Question 1

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

Accepted Answer

A firm's dominant logic refers to the common way of thinking, understanding, and approaching strategy in different businesses within the same organization. It is the shared mindset or paradigm that guides decision-making and shapes the culture of the firm.

Question 2

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

Accepted Answer

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Question 3

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

Accepted Answer

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Question 4

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

Accepted Answer

Core competencies refer to unique skills or capabilities that give a competitive advantage to an organization. They are costly-to-duplicate because they are developed over time through investments in resources, training, and experience. Economies of scope refer to the cost savings that result from producing a variety of products or services using the same resources. While core competencies may contribute to economies of scope, they are not the same thing.

Question 5

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.

Accepted Answer

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 less than the subsidized business's costs.

Question 6

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

Accepted Answer

This statement is true. A firm's stakeholders can include owners/shareholders, employees, customers, suppliers, creditors, government agencies, and the broader community.

Question 7

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

Accepted Answer

These factors are commonly used as bases for corporate diversification and can typically be replicated by other companies.

Question 8

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.

Accepted Answer

Both shared activities and internal capital allocation can create efficiencies and cost savings for a firm, which can in turn benefit equity holders by increasing profits and returns.

Question 9

Core competencies and multipoint competition are usually costly-to-duplicate bases for corporate diversification.

Accepted Answer

Core competencies and multipoint competition are sources of sustainable competitive advantage that are difficult and expensive for competitors to replicate, making them attractive for companies seeking to diversify their operations.

Question 10

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

Accepted Answer

Exploiting market power refers to a company's ability to raise prices above the competitive level without fear of losing too many customers. This is a demonstration of a costly-to-duplicate economy of scope, as it would be difficult for competitors to replicate the advantages that allow the company to exploit market power.

Question 11

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.

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Question 12

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.

Accepted Answer

This statement is true. Instead of diversification, a firm may choose to focus on developing each of its businesses separately, without seeking cost or revenue advantages from economies of scope across businesses. This strategy is known as a focused strategy or a single business strategy.

Question 13

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

Accepted Answer

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Question 14

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

Accepted Answer

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Question 15

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

Accepted Answer

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Question 16

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

Accepted Answer

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Question 17

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

Accepted Answer

Strategic alliances and diversification are different strategies with their own strengths and weaknesses. Diversification typically involves expanding into new industries or markets to reduce risk and increase growth opportunities. Strategic alliances, on the other hand, involve partnering with other companies to achieve mutual benefits such as sharing resources or expertise. While strategic alliances can provide some of the benefits of diversification, such as access to new markets or technologies, they do not offer the same level of control over the new venture as diversification does. Therefore, strategic alliances are not typically viewed as a substitute for diversification, but rather as a complementary strategy.

Question 18

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.

Accepted Answer

Multipoint competition does indeed exist when multiple diversified firms compete in multiple markets, and this competition can lead to a form of tacit collusion known as mutual forbearance.

Question 19

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.

Accepted Answer

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Question 20

For an internal capital market to create value for a diversified firm, it must offer some efficiency advantages over an external capital market.

Accepted Answer

An internal capital market can offer efficiency advantages such as lower transaction costs, faster decision making, and better alignment of investments with overall corporate strategy, which can create value for a diversified firm. Therefore, for an internal capital market to be useful, it must offer some efficiency advantages over an external capital market.

Quiz 7: Corporate Diversification