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Chapter 08 Corporate Strategy: Diversification and the Multibusiness Company Answer Key

Multiple Choice Questions

1. Diversification into new industries deserves strong consideration when a

A. single-business company can achieve profitable growth opportunities in its present industry.B. single-business company needs to develop a corporate-wide strategy.C. single-business company needs to develop a multi-line strategy.D. single-business company encounters diminishing market opportunities and stagnating sales in its

principal business.E. multiple-business company encounters enhanced market opportunities and increasing sales in its

principal business.As long as a single-business company can achieve profitable growth opportunities in its present industry, there is no urgency to pursue diversification. However, a company's opportunities for growth can become limited if the industry becomes competitively unattractive. Thus, diversifying into new industries always merits strong consideration whenever a single-business company encounters diminishing market opportunities and stagnating sales in its principal business.

AACSB: Analytical Thinking

Accessibility: Keyboard NavigationBlooms: Understand

Difficulty: 1 EasyLearning Objective: 08-01 When and how business diversification can enhance shareholder value.

Topic: Diversification

2. Diversification into a new industry cannot be considered a success unless it results in

A. easing the means of entry.B. boosting performance of the existing business.C. lowered cost of

entry.D. enhanced industry attractiveness.E. enhanced shareholder value.Crafting a diversified company's overall corporate strategy is aimed at creating enhanced shareholder value, that is, value that shareholders could not capture on their own by spreading their investments across the stocks of companies in different industries.





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3. Diversification ought to be considered when a

A. company is under pressure to create a more attractive and cost-efficient value chain.

B. company begins to encounter diminishing growth prospects in its mainstay business.C. company's profits are being squeezed and it needs to increase its net profit margins and return on

investment.D. company lacks sustainable competitive advantage in its present business.E. company has run out of ways to achieve a distinctive competence in its present business.Diversifying into new industries always merits strong consideration whenever a single-business company encounters diminishing market opportunities and stagnating sales in its principal business.


Accessibility: Keyboard NavigationBlooms: UnderstandDifficulty: 2 Medium

Learning Objective: 08-01 When and how business diversification can enhance shareholder value.Topic: Diversification

4. Diversifying into new businesses can be considered a success only if it

A. results in increased profit margins and bigger total profits.B. builds shareholder

value.C. helps a company escape the rigors of competition in its present business.D. leads to the development of a greater variety of distinctive competencies and competitive

capabilities.E. helps the company overcome the barriers to entering additional foreign markets.Diversification cannot be considered a success unless it results in added shareholder value—value that shareholders cannot capture on their own by spreading their investments across the stocks of companies in different industries.







5. It becomes particularly urgent for a company to consider diversification when there are

A. opportunities to leverage existing competencies and capabilities by expanding into businesses where these same resources are key success factors and valuable competitive assets.

B. diminishing market opportunities and stagnating sales in its principal business.C. opportunities to lower costs by entering closely related businesses.D. opportunities to transfer a powerful and well-respected brand name to the products of other

businesses and thereby increase the sales and profits of these newly entered businesses.E. needs to avoid putting all of its "eggs" in one industry basket.Diversifying into new industries always merits strong consideration whenever a single-business company encounters diminishing market opportunities and stagnating sales in its principal business.




6. To create value for shareholders via diversification, a company must

A. get into new businesses that are profitable.B. diversify into industries that are growing rapidly.C. spread its business risk across various industries by only acquiring firms that are strong competitors

in their respective industries.D. diversify into businesses that can perform better under a single corporate umbrella than they could

perform operating as independent, stand-alone businesses.E. diversify into businesses that have either key success factors or value chains that are similar to its

present businesses.Diversification cannot be considered a success unless it results in added shareholder value—value that shareholders cannot capture on their own by spreading their investments across the stocks of companies in different industries.






7. In terms of strategy making, what is the difference between a one-business company and a diversified company?

A. The first uses a business-level strategy, while the second uses a set of business strategies and a corporate strategy.

B. The first uses a business-level strategy, while the second uses a corporate-wide strategy.C. The first uses an operating strategy, while the second uses a business-line strategy.D. The first uses a functional strategy, while the second uses a business-line strategy.E. The first uses a single-line strategy, while the second uses a multi-line strategy.In a one-business company, managers have to come up with a plan for competing successfully in only a single industry environment—labeled as business strategy (or business-level strategy). But in a diversified company, the strategy-making challenge involves developing a set of business strategies, one for each industry arena in which the diversified company operates and a companywide (or corporate) strategy for improving the performance of the company's overall business lineup.





8. The task of crafting a company's overall corporate strategy for a diversified company encompasses all of the following EXCEPT

A. picking the new industries to enter and deciding on the means of entry.B. initiating actions to boost the combined performance of the corporation's collection of businesses.C. pursuing opportunities to leverage cross-business value chain relationships and strategic fit into

competitive advantage.D. establishing investment priorities and steering corporate resources into the most attractive business

units.E. divesting well-performing businesses.Strategic options for improving the corporation's overall performance include retrenching to a narrower scope of diversification by divesting poorly performing businesses, not well-performing businesses.


Accessibility: Keyboard NavigationBlooms: Remember





9. Which of the following is NOT one of the elements of crafting corporate strategy for a diversified company?

A. picking new industries to enter and deciding on the means of entryB. choosing the appropriate value chain for each business the company has

enteredC. pursuing opportunities to leverage cross-business value chain relationships and strategic fit into

competitive advantageD. establishing investment priorities and steering corporate resources into the most attractive business

unitsE. initiating actions to boost the combined performance of the businesses the firm has enteredChoosing the appropriate value chain for each business the company has entered is not one of the elements of crafting corporate strategy for a diversified company.





10. The decision to pursue diversification requires management to resolve which industries to enter and whether to enter, and includes such decisions as the following, EXCEPT

A. selecting the appropriate value chain operating practices to improve the financial outlook.B. starting a business from the ground up.C. acquiring a company already established in the target industry.D. forming a joint venture or partnership with another company.E. structuring a strategic alliance with another company to take advantage of the opportunity.The decision to pursue business diversification requires that management decide which new industries to enter and whether to enter by starting a new business from the ground up, acquiring a company already in the target industry, or forming a joint venture or strategic alliance with another company.







11. To take advantage of cross-business value chain relationships and strategic fit and turn them into a competitive advantage requires that companies determine whether there are opportunities to strengthen the business, which includes such tasks as all of the following, EXCEPT

A. the transferring of valuable resources and capabilities from one business to another.B. combining related value chain activities of different businesses to achieve lower

costs.C. forcing cultural independence, operating diversity, and sophisticated analytical responsibility on the

businesses to ensure compatibility with the corporate overhead identity.D. sharing the use of powerful and well-respected brand names across multiple businesses.E. encouraging knowledge-sharing and collaborative activity among the businesses.Forcing cultural independence, operating diversity, and sophisticated analytical responsibility on the businesses are not tasks for leveraging cross-business value chain relationships into competitive advantage.




Topic: Competitive Advantage

12. Establishing investment priorities and steering corporate resources into the most attractive business units typically requires the company to decide on all of the following options, EXCEPT

A. the pursuit of rapid growth strategies in its most promising businesses.B. initiating profit improvement or turnaround strategies in weak-performing businesses with potential.C. the divestiture of unattractive businesses.D. the pursuit of debt reduction opportunities that can lower the debt/equity ratio while maintaining

asset levels.E. the divestiture of businesses that do not fit into the company's longer term plans.The pursuit of debt reduction opportunities that can lower the debt/equity ratio while maintaining asset levels is not one of the rapid growth strategies for a company.







13. Initiating actions to boost the combined performance of the corporation's collection of businesses includes all of the following strategic options, EXCEPT

A. sticking closely with the existing business lineup and pursuing available opportunities.B. broadening the scope of diversification by entering additional industries.C. divesting some businesses and retrenching to a narrower collection of businesses.D. restructuring the entire company by adding and removing businesses to improve overall

performance.E. refocusing the existing businesses on new substitute product-line opportunities outside the existing

industry framework.Initiating actions to boost the combined performance of the corporation's collection of businesses does not include the option of refocusing the existing businesses on new substitute product-line opportunities outside the existing industry framework.





14. Diversification becomes a relevant strategic option for a company EXCEPT when it

A. spots opportunities to expand into industries whose technologies and products complement its present business.

B. leverages existing resources and capabilities by expanding into industries where these same resource strengths are key success factors and valuable competitive assets.

C. has a powerful and well-known brand name that can be transferred to the products of other businesses and thereby used as a lever for driving up the sales and profits of such businesses.

D. can open up new avenues for reducing costs by diversifying into closely related businesses.E. expands into additional businesses that unlock possibilities for a comprehensive cost enhancement

strategy.Expanding into additional businesses that unlock possibilities for a comprehensive cost enhancement strategy is not a relevant strategic option for a company for diversification.







15. The three tests for judging whether a particular diversification move can create value for shareholders are the

A. attractiveness test, the profitability test, and the shareholder value test.B. strategic fit test, the competitive advantage test, and the return-on-investment test.C. resource fit test, the profitability test, and the shareholder value test.D. attractiveness test, the cost of entry test, and the better-off

test.E. shareholder value test, the cost of entry test, and the profitability test.To build shareholder value, any business diversification strategy should pass the three Tests of Corporate Advantage: the industry attractiveness test, the cost of entry test, and the better-off test.



Difficulty: 2 MediumLearning Objective: 08-01 When and how business diversification can enhance shareholder value.


16. To test whether a particular diversification move has good prospects for creating added shareholder value, corporate strategists should use

A. profit test, the competitive strength test, the industry attractiveness test, and the capital gains test.B. better-off test, the competitive advantage test, the profit expectations test, and the shareholder value

test.C. barrier-to-entry test, the competitive advantage test, the growth test, and the stock price effect

test.D. strategic fit test, the industry attractiveness test, the growth test, the dividend effect test, and the

capital gains test.E. attractiveness test, the cost of entry test, and the better-off

test.To build shareholder value, any business diversification strategy should pass the three Tests of Corporate Advantage: the industry attractiveness test, the cost of entry test, and the better-off test.







17. The better-off test for evaluating whether a particular diversification move is likely to generate added value for shareholders involves assessing whether the move will

A. make the company better off because it will produce a greater number of core competencies.B. make the company better off by improving its balance sheet strength and credit rating.C. make the company better off by spreading shareholder risks across a greater number of businesses

and industries.D. produce a synergistic outcome such that the company's different businesses perform better together

than apart and the whole ends up being greater than the sum of the parts.E. help each business earn exactly what they were earning before coming under the same corporate

umbrella.Diversification does not result in added long-term value for shareholders unless it produces a 1 plus 1 equal to 3 effect, whereby the businesses perform better together as part of the same firm than they could have performed as independent companies.




18. A company can best accomplish diversification into new industries by

A. outsourcing most of the value chain activities that have to be performed in the target business/industry.

B. acquiring a company already operating in the target industry, creating a new business from scratch, or forming a joint venture with one or more companies to enter the target industry.

