Strategic Management and Competitive Advantage, 5e (Barney)

Chapter 7 Corporate Diversification

1) A firm implements a corporate diversification strategy when it operates in multiple industries

or markets simultaneously.
Answer: TRUE
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: FALSE
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: FALSE
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: TRUE
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: TRUE
Diff: 2
Learning Obj.: 7.1: Define Corporate Diversification and Describe Five Types of Corporate
Diversification
AACSB: Analytical Thinking

1
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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: FALSE
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: TRUE
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: TRUE
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: FALSE
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: TRUE
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

2
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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: FALSE
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: FALSE
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: FALSE
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: FALSE
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: TRUE
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

3
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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: TRUE
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: FALSE
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: TRUE
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: FALSE
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: FALSE
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

4
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21) A firm's dominant logic is a common way of thinking about strategy across different
businesses.
Answer: TRUE
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: FALSE
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: TRUE
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: FALSE
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: TRUE
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

5
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26) Overall, related diversification is less likely to be consistent with the interests of a firm's
equity holders than is unrelated diversification.
Answer: FALSE
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: TRUE
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: FALSE
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: TRUE
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: TRUE
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

6
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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: FALSE
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: FALSE
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: TRUE
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: TRUE
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: TRUE
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

7
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36) Employee compensation is an example of costly-to-duplicate economies of scope.
Answer: FALSE
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: FALSE
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: TRUE
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: FALSE
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: B
Diff: 1
Learning Obj.: 7.1: Define Corporate Diversification and Describe Five Types of Corporate
Diversification
AACSB: Analytical Thinking

8
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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: A
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: C
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: D
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: A
Diff: 2
Learning Obj.: 7.1: Define Corporate Diversification and Describe Five Types of Corporate
Diversification
AACSB: Analytical Thinking

9
Copyright © 2015 Pearson Education, Inc.
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: B
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: A
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: D
Diff: 2
Learning Obj.: 7.1: Define Corporate Diversification and Describe Five Types of Corporate
Diversification
AACSB: Analytical Thinking

10
Copyright © 2015 Pearson Education, Inc.
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: A
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: B
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: D
Diff: 2
Learning Obj.: 7.1: Define Corporate Diversification and Describe Five Types of Corporate
Diversification
AACSB: Analytical Thinking

11
Copyright © 2015 Pearson Education, Inc.
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: C
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: A
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: D
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

12
Copyright © 2015 Pearson Education, Inc.
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: D
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: A
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: B
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: D
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

13
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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: A
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: B
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: D
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
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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: C
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: A
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: D
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: A
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
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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: B
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: A
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: A
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
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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: C
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: C
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: B
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
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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: D
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: B
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: A
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: C
Diff: 2
Learning Obj.: 7.7: Identify Two Potential Substitutes for Corporate Diversification
AACSB: Analytical Thinking

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Copyright © 2015 Pearson Education, Inc.
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: A
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: B
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: A
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

19
Copyright © 2015 Pearson Education, Inc.
78) ________ are substitutes for exploiting economies of scope in diversification.
A) Tax havens
B) Tax shelters
C) Tax freedom
D) Strategic alliances
Answer: D
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: C
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: B
Diff: 2
Learning Obj.: 7.1: Define Corporate Diversification and Describe Five Types of Corporate
Diversification
AACSB: Application of Knowledge

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Copyright © 2015 Pearson Education, Inc.
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: A
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: A
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: D
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

21
Copyright © 2015 Pearson Education, Inc.
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: C
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: B
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: A
Diff: 3
Learning Obj.: 7.5: Specify the Circumstances Under Which a Firm's Diversification Strategy
Will be Rare
AACSB: Application of Knowledge

22
Copyright © 2015 Pearson Education, Inc.
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: C
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: D
Diff: 2
Learning Obj.: 7.1: Define Corporate Diversification and Describe Five Types of Corporate
Diversification
AACSB: Application of Knowledge

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: 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 implementing a
product-market diversification strategy.
Diff: 1
Learning Obj.: 7.1: Define Corporate Diversification and Describe Five Types of Corporate
Diversification
AACSB: Analytical Thinking

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90) Identify and distinguish between the five different levels of diversification discussed in
Chapter 7.
Answer: The five different levels of diversification that firms can pursue:
Single-business firms – These firms operate in a single business and 95% or more of firm
revenues come from this business.
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 95% of firm
revenues.
Related-constrained diversification – A firm using this type of related diversification operates
in multiple businesses, none of which accounts for more than 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 operate in
multiple businesses, none of which accounts for more than 70% of a firm's revenues, and these
businesses share only a couple of dimensions or have businesses 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.
Diff: 2
Learning Obj.: 7.1: Define Corporate Diversification and Describe Five Types of Corporate
Diversification
AACSB: Analytical Thinking

91) Specify the two conditions that a corporate diversification strategy must meet in order to
create economic value.
Answer: 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.
Diff: 1
Learning Obj.: 7.2: Specify the two Conditions that a Corporate Diversification Strategy must
meet in order to Create Economic Value
AACSB: Analytical Thinking

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Copyright © 2015 Pearson Education, Inc.
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: 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:
• 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.
• 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 of 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 as 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 that can
allow a diversified firm to grow substantially in a short period of time, leading senior managers
to earn higher incomes.
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
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Copyright © 2015 Pearson Education, Inc.
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: 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 the revenues in 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.
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

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: 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.
Diff: 1
AACSB: Analytical Thinking

95) Discuss the conditions under which a firm's diversification strategy will be rare.
Answer: 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.
Diff: 1
Learning Obj.: 7.5: Specify the Circumstances Under Which a Firm's Diversification Strategy
Will be Rare
AACSB: Analytical Thinking

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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: 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. 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 information-processing
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 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.
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

27
Copyright © 2015 Pearson Education, Inc.
97) Identify two potential substitutes for corporate diversification and discuss how each can
provide benefits similar to corporate diversification.
Answer: 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.
Diff: 2
Learning Obj.: 7.7: Identify Two Potential Substitutes for Corporate Diversification
AACSB: Analytical Thinking

98) Explain how strategic alliances are a substitute for exploiting economies of scope in
diversification.
Answer: By using a strategic alliance, a firm may be able to gain the economies of scope it
could have obtained if it had carefully exploited economies of scope across its businesses. For
example, instead of a firm exploiting research and development economies between two
businesses it owns, it could form a strategic alliance with a different firm and form a joint R&D
lab.
Diff: 2
Learning Obj.: 7.7: Identify Two Potential Substitutes for Corporate Diversification
AACSB: Analytical Thinking

28
Copyright © 2015 Pearson Education, Inc.