Strategic Management Chapter 8

What hurdles are present in calculating industry attractiveness scores?

deciding whether a business is related or unrelated

Choosing how best to enter a new business

depends partially on determining the least costly mode of entry.

The procedure for evaluating a diversified company's strategy does not entail

determining the degree of risk involved with each business unit.

To create value for shareholders via diversification, a company must

diversify into businesses that can perform better under a single corporate umbrella than they could perform operating as independent, stand-alone businesses.

Strategies to restructure a diversified company's business lineup involve

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.

Kjirstin is the general manager of Labcon USA, a diversified laboratory equipment design and manufacturing business with one major "core" business that accounts for 60 percent of the company's total worldwide revenues and the remainder, a collection of small related or unrelated businesses. She would define Labcon USA as a _________ enterprise.

dominant business

Once a company has diversified into a collection of related or unrelated businesses and concludes that some strategy adjustments are needed, which one of the following is not one of the main strategy options that a company can pursue?

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

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

critical resources and capabilities.

Cost reductions stemming from strategic fit along the value chains of related businesses can result in

economies of scope.

Corporate parenting refers to all of the following except

efforts to judiciously segregate funds for each business in such a way that keeps the money safe and discourages shifting funds across business units.

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

entry barriers.

The one factor that company executives need not worry about when their company is managing many diverse, unrelated firms is to

pick business-unit heads having the requisite combination of managerial skills and know-how to motivate people.

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

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.

The chief purpose of calculating quantitative industry attractiveness scores for each industry a company has diversified into is to

provide a basis for drawing analysis-based conclusions about the attractiveness of the industries a company has diversified into, both individually and as a group, and further to provide an indication of which industries offer the best and worst long-term prospects.

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

provide low-level oversight and make available minimal corporate resources

Coca-Cola's August 2018 move to acquire Costa Coffee, an international coffee chain, meant that the acquired company had to first pass which three Tests of Corporate Advantage?

the industry attractiveness test, the cost-of-entry test, and the better-off (synergy) test

What makes related diversification an attractive strategy?

the opportunity to convert cross-business strategic fit into competitive advantage over business rivals whose operations don't offer comparable strategic fit benefits

Cross-business strategic fit in a diversified enterprise is not normally achieved when

the value chain activities of unrelated businesses possess economies of scope and good financial fit.

A weighted industry attractiveness assessment is generally analytically superior to an unweighted assessment because

the various measures of attractiveness are not likely to be equally important in determining overall attractiveness.

Businesses are said to be related when

their value chains exhibit competitively important cross-business commonalities.

How would you explain the difference between a one-business company and a diversified company?

The first uses a business-level strategy, while the second uses a set of business strategies and a corporate strategy.

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

acquisition

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

acquisition

The means of entering a new business by buying an existing business is referred to as

acquisition

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

adhere to the existing business lineup.

Strategic fit

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

The decision to diversify should begin with

an economic justification.

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

an unrelated diversification strategy

Economies of scope

are cost reductions that flow from strategic fit along the value chains of related businesses.

Michelle Buck, CEO of the Hershey Company has hired you as a consultant to assess her diversified company's business units for cross-business competitive advantage potential. Your assessment would not normally involve ascertaining the extent to which Hershey's business units

are making maximum use of the parent company's competitive advantages.

The three tests for judging whether a particular diversification move can create value for shareholders are the

attractiveness test, the cost of entry test, and the better-off test.

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

better-off test.

Strategic analysis of diversified companies

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

Huawei has hired you to calculate its relative share of the global mobile phone market. How would you conduct this analysis?

by dividing Huawei's percentage share of total industry sales volume by the percentage share held by its largest rival.

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

can be placed into four broad categories of action.

Unrelated diversification strategy

can create only a small amount of competitive advantage beyond that which can be created by the individual businesses acting alone.

A company

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

Of the following strategic fit opportunities, which choice is not supportive of related business activities?

overhauling and streamlining the operations of the business by refocusing value chain activities toward businesses that can provide a superior job of parenting

Disney's ability to leverage its characters across its network of theme parks, media networks and movies, and consumer products is an example of a corporate

parenting advantage.

