Question 1

The "conglomerate discount" occurs in large, highly diversified businesses and results from analysts not knowing how to value the vast array of large businesses with complex financial reports.

Accepted Answer

The conglomerate discount is a phenomenon that occurs in large, highly diversified businesses where the sum of the parts is worth less than the whole. This is because analysts have difficulty valuing the various businesses within the conglomerate and often apply a lower valuation multiple to the overall company.

Question 2

Companies in emerging markets frequently use the unrelated diversification strategy because of the absence of a "soft infrastructure" in those markets.

Accepted Answer

In emerging markets, there is often a lack of a supportive business environment or "soft infrastructure" that can make it difficult for companies to specialize in a particular industry. Therefore, many companies opt for unrelated diversification as a way to spread their risk and take advantage of different opportunities.

Question 3

A significant benefit of an internal capital market is limiting competitors' access to information about the performance of the individual businesses within the corporation.

Accepted Answer

This is true because an internal capital market allows for centralized control of capital allocation and decision-making, which means competitors cannot easily access information about the individual businesses within the corporation. This can provide a competitive advantage for the corporation.

Question 4

Research evidence shows that increased firm size and greater levels of diversification are correlated with increased executive compensation.

Accepted Answer

Research studies have found positive correlations between firm size, diversification, and executive compensation. As firms become larger and more complex, executives may be seen as taking on greater responsibility and risk, leading to higher pay. Additionally, diversified firms require executives to possess a wider range of skills and knowledge, which can also drive up compensation.

Question 5

Synergy exists when the value created by business units working together exceeds the value that those same units create working independently.

Accepted Answer

Synergy occurs when the combined efforts of multiple units result in more value than if each unit worked separately.

Question 6

Diversification strategies can be used with both value-creating and value-neutral objectives.

Accepted Answer

Diversification strategies can be used to either create value through the expansion of the business into new markets or product lines or to remain neutral in terms of value by minimizing risk and exposure to any one market or product.

Question 7

Different incentives to diversify sometimes exist, and the quality of a firm's resources may permit only diversification that is value neutral rather than value creating.

Accepted Answer

Different incentives to diversify may exist, such as a desire to reduce risk or take advantage of new opportunities. However, if a firm's resources are not suitable for creating value through diversification, then any diversification strategy pursued may be value neutral rather than value creating.

Question 8

Compared to diversification that is grounded in intangible resources, diversification based on financial resources only is more visible to competitors and thus more imitable and less likely to create value on a long term basis.

Accepted Answer

Diversification based on financial resources only can be quickly imitated by competitors, leading to a temporary advantage at best. It is more likely to create value on a short term basis rather than on a long term basis. In contrast, diversification based on intangible resources, like brand image or customer loyalty, is more difficult to replicate and thus more likely to create sustainable long-term value.

Question 9

Performance continues to increase as diversification increases from single business to unrelated diversification.

Accepted Answer

Performance does not necessarily continue to increase as diversification increases from single business to unrelated diversification. In fact, unrelated diversification can often lead to a decrease in performance due to the challenges of managing a portfolio of disparate businesses.

Question 10

Companies creating financial economies through restructuring typically focus on high-technology businesses primarily because these firms are human-resource dependent.

Accepted Answer

The answer of Companies creating financial economies through restructuring typically...

Question 11

In a diversified firm, capital allocation can be adjusted according to more specific criteria than is possible with external market allocation of capital.

Accepted Answer

In a diversified firm, capital allocation can be adjusted based on the unique needs and specific criteria of each business unit, which is not possible with external market allocation of capital.

Question 12

Corporate tax laws, rather than tax laws affecting individuals, have had the most impact on the firm's use of free cash flows for investment in acquisitions.

Accepted Answer

The answer of Corporate tax laws, rather than tax laws...

Question 13

GE (discussed in the Chapter 6 Opening Case) is an example of a firm that has used internal capital market allocation as a means of creating value even though it competes using a related linked rather than an unrelated diversification strategy.

Accepted Answer

GE has centralized its capital allocation process and has used internal capital market allocation to allocate resources to its various business units based on their individual performance and growth potential, thereby creating value even though it uses a related linked diversification strategy.

Question 14

When implementing a restructuring strategy, a company would do best by focusing on mature, low-technology businesses rather than high-technology or service businesses.

Accepted Answer

The answer of When implementing a restructuring strategy, a company...

Question 15

One advantage of an unrelated diversification strategy in a developed economy is that competitors cannot easily imitate the financial economies whereas they can easily replicate the value gained through the use of a related diversification strategy.

Accepted Answer

The answer of One advantage of an unrelated diversification strategy...

Question 16

A significant benefit of an internal capital market is that corporate headquarters has access to detailed and accurate information regarding the performance of the company's portfolio and can thus make better capital allocation decisions.

Accepted Answer

An internal capital market allows for better communication and access to information within a company, which can lead to more informed and effective capital allocation decisions by corporate headquarters.

Question 17

In spite of the challenges associated with it, a number of firms continue to use the unrelated diversification strategy, especially in Europe and in emerging markets.

Accepted Answer

Despite the challenges, some firms do still use the unrelated diversification strategy, particularly in Europe and emerging markets.

Question 18

If managers diversify a firm in a way that does not produce value, the firm risks capital market intervention.

Accepted Answer

If a firm's diversification strategy does not add value, investors may view it as a misuse of capital and may intervene in the company's capital market operations. This could lead to a decline in the firm's stock price, loss of investor confidence, and ultimately, a reduction in the firm's overall value.

Question 19

Since the 1950s, U.S. government policy regarding antitrust concerns has remained constant.

Accepted Answer

Since the 1950s, there have been changes in U.S. government policy regarding antitrust concerns, including the introduction of the consumer welfare standard and an increased focus on protecting competition rather than competitors.

Question 20

Low firm performance is associated with increased diversification.

Accepted Answer

This statement is true. Studies have shown that low firm performance is often accompanied by increased diversification, as firms seek to spread their risks across multiple products or markets. However, this diversification strategy may not always lead to improved performance, as it can also result in managerial and operational challenges.

Quiz 6: Corporate Level Strategy