Chapter 8

A company has good financial resource fit if

each individual business sufficiently contributes to meeting companywide performance targets. the company can adequately fund all its businesses while keeping a good credit rating. the company can create enough internal cash flow to provide the capital required by its businesses.

Strategic fit

allows cross-business sharing of resources that enable value chain activities.

The decision to diversify should begin with

an economic justification.

The process of overhauling and streamlining the operations of a business is referred to as

restructuring.

Quantitative industry-attractiveness scores can be calculated based on

market size and projected growth rate. emerging threats and opportunities. the presence of cross-industry strategic fit.

Retrenching to a narrower diversification base can include which of the following?

eliminating businesses that have poor strategic fit getting out of businesses that are competitively weak focusing corporate resources on businesses in a few, carefully selected industries

Determining if there are obstacles that block a new company from gaining a foothold and thriving in an industry is an example of answering the strategy-based question of

entry barriers.

Which of the following statements are true of economies of scope?

They result from strategic fit among related businesses, allowing the sharing of resources among diversified businesses. They are a distinct concept from economies of scale. They are available only to firms engaging in related diversification.

Business units with competitive-strength ratings

above 6.7 are strong market contenders in their industries.

The crafting of strategic moves to improve a diversified company's overall performance

can be placed into four broad categories of action.

The three strategy options for pursuing diversification are

diversifying into unrelated businesses. diversifying into both related and unrelated businesses. diversifying into related businesses.

Which of the following are the ways a company can enter a new business?

joint ventures acquisition internal startup

Which of the following are questions to ask when evaluating industry attractiveness?

Which of the company's industries are most attractive? Does each industry the company has diversified into represent a good market for the company to be in? How appealing is the whole group of industries in which the company has invested?

Factors that can be used to quantify the competitive strengths of a diversified company's business subsidiaries include

ability to match or beat rivals on key product attributes. relative market share. costs relative to competitors' costs.

Factors that can be used to quantify the competitive strengths of a diversified company's business subsidiaries include

ability to match or beat rivals on key product attributes. costs relative to competitors' costs. relative market share.

A diversified company's base can be broadened by

acquiring more businesses and building positions in new industries.

If the question of entry barriers demonstrates that barriers against a company entering an industry cannot be readily overcome, the company will probably choose entry via

acquisition.

If the question of speed determines that fast movers can grab long-term advantages, the preferred mode of diversification is likely to be

acquisition.

When a company's existing businesses provide opportunities for growth and produce economic value for shareholders, it makes sense to

adhere to the existing business lineup.

A good resource fit would include solid parenting capabilities in companies that pursue which of the following?

an unrelated diversification strategy

The potential for an existing company and a new business to function better together following diversification than they would individually is part of the

better-off test.

The portfolio approach to financial fit revolves around the fact that

cash flow and investment characteristics vary among businesses.

Determining whether the premium required to make an acquisition will be worth the extra value gained is an example of answering the question of

comparative cost.

In calculating industry attractiveness scores,

competition intensity should be heavily weighted.

Determining whether the materials needed to start a business can be readily obtained by a company is an example of answering the strategy-based question of

critical resources and capabilities.

Choosing how best to enter a new business

depends partially on determining the least costly mode of entry.

The broad categories of action for crafting strategic moves to improve a diversified company's overall performance include

divesting certain businesses and retrenching to a narrower base of business operations. widening the company's business scope by making new acquisitions in new industries. sticking closely with the existing business lineup and pursuing opportunities that those businesses present.

Disney expansion from short films to animated films to live actions films to television is an example of

expansion into new markets by leveraging a core capability.

Resources whose use is applied across a wide range of industry types are known as

general resources.

The nine-cell attractiveness-strength matrix

identifies the industry attractiveness of businesses .identifies the business strength of businesses. helps diversified companies allocate resources among their businesses.

Cross-business strategic fit can exist

in customer service activities. at various points along the value chain. in supply chain activities.

What are the three Tests of Corporate Advantage?

industry attractiveness test better-off test cost of entry test

A diversified company can add value by shifting capital from business units generating free cash flow to those needing capital to grow by having a strong

internal capital market.

If the question of critical resources and capabilities demonstrates that a company has or can easily lease all of the materials necessary to start a new business, it will probably do so by

internal development.

