Chapter 7: Corporate Diversification371
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: True Page: 208 Difficulty: Easy
Chapter Objective: 1
2.
When a firm operates in multiple industries simultaneously it is said to be
implementing a geographic market diversification strategy.
True
False
Answer: False Page: 208 Difficulty: Easy
Chapter Objective: 1
3.
When a firm operates in multiple geographic markets simultaneously it is said to
be implementing a product diversification strategy.
True
False
Answer: False Page: 208 Difficulty: Easy
Chapter Objective: 1
4.
A firm has implemented a strategy of limited corporate diversification when all or
most of its business activities fall within a single industry and geographic market.
True
False
Answer: True Page: 210 Difficulty: Easy
Chapter Objective: 1
5.
The analysis of limited corporate diversification is logically equivalent to the
analysis of business-level strategies.
True
False
Answer: True Page: 211 Difficulty: Moderate
Chapter Objective: 1
6.
A dominant-business firm is pursuing a related diversification strategy and has
between 70 and 95 percent of firm revenues from a single business.
True
False
Answer: False Page: 209
Difficulty: Moderate
Chapter Objective: 1
7.
If all the businesses in which a firm operates share a significant number of inputs,
production technologies, distribution channels, similar customers, and so forth, this
corporate diversification strategy is called related-constrained diversification.
True
False
Answer: True Page: 212
Difficulty: Moderate
Chapter Objective: 1
372 Part III
8.
If the different businesses that a single firm pursues are linked on only a couple of
dimensions, or if different sets of businesses are linked along very different
dimensions, that corporate diversification strategy is called related-linked
diversification.
True
False
Answer: True Page: 212
Difficulty: Moderate
Chapter Objective: 1
9.
When less than 90 percent of a firm's revenues are generated in a single product
market, and when a firm's business share few, if any, common attributes, then that
firm is pursuing a strategy of unrelated corporate diversification.
True
False
Answer: False Page: 213
Difficulty: Hard
Chapter Objective: 1
10. Economies of scope exist in a firm when the value of the products or services it
sells increase as a function of the number of businesses in which the firm operates.
True
False
Answer: True
Page: 213
Difficulty: Moderate
Chapter Objective: 3
11. In order for corporate diversification to be economically viable there must either be
some valuable economy of scope among the multiple businesses in which a firm is
operating or it must be less costly for managers in a firm to realize these economies
of scope than for an outside equity holder on his or her own.
True
False
Answer: False
Page: 213
Difficulty: Moderate
Chapter Objective: 2
12. Currently, most scholars believe that when a firm implements a corporate
diversification strategy it destroys about 25% of its market value.
True
False
Answer: False
Page: 214
Difficulty: Hard
Chapter Objective: 2
13. Operational economies of scope include shared activities and risk reduction.
True
False
Answer: False
Page: 215
Difficulty: Moderate
Chapter Objective: 3
Chapter 7: Corporate Diversification373
14. Shared activities that can provide the basis for operational economies of scope are
quite common among related-constrained and related-linked diversified firms, as
well as firms following an unrelated diversification strategy.
True
False
Answer: False
Page: 216
Difficulty: Moderate
Chapter Objective: 3
15. Shared activities can increase the revenues in diversified firms' businesses and
failure to exploit shared activities across businesses can lead to out-of-control costs.
True
False
Answer: True
Page: 217
Difficulty: Moderate
Chapter Objective: 3
16. One of the limits of activity sharing is that sharing activities may limit the ability of
a particular business to meet its specific customers' needs.
True
False
Answer: True
Page: 218
Difficulty: Moderate
Chapter Objective: 3
17. Over the last decade, more and more diversified firms have been abandoning
efforts at managing each business's activities independently in favor of increased
activity sharing.
True
False
Answer: False
Page: 218
Difficulty: Hard
Chapter Objective: 3
18. Core competencies are complex sets of resources and capabilities that link different
businesses in a diversified firm through managerial and technical know-how,
experience, and wisdom.
True
False
Answer: True
Page: 218
Difficulty: Moderate
Chapter Objective: 3
19. 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.
True
False
Answer: False
Page: 219
Difficulty: Hard
Chapter Objective: 3
374 Part III
20. 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.
True
False
Answer: False
Page: 221
Difficulty: Moderate
Chapter Objective: 3
21. A firm's dominant logic is common way of thinking about strategy across different
businesses.
True
False
Answer: True
Page: 222
Difficulty: Moderate
Chapter Objective: 3
22. For an internal capital market to create value for a diversified firm, it must offer
some efficiency advantages over an external capital market.
