FINM7006 REVIEW LECTURE 1. HOW IS PREFERRED STOCK LIKE EQUITY AND HOW IS IT LIKE LONG-DEBT? 2. WHAT ARE OPPORTUNITY COSTS? PROVIDE AN EXAMPLE. HOW DO THESE COSTS AFFECT A PROJECTS CASH FLOW? 3. THREE YEARS AGO FITAS INC. ISSUED A 5

BPL 5100chapter 7

Chapter 7

1) A firm implements a corporate diversification strategy when it operates in multiple industries or markets simultaneously.

Answer:

Diff: 1

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

2) When a firm operates in multiple industries simultaneously it is said to be implementing a geographic market diversification strategy.

Answer:

Diff: 1

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

3) When a firm operates in multiple geographic markets simultaneously it is said to be implementing a product diversification strategy.

Answer:

Diff: 1

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

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.

Answer:

Diff: 1

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

5) Firms that pursue a strategy of related corporate diversification have some type of linkages among most of the different businesses they pursue.

Answer:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

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.

Answer:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

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.

Answer:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

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.

Answer:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

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.

Answer:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

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.

Answer:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

11) In order for corporate diversification to be economically valuable 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.

Answer:

Diff: 2

Learning Obj.:  7.2: Specify the two Conditions that a Corporate Diversification Strategy must meet in order to Create Economic Value

AACSB:  Analytical Thinking

12) Currently, most scholars believe that when a firm implements a corporate diversification strategy it destroys about 25% of its market value.

Answer:

Diff: 3

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

13) Shared activities can increase the expenses for a diversified firm’s business.

Answer:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

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.

Answer:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

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.

Answer:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

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.

Answer:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

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.

Answer:

Diff: 3

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

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.

Answer:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

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.

Answer:

Diff: 3

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

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.

Answer:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

21) A firm’s dominant logic is a common way of thinking about strategy across different businesses.

Answer:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

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

Answer:

Diff: 1

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

23) Multipoint competition exists when two or more diversified firms simultaneously compete in multiple markets, and multipoint competition can serve to facilitate a particular type of tacit collusion called mutual forbearance.

Answer:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

24) 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.

Answer:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

25) 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.

Answer:

Diff: 2

Learning Obj.:  7.4: Identify Which of these Economies of Scope a Firm’s outside Equity Investors are able to Realize on their own at Low Cost

AACSB:  Analytical Thinking
26) Overall, related diversification is less likely to be consistent with the interests of a firm’s equity holders than is unrelated diversification.

Answer:

Diff: 2

Learning Obj.:  7.4: Identify Which of these Economies of Scope a Firm’s outside Equity Investors are able to Realize on their own at Low Cost

AACSB:  Analytical Thinking

27) 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.

Answer:

Diff: 2

Learning Obj.:  7.4: Identify Which of these Economies of Scope a Firm’s outside Equity Investors are able to Realize on their own at Low Cost

AACSB:  Analytical Thinking

28) Diversification per se is usually not a rare firm strategy regardless of how rare the particular economies of scope associated with that diversification are.

Answer:

Diff: 2

Learning Obj.:  7.5: Specify the Circumstances Under Which a Firm’s Diversification Strategy Will be Rare

AACSB:  Analytical Thinking

29) A firm’s stakeholders include all of those groups or individuals who have an interest in how a firm performs.

Answer:

Diff: 2

Learning Obj.:  7.6: Indicate Which of the Economies of Scope Identified in this Chapter are more likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation

AACSB:  Analytical Thinking

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

Answer:

Diff: 1

Learning Obj.:  7.4: Identify Which of these Economies of Scope a Firm’s outside Equity Investors are able to Realize on their own at Low Cost

AACSB:  Analytical Thinking

31) 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.

Answer:

Diff: 2

Learning Obj.:  7.6: Indicate Which of the Economies of Scope Identified in this Chapter are more likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation

AACSB:  Analytical Thinking

32) Strategic alliances are generally viewed as a poor substitute for diversification since the economies of scope in diversification can be found in strategic alliances.

Answer:

Diff: 2

Learning Obj.:  7.7: Identify Two Potential Substitutes for Corporate Diversification

AACSB:  Analytical Thinking

33) 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 simply grow and develop each of its businesses separately.

Answer:

Diff: 2

Learning Obj.:  7.7: Identify Two Potential Substitutes for Corporate Diversification

AACSB:  Analytical Thinking

34) Core competencies are an example of costly-to-duplicate economies of scope.

