strategic management ch 8

Dominant-Business Firms

One major core business accounting for 50-80% of revenues and a collection of small related or unrelated businesses accounts for the remainder

Broadly-Diversified Firms

Diversification includes a wide collection of either related or unrelated businesses or a mixture of both

Narrowly-Diversified Firms

Diversification into a few (2-5) related or unrelated businesses

Multibusiness Enterprises

Diversification into several unrelated groups of related businesses

______ requires creating a new business subsidiary from its inception. External development International expansion Related diversification Internal development

Internal development

______ are cost reductions stemming from strategic fit along the value chains of related businesses. Economies of scope Strategic diversification Competitive fit Economies of scale

Economies of scope

What are the two important pitfalls of an unrelated diversification strategy? Difficulty in maintaining consistent marketing approaches and lack of investment capital to keep the businesses running Highly taxing managerial requirements and limited opportunity for competitive advantage Very little value chain strategic fit and limited potential for industry expertise in a single area Detrimental effects of governmental policies and high regulatory requirements

Highly taxing managerial requirements and limited opportunity for competitive advantage

Which of these is a solid justification for pursuing an unrelated diversification strategy? The consolidated profit of unrelated businesses is more stable than profits of firms with related businesses. Risk is reduced by spreading investments over a set of diverse industries. Higher levels of managerial compensation associated with a greater degree of diversification tend to increase shareholder value. Management personnel have a high ability to spot low-priced, underperforming companies that could become profitable with some basic guidance.

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? Competently overseeing widely diverse businesses is harder than it sounds. The failure rate of financial results is higher than the success rate. Odds are, the results will be 1+1=3. Few companies have top management capabilities that are capable of successfully managing a diverse set of businesses.

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

Evaluating the Strategy of a Diversified Company

Step 1 Assess the attractiveness of the industries the firm has diversified into. Step 2 Assess the competitive strength of the firm's business units. Step 3 Evaluate the extent of cross-business strategic fit along the value chains of the firm's various business units. Step 4 Check whether the firm's resources fit the requirements of its present business lineup. Step 5 Rank the performance of the businesses from best to worst and determine a priority for allocating resources. Step 6 Craft new strategic moves to improve overall corporate performance.

______ exists when the value chains of different businesses present opportunities for cross-business skills transfer, cost sharing, or brand-sharing. Internal development Resource fit Value chain matching Strategic fit

Strategic fit

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. Realizing cross-business strategic fit benefits is possible only through related diversification. Capturing strategic fit through related diversification builds shareholder value in ways that a diversified stock portfolio cannot. If the businesses cannot deliver shareholder value as stand-alone firms, then competitive advantage through strategic fit is unlikely to occur.

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

Which of the following most accurately defines related businesses? The businesses use an overlapping marketing strategy targeting essentially the same customer groups. The businesses depend on the same set of suppliers for key materials and inputs. The value chains of the businesses possess competitively valuable cross-business relationships. The businesses all sell the same products within the same industry.

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

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. a joint venture acquisition starting a subsidiary internal development

acquisition

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.

Economies of scope

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

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. industry attractiveness better-off cost-of-entry 1+1=3

better-off

Economies of scope can be the result of a related strategy that allows businesses to share technology, facilities, or a common sales force. are cost savings that accrue directly from a larger operation, such as lower unit costs in a large plant versus a small plant. are important in achieving a cost-based competitive advantage in a related diversification strategy. are cost reductions stemming from strategic fit along the value chains of related businesses.

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

Economies of scope in a diversified company can help the company achieve the 1+1=3 'better off' test. are important for efficiency but do not help the company in earning higher profits and returns. are usually not a factor in delivering shareholder value. are rarely sufficient to significantly impact profitability.

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

Achieving diversification through internal development involves creating an entirely new business subsidiary within the company. buying an existing business within the same industry versus outside the industry. hiring key employees from more successful competitors. expanding the current business via global partners.

creating an entirely new business subsidiary within the company.

In a company pursuing unrelated diversification, the objective is to deliver returns that on average rise enough annually to reward shareholders. acquire as many businesses as possible within a short time frame to signal to shareholders that the diversification strategy is very aggressive. earn an immediate and short-term return on investment to please shareholders. divest any businesses that do not have cross-strategic business fit with their value chains.

deliver returns that on average rise enough annually to reward shareholders.

