Chapter 7: Corporate Diversification11(

CHAPTER 7: CORPORATE DIVERSIFICATION TRUE/FALSE QUESTIONS 1. A firm implements a corporate diversification strategy when it operates in multiple industries or markets simultaneously. True False Answer: Page: Diffic !"#: #asy C$a%"er O&'ec"i(e: 1 True !" $hen a firm operates in multiple industries simultaneously it is said to %e implementing a geographic market diversification strategy. True False Answer: Page: Diffic !"#: #asy C$a%"er O&'ec"i(e: 1 False !" &. $hen a firm operates in multiple geographic markets simultaneously it is said to %e implementing a product diversification strategy. True False Answer: Page: Diffic !"#: #asy C$a%"er O&'ec"i(e: 1 False !" '. A firm has implemented a strategy of limited corporate diversification when all or most of its %usiness activities fall within a single industry and geographic market. True False Answer: Page: Diffic !"#: #asy C$a%"er O&'ec"i(e: 1 True 1! (. The analysis of limited corporate diversification is logically e)uivalent to the analysis of %usiness*level strategies. True False Answer: Page: Diffic !"#: C$a%"er O&'ec"i(e: 1 True 11 +oderate .

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A dominant*%usiness firm is pursuing a related diversification strategy and has %etween 7! and /( percent of firm revenues from a single %usiness. True False Answer: Page: !/ Diffic !"#: C$a%"er O&'ec"i(e: 1 False +oderate 7. -f all the %usinesses in which a firm operates share a significant num%er of inputs0 production technologies0 distri%ution channels0 similar customers0 and so forth0 this corporate diversification strategy is called related*constrained diversification. True False Answer: Page: 1 Diffic !"#: C$a%"er O&'ec"i(e: 1 True +oderate ". -f the different %usinesses that a single firm pursues are linked on only a couple of dimensions0 or if different sets of %usinesses are linked along very different dimensions0 that corporate diversification strategy is called related*linked diversification. True False Answer: Page: 1 Diffic !"#: C$a%"er O&'ec"i(e: 1 True +oderate /. $hen less than /! percent of a firm1s revenues are generated in a single product market0 and when a firm1s %usiness share few0 if any0 common attri%utes0 then that firm is pursuing a strategy of unrelated corporate diversification. True False Answer: Page: 1& Diffic !"#: 2ard C$a%"er O&'ec"i(e: 1 False 1! . #conomies of scope e3ist in a firm when the value of the products or services it sells increase as a function of the num%er of %usinesses in which the firm operates. True False

Chapter 7: Corporate Diversification117

Answer: True Page: 1& 11 .

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-n order for corporate diversification to %e economically via%le there must either %e some valua%le economy of scope among the multiple %usinesses in which a firm is operating or it must %e less costly for managers in a firm to reali4e these economies of scope than for an outside e)uity holder on his or her own. True False Answer: Page: Diffic !"#: C$a%"er O&'ec"i(e: False 1& +oderate 1 . Currently0 most scholars %elieve that when a firm implements a corporate diversification strategy it destroys a%out (5 of its market value. True False Answer: Page: Diffic !"#: 2ard C$a%"er O&'ec"i(e: False 1' 1&. 6perational economies of scope include shared activities and risk reduction. True False Answer: Page: Diffic !"#: C$a%"er O&'ec"i(e: & False 1( +oderate

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7hared activities that can provide the %asis for operational economies of scope are )uite common among related*constrained and related* linked diversified firms0 as well as firms following an unrelated diversification strategy. True False Answer: Page: Diffic !"#: C$a%"er O&'ec"i(e: &

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False 1( .

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7hared activities can increase the revenues in diversified firms1 %usinesses and failure to e3ploit shared activities across %usinesses can lead to out*of*control costs. True False Answer: True Page: Diffic !"#: C$a%"er O&'ec"i(e: & 17 +oderate 1. . 6ne of the limits of activity sharing is that sharing activities may limit the a%ility of a particular %usiness to meet its specific customers1 needs. True False Answer: True Page: Diffic !"#: C$a%"er O&'ec"i(e: & 1" +oderate 17 . 6ver the last decade0 more and more diversified firms have %een a%andoning efforts at managing each %usiness1s activities independently in favor of increased activity sharing. True False Answer: Page: Diffic !"#: 2ard C$a%"er O&'ec"i(e: & False 1" 1" . Core competencies are comple3 sets of resources and capa%ilities that link different %usinesses in a diversified firm through managerial and technical know*how0 e3perience0 and wisdom. True False Answer: True Page: Diffic !"#: C$a%"er O&'ec"i(e: & 1" +oderate 1/. A firm that diversifies %y e3ploiting its resources and capa%ility advantages in its original %usiness will have higher costs than firms that %egin new %usiness without these revenues and capa%ility advantages0 or lower revenues than firms lacking these advantages0 or %oth. True False

Chapter 7: Corporate Diversification11/

Answer: False

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Firms that may appear to %e unrelated diversified firms0 %ut that are0 in . fact0 related diversified firms without any shared activities are referred to as seemingly related firms. True False Answer: Page: Diffic !"#: C$a%"er O&'ec"i(e: & False 1 +oderate A firm1s dominant logic is common way of thinking a%out strategy . across different %usinesses. True False Answer: True Page: Diffic !"#: C$a%"er O&'ec"i(e: & +oderate For an internal capital market to create value for a diversified firm0 it . must offer some efficiency advantages over an e3ternal capital market. True False Answer: True Page: Diffic !"#: C$a%"er O&'ec"i(e: & & +oderate &. The %usinesses within a diversified firm always gain cost*of*capital advantages %y %eing part of a diversified firm1s portfolio. True False Answer: Page: Diffic !"#: #asy C$a%"er O&'ec"i(e: & False ' ' . +ultipoint competition e3ists when two or more diversified firms simultaneously compete in multiple markets and multipoint competition can serve to facilitate a particulate type of tacit collusion 1

