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45. A diversified company has a parenting advantage when it A. is more able than other companies to boost the combined performance of its individual businesses through its high-level guidance, general oversight, and other corporate-level contributions. B. is more able than other companies to create positive collaboration within its portfolio for different specialty groups and geographic locations. C. results in supporting short-term economic shareholder value. D. manages a set of fundamentally similar business operations inside fundamentally similar industries and environments. E. avoids acquiring undervalued companies and thus reduces risks.

. is more able than other companies to boost the combined performance of its individual businesses through its high-level guidance, general oversight, and other corporate-level contributions. Corporate parenting refers to the role that a diversified corporation plays in nurturing its component businesses through the provision of top management expertise, disciplined control, financial resources, and other types of general resources and capabilities such as long-term planning systems, business development skills, management development processes, incentive systems, umbrella brands, and an internal capital market capability to allow judicious cross-business allocation of financial resources.

84. 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? A. Businesses with high industry attractiveness ratings should be given top priority and those with low industry attractiveness ratings should be given low priority. B. 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. C. The positions of each business in the nine-cell attractiveness-strength matrix should govern resource allocation. D. Businesses with the most strategic and resource fits should be given top priority and those with the fewest strategic and resource fits should be given low priority. E. Businesses with high competitive strength ratings should be given top priority and those with low competitive strength ratings should be given low priority.

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.

28. Which of the following is NOT one of the appeals of related diversification? A. It can offer opportunities for transferring expertise, technology, and other capabilities from one business to another. B. It can offer opportunities for reducing costs on advertising by leveraging use of a competitively powerful brand name. C. It is particularly well-suited for the use of first-mover strategies and capturing valuable financial fits. D. It may present opportunities for cross-business collaboration to create valuable new competencies and capabilities. E. It can facilitate sharing of other resources (besides brands) that support corresponding value chain activities across businesses.

It is particularly well-suited for the use of first-mover strategies and capturing valuable financial fits. 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. Such matchups facilitate the sharing or transfer of the resources and capabilities that enable the performance of these activities and underlie each business's quest for competitive advantage. By facilitating the sharing or transferring of such important competitive assets, related diversification can elevate each business's prospects for competitive success.

34. What is the difference between economies of scale and economies of scope? A. Scale refers to the magnitude or size of the operation, while scope refers to the reach of defined savings within the value chain. B. Scale refers to the extent of change, while scope refers to the possibilities of change. C. Scale is about dimensions, while scope is about the capacity available for production capabilities. D. 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. E. Scale and scope mean the same thing and the only difference is the extent of cost savings accrued from unrelated businesses in each.

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. Economies of scale are cost savings that accrue directly from a larger-sized operation—for example, unit costs may be lower in a large plant than in a small plant. Economies of scope, however, stem directly from strategic fit along the value chains of related businesses, which in turn enables the businesses to share resources or to transfer them from business to business at low cost.

35. Which of the following statements about cross-business strategic fit in a diversified enterprise is NOT accurate? A. Strategic fit between two businesses exists when the management know-how accumulated in one business is transferable to the other. B. Strategic fit exists when two businesses present opportunities to economize on marketing, selling, and distribution costs. C. Competitively valuable cross-business strategic fits are what enable related diversification to produce a synergistic performance outcome. D. 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. E. Strategic fit exists when a company can transfer its brand-name reputation to the products of a newly acquired business and add to the competitive power of the new business.

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. Related diversification is an opportunity to convert cross-business strategic fit into a competitive advantage via (1) transferring skills or knowledge, (2) combining related value chain activities to achieve lower costs, (3) leveraging the use of a well-respected brand name, (4) sharing other valuable resources, and (5) using cross-business collaboration and knowledge sharing to create new resources and capabilities and drive innovation.

7. In terms of strategy making, what is the difference between a one-business company and a diversified company? A. The first uses a business-level strategy, while the second uses a set of business strategies and a corporate strategy. B. The first uses a business-level strategy, while the second uses a corporate-wide strategy. C. The first uses an operating strategy, while the second uses a business-line strategy. D. The first uses a functional strategy, while the second uses a business-line strategy. E. The first uses a single-line strategy, while the second uses a multi-line strategy.

The first uses a business-level strategy, while the second uses a set of business strategies and a corporate strategy. In a one-business company, managers have to come up with a plan for competing successfully in only a single industry environment—labeled as business strategy (or business-level strategy). But in a diversified company, the strategy-making challenge involves developing a set of business strategies, one for each industry arena in which the diversified company operates and a companywide (or corporate) strategy for improving the performance of the company's overall business lineup.

98. Conditions that may make corporate restructuring strategies appealing include all of the following EXCEPT A. ongoing declines in the market shares of one or more major business units that are falling prey to more market-savvy competitors. B. a business lineup that consists of too many slow-growth, declining, low-margin, or competitively weak businesses. C. an excessive debt burden with interest costs that eat deeply into profitability. D. ill-chosen acquisitions that haven't lived up to expectations. E. a business lineup that consists of too many cash cow businesses.

a business lineup that consists of too many cash cow businesses.

55. Which of the following is a diversified business with one major "core" business and a collection of small related or unrelated businesses? A. a broadly diversified enterprise B. a narrowly diversified enterprise C. a multi-business enterprise D. a high compensation/low risk enterprise E. a dominant business enterprise

a dominant business enterprise A dominant-business enterprise has one major "core" business that accounts for 50 to 80 percent of total revenues and a collection of small related or unrelated businesses that account for the remainder.

92. 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. a spinoff. B. a wholly-owned subsidiary. C. a functional divesture. D. fully-diluted stock. E. a restructure.

a spinoff.

91. Retrenching to a narrower diversification base is A. usually the most attractive long-run strategy for a broadly diversified company confronted with recession, high interest rates, mounting competitive pressures in several of its businesses, and sluggish growth. B. 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. C. an attractive strategy option for revamping a diverse business lineup that lacks strong cross-business financial fit. D. sometimes an attractive option for deepening a diversified company's technological expertise and supporting a faster rate of product innovation. E. a strategy best reserved for companies in poor financial shape.

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.

18. A company can best accomplish diversification into new industries by A. outsourcing most of the value chain activities that have to be performed in the target business/industry. B. 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. C. integrating forward or backward into the target industry. D. shifting from a strategic group comprised mostly of single-business companies to a strategic group comprised of diversified companies. E. employing an offensive strategy with new product innovation as its centerpiece.

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. A company can achieve diversification by acquiring an existing company, starting up a new business from scratch, or forming a joint venture with one or more companies to enter new businesses. In every case, however, the decision to diversify must start with a strong economic justification for doing so.

41. The basic premise of unrelated diversification is that A. the least risky way to diversify is to seek out businesses that are leaders in their respective industry. B. the best companies to acquire are those that offer the greatest economies of scope rather than the greatest economies of scale. C. the best way to build shareholder value is to acquire businesses with strong cross-business financial fit. D. 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. E. the task of building shareholder value is better served by seeking to stabilize earnings across the entire business cycle than by seeking to capture cross-business strategic fits.

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. With a strategy of unrelated diversification, an acquisition is deemed to have potential if it passes the industry-attractiveness and cost of entry tests and if it has good prospects for attractive financial performance.

75. 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 A. have value chain match-ups that offer opportunities to combine the performance of related value chain activities and reduce costs. B. have value chain match-ups that offer opportunities to transfer skills or technology or intellectual capital from one business to another. C. have opportunities to share use of a well-respected brand name. D. have value chain match-ups that offer opportunities to create new competitive capabilities or to leverage existing resources. E. are cash cows and which ones are cash hogs.

are cash cows and which ones are cash hogs. Relative market share, the ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors' costs, and the ability to benefit from strategic fits with other business units are some factors used in quantifying the competitive strengths of a diversified company's business subsidiaries.

