CH 8

Which of the following statements is true about unrelated diversification of a firm?

Unrelated diversification offers limited potential for competitive advantage beyond what each business generates on its own

Ranking the performance prospects of business units in a diversified company from best to worst

helps corporate management decide where to allocate resources and capital investments among the business units.

Diversification through acquisition of an existing business

helps the acquiring company clear entry barriers to an industry.

When conditions allow corporate executives to stick closely with the existing business lineup, they are likely to do which of the following?

focus on getting the best performance from each of the firm's businesses direct corporate resources to the areas with greatest profitability

Determining the competitive value of strategic fit in diversified companies is

important for evaluating the viability of a related diversification strategy

Which of these is not one of the steps in evaluating the strategy of a diversified company?

independently evaluating the value chain of each business unit as a stand-alone entity

In justifying diversification as a strategy to build shareholder value, the ______ test says that the industry to be entered through diversification must offer an opportunity for profits and return on investment that is equal or better than that of the company's present business.

industry attractiveness

______ are cost reductions stemming from strategic fit along the value chains of related businesses.

Economies of scope

True or false: Because the partners will have shared ownership in the new business, a joint venture is neither a feasible nor effective diversification strategy.

False

What are the two important pitfalls of an unrelated diversification strategy?

Highly taxing managerial requirements and limited opportunity for competitive advantage

______ requires creating a new business subsidiary from its inception.

Internal development

Which of these is a solid justification for pursuing an unrelated diversification strategy?

Management personnel have a high ability to spot low-priced, underperforming companies that could become profitable with some basic guidance.

Which of the following is generally not true of unrelated diversification?

Odds are, the results will be 1+1=3.

Which of the following most accurately defines related businesses?

The value chains of the businesses possess competitively valuable cross-business relationships.

______ exists when the value chains of different businesses present opportunities for cross-business skills transfer, cost sharing, or brand-sharing.

Strategic fit

Which of the following statements regarding single-business versus diversified firms is correct?

Strategy-making tends to be more complicated in a diversified firm versus a single-business firm.

Which of the following is an important consideration in evaluating the potential for strategic fit to deliver competitive advantage and shareholder value in a related diversification strategy?

The benefits of cross-business strategic fit are not obtained unless management successfully takes internal actions to reach them. Capturing strategic fit through related diversification builds shareholder value in ways that a diversified stock portfolio cannot. Realizing cross-business strategic fit benefits is possible only through related diversification.

True or false: Diversification into new industries merits strong consideration when a single-business company encounters diminishing market opportunities and stagnating sales in its principal business.

True

True or false: Resource fit in a diversified company extends beyond financial resources.

True

As a strategy for diversification, ______ allows a company to move straight to building a strong market position in the target industry without getting tangled up in launching a start-up.

acquisition

Economies of scope

are cost reductions stemming from strategic fit along the value chains of related businesses. are important in achieving a cost-based competitive advantage in a related diversification strategy. can be the result of a related strategy that allows businesses to share technology, facilities, or a common sales force.

A ______ company is spread around a wide collection of related businesses, unrelated businesses, or a combination of both.

broadly diversified

In justifying diversification as a strategy to build shareholder value, the ______ test says that diversifying into a new business must offer potential for the company's existing business and the new business to perform better after consolidation than as stand-alone businesses.

better-off

A reliable approach in finding an industry into which to diversify a company involves

calculating quantitative industry attractiveness scores

Economies of scope in a diversified company

can help the company achieve the 1+1=3 'better off' test.

A ______ business generates substantial cash surpluses over what is needed to fund operations, providing financial resources that can be used to invest elsewhere.

cash cow

______ involves radically altering the business lineup by divesting businesses that lack strategic fit or are poor performers and acquiring new businesses that offer better potential for shareholder value.

corporate restructuring

Which of these is the last step in evaluating the strategy of a diversified company?

crafting new strategic moves to improve overall corporate performance

A spinoff occurs when a company

creates a financially and managerially independent company intended to function on its own

Achieving diversification through internal development involves

creating an entirely new business subsidiary within the company.

The management of a diversified company might choose to broaden the company's diversification base when the company

experiences sluggish growth in sales and profits

In a company pursuing unrelated diversification, the objective is to

deliver returns that on average rise enough annually to reward shareholders

The two necessary conditions for producing valid industry attractiveness scores are

determining proper weights for the attractiveness measures and having adequate knowledge to rate the industry on each measure.

When a diversification strategy has resulted in resources and management attention being stretched too thin, which of the following is the most appropriate strategic move?

divesting some businesses and retrenching to a narrower diversification base

In a ______, one central business accounts for 50 to 80% of total revenues and several smaller businesses contribute the rest.

dominant-business enterprise

Which of these are key strategic decisions that top-level managers must make in crafting a company's diversification strategy?

finding ways to leverage cross-business value chain relationships into competitive advantage investing the company's resources into the most attractive business units choosing new industries to enter and deciding how to enter those industries taking action to improve the collective performance of all of the company's businesses

Which of the following are strategic options for allocating company financial resources in a diversified company?

fund long-range R&D ventures aimed at opening market opportunities in existing businesses make acquisitions to establish positions in new industries invest in ways that grow existing businesses

A star business

has a strong or market-leading competitive position in an attractive, high-growth market and a high level of profitability.