Answer:

Diff: 2

Learning Obj.:  7.6: Indicate Which of the Economies of Scope Identified in this Chapter are more likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation

AACSB:  Analytical Thinking

35) Exploiting market power is an example of costly-to-duplicate economies of scope.

Answer:

Diff: 2

Learning Obj.:  7.6: Indicate Which of the Economies of Scope Identified in this Chapter are more likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation

AACSB:  Analytical Thinking

36) Employee compensation is an example of costly-to-duplicate economies of scope.

Answer:

Diff: 2

Learning Obj.:  7.6: Indicate Which of the Economies of Scope Identified in this Chapter are more likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation

AACSB:  Analytical Thinking

37) Internal capital allocation is an example of less costly-to-duplicate economies of scope.

Answer:

Diff: 3

Learning Obj.:  7.6: Indicate Which of the Economies of Scope Identified in this Chapter are more likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation

AACSB:  Analytical Thinking

38) Shared activities, risk reduction, tax advantages, and employee compensation as bases for corporate diversification are usually relatively easy to duplicate.

Answer:

Diff: 1

Learning Obj.:  7.6: Indicate Which of the Economies of Scope Identified in this Chapter are more likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation

AACSB:  Analytical Thinking

39) Multipoint competition requires loose coordination between the different businesses in which a firm operates.

Answer:

Diff: 2

Learning Obj.:  7.6: Indicate Which of the Economies of Scope Identified in this Chapter are more likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation

AACSB:  Analytical Thinking

40) 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:

Diff: 1

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

41) 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:

Diff: 1

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

42) 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:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

43) When a firm simultaneously 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:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

44) 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:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

45) 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:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

46) 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:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

47) 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:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking
48) Firms such as PepsiCo that 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:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

49) Firms such as Disney that 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:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking

50) 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:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Analytical Thinking
51) 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:

Diff: 2

Learning Obj.:  7.2: Specify the two Conditions that a Corporate Diversification Strategy must meet in order to Create Economic Value

AACSB:  Analytical Thinking

52) 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:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

53) 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:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

54) Currently, most scholars believe that exploiting economies of scope through corporate diversification, on average,

A) destroyed about 25% of a firm’s market value.

B) had no impact on a firm’s market value.

C) destroyed about 55% of a firm’s market value.

D) increased a firm’s market value.

Answer:

Diff: 3

Learning Obj.:  7.2: Specify the two Conditions that a Corporate Diversification Strategy must meet in order to Create Economic Value

AACSB:  Analytical Thinking

55) 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:

Diff: 1

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

56) 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:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Application of Knowledge

57) Shared 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:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

58) Limits of activity sharing include

A) substantial organizational issues that are often associated with a diversified firm’s learning how to manage cross-business relationships and in which failure can lead to excess bureaucracy, inefficiency, and organizational gridlock.

B) a significant reduction in an 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 an organization’s ability to meet the needs of any of its customers.

Answer:

Diff: 3

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

59) ________ 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:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

60) 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:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

61) 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:

Diff: 3

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

62) 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 unrelated

B) unrelated

C) semi-related

D) link-related

Answer:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

63) 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:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

64) In general, as a source of capital a diversified firm 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:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

65) Compared to two very risky 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:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

66) ________ 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:

Diff: 1

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

67) 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:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

68) When diversified firms use the revenues from profitable businesses to subsidize the operations of another business and then set the prices of the subsidized firm’s products at a level that is below the subsidized business’s cost to produce these items, this is known as ________ pricing.

A) dynamic

B) monopoly

C) predatory

D) beneficial

Answer:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

69) 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 nor the size of the firm.

Answer:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Analytical Thinking

70) 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:

Diff: 2

Learning Obj.:  7.4: Identify Which of these Economies of Scope a Firm’s outside Equity Investors are able to Realize on their own at Low Cost

AACSB:  Analytical Thinking

71) 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:

Diff: 2

Learning Obj.:  7.4: Identify Which of these Economies of Scope a Firm’s outside Equity Investors are able to Realize on their own at Low Cost

AACSB:  Analytical Thinking

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

A) shared activities

B) internal capital allocation

C) risk reduction

D) tax advantages

Answer:

Diff: 2

Learning Obj.:  7.6: Indicate Which of the Economies of Scope Identified in this Chapter are more likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation

AACSB:  Analytical Thinking

73) 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:

Diff: 2

Learning Obj.:  7.6: Indicate Which of the Economies of Scope Identified in this Chapter are more likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation

AACSB:  Analytical Thinking

74) 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:

Diff: 2

Learning Obj.:  7.7: Identify Two Potential Substitutes for Corporate Diversification

AACSB:  Analytical Thinking

75) 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 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:

Diff: 2

Learning Obj.:  7.5: Specify the Circumstances Under Which a Firm’s Diversification Strategy Will be Rare

AACSB:  Analytical Thinking

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

A) employee compensation

B) core competencies

C) shared activities

D) risk reduction

Answer:

Diff: 3

Learning Obj.:  7.6: Indicate Which of the Economies of Scope Identified in this Chapter are more likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation

AACSB:  Analytical Thinking

77) ________ is an example of a less costly-to-duplicate economies of scope.

A) Tax advantages

B) Core competencies

C) Internal capital allocation

D) Multipoint competition

Answer:

Diff: 3

Learning Obj.:  7.6: Indicate Which of the Economies of Scope Identified in this Chapter are more likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation

AACSB:  Analytical Thinking
78) ________ are substitutes for exploiting economies of scope in diversification.

A) Tax havens

B) Tax shelters

C) Tax freedom

D) Strategic alliances

Answer:

Diff: 2

Learning Obj.:  7.7: Identify Two Potential Substitutes for Corporate Diversification

AACSB:  Analytical Thinking

At the beginning of 2001, Peach Computers competed exclusively in the computer industry and generated approximately 96% of its revenue from the sales of computers and computer-related software and approximately 4% of its 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.

79) 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:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Application of Knowledge

80) By 2003, Peach Computers’ diversification strategy was best characterized as

A) unrelated diversification.

B) related-constrained diversification.

C) related-linked diversification.

D) dominant-business diversification.

Answer:

Diff: 2

Learning Obj.:  7.1: Define Corporate Diversification and Describe Five Types of Corporate Diversification

AACSB:  Application of Knowledge

81) Which type of economies of scope is Peach Computers experiencing between its units?

A) shared activities

B) core competencies

C) multipoint competition

D) tax advantages

Answer:

Diff: 3

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Application of Knowledge

82) One of the limits of the economies of scope that Peach Computers is leveraging in its diversification strategy is

A) they may limit the ability of a particular business to meet specific customers’ needs.

B) they are 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:

Diff: 3

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Application of Knowledge

83) 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 versa, Peach Computers would be pursuing which economy of scope?

A) core competencies

B) multipoint competition

C) tax advantages

D) risk reduction

Answer:

Diff: 2

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Application of Knowledge

84) 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:

Diff: 3

Learning Obj.:  7.3: Define the Concept of “Economies of Scope” and Identify Eight Potential Economies of Scope a Diversified Firm Might try to Exploit

AACSB:  Application of Knowledge

85) 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:

Diff: 2

Learning Obj.:  7.6: Indicate Which of the Economies of Scope Identified in this Chapter are more likely to be Subject to Low-Cost Imitation and Which are Less Likely to be Subject to Low-Cost Imitation

AACSB:  Application of Knowledge

86) If no other firm in the computer industry were 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:

Diff: 3

Learning Obj.:  7.5: Specify the Circumstances Under Which a Firm’s Diversification Strategy Will be Rare

AACSB:  Application of Knowledge
87) In 2001, if Peach Computers did not want to employ a diversification strategy to enter the personal electronics industry, it could use which substitute for diversification?

A) backward vertical integration

B) product differentiation

C) strategic alliances

D) forward vertical integration

Answer:

Diff: 2

Learning Obj.:  7.7: Identify Two Potential Substitutes for Corporate Diversification

AACSB:  Application of Knowledge

88) If Peach Computers were looking to getting into the business of making telephones, its diversification would be called

A) related-linked.

B) related-constrained.

C) related-corporate.

D) unrelated.

Answer:

89) 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.

Answer:

90) Identify and distinguish between the five different levels of diversification discussed in Chapter 7.

Answer:

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

Answer:
92) 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.

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

Answer:

94) 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.

Answer:

95) Discuss the conditions under which a firm’s diversification strategy will be rare.

Answer:
96) 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.

Answer:

97) Identify two potential substitutes for corporate diversification and discuss how each can provide benefits similar to corporate diversification.

Answer:

98) Explain how strategic alliances are a substitute for exploiting economies of scope in diversification.

Answer: