Question 1

Several decades of empirical evidence indicates that the relationship between diversification and performance:

Accepted Answer

A)  Varies between countries
B)  Is mainly positive
C)  Is neither consistent nor systematic
D)  Is negative unless the diversification is between closely-related industries

Question 2

The internal labor market provides a large, diverse firm with the chance to make savings, by:

Accepted Answer

A)  Developing senior managers with wide experience
B)  Relying less on external recruitment consultants
C)  Having first-hand knowledge of a large pool of internal recruits for transfer between businesses
D)  All of the above

Question 3

The emergence of "conglomerates"-widely diversified companies-during the 1960s and 1970s was a result of:

Accepted Answer

A)  The desire of companies to escape low growth industries
B)  The belief that the tools of strategic and financial management could be applied to any type of business
C)  The willingness of some CEOs to ignore shareholder interests and order to build large corporate empires
D)  Loose monetary policies that increased the availability of corporate finance.

Question 4

Diversiﬁcation decisions by ﬁrms involve the following key issues:

Accepted Answer

A)  The attractiveness of the industry to be entered and the potential for competitive advantage
B)  The potential for the diversification to increase growth and reduce risk
C)  The opportunities for exploiting economies of scope in resources and capabilities
D)  The benefits of synergy relative to the costs or coordination.

Question 5

The British fashion company, Burberry, is considering diversifying into the hotel business.Its optimal strategy is to:

Accepted Answer

A)  Set up its own luxury hotel chain-that way it can appropriate all the profits from the venture
B)  License its brand to an existing hotel operator-that way it can avoid the costs and risks of having to invest in all the resources and capabilities required by the hotel business
C)  Stay away from hotels all together since this business is unrelated to Burberry's core fashion business
D)  Establish a separate start-up company, Burberry Hotels, in which Burberry Group retains a minority equity holding

Question 6

Porter's "three essential tests" help to determine:

Accepted Answer

A)  The likely impact of diversification upon risk
B)  The potential for diversification to create shareholder value through boosting profitability
C)  The impact of diversification on stakeholders
D)  How the financial markets would react to a diversification.

Question 7

Empirical evidence on the relationship between diversification and profitability shows that diversification has a negative impact on profitability.

Accepted Answer

A) True 
 B)False

Question 8

Despite the heterogeneity of the goods and services supplied by LVMH (e.g.leather bags and shoes, wine and spirits, fashion clothing, jewelry and watches) , we can consider LVMH's diversification to be into strategically-related industries because:

Accepted Answer

A)  Most of its products are sold at airport, tax-free shops
B)  LVMH benefits from massive economies of scope through centralizing common functions such as purchasing, R&D, manufacturing, and marketing
C)  LVMH's portfolio balances mature, cash-generating businesses with growing, cash-using businesses
D)  The different business all require global marketing to high income consumers, hence draw upon similar management capabilities.

Question 9

The statement: "Economies of scope in shared resources do not provide a sufficient justification for diversification" is:

Accepted Answer

A)  Correct: Cost savings form shared resources are of little value unless there are also organizational capabilities that can be transferred between the businesses
B)  Correct: to justify diversification economies of scope need to be supported by transactions costs in the market for the particular resources
C)  Incorrect: economies of scope are sufficient grounds for diversification on their own
D)  Incorrect: the benefits from economies of scope need to exceed the administrative costs of the corporate HQ.

Question 10

Demand-side economies of scope can justify diversification by a firm even if it doesn't achieve cost savings from supplying multiple products.

Accepted Answer

A) True 
 B)False  False

Question 11

To determine whether a firm's diversification is related or unrelated, we need to consider:

Accepted Answer

A)  Whether the businesses are within the same two-digit class of the Standard Industrial Classification
B)  Whether the two businesses have either common customers or utilize a common technology
C)  Whether the two businesses share some of the same resources and capabilities
D)  Whether the two businesses are in the same stages of their industry life cycles.

Question 12

Diversification that reduces company specific ("unsystematic") risk is beneficial to the company's bondholders since it reduces the risk of default.

Accepted Answer

A) True 
 B)False

Question 13

When diversification combines two businesses in different industrial sectors, the most important determinant of whether the diversification is likely to create value is whether the diversification:

Accepted Answer

A)  Changes the debt/equity ratio of the combined company
B)  Is between businesses with similar values and management systems
C)  Causes management to lose its focus on its core business
D)  Offers opportunities for sharing resources and capabilities.

Question 14

In principle, the information advantages of a diversified company mean that internal capital markets are more efficient than external capital markets.In practice internal capital markets tend not to reallocate investment funds from poorly-performing subsidiaries to highly-performing subsidiaries.

Accepted Answer

A) True 
 B)False

Question 15

When a firm is diversifying through acquiring a firm in another industry, the critical issue is whether the synergies that can be realized will offset the acquisition premium paid.

Accepted Answer

A) True 
 B)False

Question 16

A dominant trend in corporate strategy over the past three decades has been for companies to expand their product scope.