The steps involved in creating a diversified company's corporate strategy include

leveraging cross-business value chain relationships into competitive advantage. establishing investment priorities. picking new industries to enter and the means for entering them.

Strategic options for allocating company financial resources include which of the following?

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

According to the ITT website the company began as a telephone and teelgraph company and acquired business such as hotels and rent a cars. These acquisitons which were later divested reflected a strategy of

mostly unrelated diversification

In order for a diversified company to perform well,

much of its revenues and profits should be derived from business units with comparatively high attractiveness scores.

Companies practicing unrelated diversification overwhelmingly enter new businesses by

obtaining an established company.

companies practicing unrelated diversification overwhelmingly enter new businesses by

obtaining an established company.

Businesses with strategic fit in supply chain activities are able to perform better together by

obtaining volume discounts on incoming components. sharing logistical resources. cooperating with common supply chain partners.

Disney's ability to leverage its characters caross its network of theme parks media networks and movies and consumer products is an example of corporte

parenting advantage.

Unrelated diversification

provides a limited potential for competitive advantage. rarely performs better than the sum of what the individual business units could achieve independently. provides very general, low-value resources for the subsidiaries.

Businesses are said to be related when

their value chains exhibit competitively important cross-business commonalities.

The nine-cell attractiveness-strength matrix makes a case for a company to take which of the following actions?

to concentrate resources in businesses that possess higher degrees of attractiveness and competitive strength to remove resources from ventures that are low in attractiveness and strength unless they offer superior profit or cash flow opportunity to be cautious about investing in companies located intermediately on the grid

Examples of opportunities for strategic fit include

transferring specialized expertise from the value chain of one business to another. exploiting the common use of a well-known brand name. sharing costs between businesses by combining their related value chain activities into a single operation.

True or false: Strategic uses of corporate resources should usually take precedence over financial options.

true

Entering a new business via a joint venture can be useful in which of the following situations?

when diversification entails operations in a foreign country when an opportunity in a new industry requires more know-how than one company has alone when an opportunity is too complicated or risky for one company to attempt alone

For which of the following conditions is restructuring a diversified company's business lineup an attractive course of action?

when the company has too many businesses in slowly growing or declining industries when the interest owed on large debts is greatly reducing profitability when the market shares of one or more major business units are decreasing because of superior competition

Corporate Stragegy helps managers understand which strategy question

where should the firm compete

Diversification is not really viewed as a success unless it

yields added long-term economic value for shareholders.

Which of the following are circumstances that indicate a poor fit of nonfinancial resources in a diversified company?

A mismatch exists between a diversifying company's competitive assets and the key success factors of an industry into which it is expanding. A core business lacks accumulated resources to deal with the competitive environment of the businesses into which it has diversified. A company's resources are stretched thin in order to assimilate and oversee many new businesses in a short time.

Which of the following would not generate a strategic fit amount ITT's business units?

Provide low level oversight and make available minimal corporate resources.

The redistribution of excess cash flow by parent companies from some businesses to others

is especially important when credit is tight.

Determining the competitive value of strategic fit in diversified companies

is important in evaluating their related diversification strategies.

In order to pass the three tests of corporate advantage, executives must

negotiate favorable acquisition prices. diversify into industries where the businesses can produce consistently good earnings and return on investment. do a superior job of corporate parenting via high-level managerial oversight.

In answering the question of comparative costs, acquisition transaction costs include which of the following?

negotiating a price evaluating potential targets identifying potential targets

After a evaluating the strength, attractiveness, and fit of a diversified company's strategy, the next move is to

rank the performance potential of the businesses.

Examples of strategic fit in sales and marketing include

reducing billing costs by using common promotional tie-ins. promoting products on the same website. using a single sales force.

Which of the following would be misguided reasons for pursuing unrelated diversification?

reducing earnings volatility boosting managerial compensation risk reduction

Strategic analysis of diversified companies

builds on the same ideas and techniques used for analyzing single-business companies.

A company

can diversify into related businesses, unrelated businesses, or both.

In order to be a good market for a company to be in, an industry should

pass the industry attractiveness test.

Diversifying into new industries

should be explored when a single-business company encounters dwindling opportunities in its principal business.

Determining how rapidly an industry is changing is crucial to answering the question of ______ when choosing a mode of entry.

speed

Unrelated diversification strategies

tend to have more overall failures than successes. can create only a small amount of competitive advantage beyond that which can be created by the individual businesses acting alone.