True
False
Answer: True
Page: 223
Difficulty: Moderate
Chapter Objective: 3
23. The businesses within a diversified firm always gain cost-of-capital advantages by
being part of a diversified firm's portfolio.
True
False
Answer: False
Page: 224
Difficulty: Easy
Chapter Objective: 3
24. Multipoint competition exists when two or more diversified firms simultaneously
compete in multiple markets and multipoint competition can serve to facilitate a
particulate type of tacit collusion called mutual forbearance.
True
False
Answer: True
Page: 226
Difficulty: Moderate
Chapter Objective: 3
25. 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.
True
False
Answer: False
Page: 227
Difficulty: Moderate
Chapter Objective: 3
26. 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.
True
False
Answer: True
Page: 230
Difficulty: Moderate
Chapter Objective: 4
Chapter 7: Corporate Diversification375
27. Overall, related diversification is less likely to be consistent with the interests of a
firm's equity holders than is unrelated diversification.
True
False
Answer: False
Page: 231
Difficulty: Moderate
Chapter Objective: 4
28. 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.
True
False
Answer: True
Page: 230
Difficulty: Moderate
Chapter Objective: 4
29. 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: False
Page: 231
Difficulty: Moderate
Chapter Objective: 5
30. A firm's stakeholders include all of those groups or individuals who have an
interest in how a firm performs.
True
False
Answer: True
Page: 232
Difficulty: Moderate
Chapter Objective: 6
31. Core competencies and multipoint competition are usually costly-to-duplicate bases
for corporate diversification.
True
False
Answer: True
Page: 231
Difficulty: Easy
Chapter Objective: 6
32. Shared activities and risk reduction are usually difficult to duplicate bases for
corporate diversification but tax advantages and employee compensation are
usually relatively easy to duplicate.
True
False
Answer: False
Page: 233
Difficulty: Moderate
Chapter Objective: 6
33. Strategic alliances are generally viewed as a poor substitute for diversification since
the economies of scope in diversification can be found in strategic alliances.
True
False
Answer: False
Page: 234
Difficulty: Moderate
Chapter Objective: 7
376 Part III
34. One substitute for diversification that exists is that instead of obtaining cost or
revenue advantages from exploiting economies of scope across businesses in a
diversified firm, a firm may decide to simple grow and develop each of its
businesses separately.
True
False
Answer: True
Page: 234
Difficulty: Moderate
Chapter Objective: 7
35. While currency fluctuations can significantly affect the value of a firm's
international investments, it is now possible for firms to hedge most of these risks
through the use of a variety of financial instruments and strategies.
True
False
Answer: True
Page: 235
Difficulty: Moderate
Chapter Objective: 8
36. Firms can use international operations to avoid taxes by establishing operations in a
country that charges little or no corporate tax, known as a tax haven.
True
False
Answer: True
Page: 236
Difficulty: Moderate
Chapter Objective: 8
37. Government changes are virtually always bad for international firms, but at the
micro level, politics in a country can affect the fortunes of particular firms in
particular industries in a positive way.
True
False
Answer: False
Page: 237
Difficulty: Moderate
Chapter Objective: 8
38. Political scientists that have attempted to quantify the political risk that firms
seeking to implement international strategies are likely to face in different countries
have generally been unable to agree on a common set of criteria firms should use to
evaluate the political and economic conditions in a country.
True
False
Answer: False
Page: 237
Difficulty: Hard
Chapter Objective: 8
39. Regardless of how skilled a firm is in negotiating entry conditions, a change in
government or changes in laws can quickly nullify any agreements.
True
False
Answer: True
Page: 238
Difficulty: Easy
Chapter Objective: 8
Chapter 7: Corporate Diversification377
40. Similar to financial risks, there are a number of tools for managing political risks
associated with pursuing an international strategy.
True
False
Answer: False
Page: 237
Difficulty: Moderate
Chapter Objective: 8
MULTIPLE CHOICE QUESTIONS
41. A firm implements a _____________ when it operates in multiple industries or
markets simultaneously.