Accepted Answer

A) True 
 B)False  False

Question 17

The main difference between two businesses being strategically related rather thasn operationally related is:

Accepted Answer

A)  Strategic relatedness involves the application of common general management systems and capabilities to the two businesses; operational relatedness involves the sharing of resources
B)  Strategic related is about corporate-level synergies; operational relatedness involves business-level synergies
C)  Operational relatedness requires a multidivisional structure; for strategic relatedness, a holding company structure sufficed
D)  Operational relatedness requires that the different products share production plants and distribution systems; strategic relatedness does not. A

Question 18

Diversification whose sole impact is to reduce the variability of profits does not create value for shareholders because:

Accepted Answer

A)  Shareholders are interested in return more than in risk
B)  The most important risks (such as a global financial crisis or the collapse of the Euro)  are systemic in nature, against which diversification offers little protection
C)  The risk which is relevant to stock market valuations is perceived risk--this bears little relationship to profit variability
D)  If investors can spread risk by diversifying their portfolios, diversification adds no additional value in terms of risk spreading.

Question 19

The principle difference between the "parenting advantage" framework and Porter's "three essential tests" in evaluating the value-adding potential of diversification is:

Accepted Answer

A)  The "corporate parenting" framework focuses on the role of the corporate headquarters
B)  Porter's "three essential tests" emphasizes shareholder value creation; the "parenting advantage" considers value creation for all stakeholders
C)  Porter's "three essential tests" considers whether diversification creates shareholder value; "parenting advantage" considers whether a firm's ownership of a business creates more value than any other potential parent might
D)  Porter's value chain analysis applies to diversification decisions; "parenting advantage" applies to diversification and divestment decisions

Question 20

"Strategic relatedness" (as distinct from "operational relatedness")  in diversification refers to:

Accepted Answer

A)  The ability to use very different marketing strategies that fit with different countries
B)  The ability to sell similar products
C)  The ability to apply similar strategies, resource allocation procedures, and control systems across the businesses
D)  The ability to maximize the allocation of financial resources across the businesses

Exam 12: Diversification Strategy

Several decades of empirical evidence indicates that the relationship between diversification and performance:

Correct AnswerverifiedShow Answer

The internal labor market provides a large, diverse firm with the chance to make savings, by:

Correct AnswerverifiedShow Answer

The emergence of "conglomerates"-widely diversified companies-during the 1960s and 1970s was a result of:

Correct AnswerverifiedShow Answer

Diversiﬁcation decisions by ﬁrms involve the following key issues:

Correct AnswerverifiedShow Answer

The British fashion company, Burberry, is considering diversifying into the hotel business.Its optimal strategy is to:

Correct AnswerverifiedShow Answer

Porter's "three essential tests" help to determine:

Correct AnswerverifiedShow Answer

Empirical evidence on the relationship between diversification and profitability shows that diversification has a negative impact on profitability.

Correct AnswerverifiedShow Answer

Despite the heterogeneity of the goods and services supplied by LVMH (e.g.leather bags and shoes, wine and spirits, fashion clothing, jewelry and watches) , we can consider LVMH's diversification to be into strategically-related industries because:

Correct AnswerverifiedShow Answer

The statement: "Economies of scope in shared resources do not provide a sufficient justification for diversification" is:

Correct AnswerverifiedShow Answer

Demand-side economies of scope can justify diversification by a firm even if it doesn't achieve cost savings from supplying multiple products.

Correct AnswerverifiedFalse

To determine whether a firm's diversification is related or unrelated, we need to consider:

Correct AnswerverifiedShow Answer

Diversification that reduces company specific ("unsystematic") risk is beneficial to the company's bondholders since it reduces the risk of default.

Correct AnswerverifiedShow Answer

When diversification combines two businesses in different industrial sectors, the most important determinant of whether the diversification is likely to create value is whether the diversification:

Correct AnswerverifiedShow Answer

In principle, the information advantages of a diversified company mean that internal capital markets are more efficient than external capital markets.In practice internal capital markets tend not to reallocate investment funds from poorly-performing subsidiaries to highly-performing subsidiaries.

Correct AnswerverifiedShow Answer

When a firm is diversifying through acquiring a firm in another industry, the critical issue is whether the synergies that can be realized will offset the acquisition premium paid.

Correct AnswerverifiedShow Answer

A dominant trend in corporate strategy over the past three decades has been for companies to expand their product scope.

Correct AnswerverifiedFalse

The main difference between two businesses being strategically related rather thasn operationally related is:

Correct AnswerverifiedA

Diversification whose sole impact is to reduce the variability of profits does not create value for shareholders because:

Correct AnswerverifiedShow Answer

The principle difference between the "parenting advantage" framework and Porter's "three essential tests" in evaluating the value-adding potential of diversification is:

Correct AnswerverifiedShow Answer

"Strategic relatedness" (as distinct from "operational relatedness") in diversification refers to:

Correct AnswerverifiedShow Answer

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