Podcast
Questions and Answers
What can influence top-level executives' diversification decisions according to managerial motives?
What can influence top-level executives' diversification decisions according to managerial motives?
Which factor is likely to push managers towards inappropriate diversification?
Which factor is likely to push managers towards inappropriate diversification?
Which of the following does NOT discourage executives from using value-creating diversification strategies?
Which of the following does NOT discourage executives from using value-creating diversification strategies?
What is regarded as the most effective control of managerial motives for diversification?
What is regarded as the most effective control of managerial motives for diversification?
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Why might knowing their firms could be acquired discourage executives from certain diversification strategies?
Why might knowing their firms could be acquired discourage executives from certain diversification strategies?
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Which of the following statements best summarizes a challenge for managerial diversification decisions?
Which of the following statements best summarizes a challenge for managerial diversification decisions?
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Which misconception might executives have regarding diversification strategies?
Which misconception might executives have regarding diversification strategies?
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What role does manager reputation play in diversification decisions?
What role does manager reputation play in diversification decisions?
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Which of the following strategies can a firm use to increase market power through diversification?
Which of the following strategies can a firm use to increase market power through diversification?
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What is one way a firm can increase value through diversification?
What is one way a firm can increase value through diversification?
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Which of the following is NOT considered a value-creating reason for diversification?
Which of the following is NOT considered a value-creating reason for diversification?
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How can diversification help a firm address uncertain cash flows?
How can diversification help a firm address uncertain cash flows?
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Backward vertical integration in diversification refers to which of the following?
Backward vertical integration in diversification refers to which of the following?
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Diversification can help a firm adapt to changes in the external environment. Which aspect is critical for this adaptation?
Diversification can help a firm adapt to changes in the external environment. Which aspect is critical for this adaptation?
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Which of the following outcomes is directly supported by a successful diversification strategy?
Which of the following outcomes is directly supported by a successful diversification strategy?
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What is a primary goal of a diversification strategy when addressing low performance?
What is a primary goal of a diversification strategy when addressing low performance?
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What is a primary objective of a diversification strategy?
What is a primary objective of a diversification strategy?
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Which type of diversification aims to reduce risk for the firm?
Which type of diversification aims to reduce risk for the firm?
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What does synergy in diversification refer to?
What does synergy in diversification refer to?
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Which factor is NOT associated with Value-Reducing Diversification?
Which factor is NOT associated with Value-Reducing Diversification?
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Why might a firm seek to achieve economies of scope?
Why might a firm seek to achieve economies of scope?
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Which of the following is a reason for Value-Neutral Diversification?
Which of the following is a reason for Value-Neutral Diversification?
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What is one of the expected results of successful diversification?
What is one of the expected results of successful diversification?
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Which outcome is a potential consequence of Value-Reducing Diversification?
Which outcome is a potential consequence of Value-Reducing Diversification?
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What is meant by operational relatedness in a diversified firm?
What is meant by operational relatedness in a diversified firm?
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Which of the following statements about corporate relatedness is true?
Which of the following statements about corporate relatedness is true?
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What is a potential drawback of sharing activities among divisions?
What is a potential drawback of sharing activities among divisions?
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Which aspect does operational relatedness NOT typically affect?
Which aspect does operational relatedness NOT typically affect?
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What kind of economies do firms seek to create from value-creating diversification?
What kind of economies do firms seek to create from value-creating diversification?
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Operational relatedness primarily involves sharing which types of activities?
Operational relatedness primarily involves sharing which types of activities?
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How does operational relatedness influence managerial behavior?
How does operational relatedness influence managerial behavior?
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What can be a consequence of creating unequal benefits through sharing activities?
What can be a consequence of creating unequal benefits through sharing activities?
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What is the main goal of using an unrelated diversification strategy?
What is the main goal of using an unrelated diversification strategy?
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Which option describes an effective way to reduce risk among a firm's businesses when employing an unrelated diversification strategy?
Which option describes an effective way to reduce risk among a firm's businesses when employing an unrelated diversification strategy?
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Which of the following is an example of an external incentive that drives value-neutral diversification?
Which of the following is an example of an external incentive that drives value-neutral diversification?
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What type of situation may prompt a firm to seek diversification?
What type of situation may prompt a firm to seek diversification?
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What might indicate that a firm is pursuing value-neutral diversification?
What might indicate that a firm is pursuing value-neutral diversification?
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What characteristic is associated with internal incentives to diversify?
What characteristic is associated with internal incentives to diversify?
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In the context of diversification strategies, what does restructuring of acquired assets typically involve?
In the context of diversification strategies, what does restructuring of acquired assets typically involve?
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Which factor is least likely to drive a firm's decision to diversify?
Which factor is least likely to drive a firm's decision to diversify?
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Study Notes
Diversification and Firm Performance
- Diversification strategies aim to increase firm value by improving overall performance.
- Value creation occurs when corporate-level strategies enhance business-level strategies, increasing revenues or cutting costs in those business units.
- Synergies through shared resources and capabilities across different business units contribute to value creation.
Economies of Scope
- Synergy exists when combined business unit value exceeds the value of those units operating independently.
- Economies of scope represent cost savings from sharing resources and capabilities or transferring corporate core competencies across business units.
Value-Creating Diversification
- Market power increases through diversification by reducing costs below competitors or charging higher prices.
- Backward vertical integration involves a firm producing inputs previously sourced externally.
- Forward vertical integration involves a company becoming its own customer for some of its products or services.
Value - Neutral Diversification
- Antitrust regulations can incentivize diversification.
- Tax laws may encourage diversification actions.
- Low performance can prompt diversification to address business challenges.
- Uncertain future cash flows can motivate diversification to improve cash flow stability.
Value-Reducing Diversification
- Diversifying managerial employment risk can lead to value-reducing diversification, driven by managerial self-interest.
- Increasing managerial compensation may occur due to diversification, potentially leading to value reduction.
Related Constrained Diversification
- Operational relatedness involves sharing resources and activities among business units.
- Corporate relatedness allows for transferring corporate-level competencies across different businesses within a diversified firm.
Related Linked Diversification
- Activity sharing involves sharing primary or support activities between business units.
- Transfer of core competencies entails applying successful competencies from one business to another.
Incentives Driving Value-Neutral Diversification
- External incentives for diversification include antitrust regulations and tax laws.
- Internal incentives for diversification include low performance, uncertain future cash flows, pursuit of synergy, and risk reduction for the firm.
Managerial Motives for Diversification
- Top-level executives' diversification decisions may be influenced by reputational concerns.
- A strong external market for managerial talent can encourage managers to engage in inappropriate diversification.
- Executives are discouraged from using value-creating diversification strategies due to the potential for acquisition if their firms are not managed effectively.
External Governance Threat
- While an external governance threat provides a control mechanism for managerial diversification motives, it is not considered the most effective method.
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Description
Test your knowledge on diversification strategies and their impact on firm performance. This quiz covers concepts such as economies of scope, synergies, and market power through diversification. Enhance your understanding of how corporate-level strategies can drive business-level success.
