Chapter 08 test Bank
The two biggest drawbacks or disadvantages of unrelated diversification are:
the difficulties of competently managing many different businesses and being without the added source of competitive advantages that cross-business strategic for provides.
A related diversification strategy involves building the company around businesses:
with strategic fit with respect to key value chain activities and competitive assets.
Acquisition is an effective way to hurdle all of the following entry barriers EXCEPT:
avoiding the costs of doing due diligence
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 spinoff
Retrenching to a narrower diversification base is:
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.
Economies of scope:
are cost reductions that flow from operating in multiple related businesses.
What is the business term given for a company that generates cash flows over and above its internal requirements and can provide the corporate parent with funds for reinvestment?
cash cow
An economy of scope is BEST illustrated by being able to eliminate or reduce costs by:
combining related value-chain activities of different businesses into a single operation.
Corporate parenting refers to all of the following EXCEPT:
efforts to judiciously segregate funds for each business in such a way that keeps the money safe and discourages shifting funds across business units.
unrelated businesses:
have dissimilar value chains and resource requirements with no competitively important cross-business commonalities at the value chain level.
Corporate restructuring strategies:
involve making radical changes in a diversified company's business lineup, divesting some businesses and acquiring new ones so as to put a new face on the company's business lineup.
A diversified company has a parenting advantage when it:
is more able than other companies to boost the combined performance of it individual businesses through its high-level guidance, general oversight, and other corporate-level contributions.
The nine-cell industry attractiveness competitive strength matrix:
is useful for helping decide which businesses should have high, average, and low priorities in deploying corporate resources.
Which of the following is NOT one of the appeals of related diversification?
it is particularly well suited for the use of first-mover strategies and capturing valuable financial fits.
The three tests for judging whether a particular diversification move can create value for shareholders are:
the Attractiveness test, the cost-of-entry test, and better-off test
What is the difference between economies of scale and economies of scope?
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.
An umbrella brand:
is a generalized resource that can leveraged in unrelated diversification.
Which of the following is NOT a good candidate for divestiture in a corporate restructuring effort?
Businesses compatible with the company's revised diversification strategy
Identify and briefly describe the six steps involved in evaluating a diversified company's business lineup and diversification strategy.
Evaluating 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 the six steps for evaluating a diversified company's strategy.
A weighted industry attractiveness assessment is generally analytically superior to an unweighted assessment because
The various measures of attractiveness are not likely to be equally important in determining overall attractiveness
When should a business NOT be divested?
When the business is a cash cow
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:
selecting the appropriate value chain operating practices to improve the financial outlook.
Under what circumstances might a diversified firm choose to divest one of its businesses?
A business can be divested when there is an absence of shared values and cultural compatibility with another business, or when 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
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.
Which of the following is a diversified business with one major "core" business and a collection of small related or unrelated businesses?
A dominant business enterprise
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.
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.
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).
Which of the following is NOT a part of checking a diversified company's business units for cross-business competitive advantage potential?
Ascertaining the extent to which business units are making maximum use of the parent company's competitive advantages
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?
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.
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.
Which of the following is NOT one of the elements of crafting corporate strategy for a diversified company?
Choosing the appropriate value chain for each business the company has entered
What hurdles are present in calculationg industry attractiveness scores?
Deciding whether a business is related or unrelated
Which of the following is NOT part of the task of checking a diversified company's business lineup for adequate resource fit?
Determining whether opportunity exists for achieving 1 + 1 = 2 outcomes
Which one of the following is NOT an important aspect of evaluating the merits of a diversified company's strategy?
Determining which business units are cash cows and which ones are cash hogs, and then evaluation how soon the company's cash hogs can be transformed into cash cows.
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.
one strategic fit based approach to related diversification would be to:
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.
Explain the relevance of the following as they relate to building share holder value via diversification: a. the industry attractiveness test b. the cost-of-entry test c. 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.
The strategic options to improve a diversified company's overall performance do NOT include which of the following categories of actions?
Increasing dividend payments to shareholders and/or repurchasing shares of the company's stock
The businesses in a diversified company's lineup exhibit good resource fit when:
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.