37. Economies of scope A. are cost reductions that flow from operating in multiple related businesses. B. arise only from strategic fit relationships in the production portions of the value chains of sister businesses. C. are more associated with unrelated diversification than related diversification. D. are present whenever diversification satisfies the attractiveness test and the cost of entry test. E. arise mainly from strategic fit relationships in the distribution portions of the value chains of unrelated businesses.

are cost reductions that flow from operating in multiple related businesses. Economies of scope stem directly from strategic fit along the value chains of related businesses, which in turn enables the businesses to share resources or to transfer them from business to business at low cost.

76. Which of the following is NOT a part of checking a diversified company's business units for cross-business competitive advantage potential? A. ascertaining the extent to which business units have value chain match-ups that offer opportunities to combine the performance of related value chain activities and reduce costs B. ascertaining the extent to which business units have value chain match-ups that offer opportunities to transfer skills or technology or intellectual capital from one business to another C. ascertaining the extent to which business units are making maximum use of the parent company's competitive advantages D. ascertaining the extent to which business units have value chain match-ups that offer opportunities to create new competitive capabilities or to leverage existing resources E. ascertaining the extent to which business units present opportunities to share use of a well-respected brand name

ascertaining the extent to which business units are making maximum use of the parent company's competitive advantages

15. The three tests for judging whether a particular diversification move can create value for shareholders are the A. attractiveness test, the profitability test, and the shareholder value test. B. strategic fit test, the competitive advantage test, and the return-on-investment test. C. resource fit test, the profitability test, and the shareholder value test. D. attractiveness test, the cost of entry test, and the better-off test. E. shareholder value test, the cost of entry test, and the profitability test.

attractiveness test, the cost of entry test, and the better-off test. To build shareholder value, any business diversification strategy should pass the three Tests of Corporate Advantage: the industry attractiveness test, the cost of entry test, and the better-off test.

16. To test whether a particular diversification move has good prospects for creating added shareholder value, corporate strategists should use A. profit test, the competitive strength test, the industry attractiveness test, and the capital gains test. B. better-off test, the competitive advantage test, the profit expectations test, and the shareholder value test. C. barrier-to-entry test, the competitive advantage test, the growth test, and the stock price effect test. D. strategic fit test, the industry attractiveness test, the growth test, the dividend effect test, and the capital gains test. E. attractiveness test, the cost of entry test, and the better-off test.

attractiveness test, the cost of entry test, and the better-off test. To build shareholder value, any business diversification strategy should pass the three Tests of Corporate Advantage: the industry attractiveness test, the cost of entry test, and the better-off test.

73. The nine-cell attractiveness-strength matrix provides clear, strong logic for considering using A. only industry attractiveness in allocating resources and investment capital to its different businesses. B. only business strength in allocating resources and investment capital to the different businesses. C. both industry attractiveness and business strength in allocating resources and investment capital to its different businesses. D. both industry attractiveness and product strength in allocating resources and investment capital to its different businesses. E. both resource fit and product strength in allocating resources and investment capital to its different businesses.

both industry attractiveness and business strength in allocating resources and investment capital to its different businesses.

4. Diversifying into new businesses can be considered a success only if it A. results in increased profit margins and bigger total profits. B. builds shareholder value. C. helps a company escape the rigors of competition in its present business. D. leads to the development of a greater variety of distinctive competencies and competitive capabilities. E. helps the company overcome the barriers to entering additional foreign markets.

builds shareholder value. Diversification cannot be considered a success unless it results in added shareholder value—value that shareholders cannot capture on their own by spreading their investments across the stocks of companies in different industries.

99. Which of the following is NOT a good candidate for divestiture in a corporate restructuring effort? A. business units that lack strategic fit with the businesses to be retained B. weak performers C. businesses in unattractive industries D. businesses that are cash hogs or that lack other types of resource fit E. businesses compatible with the company's revised diversification strategy

businesses compatible with the company's revised diversification strategy

67. Relative market share is A. calculated by dividing a company's percentage share of total industry sales volume by the percentage share held by its largest rival. B. calculated by adjusting a company's revenue share up or down by a factor proportional to whether their quality/customer service factors are above/below industry averages. C. calculated by dividing a company's market share (based on dollar volume) by the industry-average market share. D. particularly useful in identifying cash cows, which have big relative market shares (above 1.0), and cash hogs, which have low relative market shares (below 0.5). E. calculated by subtracting the industry-average market share (based on revenue) from the company's market share to highlight relative share above/below the industry average. This amount is a better indicator of a business's competitive strength than is just looking at the firm's market share percentage.

calculated by dividing a company's percentage share of total industry sales volume by the percentage share held by its largest rival. A business unit's relative market share is defined as the ratio of its market share to the market share held by the largest rival firm in the industry, with market share measured in unit volume, not dollars.

42. With a strategy of unrelated diversification, an acquisition is deemed to have potential if it A. can achieve at least existing profit margins into the near future. B. has the opportunity to generate positive buzz in the industry, even if it may not be able to contribute to the parent firm's bottom line. C. can pass the industry attractiveness test and the cost of entry test, and if it has good prospects for profit growth. D. can pass at least the industry attractiveness test if not the cost of entry test. E. can add economic value for managers.

can pass the industry attractiveness test and the cost of entry test, and if it has good prospects for profit growth. With a strategy of unrelated diversification, an acquisition is deemed to have potential if it passes the industry-attractiveness and cost of entry tests and if it has good prospects for attractive financial performance.

9. Which of the following is NOT one of the elements of crafting corporate strategy for a diversified company? A. picking new industries to enter and deciding on the means of entry B. choosing the appropriate value chain for each business the company has entered C. pursuing opportunities to leverage cross-business value chain relationships and strategic fit into competitive advantage D. establishing investment priorities and steering corporate resources into the most attractive business units E. initiating actions to boost the combined performance of the businesses the firm has entered

choosing the appropriate value chain for each business the company has entered Choosing the appropriate value chain for each business the company has entered is not one of the elements of crafting corporate strategy for a diversified company.

39. An economy of scope is BEST illustrated by being able to eliminate or reduce costs by A. combining related value-chain activities of different businesses into a single operation. B. performing all of the value chain activities of related sister businesses at the same location. C. extending the firm's scope of operations over a wider geographic area. D. expanding the size of a company's manufacturing plants. E. having more value chain activities performed in-house rather than outsourcing them.

combining related value-chain activities of different businesses into a single operation. Economies of scope stem directly from strategic fit along the value chains of related businesses, which in turn enables the businesses to share resources or to transfer them from business to business at low cost.

3. Diversification ought to be considered when a A. company is under pressure to create a more attractive and cost-efficient value chain. B. company begins to encounter diminishing growth prospects in its mainstay business. C. company's profits are being squeezed and it needs to increase its net profit margins and return on investment. D. company lacks sustainable competitive advantage in its present business. E. company has run out of ways to achieve a distinctive competence in its present business.

company is under pressure to create a more attractive and cost-efficient value chain. Diversifying into new industries always merits strong consideration whenever a single-business company encounters diminishing market opportunities and stagnating sales in its principal business.

21. What is the name of the process for developing new businesses as an outgrowth of a company's established business operations? A. corporate venturing B. value chain integration C. resource capability process D. diversification activity capabilities E. business launch

corporate venturing Corporate venturing (or new venture development) is the process of developing new businesses as an outgrowth of a company's established business operations. It is also referred to as corporate entrepreneurship or intrapreneurship since it requires entrepreneurial like qualities within a larger enterprise.