A. vertical integration strategy
B. corporate diversification strategy
C. business diversification strategy
D. product differentiation strategy
Answer: B
Page: 208
Difficulty: Easy
Chapter Objective: 1
42. When a firm operates in multiple industries simultaneously, it is said to be
implementing a
A. product diversification strategy.
B. product differentiation strategy.
C. geographic market diversification strategy.
D. geographic market differentiation strategy.
Answer: A
Page: 208
Difficulty: Easy
Chapter Objective: 1
43. When a firm operates in multiple geographic markets simultaneously it is said to be
implementing a(n)
A. international diversification strategy.
B. product differentiation strategy.
C. geographic market diversification strategy.
D. geographic market differentiation strategy.
Answer: C
Page: 208
Difficulty: Moderate Chapter Objective: 1
44. When a firm implements both a product diversification strategy and a geographic
market diversification strategy it is said to be implementing a(n)
A. mixed-market diversification strategy.
B. unrelated-diversification strategy.
C. product differentiation strategy.
D. product-market diversification strategy.
Answer: D
Page: 209
Difficulty: Moderate Chapter Objective: 1
378 Part III
45. 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
B. related diversification
C. unrelated diversification
D. related-linked diversification
Answer: A
Page: 209
Difficulty: Moderate Chapter Objective: 1
46. In which type of limited corporate diversification do firms have greater than 95%
of their total sales in a single product market?
A. Dominant-business firms
B. Single-business firms
C. Related-constrained firms
D. Related-linked firms
Answer: B
Page: 210
Difficulty: Moderate Chapter Objective: 1
47. Firms pursuing _________________ have between 70% and 95% of their sales in a
single product market.
A. dominant-business diversification
B. single-business diversification
C. related-constrained diversification
D. related-linked diversification
Answer: A
Page: 210
Difficulty: Moderate Chapter Objective: 1
48. The analysis of firms pursuing a strategy of _______________ is logically
equivalent to the analysis of business-level strategies.
A. unrelated diversification
B. related-linked diversification
C. related-constrained diversification
D. limited corporate diversification
Answer: D
Page: 211
Difficulty: Moderate Chapter Objective: 1
49. Firms such as PepsiCo who operate a number of businesses around the world that
share a number of inputs, production technologies, or distribution channels but
none of whose businesses account for more than 70% of a firm's revenues are said
to be implementing a
A. related-constrained diversification.
B. related-linked diversification.
C. dominant-business diversification.
D. single-business diversification.
Answer: A
Page: 212
Difficulty: Moderate Chapter Objective: 1
Chapter 7: Corporate Diversification379
50. Firms such as Disney which own and operate businesses that share a limited
number of inputs, production technologies or distribution channels are said to be
pursuing a ________________ corporate diversification strategy.
A. related-constrained
B. related-linked
C. dominant-business
D. single-business
Answer: B
Page: 212
Difficulty: Moderate Chapter Objective: 1
51. Firms such as General Electric that generate less than 70% of their revenues from a
single product market and whose businesses share few, if any, common attributes,
are said to be pursuing _______________ corporate diversification.
A. limited
B. related-linked
C. related-constrained
D. unrelated
Answer: D
Page: 213
Difficulty: Moderate Chapter Objective: 1
52. In order for corporate diversification to be economically valuable
A. there must be some valuable economy of scope among the multiple businesses in
which a firm is operating and it must be more costly for managers in a firm to
realize these economies of scope than for outside equity holders on their own.
B. there must not be any valuable economy of scope among the multiple businesses in
which a firm is operating and it must be less costly for managers in a firm to realize
these economies of scope than for outside equity holders on their own.
C. there must be some valuable economy of scope among the multiple businesses in
which a firm is operating and it must be less costly for managers in a firm to realize
these economies of scope than for outside equity holders on their own.
D. there must not be any valuable economy of scope among the multiple businesses in
which a firm is operating and it must be more costly for managers in a firm to
realize these economies of scope than for outside equity holders on their own.
Answer: C
Page: 213
Difficulty: Moderate Chapter Objective: 2
53. When the value of the products or services a firm sells increases as a function of
the number of business that the firm operates in, ____________ are said to exist.
A. economies of scope
B. vertical economies
C. economies of scale
D. diseconomies of scope
Answer: A
Page: 213
Difficulty: Moderate Chapter Objective: 3
380 Part III
54. Which of the following statements regarding economies of scope is accurate?
A. Only firms pursuing single-business diversification can exploit economies of scope.
B. Only firms pursuing related-constrained diversification can exploit economies of
scope.
C. Only firms not pursuing diversification can exploit economies of scope.
D. Only diversified firms can exploit economies of scope.
Answer: D
Page: 213
Difficulty: Moderate Chapter Objective: 3
55. Currently, most scholars believe that exploiting economies of scope through
corporate diversification, on average,
A. destroyed about 25% of the firm’s market value.
B. had no impact on a firm’s market value.
C. destroyed about 55% of the firm’s market value.
D. increased a firm’s market value.
Answer: D
Page: 214
Difficulty: Hard
Chapter Objective: 2
56. Which type of economies of scope includes shared activities and core
competencies?
