Managing Policy and Strategy Final (Chapter 8)
When identifying a diversified company's present corporate strategy, which of the following would not be something to look for?
Actions over the past few years to substitute global strategies for multi-country strategies in one or more business units
Conditions that may make corporate restructuring strategies appealing include
All of these.
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 sister business units are making maximum use of the parent company's competitive advantages
Which of the following best illustrates an economy of scope?
Being able to eliminate or reduce costs by combining related value-chain activities of different businesses into a single operation
Which one 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 and solid strategic and resource fits generally should head the list for corporate resource support.
Which one 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
Which one of the following is not a reasonable option for deploying a diversified company's financial resources?
Concentrating most of a company's financial resources in cash cow businesses and allocating little or no additional resources to cash hog businesses until they show enough strength to generate positive cash flows
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 to build/enhance the reputation of the company's brand name
Which of the following is not among the disadvantages and managerial problems encountered by companies pursuing unrelated diversification strategies?
D.Ending up with too many cash hog businesses (as compared to related diversification strategies where cash hog businesses are rare)
Which one of the following is not part of the task of checking a diversified company's business line-up for adequate resource fit?
Determining whether some business units have value chain match-ups that offer opportunities to transfer skills or technology or intellectual capital from one business to another
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 evaluating how soon the company's cash hogs can be transformed into cash cows
Which one of the following is not a way for a company to build competitive advantage by pursuing a multinational diversification strategy?
Expansion of a company's business model to include revenues from exporting, franchising, and licensing
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
Which of the following is not likely to command much strategic attention from the top executives of companies pursuing an unrelated diversification strategy?
Looking for new businesses that present good opportunities for achieving economies of scope
Which of the following is not one of the appeals of related diversification?
Related diversification is particularly well-suited for the use of first-mover strategies and capturing valuable financial fits.
Which of the following is an important appeal of a related diversification strategy?
Related diversification offers more competitive advantage potential than does unrelated diversification.
Which of the following is not a major consideration in evaluating the pluses and minuses of a diversified company's strategy?
Scrutinizing each industry/business to determine where driving forces are strongest/weakest and how many profitable strategic groups the company has diversified into
Which of the following statements about cross-business strategic fit in a diversified enterprise is not accurate?
Strategic fit is primarily a byproduct of unrelated diversification and exists when the value chain activities of unrelated businesses possess economies of scope and good financial fit.
Which of the following is not one of the appeals of an unrelated diversification strategy?
Superior top management ability to cope with the wide variety of problems encountered in managing a broadly diversified group of businesses
Which of the following is not generally something that ought to be considered in evaluating the attractiveness of a diversified company's business makeup?
The frequency with which strategic alliances and collaborative partnerships are used in each industry, the extent to which firms in the industry utilize outsourcing, and whether the industries a company has diversified into have common key success factors
Diversification becomes a relevant strategic option in all but which one of the following situations?
When a company is only earning a low profit margin in its principal business.
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 one of the following is not a factor that makes it appealing to diversify into a new industry by forming an internal start-up 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.
Diversification ought to be considered when
a company begins to encounter diminishing growth prospects in its mainstay business.
A diversified company's business units exhibit good resource fit when
a company 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.
What sets a multinational diversification strategy apart from other diversification strategies is
a diversity of businesses and a diversity of national markets.
A joint venture is an attractive way for a company to enter a new industry when
a firm is missing some essential skills or capabilities or resources and needs a partner to supply the missing expertise and competencies or fill the resource gaps.
A company can best accomplish diversification into new industries by
acquiring a company already operating in the target industry, creating a new business subsidiary internally to compete in the target industry, or forming a joint venture with another company to enter the target industry.
The most popular strategy for entering new businesses and accomplishing diversification is
acquisition of an existing business already in the chosen 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.
Cross-business strategic fits can be found
anywhere along the respective value chains of related businesses.
The best place to look for cross-business strategic fits is
anywhere along the respective value chains of related businesses—no one place is best.
Economies of scope
are cost reductions that flow from operating in multiple related businesses.