89. 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? A. multinational diversification B. restructure the company's business lineup with a combination of divestitures and new acquisitions C. craft new initiatives designed to build/enhance the reputation and image of the company D. divest some businesses and retrench to a narrower diversification base E. broaden the diversification base

craft new initiatives designed to build/enhance the reputation and image of the company

64. What hurdles are present in calculating industry attractiveness scores? A. deciding on the appropriate weights for the attractiveness measures B. different analysts use different weights for the different attractiveness measures C. gaining sufficient command of the industry to assign more accurate and objective ratings D. deciding the impact of strategic fits to unrelated and related diversification E. deciding whether a business is related or unrelated

deciding whether a business is related or unrelated Each attractiveness measure is assigned a weight reflecting its relative importance in determining an industry's attractiveness, since not all attractiveness measures are equally important. Because of a degree of subjectivity involved in the measurement, it is not easy to accurately calculate industry attractiveness scores.

85. The options for allocating a diversified company's financial resources include all of the following EXCEPT A. making acquisitions to establish positions in new businesses or to complement existing businesses. B. investing in ways to strengthen or grow existing businesses. C. funding long-range R&D ventures aimed at opening market opportunities in new or existing businesses. D. paying off existing debt and building cash reserves. E. decreasing dividend payments and/or selling shares of stock.

decreasing dividend payments and/or selling shares of stock.

83. Which of the following is NOT part of the task of checking a diversified company's business lineup for adequate resource fit? A. determining whether the excess cash flows generated by cash cow businesses are sufficient to cover the negative cash flows of its cash hog businesses B. determining whether recently acquired businesses are acting to strengthen a company's resource base and competitive capabilities or whether they are causing its competitive and managerial resources to be stretched too thinly across its businesses C. determining whether opportunity exists for achieving 1 + 1 = 2 outcomes D. determining whether the company has adequate financial strength to fund its different businesses and maintain a healthy credit rating E. determining whether the corporate parent has or can develop sufficient resource strengths and competitive capabilities to be successful in each of the businesses it has diversified into

determining whether opportunity exists for achieving 1 + 1 = 2 outcomes

57. Which one of the following is NOT an important aspect of evaluating the merits of a diversified company's strategy? A. assessing the competitive strength of each business the company has diversified into B. 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 C. evaluating the strategic fits and resource fits among the various sister businesses D. assessing the attractiveness of the industries the company has diversified into, both individually and as a group E. ranking the performance prospects of the businesses from best to worst and deciding what priority to give each of the company's business units in allocating resources

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 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 all important aspects for a diversified company's strategy.

5. It becomes particularly urgent for a company to consider diversification when there are A. opportunities to leverage existing competencies and capabilities by expanding into businesses where these same resources are key success factors and valuable competitive assets. B. diminishing market opportunities and stagnating sales in its principal business. C. opportunities to lower costs by entering closely related businesses. D. opportunities to transfer a powerful and well-respected brand name to the products of other businesses and thereby increase the sales and profits of these newly entered businesses. E. needs to avoid putting all of its "eggs" in one industry basket.

diminishing market opportunities and stagnating sales in its principal business. Diversifying into new industries always merits strong consideration whenever a single-business company encounters diminishing market opportunities and stagnating sales in its principal business.

6. To create value for shareholders via diversification, a company must A. get into new businesses that are profitable. B. diversify into industries that are growing rapidly. C. spread its business risk across various industries by only acquiring firms that are strong competitors in their respective industries. D. diversify into businesses that can perform better under a single corporate umbrella than they could perform operating as independent, stand-alone businesses. E. diversify into businesses that have either key success factors or value chains that are similar to its present businesses.

diversify into businesses that can perform better under a single corporate umbrella than they could perform operating as independent, stand-alone businesses. Diversification cannot be considered a success unless it results in added shareholder value—value that shareholders cannot capture on their own by spreading their investments across the stocks of companies in different industries.

30. One strategic fit based approach to related diversification would be to A. 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. B. diversify into foreign markets where the firm has unrelated businesses. C. acquire rival firms that have broader product lines so as to give the company access to a wider range of buyer groups. D. acquire companies in forward distribution channels (wholesalers and/or retailers). E. expand into foreign markets where the firm currently does no business.

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. Transferring specialized expertise, technological know-how, or other competitively valuable strategic assets from one business's value chain to another's is a sound diversification strategy with a good strategic fit.

96. Strategies to restructure a diversified company's business lineup involve A. revamping the value chains of each of a diversified company's businesses. B. focusing on restoring the profitability of its money-losing businesses and thereby improving the company's overall profitability. C. revamping the strategies of its different businesses, especially those that are performing poorly. D. 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. E. broadening the scope of diversification to include a larger number of smaller and more diverse businesses.

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.

Topic: Diversification 8. The task of crafting a company's overall corporate strategy for a diversified company encompasses all of the following EXCEPT A. picking the new industries to enter and deciding on the means of entry. B. initiating actions to boost the combined performance of the corporation's collection of businesses. C. pursuing opportunities to leverage cross-business value chain relationships and strategic fit into competitive advantage. D. establishing investment priorities and steering corporate resources into the most attractive business units. E. divesting well-performing businesses.

divesting well-performing businesses. Strategic options for improving the corporation's overall performance include retrenching to a narrower scope of diversification by divesting poorly performing businesses, not well-performing businesses.

54. Which of the following is a diversified business with one major "core" business and a collection of small related or unrelated businesses? A. broadly diversified enterprise B. narrowly diversified enterprise C. multibusiness enterprise D. high-compensation/low-risk enterprise E. dominant business enterprise

dominant business enterprise Some diversified companies are really dominant-business enterprises. That is, one major "core" business accounts for 50 to 80 percent of total revenues and a collection of small related or unrelated businesses accounts for the remainder.

43. Corporate parenting refers to all of the following EXCEPT A. the role that a diversified corporation plays in nurturing its component businesses through the provision of top management expertise, disciplined control, financial resources, and capabilities. B. the help subsidiaries receive in performing better when they utilize astute high-level guidance from corporate executives. C. the corporation's ability to provide generalized support resources so as to create value by lowering companywide overhead costs by eliminating duplication of efforts. D. efforts to capitalize on the umbrella brands and enhance value proposition across businesses. E. efforts to judiciously segregate funds for each business in such a way that keeps the money safe and discourages shifting funds across business units.

efforts to judiciously segregate funds for each business in such a way that keeps the money safe and discourages shifting funds across business units. Corporate parenting refers to the role that a diversified corporation plays in nurturing its component businesses through the provision of top management expertise, disciplined control, financial resources, and other types of general resources and capabilities such as long-term planning systems, business development skills, management development processes, incentive systems, umbrella brands, and an internal capital market capability to allow judicious cross-business allocation of financial resources.

2. Diversification into a new industry cannot be considered a success unless it results in A. easing the means of entry. B. boosting performance of the existing business. C. lowered cost of entry. D. enhanced industry attractiveness. E. enhanced shareholder value.

enhanced shareholder value. Crafting a diversified company's overall corporate strategy is aimed at creating enhanced shareholder value, that is, value that shareholders could not capture on their own by spreading their investments across the stocks of companies in different industries.