A. Operational economies of scope
B. Financial economies of scope
C. Anticompetitive economies of scope
D. Employee and stakeholder incentives for diversification
Answer: A
Page: 214
Difficulty: Easy
Chapter Objective: 3
57. If a diversified firm had three businesses and these companies shared a common
marketing and service operation, as well as common technology and development,
this would be an example of which type of economy of scope?
A. Core competencies
B. Shared activities
C. Risk reduction
D. Multipoint competition
Answer: B
Page: 215
Difficulty: Moderate Chapter Objective: 3
58. Share activities are quite common between both _____________ and
____________ diversified firms.
A. single business; dominant-business
B. related-constrained; single business
C. related-linked; dominant-business
D. related-constrained; related-linked
Answer: D
Page: 216
Difficulty: Moderate
Chapter Objective: 3
Chapter 7: Corporate Diversification381
59. Limits of activity sharing include
A. substantial organizational issues are often associated with a diversified firm’s
learning how to manage cross-business relationships and failure can lead to excess
bureaucracy, inefficiency, and organizational gridlock.
B. a significant reduction in the organization’s innovation and flexibility.
C. substantial organizational issues related to adequately compensating personnel
across businesses and setting transfer prices.
D. a significant reduction in the organization’s ability to meet the needs of any of its
customers.
Answer: A
Page: 218
Difficulty: Hard
Chapter Objective: 3
60. ___________ are complex sets of resources and capabilities that link different
businesses in a diversified firm through managerial and technical know-how,
experience and wisdom.
A. Managerial competencies
B. Core competencies
C. Competitive advantages
D. Core advantages
Answer: B
Page: 218
Difficulty: Moderate Chapter Objective: 3
61. A firm that diversifies by exploiting its resources and capability advantages in its
original business will have ____________ costs than (as) firms that begin a new
business without these resource and capability advantages, or __________
revenues than (as) firms lacking these advantages.
A. higher; lower
B. the same; higher
C. lower; the same
D. lower; higher
Answer: D
Page: 219
Difficulty: Moderate Chapter Objective: 3
62. If all of a firm's businesses share the same core competencies, then that firm has
implemented a strategy of _____________ diversification.
A. single business
B. related-linked
C. related-constrained
D. dominant-business
Answer: C
Page: 220
Difficulty: Hard
Chapter Objective: 3
63. Diversified firms that are exploiting core competencies as an economy of scope,
but are not doing so with any shared activities are sometimes called __________
diversified firms.
A. seemingly related
B. unrelated
C. semi-related
D. link-related
Answer: A
Page: 221
Difficulty: Moderate Chapter Objective: 3
382 Part III
64. A common way of thinking about strategy across different businesses within a firm
is known as the firm's
A. core competency.
B. competitive advantage.
C. economy of scope.
D. dominant logic.
Answer: D
Page: 222
Difficulty: Moderate Chapter Objective: 3
65. In general, a diversified firm, as a source of capital has _____________
information about a business that it owns, compared to external sources of capital.
A. more and better
B. the same
C. less and inferior
D. more but biased
Answer: A
Page: 223
Difficulty: Moderate Chapter Objective: 3
66. Compared to two very risk businesses that have cash flows that are not highly
correlated over time and that are operating separately, the risk of a diversified firm
operating in those same two businesses simultaneously is
A. somewhat higher.
B. lower.
C. the same.
D. substantially higher.
Answer: B
Page: 225
Difficulty: Moderate Chapter Objective: 3
67. ____________ exists when two or more diversified firms simultaneously compete
in multiple markets.
A. Multipoint competition
B. Dynamic competition
C. Multipoint cooperation
D. Dynamic cooperation
Answer: A
Page: 226
Difficulty: Easy
Chapter Objective: 3
68. For multipoint competition to lead to mutual forbearance
A. the threat of retaliation must be substantial and the firms pursuing this strategy
must have strong linkages among their diversified businesses.
B. the threat of retaliation must be low and the firms pursuing this strategy must have
strong linkages among their diversified businesses.
C. the threat of retaliation must be low and the firms pursuing this strategy must have
weak linkages among their diversified businesses.
D. the threat of retaliation must be substantial and the firms pursuing this strategy
must have weak linkages among their diversified businesses.
Answer: A
Page: 227
Difficulty: Moderate Chapter Objective: 3
Chapter 7: Corporate Diversification383
69. When diversified firms use the revenues from profitable businesses to subsidize the
operations of another business, and then set the prices of the subsidized firms
products at a level that is below the subsidized business's cost to produce these
items, this known as ___________ pricing.
A. dynamic
B. monopoly
C. predatory
D. beneficial
Answer: C
Page: 227
Difficulty: Moderate Chapter Objective: 3
70. Research over the years has demonstrated conclusively that the primary
determinant of the compensation of top managers in a firm is
A. not the size of the firm, usually measured in sales, but the economic performance of
the firm.
