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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

Chapter 06
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.
True 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.
True False

3. When firms diversify into unrelated businesses, the primary potential benefits are
horizontal relationships, i.e., businesses sharing tangible and intangible resources.
True False

4. A newly acquired business must always have products that are similar to the existing
businesses' products to benefit from the corporation's core competence.

True False

5. Sharing activities across business units can provide two primary benefits: cost savings and
revenue enhancements.
True False

6. 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.
True False

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

7. Market power refers to cost savings from leveraging core competencies or sharing activities
among the businesses in a corporation.
True False

8. The two principal means by which firms achieve synergy through market power are: pooled
negotiating power and corporate parenting.
True 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.
True False

10. A firm that incorporates more processes toward the original source of raw materials is an
example of forward integration.
True False

11. A publishing company that purchases a chain of bookstores to sell its books is an example
of unrelated diversification.
True 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.
True False

13. Vertical integration should be undertaken when demand for the organization's products is


very unstable.
True False

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

14. Market transactions do not involve transaction costs.
True False

15. Vertical integration is attractive when market transaction costs are higher than internal
administrative costs.
True False

16. According to the text, the two main sources of synergy in unrelated diversification are
parenting and financial synergies via portfolio management.
True False

17. Restructuring requires the corporate office to find either poorly performing firms with
unrealized potential or firms in industries on the threshold of significant, positive change.
True False

18. Portfolio management should be considered as the primary basis for formulating
corporate-level strategies.
True False

19. Portfolio management matrices generally consist of two axes that reflect industry or
market growth and the market share of a business.
True False

20. The acquisition of two or more counter-cyclical businesses is an example of using
diversification to reduce risk.
True False

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

21. An advantage of mergers and acquisitions is that they can enable a firm to rapidly enter
new product markets.
True False

22. Among the disadvantages of acquisitions are the expensive premiums that are frequently
paid to acquire a business.
True False

23. Through joint ventures, firms can directly acquire the assets and competencies of other
firms.
True False

24. The potential advantages of strategic alliances and joint ventures include entering new
markets as well as developing and diffusing new technologies.
True False

25. For strategic alliances to be effective, reliance on written contracts to delimit
responsibilities and enforce compliance is vital.
True False

26. An advantage of a firm entering into a strategic alliance is that it does not have to "share
the wealth" with its partners.
True False

27. An advantage of internal development is that firms do not have to combine activities
across the value chains of many companies and merge company cultures.
True False

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

28. In recent years, many high tech firms such as Priceline.com have suffered from the
negative impact of uncontrolled growth.
True False

29. Greenmail is an offer by a company, threatened by takeover, to offer its stock at a reduced
price to a third party.
True False

30. 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 False

Multiple Choice Questions

31. Corporate-level strategy addresses two related issues:
A. how to compete in a given business; the application of technology.
B. what businesses to compete in; how these businesses can achieve synergy.
C. how to integrate primary activities; increase shareholder wealth.
D. how to improve a firm's infrastructure; how to maintain ethical behavior.

32. Individual investors are dependent upon the corporation's managers to
A. diversify the stockholder's investments in order to reduce risk.
B. add value to their investments in a way that the stockholders could not accomplish on their
own.
C. achieve risk reduction at a lower cost than stockholders could obtain on their own.
D. maximize short-term returns in the form of dividends.

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

33. McKesson, a large distribution company, sells many product lines such as pharmaceuticals
and liquor through its super warehouses. This is an example of
A. achieving economies of scope through related diversification.
B. achieving market power through related diversification.
C. attaining the benefits of restructuring through unrelated diversification.
D. attaining the benefits of parenting through unrelated diversification.

34. Philip Morris bought Miller Brewing and used its marketing expertise to improve Miller's
market share. This justification for diversification is best described as
A. utilizing common infrastructures.
B. capitalizing on core competencies.
C. reducing corporate risk.
D. using portfolio analysis.

35. The corporate office of Cooper Industries adds value to its acquired businesses by
performing such activities as auditing their manufacturing operations, improving their
accounting activities, and centralizing union negotiations. This is an example of
A. achieving economies of scope through related diversification.
B. achieving market power through related diversification.
C. attaining the benefits of restructuring through unrelated diversification.
D. attaining the benefits of parenting through unrelated diversification.