It makes sense to stick closely with a diversified company's present business lineup when

the company's existing businesses match the company's diversification strategy. the existing business lineup provides ample opportunity for growth. the current lineup reliably creates economic value for shareholders.

Examples of strategic fit in manufacturing include

the consolidation of production into a smaller number of plants. the sharing of cost-efficient production methods. the transfer of expertise in quality control.

Restructuring a business

often entails transferring experienced managers to the newly acquired business. generally involves liquidating underutilized assets. usually occurs when a diversified company acquires a new business that is underperforming.

Which of the following are true concerning the interpretation of industry-attractiveness scores?

A strongly performing diversified company's primary businesses should be in industries with high growth potential. If a company's scores are all above 5, it probably operates in an attractive group of industries Industries that score much less than five are unlikely to be attractive.

Which of the following statements are true of unrelated diversification?

A very small number of unanticipated problems or mistakes can have a major negative effect on corporate earnings. Problems can occur when corporate management makes decisions for businesses they do not know well. Most management teams are not capable of effectively managing a diversified group of unrelated businesses.

What questions can be answered by determining the competitive value of strategic fit in diversified companies?

Are the cost savings associated with economies of scope likely to give one or more businesses a cost-based advantage? Will leveraging a potent umbrella brand or corporate image strengthen the businesses and increase sales? How much competitive value will come from the cross-business transfer of skills, technology, or intellectual capital?

Which of the following statements are true concerning the portfolio approach to ensuring financial fit?

Business units in quickly expanding industries are often cash hogs. Cash cows have limited growth but are a valuable financial resource. The portfolio approach relies on the premise that cash flow and investment traits vary among different businesses.

which of the following ratings concerning interpretation of competitive-strength scores are correct?

Businesses with ratings in the 3.3 to 6.7 range have moderate competitive strength. Businesses with ratings below 3.3 are in competitively weak market positions. Business units with ratings above 6.7 are strong market contenders in their industries.

ITT is a technology oriented engineering and manufacturing company with business divisions and products: Industrial Process Division - pumps valves and control systems, Motion Tech divison, Interconnect solutions, control technologies

Combination of related and unrelated diversification.

Which of the following statements are true of multibusiness diversification strategies?

Combination related-unrelated diversification strategies are attractive to companies with a mix of valuable competitive assets. Some multibusiness enterprises are diversified into unrelated areas but have a group of related businesses within each area. Some companies are narrowly diversified around two to five related or unrelated businesses

Which of the following statements are true about a successful diversification effort?

It must add long-term economic value for shareholders. It must give shareholders value that they cannot get by purchasing different stocks on their own.

Steps involved in assessing the positive and negative aspects of a diversified company's strategy and determining how to improve performance include which of the following?

Determining if the firm's resources fit the requirements of its current business lineup. Determining the competitive strength of the company's business units. Evaluating the individual and group attractiveness of the industries the company has diversified into.

__________ could potentially be achieved through cost reductions stemming from strategic fit along the value chains of ITT's businesses.

Economies of Scope

True or false: The benefits of cross-business strategic fit follow naturally once a company can diversify into related businesses.

False

Which of the following are among the four questions that need to be asked when determining how best to enter a new business?

Is speed an important factor in the firm's chances for successful entry? Are there entry barriers to overcome? Which is the least costly mode of entry, given the company's objectives?

Which statement is true concerning the pursuit of growth through unrelated diversification?

It can be misguided if the growth is not profitable growth.

Which of the following are benefits of acquisition?

It is a useful way to get over entry barriers, such as building brand awareness. It is quicker than trying to launch a new operation. It allows access to hard-to-find resources and capabilities that work well with those of the acquiring company.

Which of the following statements are true concerning whether a company has sufficient nonfinancial resources?

The broader the diversification, the greater the concern that corporate executives are overburdened trying to parent too many companies. A company's resources can be overtaxed by making many acquisitions and calling on management to oversee many businesses quickly. If a company's strategy is closely tied to moving technologies from existing businesses to new ones, it must develop more resources to supply them.

Which of the following is true concerning relative market share?

The further below 1 a business unit's relative market share is, the weaker its competitive strength and market position with its rivals.