1 ! ,art ---

called mutual for%earance. True False Answer: True Page: Diffic !"#: . +oderate (

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,redatory pricing is a type of cross*su%sidi4ation in which a firm uses . revenues from other %usinesses to set its prices in a particular %usiness so that the prices are su%stantially more than the su%sidi4ed %usiness1s costs. True False Answer: Page: Diffic !"#: C$a%"er O&'ec"i(e: & False 7 +oderate 8oth shared activities and internal capital allocation are e3amples of . economies of scope that have the potential for generating positive returns for a firm1s e)uity holders. True False Answer: True Page: Diffic !"#: C$a%"er O&'ec"i(e: ' &! +oderate 6verall0 related diversification is less likely to %e consistent with the . interests of a firm1s e)uity holders than is unrelated diversification. True False Answer: Page: Diffic !"#: C$a%"er O&'ec"i(e: ' False &1 +oderate The only two economies of scope that do not have the potential for . generating positive returns for a firm1s e)uity holders are diversification in order to ma3imi4e the si4e of a firm0 and diversification to reduce risk. True False Answer: True Page: Diffic !"#: C$a%"er O&'ec"i(e: ' &! +oderate " 7 .

Chapter 7: Corporate Diversification1 1

/. Diversification per se is usually not a rare firm strategy regardless of how rare the particular economies of scope associated with that diversification are. True False Answer: Page: Diffic !"#: C$a%"er O&'ec"i(e: ( False &1 +oderate &! . A firm1s stakeholders include all of those groups or individuals who have an interest in how a firm performs. True False Answer: True Page: Diffic !"#: C$a%"er O&'ec"i(e: . & +oderate &1. Core competencies and multipoint competition are usually costly*to* duplicate %ases for corporate diversification. True False Answer: True Page: Diffic !"#: #asy C$a%"er O&'ec"i(e: . &1 & . 7hared activities and risk reduction are usually difficult to duplicate %ases for corporate diversification %ut ta3 advantages and employee compensation are usually relatively easy to duplicate. True False Answer: Page: Diffic !"#: C$a%"er O&'ec"i(e: . False && +oderate &&. 7trategic alliances are generally viewed as a poor su%stitute for diversification since the economies of scope in diversification can %e found in strategic alliances. True False Answer: Page: Diffic !"#: C$a%"er O&'ec"i(e: 7 False &' +oderate &'. 6ne su%stitute for diversification that e3ists is that instead of o%taining

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cost or revenue advantages from e3ploiting economies of scope across %usinesses in a diversified firm0 a firm may decide to simple grow and develop each of its %usinesses separately. True False Answer: True Page: Diffic !"#: C$a%"er O&'ec"i(e: 7 &' +oderate &(. $hile currency fluctuations can significantly affect the value of a firm1s international investments0 it is now possi%le for firms to hedge most of these risks through the use of a variety of financial instruments and strategies. True False Answer: True Page: Diffic !"#: C$a%"er O&'ec"i(e: " &( +oderate &.. Firms can use international operations to avoid ta3es %y esta%lishing operations in a country that charges little or no corporate ta30 known as a ta3 haven. True False Answer: True Page: Diffic !"#: C$a%"er O&'ec"i(e: " &. +oderate &7. 9overnment changes are virtually always %ad for international firms0 %ut at the micro level0 politics in a country can affect the fortunes of particular firms in particular industries in a positive way. True False Answer: Page: Diffic !"#: C$a%"er O&'ec"i(e: " False &7 +oderate &" . ,olitical scientists that have attempted to )uantify the political risk that firms seeking to implement international strategies are likely to face in different countries have generally %een una%le to agree on a common set of criteria firms should use to evaluate the political and economic conditions in a country. True False

Chapter 7: Corporate Diversification1 &

Answer: False

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&/. :egardless of how skilled a firm is in negotiating entry conditions0 a change in government or changes in laws can )uickly nullify any agreements. True False Answer: True Page: Diffic !"#: #asy C$a%"er O&'ec"i(e: " &"

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7imilar to financial risks0 there are a num%er of tools for managing political risks associated with pursuing an international strategy. True False Answer: Page: Diffic !"#: C$a%"er O&'ec"i(e: " False &7 +oderate )ULTIPLE CHOICE QUESTIONS '1 A firm implements a ;;;;;;;;;;;;; when it operates in multiple . industries or markets simultaneously. A. vertical integration strategy 8. corporate diversification strategy C. %usiness diversification strategy D. product differentiation strategy Answer: 8 Page: !" Diffic !"#: #asy C$a%"er O&'ec"i(e: 1 ' $hen a firm operates in multiple industries simultaneously0 it is said to . %e implementing a A. product diversification strategy. 8. product differentiation strategy. C. geographic market diversification strategy. D. geographic market differentiation strategy. Answer: A Page: !" Diffic !"#: #asy C$a%"er O&'ec"i(e: 1

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'&. $hen a firm operates in multiple geographic markets simultaneously it is said to %e implementing a<n= A. international diversification strategy. 8. product differentiation strategy. C. geographic market diversification strategy. D. geographic market differentiation strategy. Answer: C Page: !" Diffic !"#: C$a%"er O&'ec"i(e: 1 +oderate '' . $hen a firm implements %oth a product diversification strategy and a geographic market diversification strategy it is said to %e implementing a<n= A. mi3ed*market diversification strategy. 8. unrelated*diversification strategy. C. product differentiation strategy. D. product*market diversification strategy. Answer: D Page: !/ Diffic !"#: C$a%"er O&'ec"i(e: 1 +oderate

