Deck 7: Corporate Diversification

Question 1

Firms that pursue a strategy of related corporate diversification have some type of linkages among most of the different businesses they pursue.

Answer 1

True

Question 2

When a firm operates in multiple industries simultaneously it is said to be implementing a geographic market diversification strategy.

Answer 2

False

Question 3

A firm that diversifies by exploiting its resources and capability advantages in its original business will have higher costs than firms that begin new business without these revenues and capability advantages or lower revenues than firms lacking these advantages, or both.

Answer 3

False

Question 4

Firms that may appear to be unrelated diversified firms, but that are, in fact, related diversified firms without any shared activities are referred to as seemingly related firms.

Question 5

One of the limits of activity sharing is that sharing activities may limit the ability of a particular business to meet its specific customers' needs.

Question 6

A firm has implemented a strategy of limited corporate diversification when all or most of its business activities fall within a single industry and geographic market.

Question 7

If the different businesses that a single firm pursues are linked on only a couple of dimensions, or if different sets of businesses are linked along very different dimensions, that corporate diversification strategy is called related-linked diversification.

Question 8

Core competencies are complex sets of resources and capabilities that link different businesses in a diversified firm through managerial and technical know-how, experience, and wisdom.

Question 9

Shared activities can increase the revenues in diversified firms' businesses, and failure to exploit shared activities across businesses can lead to out-of-control costs.

Question 10

Shared activities that can provide the basis for operational economies of scope are quite common among related-constrained and related-linked diversified firms, as well as firms following an unrelated diversification strategy.

Question 11

A dominant-business firm is pursuing a related diversification strategy and has between 70 and 95 percent of firm revenues from a single business.

Question 12

Currently, most scholars believe that when a firm implements a corporate diversification strategy it destroys about 25% of its market value.

Question 13

A firm implements a corporate diversification strategy when it operates in multiple industries or markets simultaneously.

Question 14

In order for corporate diversification to be economically valuable there must either be some valuable economy of scope among the multiple businesses in which a firm is operating or it must be less costly for managers in a firm to realize these economies of scope than for an outside equity holder on his or her own.

Question 15

If all the businesses in which a firm operates share a significant number of inputs, production technologies, distribution channels, similar customers, and so forth, this corporate diversification strategy is called related-constrained diversification.

Question 16

When a firm operates in multiple geographic markets simultaneously it is said to be implementing a product diversification strategy.

Question 17

When less than 90 percent of a firm's revenues are generated in a single product market and when a firm's business share few, if any, common attributes, then that firm is pursuing a strategy of unrelated corporate diversification.

Question 18

Economies of scope exist in a firm when the value of the products or services it sells increase as a function of the number of businesses in which the firm operates.

Question 19

Shared activities can increase the expenses for a diversified firm's business.

Question 20

Over the last decade, more and more diversified firms have been abandoning efforts at managing each business's activities independently in favor of increased activity sharing.

Question 21

Employee compensation is an example of costly-to-duplicate economies of scope.

Question 22

Shared activities and risk reduction are usually difficult-to-duplicate bases for corporate diversification, but tax advantages and employee compensation are usually relatively easy to duplicate.

Question 23

Predatory pricing is a type of cross-subsidization in which a firm uses revenues from other businesses to set its prices in a particular business so that the prices are substantially more than the subsidized business's costs.

Question 24

The only two economies of scope that do not have the potential for generating positive returns for a firm's equity holders are diversification in order to maximize the size of a firm and diversification to reduce risk.

Question 25

A firm's stakeholders include all of those groups or individuals who have an interest in how a firm performs.

Question 26

Strategic alliances are generally viewed as a poor substitute for diversification since the economies of scope in diversification can be found in strategic alliances.

Question 27

Core competencies are an example of costly-to-duplicate economies of scope.

Question 28

Both shared activities and internal capital allocation are examples of economies of scope that have the potential for generating positive returns for a firm's equity holders.

Question 29

Multipoint competition requires loose coordination between the different businesses in which a firm operates.

Question 30

Most of the different types of economies of scope cannot be realized by equity holders on their own.

Question 31

Internal capital allocation is an example of less costly-to-duplicate economies of scope.