14. Diversification becomes a relevant strategic option for a company EXCEPT when it A. spots opportunities to expand into industries whose technologies and products complement its present business. B. leverages existing resources and capabilities by expanding into industries where these same resource strengths are key success factors and valuable competitive assets. C. has a powerful and well-known brand name that can be transferred to the products of other businesses and thereby used as a lever for driving up the sales and profits of such businesses. D. can open up new avenues for reducing costs by diversifying into closely related businesses. E. expands into additional businesses that unlock possibilities for a comprehensive cost enhancement strategy.

expands into additional businesses that unlock possibilities for a comprehensive cost enhancement strategy. Expanding into additional businesses that unlock possibilities for a comprehensive cost enhancement strategy is not a relevant strategic option for a company for diversification.

29. Strategic fit between two or more businesses exists when one or more activities comprising their respective value chains present opportunities A. to prevent the transfer of expertise or technology or capabilities from one business to another. B. to independently preserve common brand names from cross-business usage. C. to increase costs by combining the performance of the related value chain activities of different businesses. D. for cross-business collaboration to build valuable new resource strengths and competitive capabilities. E. to maintain business value chain activities separate and apart from one business to another to protect company independence.

for cross-business collaboration to build valuable new resource strengths and competitive capabilities. 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.

11. 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 A. the transferring of valuable resources and capabilities from one business to another. B. combining related value chain activities of different businesses to achieve lower costs. C. forcing cultural independence, operating diversity, and sophisticated analytical responsibility on the businesses to ensure compatibility with the corporate overhead identity. D. sharing the use of powerful and well-respected brand names across multiple businesses. E. encouraging knowledge-sharing and collaborative activity among the businesses.

forcing cultural independence, operating diversity, and sophisticated analytical responsibility on the businesses to ensure compatibility with the corporate overhead identity. Forcing cultural independence, operating diversity, and sophisticated analytical responsibility on the businesses are not tasks for leveraging cross-business value chain relationships into competitive advantage.

53. Which of the following is NOT an erroneous rationale for unrelated diversification? A. risk reduction by spreading the company's investments over a set of diverse industries B. expectations for rapid or continuous growth C. stabilize earnings, i.e. market downtrends in some of the company's businesses will be partially offset by cyclical upswings in its other businesses D. managerial motives including the prospects for higher compensation E. growth by acquisition of an undervalued company at a bargain price can deliver enhanced shareholder value

growth by acquisition of an undervalued company at a bargain price can deliver enhanced shareholder value Management sometimes undertakes a strategy of unrelated diversification for the wrong reasons: (1) risk reduction by spreading the company's investments over a set of diverse industries; (2) expectations for rapid or continuous growth; (3) earnings stabilization, i.e. market downtrends in some of the company's businesses will be partially offset by cyclical upswings in its other businesses; (4) managerial motives including the prospects for higher compensation—diversification for this reason alone is far more likely to reduce shareholder value than to increase it. The premise of acquisition-minded corporations is that growth by acquisition can deliver enhanced shareholder value through upward-trending corporate revenues and earnings and a stock price that on average rises enough year after year to amply reward and please shareholders. Three types of acquisition candidates are usually of particular interest: (1) businesses that have bright growth prospects but are short on investment capital, (2) undervalued companies that can be acquired at a bargain price, and (3) struggling companies whose operations can be turned around with the aid of the parent company's financial resources and managerial know-how.

26. Unrelated businesses A. sell products from the different businesses to much the same types of buyers and retail outlets. B. have dissimilar value chains and resource requirements with no competitively important cross-business commonalities at the value chain level. C. perform better than just the sum of the individual businesses. D. will always have several key suppliers in common. E. employ production methods that create economies of scale.

have dissimilar value chains and resource requirements with no competitively important cross-business commonalities at the value chain level. Unrelated businesses have dissimilar value chains and resource requirements, with no competitively important cross-business commonalities at the value chain level.

32. Businesses with strategic fit with respect to their supply chain activities perform better together because of all of the following EXCEPT the A. potential for skills transfer in procuring materials. B. sharing of resources and capabilities in logistics. C. benefits of added collaboration with common supply chain partners. D. added leverage gained with shippers when securing volume discounts on incoming parts and components. E. increased allocation and allotment of support activities and specialized resources and capabilities.

increased allocation and allotment of support activities and specialized resources and capabilities. Businesses with strategic fit with respect to their supply chain activities can perform better together because of the potential for transferring skills in procuring materials, sharing resources and capabilities in logistics, collaborating with common supply chain partners, and/or increasing leverage with shippers in securing volume discounts on incoming parts and components.

88. The strategic options to improve a diversified company's overall performance do NOT include which of the following categories of actions? A. broadening the company's business scope by making new acquisitions in new industries B. increasing dividend payments to shareholders and/or repurchasing shares of the company's stock C. restructuring the company's business lineup with a combination of divestitures and acquisitions to put a whole new face on the company's business makeup D. pursuing multinational diversification and striving to globalize the operations of several of the company's business units E. divesting weak-performing businesses and retrenching to a narrower base of business operations

increasing dividend payments to shareholders and/or repurchasing shares of the company's stock

78. The businesses in a diversified company's lineup exhibit good resource fit when A. the resource requirements of each business exactly match the resources the company has available. B. 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. C. each business generates just enough cash flow annually to fund its own capital requirements and thus does not require cash infusions from the corporate parent. D. each business unit produces sufficient cash flows over and above what is needed to build and maintain the business, thereby providing the parent company with enough cash to pay shareholders a generous and steadily increasing dividend. E. there are enough cash cow businesses to support the capital requirements of the cash hog businesses.

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.

79. What is it called when a diversified company can add value by shifting capital from business units generating free cash flow to those needing additional capital to expand and realize their growth potential? A. internal capital market B. cash cow benefits C. economic value added D. shareholder value added E. derived valuation

internal capital market

86. Which of the following is NOT a reasonable option for deploying a diversified company's financial resources? A. making acquisitions to establish positions in new businesses or to complement existing businesses B. investing financial resources in cash cow businesses until they show enough strength to generate positive cash flows C. funding long-range R&D ventures aimed at opening market opportunities in new or existing businesses D. paying down existing debt, increasing dividends, or repurchasing shares of the company's stock E. investing in ways to strengthen or grow existing businesses

investing financial resources in cash cow businesses until they show enough strength to generate positive cash flows

97. Corporate restructuring strategies A. involve making major changes in a diversified company's business lineup, divesting some businesses and/or acquiring others, so as to put a whole new face on the company's business lineup. B. entail reducing the scope of diversification to a smaller number of businesses. C. entail selling off marginal businesses to free up resources for redeployment to the remaining businesses. D. focus on crafting initiatives to restore a diversified company's money-losing businesses to profitability. E. focus on broadening the scope of diversification to include a larger number of businesses and boosting the company's growth and profitability.

involve making major changes in a diversified company's business lineup, divesting some businesses and/or acquiring others, so as to put a whole new face on the company's business lineup.

44. An umbrella brand A. is a generalized resource that can be leveraged in unrelated diversification. B. is a brand name that can steer a narrow assortment of business types. C. represents a public disclosure spotlighting the corporate image. D. represents an overall corporate marker covering its overriding image of sustainability and responsibility. E. is a specialized resource designed to influence profit growth.

is a generalized resource that can be leveraged in unrelated diversification. An umbrella brand is a corporate brand name that can be applied to a wide assortment of business types. As such, it is a type of general resource that can be leveraged in unrelated diversification.

71. The nine-cell industry attractiveness competitive strength matrix A. is useful for helping decide which businesses should have high, average, and low priorities in deploying corporate resources. B. indicates which businesses are cash hogs and which are cash cows. C. pinpoints what strategies are most appropriate for businesses positioned in the three top cells of the matrix, but is less clear about the best strategies for businesses positioned in the bottom six cells. D. identifies which sister businesses have the greatest strategic fit. E. identifies which sister businesses have the highest level of resource fit.

is useful for helping decide which businesses should have high, average, and low priorities in deploying corporate resources. 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.