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A firm has implemented a strategy of ;;;;;;;;;;;;;;;;;;;;; when all or most of its activities fall within a single industry and geographic market. A. limited corporate diversification 8. related diversification C. unrelated diversification D. related*linked diversification Answer: A Page: !/ Diffic !"#: C$a%"er O&'ec"i(e: 1 +oderate '. . A. 8. C. -n which type of limited corporate diversification do firms have greater than /(5 of their total sales in a single product market> Dominant*%usiness firms 7ingle*%usiness firms :elated*constrained firms

Chapter 7: Corporate Diversification1 (

D. :elated*linked firms Answer: 8 Page: 1! Diffic !"#: +oderate

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'7 Firms pursuing ;;;;;;;;;;;;;;;;; have %etween 7!5 and /(5 of . their sales in a single product market. A. dominant*%usiness diversification 8. single*%usiness diversification C. related*constrained diversification D. related*linked diversification Answer: A Page: 1! Diffic !"#: C$a%"er O&'ec"i(e: 1 +oderate '" The analysis of firms pursuing a strategy of ;;;;;;;;;;;;;;; is . logically e)uivalent to the analysis of %usiness*level strategies. A. unrelated diversification 8. related*linked diversification C. related*constrained diversification D. limited corporate diversification Answer: D Page: 11 Diffic !"#: C$a%"er O&'ec"i(e: 1 +oderate '/. Firms such as ,epsiCo who operate a num%er of %usinesses around the world that share a num%er of inputs0 production technologies0 or distri%ution channels %ut none of whose %usinesses account for more than 7!5 of a firm1s revenues are said to %e implementing a A. related*constrained diversification. 8. related*linked diversification. C. dominant*%usiness diversification. D. single*%usiness diversification. Answer: A Page: 1 Diffic !"#: C$a%"er O&'ec"i(e: 1 +oderate

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Firms such as Disney which own and operate %usinesses that share a limited num%er of inputs0 production technologies or distri%ution channels are said to %e pursuing a ;;;;;;;;;;;;;;;; corporate

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diversification strategy. A. related*constrained 8. related*linked C. dominant*%usiness D. single*%usiness Answer: 8 Page: 1 Diffic !"#: +oderate (1 .

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Firms such as 9eneral #lectric that generate less than 7!5 of their revenues from a single product market and whose %usinesses share few0 if any0 common attri%utes0 are said to %e pursuing ;;;;;;;;;;;;;;; corporate diversification. A. limited 8. related*linked C. related*constrained D. unrelated Answer: D Page: 1& Diffic !"#: C$a%"er O&'ec"i(e: 1 +oderate ( -n order for corporate diversification to %e economically valua%le . A. there must %e some valua%le economy of scope among the multiple %usinesses in which a firm is operating and it must %e more costly for managers in a firm to reali4e these economies of scope than for outside e)uity holders on their own. 8. there must not %e any valua%le economy of scope among the multiple %usinesses in which a firm is operating and it must %e less costly for managers in a firm to reali4e these economies of scope than for outside e)uity holders on their own. C. there must %e some valua%le economy of scope among the multiple %usinesses in which a firm is operating and it must %e less costly for managers in a firm to reali4e these economies of scope than for outside e)uity holders on their own. D. there must not %e any valua%le economy of scope among the multiple %usinesses in which a firm is operating and it must %e more costly for managers in a firm to reali4e these economies of scope than for outside e)uity holders on their own. Answer: C Page: 1& Diffic !"#: C$a%"er O&'ec"i(e: +oderate

Chapter 7: Corporate Diversification1 7

(&. $hen the value of the products or services a firm sells increases as a function of the num%er of %usiness that the firm operates in0 ;;;;;;;;;;;; are said to e3ist. A. economies of scope 8. vertical economies C. economies of scale D. diseconomies of scope Answer: A Page: 1& Diffic !"#: C$a%"er O&'ec"i(e: & +oderate

(' $hich of the following statements regarding economies of scope is . accurate> A. 6nly firms pursuing single*%usiness diversification can e3ploit economies of scope. 8. 6nly firms pursuing related*constrained diversification can e3ploit economies of scope. C. 6nly firms not pursuing diversification can e3ploit economies of scope. D. 6nly diversified firms can e3ploit economies of scope. Answer: D Page: 1& Diffic !"#: C$a%"er O&'ec"i(e: & +oderate (( Currently0 most scholars %elieve that e3ploiting economies of scope . through corporate diversification0 on average0 A. destroyed a%out (5 of the firm?s market value. 8. had no impact on a firm?s market value. C. destroyed a%out ((5 of the firm?s market value. D. increased a firm?s market value. Answer: D Page: 1' Diffic !"#: 2ard C$a%"er O&'ec"i(e: (. . A. 8. C. $hich type of economies of scope includes shared activities and core competencies> 6perational economies of scope Financial economies of scope Anticompetitive economies of scope

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D. #mployee and stakeholder incentives for diversification Answer: A Page: 1' Diffic !"#: #asy C$a%"er O&'ec"i(e: & (7 . -f a diversified firm had three %usinesses and these companies shared a common marketing and service operation0 as well as common technology and development0 this would %e an e3ample of which type of economy of scope> A. Core competencies 8. 7hared activities C. :isk reduction D. +ultipoint competition Answer: 8 Page: 1( Diffic !"#: C$a%"er O&'ec"i(e: & +oderate (" 7hare activities are )uite common %etween %oth ;;;;;;;;;;;;; and . ;;;;;;;;;;;; diversified firms. A. single %usiness@ dominant*%usiness 8. related*constrained@ single %usiness C. related*linked@ dominant*%usiness D. related*constrained@ related*linked Answer: D Page: 1. Diffic !"#: C$a%"er O&'ec"i(e: & +oderate

