Strategic Management and Competitive Advantage, 4e (Barney)
Chapter 7 Corporate Diversification
1) A firm implements a corporate diversification strategy when it operates in multiple industries
or markets simultaneously.
2) When a firm operates in multiple industries simultaneously it is said to be implementing a
geographic market diversification strategy.
3) When a firm operates in multiple geographic markets simultaneously it is said to be
implementing a product diversification strategy.
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.
5) The analysis of limited corporate diversification is logically equivalent to the analysis of
business-level strategies.
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.
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.
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.
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.
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.
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.
12) Currently, most scholars believe that when a firm implements a corporate diversification
strategy it destroys about 25% of its market value.
13) Operational economies of scope include shared activities and risk reduction.
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.
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.
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.
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.
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.
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.
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.
21) A firm’s dominant logic is a common way of thinking about strategy across different
businesses.
22) For an internal capital market to create value for a diversified firm, it must offer some
efficiency advantages over an external capital market.
23) The businesses within a diversified firm always gain cost-of-capital advantages by being part
of a diversified firm’s portfolio.
24) 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.
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.
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.
27) Overall, related diversification is less likely to be consistent with the interests of a firm’s
equity holders than is unrelated diversification.
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.
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.
30) A firm’s stakeholders include all of those groups or individuals who have an interest in how a
firm performs.
31) Core competencies and multipoint competition are usually costly-to-duplicate bases for
corporate diversification.
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.
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.
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 simply grow and develop each of its businesses separately.
35) Core competencies are an example of a costly-to-duplicate economies of scope.
36) Exploiting market power is an example of a costly-to-duplicate economies of scope.
37) Employee compensation is an example of a costly–to-duplicate economies of scope.
38) Internal capital allocation is an example of a less costly-to-duplicate economies of scope.
39) Shared activities, risk reduction, tax advantages, and employee compensation as bases for
corporate diversification are usually relatively easy to duplicate.
40) Multipoint competition requires loose coordination between the different businesses in which
a firm operates.
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
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.
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.
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.
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
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
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
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
49) 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.
50) 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
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
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.
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
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.
55) 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.
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
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
58) 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
59) 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.
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
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
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
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
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.
65) 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
66) 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.