Diversifying into new businesses is justifiable only if it
builds shareholder value.
Relative market share is
calculated by dividing a business's percentage share of total industry sales volume by the percentage share held by its largest rival—it is a better indicator of a business's competitive strength than is a simple percentage measure of market share.
The attractiveness test for evaluating whether diversification into a particular industry is likely to build shareholder value involves determining whether
conditions in the target industry are sufficiently attractive to permit earning consistently good profits and returns on investment.
The cost-of-entry test for evaluating whether diversification into a particular industry is likely to build shareholder value involves
considering whether a company's costs to enter the target industry are low enough to allow for good profits or so high that potential profits would be eroded.
The two biggest drawbacks or disadvantages of unrelated diversification are
demanding managerial requirements and limited competitive advantage potential that cross-business strategic fit provides.
The basic purpose of calculating competitive strength scores for each of a diversified company's business units is to
determine how strongly positioned each business unit is in its industry.
A strategy of diversifying into unrelated businesses
discounts the importance of strategic fit benefits and instead focuses on building and managing a group of businesses capable of delivering good financial performance irrespective of the industries these businesses are in.
To create value for shareholders via diversification, a company must
diversify into businesses that can perform better under a single corporate umbrella than they could perform operating as independent, stand-alone businesses.
One strategic fit-based approach to related diversification would be to
diversify into new industries that present opportunities to transfer competitively valuable expertise, technological know-how, or other capabilities from one business to another.
Strategies to restructure a diversified company's business lineup involves
divesting some businesses and acquiring new ones so as to put a new face on a diversified company's business makeup.
In companies pursuing a strategy of unrelated diversification,
each business is on its own in trying to build a competitive edge and the consolidated performance of the businesses is likely to be no better than the sum of what the individual businesses could achieve if they were independent.
Evaluating a diversified company's corporate strategy and critiquing the pluses and minuses of its business lineup involves
evaluating the strategic fits and resource fits among the various sister businesses and deciding what priority to give each of the company's business units in allocating resources.
The better-off test for evaluating whether a particular diversification move is likely to generate added value for shareholders involves
evaluating whether the diversification move will produce a 1 + 1 = 3 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.
A "cash cow" type of business
generates positive cash flows over and above its internal requirements, thus providing a corporate parent with cash flows that can be used for financing new acquisitions, investing in cash hog businesses, and/or paying dividends.
A diversified company that leverages the strategic fits of its related businesses into competitive advantage
has a clear path to achieving 1 + 1 = 3 gains in shareholder value.
Retrenching to a narrower diversification base
has the advantage of focusing a diversified firm's energies on building strong positions in a few core businesses rather the stretching its resources and managerial attention too thinly across many businesses.
A key issue in companies pursuing an unrelated diversification strategy is
how wide a net to cast in building a portfolio of unrelated businesses.
A company pursuing a related diversification strategy would likely address the issue of what additional industries/businesses to diversify into by
identifying an attractive industry whose value chain has good strategic fit with one or more of the firm's present businesses.
The businesses in a diversified company's lineup exhibit good resource fit when
individual businesses add to a company's resource strengths and when a company has the resources to adequately support the requirements of its businesses as a group without spreading itself too thin.
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.
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 start-up operation, and allows the acquirer to move directly to the task of building a strong position in the target industry.
Diversification merits strong consideration whenever a single-business company
is faced with diminishing market opportunities and stagnating sales in its principal business.
The nine-cell industry attractiveness-competitive strength matrix
is useful for helping decide which businesses should have high, average, and low priorities in allocating corporate resources.
In a diversified company, a business subsidiary has more competitive advantage potential when
it has value chain relationships with other business subsidiaries that present competitively valuable opportunities to transfer skills or technology or intellectual capital from one business to another, combine the performance of related activities and reduce costs, share use of a well-respected brand name, or collaborate to create new competitive capabilities.
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.
Calculating quantitative attractiveness ratings for the industries a diversified company has invested in
provides a basis for deciding whether a diversified company has good prospects for growth and profitability, given the attractiveness ratings of the industries in which it has business interests.