(/. Aimits of activity sharing include A. su%stantial organi4ational issues are often associated with a diversified firm?s learning how to manage cross*%usiness relationships and failure can lead to e3cess %ureaucracy0 inefficiency0 and organi4ational gridlock. 8. a significant reduction in the organi4ation?s innovation and fle3i%ility. C. su%stantial organi4ational issues related to ade)uately compensating personnel across %usinesses and setting transfer prices. D. a significant reduction in the organi4ation?s a%ility to meet the needs of any of its customers. Answer: A Page: 1" Diffic !"#: 2ard C$a%"er O&'ec"i(e: &

Chapter 7: Corporate Diversification1 /

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;;;;;;;;;;; are comple3 sets of resources and capa%ilities that link different %usinesses in a diversified firm through managerial and technical know*how0 e3perience and wisdom. A. +anagerial competencies 8. Core competencies C. Competitive advantages D. Core advantages Answer: 8 Page: 1" Diffic !"#: C$a%"er O&'ec"i(e: & +oderate .1 . A firm that diversifies %y e3ploiting its resources and capa%ility advantages in its original %usiness will have ;;;;;;;;;;;; costs than <as= firms that %egin a new %usiness without these resource and capa%ility advantages0 or ;;;;;;;;;; revenues than <as= firms lacking these advantages. A. higher@ lower 8. the same@ higher C. lower@ the same D. lower@ higher Answer: D Page: 1/ Diffic !"#: C$a%"er O&'ec"i(e: & +oderate . -f all of a firm1s %usinesses share the same core competencies0 then that . firm has implemented a strategy of ;;;;;;;;;;;;; diversification. A. single %usiness 8. related*linked C. related*constrained D. dominant*%usiness Answer: C Page: ! Diffic !"#: C$a%"er O&'ec"i(e: & 2ard .&. Diversified firms that are e3ploiting core competencies as an economy of scope0 %ut are not doing so with any shared activities are sometimes called ;;;;;;;;;; diversified firms. A. seemingly related 8. unrelated C. semi*related D. link*related Answer: A Page: 1 Diffic !"#: C$a%"er O&'ec"i(e: & +oderate

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.' A common way of thinking a%out strategy across different %usinesses . within a firm is known as the firm1s A. core competency. 8. competitive advantage. C. economy of scope. D. dominant logic. Answer: D Page: Diffic !"#: C$a%"er O&'ec"i(e: & +oderate .( . -n general0 a diversified firm0 as a source of capital has ;;;;;;;;;;;;; information a%out a %usiness that it owns0 compared to e3ternal sources of capital. A. more and %etter 8. the same C. less and inferior D. more %ut %iased Answer: A Page: & Diffic !"#: C$a%"er O&'ec"i(e: & +oderate .. . Compared to two very risk %usinesses that have cash flows that are not highly correlated over time and that are operating separately0 the risk of a diversified firm operating in those same two %usinesses simultaneously is A. somewhat higher. 8. lower. C. the same. D. su%stantially higher. Answer: 8 Page: ( Diffic !"#: C$a%"er O&'ec"i(e: & +oderate .7 ;;;;;;;;;;;; e3ists when two or more diversified firms . simultaneously compete in multiple markets. A. +ultipoint competition 8. Dynamic competition C. +ultipoint cooperation D. Dynamic cooperation Answer: A Page: . Diffic !"#: #asy C$a%"er O&'ec"i(e: & ." For multipoint competition to lead to mutual for%earance

Chapter 7: Corporate Diversification1&1

. A. the threat of retaliation must %e su%stantial and the firms pursuing this strategy must have strong linkages among their diversified %usinesses. 8. the threat of retaliation must %e low and the firms pursuing this strategy must have strong linkages among their diversified %usinesses. C. the threat of retaliation must %e low and the firms pursuing this strategy must have weak linkages among their diversified %usinesses. D. the threat of retaliation must %e su%stantial and the firms pursuing this strategy must have weak linkages among their diversified %usinesses. Answer: A Page: 7 Diffic !"#: C$a%"er O&'ec"i(e: & +oderate ./. $hen diversified firms use the revenues from profita%le %usinesses to su%sidi4e the operations of another %usiness0 and then set the prices of the su%sidi4ed firms products at a level that is %elow the su%sidi4ed %usiness1s cost to produce these items0 this known as ;;;;;;;;;;; pricing. A. dynamic 8. monopoly C. predatory D. %eneficial Answer: C Page: 7 Diffic !"#: C$a%"er O&'ec"i(e: & +oderate 7! :esearch over the years has demonstrated conclusively that the . primary determinant of the compensation of top managers in a firm is A. not the si4e of the firm0 usually measured in sales0 %ut the economic performance of the firm. 8. %oth the economic performance of the firm as well as the si4e of the firm0 usually measured in sales. C. not the economic performance of the firm0 %ut the si4e of the firm0 usually measured in sales. D. neither the economic performance of the firm or the si4e of the firm. Answer: C Page: " Diffic !"#: C$a%"er O&'ec"i(e: & +oderate 71 . $hich of the following economies of scope do not have the potential for generating positive returns for a firm1s e)uity holders since the economies of scope can %e reali4ed %y outside e)uity holders at a low