Which of the following statements are true of a nine-cell matrix?

The horizontal axis is divided into regions for strong, average, and weak competitive strength. Overall attractiveness and strength scores are used to plot business units, which are displayed as bubbles. The vertical axis is divided into regions for high, medium, and low attractiveness.

Which of the following are true in using cross-business strategic fit to create gains in profitability and shareholder value?

The more a company's businesses are related, the greater the company's opportunity to turn strategic fit into competitive advantage. Cross-business strategic fit benefits are possible only through a strategy of related diversification. It builds shareholder value in ways that are not possible through stock ownership in a variety of industries.

Which of the following statements are true concerning the ranking of a diversified company's business units from best to worst?

The position of different businesses in the nine-cell matrix is a good criteria for identifying high-opportunity and low-opportunity businesses. Future revenue and earnings for fast-growing industries usually look superior to those for slow-growing industries. The rankings help high-level executives prioritize businesses for resource support and capital investment.

Which of the following are drawbacks of acquisition?

There are often excessive premiums. Integration of the company into the existing firm can be time consuming. There can be high integration costs.

Which of the following statements are true concerning the cross-business allocation of financial resources by parent companies?

There is increased opportunity to add shareholder value because managers are privy to internal information unavailable to external financiers. Parent companies can deliver funds that would otherwise be unavailable owing to poor market conditions. Cross-business allocation can be especially advantageous during times of financial market crises.

Internal development of a new business is a good idea when which of the following conditions are met?

There is plenty of time to start the business. It is cheaper to enter internally than through an acquisition. The parent company has the in-house resources needed to launch the company.

In an unrelated diversification strategy, managers must make sure acquisition candidates have which of the following characteristics?

They are in an industry with attractive growth potential. They meet corporate targets for profitability and return on investment. They are big enough to significantly contribute to the parent company's bottom line.

Which of the following statements are true of specialized resources?

They are leveraged in related diversification. Their usefulness is limited in applications beyond those which they were created to serve. Their value is evident only when they are used in very specific businesses and industries.

Which of the following is true about joint ventures?

They are usually short-lived, ending as soon as the partners decide to part ways.

Which of the following is true of economies of scope?

They come directly from strategic fit along the value chains of related businesses.

Which of the following are true of related businesses?

They have similar resources and capabilities. They can be combined to perform better than the sum of the individual businesses. They have compatible value chain activities.

In an unrelated diversification strategy, managers must make sure acquisition candidates have which of the following characteristics?

They meet corporate targets for profitability and return on investment. They are in an industry with attractive growth potential. They are big enough to significantly contribute to the parent company's bottom line.

A diversified company in which one core business accounts for 50% to 80% of total revenues and other businesses account for the remainder is known as

a dominant-business enterprise.

Diversified companies that are able to create more value in their businesses than other diversified companies have what is called

a parenting advantage.

n calculating industry attractiveness scores,

competition intensity should be heavily weighted.

In a nine-cell matrix,

competitive strength is plotted on the horizontal axis. industry attractiveness is plotted on the vertical axis. each axis is divided into three regions.

Businesses with strategic fit in supply chain activities are able to perform better together by

cooperating with common supply chain partners. sharing logistical resources. obtaining volume discounts on incoming components.

Which of the following are terms that refer to diversification by starting a new business subsidiary from scratch?

corporate venturing new venture development internal development

When a firm with a related diversification strategy has businesses that match specialized resource requirements at points along their value chains that are critical for the business's market success, they are said to have

resource fit.

If a company has poorly chosen acquisitions that are underperforming expectations, it is a good idea to

restructure its business lineup.

When a company's management decides that it needs to concentrate on a smaller number of businesses, it is a good strategy to

retrench to a narrower diversification base.

Which of the following are strategic options for increasing a corporation's overall success?

retrenching to a narrower scope of diversification by divesting poorly performing businesses sticking closely with the existing business lineup and pursuing opportunities presented by these businesses broadening the scope of diversification by entering additional industries

True or false: One method of broadening a company's diversification base is to add businesses that will complement and strengthen the market position of businesses in industries where the company already has a stake.

true

Corporate brands that do not have a connotation of any specific type of product are known as

umbrella brands.

Corporate parents effectively contribute to the success of their businesses by

utilizing popular umbrella brands. providing general resources that lower their operating costs