Question 1

Companies with a strong track record of internal new venturing generally excel at research and development.

Accepted Answer

Companies that have a strong track record of internal new venturing invest heavily in research and development to generate new ideas and innovations. This helps them stay ahead of the competition and create new markets or disrupt existing ones. Without a robust R&D function, it is challenging for companies to come up with breakthrough products and services that can drive growth and profitability in the long term. Therefore, companies that prioritize internal new venturing are likely to have a strong focus on R&D.

Question 2

Sara Lee Corp., a clothing firm, purchased Platex Apparel Inc. This purchase helped to make Sara Lee Corp. one of the largest makers of women's apparel in the United States. Sara Lee Corp. utilized an acquisition strategy.

Accepted Answer

The statement is true, as Sara Lee Corp. used an acquisition strategy to purchase Platex Apparel Inc. and become one of the largest makers of women's apparel in the US.

Question 3

Free cash flow refers to additional funds from a government stimulus program.

Accepted Answer

Free cash flow refers to the amount of cash a company has left over after paying for expenses and investing in capital projects. It is not related to government stimulus programs.

Question 4

At Burger King, multiple items such as a cheeseburger, french fries, and a drink are combined together to create a complete meal. This is an example of diversification.

Accepted Answer

Diversification refers to a strategy of entering into new markets or creating new products, whereas combining items into a meal is an example of bundling or product bundling.

Question 5

A company can increase the probability of success of an internal venture by constructing efficient scale manufacturing facilities ahead of demand.

Accepted Answer

By constructing efficient scale manufacturing facilities ahead of demand, a company can ensure that it is able to meet the demand for its products as it grows, thereby increasing the probability of success of its internal venture. This approach allows a company to focus on scaling its operations and improving efficiency, rather than scrambling to catch up with demand, which can lead to quality issues, delays, and other problems.

Question 6

Diversification is the process of a company entering new industries distinct from its core industry, using a multibusiness model.

Accepted Answer

This is an accurate definition of diversification.

Question 7

A company's top managers do not need to have entrepreneurial capabilities for diversification to increase profitability.

Accepted Answer

Diversification often involves entering new markets or industries, which requires innovation, risk-taking, and an entrepreneurial mindset. Top managers who possess entrepreneurial capabilities are better equipped to make strategic decisions and identify opportunities for growth, which can ultimately lead to increased profitability. Therefore, having entrepreneurial capabilities is important for diversification to be successful.

Question 8

If a company's core skills are highly specialized and have few applications outside the core business, then a company should pursue a related diversification strategy.

Accepted Answer

A related diversification strategy is appropriate when a company's core skills have applications outside the core business.

Question 9

An advantage of unrelated diversification is that competencies can be shared and leveraged throughout the value chain activities.

Accepted Answer

Unrelated diversification involves entering into a business or industry that is not related to the company's current business or industry, which means there are limited opportunities to share and leverage competencies throughout the value-chain activities.

Question 10

If a company generates free cash flow, that money technically belongs to shareholders.

Accepted Answer

Free cash flow is the cash that a company generates after accounting for all its expenses and capital expenditures. This cash technically belongs to the shareholders because it represents the amount of money that could be paid out as dividends or used for share buybacks. However, the company's management has the discretion to use the free cash flow in different ways, such as reinvesting it into the business or paying off debt. Ultimately, the decision about how to use free cash flow is made by the company's board of directors, which represents the interests of the shareholders.

Question 11

One way a diversified company can increase its profitability is by acquiring inefficient or poorly managed companies and then restructuring them to improve their performance.

Accepted Answer

By acquiring and restructuring poorly managed companies, a diversified company can improve their performance and increase profitability.

Question 12

Firms can create profitable new business units by leveraging their competencies.

Accepted Answer

Leveraging competencies refers to utilizing the existing knowledge, skills, and resources of a firm to create new business units that can generate profits. Therefore, it is possible for firms to create profitable new business units by leveraging their competencies.

Question 13

When a firm does not pay out its free cash flow to its shareholders, the shareholders bear an opportunity cost equal to their next best use of those funds.

Accepted Answer

This statement is true as the shareholders could have invested those funds in other opportunities with potentially higher returns, and not paying out the free cash flow may be viewed as a missed opportunity for those shareholders.

Question 14

Economies of scope arise when one or more of a diversified company's business units are able to realize cost-saving or differentiation advantages because it can more effectively pool, share, and utilize resources or capabilities.

Accepted Answer

Economies of scope are a well-known concept in business, referring to the cost-saving advantages that can be achieved through the sharing of resources, capabilities, or activities across business units or product lines. This can include economies of scale, where the cost per unit decreases as the volume of production increases, but it can also encompass other kinds of benefits, such as reduced transaction costs, improved learning, increased flexibility, or enhanced brand reputation. Essentially, economies of scope enable a company to generate more value from its resource base by leveraging synergies and transferable competencies across different parts of the organization.

Question 15

A company can pursue relative diversification to enhance the competitive position of its core business.

Accepted Answer

Relative diversification involves expanding into related businesses or products that complement the company's core business. This can lead to increased efficiency, synergy and a stronger competitive position for the core business.

Question 16

An advantage of a joint venture is that it allows a company to quickly gain entry into a new industry where barriers are high.

Accepted Answer

The answer of An advantage of a joint venture is...

Question 17

An appropriate reason to diversify is to pool the risk from several business ventures to create a more stable income stream.

Accepted Answer

The answer of An appropriate reason to diversify is to...

Question 18

Transferring competencies across industries involves taking a distinctive competency developed in one industry and implanting it in an existing business unit in another industry.

Accepted Answer

Transferring competencies across industries involves the process of utilizing a competency from one industry to another. This can involve taking a specific skill or experience present in one industry or business and applying it in a different context. By doing so, businesses are able to gain a unique advantage and enhance their overall competitiveness.

Question 19

Research finds that the higher the number of business units in a company's portfolio, the easier it is for corporate managers to remain informed about the complexities of each business.

Accepted Answer

This statement is not supported by research. In fact, having a larger number of business units in a portfolio can make it more difficult for corporate managers to remain informed about each business due to increased complexity and diversity of operations.

Question 20

The coordination required to realize value from a diversification strategy based on transferring, sharing, or leveraging competencies is a major source of bureaucratic costs.

Accepted Answer

Transferring, sharing, or leveraging competencies across different business units or product lines can be challenging and require significant coordination efforts, which can result in bureaucratic costs. These costs include the time and resources needed to manage and oversee the transfer of knowledge, the development of shared processes and systems, and the alignment of different units' goals and objectives. However, if done effectively, these efforts can also lead to significant synergies and competitive advantages.

Quiz 10: Corporate-Level Strategy: Related and Unrelated Diversification