36. __________ 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.
A. Primary value chain activities
B. Culture
C. Core competencies
D. Horizontal integration

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

37. 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?
A. The competence must help the business gain strength relative to its competition.
B. The new business must be similar to existing businesses to benefit from a core competence.
C. The collection of competencies should be unique, so that they cannot be easily imitated.
D. The new business must have an established large market share.

38. Sharing core competencies is one of the primary potential advantages of diversification. In
order for diversification to be most successful, it is important that
A. the similarity required for sharing core competencies must be in the value chain, not in the
product.
B. the products use similar distribution channels.
C. the target market is the same, even if the products are very different.
D. the methods of production are the same.

39. When management uses common production facilities or purchasing procedures to
distribute different but related products, they are
A. building on core competencies.
B. sharing activities.
C. achieving process gains.
D. using portfolio analysis.

40. Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by
producing much of its own polypropylene fiber, a key input into its manufacturing process.
This is an example of
A. leveraging core competencies.
B. sharing activities.
C. vertical integration.
D. pooled negotiating power.

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

41. The risks of vertical integration include all of the following except
A. costs and expenses associated with increased overhead and capital expenditures.
B. lack of control over valuable assets.
C. problems associated with unbalanced capacities along the value chain.
D. additional administrative costs associated with managing a more complex set of activities.

42. Unbalanced capacities that limit cost savings, difficulties in combining specializations,
and reduced flexibility are disadvantages associated with
A. strategic alliances.
B. divestment.
C. vertical integration.
D. horizontal integration.

43. A firm should consider vertical integration when
A. the competitive situation is highly volatile.
B. customer needs are evolving.
C. the firm's suppliers willingly cooperate with the firm.
D. the firm's suppliers of raw materials are often unable to maintain quality standards.

44. It may be advantageous to vertically integrate when
A. lower transaction costs and improved coordination are vital and achievable through vertical
integration.
B. the minimum efficient scales of two corporations are different.
C. flexibility is reduced, providing a more stationary position in the competitive environment.
D. various segregated specializations will be combined.

45. Transaction costs include all of the following costs except
A. search costs.
B. negotiating costs.
C. monitoring costs.
D. agency costs.

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

46. Vertical integration is attractive when
A. transaction costs are higher than internal administrative costs.
B. internal administrative costs are higher than transaction costs.
C. transaction costs and internal administrative costs are equal.
D. search costs are higher than monitoring costs.

47. __________ is when a firm's corporate office helps subsidiaries make wise choices in
their own acquisitions, divestures, and new ventures.
A. Parenting
B. Restructuring
C. Leveraging core competencies
D. Increasing market power

48. __________ 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.
A. Parenting
B. Restructuring
C. Leveraging core competencies
D. Sharing activities

49. According to the text, corporate restructuring includes
A. capital restructuring, asset restructuring, and technology restructuring.
B. global diversification, capital restructuring, and asset restructuring.
C. management restructuring, financial restructuring, and procurement restructuring.
D. capital restructuring, asset restructuring, and management restructuring.

50. Portfolio management matrices are applied to what level of strategy?
A. Departmental level
B. Business level
C. Corporate level
D. International level

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

51. When using a BCG matrix, a business that currently holds a large market share in a
rapidly growing market and that has minimal or negative cash flow would be known as a
A. cow.
B. dog.
C. problem child.
D. star.

52. In the BCG (Boston Consulting Group) Matrix, a business that has a low market share in
an industry characterized by high market growth is termed a
A. star.
B. question mark.
C. cash cow.
D. dog.

53. 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.
B. Businesses are plotted on a 3-dimensional grid.
C. Position in the matrix suggests a need for, or ability to share, infrastructures or build on
core competences.
D. They are most helpful in helping businesses develop types of competitive advantage.

54. A "cash cow," referred to in the Boston Consulting Group Portfolio management
technique, refers to a business that has
A. low market growth and relatively high market share.
B. relatively low market share and low market growth.
C. relatively low market share and high market growth.
D. high market growth and relatively high market share.

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

55. In managing a firm's portfolio, the BCG matrix would suggest that
A. "dogs" should be invested in to increase market share and become cash cows.
B. "stars" are in low growth markets and can provide excess cash to fund other opportunities.
C. "question marks" can represent future "stars" if their market share is increased.
D. "cash cows" require substantial cash outlays to maintain market share.

56. In the Boston Consulting Group's (BCG) Growth Share Matrix, the suggested strategy for
"stars" is to
A. milk them to finance other businesses.
B. invest large sums to gain a good market share.
C. not invest in them and to shift cash flow to other businesses.
D. maintain position and after the market growth slows use the business to provide cash flow.