What is it called when a diversified company cab add value by shifting capital from business units generating free cash flow to those needing additional capital to expand and realize their growth potential?
Internal Capital Market
Which of the following is NOT a reasonable option for deploying a diversified company's financial resources?
Investing financial resources in cash cow businesses until they show enough strength to generate positive cash flows
What does the industry attractiveness test involve in evaluating a diversified company's business lineup? Why is it relevant?
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. The more attractive the industries (both individually and as a group) that a diversified company is in, the better its prospects for good long-term performance.
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.
Which of the prime examples of strategic fit opportunities below are NOT related business activities?
Overhauling and streamlining the operations of the business by refocusing value chain activities toward businesses that can provide a superior job of parenting
Under what circumstances might an already diversified company choose to pursue corporate restructuring?
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.
The better-off test whether a particular diversification move is likely to generate added value for shareholders involves assessing whether the move will:
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.
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
Corporate strategy options for already diversified companies include all of the following EXCEPT:
Pursuing certain acquisitions even if they have done badly or haven;t quite lived up to expectations
Under what circumstances might an already diversified company choose to enter additional businesses and broaden its diversification base?
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.
Which of the following statements about cross-business strategic fit in a diversified enterprise is NOT accurate?
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.
In terms of strategy making, what is the difference between a one-business company and a diversified company?
The first uses a business-level strategy, while the second uses a set of business strategies and corporate strategy.
Once a company has diversified into a collection of related or unrelated businesses and concludes that some strategy adjustments are needed, what are the four main strategic paths it can employ to improve the performance of its overall business lineup?
The four main 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.
Which of the following is NOT generally something that ought to be considered in evaluating the attractiveness of a multi-business (diversified) company's business makeup?
The frequency with which strategic alliances and collaborative partnerships are used to each industry, and the extant to which firms in the industry utilize outsourcing.
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.
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.
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.
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?
When a diversified company has too many cash cows
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?
When the industry is growing rapidly and the target industry is comprised of several relatively large and well-established firms
Conditions that may make corporate restructuring strategies appealing include all of the following EXCEPT:
a business lineup that consists of too many cash cow businesses
A company can best accomplish diversification into new industries by:
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
The basic premise of unrelated diversification is that:
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.
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:
are cash cows and which ones are cash hogs
The nine-cell attractiveness-strength matrix provides clear, strong logic for considering using:
both industry attractiveness and business strength in allocating resources and investment capital to its different businesses
Retrenching to a narrower diversification base can be attractive or advisable EXCEPT when:
business units are cash cows with promising futures
relative market share is:
calculated by dividing a company's percentage share of total industry sales volume by the percentage share held by its largest rival
With a strategy of unrelated diversification, an acquisition is deemed to have potential if it:
can pass the industry attractiveness test and the cost-of-entry test, and if it has good prospects for profit growth.
What is the name of the process for developing new businesses as an outgrowth of a company's established business operations?
corporate venturing
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?
craft new initiatives designed to build/ enhance the reputation and image of the company
The options for allocating a diversified company's financial resources include all of the following EXCEPT:
decreasing dividend payments and/or selling shares of stock
Strategies to restructure a diversified company's business lineup invlove:
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.
The task of crafting a company's overall corporate strategy for a diverified company encompasses all of the following EXCEPT:
divesting well-performing businesses.
Diversification becomes a relevant strategic option for a company EXCEPT when it:
expands into additional businesses that unlock possibilities for a comprehensive cost enhancement strategy.
Strategic fit between two or more businesses exists when one or more activities comprising their respective value chains present opportunities:
for cross-business collaboration to build valuable new resource strengths and competitive capabilities.
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:
forcing cultural independence, operating diversity, and sophisticated analytical responsibility on the businesses to ensure compatibility with the corporate overhead identity.
Acquisition of an existing business is an attractive strategy option for entering a promising new industry because it:
is an effective way to hurdle entry barriers, is usually quicker than trying to launch a brand-new startup operation, an allows the acquirer to move directly to the task of building a strong position in the target industry.