In terms of diversification, unrelated businesses are business that

have dissimilar value chains and resource requirements with no competitively valuable cross-business relationships.

An unrelated diversification strategy

is also called a conglomerate. represents a willingness by senior management to diversify into any industry where there are opportunities to improve financial results.

An unrelated diversification strategy

offers limited potential for competitive advantage beyond what each business can generate on its own

A diversified company can gain from value chain match-ups that present which of the following? (Select all that apply.)

opportunities to combine the performance of activities that will reduce costs and capture economies of scope opportunities to transfer skills, technology, or intellectual capital between businesses opportunities to share a well-respected brand name across product or service categories

What is it called when a company owns a variety of businesses that increase its effectiveness, while having plenty of resources to add customer value to these businesses without financially stressing itself?

resource fit

Strategic fit among businesses can enhance shareholder value by

sharing facilities or resources to reduce costs. transferring skills and capabilities from one business to another. leveraging use of a common brand name.

Investing in ways to grow existing business or to fund long-range R&D ventures for opening new market opportunities are examples of ______ for allocating company financial resources.

strategic options

Which of the following is not one of the actions needed by corporate executives to succeed in an unrelated diversification strategy?

taking a completely "hands off" approach to let each of the unrelated businesses run itself

Which of the following is the ultimate measure of successful business diversification?

the achievement of added shareholder value

Diversified companies might find it desirable to add to their existing business lineup for which of the following reasons?

to address vulnerabilities due to seasonal or recessionary influences to counter unfavorable driving forces facing core businesses to make use of the potential for transferring resources and capabilities to other related businesses

Under which of the following conditions is a joint venture, as a diversification strategy, a strategically good idea?

when the opportunity involves too much risk or complexity for one company to assume alone when the opportunities in a new industry require a broader range of capabilities and knowledge than an expansion-minded company has when the expansion-minded company wants to minimize risk in entering an industry with significant political and regulatory factors

The key outcome of a nine-cell matrix attractiveness/strength matrix is in providing valuable guidance in making strategic decisions about

where to allocate resources and investment capital in a diversified business

In general, corporate executives of a company that has extensively diversified into unrelated businesses are forced to "manage by the ________," meaning that they need to rely on the financial and operating results of each business.

numbers

In which of the following situations is corporate restructuring an appealing business strategy?

when many of the company's business are in slow-growth or low-margin industries when the company has an excessive debt burden and interest payments when new technologies threaten one or more important business of the company

Evaluating each business unit's strength and competitive position in its industry

is performed using calculations similar to an assessment of overall industry attractiveness. indicates each business unit's likelihood of success. serves as a guide for ordering the units from competitively strongest to weakest.

The greater the number of unrelated businesses a company is in, the more corporate executives will need to

know what to do if a business encounters difficulty. pick business-unit leaders with the ability to achieve performance gains. remain informed about each industry.

A diversification strategy should avoid adding businesses that make excessive demands on nonfinancial resources, including which of the following?

managerial talent technology and information systems marketing support

Which of the following are measures used in calculating industry attractiveness scores in a diversified company?

market size and projected growth rate social, political, regulatory, and environmental factors emerging opportunities and threats

A single-business firm should strongly consider diversifying into new industries when

marketing opportunities and sales decrease in their primary business.

Thinning out unwanted businesses to form a more narrow diversification base

normally improves corporate performance

Which of the following should not receive high priority for the allocation of company resources in a multibusiness company?

the businesses that show weak performance in unattractive industries

In a diversified company, adhering tightly to the existing business lineup as opposed to shaking things up is advisable when

the company already has promising growth potential

In a diversified company, resource fit is present when individual businesses strengthen the company's total mix of resources and capabilities, and

the company has enough value adding resources to support the whole group of businesses without overextending itself.

Relative market share, brand image and reputation, and costs and profitability relative to competitors are measures that can be used in evaluating

the competitive strength of each business-unit in a diversified company

Which of the following has the disadvantage of providing little opportunity to reduce costs and leverage brand name to gain competitive advantages?

unrelated diversification

A(n) ______ discounts the importance of cross-business strategic fit, focusing instead on entering businesses that allow the company as a whole to increase earnings.

unrelated diversification strategy

In the calculation of industry attractiveness scores, the relative importance given to various measures of attractiveness is determined by using factors called _________, which together add up to 1.0

weights

Under which of the following conditions is internal development as a diversification strategy an attractive option?

when adding new production capacity will not adversely impact the supply-demand balance in the industry when the parent company already possesses the skills and resources needed to be competitive when the targeted industry has many small firms such that the start-up does not have to compete against large, powerful rivals

The three tests that must be "passed" in order for a diversification strategy to build shareholder value are

industry attractiveness, cost-of-entry, and better-off.

Which of the following are financial options for allocating financial resources in a diversified company? (Select all that apply.)

increasing dividend payments to shareholders repurchasing shares of the company's common stock paying off existing long-term and short-term debt

In a nine-cell matrix for evaluating the strength of a diversified company's business lineup, ______ is plotted on the vertical axis and ______ is plotted on the horizontal axis.

industry attractiveness competitive strength