simple household items, cookware, and hardware. In the early 1950s, JC's business consisted solely of manufactured curtain rods that were sold through hardware stores and retailers like Sears. Since the 1960s however, the company has diversified extensively through acquisition into such businesses as paintbrushes, writing pens, pots and pans, and hairbrushes. Over 90 percent of its growth can be attributed to these many small acquisitions, whose performance it improved tremendously through aggressive restructuring and its corporate emphasis on cost-cutting and cost controls. While JC's sixteen different lines of business may appear quite different, they all share the common characteristics of being staple manufactured items and sold primarily through volume retail channels like Wal-Mart, Target, and Kmart. Because JC operates each line of business autonomously (separate manufacturing, R&D, and selling responsibilities for each line), it is perhaps best described as pursuing a related linked diversification strategy. The common linkages are both internal (accounting systems, product merchandising skills, and acquisition competency) and external (distribution channel of volume retailers). JC is presently contemplating the acquisition of Plastico, a $3 billion U.S.-based manufacturer of flexible plastic products like trash cans, reheatable and freezable food containers, and a broad range of other plastic storage containers designed for home and office use. While Plastico has been highly innovative (over 80% of its growth has come from internal new product development), it has had difficulty controlling costs and is losing ground against powerful customers like Wal-Mart. JC believes that the market power it wields with retailers like Wal-Mart will help it turn Plastico's prospects around. -(Refer to Case Scenario 2) What difficulties might you expect JC to encounter related to its acquisition of Plastico?

The drawbacks to transferring competencies by moving key people into new management positions include all EXCEPT

In making a decision to diversify, managers should use value-creating reasons or face the risk that their firms will be acquired and they could lose their jobs. Which of the following is a value-creating reason to diversify?

A major advantage of diversification is that overall monitoring costs are reduced, since each separate business comes under the control of corporate headquarters.

The use of poison pills increases the chance that a poorly performing firm will be taken over.

What is the similarity between high-technology firms and service-based firms that makes them risky as restructuring candidates?

Extensive outsourcing contributes to the firm's core competencies and helps the firm transfer those competencies to other business units in the diversified firm.

Large diversified businesses often face what is known as the "conglomerate discount." This discount means that investors

Vertical integration exists when a company produces its own inputs (forward integration) or owns its own source of output distribution (backward integration).

Certain regulatory changes (such as antitrust regulation and tax laws) create incentives or disincentives for diversification that _________________.

A company that tries to balance both operational and corporate relatedness and fails risks incurring diseconomies of scope.

Successful product diversification is expected to increase the variability in the firm's profitability since the earnings are generated from several different business units.

When implementing a restructuring strategy, a company would do best by focusing on mature, low-technology businesses rather than high-technology or service businesses.

Specialty Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve the high temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare and only two brick plants in the U.S. make this type of brick. Specialty Steel has decided to buy one of these brick plants. This is an example of