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cost %y investing in a diversified portfolio of stock> A. 7hared activities 8. Diversification to ma3imi4e the si4e of a firm C. -nternal capital allocation D. #3ploiting market power Answer: 8 Page: &! Diffic !"#: C$a%"er O&'ec"i(e: ' +oderate 7 The only economy of scope that an unrelated firm can try to reali4e is . A. core competencies. 8. ta3 advantages. C. multipoint competition. D. risk reduction. Answer: D Page: &1 Diffic !"#: C$a%"er O&'ec"i(e: ' +oderate 7&. $hich of the following economies of scope is costly*to*duplicate> A. 7hared activities 8. -nternal capital allocation C. :isk reduction D. Task advantages Answer: 8 Page: & Diffic !"#: C$a%"er O&'ec"i(e: . +oderate 7' $hich of the following economies of scope is less costly*to*duplicate> . A. #mployee compensation 8. Core competencies C. +ultipoint competition D. #3ploiting market power Answer: A Page: & Diffic !"#: C$a%"er O&'ec"i(e: . +oderate 7( 7u%stitutes for e3ploiting economies of scope in diversification include . A. growing and developing independent %usinesses within a diversified firm and vertical integration. 8. vertical integration and strategic alliances.

Chapter 7: Corporate Diversification1&&

C. growing and developing independent %usinesses within a diversified firm and strategic alliances. D. strategic alliances and multipoint competition. Answer: C Page: &' Diffic !"#: C$a%"er O&'ec"i(e: 7 +oderate 7. $hich of the following statements regarding the rarity of . diversification is accurate> A. -f only a few competing firms have e3ploited a particular economy of scope0 that economy of scope can %e rare. 8. A particular economy of scope can only %e rare if no other firms are e3ploiting that economy of scope. C. A particular economy of scope can only %e rare even if many other firms are e3ploiting that economy of scope. D. -f only a few competing firms have e3ploited a particular economy of scope0 that economy of scope can %e rare %ut only if the firm is pursuing unrelated diversification. Answer: A Page: &1 Diffic !"#: C$a%"er O&'ec"i(e: ( +oderate 77 . A. 8. $hich of the following statements regarding financial risk and international diversification is accurate> 2edging strategies can help reduce %oth financial and political risks. 2edging strategies can help reduce political risks %ut not financial risks. C. 2edging strategies can help reduce financial risks %ut not political risks. D. 2edging strategies can1t help reduce either financial or political risks. Answer: C Page: &( Diffic !"#: C$a%"er O&'ec"i(e: 7 +oderate 7" -n terms of political risk which country is the least risky country within . which to do %usiness in the entire world> A. 7wit4erland 8. Au3em%ourg C. 7weden D. the Bnited 7tates Answer: 8 Page: &7 Diffic !"#: 2ard C$a%"er O&'ec"i(e: 7

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7/. -n terms of political risk which country is the most risky country within which to do %usiness in the entire world> A. Corth Dorea 8. -ran C. Cu%a D. Eaire Answer: A Page: &7 Diffic !"#: 2ard C$a%"er O&'ec"i(e: 7 "! A country that charges little or no corporate ta3 is known as a . A. ta3 li%erty. 8. ta3 shelter. C. ta3 freedom. D. ta3 haven. Answer: D Page: &. Diffic !"#: C$a%"er O&'ec"i(e: 7 +oderate At the %eginning of !!1 ,each Computers competed e3clusively in the computer industry and generated appro3imately /(5 of its revenue from the sales of computers and computer related software and appro3imately (5 of ,each1s revenues were generated from sales of other peripherals. Further0 of these revenues .!5 was from sales in the B.7.0 &!5 was from sales in #urope0 75 was from sales in Asia and &5 was from other areas. -n 6cto%er !!10 ,each entered the personal electronics industry %y introducing a new +,& player known as the ,each,it. -n developing and selling the ,each,it0 ,each Computers was a%le to use many of the same :FD facilities0 suppliers0 production facilities0 and distri%ution and sales outlets as the computers and software ,each Computers traditionally sold. 8y !!&0 the ,each,it +,& ,layer0 accessories for the unit0 and sales of songs on ,each Computers1 CectarTunes we%site accounted for &(5 of ,each Computers1 revenues. "1 -n !!10 ,each Computers1 diversification strategy was %est . characteri4ed as A. related*linked diversification. 8. dominant*%usiness diversification. C. single*%usiness diversification. D. related*constrained diversification. Answer: C Page: 1! Diffic !"#: C$a%"er O&'ec"i(e: 1 +oderate

Chapter 7: Corporate Diversification1&(

" 8y !!&0 ,each Computer1s diversification strategy was %est . characteri4ed as A. unrelated diversification. 8. related*constrained diversification. C. related*linked diversification. D. dominant*%usiness diversification. Answer: 8 Page: 1 Diffic !"#: C$a%"er O&'ec"i(e: 1 +oderate

"& $hich type of economies of scope is ,each Computers e3periencing . %etween its units> A. 7hare activities 8. Core competencies C. +ultipoint competition D. Ta3 advantages Answer: A Page: 1( Diffic !"#: 2ard C$a%"er O&'ec"i(e: & "' 6ne of the limits of the economies of scope that ,each Computers is . leveraging in its diversification strategy is that it A. may limit the a%ility of a particular %usiness to meet specific customers1 needs. 8. is significantly affected %y the way a diversified firm is organi4ed. C. they are not tangi%le and may %e reflected only in the shared knowledge0 e3perience and wisdom across %usinesses. D. the level and type of diversification that a firm pursues can affect the efficiency of this allocation process. Answer: A Page: 1" Diffic !"#: 2ard C$a%"er O&'ec"i(e: & "( . -f one of the reasons that ,each Computers entered into the electronics industry was to offset weakness in the computer industry %ecause when the computer industry was weak the electronics industry was strong0 and vice*a*versa0 ,each Computers would %e pursuing which economy of scope> A. Core competencies 8. +ultipoint competition

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C. Ta3 advantages D. :isk reduction Answer: D Page: ". .