C. integrating forward or backward into the target industry.D. shifting from a strategic group comprised mostly of single-business companies to a strategic group

comprised of diversified companies.E. employing an offensive strategy with new product innovation as its centerpiece.A company can achieve diversification by acquiring an existing company, starting up a new business from scratch, or forming a joint venture with one or more companies to enter new businesses. In every case, however, the decision to diversify must start with a strong economic justification for doing so.







19. Apple's $3 billion acquisition of Beats Electronics and Beats Music in 2014 was an attractive strategy option for entering promising new industries in headphones and streaming music services because it

A. was an effective way to hurdle entry barriers, is usually quicker than trying to launch a brand-new startup operation, and allows the acquirer to move directly to the task of building a strong position in the target industry.

B. was less expensive than launching a new startup operation, thus passing the cost of entry test.C. offered a challenging opportunity to train new resources and revive a sagging business even if does

not offer great prospects for growth, profitability, or return on investment.D. was more likely to result in passing the shareholder value test, the profitability test, and the better-

off test.E. offered the prospect of gaining an immediate competitive advantage in the new industry and thus

helps ensure that the diversification move will pass the competitive advantage test for building shareholder value.

Acquisition of an existing business offers an effective way to hurdle such entry barriers as acquiring technological know-how, establishing supplier relationships, achieving scale economies, building brand awareness, and securing adequate distribution. However, the industry to be entered through diversification must be structurally attractive, have resource requirements that match those of the parent company, and offer good prospects for growth, profitability, and return on investment.





20. An acquisition premium is the amount by which the price offered for an existing business exceeds the

A. fair market value of similar companies in the same geographic locale.B. preacquisition market value of the target company.C. comparable value of similar companies within the same

market.D. amount paid as a down payment to be held in escrow until closing.E. difference between the amount that was offered and the amount that is escrowed.An acquisition premium, or control premium, is the amount by which the price offered exceeds the preacquisition market value of the target company.







21. What is the name of the process for developing new businesses as an outgrowth of a company's established business operations?

A. corporate venturingB. value chain integrationC. resource capability

processD. diversification activity capabilitiesE. business launchCorporate venturing (or new venture development) is the process of developing new businesses as an outgrowth of a company's established business operations. It is also referred to as corporate entrepreneurship or intrapreneurship since it requires entrepreneurial like qualities within a larger enterprise.





22. Which of the following is NOT a factor that makes it appealing to diversify into a new industry by forming an internal startup subsidiary to enter and compete in the target industry?

A. when internal entry is cheaper than entry via acquisitionB. when a company possesses the skills and resources to overcome entry barriers and there is ample

time to launch the business and compete effectivelyC. when adding new production capacity will not adversely impact the supply demand balance in the

industry by creating oversupply conditionsD. when the industry is growing rapidly and the target industry is comprised of several relatively large

and well-established firmsE. when incumbent firms are likely to be slow or ineffective in combating a new entrant's efforts to

crack the marketIf the target industry is already comprised of several relatively large and well-established firms, it will not be appealing for a company to form an internal startup and enter and compete in the same industry.






23. The big dilemma an acquisition-minded firm faces is whether to

A. focus on building brand awareness or establishing supplier relationships.B. pay a premium price for a successful company or buy a struggling company at a bargain

price.C. strive for scale economies or to acquire technical know-how to customize production.D. focus on building brand awareness or striving for scale economies.E. focus on acquiring technical know-how or outsourcing production.Acquisition offers an effective way to hurdle such entry barriers as acquiring technological know-how, establishing supplier relationships, achieving scale economies, building brand awareness, and securing adequate distribution. The big dilemma an acquisition-minded firm faces is whether to pay a premium price for a successful company or to buy a struggling company at a bargain price.




24. The transaction costs of completing a business agreement or deal of some sort, over and above the price of the deal, can include all of the following EXCEPT

A. the costs of searching for an attractive target.B. the costs of evaluating its worth.C. bargaining costs.D. the costs of completing the transaction.E. the premium cost.Transaction costs are the costs of completing a business agreement or deal, over and above the price of the deal. They can include the costs of searching for an attractive target, the costs of evaluating its worth, bargaining costs, and the costs of completing the transaction, but not the premium cost. This is because the price of the deal includes the acquisition premium cost over the share price of the target company.



Learning Objective: 08-01 When and how business diversification can enhance shareholder value.Topic: Competitive Advantage



25. The essential requirement for different businesses to be "related" is that

A. their value chains exhibit competitively valuable cross-business commonalities.B. the products of the different businesses are bought by many of the same types of

buyers.C. the products of the different businesses are sold in the same types of retail

stores.D. the businesses have several key suppliers in common.E. the production methods they employ both entail economies of scale.Businesses are said to be related when their value chains exhibit competitively important cross-business commonalities.

AACSB: Reflective Thinking


Learning Objective: 08-02 How related diversification strategies can produce cross-business strategic fit capable of delivering competitive advantage.

Topic: Concentric Diversification

26. Unrelated businesses

A. sell products from the different businesses to much the same types of buyers and retail outlets.B. have dissimilar value chains and resource requirements with no competitively important cross-

business commonalities at the value chain level.C. perform better than just the sum of the individual businesses.D. will always have several key suppliers in common.E. employ production methods that create economies of

scale.Unrelated businesses have dissimilar value chains and resource requirements, with no competitively important cross-business commonalities at the value chain level.







27. A related diversification strategy involves building the company around businesses

A. with strategic fit with respect to key value chain activities and competitive assets.B. that are highly independent, proficient, and efficient operating firms.C. with strategic fit across separate value chain activities that drive each business.D. that can also include unrelated businesses with dissimilar resource requirements.E. that have dissimilar value chain activities with no cross-business commonalities.A related diversification strategy involves building the company around businesses where there is good strategic fit across corresponding value chain activities. Strategic fit exists whenever one or more activities constituting the value chains of different businesses are sufficiently similar to present opportunities for cross-business sharing or transferring of the resources and capabilities that enable these activities.



Difficulty: 1 EasyLearning Objective: 08-02 How related diversification strategies can produce cross-business strategic fit capable of delivering competitive

advantage.Topic: Concentric Diversification

28. Which of the following is NOT one of the appeals of related diversification?

A. It can offer opportunities for transferring expertise, technology, and other capabilities from one business to another.

B. It can offer opportunities for reducing costs on advertising by leveraging use of a competitively powerful brand name.

C. It is particularly well-suited for the use of first-mover strategies and capturing valuable financial fits.D. It may present opportunities for cross-business collaboration to create valuable new competencies

and capabilities.E. It can facilitate sharing of other resources (besides brands) that support corresponding value chain

activities across businesses.Related diversification is based on value chain matchups with respect to key value chain activities—those that play a central role in each business's strategy and that link to its industry's key success factors. Such matchups facilitate the sharing or transfer of the resources and capabilities that enable the performance of these activities and underlie each business's quest for competitive advantage. By facilitating the sharing or transferring of such important competitive assets, related diversification can elevate each business's prospects for competitive success.







29. Strategic fit between two or more businesses exists when one or more activities comprising their respective value chains present opportunities

A. to prevent the transfer of expertise or technology or capabilities from one business to another.B. to independently preserve common brand names from cross-business usage.C. to increase costs by combining the performance of the related value chain activities of different

businesses.D. for cross-business collaboration to build valuable new resource strengths and competitive

capabilities.E. to maintain business value chain activities separate and apart from one business to another to protect

company independence.A related diversification strategy involves building the company around businesses where there is good strategic fit across corresponding value chain activities. Strategic fit exists whenever one or more activities constituting the value chains of different businesses are sufficiently similar to present opportunities for cross-business sharing or transferring of the resources and capabilities that enable these activities.





30. One strategic fit based approach to related diversification would be to

A. diversify into new industries that present opportunities to transfer specialized expertise, technological know-how, or other valuable resources and capabilities from one business's value chain to another's.

B. diversify into foreign markets where the firm has unrelated businesses.C. acquire rival firms that have broader product lines so as to give the company access to a wider range

of buyer groups.D. acquire companies in forward distribution channels (wholesalers and/or

retailers).E. expand into foreign markets where the firm currently does no business.Transferring specialized expertise, technological know-how, or other competitively valuable strategic assets from one business's value chain to another's is a sound diversification strategy with a good strategic fit.







31. Which of the prime examples of strategic fit opportunities below are NOT related business activities?

A. transferring specialized expertise, technological know-how, or other valuable resources and capabilities from one business's value chain to another's

B. cost sharing between businesses by combining their related value chain activities into a single operation

C. overhauling and streamlining the operations of the business by refocusing value chain activities toward businesses that can provide a superior job of parenting

D. exploiting common use of a well-known brand nameE. sharing other resources (besides brands) that support corresponding value chain activities across

businessesTransferring specialized expertise, technological know-how, or other valuable resources and capabilities from one business's value chain to another's, cost sharing between businesses by combining their related value chain activities into a single operation, exploiting common use of a well-known brand name, and sharing other resources (besides brands) that support corresponding value chain activities across businesses are all good examples of strategic fit opportunities.





32. Businesses with strategic fit with respect to their supply chain activities perform better together because of all of the following EXCEPT the

A. potential for skills transfer in procuring materials.B. sharing of resources and capabilities in logistics.C. benefits of added collaboration with common supply chain partners.D. added leverage gained with shippers when securing volume discounts on incoming parts and

components.E. increased allocation and allotment of support activities and specialized resources and capabilities.Businesses with strategic fit with respect to their supply chain activities can perform better together because of the potential for transferring skills in procuring materials, sharing resources and capabilities in logistics, collaborating with common supply chain partners, and/or increasing leverage with shippers in securing volume discounts on incoming parts and components.







33. Which of the following is NOT a contributing reason for businesses with strategic fit in R&D or technology activities to perform better together?

A. the ability to continue using existing processesB. cost savings in research and development areasC. shorter times in getting new products to marketD. increased sales in both the parent company and the diversified

businessesE. a greater number of innovative products or

processesBusinesses with strategic fit in R&D or technology development perform better together than apart because of potential cost savings in R&D, shorter times in getting new products to market, and more innovative products or processes. Moreover, technological advances in one business can lead to increased sales for both. Technological innovations have been the key driver behind the success of several diversified businesses, while businesses using outdated processes or technologies tend to lag behind or even fail.





34. What is the difference between economies of scale and economies of scope?

A. Scale refers to the magnitude or size of the operation, while scope refers to the reach of defined savings within the value chain.

B. Scale refers to the extent of change, while scope refers to the possibilities of change.C. Scale is about dimensions, while scope is about the capacity available for production capabilities.D. Scale refers to cost savings that accrue directly from larger-sized operations, while scope stems

directly from strategic fit along the value chains of related businesses.E. Scale and scope mean the same thing and the only difference is the extent of cost savings accrued

from unrelated businesses in each.Economies of scale are cost savings that accrue directly from a larger-sized operation—for example, unit costs may be lower in a large plant than in a small plant. Economies of scope, however, stem directly from strategic fit along the value chains of related businesses, which in turn enables the businesses to share resources or to transfer them from business to business at low cost.