B. both the economic performance of the firm as well as the size of the firm, usually
measured in sales.
C. not the economic performance of the firm, but the size of the firm, usually
measured in sales.
D. neither the economic performance of the firm or the size of the firm.
Answer: C
Page: 228
Difficulty: Moderate Chapter Objective: 3
71. Which of the following economies of scope do not have the potential for generating
positive returns for a firm's equity holders since the economies of scope can be
realized by outside equity holders at a low cost by investing in a diversified
portfolio of stock?
A. Shared activities
B. Diversification to maximize the size of a firm
C. Internal capital allocation
D. Exploiting market power
Answer: B
Page: 230
Difficulty: Moderate Chapter Objective: 4
72. The only economy of scope that an unrelated firm can try to realize is
A. core competencies.
B. tax advantages.
C. multipoint competition.
D. risk reduction.
Answer: D
Page: 231
Difficulty: Moderate Chapter Objective: 4
73. Which of the following economies of scope is costly-to-duplicate?
A. Shared activities
B. Internal capital allocation
C. Risk reduction
D. Task advantages
Answer: B
Page: 232
Difficulty: Moderate Chapter Objective: 6
384 Part III
74. Which of the following economies of scope is less costly-to-duplicate?
A. Employee compensation
B. Core competencies
C. Multipoint competition
D. Exploiting market power
Answer: A
Page: 232
Difficulty: Moderate
Chapter Objective: 6
75. Substitutes for exploiting economies of scope in diversification include
A. growing and developing independent businesses within a diversified firm and
vertical integration.
B. vertical integration and strategic alliances.
C. growing and developing independent businesses within a diversified firm and
strategic alliances.
D. strategic alliances and multipoint competition.
Answer: C
Page: 234
Difficulty: Moderate Chapter Objective: 7
76. Which of the following statements regarding the rarity of diversification is
accurate?
A. If only a few competing firms have exploited a particular economy of scope, that
economy of scope can be rare.
B. A particular economy of scope can only be rare if no other firms are exploiting that
economy of scope.
C. A particular economy of scope can only be rare even if many other firms are
exploiting that economy of scope.
D. If only a few competing firms have exploited a particular economy of scope, that
economy of scope can be rare but only if the firm is pursuing unrelated
diversification.
Answer: A
Page: 231
Difficulty: Moderate Chapter Objective: 5
77. Which of the following statements regarding financial risk and international
diversification is accurate?
A. Hedging strategies can help reduce both financial and political risks.
B. Hedging strategies can help reduce political risks but not financial risks.
C. Hedging strategies can help reduce financial risks but not political risks.
D. Hedging strategies can't help reduce either financial or political risks.
Answer: C
Page: 235
Difficulty: Moderate Chapter Objective: 7
78. In terms of political risk which country is the least risky country within which to do
business in the entire world?
A. Switzerland
B. Luxembourg
C. Sweden
D. the United States
Answer: B
Page: 237
Difficulty: Hard
Chapter Objective: 7
Chapter 7: Corporate Diversification385
79. In terms of political risk which country is the most risky country within which to
do business in the entire world?
A. North Korea
B. Iran
C. Cuba
D. Zaire
Answer: A
Page: 237
Difficulty: Hard
Chapter Objective: 7
80. A country that charges little or no corporate tax is known as a
A. tax liberty.
B. tax shelter.
C. tax freedom.
D. tax haven.
Answer: D
Page: 236
Difficulty: Moderate Chapter Objective: 7
At the beginning of 2001 Peach Computers competed exclusively in the computer industry and
generated approximately 95% of its revenue from the sales of computers and computer related
software and approximately 5% of Peach's revenues were generated from sales of other
peripherals. Further, of these revenues 60% was from sales in the U.S., 30% was from sales in
Europe, 7% was from sales in Asia and 3% was from other areas. In October 2001, Peach
entered the personal electronics industry by introducing a new MP3 player known as the
PeachPit. In developing and selling the PeachPit, Peach Computers was able to use many of the
same R&D facilities, suppliers, production facilities, and distribution and sales outlets as the
computers and software Peach Computers traditionally sold. By 2003, the PeachPit MP3 Player,
accessories for the unit, and sales of songs on Peach Computers' NectarTunes website accounted
for 35% of Peach Computers' revenues.