80. A diversified company's business units exhibit good financial resource fit when A. each business is sufficiently profitable to generate an attractive return on invested capital. B. the resource requirements of each business exactly match the company's available resources. C. it 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. D. each business unit produces large internal cash flows over and above what is needed to build and maintain the business. E. each business is sufficiently profitable to generate an attractive return on invested capital.

it 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.

77. A diversified company's business units exhibit good resource fit when A. each business is a cash cow. B. 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. C. each business is sufficiently profitable to generate an attractive return on invested capital. D. each business unit produces large internal cash flows over and above what is needed to build and maintain the business. E. the resource requirements of each business exactly match the company's available resources.

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.

65. For a diversified company to be a strong performer A. a substantial portion of its revenues and expenses must come from business units with relatively low attractiveness scores. B. its principal business must be in industries with a good outlook for growth and above-average profitability. C. its business units in high attractiveness score industries should be candidates for divesture. D. its business units must operate within the favorable aspects of their industry environment. E. its business units must have a popular image, even if the performance of their products does not greatly satisfy buyer expectations.

its principal business must be in industries with a good outlook for growth and above-average profitability. Above-average profitability on a consistent basis is a signal of competitive advantage, and therefore its principal business must be in industries with a good outlook for growth and above-average profitability.

90. 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 A. it has resources or capabilities that are eminently transferable to other related or complementary businesses. B. the company's growth is sluggish and it wants the sales and profit boost that a new business can provide. C. management wants to lessen the company's vulnerability to seasonal or recessionary influences or to threats from emerging new technologies, legislative regulations, and new product innovations that alter buyer preferences and resource requirements. D. it wants to make new acquisitions to strengthen or complement some of its present businesses, market positioning, and competitive capabilities. E. its top management wants to increase its compensation.

its top management wants to increase its compensation.

48. For an unrelated diversification strategy to produce financial results above that of stand-alone entities, executives must do all of the following EXCEPT A. diversify into businesses that can produce consistently good earnings and returns on investment and thereby satisfy the attractiveness test. B. negotiate favorable acquisition prices (to satisfy the cost of entry test). C. do a superior job of corporate parenting via high-level managerial oversight and resource sharing, financial resource allocation and portfolio management, or restructuring underperforming businesses (to satisfy the better-off test). D. satisfy the attractiveness test, the cost of entry test, and the better-off test. E. leverage the cross-business strategic fit advantage effectively.

leverage the cross-business strategic fit advantage effectively. Given the absence of cross-business strategic fit with which to create competitive advantages, an unrelated diversification strategy ultimately hinges on the ability of the parent company to improve its businesses (and make the combination better off) via other means.

40. A big advantage of related diversification is that it A. 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. B. is less capital intensive and usually more profitable than unrelated diversification. C. involves diversifying into industries having the same kinds of key success factors. D. is less risky than either vertical integration or unrelated diversification due to lower capital requirements. E. passes the industry attractiveness test and thus offers the best route to 2 + 2 = 4 benefits.

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 competitive advantage potential that flows from the capture of strategic fit benefits is what enables a company pursuing related diversification to achieve 1 + 1 = 3 financial performance and the hoped-for gains in shareholder value.

31. Which of the prime examples of strategic fit opportunities below are NOT related business activities? A. transferring specialized expertise, technological know-how, or other valuable resources and capabilities from one business's value chain to another's B. cost sharing between businesses by combining their related value chain activities into a single operation C. overhauling and streamlining the operations of the business by refocusing value chain activities toward businesses that can provide a superior job of parenting D. exploiting common use of a well-known brand name E. sharing other resources (besides brands) that support corresponding value chain activities across businesses

overhauling and streamlining the operations of the business by refocusing value chain activities toward businesses that can provide a superior job of parenting Transferring specialized expertise, technological know-how, or other valuable resources and capabilities from one business's value chain to another's, cost sharing between businesses by combining their related value chain activities into a single operation, exploiting common use of a well-known brand name, and sharing other resources (besides brands) that support corresponding value chain activities across businesses are all good examples of strategic fit opportunities.

23. The big dilemma an acquisition-minded firm faces is whether to A. focus on building brand awareness or establishing supplier relationships. B. pay a premium price for a successful company or buy a struggling company at a bargain price. C. strive for scale economies or to acquire technical know-how to customize production. D. focus on building brand awareness or striving for scale economies. E. focus on acquiring technical know-how or outsourcing production.

pay a premium price for a successful company or buy a struggling company at a bargain price. Acquisition 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. The big dilemma an acquisition-minded firm faces is whether to pay a premium price for a successful company or to buy a struggling company at a bargain price.

52. The one factor that company executives need not worry about when their company is managing many diverse, unrelated firms is to A. stay abreast of what's happening in each industry and subsidiary. B. pick business-unit heads having the requisite combination of managerial skills and know-how to motivate people. C. understand the true value of strategic investment proposals by business-unit managers. D. know what to do if a business unit stumbles. E. "manage by the numbers"—that is, keep a close track on the financial and operating results of each subsidiary.

pick business-unit heads having the requisite combination of managerial skills and know-how to motivate people. The greater the number of businesses a company is operating in and the more diverse those businesses are, the more difficult it is for corporate managers to: (1) stay abreast of what's happening in each industry and each subsidiary; (2) pick business-unit heads having the requisite combination of managerial skills and know-how to drive gains in performance; (3) tell the difference between those strategic proposals of business-unit managers that are prudent and those that are risky or unlikely to succeed; (4) know what to do if a business unit stumbles and its results suddenly head downhill; and (5) "manage by the numbers"—that is, keep a close track on the financial and operating results of each subsidiary and assume that the heads of the various subsidiaries have most everything under control so long as the latest key financial and operating measures look good.

An acquisition premium is the amount by which the price offered for an existing business exceeds the A. fair market value of similar companies in the same geographic locale. B. preacquisition market value of the target company. C. comparable value of similar companies within the same market. D. amount paid as a down payment to be held in escrow until closing. E. difference between the amount that was offered and the amount that is escrowed.

preacquisition market value of the target company. An acquisition premium, or control premium, is the amount by which the price offered exceeds the preacquisition market value of the target company.

17. The better-off test for evaluating whether a particular diversification move is likely to generate added value for shareholders involves assessing whether the move will A. make the company better off because it will produce a greater number of core competencies. B. make the company better off by improving its balance sheet strength and credit rating. C. make the company better off by spreading shareholder risks across a greater number of businesses and industries. D. 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. E. help each business earn exactly what they were earning before coming under the same corporate umbrella.

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. Diversification does not result in added long-term value for shareholders unless it produces a 1 plus 1 equal to 3 effect, whereby the businesses perform better together as part of the same firm than they could have performed as independent companies.

61. The chief purpose of calculating quantitative industry attractiveness scores for each industry a company has diversified into is to A. determine which industry is the biggest and fastest growing. B. get in position to rank the industries from most competitive to least competitive. C. 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. D. ascertain which industries have the easiest-to-achieve key success factors. E. rank the attractiveness of the various industry value chains from best to worst.

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 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.