57. All of the following are limitations (or downsides) of the BCG (Boston Consulting Group)
matrix except
A. every business cannot be accurately measured and compared on the two dimensions.
B. it views each business as a stand-alone entity and ignores the potential for synergies across
businesses.
C. it takes a dynamic view of competition which can lead to overly complex analyses.
D. while easy to comprehend, the BCG matrix can lead to some troublesome and overly
simplistic prescriptions.

58. The three primary means by which a firm can diversify are:
A. mergers and acquisitions; joint ventures and strategic alliances; internal development.
B. mergers and acquisitions; differentiation; overall cost leadership.
C. joint ventures and strategic alliances; integration of value chain activities; acquiring human
capital.
D. mergers and acquisitions; internal development; differentiation.

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

59. The downsides or limitations of mergers and acquisitions include all of the following
except:
A. expensive premiums that are frequently paid to acquire a business.
B. difficulties in integrating the activities and resources of the acquired firm into a
corporation's on-going operations.
C. it is a slow means to enter new markets and acquire skills and competences.
D. there can be many cultural issues that can doom an otherwise promising acquisition.

60. Divesting businesses can accomplish many different objectives. These include
A. enabling managers to focus their efforts more directly on the firm's core businesses.
B. providing the firm with more resources to spend on more attractive alternatives.
C. raising cash to help fund existing businesses.
D. all of the above.

61. A company offering local telecommunications service combines resources with an
international company that manufactures digital switching equipment to research a new type
of telecommunications technology. This is an example of
A. joint diversification.
B. strategic alliance.
C. divestment.
D. global integration.

62. Cooperative relationships such as __________ have the potential advantages such as
entering new markets, reducing manufacturing (or other) costs in the value chain, and
developing and diffusing new technologies.
A. joint ventures
B. mergers and acquisitions
C. strategic alliances
D. A and C

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

63. All of the following are guidelines for managing strategic alliances except
A. establishing a clear understanding between partners.
B. relying primarily on a contract to make the joint venture work.
C. not shortchanging your partner.
D. working hard to ensure a collaborative relationship between partners.

64. Which of the following statements regarding internal development as a means of
diversification is false?
A. Many companies use internal development to extend their product lines or add to their
service offerings.
B. An advantage of internal development is that it is generally faster than other means of
diversification and firms can benefit from speed in developing new products and services.
C. The firm is able to capture the wealth created without having to "share the wealth" with
alliance partners.
D. Firms can often develop products or services at a lower cost if they rely on their own
resources instead of external funding.

65. __________ may be time consuming and, therefore, firms may forfeit the benefits of
speed that growth through __________ and __________ can provide.
A. Strategic alliances; joint ventures, internal development
B. Internal development; mergers; acquisitions
C. Strategic alliances; mergers; joint ventures
D. Mergers; internal development; strategic alliances

66. According to Michael Porter: "There's a tremendous allure to __________. It's the big
play, the dramatic gesture. With one stroke of the pen you can add billions to size, get a front
page story, and create excitement in markets."
A. strategic alliances and joint ventures
B. mergers and acquisitions
C. internal development
D. differentiation strategies

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

67. An antitakeover tactic called (a) __________ is when a firm offers to buy shares of their
stock from a company (or individual) planning to acquire their firm at a higher price than the
unfriendly company paid for it.
A. golden parachute
B. greenmail
C. poison pill
D. scorched earth

68. An antitakeover tactic in which existing shareholders have the option to buy additional
shares of stock at a discount to the current market price is called
A. greenmail.
B. a poison pill.
C. a golden parachute.
D. scorched earth.

69. The term "golden parachutes" refers to
A. a clause requiring that huge dividend payments be made upon takeover.
B. financial inducements offered by a threatened firm to stop a hostile suitor from acquiring it.
C. managers of a firm involved in a hostile takeover approaching a third party about making
the acquisition.
D. pay given to executives fired because of a takeover.

70. Antitakeover tactics include all of the following except
A. greenmail.
B. golden parachutes.
C. golden handcuffs.
D. poison pills.

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification
Essay Questions

71. What are the primary benefits and risks associated with related diversification?

72. Briefly explain the advantages and disadvantages of vertical integration.

73. What are some of the key issues to take into account when considering whether or not to
vertically integrate?

74. Explain how transaction cost analysis can provide insights into vertical integration
decisions.

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

75. What are the primary benefits and risks associated with unrelated diversification?

76. Explain the uses and limitations of portfolio management matrices such as the growthshare matrix developed by the Boston Consulting Group (BCG).