35. Which of the following statements about cross-business strategic fit in a diversified enterprise is NOT accurate?

A. Strategic fit between two businesses exists when the management know-how accumulated in one business is transferable to the other.

B. Strategic fit exists when two businesses present opportunities to economize on marketing, selling, and distribution costs.

C. Competitively valuable cross-business strategic fits are what enable related diversification to produce a synergistic performance outcome.

D. Strategic fit is primarily a by-product of unrelated diversification and exists when the value chain activities of unrelated businesses possess economies of scope and good financial fit.

E. Strategic fit exists when a company can transfer its brand-name reputation to the products of a newly acquired business and add to the competitive power of the new business.

Related diversification is an opportunity to convert cross-business strategic fit into a competitive advantage via (1) transferring skills or knowledge, (2) combining related value chain activities to achieve lower costs, (3) leveraging the use of a well-respected brand name, (4) sharing other valuable resources, and (5) using cross-business collaboration and knowledge sharing to create new resources and capabilities and drive innovation.





36. What makes related diversification an attractive strategy?

A. the ability to broaden the company's product lineB. the opportunity to convert cross-business strategic fit into competitive advantage over business

rivals whose operations don't offer comparable strategic fit benefitsC. the potential for improving the stability of the company's financial performanceD. the ability to serve a broader spectrum of buyer needsE. the added capability it provides in overcoming the barriers to entering foreign marketsWhat makes related diversification an attractive strategy is the opportunity to convert cross-business strategic fit into a competitive advantage over business rivals whose operations do not offer comparable strategic-fit benefits.







37. Economies of scope

A. are cost reductions that flow from operating in multiple related businesses.B. arise only from strategic fit relationships in the production portions of the value chains of sister

businesses.C. are more associated with unrelated diversification than related diversification.D. are present whenever diversification satisfies the attractiveness test and the cost of entry

test.E. arise mainly from strategic fit relationships in the distribution portions of the value chains of

unrelated businesses.Economies of scope stem directly from strategic fit along the value chains of related businesses, which in turn enables the businesses to share resources or to transfer them from business to business at low cost.





38. When discussing "economies of scope," it involves understanding that they

A. stem from the cost-saving efficiencies of operating over a wider geographic area.B. have to do with the cost-saving efficiencies of distributing a firm's product through many different

distribution channels simultaneously.C. stem from cost-saving strategic fits along the value chains of related businesses.D. refer to the cost savings that flow from operating across all or most of an industry's value chain

activities.E. arise from the cost-saving efficiencies of having a wide product line and offering customers a big

selection of models and styles to choose from.Economies of scope stem directly from strategic fit along the value chains of related businesses, which in turn enables the businesses to share resources or to transfer them from business to business at low cost.







39. An economy of scope is BEST illustrated by being able to eliminate or reduce costs by

A. combining related value-chain activities of different businesses into a single operation.B. performing all of the value chain activities of related sister businesses at the same location.C. extending the firm's scope of operations over a wider geographic

area.D. expanding the size of a company's manufacturing plants.E. having more value chain activities performed in-house rather than outsourcing them.Economies of scope stem directly from strategic fit along the value chains of related businesses, which in turn enables the businesses to share resources or to transfer them from business to business at low cost.





40. A big advantage of related diversification is that it

A. offers ways for a firm to realize 1 + 1 = 3 benefits because the value chains of the different businesses present competitively valuable cross-business relationships.

B. is less capital intensive and usually more profitable than unrelated diversification.C. involves diversifying into industries having the same kinds of key success factors.D. is less risky than either vertical integration or unrelated diversification due to lower capital

requirements.E. passes the industry attractiveness test and thus offers the best route to 2 + 2 = 4 benefits.The competitive advantage potential that flows from the capture of strategic fit benefits is what enables a company pursuing related diversification to achieve 1 + 1 = 3 financial performance and the hoped-for gains in shareholder value.







41. The basic premise of unrelated diversification is that

A. the least risky way to diversify is to seek out businesses that are leaders in their respective industry.B. the best companies to acquire are those that offer the greatest economies of scope rather than the

greatest economies of scale.C. the best way to build shareholder value is to acquire businesses with strong cross-business financial

fit.D. any company that can be acquired on good financial terms and that has satisfactory growth and

earnings potential represents a good acquisition and a good business opportunity.E. the task of building shareholder value is better served by seeking to stabilize earnings across the

entire business cycle than by seeking to capture cross-business strategic fits.With a strategy of unrelated diversification, an acquisition is deemed to have potential if it passes the industry-attractiveness and cost of entry tests and if it has good prospects for attractive financial performance.



Learning Objective: 08-03 The merits and risks of unrelated diversification strategies.Topic: Concentric Diversification

42. With a strategy of unrelated diversification, an acquisition is deemed to have potential if it

A. can achieve at least existing profit margins into the near future.B. has the opportunity to generate positive buzz in the industry, even if it may not be able to contribute

to the parent firm's bottom line.C. can pass the industry attractiveness test and the cost of entry test, and if it has good prospects for

profit growth.D. can pass at least the industry attractiveness test if not the cost of entry test.E. can add economic value for managers.With a strategy of unrelated diversification, an acquisition is deemed to have potential if it passes the industry-attractiveness and cost of entry tests and if it has good prospects for attractive financial performance.



Difficulty: 1 EasyLearning Objective: 08-03 The merits and risks of unrelated diversification strategies.




43. Corporate parenting refers to all of the following EXCEPT

A. the role that a diversified corporation plays in nurturing its component businesses through the provision of top management expertise, disciplined control, financial resources, and capabilities.

B. the help subsidiaries receive in performing better when they utilize astute high-level guidance from corporate executives.

C. the corporation's ability to provide generalized support resources so as to create value by lowering companywide overhead costs by eliminating duplication of efforts.

D. efforts to capitalize on the umbrella brands and enhance value proposition across businesses.

E. efforts to judiciously segregate funds for each business in such a way that keeps the money safe and discourages shifting funds across business units.

Corporate parenting refers to the role that a diversified corporation plays in nurturing its component businesses through the provision of top management expertise, disciplined control, financial resources, and other types of general resources and capabilities such as long-term planning systems, business development skills, management development processes, incentive systems, umbrella brands, and an internal capital market capability to allow judicious cross-business allocation of financial resources.



Difficulty: 2 MediumLearning Objective: 08-03 The merits and risks of unrelated diversification strategies.


44. An umbrella brand

A. is a generalized resource that can be leveraged in unrelated diversification.

B. is a brand name that can steer a narrow assortment of business types.

C. represents a public disclosure spotlighting the corporate image.D. represents an overall corporate marker covering its overriding image of sustainability and

responsibility.E. is a specialized resource designed to influence profit growth.An umbrella brand is a corporate brand name that can be applied to a wide assortment of business types. As such, it is a type of general resource that can be leveraged in unrelated diversification.



Difficulty: 1 EasyLearning Objective: 08-03 The merits and risks of unrelated diversification strategies.




45. A diversified company has a parenting advantage when it

A. is more able than other companies to boost the combined performance of its individual businesses through its high-level guidance, general oversight, and other corporate-level contributions.

B. is more able than other companies to create positive collaboration within its portfolio for different specialty groups and geographic locations.

C. results in supporting short-term economic shareholder value.

D. manages a set of fundamentally similar business operations inside fundamentally similar industries and environments.

E. avoids acquiring undervalued companies and thus reduces risks.Corporate parenting refers to the role that a diversified corporation plays in nurturing its component businesses through the provision of top management expertise, disciplined control, financial resources, and other types of general resources and capabilities such as long-term planning systems, business development skills, management development processes, incentive systems, umbrella brands, and an internal capital market capability to allow judicious cross-business allocation of financial resources.




46. With an unrelated diversification strategy, the types of companies that make particularly attractive acquisition targets are

A. struggling companies with good turnaround potential, undervalued companies that can be acquired at a bargain price, and companies that have bright growth prospects but are short on investment capital.

B. companies offering the biggest potential to reduce labor costs.C. cash cow businesses with excellent financial fit.D. companies that are market leaders in their respective industries.E. companies that employ the same basic type of competitive strategy as the parent corporation's

existing businesses.Struggling companies with good turnaround potential, undervalued companies that can be acquired at a bargain price, and companies with bright growth prospects but short on investment capital are all attractive acquisition targets for a company with an unrelated diversification strategy.






47. The two biggest drawbacks or disadvantages of unrelated diversification are

A. the difficulties of passing the cost of entry test and the ease with which top managers can make the mistake of diversifying into businesses where competition is too intense.

B. the difficulties of capturing financial fit and having insufficient financial resources to spread business risk across many different lines of business.

C. the demanding managerial requirements and the limited competitive advantage potential due to lack of cross-business strategic fit benefits.

D. ending up with too many cash hog businesses and too much diversity among the competitive strategies of the businesses it has diversified into.

E. the difficulties of achieving economies of scope and conflicts/incompatibility among the competitive strategies of the company's different businesses.

Besides demanding managerial requirements, unrelated diversification offers only a limited potential for competitive advantage beyond what each individual business can generate on its own. Unlike a related diversification strategy, unrelated diversification provides no cross-business strategic fit benefits that allow each business to perform its key value chain activities in a more efficient and effective manner.




48. For an unrelated diversification strategy to produce financial results above that of stand-alone entities, executives must do all of the following EXCEPT

A. diversify into businesses that can produce consistently good earnings and returns on investment and thereby satisfy the attractiveness test.

B. negotiate favorable acquisition prices (to satisfy the cost of entry test).C. do a superior job of corporate parenting via high-level managerial oversight and resource sharing,

financial resource allocation and portfolio management, or restructuring underperforming businesses (to satisfy the better-off test).

D. satisfy the attractiveness test, the cost of entry test, and the better-off test.E. leverage the cross-business strategic fit advantage

effectively.Given the absence of cross-business strategic fit with which to create competitive advantages, an unrelated diversification strategy ultimately hinges on the ability of the parent company to improve its businesses (and make the combination better off) via other means.






49. The two biggest drawbacks or disadvantages of unrelated diversification are

A. underemphasizing the importance of resource fit and the strong likelihood of diversifying into businesses that top management does not know all that much about.

B. insufficient cash flows to finance so many different lines of business and a lack of uniformity among the strategies of the businesses it has diversified into.

C. volatile sales and profits and making the mistake of diversifying into too many cash cow businesses.D. the difficulties of competently managing many different businesses and being without the added

source of competitive advantage that cross-business strategic fit provides.E. over-investing in the achievement of economies of scope and the difficulties of achieving a good

mix of cash cow and cash hog businesses.Besides demanding managerial requirements, unrelated diversification offers only a limited potential for competitive advantage beyond what each individual business can generate on its own. Unlike a related diversification strategy, unrelated diversification provides no cross-business strategic fit benefits that allow each business to perform its key value chain activities in a more efficient and effective manner.