Question 32

Exploiting market power is an example of costly-to-duplicate economies of scope.

Question 33

Diversification per se is usually not a rare firm strategy regardless of how rare the particular economies of scope associated with that diversification are.

Question 34

The businesses within a diversified firm always gain cost-of-capital advantages by being part of a diversified firm's portfolio.

Question 35

A firm's dominant logic is a common way of thinking about strategy across different businesses.

Question 36

A firm implements a ________ when it operates in multiple industries or markets simultaneously.

A) vertical integration strategy
B) corporate diversification strategy
C) business diversification strategy
D) product-differentiation strategy

Question 37

Shared activities, risk reduction, tax advantages, and employee compensation as bases for corporate diversification are usually relatively easy to duplicate.

Question 38

Overall, related diversification is less likely to be consistent with the interests of a firm's equity holders than is unrelated diversification.

Question 39

Multipoint competition exists when two or more diversified firms simultaneously compete in multiple markets, and multipoint competition can serve to facilitate a particular type of tacit collusion called mutual forbearance.

Question 40

One substitute for diversification that exists is that instead of obtaining cost or revenue advantages from exploiting economies of scope across businesses in a diversified firm, a firm may decide to simply grow and develop each of its businesses separately.

Question 41

A firm that diversifies by exploiting its resources and capability advantages in its original business will have ________ costs than (as) firms that begin a new business without these resource and capability advantages, or ________ revenues than (as) firms lacking these advantages.

A) higher; lower
B) the same; higher
C) lower; the same
D) lower; higher

Question 42

When a firm operates in multiple geographic markets simultaneously it is said to be implementing a(n)

A) international diversification strategy.
B) product-differentiation strategy.
C) geographic market diversification strategy.
D) geographic market differentiation strategy.

Question 43

Firms pursuing ________ have between 70% and 95% of their sales in a single product market.

A) dominant-business diversification
B) single-business diversification
C) related-constrained diversification
D) related-linked diversification

Question 44

Currently, most scholars believe that exploiting economies of scope through corporate diversification, on average,

A) destroyed about 25% of a firm's market value.
B) had no impact on a firm's market value.
C) destroyed about 55% of a firm's market value.
D) increased a firm's market value.

Question 45

Shared activities are quite common between both ________ and ________ diversified firms.

A) single-business; dominant-business
B) related-constrained; single-business
C) related-linked; dominant-business
D) related-constrained; related-linked

Question 46

If a diversified firm had three businesses and these companies shared a common marketing and service operation, as well as common technology and development, this would be an example of which type of economy of scope?

A) core competencies
B) shared activities
C) risk reduction
D) multipoint competition

Question 47

Firms such as PepsiCo that operate a number of businesses around the world that share a number of inputs, production technologies, or distribution channels but none of whose businesses account for more than 70% of a firm's revenues are said to be implementing a

A) related-constrained diversification.
B) related-linked diversification.
C) dominant-business diversification.
D) single-business diversification.

Question 48

Limits of activity sharing include

A) substantial organizational issues that are often associated with a diversified firm's learning how to manage cross-business relationships and in which failure can lead to excess bureaucracy, inefficiency, and organizational gridlock.
B) a significant reduction in an organization's innovation and flexibility.
C) substantial organizational issues related to adequately compensating personnel across businesses and setting transfer prices.
D) a significant reduction in an organization's ability to meet the needs of any of its customers.

Question 49

Firms such as Disney that own and operate businesses that share a limited number of inputs, production technologies or distribution channels are said to be pursuing a ________ corporate diversification strategy.

A) related-constrained
B) related-linked
C) dominant-business
D) single-business

Question 50

The analysis of firms pursuing a strategy of ________ is logically equivalent to the analysis of business-level strategies.

A) unrelated diversification
B) related-linked diversification
C) related-constrained diversification
D) limited corporate diversification

Question 51

A firm has implemented a strategy of ________ when all or most of its activities fall within a single industry and geographic market.

A) limited corporate diversification
B) related diversification
C) unrelated diversification
D) related-linked diversification

Question 52

When a firm operates in multiple industries simultaneously, it is said to be implementing a

A) product diversification strategy.
B) product-differentiation strategy.
C) geographic market diversification strategy.
D) geographic market differentiation strategy.