81. In 2001, Peach Computers' diversification strategy was best characterized as
A. related-linked diversification.
B. dominant-business diversification.
C. single-business diversification.
D. related-constrained diversification.
Answer: C
Page: 210
Difficulty: Moderate
Chapter Objective: 1
82. By 2003, Peach Computer's diversification strategy was best characterized as
A. unrelated diversification.
B. related-constrained diversification.
C. related-linked diversification.
D. dominant-business diversification.
Answer: B
Page: 212
Difficulty: Moderate Chapter Objective: 1
386 Part III
83. Which type of economies of scope is Peach Computers experiencing between its
units?
A. Share activities
B. Core competencies
C. Multipoint competition
D. Tax advantages
Answer: A
Page: 215
Difficulty: Hard
Chapter Objective: 3
84. One of the limits of the economies of scope that Peach Computers is leveraging in
its diversification strategy is that it
A. may limit the ability of a particular business to meet specific customers' needs.
B. is significantly affected by the way a diversified firm is organized.
C. they are not tangible and may be reflected only in the shared knowledge,
experience and wisdom across businesses.
D. the level and type of diversification that a firm pursues can affect the efficiency of
this allocation process.
Answer: A
Page: 218
Difficulty: Hard
Chapter Objective: 3
85. If one of the reasons that Peach Computers entered into the electronics industry was
to offset weakness in the computer industry because when the computer industry
was weak the electronics industry was strong, and vice-a-versa, Peach Computers
would be pursuing which economy of scope?
A. Core competencies
B. Multipoint competition
C. Tax advantages
D. Risk reduction
Answer: D
Page: 225
Difficulty: Moderate Chapter Objective: 3
86. If, when Peach Computers introduced its PeachPit in 2001, the company used its
profits in the computer industry to subsidize its operations in the electronics
industry and used this subsidy to sell the PeachPit for a price that was less than the
cost of producing and selling the MP3 players, this would be an example of
A. mutual forbearance.
B. escalation of commitment.
C. predatory pricing.
D. multipoint competition.
Answer: C
Page: 227
Difficulty: Hard
Chapter Objective: 3
87. Peach Computers' equity holders, its employees, suppliers and customers along
with all of those groups and individuals who have an interest in how Peach
Computers performs are referred to as
A. focal groups.
B. stakeholders.
C. supporters.
D. stockholders.
Answer: B
Page: 232
Difficulty: Moderate Chapter Objective: 6
Chapter 7: Corporate Diversification387
88. If no other firm in the computer industry was using a diversification strategy
similar to Peach Computers', this diversification strategy could be said to be
A. rare and costly-to-duplicate.
B. rare and less costly-to-duplicate.
C. common but costly to duplicate.
D. common and less costly-to-duplicate.
Answer: A
Page: 231
Difficulty: Hard
Chapter Objective: 5
89. In 2001, if Peach Computers did not want to employ a diversification strategy to
enter the personal electronics industry, they could use which substitute for
diversification?
A. Backward vertical integration
B. Product differentiation
C. Strategic alliances
D. Forward vertical integration
Answer: C
Page: 234
Difficulty: Moderate Chapter Objective: 7
90. If Peach Computers was seeking to further expand its international operations and
wanted to avoid countries with a high political risk, it should consider all of the
following countries for expansion except
A. Luxembourg.
B. Norway.
C. Singapore.
D. North Korea.
Answer: D
Page: 237
Difficulty: Moderate Chapter Objective: 8
ESSAY QUESTIONS
91. Discuss when a firm is implementing a corporate diversification strategy and
differentiate between a product diversification strategy, a geographic market
diversification strategy and a product-market diversification strategy.
A firm is implementing a corporate diversification strategy when it operates in multiple
industries or markets simultaneously. A firm is said to be implementing a product
diversification strategy when it operates in multiple industries simultaneously. A firm is said
to be pursuing a geographic market diversification strategy when it operates in multiple
geographic markets simultaneously. When a firm implements both a product diversification
strategy and a geographic market diversification strategy simultaneously it is said to be
producing a product-market diversification strategy.
Pages:
208-209
Difficulty: Easy
Chapter Objective: 1
92. Identify and distinguish between the five different levels of diversification discussed in
Chapter 7.
The five different levels of diversification that firms can pursue include
Single-business firms – These firms operate in a single business and 95% or more of firm
revenues come from this business.
388 Part III
Dominant-business diversification – Firms using this type of limited diversification
strategy operate in two or more businesses, one of which accounts for between 70% and 90%
of firm revenues.
Related-constrained diversification – A firm using this type of related diversification
operates in multiple businesses, none of which accounts for more that 70% of firm revenues
that share a significant number of dimensions including inputs, production technologies,
distribution channels, similar customers, etc. This strategy is termed “constrained” because
corporate managers pursue business opportunities in new markets or industries only if those
markets or industries share numerous resource and capability requirements with the
businesses the firm is currently pursuing.