In a company pursuing unrelated diversification, the objective is to divest any businesses that do not have cross-strategic business fit with their value chains. deliver returns that on average rise enough annually to reward shareholders. earn an immediate and short-term return on investment to please shareholders. acquire as many businesses as possible within a short time frame to signal to shareholders that the diversification strategy is very aggressive.

deliver returns that on average rise enough annually to reward shareholders.

Strategic fit

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

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

false

cash cow

generates operating cash flows over and above its internal requirements, thereby providing financial resources that may be used to invest in cash hogs, finance new acquisitions, fund share buyback programs, or pay dividends.

cash hog

generates operating cash flows that are too small to fully fund its operations and growth; a cash hog must receive cash infusions from outside sources to cover its working capital and investment requirements

In terms of diversification, unrelated businesses are business that are located in geographically dispersed locations on a global scale. that are based on strategic alliances with no shared ownership or single corporate parent. have dissimilar value chains and resource requirements with no competitively valuable cross-business relationships. tend to have a lower earnings potential compared to related businesses.

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

unrelated businesses

have dissimilar value chains and resources requirements, with no competitively important cross-business value chain relationships

Diversification through acquisition of an existing business usually costs less than internal development. is preferable to a joint venture because of the level of investment required. is usually less successful than other approaches to diversification. helps the acquiring company clear entry barriers to an industry.

helps the acquiring company clear entry barriers to an industry.

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. better-off, strategic fit, and SWOT. cost-of-entry, profit growth, and labor cost. industry attractiveness, benchmarking, and profitability.

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

Corporate restructuring

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

An unrelated diversification strategy is usually executed through internal development. is also called a conglomerate is not as likely to achieve competitive advantage in a particular industry as is a related diversification strategy. represents a willingness by senior management to diversify into any industry where there are opportunities to improve financial results.

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

A single-business firm should strongly consider diversifying into new industries when marketing opportunities and sales decrease in their primary business. they need to quickly generate cash across multiple business units. they have achieved significant and profitable growth in their main business. they are unable to compete with foreign companies.

marketing opportunities and sales decrease in their primary business.

An unrelated diversification strategy offers significantly better potential for competitive advantage compared to what each business could generate on its own. offers limited potential for competitive advantage beyond what each business can generate on its own is more likely than related diversification to exhibit a high degree of strategic fit and therefore a greater chance of competitive advantage. is likely to offer enhanced consolidated performance compared to the sum of what the individual businesses could achieve independently.

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

Related businesses

possess competitively valuable cross-business value chain and resource matchups

Which of the following is not one of the actions needed by corporate executives to succeed in an unrelated diversification strategy? overseeing the businesses so that they perform at a higher level than they would as stand-alone businesses taking a completely "hands off" approach to let each of the unrelated businesses run itself identifying and acquiring new businesses that can produce good earnings and returns on investment negotiating favorable acquisition prices

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

Strategic fit among businesses can enhance shareholder value by transferring skills and capabilities from one business to another. leveraging use of a common brand name. spreading risk across completely different businesses. sharing facilities or resources to reduce costs.

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

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

true

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. acquisition unrelated diversification strategy related diversification strategy strategic alliance

unrelated diversification strategy

Under which of the following conditions is a joint venture, as a diversification strategy, a strategically good idea? 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 when the expansion-minded company wants to ensure a long-term business arrangement with a partner that fits with their diversification goals 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 when the opportunity involves too much risk or complexity for one company to assume alone

Under which of the following conditions is internal development as a diversification strategy an attractive option? when the targeted industry has many small firms such that the start-up does not have to compete against large, powerful rivals when the parent company already possesses the skills and resources needed to be competitive when adding new production capacity will not adversely impact the supply-demand balance in the industry when the business needs to be launched and operational within a very short time

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

Cost of Entry Test

—the cost to enter the target industry does not erode its long-term profit potential.

Better-Off Test—

—the firm's businesses will perform better together than as stand-alone firms, producing a synergistic 1+1=3 effect on shareholder value.

Industry Attractiveness Test

—the target industry presents good long-term profit opportunities.

Misguided Reasons for Diversifying

• Risk reduction • Growth • Managerial motives • Earnings stabilization