Question 53

In order for corporate diversification to be economically valuable

A) there must be some valuable economy of scope among the multiple businesses in which a firm is operating and it must be more costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.
B) there must not be any valuable economy of scope among the multiple businesses in which a firm is operating and it must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.
C) there must be some valuable economy of scope among the multiple businesses in which a firm is operating and it must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.
D) there must not be any valuable economy of scope among the multiple businesses in which a firm is operating and it must be more costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.

Question 54

Firms such as General Electric that generate less than 70% of their revenues from a single product market and whose businesses share few, if any, common attributes are said to be pursuing ________ corporate diversification.

A) limited
B) related-linked
C) related-constrained
D) unrelated

Question 55

In which type of limited corporate diversification do firms have greater than 95% of their total sales in a single product market?

A) dominant-business firms
B) single-business firms
C) related-constrained firms
D) related-linked firms

Question 56

When the value of the products or services a firm sells increases as a function of the number of business that the firm operates in, ________ are said to exist.

A) economies of scope
B) vertical economies
C) economies of scale
D) diseconomies of scope

Question 57

Which of the following statements regarding economies of scope is accurate?

A) Only firms pursuing single-business diversification can exploit economies of scope.
B) Only firms pursuing related-constrained diversification can exploit economies of scope.
C) Only firms not pursuing diversification can exploit economies of scope.
D) Only diversified firms can exploit economies of scope.

Question 58

When a firm simultaneously implements both a product diversification strategy and a geographic market diversification strategy it is said to be implementing a(n)

A) mixed-market diversification strategy.
B) unrelated-diversification strategy.
C) product-differentiation strategy.
D) product-market diversification strategy.

Question 59

Which type of economies of scope includes shared activities and core competencies?

A) operational economies of scope
B) financial economies of scope
C) anticompetitive economies of scope
D) employee and stakeholder incentives for diversification

Question 60

________ are complex sets of resources and capabilities that link different businesses in a diversified firm through managerial and technical know-how, experience and wisdom.

A) Managerial competencies
B) Core competencies
C) Competitive advantages
D) Core advantages

Question 61

Substitutes for exploiting economies of scope in diversification include

A) growing and developing independent businesses within a diversified firm and vertical integration.
B) vertical integration and strategic alliances.
C) growing and developing independent businesses within a diversified firm and strategic alliances.
D) strategic alliances and multipoint competition.

Question 62

The only economy of scope that an unrelated firm can try to realize is

A) core competencies.
B) tax advantages.
C) multipoint competition.
D) risk reduction.

Question 63

________ is an example of a less costly-to-duplicate economies of scope.

A) Tax advantages
B) Core competencies
C) Internal capital allocation
D) Multipoint competition

Question 64

When diversified firms use the revenues from profitable businesses to subsidize the operations of another business and then set the prices of the subsidized firm's products at a level that is below the subsidized business's cost to produce these items, this is known as ________ pricing.

A) dynamic
B) monopoly
C) predatory
D) beneficial

Question 65

Which of the following economies of scope is costly to duplicate?

A) shared activities
B) internal capital allocation
C) risk reduction
D) tax advantages

Question 66

Which of the following economies of scope do not have the potential for generating positive returns for a firm's equity holders since the economies of scope can be realized by outside equity holders at a low cost by investing in a diversified portfolio of stock?

A) shared activities
B) diversification to maximize the size of a firm
C) internal capital allocation
D) exploiting market power

Question 67

Compared to two very risky businesses that have cash flows that are not highly correlated over time and that are operating separately, the risk of a diversified firm operating in those same two businesses simultaneously is

A) somewhat higher.
B) lower.
C) the same.
D) substantially higher.

Question 68

Research over the years has demonstrated conclusively that the primary determinant of the compensation of top managers in a firm is

A) not the size of the firm, usually measured in sales, but the economic performance of the firm.
B) both the economic performance of the firm as well as the size of the firm, usually measured in sales.
C) not the economic performance of the firm but the size of the firm, usually measured in sales.
D) neither the economic performance of the firm nor the size of the firm.