Assessments of the long-term attractiveness of each industry represented in a diversified company's lineup of businesses should be based on
quantitative industry attractiveness scores derived from rating each industry on several relevant attractiveness measures (weighted according to their relative importance in determining overall attractiveness).
Assessments of how a diversified company's subsidiaries compare in competitive strength should be based on such factors as
relative market share, ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors, and ability to benefit from strategic fits with sister businesses.
In diversified companies with unrelated businesses, the strategic attention of top executives tends to be focused on
screening acquisition candidates and evaluating the pros and cons of keeping or divesting existing businesses.
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, and using the overall competitive strength scores to evaluate the 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 weighted rating, adding the weighted ratings for each industry to obtain an overall industry attractiveness score, and using the overall industry attractiveness scores to evaluate the attractiveness of all the industries, both individually and as a group.
The success of unrelated diversification is dependent upon management's ability to
spotting bargain-priced companies with big upside potential and then turning around their operations quickly with the aid of the parent company's financial resources and managerial know-how.
One appealing aspect of unrelated diversification is that it
spreads the business risk across a group of truly diverse industries.
Economies of scope
stem from cost-saving strategic fits along the value chains of related businesses.
With an unrelated diversification strategy, the types of companies that make particularly attractive acquisition targets 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 9-cell industry attractiveness/competitive strength matrix provides is
that businesses having the greatest competitive strength and 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.
The most important strategy-making guidance that comes from drawing a 9-cell industry attractiveness- competitive strength matrix is
that corporate resources should be concentrated on those businesses enjoying both a higher degree of industry attractiveness and competitive strength and that businesses having low competitive strength in relatively unattractive industries should be looked at for possible divestiture.
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 the better-off test.
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 the better-off test.
Internal start-up of a new business subsidiary can be a more attractive means of entering a desirable new business than is acquiring an existing firm already in the targeted industry when
the company has ample time and adequate resources to launch the new internal start-up business from the ground up.
To identify a diversified company's strategy, one should consider such factors as
the extent to which the firm is broadly or narrowly diversified, whether it is pursuing related or unrelated diversification (or a mixture of both), and the recent moves it has made to divest businesses, acquire new businesses, and strengthen the positions of existing businesses.
Checking a diversified firm's business portfolio for the competitive advantage potential of cross-business strategic fits entails consideration of
the extent to which there are competitively valuable relationships between the value chains of sister business units and what opportunities they present to reduce costs, share use of a potent brand name, create competitively valuable new capabilities via cross-business collaboration, or transfer skills or technology or intellectual capital from one business to another.
A joint venture is an attractive way for a company to enter a new industry when
the opportunity is too risky or complex for a company to pursue alone, a company lacks some important resources or competencies and needs a partner to supply them, and/or a company needs a local partner in order to enter a desirable business in a foreign country.
What makes related diversification an attractive strategy is
the opportunity to convert cross-business strategic fits into competitive advantages over business rivals whose operations don't offer comparable strategic fit benefits.
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.
Businesses are said to be "related" when
their value chains possess competitively valuable cross-business relationships that present opportunities to transfer resources from one business to another, combine similar activities and reduce costs, share use of a well-known brand name, and/or create mutually useful resource strengths and capabilities.
The essential requirement for different businesses to be "related" is that
their value chains possess competitively valuable cross-business relationships.
Diversifying into a new industry by forming a new internal subsidiary to enter and compete in the target industry is attractive when
there is ample time to launch the new business from the ground up and entry barriers can be hurdled at acceptable cost.
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.
The sources of a competitive advantage for a diversified multinational corporation do not include
trying to maximize the number of cash cow businesses and minimize the number of cash hog businesses.
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.
Checking a diversified company's business portfolio for the competitive advantage potential of cross- business strategic fits does not involve ascertaining
which business units are cash cows and which ones are cash hogs.
When industry attractiveness ratings are calculated for each of the industries a multi-business company has diversified into, the results help indicate
which industries appear to be the best and worst ones to be in and the attractiveness of all the industries as a group from the standpoint of the company's long-term performance.