50. Which of the following rationales for pursuing unrelated diversification is likely to increase shareholder value?

A. to reduce risk by way of spreading the company's investments over a set of truly diverse industriesB. to enable a company to achieve rapid or continuous growthC. to chance that market downtrends in some of the company's businesses will be partially offset by

cyclical upswings in its other businessesD. to provide benefits to managers such as high compensation and reduced unemployment riskE. to restructure an underperforming businessRisk reduction, rapid growth, stabilization of earnings, and managerial motives are misguided reasons for pursuing unrelated diversification to increase shareholder value.






51. Two important negatives of unrelated diversification are

A. underemphasizing the importance of resource fit and the strong likelihood of diversifying into businesses that top management does NOT know all that much about.

B. insufficient cash flows to finance so many different lines of business and a lack of uniformity among the strategies of the businesses it has diversified into.

C. volatile sales and profits and making the mistake of diversifying into too many cash cow businesses.D. the difficulties of competently managing a set of fundamentally different businesses and having a

very limited competitive advantage potential that cross-business strategic fit provides.E. overinvesting in the achievement of economies of scope and the difficulties of achieving a good mix

of cash cow and cash hog businesses.Unrelated diversification strategies have two important negatives that undercut the pluses: very demanding managerial requirements and limited competitive advantage potential due to the absence of cross-business strategic fit.




52. The one factor that company executives need not worry about when their company is managing many diverse, unrelated firms is to

A. stay abreast of what's happening in each industry and subsidiary.B. pick business-unit heads having the requisite combination of managerial skills and know-how to

motivate people.C. understand the true value of strategic investment proposals by business-unit managers.D. know what to do if a business unit stumbles.E. "manage by the numbers"—that is, keep a close track on the financial and operating results of each

subsidiary.The greater the number of businesses a company is operating in and the more diverse those businesses are, the more difficult it is for corporate managers to: (1) stay abreast of what's happening in each industry and each subsidiary; (2) pick business-unit heads having the requisite combination of managerial skills and know-how to drive gains in performance; (3) tell the difference between those strategic proposals of business-unit managers that are prudent and those that are risky or unlikely to succeed; (4) know what to do if a business unit stumbles and its results suddenly head downhill; and (5) "manage by the numbers"—that is, keep a close track on the financial and operating results of each subsidiary and assume that the heads of the various subsidiaries have most everything under control so long as the latest key financial and operating measures look good.



Difficulty: 3 HardLearning Objective: 08-03 The merits and risks of unrelated diversification strategies.




53. Which of the following is NOT an erroneous rationale for unrelated diversification?

A. risk reduction by spreading the company's investments over a set of diverse industriesB. expectations for rapid or continuous growthC. stabilize earnings, i.e. market downtrends in some of the company's businesses will be partially

offset by cyclical upswings in its other businessesD. managerial motives including the prospects for higher compensationE. growth by acquisition of an undervalued company at a bargain price can deliver enhanced

shareholder valueManagement sometimes undertakes a strategy of unrelated diversification for the wrong reasons: (1) risk reduction by spreading the company's investments over a set of diverse industries; (2) expectations for rapid or continuous growth; (3) earnings stabilization, i.e. market downtrends in some of the company's businesses will be partially offset by cyclical upswings in its other businesses; (4) managerial motives including the prospects for higher compensation—diversification for this reason alone is far more likely to reduce shareholder value than to increase it. The premise of acquisition-minded corporations is that growth by acquisition can deliver enhanced shareholder value through upward-trending corporate revenues and earnings and a stock price that on average rises enough year after year to amply reward and please shareholders. Three types of acquisition candidates are usually of particular interest: (1) businesses that have bright growth prospects but are short on investment capital, (2) undervalued companies that can be acquired at a bargain price, and (3) struggling companies whose operations can be turned around with the aid of the parent company's financial resources and managerial know-how.





54. Which of the following is a diversified business with one major "core" business and a collection of small related or unrelated businesses?

A. broadly diversified enterpriseB. narrowly diversified enterpriseC. multibusiness enterpriseD. high-compensation/low-risk enterpriseE. dominant business enterpriseSome diversified companies are really dominant-business enterprises. That is, one major "core" business accounts for 50 to 80 percent of total revenues and a collection of small related or unrelated businesses accounts for the remainder.







55. Which of the following is a diversified business with one major "core" business and a collection of small related or unrelated businesses?

A. a broadly diversified enterpriseB. a narrowly diversified enterpriseC. a multi-business enterpriseD. a high compensation/low risk enterpriseE. a dominant business enterpriseA dominant-business enterprise has one major "core" business that accounts for 50 to 80 percent of total revenues and a collection of small related or unrelated businesses that account for the remainder.



Learning Objective: 08-04 The analytic tools for evaluating a company's diversification strategy.Topic: Concentric Diversification

56. There is ample room for companies to customize their diversification strategies and be defined as being either narrowly or broadly diversified, and when combination related-unrelated diversification strategy options are adopted, they have particular appeal to

A. those companies with a mix of valuable competitive assets, covering the spectrum from generalized to specialized resources and capabilities.

B. those large multibusiness firms, sometimes called conglomerates, because they have a unique capability designed to stabilize earnings.

C. companies with a portfolio of product choices for buyer-related behavior.D. corporate managers who take on risks without performing due diligence.E. corporate managers who want to play the corporate parent role without fiduciary responsibility.Combination related-unrelated diversification strategies have particular appeal for companies with a mix of valuable competitive assets, covering the spectrum from general to specialized resources and capabilities.



Learning Objective: 08-04 The analytic tools for evaluating a company's diversification strategy.Topic: Concentric Diversification



57. Which one of the following is NOT an important aspect of evaluating the merits of a diversified company's strategy?

A. assessing the competitive strength of each business the company has diversified intoB. determining which business units are cash cows and which ones are cash hogs, and then evaluating

how soon the company's cash hogs can be transformed into cash cowsC. evaluating the strategic fits and resource fits among the various sister businessesD. assessing the attractiveness of the industries the company has diversified into, both individually and

as a groupE. ranking the performance prospects of the businesses from best to worst and deciding what priority to

give each of the company's business units in allocating resourcesEvaluating industry attractiveness, evaluating business unit competitive strength, determining the competitive value of strategic fit in diversified companies, checking for resource fit, ranking business units and assigning a priority for resource allocation, and crafting new strategic moves to improve overall corporate performance are all important aspects for a diversified company's strategy.



Difficulty: 1 EasyLearning Objective: 08-04 The analytic tools for evaluating a company's diversification strategy.


58. As a rule, the key indicators of industry attractiveness, for all the industries represented in a diversified company's business portfolio, should NOT be measured on such attractiveness factors as

A. market size and projected growth rate.B. emerging opportunities and threats, and the intensity of competition.C. resource requirements and the presence of cross-industry strategic fits.D. seasonal and cyclical factors, industry profitability, and whether an industry has significant social,

political, regulatory, and environmental problems.E. the utility of the products for consumers from all age-groups.Market size and projected growth rate, the intensity of competition, emerging opportunities and threats, the presence of cross-industry strategic fit, resource requirements, social, political, regulatory, and environmental factors, and industry profitability are some measures for gauging industry attractiveness.



Learning Objective: 08-04 The analytic tools for evaluating a company's diversification strategy.Topic: Diversification



59. Which of the following is NOT generally something that ought to be considered in evaluating the attractiveness of a multibusiness (diversified) company's business makeup?

A. market size and projected growth rate, industry profitability, and the intensity of competitionB. industry uncertainty and business riskC. the frequency with which strategic alliances and collaborative partnerships are used in each

industry, and the extent to which firms in the industry utilize outsourcingD. resource requirements, and whether an industry has significant social, political, regulatory, and

environmental problemsE. the presence of cross-industry strategic fits and matching resource requirements to the parent

companyMarket size and projected growth rate, the intensity of competition, emerging opportunities and threats, the presence of cross-industry strategic fit, resource requirements, social, political, regulatory, and environmental factors, and industry profitability are some measures for gauging industry attractiveness.




60. Calculating quantitative attractiveness ratings for the industries a company has diversified into involves

A. determining each industry's key success factors, calculating the ability of the company to be successful on each industry KSF, and obtaining overall measures of the firm's ability to compete successfully in each of its industries based on the combined KSF ratings.

B. determining each industry's competitive advantage factors, calculating the ability of the company to be successful on each competitive advantage factor, and obtaining overall measures of the firm's ability to achieve sustainable competitive advantage in each of its industries based on the combined competitive advantage factor ratings.

C. selecting a set of industry attractiveness measures, weighting the importance of each measure, rating each industry on each attractiveness measure, multiplying the industry ratings by the assigned weight to obtain a weighted rating, adding the weighted ratings for each industry to obtain an overall industry attractiveness score, and using the overall industry attractiveness scores to interpret the attractiveness of all the industries, both individually and as a group.

D. rating the attractiveness of each industry's strategic and resource fits, summing the attractiveness scores, and determining whether the overall scores for the industries as a group are appealing or not.

E. identifying each industry's average profitability, rating the difficulty of achieving average profitability in each industry, and deciding whether the company's prospects for above-average profitability are attractive or unattractive, industry by industry.

Calculating quantitative competitive strength ratings for each of a diversified company's business units involves selecting a set of competitive strength measures, weighting the importance of each measure, rating each business on each strength measure, and multiplying the strength ratings by the assigned weight to obtain a weighted rating. The sum of the weighted ratings across all the strength measures provides a quantitative measure of a business unit's overall market strength and competitive standing.



Difficulty: 3 HardLearning Objective: 08-04 The analytic tools for evaluating a company's diversification strategy.




61. The chief purpose of calculating quantitative industry attractiveness scores for each industry a company has diversified into is to

A. determine which industry is the biggest and fastest growing.B. get in position to rank the industries from most competitive to least competitive.C. provide a basis for drawing analysis-based conclusions about the attractiveness of the industries a

company has diversified into, both individually and as a group, and further to provide an indication of which industries offer the best and worst long-term prospects.

D. ascertain which industries have the easiest-to-achieve key success factors.

E. rank the attractiveness of the various industry value chains from best to worst.Calculating quantitative industry attractiveness scores for each industry helps in ranking the performance prospects of the businesses from best to worst and determining what the corporate parent's priorities should be in allocating resources to its various businesses.




62. A weighted industry attractiveness assessment is generally analytically superior to an unweighted assessment because

A. a weighted ranking identifies which industries offer the best/worst long-term profit prospects.B. an unweighted ranking doesn't discriminate between strong and weak industry driving forces and

industry competitive forces.C. it does a more accurate job of singling out which industry key success factors are the most

important.D. an unweighted ranking doesn't help identify which industries have the easiest and hardest value

chains to execute.E. the various measures of attractiveness are not likely to be equally important in determining overall

attractiveness.Each attractiveness measure is assigned a weight reflecting its relative importance in determining an industry's attractiveness, since not all attractiveness measures are equally important.






63. When calculating the weighted industry attractiveness scores, we find the more intensely competitive an industry is

A. the lower the attractiveness weighting for that industry.B. the higher the attractiveness weighting for that industry.C. suggests the resources are beyond the parent company's

reach.D. suggests the industry attractiveness measures have been incorrectly weighted.E. the more likely the company's profit and revenues will be intensive.Industries where competitive pressures are relatively weak are more attractive than industries where competitive pressures are strong. Therefore, the more intensely competitive an industry is, the lower the attractiveness rating for that industry.





