DIVERSIFICATION EXAM QUESTIONS

PDF Download

DIVERSIFICATION EXAM QUESTIONS

Actual Qs and Ans Expert-Verified Explanation

This Exam contains:

-Guarantee passing score -12 Questions and Answers -format set of multiple-choice -Expert-Verified Explanation

Question 1: Zhou et al. 2022 - Resources and capabilities

Answer:

• 'capabilities act upon resources in routine fashion'
• Resources and capabilities set different limits on diversification - Resources are often rivalrous, whilst

capabilities can generally support multiple products or businesses within the same time period

Question 2: Nippa et al. 2011 - CPM and performance

Answer:

• Multi-business corporations are the most prevalent form of organisation, but theoretically, corporate

diversification destroys value - Paper explores this gap

• Corporate Portfolio Management historically gained prominence from the idea from Drucker etc. that

management is a profession with universal principles and thus Managerial control of SBUs > market forces

• Lack of theoretical and empirical consensus on the relationship between diversification and

performance

Question 3: Nippa et al. 2011 - Value enhancing and destroying diversification

Answer:

• Value enhancing - Arguments from market power theory, internal capital market efficiency reasoning,

transaction costs theory, portfolio theory, industry or product life cycles, and taxation advantages

• Value destroying - Internal transaction costs/governance costs increasing; the more efficient the

external capital market, the lower the market-based transaction costs compared to internalisation

• Inverted U model - There is an optimal level of diversification - Related diversifiers are able to benefit

from synergies at reasonable coordination costs, leading to an increase in profitability compared to focused firms and limited diversifiers (most empirically supported idea)

Question 4: Aversa et al. 2021

Answer:

• Studies Amazon's business model diversification - Interacting with customers in different ways, even

when this implies mobilizing the same product or service

• Business models feature demand-side complementarities: Google could not finance its search engine

without satisfying advertisement clients, and concurrently advertisers would dwindle without users adopting Google search engine

• Network effects - Demand-side economies of scale
• One-stop-shop effects - Basic efficiencies (reduced transaction and communication costs)
• Implication - Firms don't necessarily have to diversify between product markets - Lots of the benefits of

diversification (synergies) can come from diversifying business models (without value destructive mergers/acquisitions)

Question 5: Prahalad and Bettis 1986

Answer:

• Dominant Logics (management logic/routines) constrain diversification - Oliver 1997
• Managers develop world-views to make decisions in a single business area
• Management quality is dependent on the applicability of the dominant logic - Management of a

one-industry firm (e.g. General Motors), or a diversified firm in strategically similar businesses (e.g.Procter & Gamble), is simpler than a diversified firm in strategically dissimilar industries (e.g. General Electric)

• Related diversifiers outperform unrelated diversifiers due to the applicability of dominant logics
• Each top management team at a given point in time has an inbuilt limit to the extent of diversity it can

manage - Org structure can extend but not eliminate this limit

Question 6: Schommer et al. 2019 - Diversification discount?

Answer:

• Results from selection effects, because discounted firms self-select into pursuing diversification

strategies (Villalonga, 2001)

• Relative value of diversified firms increases during recessionary periods, because their capacity to use

internal capital markets provides them with advantages over more focused firm

Question 7: Khanna and Palepu 2000

Answer:

• Studies business groups in India - Collections of public firms in a range of industries, under common

ownership and control

• Institutional context is weak - Financial markets are characterised by inadequate disclosure and weak

corporate governance and control

• Scale and scope allows business groups to internally replicate the functions provided by standalone

intermediary institutions usually

• Benefits: access to foreign capital (international investors and joint venture partners value groups'

investment in reputation and preferential access to bureaucrats)

Question 8: Schommer et al. 2019 - Empirical work

Answer:

• Environmental pressures have led firms to select more value-creating diversification strategies and

avoid value-destroying ones, leading to an improvement in the aggregate relationship between diversification and firm performance

• Challenges inverted U model - May have been historically true due a weak selection environment that

allowed more firms to pursue unrelated diversification strategies with detrimental performance outcomes

• Diversification has other rationales other than performance - Dependent on the strength of

environmental factors whether firms are forced to make performance-optimal choices about their diversification strategies

Question 9: Jin and Eapen 2022

Answer:

• Mutual forbearance: When rival firms meet each other in multiple markets, an aggressive action by one

firm in one market can invite retaliation against it in all the other markets they share - Firms with multi-point contact tend to refrain from rivalry against each other

• Studies product launches between incumbents and newcomers
• At low levels of multisegment contact, both new and incumbent firms gain from launching new

products in that segment

• At high levels of multisegment contact, the expectation of retaliation in some or all of the other

overlapping segments encourages the focal firm to forbear from these actions

Question 10: Schommer et al. 2019 - Diversification over time

Answer:

• Increasing shareholder power, liberalisation of capital markets, and a more active market for corp.

control have curbed conglomeration strategies - 'de-institutionalisation' of the conglomerate form in the late 1980s and early 1990s in the US

• Emerging countries - With increasing institutional development, the relative benefits of diversification

have decreased, and its relative costs increased

Question 11: Schommer et al. 2019 - Related diversification

Answer:

• Firms with a smaller number of businesses are likely to be more related diversifiers than those with a

larger number of businesses

• In contrast to unrelated businesses, related ones tend to share common firm-specific assets and to

give rise to resource complementarities

• Unrelated diversifiers deliver advantages through the greater relative efficiency of internal versus

external capital markets and other finance- related advantages (e.g. risk-spreading)

Question 12: Zhou et al. 2022 - Economies of scope

Answer:

• Scale free resources provide a strong rationale for diversification: When Microsoft entered the

smartphone industry (via acquisition of Nokia); the related resource is the operating system which is a scale-free (use in smartphones does not necessitate its redeployment from computers)

• Inter-temporal economies of scope - Redeploying resources from one segment to another - Rival

resources

• Intra-temporal economies of scope - Contemporaneous sharing of resources between multiple

segments - Scale-free resources, or rival resources with excess capacity