An investor is analyzing two firms in the same industry. She is looking for long term performance from her investment. Both firms are basically identical except one firm is involved in substantial downsizing and the other firm is undertaking aggressive downscoping. The investor should invest in the
A) downscoping firm because the higher debt load will discipline managers to act in shareholders' best interests.
B) downscoping firm because it will be focusing on the firm's core businesses.
C) downsizing firm because it will be making decisions based on tactical strategies.
D) downsizing firm because it is eliminating employees who are essentially "dead weight" and are dragging down the firm's profitability.

Question

Quizplus · Accepted Answer

The investor should invest in the downscoping firm because it will be focusing on the firm's core businesses. Unlike downsizing, which involves reducing the size of the firm, downscoping involves divesting non-core businesses to focus on the firm's core businesses. This strategy usually results in improved long-term performance since the firm can allocate more resources to its core activities. Additionally, downsizing can have negative effects on morale and productivity, while downscoping can often have a positive effect on both.

An Investor Is Analyzing Two Firms in the Same Industry