87. Corporate strategy options for already diversified companies include all of the following EXCEPT A. broadening the company's business scope by making new acquisitions in new industries. B. divesting weak-performing businesses and retrenching to a narrower base of business operations. C. restructuring the company's business lineup with a combination of divestitures and new acquisitions to put a whole new face on the company's business makeup. D. pursuing growth opportunities within the existing business lineup. E. pursuing certain acquisitions even if they have done badly or haven't quite lived up to expectations.

pursuing certain acquisitions even if they have done badly or haven't quite lived up to expectations.

81. Management's ranking of business units and establishing a priority for resource allocation should A. always make the company's business units with strong resource strengths and competitive capabilities the central focus of funding initiatives. B. put business units with the brightest profit and growth prospects and solid strategic and resource fits at the top of the investment priority list. C. utilize activity-based costing and benchmarking to determine the funding needs of each business unit. D. first consider the strength of funding proposals presented by managers of each division or business unit. E. give priority for funding to cash hog businesses.

put business units with the brightest profit and growth prospects and solid strategic and resource fits at the top of the investment priority list.

69. The value of determining the relative competitive strength of each business a company has diversified into is to have a quantitative basis for A. identifying which businesses have large/small competitive advantages or competitive disadvantages vis-à-vis the rivals in their respective industries. B. rating them from strongest to weakest in terms of contributing to the corporate parent's revenue growth. C. comparing resource strengths and weaknesses, business by business. D. rating them from strongest to weakest in contending for market leadership in their respective industries. E. rating them from strongest to weakest in terms of contributing to the corporate parent's profitability.

rating them from strongest to weakest in contending for market leadership in their respective industries.

13. Initiating actions to boost the combined performance of the corporation's collection of businesses includes all of the following strategic options, EXCEPT A. sticking closely with the existing business lineup and pursuing available opportunities. B. broadening the scope of diversification by entering additional industries. C. divesting some businesses and retrenching to a narrower collection of businesses. D. restructuring the entire company by adding and removing businesses to improve overall performance. E. refocusing the existing businesses on new substitute product-line opportunities outside the existing industry framework.

refocusing the existing businesses on new substitute product-line opportunities outside the existing industry framework. Initiating actions to boost the combined performance of the corporation's collection of businesses does not include the option of refocusing the existing businesses on new substitute product-line opportunities outside the existing industry framework.

66. Assessments of how a diversified company's subsidiaries compare in competitive strength should be based on such factors as A. vulnerability to seasonal and cyclical downturns, vulnerability to driving forces, and vulnerability to fluctuating interest rates and exchange rates. B. relative market share, the ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors, and the ability to benefit from strategic fits with sister businesses. C. the appeal of its strategy, the relative number of competitive capabilities, the number of products in each business's product line, which businesses have the highest/lowest market shares, and which businesses earn the highest/lowest profits before taxes. D. the ability to hurdle barriers to entry, value chain attractiveness, and business risk. E. cost reduction potential, customer satisfaction potential, and comparisons of annual cash flows from operations.

relative market share, the ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors, and the ability to benefit from strategic fits with sister businesses. Relative market share, the ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors' costs, and the ability to benefit from strategic fits with other business units are some factors used in quantifying the competitive strengths of a diversified company's business subsidiaries.

93. Moves to improve a diversified company's overall performance do NOT include A. retrenching to a narrower base of business operations. B. broadening the company's business scope by making new acquisitions in new industries. C. restructuring the company's business lineup and putting a whole new face on the company's business makeup. D. sticking closely to the existing business lineup and pursuing the growth opportunities presented by these businesses. E. retaining weak-performing businesses in order to sustain a wide base of business operations.

retaining weak-performing businesses in order to sustain a wide base of business operations.

68. Calculating quantitative competitive strength ratings for each of a diversified company's business units involves A. determining each industry's key success factors, rating the ability of each business to be successful on each industry KSF, and adding the individual ratings to obtain overall measures of each business's ability to compete successfully. B. identifying the competitive forces facing each business, rating the strength of these competitive forces industry by industry, and then ranking each business's ability to be profitable, given the strength of the competition it faces. C. 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. D. determining which businesses possess good strategic fit with other businesses, identifying the portion of the value chain where this fit occurs, and evaluating the strength of the competitive advantage attached to each of the strategic fits to get an overall measure of competitive advantage potential. Businesses with the highest/lowest competitive advantage potential have the most/least competitive strength. E. rating the caliber of each businesses strategic and resource fit, weighting the importance of each type of strategic/resource fit, calculating weighted strategic/resource fit scores, and adding the weighted ratings for each business to obtain an overall strength score for each business unit that indicates whether the company has adequate strategic/resource fits to be a strong market contender in each of the industries where it competes.

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.

60. Calculating quantitative attractiveness ratings for the industries a company has diversified into involves A. determining each industry's key success factors, calculating the ability of the company to be successful on each industry KSF, and obtaining overall measures of the firm's ability to compete successfully in each of its industries based on the combined KSF ratings. B. determining each industry's competitive advantage factors, calculating the ability of the company to be successful on each competitive advantage factor, and obtaining overall measures of the firm's ability to achieve sustainable competitive advantage in each of its industries based on the combined competitive advantage factor ratings. C. 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 interpret the attractiveness of all the industries, both individually and as a group. D. rating the attractiveness of each industry's strategic and resource fits, summing the attractiveness scores, and determining whether the overall scores for the industries as a group are appealing or not. E. identifying each industry's average profitability, rating the difficulty of achieving average profitability in each industry, and deciding whether the company's prospects for above-average profitability are attractive or unattractive, industry by industry.

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 interpret the attractiveness of all the industries, both individually and as a group. 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, and multiplying the strength ratings by the assigned weight to obtain a weighted rating. The sum of the weighted ratings across all the strength measures provides a quantitative measure of a business unit's overall market strength and competitive standing.

10. 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 A. selecting the appropriate value chain operating practices to improve the financial outlook. B. starting a business from the ground up. C. acquiring a company already established in the target industry. D. forming a joint venture or partnership with another company. E. structuring a strategic alliance with another company to take advantage of the opportunity.

selecting the appropriate value chain operating practices to improve the financial outlook. The decision to pursue business diversification requires that management decide which new industries to enter and whether to enter by starting a new business from the ground up, acquiring a company already in the target industry, or forming a joint venture or strategic alliance with another company.

1. Diversification into new industries deserves strong consideration when a A. single-business company can achieve profitable growth opportunities in its present industry. B. single-business company needs to develop a corporate-wide strategy. C. single-business company needs to develop a multi-line strategy. D. single-business company encounters diminishing market opportunities and stagnating sales in its principal business. E. multiple-business company encounters enhanced market opportunities and increasing sales in its principal business.

single-business company encounters diminishing market opportunities and stagnating sales in its principal business. As long as a single-business company can achieve profitable growth opportunities in its present industry, there is no urgency to pursue diversification. However, a company's opportunities for growth can become limited if the industry becomes competitively unattractive. Thus, diversifying into new industries always merits strong consideration whenever a single-business company encounters diminishing market opportunities and stagnating sales in its principal business.

38. When discussing "economies of scope," it involves understanding that they A. stem from the cost-saving efficiencies of operating over a wider geographic area. B. have to do with the cost-saving efficiencies of distributing a firm's product through many different distribution channels simultaneously. C. stem from cost-saving strategic fits along the value chains of related businesses. D. refer to the cost savings that flow from operating across all or most of an industry's value chain activities. E. arise from the cost-saving efficiencies of having a wide product line and offering customers a big selection of models and styles to choose from.

stem from cost-saving strategic fits along the value chains of related businesses. Economies of scope stem directly from strategic fit along the value chains of related businesses, which in turn enables the businesses to share resources or to transfer them from business to business at low cost.