64. What hurdles are present in calculating industry attractiveness scores?

A. deciding on the appropriate weights for the attractiveness measures

B. different analysts use different weights for the different attractiveness measures

C. gaining sufficient command of the industry to assign more accurate and objective ratingsD. deciding the impact of strategic fits to unrelated and related diversificationE. deciding whether a business is related or unrelatedEach attractiveness measure is assigned a weight reflecting its relative importance in determining an industry's attractiveness, since not all attractiveness measures are equally important. Because of a degree of subjectivity involved in the measurement, it is not easy to accurately calculate industry attractiveness scores.






65. For a diversified company to be a strong performer

A. a substantial portion of its revenues and expenses must come from business units with relatively low attractiveness scores.

B. its principal business must be in industries with a good outlook for growth and above-average profitability.

C. its business units in high attractiveness score industries should be candidates for divesture.D. its business units must operate within the favorable aspects of their industry environment.E. its business units must have a popular image, even if the performance of their products does not

greatly satisfy buyer expectations.Above-average profitability on a consistent basis is a signal of competitive advantage, and therefore its principal business must be in industries with a good outlook for growth and above-average profitability.





66. Assessments of how a diversified company's subsidiaries compare in competitive strength should be based on such factors as

A. vulnerability to seasonal and cyclical downturns, vulnerability to driving forces, and vulnerability to fluctuating interest rates and exchange rates.

B. relative market share, the ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors, and the ability to benefit from strategic fits with sister businesses.

C. the appeal of its strategy, the relative number of competitive capabilities, the number of products in each business's product line, which businesses have the highest/lowest market shares, and which businesses earn the highest/lowest profits before taxes.

D. the ability to hurdle barriers to entry, value chain attractiveness, and business risk.E. cost reduction potential, customer satisfaction potential, and comparisons of annual cash flows from

operations.Relative market share, the ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors' costs, and the ability to benefit from strategic fits with other business units are some factors used in quantifying the competitive strengths of a diversified company's business subsidiaries.






67. Relative market share is

A. calculated by dividing a company's percentage share of total industry sales volume by the percentage share held by its largest rival.

B. calculated by adjusting a company's revenue share up or down by a factor proportional to whether their quality/customer service factors are above/below industry averages.

C. calculated by dividing a company's market share (based on dollar volume) by the industry-average market share.

D. particularly useful in identifying cash cows, which have big relative market shares (above 1.0), and cash hogs, which have low relative market shares (below 0.5).

E. calculated by subtracting the industry-average market share (based on revenue) from the company's market share to highlight relative share above/below the industry average. This amount is a better indicator of a business's competitive strength than is just looking at the firm's market share percentage.

A business unit's relative market share is defined as the ratio of its market share to the market share held by the largest rival firm in the industry, with market share measured in unit volume, not dollars.







68. Calculating quantitative competitive strength ratings for each of a diversified company's business units involves

A. determining each industry's key success factors, rating the ability of each business to be successful on each industry KSF, and adding the individual ratings to obtain overall measures of each business's ability to compete successfully.

B. identifying the competitive forces facing each business, rating the strength of these competitive forces industry by industry, and then ranking each business's ability to be profitable, given the strength of the competition it faces.

C. selecting a set of competitive strength measures, weighting the importance of each measure, rating each business on each strength measure, multiplying the strength ratings by the assigned weight to obtain a weighted rating, adding the weighted ratings for each business unit to obtain an overall competitive strength score, and using the overall competitive strength scores to evaluate the competitive strength of all the businesses, both individually and as a group.

D. determining which businesses possess good strategic fit with other businesses, identifying the portion of the value chain where this fit occurs, and evaluating the strength of the competitive advantage attached to each of the strategic fits to get an overall measure of competitive advantage potential. Businesses with the highest/lowest competitive advantage potential have the most/least competitive strength.

E. rating the caliber of each businesses strategic and resource fit, weighting the importance of each type of strategic/resource fit, calculating weighted strategic/resource fit scores, and adding the weighted ratings for each business to obtain an overall strength score for each business unit that indicates whether the company has adequate strategic/resource fits to be a strong market contender in each of the industries where it competes.

Calculating quantitative competitive strength ratings for each of a diversified company's business units involves selecting a set of competitive strength measures, weighting the importance of each measure, rating each business on each strength measure, and multiplying the strength ratings by the assigned weight to obtain a weighted rating. The sum of the weighted ratings across all the strength measures provides a quantitative measure of a business unit's overall market strength and competitive standing.







69. The value of determining the relative competitive strength of each business a company has diversified into is to have a quantitative basis for

A. identifying which businesses have large/small competitive advantages or competitive disadvantages vis-à-vis the rivals in their respective industries.

B. rating them from strongest to weakest in terms of contributing to the corporate parent's revenue growth.

C. comparing resource strengths and weaknesses, business by business.D. rating them from strongest to weakest in contending for market leadership in their respective

industries.E. rating them from strongest to weakest in terms of contributing to the corporate parent's profitability.Doing an appraisal of each business unit's strength and competitive position in its industry provides a basis for ranking the units from competitively strongest to competitively weakest and sizing up the competitive strength of all the business units as a group. Business units with competitive-strength ratings above 6.7 (on a scale of 1 to 10) are strong market contenders in their industries. Businesses with ratings in the 3.3-to-6.7 range have moderate competitive strength vis-à-vis rivals. Businesses with ratings below 3.3 are in competitively weak market positions. If a diversified company's business units all have competitive-strength scores above 5, it is fair to conclude that its business units are all fairly strong market contenders in their respective industries.




70. What does a competitive strength score above 5 tell us about a diversified company's position in the market?

A. that its business units are all fairly strong market contenders in their respective industriesB. that its business units are all fairly weak market contenders in their respective industriesC. that the company will not likely perform wellD. that a company's competitive strength score does not relate to the market position of that businessE. that the company will likely failIf a diversified company's business units all have competitive-strength scores above 5, it is fair to conclude that its business units are all fairly strong market contenders in their respective industries.






71. The nine-cell industry attractiveness competitive strength matrix

A. is useful for helping decide which businesses should have high, average, and low priorities in deploying corporate resources.

B. indicates which businesses are cash hogs and which are cash cows.C. pinpoints what strategies are most appropriate for businesses positioned in the three top cells of the

matrix, but is less clear about the best strategies for businesses positioned in the bottom six cells.D. identifies which sister businesses have the greatest strategic fit.E. identifies which sister businesses have the highest level of resource fit.The nine-cell attractiveness-strength matrix provides clear, strong logic for why a diversified company needs to consider both industry attractiveness and business strength in allocating resources and investment capital to its different businesses. A good case can be made for concentrating resources in those businesses that enjoy higher degrees of attractiveness and competitive strength, being very selective in making investments in businesses with intermediate positions on the grid, and withdrawing resources from businesses that are lower in attractiveness and strength unless they offer exceptional profit or cash flow potential.




72. One of the most significant contributions to strategy making in diversified companies that the nine-cell industry attractiveness competitive strength matrix provides is

A. identifying which businesses have strategies that should be continued, which businesses have strategies that need fine-tuning, and which businesses have strategies that need a major overhaul.

B. that businesses having the greatest competitive strength and that are positioned in the most attractive industries should have the highest priority for corporate resource allocation and that competitively weak businesses in relatively unattractive industries should have the lowest priority and perhaps even be considered for divestiture.

C. pinpointing which strategies are most appropriate for businesses positioned in the four corners of the matrix (although the matrix reveals little about the best strategies for businesses positioned in the remainder of the matrix).

D. its ability to pinpoint what kind of competitive advantage or disadvantage each business has.E. pinpointing which businesses to keep and which ones to divest.The nine-cell attractiveness-strength matrix provides clear, strong logic for why a diversified company needs to consider both industry attractiveness and business strength in allocating resources and investment capital to its different businesses. A good case can be made for concentrating resources in those businesses that enjoy higher degrees of attractiveness and competitive strength, being very selective in making investments in businesses with intermediate positions on the grid, and withdrawing resources from businesses that are lower in attractiveness and strength unless they offer exceptional profit or cash flow potential.






73. The nine-cell attractiveness-strength matrix provides clear, strong logic for considering using

A. only industry attractiveness in allocating resources and investment capital to its different businesses.B. only business strength in allocating resources and investment capital to the different businesses.C. both industry attractiveness and business strength in allocating resources and investment capital to

its different businesses.D. both industry attractiveness and product strength in allocating resources and investment capital to its

different businesses.E. both resource fit and product strength in allocating resources and investment capital to its different

businesses.The nine-cell attractiveness-strength matrix provides clear, strong logic for why a diversified company needs to consider both industry attractiveness and business strength in allocating resources and investment capital to its different businesses. A good case can be made for concentrating resources in those businesses that enjoy higher degrees of attractiveness and competitive strength, being very selective in making investments in businesses with intermediate positions on the grid, and withdrawing resources from businesses that are lower in attractiveness and strength unless they offer exceptional profit or cash flow potential.




74. Checking the competitive advantage potential of cross-business strategic fits in a diversified company involves evaluating the extent to which sister businesses present opportunities

A. to combine the performance of certain cross-business activities and thereby reduce costs.B. to transfer skills, technology, or intellectual capital from one business to another.C. for the company's different businesses to share use of a well-respected brand

name.D. for sister businesses to collaborate in creating valuable new competitive

capabilities.E. to create a positive image in the industry irrespective of the financial performance of its

businesses.Relative market share, the ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors' costs, and the ability to benefit from strategic fits with other business units are some factors used in quantifying the competitive strengths of a diversified company's business subsidiaries.







75. Checking a diversified company's business portfolio for the competitive advantage potential of cross-business strategic fits does NOT involve ascertaining the extent to which sister business units

A. have value chain match-ups that offer opportunities to combine the performance of related value chain activities and reduce costs.

B. have value chain match-ups that offer opportunities to transfer skills or technology or intellectual capital from one business to another.

C. have opportunities to share use of a well-respected brand name.D. have value chain match-ups that offer opportunities to create new competitive capabilities or to

leverage existing resources.E. are cash cows and which ones are cash hogs.Relative market share, the ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors' costs, and the ability to benefit from strategic fits with other business units are some factors used in quantifying the competitive strengths of a diversified company's business subsidiaries.





76. Which of the following is NOT a part of checking a diversified company's business units for cross-business competitive advantage potential?

