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# Companies are often torn between the benefits of focusing on

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SVP
Joined: 11 Mar 2008
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Location: Southern California
Schools: Chicago (dinged), Tuck (November), Columbia (RD)
Companies are often torn between the benefits of focusing on [#permalink]

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13 May 2008, 22:20
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Companies are often torn between the benefits of focusing on one major product or service and the drawbacks of relying too heavily on one primary source of income. While narrow focus can provide a company with an advantage over competitors that offer a wider range of products or services, an undiversified income stream can leave a company susceptible to major fluctuations in cash flow. We can see this tension realized when, for example, ________________.

(A) a local messenger service known for its speedy deliveries is forced to lay off twenty percent of its work force after a rise in local taxes encourages many local businesses to move out of state
(B) an advertising agency loses one of its clients
(C) a holding company that owns a car rental agency and a national doughnut chain is now interested in purchasing a professional basketball team
(D) a construction company opts to use non-union labor to increase its profits
(E) a specialty sandwich store decides to open franchises throughout the country that will focus on using local ingredients
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CEO
Joined: 17 May 2007
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13 May 2008, 22:38
A for me - will explain more if correct.
Intern
Joined: 03 Apr 2008
Posts: 18

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13 May 2008, 22:40
E.......for me......

speciality sandwich maker going for local chains......
Manager
Joined: 27 Jul 2007
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14 May 2008, 06:26
Staright A - none other shows the "tension".
Director
Joined: 26 Jul 2007
Posts: 535
Schools: Stern, McCombs, Marshall, Wharton

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14 May 2008, 07:12
I go with B.

Companies are often torn between the benefits of focusing on one major product or service and the drawbacks of relying too heavily on one primary source of income. While narrow focus can provide a company with an advantage over competitors that offer a wider range of products or services, an undiversified income stream can leave a company susceptible to major fluctuations in cash flow. We can see this tension realized when, for example, ________________.

(A) a local messenger service known for its speedy deliveries is forced to lay off twenty percent of its work force after a rise in local taxes encourages many local businesses to move out of state

To me this doesnt speak to an undiversified company. This conflict will address companies whether they are diversified or not. This also doesn't affect the income stream only expenses.

(B) an advertising agency loses one of its clients

If you have a company that only relies on one source of income, when you lose a client it will impact you more.
Manager
Joined: 27 Jul 2007
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14 May 2008, 07:27
Great point gixxer.
I am still confused. The stem doesnt say fluctuations in cash flow shd affect only diversified. It can be for both diversified or undiversified. The way diversified will react will be different.

Director
Joined: 26 Jul 2007
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14 May 2008, 07:36
farend wrote:
Great point gixxer.
I am still confused. The stem doesnt say fluctuations in cash flow shd affect only diversified. It can be for both diversified or undiversified. The way diversified will react will be different.

This is the way I understood the problem.

Compamies are torn between benefits and drawbacks of being undiversified.

Here is a disadvantage of being undiversifed = undiversified income stream.

We can see this tension realized when.

In other words, which is a realized expample of a disadvantage of being undiversified.

An advertising agency will have an advantage over a company that may advertise as a side componet to another business but if the advertisers loses a client it will hurt them more because they only receive money from clients.
SVP
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14 May 2008, 07:49
OA is A
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Director
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14 May 2008, 07:58
Nice one. Almost went with A.
After reading the above expln, agree with B. Thanks
Director
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14 May 2008, 07:59
Confused now...
Director
Joined: 26 Jul 2007
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14 May 2008, 08:00
Can somone explain the logic of A to me.

How does a tax increase that incourages many local business to move out of state, causing a messenger service to lay off workers speak to the tension of diversification?

Is it that the local messenger service is only local and therfore anything local will affect them, whereas if the messenger service was national it wouldn't affect them as much?

I'm confused because twice the argument pointed to one source of income as the drawback and taxes do not affect income, they are an expense. They will affect revenue but not income. I feel A would be better if it stated that the local people started using messengers services less reducing their income.
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14 May 2008, 08:03
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I put B on my MGMAT CAT and got this one wrong.

The OE is:

The tension indicated in the argument is that between the benefits of focusing on one primary product or service and the inherent risks of relying too heavily on an undiversified income stream. The correct answer choice must exemplify this tension.

(A) CORRECT. This example correctly identifies a company with a clear, narrow focus – a local messenger service - that enjoys a competitive advantage because of its reputation for speedy deliveries. At the same time, its undiversified income stream becomes problematic when a factor outside of its control – the relocation of local businesses out of state – forces it to lay off employees.

(B) This example does not specify any particular focus of the advertising agency nor does it demonstrate any major cash flow consequences due to the loss of the client.

(C) In contrast to the predicament described in the passage, this example describes a company that is interested in diversifying its holdings.

(D) The fact that the construction company is attempting to increase its profits does not illustrate the tension described in the passage.

(E) Though the specialty sandwich store that uses local ingredients might be called a very focused company, there is no evidence presented that this focus has had any adverse effect on cash flow.
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14 May 2008, 08:15
terp06 wrote:
Companies are often torn between the benefits of focusing on one major product or service and the drawbacks of relying too heavily on one primary source of income. While narrow focus can provide a company with an advantage over competitors that offer a wider range of products or services, an undiversified income stream can leave a company susceptible to major fluctuations in cash flow. We can see this tension realized when, for example, ________________.