Related-linked diversification – Firms using this type of related diversification when it
operates in multiple business, none of which accounts for more than 70% of a firms
revenues, and these businesses share only a couple of dimensions, or have business that are
linked along very different dimensions.
Unrelated corporate diversification - When less than 70 percent of a firm’s revenues is
generated in a single product market, and when a firm’s businesses share few, if any,
common attributes, then that firm is pursuing a strategy of unrelated corporate
diversification.
Pages:
209-213
Difficulty: Moderate
Chapter Objective: 1
93. Specify the two conditions that a corporate diversification strategy must meet in order
to create economic value.
In 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: 213
Difficulty: Easy
Chapter Objective: 2
94. 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.
Economies of scope exist in a firm when the value of the products or services it sells
increases as a function of the number of businesses that firm operates in. The term “scope” in
this definition refers to the range of businesses in which a diversified firm operates. For this
reason, only diversified firms can, by definition, exploit economies of scope. Economies of
scope are valuable to the extent that they increase a firm’s revenues or decrease its costs,
compared to what would be the case if these economies of scope were not exploited. There
are eight different types of economies of scope including:
 Shared activities in which a firm's businesses share a variety of activities throughout
their value chains can serve as the basis for operational economies of scope.
 Core competencies are complex sets of resources and capabilities that link different
businesses in a diversified firm through managerial and technical know-how,
experience, and wisdom.
Chapter 7: Corporate Diversification389

Internal capital allocation. In a sense, diversification creates an internal capital
market in which businesses 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 external capital market.
 Risk reduction. Diversified firms can achieve a lower level of risk if they build a
business portfolio that has a low correlation between the cash flows of the businesses
in the portfolio.
 Tax Advantages. A diversified firm can use losses in some of its businesses to offset
profits in others, thereby reducing its overall tax liability. Second, because
diversification can reduce the riskiness of a firm’s cash flows, it can also reduce the
probability that a firm will declare bankruptcy. This can increase a firm’s debt
capacity which is particularly important in tax environments where interest payments
on debt are tax deductible.
 Multipoint competition is an anticompetitive economy of scope that exists when two
or more diversified firms simultaneously compete in multiple markets. Multipoint
competition can serve to facilitate a particular type of tacit collusion called mutual
forbearance in which firms forgo acts competitive strategies in one business because
of the possibility of retaliation by a competitor in another business.
 Exploiting market power. Internal allocations of capital among a diversified firm’s
businesses may enable it to exploit in some of its businesses the market power
advantages it enjoys in other of its businesses through actions such subsidizing the
operations of another of its businesses.
 Maximizing management compensation managers seeking to maximize their income
should attempt to grow their firm. One of the easiest ways to grow a firm is through
diversification, especially unrelated diversification through mergers and acquisitions
which can allow a diversified firm can grow substantially in a short period of time,
leading senior managers to earn higher incomes.
Pages:
215-228
Difficulty: Hard
Chapter Objective: 3
95. Discuss shared activities as a potential source of economies of scope for diversified
firms and identify the potential benefits and limits of activity sharing.
When the companies in a diversified firm share a variety of activities throughout their value
chains these activities can serve as the basis for operational economies of scope. Potential
shared activities can be found throughout a firm's value chain from input activities through
dealer support and service. Activity sharing can have the effect of reducing a diversified
firm's costs and failure to exploit share activities across business can lead to out-of-control
costs. Shared activities can also increase a diversified firm's businesses through shared
product development and sales activities, as well as by enhancing business revenues by
exploiting strong, positive reputations of some of a firm's businesses in other of its
businesses. There are three important limits to activity sharing. First, substantial
organizational issues can be associated with a diversified firm's learning how to manage
cross-business relationships. Second, sharing activities may limit the ability of a particular
business to meet its specific customer's needs. Finally, if one business in a diversified firm
has a poor reputation, sharing activities with that business can reduce the quality of the
reputation of other businesses in the firm.
Pages:
215-218
Difficulty: Moderate
Chapter Objective: 3
390 Part III
96. 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.
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. Diversification in order to maximize the size of a firm
does not generate positive returns because firm size, per se, is not valuable. Diversification
in order to reduce risk does not generate positive returns because equity holders can do this
on their own at a very low cost by simply investing in a diversified portfolio of stocks.
Page: 230
Difficulty: Easy
Chapter Objective: 4
97. Discuss the conditions under which a firm's diversification strategy will be rare.
The rarity of diversification depends not on diversification per se but on how rare the
particular economies of scope associated with that diversification are. If only a few
competing firms have exploited a particular economy of scope, that economy of scope can be
rare. If numerous firms have done so, it will be common and not a source of competitive
advantage.