A. ascertaining the extent to which business units have value chain match-ups that offer opportunities to combine the performance of related value chain activities and reduce costs

B. ascertaining the extent to which business units have value chain match-ups that offer opportunities to transfer skills or technology or intellectual capital from one business to another

C. ascertaining the extent to which business units are making maximum use of the parent company's competitive advantages

D. ascertaining the extent to which business units have value chain match-ups that offer opportunities to create new competitive capabilities or to leverage existing resources

E. ascertaining the extent to which business units present opportunities to share use of a well-respected brand name

The real question is how much competitive value can be generated from strategic fit. Are the cost savings associated with economies of scope likely to give one or more individual businesses a cost-based advantage over rivals? How much competitive value will come from the cross-business transfer of skills, technology, or intellectual capital or the sharing of competitive assets? Will leveraging a potent umbrella brand or corporate image strengthen the businesses and increase sales significantly? Will cross-business collaboration to create new competitive capabilities lead to significant gains in performance? The greater the value of cross-business strategic fit in enhancing the performance of a diversified company's businesses, the more competitively powerful is the company's related diversification strategy.






77. A diversified company's business units exhibit good resource fit when

A. each business is a cash cow.

B. its businesses add to a company's overall resource strengths and have matching resource requirements and/or when the parent has adequate corporate resources to support its business needs and add value.

C. each business is sufficiently profitable to generate an attractive return on invested capital.D. each business unit produces large internal cash flows over and above what is needed to build and

maintain the business.E. the resource requirements of each business exactly match the company's available resources.A company pursuing related diversification exhibits resource fit when its businesses have matching specialized resource requirements along their value chains; a company pursuing unrelated diversification has resource fit when the parent company has adequate corporate resources (parenting and general resources) to support its businesses' needs and add value.




78. The businesses in a diversified company's lineup exhibit good resource fit when

A. the resource requirements of each business exactly match the resources the company has available.

B. individual businesses have matching resource requirements at points along their value chain and add to a company's overall resource strengths and when solid parenting capabilities exist without spreading itself too thin.

C. each business generates just enough cash flow annually to fund its own capital requirements and thus does not require cash infusions from the corporate parent.

D. each business unit produces sufficient cash flows over and above what is needed to build and maintain the business, thereby providing the parent company with enough cash to pay shareholders a generous and steadily increasing dividend.

E. there are enough cash cow businesses to support the capital requirements of the cash hog businesses.A company pursuing related diversification exhibits resource fit when its businesses have matching specialized resource requirements along their value chains; a company pursuing unrelated diversification has resource fit when the parent company has adequate corporate resources (parenting and general resources) to support its businesses' needs and add value.






79. What is it called when a diversified company can add value by shifting capital from business units generating free cash flow to those needing additional capital to expand and realize their growth potential?

A. internal capital marketB. cash cow benefitsC. economic value addedD. shareholder value addedE. derived valuationA strong internal capital market allows a diversified company to add value by shifting capital from business units generating free cash flow to those needing additional capital to expand and realize their growth potential.





80. A diversified company's business units exhibit good financial resource fit when

A. each business is sufficiently profitable to generate an attractive return on invested capital.B. the resource requirements of each business exactly match the company's available resources.C. it has the resources to adequately support the requirements of its businesses as a group without

spreading itself too thin and when individual businesses add to a company's overall strengths.D. each business unit produces large internal cash flows over and above what is needed to build and

maintain the business.E. each business is sufficiently profitable to generate an attractive return on invested capital.A portfolio approach to ensuring financial fit among a firm's businesses is based on the fact that different businesses have different cash flow and investment characteristics. Factors to consider in assessing the financial resource fit for businesses in a diversified firm's portfolio are: (1) do individual businesses adequately contribute to achieving companywide performance targets without spreading resources too thinly, and (2) does the corporation possess adequate financial strength to fund its different businesses and maintain a healthy credit rating as well as possess the resources needed to be successful in each of its businesses.







81. Management's ranking of business units and establishing a priority for resource allocation should

A. always make the company's business units with strong resource strengths and competitive capabilities the central focus of funding initiatives.

B. put business units with the brightest profit and growth prospects and solid strategic and resource fits at the top of the investment priority list.

C. utilize activity-based costing and benchmarking to determine the funding needs of each business unit.

D. first consider the strength of funding proposals presented by managers of each division or business unit.

E. give priority for funding to cash hog businesses.Business subsidiaries with the brightest profit and growth prospects, attractive positions in the nine-cell matrix, and solid strategic and resource fit should receive top priority for allocation of corporate resources.





82. The tests of whether a diversified company's businesses exhibit resource fit do NOT include whether

A. the excess cash flows generated by cash cow businesses are sufficient to cover the negative cash flows of its cash hog businesses.

B. a business adequately contributes to achieving the corporate parent's performance targets.C. the company has adequate financial strength to fund its different businesses and maintain a healthy

credit rating.D. the corporate parent has sufficient cash to fund the needs of its individual businesses and pay

dividends to shareholders without having to borrow money.E. the corporate parent has or can develop sufficient resource strengths and competitive capabilities to

be successful in each of the businesses it has diversified into.To exhibit resource fit, it is not critical for a diversified company to check whether it has sufficient cash to fund the needs of its individual businesses and pay dividends to shareholders without having to borrow money.







83. Which of the following is NOT part of the task of checking a diversified company's business lineup for adequate resource fit?

A. determining whether the excess cash flows generated by cash cow businesses are sufficient to cover the negative cash flows of its cash hog businesses

B. determining whether recently acquired businesses are acting to strengthen a company's resource base and competitive capabilities or whether they are causing its competitive and managerial resources to be stretched too thinly across its businesses

C. determining whether opportunity exists for achieving 1 + 1 = 2 outcomesD. determining whether the company has adequate financial strength to fund its different businesses

and maintain a healthy credit ratingE. determining whether the corporate parent has or can develop sufficient resource strengths and

competitive capabilities to be successful in each of the businesses it has diversified intoA diversified company should check for opportunities to achieve 1 + 1 = 3 outcomes.





84. Which of the following is the BEST guideline for deciding what the priorities should be for allocating resources to the various businesses of a diversified company?

A. Businesses with high industry attractiveness ratings should be given top priority and those with low industry attractiveness ratings should be given low priority.

B. Business subsidiaries with the brightest profit and growth prospects, attractive positions on the nine-cell matrix, and solid strategic and resource fits generally should head the list for corporate resource support.

C. The positions of each business in the nine-cell attractiveness-strength matrix should govern resource allocation.

D. Businesses with the most strategic and resource fits should be given top priority and those with the fewest strategic and resource fits should be given low priority.

E. Businesses with high competitive strength ratings should be given top priority and those with low competitive strength ratings should be given low priority.

As a rule, business subsidiaries with the brightest profit and growth prospects, attractive positions in the nine-cell matrix, and solid strategic and resource fit should receive top priority for allocation of corporate resources.






85. The options for allocating a diversified company's financial resources include all of the following EXCEPT

A. making acquisitions to establish positions in new businesses or to complement existing businesses.B. investing in ways to strengthen or grow existing businesses.C. funding long-range R&D ventures aimed at opening market opportunities in new or existing

businesses.D. paying off existing debt and building cash reserves.E. decreasing dividend payments and/or selling shares of stock.Ideally, a diversified company will have sufficient financial resources to strengthen or grow its existing businesses, make any new acquisitions that are desirable, fund other promising business opportunities, pay off existing debt, and periodically increase dividend payments to shareholders and/or repurchase shares of stock.





86. Which of the following is NOT a reasonable option for deploying a diversified company's financial resources?

A. making acquisitions to establish positions in new businesses or to complement existing businessesB. investing financial resources in cash cow businesses until they show enough strength to generate

positive cash flowsC. funding long-range R&D ventures aimed at opening market opportunities in new or existing

businessesD. paying down existing debt, increasing dividends, or repurchasing shares of the company's stockE. investing in ways to strengthen or grow existing businessesIdeally, a diversified company will have sufficient financial resources to strengthen or grow its existing businesses, make any new acquisitions that are desirable, fund other promising business opportunities, pay off existing debt, and periodically increase dividend payments to shareholders and/or repurchase shares of stock.



Difficulty: 2 MediumLearning Objective: 08-04 The analytic tools for evaluating a company's diversification strategy.




87. Corporate strategy options for already diversified companies include all of the following EXCEPT

A. broadening the company's business scope by making new acquisitions in new industries.B. divesting weak-performing businesses and retrenching to a narrower base of business

operations.C. restructuring the company's business lineup with a combination of divestitures and new acquisitions

to put a whole new face on the company's business makeup.D. pursuing growth opportunities within the existing business lineup.E. pursuing certain acquisitions even if they have done badly or haven't quite lived up to expectations.Corporate strategic options for diversified companies include sticking closely with the existing business lineup and pursuing the opportunities these businesses present, broadening the company's business scope by making new acquisitions in new industries, divesting certain businesses and retrenching to a narrower base of business operations, and restructuring the company's business lineup and putting a whole new face on the company's business makeup.



Learning Objective: 08-05 What four main corporate strategy options a diversified company can employ for solidifying its strategy and improving company performance.

Topic: Conglomerate diversification

88. The strategic options to improve a diversified company's overall performance do NOT include which of the following categories of actions?

A. broadening the company's business scope by making new acquisitions in new industriesB. increasing dividend payments to shareholders and/or repurchasing shares of the company's stockC. restructuring the company's business lineup with a combination of divestitures and acquisitions to

put a whole new face on the company's business makeupD. pursuing multinational diversification and striving to globalize the operations of several of the

company's business unitsE. divesting weak-performing businesses and retrenching to a narrower base of business

operationsCorporate strategic options for diversified companies include sticking closely with the existing business lineup and pursuing the opportunities these businesses present, broadening the company's business scope by making new acquisitions in new industries, divesting certain businesses and retrenching to a narrower base of business operations, and restructuring the company's business lineup and putting a whole new face on the company's business makeup.







89. Once a company has diversified into a collection of related or unrelated businesses and concludes that some strategy adjustments are needed, which one of the following is NOT one of the main strategy options that a company can pursue?

A. multinational diversificationB. restructure the company's business lineup with a combination of divestitures and new acquisitionsC. craft new initiatives designed to build/enhance the reputation and image of the companyD. divest some businesses and retrench to a narrower diversification baseE. broaden the diversification baseCorporate strategic options for diversified companies include sticking closely with the existing business lineup and pursuing the opportunities these businesses present, broadening the company's business scope by making new acquisitions in new industries, divesting certain businesses and retrenching to a narrower base of business operations, and restructuring the company's business lineup and putting a whole new face on the company's business makeup.



Difficulty: 1 EasyLearning Objective: 08-05 What four main corporate strategy options a diversified company can employ for solidifying its strategy and

improving company performance.Topic: Conglomerate diversification

90. A company that is already diversified may choose to broaden its business scope by building positions in new related or unrelated businesses because of all of the following EXCEPT

A. it has resources or capabilities that are eminently transferable to other related or complementary businesses.

B. the company's growth is sluggish and it wants the sales and profit boost that a new business can provide.

C. management wants to lessen the company's vulnerability to seasonal or recessionary influences or to threats from emerging new technologies, legislative regulations, and new product innovations that alter buyer preferences and resource requirements.

D. it wants to make new acquisitions to strengthen or complement some of its present businesses, market positioning, and competitive capabilities.

