Chapter 6 Corporate-Level Strategy: Creating Value through Diversification True/False Questions 1. Whenever an organization diversifies, it represents investing a stockholder's funds in a way in which the individual investor is unable. Answer: False 2. Diversification that results in strengthening the value chain and increasing competitive advantages is the best possible example of investing stockholders' funds in a way that individual investors cannot. Answer: True 3. When firms diversify into unrelated businesses, the primary potential benefits are horizontal relationships, i.e., businesses sharing tangible and intangible resources. Answer: False 4. Market power refers to cost savings from leveraging core competencies or sharing activities among the businesses in a corporation. Answer: False 5. A newly acquired business must always have products that are similar to the existing businesses' products to benefit from the corporation's core competence. Answer: False 6. Sharing activities across business units can provide two primary benefits: cost savings and revenue enhancements. Answer: True 7. Sharing activities among business units can have a negative effect on a given business's differentiation—as in the example of Daimler-Benz's acquisition of Chrysler. Answer: True 333
Chapter 6 Corporate-Level Strategy: Creating Value through Diversification 8. The two principal means by which firms achieve synergy through market power are: pooled negotiating power and corporate parenting. Answer: False 9. 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. Answer: True 10. A firm that incorporates more processes toward the original source of raw materials is an example of forward integration. Answer: False 11. A publishing company that purchases a chain of bookstores to sell its books is an example of unrelated diversification. Answer: False 12. 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. Answer: True 13. Vertical integration should be undertaken when demand for the organization's products is very unstable. Answer: False 14. Market transactions do not involve transaction costs. Answer: False 15. Vertical integration is attractive when market transaction costs are higher than internal administrative costs. Answer: True 334
Chapter 6 Corporate-Level Strategy: Creating Value through Diversification 16. According to the text, the two main sources of synergy in unrelated diversification are parenting and financial synergies. Answer: True
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