(A) a local messenger service known for its speedy deliveries is forced to lay off twenty percent of its work force after a rise in local taxes encourages many local businesses to move out of state
(B) an advertising agency loses one of its clients
(C) a holding company that owns a car rental agency and a national doughnut chain is now interested in purchasing a professional basketball team
(D) a construction company opts to use non-union labor to increase its profits
(E) a specialty sandwich store decides to open franchises throughout the country that will focus on using local ingredients

Agree with A...
Local messenger is suffering because it relies on one service & one source of income - delivery. Now that all of its customers move out of the area, the messenger company cannot do anything, but layoff its people.
Director
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14 May 2008, 08:26
terp06 wrote:
I put B on my MGMAT CAT and got this one wrong.

The OE is:

The tension indicated in the argument is that between the benefits of focusing on one primary product or service and the inherent risks of relying too heavily on an undiversified income stream. The correct answer choice must exemplify this tension.

(A) CORRECT. This example correctly identifies a company with a clear, narrow focus – a local messenger service - that enjoys a competitive advantage because of its reputation for speedy deliveries. At the same time, its undiversified income stream becomes problematic when a factor outside of its control – the relocation of local businesses out of state – forces it to lay off employees.

(B) This example does not specify any particular focus of the advertising agency nor does it demonstrate any major cash flow consequences due to the loss of the client.

(C) In contrast to the predicament described in the passage, this example describes a company that is interested in diversifying its holdings.

(D) The fact that the construction company is attempting to increase its profits does not illustrate the tension described in the passage.

(E) Though the specialty sandwich store that uses local ingredients might be called a very focused company, there is no evidence presented that this focus has had any adverse effect on cash flow.

Thanks for the explanation terp.

"enjoys a competitive advantage because of its reputation for speedy deliveries"

This does not indicate the advantage is because of undiversification.

I do see however how I misinterpreted that the taxes were affecting the messenger service income when in fact the business' moving are affect their income.
Senior Manager
Joined: 26 Mar 2008
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14 May 2008, 09:59
I was also stuck between A and B. But then I used following logic and eliminated B.
B says advertising company lost one of its clients. . It looks one of its clients means company was diversified and had many clients.
Manager
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14 May 2008, 19:47
A for me.
CEO
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15 May 2008, 03:54
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Since I was the first one to go with A, I gotta do some explaining.

terp06 wrote:
Companies are often torn between the benefits of focusing on one major product or service and the drawbacks of relying too heavily on one primary source of income. While narrow focus can provide a company with an advantage over competitors that offer a wider range of products or services, an undiversified income stream can leave a company susceptible to major fluctuations in cash flow. We can see this tension realized when, for example, ________________. <-- basically the company must have a niche and it should be "susceptible" i.e. deeply affected by a cashflow problem. Only A fits the bill.

(A) a local messenger service known for its speedy deliveries is forced to lay off twenty percent of its work force after a rise in local taxes encourages many local businesses to move out of state <-- now thats more like it. its a "LOCAL" messenger service, that's its niche. Its facing a cashflow problem because of rise in LOCAL taxes since its local and not diversified its income stream into the entire country.

(B) an advertising agency loses one of its clients <-- so what losing one client is not going to create a "cashflow" problem.

(C) a holding company that owns a car rental agency and a national doughnut chain is now interested in purchasing a professional basketball team <-- niche ?? hardly

(D) a construction company opts to use non-union labor to increase its profits <-- cashflow problems not profit increases

(E) a specialty sandwich store decides to open franchises throughout the country that will focus on using local ingredients <-- definitely not since the company here wants to lose its niche.
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Joined: 28 Apr 2008
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15 May 2008, 12:09
C's torn between
1. focus on on one prod/service, seen as an adv. over competition.
2. relying on one prim.source of income. susceptible to fluct. in cashflow

I am picking E over A.

terp06 wrote:
Companies are often torn between the benefits of focusing on one major product or service and the drawbacks of relying too heavily on one primary source of income. While narrow focus can provide a company with an advantage over competitors that offer a wider range of products or services, an undiversified income stream can leave a company susceptible to major fluctuations in cash flow. We can see this tension realized when, for example, ________________.

(A) a local messenger service known for its speedy deliveries is forced to lay off twenty percent of its work force after a rise in local taxes encourages many local businesses to move out of state
> "known for" speedy deliveries doesnt necessarily mean its primary business revenue stream is from a single source ?
(B) an advertising agency loses one of its clients
> we dont see the contrast between the two issues here.
(C) a holding company that owns a car rental agency and a national doughnut chain is now interested in purchasing a professional basketball team
> fully diversified company, so no issue of single stream of revenue.
(D) a construction company opts to use non-union labor to increase its profits
> dont have enough info if the company is relying on single prod/service for revenue.
E) a specialty sandwich store decides to open franchises throughout the country that will focus on using local ingredients
> definetly single prod/service focus, though they could be making many specialty sandwiches. It can be argued its a single stream of revenue even though they are diversified in terms of locations. What if every one stops going to these franchises because of a virus outbreak ?
Manager
Joined: 28 Apr 2008
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15 May 2008, 12:16
I was thrown off by "known for" in A. Agree that company in A is more likely to be effected as opposed to E
Senior Manager
Joined: 07 Jan 2008
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23 May 2008, 16:53
A gives a good example of a business relying on one product and having problems because of this exclusivity. So, A.
Re: CR Diversification   [#permalink] 23 May 2008, 16:53

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