E. its top management wants to increase its compensation.Several motivating factors for broadening a diversified company's business base are in play. One is sluggish growth that makes the potential revenue and profit boost of a newly acquired business look attractive. A second is the potential for transferring resources and capabilities to other related or complementary businesses. A third is rapidly changing conditions in one or more of a company's core businesses, brought on by technological, legislative, or demographic changes. A fourth and very important, motivating factor for adding new businesses is to complement and strengthen the market position and competitive capabilities of one or more of the company's present businesses.







91. Retrenching to a narrower diversification base is

A. usually the most attractive long-run strategy for a broadly diversified company confronted with recession, high interest rates, mounting competitive pressures in several of its businesses, and sluggish growth.

B. a strategy that allows a diversified firm's energies to be concentrated on building strong positions in a smaller number of businesses rather the stretching its resources and managerial attention too thinly across many businesses.

C. an attractive strategy option for revamping a diverse business lineup that lacks strong cross-business financial fit.

D. sometimes an attractive option for deepening a diversified company's technological expertise and supporting a faster rate of product innovation.

E. a strategy best reserved for companies in poor financial shape.Retrenching to a narrower diversification base is usually undertaken when top management concludes that its diversification has ranged too far afield and that the company can improve long-term performance by concentrating on a smaller number of businesses.



Difficulty: 3 HardLearning Objective: 08-05 What four main corporate strategy options a diversified company can employ for solidifying its strategy and

improving company performance.Topic: Diversification

92. When a corporate parent creates an independent company and divests it by distributing to its stockholders new shares in the business, it is called

A. a spinoff.B. a wholly-owned subsidiary.C. a functional divesture.D. fully-diluted stock.E. a restructure.A spin-off is an independent company created when a corporate parent divests a business either by selling shares to the public via an initial public offering or by distributing shares in the new company to shareholders of the corporate parent.







93. Moves to improve a diversified company's overall performance do NOT include

A. retrenching to a narrower base of business operations.

B. broadening the company's business scope by making new acquisitions in new industries.C. restructuring the company's business lineup and putting a whole new face on the company's business

makeup.D. sticking closely to the existing business lineup and pursuing the growth opportunities presented by

these businesses.E. retaining weak-performing businesses in order to sustain a wide base of business

operations.Strategic options to improve a diversified company's overall performance include: (1) sticking closely with the existing business lineup and pursuing the opportunities these businesses present; (2) broadening the company's business scope by making new acquisitions in new industries; (3) divesting some businesses and retrenching to a narrower base of business operations; and (4) restructuring the company's business lineup and putting a whole new face on the company's business makeup. It makes no strategic sense to retain weak performers and thereby sustain a wide base of operations.





94. In which of the following instances is retrenching to a narrower diversification base NOT likely to be an attractive or advisable strategy for a diversified company?

A. when a diversified company has struggled to make certain businesses attractively profitableB. when a diversified company has too many cash cowsC. when one or more businesses are cash hogs with questionable long-term potentialD. when businesses in once-attractive industries have badly

deterioratedE. when a diversified company has businesses that have little or no strategic or resource fits with the

"core" businesses that management wishes to concentrate onSometimes retrenching to a narrower diversification base has to be considered because market conditions in a once-attractive industry have badly deteriorated. A business can become a prime candidate for divestiture because it lacks adequate strategic or resource fit, because it is a cash hog with questionable long-term potential, or because remedying its competitive weaknesses is too expensive relative to the likely gains in profitability. Sometimes a company acquires businesses that down the road just do not work out as expected even though management has tried its best.







95. When should a business NOT be divested?

A. when the business is worth more to another company than to the parent company

B. when the business is a cash cowC. when the business provides valuable strategic or resource fits for another

companyD. when shareholders would be better served if the company sells the business for a generous

premiumE. when the business lacks the cross-boundary presence of shared values and cultural compatibilityA business should be divested when it is worth more to another company than to the present parent; in such cases, shareholders would be well served if the company sells the business and collects a premium price from the buyer for whom the business is a valuable fit.





96. Strategies to restructure a diversified company's business lineup involve

A. revamping the value chains of each of a diversified company's businesses.

B. focusing on restoring the profitability of its money-losing businesses and thereby improving the company's overall profitability.

C. revamping the strategies of its different businesses, especially those that are performing poorly.D. divesting low-performing businesses that do not fit and acquiring new ones where opportunities are

more promising to put a new face on the company's business makeup.E. broadening the scope of diversification to include a larger number of smaller and more diverse

businesses.Corporate strategic options for diversified companies include sticking closely with the existing business lineup and pursuing the opportunities these businesses present, broadening the company's business scope by making new acquisitions in new industries, divesting certain businesses and retrenching to a narrower base of business operations, and restructuring the company's business lineup and putting a whole new face on the company's business makeup.







97. Corporate restructuring strategies

A. involve making major changes in a diversified company's business lineup, divesting some businesses and/or acquiring others, so as to put a whole new face on the company's business lineup.

B. entail reducing the scope of diversification to a smaller number of businesses.C. entail selling off marginal businesses to free up resources for redeployment to the remaining

businesses.D. focus on crafting initiatives to restore a diversified company's money-losing businesses to

profitability.E. focus on broadening the scope of diversification to include a larger number of businesses and

boosting the company's growth and profitability.Corporate restructuring involves making major changes in a diversified company's business lineup, divesting some businesses and/or acquiring others, so as to put a whole new face on the company's business lineup.





98. Conditions that may make corporate restructuring strategies appealing include all of the following EXCEPT

A. ongoing declines in the market shares of one or more major business units that are falling prey to more market-savvy competitors.

B. a business lineup that consists of too many slow-growth, declining, low-margin, or competitively weak businesses.

C. an excessive debt burden with interest costs that eat deeply into profitability.D. ill-chosen acquisitions that haven't lived up to expectations.E. a business lineup that consists of too many cash cow businesses.Performing radical surgery or restructuring a company's business lineup is appealing when its financial performance is being squeezed or eroded by: a serious mismatch between the company's resources and capabilities and the type of diversification that it has pursued; too many businesses in slow-growth, declining, low-margin, or otherwise unattractive industries; too many competitively weak businesses; the emergence of new technologies that threaten the survival of one or more important businesses; ongoing declines in the market shares of one or more major business units that are falling prey to more market-savvy competitors; an excessive debt burden with interest costs that eat deeply into profitability, and ill-chosen acquisitions that haven't lived up to expectations.







99. Which of the following is NOT a good candidate for divestiture in a corporate restructuring effort?

A. business units that lack strategic fit with the businesses to be retainedB. weak performersC. businesses in unattractive industriesD. businesses that are cash hogs or that lack other types of resource fitE. businesses compatible with the company's revised diversification strategyBusinesses compatible with the company's revised diversification strategy need not be divested in a corporate restructuring effort.





Essay Questions

100. Briefly discuss when it makes good strategic sense for a company to consider diversification.

Diversification is a sound strategic option when a company can:

• spot opportunities to expand into industries whose technologies and products complement its present business.• leverage existing resources and capabilities by expanding into industries where these same resource strengths are key success factors and valuable competitive assets.• combine the related value chain activities of different businesses to achieve lower costs.• boast of a powerful and well-known brand name that can be transferred to the products of other businesses and thereby be used as a lever for driving up the sales and profits of such businesses.• open up new avenues for reducing costs by diversifying into closely related businesses.• encourage knowledge sharing and collaborative activity among the businesses.


Blooms: RememberDifficulty: 2 Medium

Learning Objective: 08-01 When and how business diversification can enhance shareholder value.Topic: Competitive Advantage



101. Identify and briefly discuss each of the three tests for determining whether diversification into a new business is likely to build shareholder value.

To build shareholder value, any business diversification strategy should pass the three Tests of Corporate Advantage:The industry attractiveness test: The industry to be entered through diversification must be structurally attractive (in terms of the five forces), have resource requirements that match those of the parent company, and offer good prospects for growth, profitability, and return on investment.The cost of entry test: The cost of entering the target industry must not be so high as to exceed the potential for good profitability.The better-off test: Diversifying into a new business must offer potential for the company's existing businesses and the new business to perform better together under a single corporate umbrella than they would perform operating as independent, stand-alone businesses—an effect known as synergy.


Blooms: UnderstandDifficulty: 2 Medium


102. The attractiveness test is the most important test for determining whether diversification into a new business is likely to result in 1 + 1 = 3 increases in shareholder value (as opposed to simply a 1 + 1 = 2 type of increase). True or false? Justify and explain your answer.

True. Diversifying into a new business must offer potential for the company's existing businesses and the new business to perform better together under a single corporate umbrella than they would perform operating as independent, stand-alone businesses—an effect known as synergy. For example, let's say that company A diversifies by purchasing company B in another industry. If A and B's consolidated profits in the years to come prove no greater than what each could have earned on its own, then A's diversification won't provide its shareholders with any added value. Company A's shareholders could have achieved the same 1 + 1 = 2 result by merely purchasing stock in company B. Diversification does not result in added long-term value for shareholders unless it produces a 1 + 1 = 3 effect, whereby the businesses perform better together as part of the same firm than they could have performed as independent companies.


Blooms: UnderstandDifficulty: 1 Easy




103. Explain the relevance of the following as they relate to building shareholder value via diversification.

a. the industry attractiveness testb. the cost of entry testc. the better-off test

In principle, diversification cannot be considered a success unless it results in added long-term economic value for shareholders. Business diversification stands little chance of building shareholder value without passing the following three Tests of Corporate Advantage:

a. The industry attractiveness test: The industry to be entered through diversification must be structurally attractive (in terms of the five forces), have resource requirements that match those of the parent company, and offer good prospects for growth, profitability, and return on investment.b. The cost of entry test: The cost of entering the target industry must not be so high as to exceed the potential for good profitability. Since the owners of a successful and growing company usually demand a price that reflects their business's profit prospects, it's easy for such an acquisition to fail the cost of entry test.c. The better-off test: Diversifying into a new business must offer potential for the company's existing businesses and the new business to perform better together under a single corporate umbrella than they would perform operating as independent, stand-alone businesses.




104. Identify and briefly discuss each of the three options for entering new businesses. What are the driving choice parameters for entry into new businesses and which one is the most popular in the sense of being used most frequently?

• Acquisition is the most popular means of diversifying into another industry. Not only is it quicker than trying to launch a new operation, but it also offers an effective way to hurdle such entry barriers as acquiring technological know-how, establishing supplier relationships, achieving scale economies, building brand awareness, and securing adequate distribution.• Achieving diversification through internal development involves starting a new business subsidiary from scratch. Generally, internal development of a new business has appeal only when (1) the parent company already has in-house most of the resources and capabilities it needs to piece together a new business and compete effectively; (2) there is ample time to launch the business; (3) the internal cost of entry is lower than the cost of entry via acquisition; (4) adding new production capacity will not adversely impact the supply-demand balance in the industry; and (5) incumbent firms are likely to be slow or ineffective in responding to a new entrant's efforts to crack the market.• Entering a new business via a joint venture can be useful in at least three types of situations. First, a joint venture is a good vehicle for pursuing an opportunity that is too complex, uneconomical, or risky for one company to pursue alone. Second, joint ventures make sense when the opportunities in a new industry require a broader range of competencies and know-how than a company can marshal on its own. Third, companies sometimes use joint ventures to diversify into a new industry when the diversification move entails having operations in a foreign country.






