BUS 4385 UPDATED EXAM SCRIPT QUESTIONS AND
ANSWERS RATED A+
✔✔High level of diversification - ✔✔Unrelated- Less than 70% comes from one
business and no common linkages
✔✔Value creating diversification - ✔✔-Economies of scope (share activities, transfer
core competencies)
-Market power (block competitors, multipoint competition, vertical integration)
-Financial economies (efficient internal capital allocation, business restructuring)
✔✔Value neutral diversification - ✔✔-Antitrust
-Tax law
-Low performance
-Uncertain future CF
-Risk reduction for firm
-Tangible/Intangible resources
✔✔Value reducing diversification - ✔✔-Diversify managerial employment risk
-Increase managerial compensation
✔✔Adding value through unrelated diversification - ✔✔-Efficient internal capital market
allocation
-Restructuring options
✔✔Adding value through related diversification - ✔✔-Economies of scope
-Transfer core competencies
-Market power
✔✔Efficient internal capital market allocation - ✔✔-Acquire attractive companies
-Transfer from cash generating units to high growth cash needy ones
-Exploit managers inside knowledge of firm
-Invest without giving out sensitive info to investors
✔✔Effective restructuring - ✔✔-Acquire underdeveloped, sick orgs
-Company replaces managers, change strategies, new tech, control systems, divest
parts of company, combine operations
-Parent company sells unit after changes
✔✔6 questions before deciding to diversify - ✔✔1. What can we do better than
competitors (unique assets/strengths)?
2. Strategic asset needed to succeed in new market (need all)?
3. Catch up/leapfrog competitors at own game?
4. Diversification separate strategic assets that need to be together?
5. Can be a player or a winner?
, 6. What can we learn and are we organized enough to learn it?
✔✔Economies of scope - ✔✔Cost savings a firm creates by successfully sharing
resources and capabilities or transferring core competencies that were developed in
one business to another business
✔✔Related constrained diversification - ✔✔High operational relatedness (share
activities btw businesses) and low corporate relatedness (transfer core competencies)
✔✔Unrelated diversification - ✔✔Low operational relatedness (share activities btw
businesses) and low corporate relatedness (transfer core competencies)
✔✔Operational and corporate relatedness - ✔✔High operational relatedness (share
activities btw businesses) and high corporate relatedness (transfer core competencies)
✔✔Related linked diversification - ✔✔Low operational relatedness (share activities btw
businesses) and high corporate relatedness (transfer core competencies)
✔✔Corporate level core competencies - ✔✔Complex set of resources and capabilities
that link different businesses through managerial and technological knowledge,
expertise, experience
✔✔Market power - ✔✔Firm is able to sell its products above the existing competitive
level or to reduce the costs of its primary and support activities below the competitive
level
✔✔Multipoint competition - ✔✔2 or more diversified firms simultaneously compete in the
same product areas or geographical areas
✔✔Vertical integration - ✔✔Company produces its own inputs or own its own source of
distribution
✔✔Financial economies - ✔✔Cost savings realized through improved allocations of
financial resources based on investments inside or outside the firm
✔✔Synergy - ✔✔Value created by business units working together exceeds the value
that those same units create working independently
✔✔Acquisition - ✔✔One firm buys a controlling or total interest in another firm with the
intent of making the acquired firm a subsidiary business within its portfolio
✔✔Takeover - ✔✔Special type of acquisition where the target firm does not solicit the
acquiring firm's bid, unfriendly
ANSWERS RATED A+
✔✔High level of diversification - ✔✔Unrelated- Less than 70% comes from one
business and no common linkages
✔✔Value creating diversification - ✔✔-Economies of scope (share activities, transfer
core competencies)
-Market power (block competitors, multipoint competition, vertical integration)
-Financial economies (efficient internal capital allocation, business restructuring)
✔✔Value neutral diversification - ✔✔-Antitrust
-Tax law
-Low performance
-Uncertain future CF
-Risk reduction for firm
-Tangible/Intangible resources
✔✔Value reducing diversification - ✔✔-Diversify managerial employment risk
-Increase managerial compensation
✔✔Adding value through unrelated diversification - ✔✔-Efficient internal capital market
allocation
-Restructuring options
✔✔Adding value through related diversification - ✔✔-Economies of scope
-Transfer core competencies
-Market power
✔✔Efficient internal capital market allocation - ✔✔-Acquire attractive companies
-Transfer from cash generating units to high growth cash needy ones
-Exploit managers inside knowledge of firm
-Invest without giving out sensitive info to investors
✔✔Effective restructuring - ✔✔-Acquire underdeveloped, sick orgs
-Company replaces managers, change strategies, new tech, control systems, divest
parts of company, combine operations
-Parent company sells unit after changes
✔✔6 questions before deciding to diversify - ✔✔1. What can we do better than
competitors (unique assets/strengths)?
2. Strategic asset needed to succeed in new market (need all)?
3. Catch up/leapfrog competitors at own game?
4. Diversification separate strategic assets that need to be together?
5. Can be a player or a winner?
, 6. What can we learn and are we organized enough to learn it?
✔✔Economies of scope - ✔✔Cost savings a firm creates by successfully sharing
resources and capabilities or transferring core competencies that were developed in
one business to another business
✔✔Related constrained diversification - ✔✔High operational relatedness (share
activities btw businesses) and low corporate relatedness (transfer core competencies)
✔✔Unrelated diversification - ✔✔Low operational relatedness (share activities btw
businesses) and low corporate relatedness (transfer core competencies)
✔✔Operational and corporate relatedness - ✔✔High operational relatedness (share
activities btw businesses) and high corporate relatedness (transfer core competencies)
✔✔Related linked diversification - ✔✔Low operational relatedness (share activities btw
businesses) and high corporate relatedness (transfer core competencies)
✔✔Corporate level core competencies - ✔✔Complex set of resources and capabilities
that link different businesses through managerial and technological knowledge,
expertise, experience
✔✔Market power - ✔✔Firm is able to sell its products above the existing competitive
level or to reduce the costs of its primary and support activities below the competitive
level
✔✔Multipoint competition - ✔✔2 or more diversified firms simultaneously compete in the
same product areas or geographical areas
✔✔Vertical integration - ✔✔Company produces its own inputs or own its own source of
distribution
✔✔Financial economies - ✔✔Cost savings realized through improved allocations of
financial resources based on investments inside or outside the firm
✔✔Synergy - ✔✔Value created by business units working together exceeds the value
that those same units create working independently
✔✔Acquisition - ✔✔One firm buys a controlling or total interest in another firm with the
intent of making the acquired firm a subsidiary business within its portfolio
✔✔Takeover - ✔✔Special type of acquisition where the target firm does not solicit the
acquiring firm's bid, unfriendly