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-f0 when ,each Computers introduced its ,each,it in !!10 the company used its profits in the computer industry to su%sidi4e its operations in the electronics industry and used this su%sidy to sell the ,each,it for a price that was less than the cost of producing and selling the +,& players0 this would %e an e3ample of A. mutual for%earance. 8. escalation of commitment. C. predatory pricing. D. multipoint competition. Answer: C Page: 7 Diffic !"#: 2ard C$a%"er O&'ec"i(e: & "7 . ,each Computers1 e)uity holders0 its employees0 suppliers and customers along with all of those groups and individuals who have an interest in how ,each Computers performs are referred to as A. focal groups. 8. stakeholders. C. supporters. D. stockholders. Answer: 8 Page: & Diffic !"#: C$a%"er O&'ec"i(e: . +oderate "" . -f no other firm in the computer industry was using a diversification strategy similar to ,each Computers10 this diversification strategy could %e said to %e A. rare and costly*to*duplicate. 8. rare and less costly*to*duplicate. C. common %ut costly to duplicate. D. common and less costly*to*duplicate. Answer: A Page: &1 Diffic !"#: 2ard C$a%"er O&'ec"i(e: ( "/ . -n !!10 if ,each Computers did not want to employ a diversification strategy to enter the personal electronics industry0 they could use which su%stitute for diversification> A. 8ackward vertical integration 8. ,roduct differentiation

Chapter 7: Corporate Diversification1&7

C. 7trategic alliances D. Forward vertical integration Answer: C Page: &' Diffic !"#: +oderate /! .

C$a%"er O&'ec"i(e: 7

-f ,each Computers was seeking to further e3pand its international operations and wanted to avoid countries with a high political risk0 it should consider all of the following countries for e3pansion e3cept A. Au3em%ourg. 8. Corway. C. 7ingapore. D. Corth Dorea. Answer: D Page: &7 Diffic !"#: C$a%"er O&'ec"i(e: " +oderate ESSA* QUESTIONS +,-Disc ss w$en a fir. is i.%!e.en"ing a c/r%/ra"e 0i(ersifica"i/n s"ra"eg# an0 0ifferen"ia"e &e"ween a %r/0 c" 0i(ersifica"i/n s"ra"eg#1 a ge/gra%$ic .ar2e" 0i(ersifica"i/n s"ra"eg# an0 a %r/0 c"3.ar2e" 0i(ersifica"i/n s"ra"eg#A firm is implementing a corporate diversification strategy when it operates in multiple industries or markets simultaneously. A firm is said to %e implementing a product diversification strategy when it operates in multiple industries simultaneously. A firm is said to %e pursuing a geographic market diversification strategy when it operates in multiple geographic markets simultaneously. $hen a firm implements %oth a product diversification strategy and a geographic market diversification strategy simultaneously it is said to %e producing a product*market diversification strategy. Pages: !"* !/ Diffic !"#: #asy C$a%"er O&'ec"i(e: 1 +4-I0en"if# an0 0is"ing is$ &e"ween "$e fi(e 0ifferen" !e(e!s /f 0i(ersifica"i/n 0isc sse0 in C$a%"er 7The five different levels of diversification that firms can pursue include Sing!e3& siness fir.s 5 These firms operate in a single %usiness and /(5 or more of firm revenues come from this %usiness. D/.inan"3& siness 0i(ersifica"i/n 5 Firms using this type of limited diversification strategy operate in two or more %usinesses0 one of which accounts for %etween 7!5 and /!5 of firm revenues.

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Re!a"e03c/ns"raine0 0i(ersifica"i/n G A firm using this type of related diversification operates in multiple %usinesses0 none of which accounts for more that 7!5 of firm revenues that share a significant num%er of dimensions including inputs0 production technologies0 distri%ution channels0 similar customers0 etc. This strategy is termed HconstrainedI %ecause corporate managers pursue %usiness opportunities in new markets or industries only if those markets or industries share numerous resource and capa%ility re)uirements with the %usinesses the firm is currently pursuing. Re!a"e03!in2e0 0i(ersifica"i/n G Firms using this type of related diversification when it operates in multiple %usiness0 none of which accounts for more than 7!5 of a firms revenues0 and these %usinesses share only a couple of dimensions0 or have %usiness that are linked along very different dimensions. Unre!a"e0 c/r%/ra"e 0i(ersifica"i/n 3 $hen less than 7! percent of a firm?s revenues is generated in a single product market0 and when a firm?s %usinesses share few0 if any0 common attri%utes0 then that firm is pursuing a strategy of unrelated corporate diversification. Pages: !/* 1& Diffic !"#: +oderate C$a%"er O&'ec"i(e: 1 +6-S%ecif# "$e "w/ c/n0i"i/ns "$a" a c/r%/ra"e 0i(ersifica"i/n s"ra"eg# . s" .ee" in /r0er "/ crea"e ec/n/.ic (a! eIn order for corporate diversification to be economically valuable, two conditions must hold. First, there must be some valuable economy of scope among the multiple businesses in which a firm is operating. Second, it must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own. If outside investors could realize the value of a particular economy of scope on their own, and at low cost, then they would have few incentives to hire managers to realize this economy of scope for them. Page: 1& Diffic !"#: #asy C$a%"er O&'ec"i(e: +7-Define "$e c/nce%" /f ec/n/.ies /f sc/%e1 0isc ss w$en "$e# are (a! a&!e an0 i0en"if# an0 0ifferen"ia"e &e"ween f/ r /f "$e eig$" %/"en"ia! ec/n/.ies /f sc/%e a 0i(ersifie0 fir. .ig$" "r# "/ e8%!/i"#conomies of scope e3ist in a firm when the value of the products or services it sells increases as a function of the num%er of %usinesses that firm operates in. The term HscopeI in this definition refers to the range of %usinesses in which a diversified firm operates. For this reason0 only diversified firms can0 %y