Question 69

________ are substitutes for exploiting economies of scope in diversification.

A) Tax havens
B) Tax shelters
C) Tax freedom
D) Strategic alliances

Question 70

At the beginning of 2001, Peach Computers competed exclusively in the computer industry and generated approximately 96% of its revenue from the sales of computers and computer-related software and approximately 4% of its revenues were generated from sales of other peripherals. Further, of these revenues, 60% was from sales in the U.S., 30% was from sales in Europe, 7% was from sales in Asia and 3% was from other areas. In October 2001, Peach entered the personal electronics industry by introducing a new MP3 player known as the PeachPit. In developing and selling the PeachPit, Peach Computers was able to use many of the same R&D facilities, suppliers, production facilities, and distribution and sales outlets as the computers and software Peach Computers traditionally sold. By 2003, the PeachPit MP3 Player, accessories for the unit, and sales of songs on Peach Computers' NectarTunes website accounted for 35% of Peach Computers' revenues.
In 2001, Peach Computers' diversification strategy was best characterized as

A) related-linked diversification.
B) dominant-business diversification.
C) single-business diversification.
D) related-constrained diversification.

Question 71

A common way of thinking about strategy across different businesses within a firm is known as the firm's

A) core competency.
B) competitive advantage.
C) economy of scope.
D) dominant logic.

Question 72

Which of the following economies of scope is less costly to duplicate?

A) employee compensation
B) core competencies
C) multipoint competition
D) exploiting market power

Question 73

In general, as a source of capital a diversified firm has ________ information about a business that it owns compared to external sources of capital.

A) more and better
B) the same
C) less and inferior
D) more but biased

Question 74

Which of the following economies of scope is costly-to-duplicate?

A) employee compensation
B) core competencies
C) shared activities
D) risk reduction

Question 75

________ exists when two or more diversified firms simultaneously compete in multiple markets.

A) Multipoint competition
B) Dynamic competition
C) Multipoint cooperation
D) Dynamic cooperation

Question 76

For multipoint competition to lead to mutual forbearance,

A) the threat of retaliation must be substantial and the firms pursuing this strategy must have strong linkages among their diversified businesses.
B) the threat of retaliation must be low and the firms pursuing this strategy must have strong linkages among their diversified businesses.
C) the threat of retaliation must be low and the firms pursuing this strategy must have weak linkages among their diversified businesses.
D) the threat of retaliation must be substantial and the firms pursuing this strategy must have weak linkages among their diversified businesses.

Question 77

Which of the following statements regarding the rarity of diversification is accurate?

A) If only a few competing firms have exploited a particular economy of scope, that economy of scope can be rare.
B) A particular economy of scope can only be rare if no other firms are exploiting that economy of scope.
C) A particular economy of scope can be rare even if many other firms are exploiting that economy of scope.
D) If only a few competing firms have exploited a particular economy of scope, that economy of scope can be rare but only if the firm is pursuing unrelated diversification.

Question 78

Diversified firms that are exploiting core competencies as an economy of scope but are not doing so with any shared activities are sometimes called ________ diversified firms.

A) seemingly unrelated
B) unrelated
C) semi-related
D) link-related

Question 79

If all of a firm's businesses share the same core competencies, then that firm has implemented a strategy of ________ diversification.

A) single-business
B) related-linked
C) related-constrained
D) dominant-business

Question 80

At the beginning of 2001, Peach Computers competed exclusively in the computer industry and generated approximately 96% of its revenue from the sales of computers and computer-related software and approximately 4% of its revenues were generated from sales of other peripherals. Further, of these revenues, 60% was from sales in the U.S., 30% was from sales in Europe, 7% was from sales in Asia and 3% was from other areas. In October 2001, Peach entered the personal electronics industry by introducing a new MP3 player known as the PeachPit. In developing and selling the PeachPit, Peach Computers was able to use many of the same R&D facilities, suppliers, production facilities, and distribution and sales outlets as the computers and software Peach Computers traditionally sold. By 2003, the PeachPit MP3 Player, accessories for the unit, and sales of songs on Peach Computers' NectarTunes website accounted for 35% of Peach Computers' revenues.
By 2003, Peach Computers' diversification strategy was best characterized as

A) unrelated diversification.
B) related-constrained diversification.
C) related-linked diversification.
D) dominant-business diversification.