Exam 12: Diversification Strategy

Empirical studies of the outcomes of corporate refocusing initiatives show that divesting diversified businesses increases profitability and generates positive returns for shareholders.

Diversification decisions by firms involve two key issues: how attractive is the industry to be entered and can the firm establish a competitive advantage within it?

The continuing prominence of large,highly diversified business groups in many emerging market countries (e.g.Tata Group in India)is mainly the result of:

When a company in industry A acquires a company in industry B,Porter's "better-off" test is satisfied when:

The critical test of whether diversification will create shareholder value is whether it will contribute to competitive advantage.

Which is a more efficient mechanism for allocating capital among different businesses: the internal capital allocation of diversified firms or the external capital market?

"Strategic relatedness" (as distinct from "operational relatedness")in diversification refers to:

Diversification that reduces company specific ("unsystematic")risk is beneficial to the company's bondholders since it reduces the risk of default.

The continuing dominance of highly-diversified business groups in many emerging countries is a result of the less developed capital and labor markets in these countries.

Tata Group,the Virgin Group,and Berkshire Hathaway are holding companies that comprise largely independent businesses with few relationships with one another.Inevitably,these groups lack significant potential to add value to the individual businesses.