105. Carefully explain the difference between and the rationale for selecting a strategy of related diversification and/or a strategy of unrelated diversification.

A related diversification strategy involves building the company around businesses where there is good strategic fit across corresponding value chain activities. Strategic fit exists whenever one or more activities constituting the value chains of different businesses are sufficiently similar to present opportunities for cross-business sharing or transferring of the resources and capabilities that enable these activities. Companies that pursue a strategy of unrelated diversification generally exhibit a willingness to diversify into any business in any industry where senior managers see an opportunity to realize consistently good financial results.





106. Which is the better approach to diversification—a strategy of related diversification or a strategy of unrelated diversification? Explain and support your answer.

Any approach to diversification is fine as long it provides a clear avenue for increasing shareholder value. Diversifying into related businesses where competitively valuable strategic-fit benefits can be captured puts a company's businesses in position to perform better financially as part of the company than they could have performed as independent enterprises, thus providing a clear avenue for increasing shareholder value and satisfying the better-off test. Where unrelated business are concerned, unless the combination of businesses is more profitable together under the corporate umbrella than they are apart as independent businesses, the strategy cannot create economic value for shareholders. And unless it does so, there is no real justification for unrelated diversification, since top executives have a fiduciary responsibility to maximize long-term shareholder value for the company's owners (its shareholders).


Blooms: EvaluateDifficulty: 2 Medium





107. What is meant by the term strategic fit? What are the advantages of pursuing strategic fit and matchups in choosing which industries to diversify into?

A related diversification strategy involves building the company around businesses where there is good strategic fit across corresponding value chain activities. Strategic fit exists whenever one or more activities constituting the value chains of different businesses are sufficiently similar to present opportunities for cross-business sharing or transferring of the resources and capabilities that enable these activities. Related diversification is based on value chain matchups with respect to key value chain activities—those that play a central role in each business's strategy and that link to its industry's key success factors.





108. Discuss the pros and cons of a strategy of unrelated diversification.

Pros: Where there are opportunities to diversify into any business with potential to obtain consistently good financial results, it makes a good strategy for unrelated diversification.Cons: However, unrelated diversification strategies have two important negatives that undercut the pluses: very demanding managerial requirements and limited competitive advantage potential due to absence of cross-business strategic fit.




109. Briefly explain the relevance of quantitatively measuring the competitive strength of each business in a diversified company's business portfolio and determining which business units are strongest and weakest. List the six steps involved in the process.

Conducting a quantitative appraisal of each business unit's strength and competitive position in its industry not only reveals its chances for industry success, but also provides a basis for ranking the units from competitively strongest to weakest. The steps include: (1) evaluating industry attractiveness, (2) evaluating business unit competitive strength, (3) determining the competitive value of strategic fit in diversified companies, (4) checking for resource fit, (5) ranking business units and assigning a priority for resource allocation, and (6) crafting new strategic moves to improve overall corporate performance are the six steps for evaluating a diversified company's strategy.



Learning Objective: 08-04 The analytic tools for evaluating a company's diversification strategy.




110. What is the industry attractiveness test? How is it used to evaluate a diversified company's business lineup? Why is it relevant?

The industry to be entered through diversification must offer an opportunity for profits and return on investment that is equal to or better than that of the company's present lineup of businesses—and this is known as industry attractiveness.The test for gauging industry attractiveness involves calculating quantitative industry attractiveness scores based upon the following nine dimensions: (1) market size and projected growth rate; (2) intensity of competition; (3) emerging opportunities and threats; (4) presence of cross-industry strategic fit; (5) resource requirements; (6) seasonal and cyclical factors; (7) social, political, regulatory, and environmental factors; (8) industry profitability; (9) industry uncertainty and business risk. These dimensions are first assigned numbers from 1 to 10, and are then weighted to reflect their relative importance.Two conditions are necessary for an industry attractiveness score to be relevant: (1) deciding on appropriate weights for the industry attractiveness measures, and (2) possessing.


Blooms: UnderstandDifficulty: 3 Hard


111. What is the relevance of quantitatively measuring the competitive strength of each business in a diversified company's business portfolio and determining which business units are strongest and weakest?

Calculating quantitative industry attractiveness scores for each industry helps in ranking the performance prospects of the businesses from best to worst and determining what the corporate parent's priorities should be in allocating resources to its various businesses. A good case can be made for concentrating resources in those businesses that enjoy higher degrees of attractiveness and competitive strength, being very selective in making investments in businesses with intermediate positions on the grid, and withdrawing resources from businesses that are lower in attractiveness and strength unless they offer exceptional profit or cash flow potential.






112. What are the advantages and benefits of using an industry attractive-business strength matrix to evaluate a diversified company's lineup of businesses?

The nine-cell attractiveness-strength matrix provides clear, strong logic for why a diversified company needs to consider both industry attractiveness and business strength in allocating resources and investment capital to its different businesses. A good case can be made for concentrating resources in those businesses that enjoy higher degrees of attractiveness and competitive strength, being very selective in making investments in businesses with intermediate positions on the grid, and withdrawing resources from businesses that are lower in attractiveness and strength unless they offer exceptional profit or cash flow potential.




113. What is meant by the term "resource fit," as it applies to evaluating a diversified company's business lineup?

A diversified company exhibits resource fit when its businesses add to a company's overall mix of resources and capabilities and when the parent company has sufficient resources to support its entire group of businesses without spreading itself too thin.




114. Explain the difference between a cash cow business and a cash hog business.

A cash cow business generates cash flows over and above its internal requirements, thus providing a corporate parent with funds for investing in cash hog businesses, financing new acquisitions, or paying dividends. A cash hog business generates cash flows that are too small to fully fund its growth; it thereby requires cash infusions to provide additional working capital and finance new capital investment.






115. Why is it pertinent in evaluating a diversified company's business lineup to rank a diversified company's businesses on the basis of their future performance prospects?

Once a diversified company's strategy has been evaluated from the perspective of industry attractiveness, competitive strength, strategic fit, and resource fit, the next step is to use this information to rank the performance prospects of the businesses from best to worst. Such ranking helps top-level executives assign each business a priority for resource support and capital investment.




116. What factors should management consider when ranking business units and setting a priority for resource allocation?

As a rule, business subsidiaries with (1) the brightest profit and growth prospects, (2) attractive positions in the nine-cell matrix, and (3) solid strategic and resource fit should receive top priority for allocation of corporate resources.However, in ranking the prospects of the different businesses from best to worst, it makes good strategic sense to also consider each business's past performance as concerns sales growth, profit growth, contribution to company earnings, return on capital invested in the business, and cash flow from operations. Competitively strong businesses in attractive industries have significantly better performance prospects than competitively weak businesses in unattractive industries.




117. What are the four main strategic paths that a diversified company can employ to improve the performance of its overall business lineup?

Strategic moves to improve a diversified company's overall performance include: (1) sticking closely with the existing business lineup and pursuing the opportunities these businesses present; (2) broadening the company's business scope by making new acquisitions in new industries; (3) divesting some businesses and retrenching to a narrower base of business operations; and (4) restructuring the company's business lineup and putting a whole new face on the company's business makeup.







118. What might induce an already diversified company to enter additional businesses and broaden its diversification base?

Opting to broaden a diversified company's business base is often attributable to (1) sluggish growth in revenues or profits; (2) vulnerability to seasonality or recessionary influences; (3) the potential for transferring resources and capabilities to other related businesses; (4) unfavorable driving forces; or (5) a need to complement and strengthen the market position and competitive capabilities of one or more of its present businesses.


Blooms: ApplyDifficulty: 2 Medium



119. An additional, and often very important motivating factor for adding new businesses is to complement and strengthen the market position and competitive capabilities of one or more of its present businesses. Explain and give three examples.

Sometimes, companies need to complement and strengthen the market position and competitive capabilities of one or more of their present businesses. Three relatively recent examples of companies that made acquisitions with valuable strategic fit between the value chain activities of the two companies include:

1. In 2011, Microsoft broadened and complemented its diversification base in online gaming and software and mobile devices via the $8.5 billion acquisition of Skype, a global internet communications business.2. In 2014, Apple strengthened its iTunes music business with the $3 billion acquisition of Beats Electronics and Beats Music, a company that produced headphones and provided streaming music services.3. In 2015, Dutch-based Heineken, the world's third-largest brewer, broadened its slow-growing beer portfolio and increased its geographical reach via a purchase of a 50% stake in California-based Lagunitas Brewing Company, a regional craftbrewer whose brands were growing at 58% per year due to changing beer consumption patterns in the United States.


Blooms: ApplyDifficulty: 2 Medium





120. Under what circumstances might a diversified firm choose to divest one or more of its businesses?

Candidates for divestiture in a corporate restructuring effort typically include not only weak or up-and-down performers or those in unattractive industries, but also: (1) business units that lack strategic fit with the businesses to be retained, (2) business units that are cash hogs, and/or (3) business units in a once-attractive industry that have badly deteriorated.





121. Why has corporate restructuring become a popular strategy at many diversified companies over the past decade?

Performing radical surgery or restructuring a company's business lineup has become a popular strategy at many diversified companies, especially those that had diversified broadly into many different industries and lines of business. Under some circumstances a diversified company's financial performance has become squeezed or eroded by a serious mismatch between the company's resources and capabilities and the type of diversification that it has pursued, resulting in: (1) too many businesses in slow-growth, declining, low-margin, or otherwise unattractive industries; (2) too many competitively weak businesses; (3) an excessive debt burden with interest costs that eat deeply into profitability; and/or (4) ill-chosen acquisitions that haven't lived up to expectations.







122. Identify and explain the meaning and strategic significance of each of the following terms.

a) Related diversificationb) Strategic fitc) Economies of scoped) Retrenchinge) Unrelated diversification

a) Related diversification: Businesses are "related" when their value chains possess competitively valuable cross-business relationships.b) Strategic fit: Strategic fit occurs when value chains of different businesses present opportunities for cross-business combinations such as skills transfer, cost sharing, or brand sharing.c) Economies of scope: Economies of scope stem directly from cost-saving strategic fit along the value chains of related businesses. Such economies are open only to a multibusiness enterprise and are the result of a related diversification strategy that allows sibling businesses to share technology, perform R&D together, use common manufacturing or distribution facilities, share a common sales force or distributor/dealer network, and/or share the same administrative infrastructure.d) Retrenching: Evidence indicates that pruning businesses and thereby narrowing a firm's diversification base in a smaller number of core businesses improves corporate performance.e) Unrelated diversification: An unrelated diversification strategy discounts the importance of pursuing cross-business strategic fit and, instead, focuses squarely on entering and operating businesses in diverse industries that allow the company as a whole to increase its earnings.







Documents

clemsonaphistudy.weebly.com · Web viewwas an effective way to hurdle entry barriers, is usually quicker than trying to launch a brand-new startup operation, and allows the acquirer