46. With an unrelated diversification strategy, the types of companies that make particularly attractive acquisition targets are A. 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. B. companies offering the biggest potential to reduce labor costs. C. cash cow businesses with excellent financial fit. D. companies that are market leaders in their respective industries. E. companies that employ the same basic type of competitive strategy as the parent corporation's existing businesses.

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. Struggling companies with good turnaround potential, undervalued companies that can be acquired at a bargain price, and companies with bright growth prospects but short on investment capital are all attractive acquisition targets for a company with an unrelated diversification strategy.

72. One of the most significant contributions to strategy making in diversified companies that the nine-cell industry attractiveness competitive strength matrix provides is A. identifying which businesses have strategies that should be continued, which businesses have strategies that need fine-tuning, and which businesses have strategies that need a major overhaul. B. 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. C. pinpointing which strategies are most appropriate for businesses positioned in the four corners of the matrix (although the matrix reveals little about the best strategies for businesses positioned in the remainder of the matrix). D. its ability to pinpoint what kind of competitive advantage or disadvantage each business has. E. pinpointing which businesses to keep and which ones to divest.

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.

70. What does a competitive strength score above 5 tell us about a diversified company's position in the market? A. that its business units are all fairly strong market contenders in their respective industries B. that its business units are all fairly weak market contenders in their respective industries C. that the company will not likely perform well D. that a company's competitive strength score does not relate to the market position of that business E. that the company will likely fail

that its business units are all fairly strong market contenders in their respective industries If a diversified company's business units all have competitive-strength scores above 5, it is fair to conclude that its business units are all fairly strong market contenders in their respective industries.

33. Which of the following is NOT a contributing reason for businesses with strategic fit in R&D or technology activities to perform better together? A. the ability to continue using existing processes B. cost savings in research and development areas C. shorter times in getting new products to market D. increased sales in both the parent company and the diversified businesses E. a greater number of innovative products or processes

the ability to continue using existing processes Businesses with strategic fit in R&D or technology development perform better together than apart because of potential cost savings in R&D, shorter times in getting new products to market, and more innovative products or processes. Moreover, technological advances in one business can lead to increased sales for both. Technological innovations have been the key driver behind the success of several diversified businesses, while businesses using outdated processes or technologies tend to lag behind or even fail.

82. The tests of whether a diversified company's businesses exhibit resource fit do NOT include whether A. the excess cash flows generated by cash cow businesses are sufficient to cover the negative cash flows of its cash hog businesses. B. a business adequately contributes to achieving the corporate parent's performance targets. C. the company has adequate financial strength to fund its different businesses and maintain a healthy credit rating. D. the corporate parent has sufficient cash to fund the needs of its individual businesses and pay dividends to shareholders without having to borrow money. E. the corporate parent has or can develop sufficient resource strengths and competitive capabilities to be successful in each of the businesses it has diversified into.

the corporate parent has sufficient cash to fund the needs of its individual businesses and pay dividends to shareholders without having to borrow money.

47. The two biggest drawbacks or disadvantages of unrelated diversification are A. the difficulties of passing the cost of entry test and the ease with which top managers can make the mistake of diversifying into businesses where competition is too intense. B. the difficulties of capturing financial fit and having insufficient financial resources to spread business risk across many different lines of business. C. the demanding managerial requirements and the limited competitive advantage potential due to lack of cross-business strategic fit benefits. D. ending up with too many cash hog businesses and too much diversity among the competitive strategies of the businesses it has diversified into. E. the difficulties of achieving economies of scope and conflicts/incompatibility among the competitive strategies of the company's different businesses.

the demanding managerial requirements and the limited competitive advantage potential due to lack of cross-business strategic fit benefits. Besides demanding managerial requirements, unrelated diversification offers only a limited potential for competitive advantage beyond what each individual business can generate on its own. Unlike a related diversification strategy, unrelated diversification provides no cross-business strategic fit benefits that allow each business to perform its key value chain activities in a more efficient and effective manner.

51. Two important negatives of unrelated diversification are A. underemphasizing the importance of resource fit and the strong likelihood of diversifying into businesses that top management does NOT know all that much about. B. insufficient cash flows to finance so many different lines of business and a lack of uniformity among the strategies of the businesses it has diversified into. C. volatile sales and profits and making the mistake of diversifying into too many cash cow businesses. D. the difficulties of competently managing a set of fundamentally different businesses and having a very limited competitive advantage potential that cross-business strategic fit provides. E. overinvesting in the achievement of economies of scope and the difficulties of achieving a good mix of cash cow and cash hog businesses.

the difficulties of competently managing a set of fundamentally different businesses and having a very limited competitive advantage potential that cross-business strategic fit provides. Unrelated diversification strategies have two important negatives that undercut the pluses: very demanding managerial requirements and limited competitive advantage potential due to the absence of cross-business strategic fit.

49. The two biggest drawbacks or disadvantages of unrelated diversification are A. underemphasizing the importance of resource fit and the strong likelihood of diversifying into businesses that top management does not know all that much about. B. insufficient cash flows to finance so many different lines of business and a lack of uniformity among the strategies of the businesses it has diversified into. C. volatile sales and profits and making the mistake of diversifying into too many cash cow businesses. D. the difficulties of competently managing many different businesses and being without the added source of competitive advantage that cross-business strategic fit provides. E. over-investing in the achievement of economies of scope and the difficulties of achieving a good mix of cash cow and cash hog businesses.

the difficulties of competently managing many different businesses and being without the added source of competitive advantage that cross-business strategic fit provides. Besides demanding managerial requirements, unrelated diversification offers only a limited potential for competitive advantage beyond what each individual business can generate on its own. Unlike a related diversification strategy, unrelated diversification provides no cross-business strategic fit benefits that allow each business to perform its key value chain activities in a more efficient and effective manner.

59. Which of the following is NOT generally something that ought to be considered in evaluating the attractiveness of a multibusiness (diversified) company's business makeup? A. market size and projected growth rate, industry profitability, and the intensity of competition B. industry uncertainty and business risk C. the frequency with which strategic alliances and collaborative partnerships are used in each industry, and the extent to which firms in the industry utilize outsourcing D. resource requirements, and whether an industry has significant social, political, regulatory, and environmental problems E. the presence of cross-industry strategic fits and matching resource requirements to the parent company

the frequency with which strategic alliances and collaborative partnerships are used in each industry, and the extent to which firms in the industry utilize outsourcing 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.

63. When calculating the weighted industry attractiveness scores, we find the more intensely competitive an industry is A. the lower the attractiveness weighting for that industry. B. the higher the attractiveness weighting for that industry. C. suggests the resources are beyond the parent company's reach. D. suggests the industry attractiveness measures have been incorrectly weighted. E. the more likely the company's profit and revenues will be intensive.

the lower the attractiveness weighting for that industry. Industries where competitive pressures are relatively weak are more attractive than industries where competitive pressures are strong. Therefore, the more intensely competitive an industry is, the lower the attractiveness rating for that industry.

36. What makes related diversification an attractive strategy? A. the ability to broaden the company's product line B. the opportunity to convert cross-business strategic fit into competitive advantage over business rivals whose operations don't offer comparable strategic fit benefits C. the potential for improving the stability of the company's financial performance D. the ability to serve a broader spectrum of buyer needs E. the added capability it provides in overcoming the barriers to entering foreign markets

the opportunity to convert cross-business strategic fit into competitive advantage over business rivals whose operations don't offer comparable strategic fit benefits What makes related diversification an attractive strategy is the opportunity to convert cross-business strategic fit into a competitive advantage over business rivals whose operations do not offer comparable strategic-fit benefits.