A diversified company's business units exhibit good resource fit when:
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.
For a diversified company to be a strong performer:
its principles business must be in industries with a good outlook for growth and above-average profitability.
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:
its top management wants to increase its compensation.
For an unrelated diversification strategy to produce financial results above that of stand-alone entities, executives must do all of the following EXCEPT:
leverage the cross-business strategic fit advantage effectively
A big advantage of related diversification is that it:
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.
The chief purpose of calculating quantitative industry attractiveness scores for each industry a company has diversified into is to:
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.
The value of determining the relative competitive strength of each business a company has diversified into is to have a quantitative basis for:
rating them from strongest to weakest in contending for market leadership in their respective industries
Initiating actions to boost the combined performance of the corporation's collection of businesses includes all of the following strategic options, EXCEPT:
refocusing the existing businesses on new substitute product-line opportunities outside the existing industry framework.
Assessments of how a diversified company's subsidiaries compare in competitive strength should be based on such factors as:
relative market share, the ability to match or beat rivals on key products attributes, brand image and reputation, costs relative to competitors, and the ability to benefit from strategic fits with sister businesses earn the highest/lowest profits before taxes.
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, 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, adding the weighted ratings for each business unit to obtain an overall competitive strength of all the businesses, both individually and as a group.
Calculating quantitative attractiveness ratings for the industries a company has diversified into involves:
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 a weighted rating, adding the weighting 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
When discussing "economies of scope," it involves understanding that they:
stem from cost-saving strategic fits along the value chains or related businesses.
With an unrelated diversification strategy, the types of companies that makes particularly attractive acquisition target are:
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.
One of the most significant contributions to strategy making in diversified companies that the nine-cell industry attractiveness competitive strength matrix provides is:
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
What does a competitive strength score above 5 tell us about a diversified company's position in the market?
that its business units are all fairly strong contenders in their respective industries
To test whether a particular diversification move has good prospects for creating added shareholder value, corporate strategists should use:
the Attractiveness test, the cost-of-entry test, and better-off test
Which of the following is NOT a contributing reason for businesses with strategic fit in R&D or technology activities to perform better together?
the ability to continue using existing processes
The two biggest drawbacks or disadvantages of unrelated diversification are:
the demanding managerial requirements and the limited competitive advantage potential due to lack of cross-business strategic fit benefits.
A portfolio approach to managing a company's financial resource fit is based on:
the fact that different businesses have different cash flow and investment characteristics.
Businesses with strategic fit with respect to their supply chain activities perform better together because of all of the following EXCEPT:
the increased allocation and allotment of support activities and specialized resources and capabilities.
When calculating the weighted industry attractiveness scores, we find the more intensely competitive an industry is:
the lower the attractiveness weighting for that industry
What makes related diversification an attractive strategy?
the opportunity to convert cross-business strategic fit into competitive advantage over business rivals whose operations don't offer comparable strategic fit benefits.
An acquisition premium is the amount by which the price offered for an existing business exceeds:
the preacquisition market value of the target company.
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:
the premium cost
Establishing investment priorities and steering corporate resources in the most attractive business units typically requires the company to decide on all of the following options, EXCEPT:
the pursuit of debt reduction opportunities that can lower the debt/equity ratio while maintaining assest levels.
As a rule, the key indicators of industry attractiveness, for all the industries represented factors as:
the utility of the products for consumers from all age-groups.
the essential requirement for different businesses to be "related" is that:
their value chains exhibit competitively valuable cross-business commonalities.
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:
those companies with a mix of valuable competitive assests, covering the spectrum from generalized to specialized resources and capabillities
Checking the competitive advantage potential of cross-business strategic fits in a diversified company involves evaluating the extent to which sister businesses present opportunities:
to create a positive image in the industry irrespective of the financial performance of its businesses.
Which of the following rationales for pursuing unrelated diversification is likely to increase shareholder value?
to restructure an under performing business
The tests of whether a diversified company's businesses exhibit resource fit do NOT include:
whether the corporate parent has sufficient cash to fund the needs of its individual businesses and pay dividends to shareholders without having to borrow money.
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.
