Challenge Questions

$7\mathrm{.}1.$ One simple way to think about relatedness is to look at the products or services a firm manufactures. The more similar these products or services are, the more related is the firm's diversification strategy. Why or why not would firms that exploit core competencies in their diversification strategies always produce products or services that are similar to each other?

$7\mathrm{.}2.$ A firm implementing a diversification strategy has just acquired what it claims is a strategically related target firm but announces that it is not going to change this recently acquired firm in any way. Why or why not would this type of diversifying

acquisition enable the firm to realize any valuable economies of scope that could not be duplicated by outside investors on their own?

$7\mathrm{.}3.$ One of the reasons why internal capital markets may be more efficient than external capital markets is that firms may not want to reveal full information about their sources of competitive advantage to external capital markets in order to reduce the threat of competitive imitation. This suggests that external capital markets may systematically undervalue firms with competitive advantages that are subject to imitation. If you agree with this analysis, how could you trade on

this information in your own invesp. ment activities?

$7\mathrm{.}4.$ A particular firm is owned by members of a single family. Most of the wealth of this family is derived from the operations of this firm, and the family does not want to $"$go put. lic" with the firm by selling its equity position to outside investors. Will this firm choose to pursue a highly related diversification strategy or a somerwhat less related diversification strategy?

$7\mathrm{.}5.$ Under what conditions willa related diversification strategy notbe a source of competitive advantage for a firm?