Question 1

Discuss shared activities as a potential source of economies of scope for diversified firms and identify the potential benefits and limits of activity sharing.

Accepted Answer

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Question 2

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 allow a firm to leverage its resources and capabilities to generate positive returns for its equity holders, which is an example of economies of scope.

Question 3

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.

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Question 4

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

Accepted Answer

Economies of scope related to employee compensation are generally less costly to duplicate because they involve tangible, straightforward strategies such as salary structures, benefits, and incentives that can be analyzed and potentially replicated by competitors. Core competencies, multipoint competition, and exploiting market power involve more complex, intangible strategies deeply embedded within a company's operations and strategic positioning, making them harder and more costly to duplicate.

Question 5

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

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Question 6

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

Accepted Answer

Related diversification can create synergies and economies of scope within the firm, leading to potential benefits for equity holders. Unrelated diversification, on the other hand, may not have clear synergies and can lead to a lack of focus and inefficient allocation of resources, potentially harming equity holders.

Question 7

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 refers to when multiple diversified firms compete in multiple markets. This type of competition can lead to mutual forbearance, which is a type of tacit collusion where firms agree not to aggressively compete with each other in certain markets.

Question 8

Identify and discuss the two economies of scope that do not have the potential for generating positive returns for a firm's outside equity investors.

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Question 9

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.

Accepted Answer

Seemingly related diversified firms have no shared activities, while related diversified firms do have shared activities. Therefore, firms that appear to be unrelated diversified firms without any shared activities are simply unrelated diversified firms.

Question 10

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

Accepted Answer

Economies of scope often require cooperation and coordination among different divisions or units within a firm. Equity holders may have limited ability to achieve these economies on their own without the help of managers and other stakeholders.

Question 11

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 involves setting prices below cost to drive competitors out of business, not above cost.

Question 12

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

Accepted Answer

A particular economy of scope can be considered rare if it has only been exploited by a few competing firms. This is because the competitors have created a barrier to entry, making it difficult for other firms to also take advantage of that economy of scope. However, this does not necessarily mean that the firm pursuing that economy of scope is engaging in unrelated diversification.

Question 13

Substitutes for exploiting economies of scope in diversification include

Accepted Answer

Growing and developing independent businesses within a diversified firm and strategic alliances are both alternatives to exploiting economies of scope in diversification. Vertical integration and multipoint competition are also potential diversification strategies, but are not listed as substitutes for exploiting economies of scope in the given options.

Question 14

Define the concept of economies of scope,discuss when they are valuable and identify and differentiate between four of the eight potential economies of scope a diversified firm might try to exploit.

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Question 15

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

Accepted Answer

Diversification within a firm can spread risks and potentially stabilize returns, but it does not inherently provide cost-of-capital advantages to all businesses within the portfolio. Cost of capital is influenced by the risk associated with specific business units and the overall market conditions, not merely by being part of a diversified firm.

Question 16

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. Stakeholders can include employees, shareholders, customers, suppliers, government, and the local community.

Question 17

Specify the two conditions that a corporate diversification strategy must meet in order to create economic value.

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Question 18

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 its common way of thinking about strategy across its various businesses, and is shaped by its core competencies, capabilities, and resources.

Question 19

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

Accepted Answer

Core competencies are unique strengths and abilities that are difficult and costly for competitors to duplicate. This makes them a valuable source of economies of scope for a company. On the other hand, employee compensation, shared activities, and risk reduction can be easily duplicated by competitors, making them less costly-to-duplicate and less valuable as sources of economies of scope.

Question 20

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.

Accepted Answer

Diversifying by leveraging existing resources and capabilities typically allows a firm to enjoy cost advantages or generate higher revenues due to the efficient use of its established strengths, compared to firms starting new ventures without such advantages.

Quiz 9: Corporate Diversification