Question 1

The continuing dominance of conglomerate firms in many emerging countries reflects the underdeveloped capital and labor markets of these countries.

Accepted Answer

Conglomerates often thrive in emerging markets due to inefficiencies in capital and labor markets, which they can navigate better than smaller firms.

Question 2

If a utility company supplies both gas and electricity to its customers,it can exploit economies of scope in billing and customer service.

Accepted Answer

Economies of scope refer to the cost savings that result from producing two or more related products or services together. In this case, the utility company can save costs by billing and serving gas and electricity customers together rather than separately.

Question 3

A major reason for the trend to corporate refocusing after 1980 was a shifting of corporate goals from growth to profitability.

Accepted Answer

The trend to corporate refocusing after 1980 was indeed driven by a shift in corporate goals from growth to profitability. Many companies realized that pursuing growth at any cost was not sustainable and refocused on improving profitability and shareholder returns.

Question 4

The potential to exploit economies of scope in common resources is an adequate justification for diversification.

Accepted Answer

The answer of The potential to exploit economies of scope...

Question 5

If a company can exploit economies of scope in its intellectual property either through licensing or through diversification,the transaction costs of licensing are likely to be a major factor in its choice between the two.

Accepted Answer

Transaction costs of licensing, such as negotiation and enforcement, can influence a company's decision to either license its intellectual property or diversify its operations to exploit economies of scope.

Question 6

Diversification has been a key source of value creation for most of the firms that have dared to expand beyond the boundaries of their own industry.

Accepted Answer

Diversification can create value, but it often leads to challenges such as lack of focus, increased complexity, and potential misallocation of resources, which can outweigh the benefits for many firms.

Question 7

A critical advantage of diversified over specialized firms is in their allocation of human resources where diversified firms can utilize their superior information on their employees to allocate individuals according to their proven abilities.

Accepted Answer

Diversified firms have the advantage of being able to use their knowledge of their employees' skills and abilities to allocate them to the tasks and roles that they are best suited for, which can lead to better overall performance and productivity. Specialized firms, on the other hand, may have a narrower range of tasks and roles, which can limit their ability to make use of their employees' full potential.

Question 8

The dominant trend of the past two decades has been for companies to expand beyond their core businesses.

Accepted Answer

The answer of The dominant trend of the past two...

Question 9

When a firm is diversifying through acquiring a firm in another issue,the critical issue is whether the synergies that can be realized will offset the acquisition premium paid.

Accepted Answer

The key concern in diversification through acquisition is whether the potential synergies, such as cost savings or increased revenue, will justify the premium paid for the acquisition.

Question 10

Corporate diversiﬁcation that reduces the unsystematic risk of a company's securities will result in those securities being higher valued by the stock market.

Accepted Answer

The answer of Corporate diversiﬁcation that reduces the unsystematic risk...

Question 11

The primary motive for diversification during the period 1960-1980 was the quest to create shareholder value.

Accepted Answer

The primary motive for diversification during the period 1960-1980 was often to stabilize earnings by spreading business risks across different industries, rather than the modern emphasis on creating shareholder value through focus and core competency.

Question 12

Economies of scope may be viewed as economies of scale that are exploited over multiple products.

Accepted Answer

Economies of scope refer to cost savings that result from producing multiple products together, similar to economies of scale that result from producing a large quantity of a single product.

Question 13

Economies of scope in organizational capabilities can be exploited as effectively through contractual agreements with firms in anther industry as through diversifying into that industry.

Accepted Answer

Economies of scope in organizational capabilities often involve leveraging shared resources, knowledge, and processes across different but related product lines or services within a single organization. While contractual agreements with firms in another industry can provide some benefits, they may not fully capture the efficiencies and synergies that come from diversifying into that industry and integrating operations internally. Diversification allows for more direct control and coordination across different activities, potentially leading to greater cost savings and innovation compared to what can be achieved through arm's-length contractual relationships.

Question 14

Harold Geneen's statement that: "Telephones,hotels,insurance-it's all the same.If you know the numbers inside out,you know the company inside out" reflects the belief that industry specific knowledge was not important to the corporate management of diversified firms.

Accepted Answer

Geneen's statement suggests that understanding the financials ("the numbers") is sufficient for managing any type of business, implying that industry-specific knowledge is not necessary for effective corporate management.

Question 15

In principle,the information advantages of a diversified company mean that internal capital markets are more efficient than external capital markets,but in practice internal capital markets tend to allocate funds to subsidise poor performing subsidiaries.

Accepted Answer

Internal capital markets can suffer from inefficiencies such as agency problems and lack of transparency, leading to suboptimal allocation of resources to underperforming subsidiaries.

Question 16

Diversification that reduces the risk of bankruptcy is more beneficial to shareholders than to managers.

Accepted Answer

The answer of Diversification that reduces the risk of bankruptcy...

Question 17

According to Michael Porter,industry attractiveness is a sufficient justification for diversification.

Accepted Answer

According to Michael Porter, industry attractiveness alone is not a sufficient justification for diversification. Diversification should be based on the potential for creating value through the sharing of resources and capabilities across businesses.

Question 18

The history of diversification features two periods: 1950 to 1980,when the trend was to diversify,and 1980 to today when most large firms refocused on their core businesses

Accepted Answer

The trend from 1950 to 1980 was for companies to diversify, but from 1980 onwards, many firms began to refocus on their core businesses, often due to the realization that diversification did not always lead to better performance.

Question 19

The critical test of whether diversification will create shareholder value is whether it will contribute to competitive advantage.

Accepted Answer

Diversification that leads to a competitive advantage can create shareholder value by increasing the company's overall success and profitability. However, diversification that doesn't contribute to a competitive advantage may not create shareholder value and could even lead to decreased performance.

Question 20

Diversiﬁcation decisions by ﬁrms involve two key issues: how attractive is the industry to be entered and can the ﬁrm establish a competitive advantage within it?

Accepted Answer

This statement correctly summarizes the two key issues that firms consider when making diversification decisions.

Quiz 13: Diversification Strategy