Page: 231
Difficulty: Easy
Chapter Objective: 5
98. Identify which economies of scope are more likely to be subject to low-cost imitation
and which are less likely to be subject to low-cost imitation and discuss why each is
either costly or less-costly to duplicate.
The extent to which a valuable and rare corporate diversification strategy is immune from
direct duplication depends on how costly it is for competing firms to realize this same
economy of scope. Some economies of scope are, in general, more costly to duplicate than
others. Shared activities, risk reduction, tax advantages, and employee compensation as bases
for corporate diversification are usually relatively easy to duplicate. Because shared
activities are based on tangible assets that a firm exploits across multiple businesses, such as
common R&D labs, common sales forces, and common manufacturing, they are usually
relatively easy to duplicate. The only duplication issues for shared activities concern
developing the cooperative cross-business relationships that often facilitate the use of shared
activities—issues discussed in the next chapter. Moreover, because risk reduction, tax
advantages, and employee compensation motives for diversifying can be accomplished
through both related and unrelated diversification, these motives for diversifying tend to be
relatively easy to duplicate.
On the other hand, other economies of scope are much more difficult to duplicate. These
difficult-to-duplicate economies of scope include core competencies, internal capital
allocation efficiencies, multipoint competition, and exploitation of market power. Because
core competencies are more intangible, their direct duplication is often challenging. The
realization of capital allocation economies of scope requires very substantial informationprocessing capabilities. These capabilities are often very difficult to develop. Multipoint
competition requires very close coordination between the different businesses in which a
firm operates. This kind of coordination is socially complex and thus may often be immune
from direct duplication. Finally, exploitation of market power may be costly to duplicate
because it requires that a firm must possess significant market power in one of its lines of
Chapter 7: Corporate Diversification391
business. A firm that does not have this market power advantage would have to obtain it. The
cost of doing so, in most situations, would be prohibitive.
Pages:
231-234
Difficulty: Moderate
Chapter Objective: 6
99. Identify two potential substitutes for corporate diversification and discuss how each can
provide benefits similar to corporate diversification.
Two obvious substitutes for diversification exist. First, instead of obtaining cost or revenue
advantages from exploiting economies of scope across businesses in a diversified firm, a
firm may decide to simply grow and develop each of its businesses separately. In this sense,
a firm that successfully implements a cost leadership strategy or a product differentiation
strategy in a single business can obtain the same cost or revenue advantages it could have
obtained by exploiting economies of scope, but without having to develop cross-business
relations. Growing independent businesses within a diversified firm can be a substitute for
exploiting economies of scope in a diversification strategy.
A second substitute for exploiting economies of scope in diversification can be found in
strategic alliances. By using a strategic alliance, firms may be able to gain the economies of
scope they could have obtained if they had carefully exploited economies of scope across
businesses they own. Thus, for example, instead of a firm exploiting research and
development economies of scope between two businesses it owns, it could form a strategic
alliance with a different firm and form a joint research and development lab. Instead of a
firm exploiting sales economies of scope by linking its businesses through a common sales
force, it might develop a sales agreement with another firm and obtain cost or revenue
advantages in this way.
Page: 234
Difficulty: Moderate
Chapter Objective: 7
100. Discuss why an international strategy can be thought of as a special case of corporate
diversification strategy and discuss two unique challenges facing a firm pursuing
international diversification opportunities and what firms can do to overcome these
challenges.
A firm pursuing international strategy is pursuing, at least, a strategy of geographic
diversification and perhaps a strategy of product-market diversification. In this sense, an
international strategy can be thought of as a special case of a corporate diversification
strategy. The two unique challenges facing firms pursuing international diversification are
financial risks and political risks.
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
firm's exposure and position. Firms can use a variety of financial instruments and strategies
to hedge against financial risks.
Political risk involves changes in the political rules of the game and can have the effect of
increasing some environmental threats, reducing others, and thereby changing the value of a
firm’s resources and capabilities. Politics can affect the value of a firm’s international
strategies at the macro and micro levels. At the macro level, broad changes in the political
392 Part III
situation in a country can change the value of an investment. At the micro level, politics in a
country can affect the fortunes of particular firms in particular industries.
Unlike financial risks, there are relatively few tools for managing the political risks
associated with pursuing an international strategy. Options to reduce political risk include
 Pursuing international opportunities only in countries where political risk is very small.
 Limiting 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 by developing valuable, rare, and
costly-to-imitate resources and capabilities in managing political risks.
Pages:
234-239
Difficulty: Moderate
Chapter Objective: 8