Chapter 7: Corporate Diversification1&/

definition0 e3ploit economies of scope. #conomies of scope are valua%le to the e3tent that they increase a firm?s revenues or decrease its costs0 compared to what would %e the case if these economies of scope were not e3ploited. There are eight different types of economies of scope including: 7hared activities in which a firm1s %usinesses share a variety of activities throughout their value chains can serve as the %asis for operational economies of scope. Core competencies are comple3 sets of resources and capa%ilities that link different %usinesses in a diversified firm through managerial and technical know*how0 e3perience0 and wisdom. -nternal capital allocation. -n a sense0 diversification creates an internal capital market in which %usinesses in a diversified firm compete for corporate capital. An internal capital market creates value for a diversified firm when it offers some efficiency advantages over an e3ternal capital market. :isk reduction. Diversified firms can achieve a lower level of risk if they %uild a %usiness portfolio that has a low correlation %etween the cash flows of the %usinesses in the portfolio. Ta3 Advantages. A diversified firm can use losses in some of its %usinesses to offset profits in others0 there%y reducing its overall ta3 lia%ility. 7econd0 %ecause diversification can reduce the riskiness of a firm?s cash flows0 it can also reduce the pro%a%ility that a firm will declare %ankruptcy. This can increase a firm?s de%t capacity which is particularly important in ta3 environments where interest payments on de%t are ta3 deducti%le. +ultipoint competition is an anticompetitive economy of scope that e3ists when two or more diversified firms simultaneously compete in multiple markets. +ultipoint competition can serve to facilitate a particular type of tacit collusion called mutual for%earance in which firms forgo acts competitive strategies in one %usiness %ecause of the possi%ility of retaliation %y a competitor in another %usiness. #3ploiting market power. -nternal allocations of capital among a diversified firm?s %usinesses may ena%le it to e3ploit in some of its %usinesses the market power advantages it enJoys in other of its %usinesses through actions such su%sidi4ing the operations of another of its %usinesses. +a3imi4ing management compensation managers seeking to ma3imi4e their income should attempt to grow their firm. 6ne of the easiest ways to grow a firm is through diversification0 especially unrelated

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diversification through mergers and ac)uisitions which can allow a diversified firm can grow su%stantially in a short period of time0 leading senior managers to earn higher incomes. Pages: 1(* " Diffic !"#: 2ard C$a%"er O&'ec"i(e: & +9-Disc ss s$are0 ac"i(i"ies as a %/"en"ia! s/ rce /f ec/n/.ies /f sc/%e f/r 0i(ersifie0 fir.s an0 i0en"if# "$e %/"en"ia! &enefi"s an0 !i.i"s /f ac"i(i"# s$aring$hen the companies in a diversified firm share a variety of activities throughout their value chains these activities can serve as the %asis for operational economies of scope. ,otential shared activities can %e found throughout a firm1s value chain from input activities through dealer support and service. Activity sharing can have the effect of reducing a diversified firm1s costs and failure to e3ploit share activities across %usiness can lead to out*of* control costs. 7hared activities can also increase a diversified firm1s %usinesses through shared product development and sales activities0 as well as %y enhancing %usiness revenues %y e3ploiting strong0 positive reputations of some of a firm1s %usinesses in other of its %usinesses. There are three important limits to activity sharing. First0 su%stantial organi4ational issues can %e associated with a diversified firm1s learning how to manage cross*%usiness relationships. 7econd0 sharing activities may limit the a%ility of a particular %usiness to meet its specific customer1s needs. Finally0 if one %usiness in a diversified firm has a poor reputation0 sharing activities with that %usiness can reduce the )uality of the reputation of other %usinesses in the firm. Pages: 1(* 1" Diffic !"#: +oderate C$a%"er O&'ec"i(e: & +:-I0en"if# an0 0isc ss "$e "w/ ec/n/.ies /f sc/%e "$a" 0/ n/" $a(e "$e %/"en"ia! f/r genera"ing %/si"i(e re" rns f/r a fir.;s / "si0e e< i"# in(es"/rsThe only two economies of scope that do not have the potential for generating positive returns for a firm1s e)uity holders are diversification in order to ma3imi4e the si4e of a firm0 and diversification to reduce risk. Diversification in order to ma3imi4e the si4e of a firm does not generate positive returns %ecause firm si4e0 per se0 is not valua%le. Diversification in order to reduce risk does not generate positive returns %ecause e)uity holders can do this on their own at a very low cost %y simply investing in a diversified portfolio of stocks. Page: &! Diffic !"#: #asy C$a%"er O&'ec"i(e: ' +7-Disc ss "$e c/n0i"i/ns n0er w$ic$ a fir.;s 0i(ersifica"i/n s"ra"eg# wi!! &e rare-