77. Summarize the advantages and disadvantages of mergers and acquisitions as a means of
diversification.

78. Discuss some of the potential benefits of divestment.

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

79. 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.

80. Discuss how the potential benefits of diversification may be adversely affected by
conflicts between managers' interests and stockholders' interests. Hint: Egotism, growth for
growth's sake, antitakeover tactics.

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

Chapter 06 Corporate-Level Strategy: Creating Value through Diversification
Answer Key

True / False Questions

1. (p. 198) Whenever an organization diversifies, it represents investing a stockholder's funds in
a way in which the individual investor is unable.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-2

2. (p. 198) 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.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-2

3. (p. 198) When firms diversify into unrelated businesses, the primary potential benefits are
horizontal relationships, i.e., businesses sharing tangible and intangible resources.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-2

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

4. (p. 200) A newly acquired business must always have products that are similar to the existing
businesses' products to benefit from the corporation's core competence.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-3

5. (p. 201 - 202) Sharing activities across business units can provide two primary benefits: cost
savings and revenue enhancements.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-3

6. (p. 203) 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.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-3

7. (p. 203) Market power refers to cost savings from leveraging core competencies or sharing
activities among the businesses in a corporation.
FALSE

AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 06-3

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

8. (p. 203) The two principal means by which firms achieve synergy through market power are:
pooled negotiating power and corporate parenting.
FALSE

AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 06-3

9. (p. 203 - 204) 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

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-3

10. (p. 206) A firm that incorporates more processes toward the original source of raw materials
is an example of forward integration.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-3

11. (p. 206) A publishing company that purchases a chain of bookstores to sell its books is an
example of unrelated diversification.
FALSE

AACSB: Analytic
Bloom's: Application
Difficulty: Hard
Learning Objective: 06-3

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

12. (p. 206 - 207) 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

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-3

13. (p. 208) Vertical integration should be undertaken when demand for the organization's
products is very unstable.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-3

14. (p. 208 - 209) Market transactions do not involve transaction costs.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-3

15. (p. 208 - 209) Vertical integration is attractive when market transaction costs are higher than
internal administrative costs.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-3

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

16. (p. 209 - 211) According to the text, the two main sources of synergy in unrelated
diversification are parenting and financial synergies via portfolio management.
TRUE

AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 06-4

17. (p. 210) Restructuring requires the corporate office to find either poorly performing firms
with unrealized potential or firms in industries on the threshold of significant, positive
change.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-4

18. (p. 211) Portfolio management should be considered as the primary basis for formulating
corporate-level strategies.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-4

19. (p. 211) Portfolio management matrices generally consist of two axes that reflect industry or
market growth and the market share of a business.
TRUE

AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 06-4

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Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

20. (p. 214) The acquisition of two or more counter-cyclical businesses is an example of using
diversification to reduce risk.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-4

21. (p. 215 - 216) An advantage of mergers and acquisitions is that they can enable a firm to
rapidly enter new product markets.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-5

22. (p. 217) Among the disadvantages of acquisitions are the expensive premiums that are
frequently paid to acquire a business.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-5

23. (p. 220) Through joint ventures, firms can directly acquire the assets and competencies of
other firms.
FALSE

AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 06-5

6-23


Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

24. (p. 220 - 222) The potential advantages of strategic alliances and joint ventures include
entering new markets as well as developing and diffusing new technologies.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-5

25. (p. 222) For strategic alliances to be effective, reliance on written contracts to delimit
responsibilities and enforce compliance is vital.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-5

26. (p. 220 - 222) An advantage of a firm entering into a strategic alliance is that it does not have
to "share the wealth" with its partners.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-5

27. (p. 222) An advantage of internal development is that firms do not have to combine activities
across the value chains of many companies and merge company cultures.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-5

6-24


Chapter 06 - Corporate-Level Strategy: Creating Value through Diversification

28. (p. 223 - 224) In recent years, many high tech firms such as Priceline.com have suffered from
the negative impact of uncontrolled growth.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-6

29. (p. 225) Greenmail is an offer by a company, threatened by takeover, to offer its stock at a
reduced price to a third party.
FALSE

AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 06-6

30. (p. 225) 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

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 06-6

6-25


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