24. 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 A. the costs of searching for an attractive target. B. the costs of evaluating its worth. C. bargaining costs. D. the costs of completing the transaction. E. the premium cost.

the premium cost. Transaction costs are the costs of completing a business agreement or deal, over and above the price of the deal. They can include the costs of searching for an attractive target, the costs of evaluating its worth, bargaining costs, and the costs of completing the transaction, but not the premium cost. This is because the price of the deal includes the acquisition premium cost over the share price of the target company.

12. Establishing investment priorities and steering corporate resources into the most attractive business units typically requires the company to decide on all of the following options, EXCEPT A. the pursuit of rapid growth strategies in its most promising businesses. B. initiating profit improvement or turnaround strategies in weak-performing businesses with potential. C. the divestiture of unattractive businesses. D. the pursuit of debt reduction opportunities that can lower the debt/equity ratio while maintaining asset levels. E. the divestiture of businesses that do not fit into the company's longer term plans.

the pursuit of debt reduction opportunities that can lower the debt/equity ratio while maintaining asset levels. The pursuit of debt reduction opportunities that can lower the debt/equity ratio while maintaining asset levels is not one of the rapid growth strategies for a company.

58. As a rule, the key indicators of industry attractiveness, for all the industries represented in a diversified company's business portfolio, should NOT be measured on such attractiveness factors as A. market size and projected growth rate. B. emerging opportunities and threats, and the intensity of competition. C. resource requirements and the presence of cross-industry strategic fits. D. seasonal and cyclical factors, industry profitability, and whether an industry has significant social, political, regulatory, and environmental problems. E. the utility of the products for consumers from all age-groups.

the utility of the products for consumers from all age-groups. 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.

62. A weighted industry attractiveness assessment is generally analytically superior to an unweighted assessment because A. a weighted ranking identifies which industries offer the best/worst long-term profit prospects. B. an unweighted ranking doesn't discriminate between strong and weak industry driving forces and industry competitive forces. C. it does a more accurate job of singling out which industry key success factors are the most important. D. an unweighted ranking doesn't help identify which industries have the easiest and hardest value chains to execute. E. the various measures of attractiveness are not likely to be equally important in determining overall attractiveness.

the various measures of attractiveness are not likely to be equally important in determining overall attractiveness. Each attractiveness measure is assigned a weight reflecting its relative importance in determining an industry's attractiveness, since not all attractiveness measures are equally important.

25. The essential requirement for different businesses to be "related" is that A. their value chains exhibit competitively valuable cross-business commonalities. B. the products of the different businesses are bought by many of the same types of buyers. C. the products of the different businesses are sold in the same types of retail stores. D. the businesses have several key suppliers in common. E. the production methods they employ both entail economies of scale.

their value chains exhibit competitively valuable cross-business commonalities. Businesses are said to be related when their value chains exhibit competitively important cross-business commonalities.

56. 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 A. those companies with a mix of valuable competitive assets, covering the spectrum from generalized to specialized resources and capabilities. B. those large multibusiness firms, sometimes called conglomerates, because they have a unique capability designed to stabilize earnings. C. companies with a portfolio of product choices for buyer-related behavior. D. corporate managers who take on risks without performing due diligence. E. corporate managers who want to play the corporate parent role without fiduciary responsibility.

those companies with a mix of valuable competitive assets, covering the spectrum from generalized to specialized resources and capabilities. Combination related-unrelated diversification strategies have particular appeal for companies with a mix of valuable competitive assets, covering the spectrum from general to specialized resources and capabilities.

74. Checking the competitive advantage potential of cross-business strategic fits in a diversified company involves evaluating the extent to which sister businesses present opportunities A. to combine the performance of certain cross-business activities and thereby reduce costs. B. to transfer skills, technology, or intellectual capital from one business to another. C. for the company's different businesses to share use of a well-respected brand name. D. for sister businesses to collaborate in creating valuable new competitive capabilities. E. to create a positive image in the industry irrespective of the financial performance of its businesses.

to create a positive image in the industry irrespective of the financial performance of its businesses. Relative market share, the ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors' costs, and the ability to benefit from strategic fits with other business units are some factors used in quantifying the competitive strengths of a diversified company's business subsidiaries.

50. Which of the following rationales for pursuing unrelated diversification is likely to increase shareholder value? A. to reduce risk by way of spreading the company's investments over a set of truly diverse industries B. to enable a company to achieve rapid or continuous growth C. to chance that market downtrends in some of the company's businesses will be partially offset by cyclical upswings in its other businesses D. to provide benefits to managers such as high compensation and reduced unemployment risk E. to restructure an underperforming business

to restructure an underperforming business Risk reduction, rapid growth, stabilization of earnings, and managerial motives are misguided reasons for pursuing unrelated diversification to increase shareholder value.

19. Apple's $3 billion acquisition of Beats Electronics and Beats Music in 2014 was an attractive strategy option for entering promising new industries in headphones and streaming music services because it A. was an effective way to hurdle entry barriers, is usually quicker than trying to launch a brand-new startup operation, and allows the acquirer to move directly to the task of building a strong position in the target industry. B. was less expensive than launching a new startup operation, thus passing the cost of entry test. C. offered a challenging opportunity to train new resources and revive a sagging business even if does not offer great prospects for growth, profitability, or return on investment. D. was more likely to result in passing the shareholder value test, the profitability test, and the better-off test. E. offered the prospect of gaining an immediate competitive advantage in the new industry and thus helps ensure that the diversification move will pass the competitive advantage test for building shareholder value.

was an effective way to hurdle entry barriers, is usually quicker than trying to launch a brand-new startup operation, and allows the acquirer to move directly to the task of building a strong position in the target industry. Acquisition of an existing business 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. However, the industry to be entered through diversification must be structurally attractive, have resource requirements that match those of the parent company, and offer good prospects for growth, profitability, and return on investment.

94. 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? A. when a diversified company has struggled to make certain businesses attractively profitable B. when a diversified company has too many cash cows C. when one or more businesses are cash hogs with questionable long-term potential D. when businesses in once-attractive industries have badly deteriorated E. when a diversified company has businesses that have little or no strategic or resource fits with the "core" businesses that management wishes to concentrate on

when a diversified company has too many cash cows

95. When should a business NOT be divested? A. when the business is worth more to another company than to the parent company B. when the business is a cash cow C. when the business provides valuable strategic or resource fits for another company D. when shareholders would be better served if the company sells the business for a generous premium E. when the business lacks the cross-boundary presence of shared values and cultural compatibility

when the business is a cash cow

22. 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? A. when internal entry is cheaper than entry via acquisition B. when a company possesses the skills and resources to overcome entry barriers and there is ample time to launch the business and compete effectively C. when adding new production capacity will not adversely impact the supply demand balance in the industry by creating oversupply conditions D. when the industry is growing rapidly and the target industry is comprised of several relatively large and well-established firms E. when incumbent firms are likely to be slow or ineffective in combating a new entrant's efforts to crack the market

when the industry is growing rapidly and the target industry is comprised of several relatively large and well-established firms If the target industry is already comprised of several relatively large and well-established firms, it will not be appealing for a company to form an internal startup and enter and compete in the same industry.

27. A related diversification strategy involves building the company around businesses A. with strategic fit with respect to key value chain activities and competitive assets. B. that are highly independent, proficient, and efficient operating firms. C. with strategic fit across separate value chain activities that drive each business. D. that can also include unrelated businesses with dissimilar resource requirements. E. that have dissimilar value chain activities with no cross-business commonalities.

with strategic fit with respect to key value chain activities and competitive assets. 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.