Chapter 7: Corporate Diversification1'1

The rarity of diversification depends not on diversification per se %ut on how rare the particular economies of scope associated with that diversification are. -f only a few competing firms have e3ploited a particular economy of scope0 that economy of scope can %e rare. -f numerous firms have done so0 it will %e common and not a source of competitive advantage. Page: &1 Diffic !"#: #asy C$a%"er O&'ec"i(e: ( +=-I0en"if# w$ic$ ec/n/.ies /f sc/%e are ./re !i2e!# "/ &e s &'ec" "/ !/w3c/s" i.i"a"i/n an0 w$ic$ are !ess !i2e!# "/ &e s &'ec" "/ !/w3c/s" i.i"a"i/n an0 0isc ss w$# eac$ is ei"$er c/s"!# /r !ess3c/s"!# "/ 0 %!ica"eThe e3tent to which a valua%le and rare corporate diversification strategy is immune from direct duplication depends on how costly it is for competing firms to reali4e this same economy of scope. 7ome economies of scope are0 in general0 more costly to duplicate than others. 7hared activities0 risk reduction0 ta3 advantages0 and employee compensation as %ases for corporate diversification are usually relatively easy to duplicate. 8ecause shared activities are %ased on tangi%le assets that a firm e3ploits across multiple %usinesses0 such as common :FD la%s0 common sales forces0 and common manufacturing0 they are usually relatively easy to duplicate. The only duplication issues for shared activities concern developing the cooperative cross*%usiness relationships that often facilitate the use of shared activitiesK issues discussed in the ne3t chapter. +oreover0 %ecause risk reduction0 ta3 advantages0 and employee compensation motives for diversifying can %e accomplished through %oth related and unrelated diversification0 these motives for diversifying tend to %e relatively easy to duplicate. 6n the other hand0 other economies of scope are much more difficult to duplicate. These difficult*to*duplicate economies of scope include core competencies0 internal capital allocation efficiencies0 multipoint competition0 and e3ploitation of market power. 8ecause core competencies are more intangi%le0 their direct duplication is often challenging. The reali4ation of capital allocation economies of scope re)uires very su%stantial information* processing capa%ilities. These capa%ilities are often very difficult to develop. +ultipoint competition re)uires very close coordination %etween the different %usinesses in which a firm operates. This kind of coordination is socially comple3 and thus may often %e immune from direct duplication. Finally0 e3ploitation of market power may %e costly to duplicate %ecause it re)uires that a firm must possess significant market power in one of its lines of %usiness. A firm that does not have this market power advantage would have to o%tain it. The cost of doing so0 in most situations0 would %e prohi%itive.

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++-I0en"if# "w/ %/"en"ia! s &s"i" "es f/r c/r%/ra"e 0i(ersifica"i/n an0 0isc ss $/w eac$ can %r/(i0e &enefi"s si.i!ar "/ c/r%/ra"e 0i(ersifica"i/nTwo o%vious su%stitutes for diversification e3ist. First0 instead of o%taining cost or revenue advantages from e3ploiting economies of scope across %usinesses in a diversified firm0 a firm may decide to simply grow and develop each of its %usinesses separately. -n this sense0 a firm that successfully implements a cost leadership strategy or a product differentiation strategy in a single %usiness can o%tain the same cost or revenue advantages it could have o%tained %y e3ploiting economies of scope0 %ut without having to develop cross*%usiness relations. 9rowing independent %usinesses within a diversified firm can %e a su%stitute for e3ploiting economies of scope in a diversification strategy. A second su%stitute for e3ploiting economies of scope in diversification can %e found in strategic alliances. 8y using a strategic alliance0 firms may %e a%le to gain the economies of scope they could have o%tained if they had carefully e3ploited economies of scope across %usinesses they own. Thus0 for e3ample0 instead of a firm e3ploiting research and development economies of scope %etween two %usinesses it owns0 it could form a strategic alliance with a different firm and form a Joint research and development la%. -nstead of a firm e3ploiting sales economies of scope %y linking its %usinesses through a common sales force0 it might develop a sales agreement with another firm and o%tain cost or revenue advantages in this way. Page: &' Diffic !"#: +oderate C$a%"er O&'ec"i(e: 7 ,>>- Disc ss w$# an in"erna"i/na! s"ra"eg# can &e "$/ g$" /f as a s%ecia! case /f c/r%/ra"e 0i(ersifica"i/n s"ra"eg# an0 0isc ss "w/ ni< e c$a!!enges facing a fir. % rs ing in"erna"i/na! 0i(ersifica"i/n /%%/r" ni"ies an0 w$a" fir.s can 0/ "/ /(erc/.e "$ese c$a!!engesA firm pursuing international strategy is pursuing0 at least0 a strategy of geographic diversification and perhaps a strategy of product*market diversification. -n this sense0 an international strategy can %e thought of as a special case of a corporate diversification strategy. The two uni)ue challenges facing firms pursuing international diversification are financial risks and political risks.

Chapter 7: Corporate Diversification1'&

The two most significant financial risks are currently fluctuations and different inflation rates across countries in which they operate. Currency fluctuations can significantly affect the value of a firm?s international investments either positively or negatively depending on the firm1s e3posure and position. Firms can use a variety of financial instruments and strategies to hedge against financial risks. ,olitical risk involves changes in the political rules of the game and can have the effect of increasing some environmental threats0 reducing others0 and there%y changing the value of a firm?s resources and capa%ilities. ,olitics can affect the value of a firm?s international strategies at the macro and micro levels. At the macro level0 %road changes in the political situation in a country can change the value of an investment. At the micro level0 politics in a country can affect the fortunes of particular firms in particular industries. Bnlike financial risks0 there are relatively few tools for managing the political risks associated with pursuing an international strategy. 6ptions to reduce political risk include ,ursuing international opportunities only in countries where political risk is very small. Aimiting investments in politically risky environments. Treating each of the determinants of political risk as negotiation points as a firm enters into a new country market. Turning the threat of political risk into an opportunity %y developing valua%le0 rare0 and costly*to*imitate resources and capa%ilities in managing political risks. Pages: O&'ec"i(e: " &'* &/ Diffic !"#: +oderate C$a%"er