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

pass the industry attractiveness test.

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

speed

Unrelated diversification strategies

tend to have more overall failures than successes.

The major benefit of a related diversification strategy is

that it offers potential 1 + 1 = 3 or "synergy" benefits because of valuable cross-business relationships among the value chains of the corporation's different businesses.

The tests of whether a diversified company's businesses exhibit resource fit do not include whether

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

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

Economies of scope

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

False

Mary Barra, CEO of General Motors, has asked you to evaluate the financial resource fit of its new autonomous (self-driving) vehicle and electric vehicle (EV) divisions. You would advise CEO Barra that a diversified company's business units exhibit good financial resource fit when

GM has the resources to adequately support the requirements of its new divisions as a group without spreading itself too thin because these new divisions have the potential to add to GM's overall strengths.

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

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

Which of the following is true concerning relative market share?

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

Which of the following is true about joint ventures?

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

Which of the following is true of economies of scope?

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

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

True

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

True

Corporate Strategy helps managers understand which strategy question?

Where should the firm compete?

Conditions that may make corporate restructuring strategies appealing include all of the following except

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

Which of the following is a diversified business with one major "core" business and a collection of small related or unrelated businesses?

a dominant business enterprise

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

a dominant-business enterprise.

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

a parenting advantage

Retrenching to a narrower diversification base is

a strategy that allows a diversified firm's energies to be concentrated on building strong positions in a smaller number of businesses rather the stretching its resources and managerial attention too thinly across many businesses.

Business units with competitive-strength ratings

above 6.7 are strong market contenders in their industries.

A company can best accomplish diversification into new industries by

acquiring a company already operating in the target industry, creating a new business from scratch, or forming a joint venture with one or more companies to enter the target industry.

A diversified company's base can be broadened by

acquiring more businesses and building positions in new industries.

A portfolio business that generates operating cash flows over and above internal requirements, thereby providing financial resources that may be used to finance new acquisitions, fund share buyback programs, or pay dividends is commonly called a

cash cow.

The portfolio approach to financial fit revolves around the fact that

cash flow and investment characteristics vary among businesses.

ITT's portfolio of business units reflects a strategy of

combination of related and unrelated diversification.

An economy of scope is BEST illustrated by being able to eliminate or reduce costs by

combining related value-chain activities of different businesses into a single operation.

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

comparative cost.

In calculating industry attractiveness scores,

competition intensity should be heavily weighted.

What is the name of the process for developing new businesses as an outgrowth of a company's established business operations?

corporate venturing

Assessing the competitive advantage potential of cross-business strategic fit involves

evaluating how much benefit a diversified company can gain from cross-business value chain matchups and resource sharing.

Disney's expansion from short films to animated films to live action films to television is an example of

expansion into new markets by leveraging a core capability.

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

general resources.

A "cash hog" type of business

generates cash flows that are too small to fully fund its operations and growth.

Combination related-unrelated diversification strategies have particular appeal for companies

having a mix of valuable competitive assets, covering the spectrum from generalized to special resources and capabilities.

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

internal capital market.

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

internal development.

Corporate restructuring strategies

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.

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

is especially important when credit is tight.

Determining the competitive value of strategic fit in diversified companies

is important in evaluating their related diversification strategies.

A diversified company has a parenting advantage when it

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.

According to ITT's website, the company began as a telephone and telegraph company; in the 1960s and 1970s it acquired businesses such as Sheraton Hotels, Avis Rent-a-Car, Hartford Insurance, and Continental Baking (the makers of Wonder Bread). These acquisitions, which were later divested, reflected a strategy of

mostly unrelated diversification.

In order for a diversified company to perform well,

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

Companies practicing unrelated diversification overwhelmingly enter new businesses by

obtaining an established company.

By cutting back operations to match areas of declining demand and moving some operations overseas, Hewlett-Packard anticipates a reduction in costs of more than $2 billion. But despite having made significant progress toward being a smaller, more nimble company, significant challenges in returning to profitability still remain. Hewlett-Packard is a good example of

pursuing a strategy of corporate restructuring

Management's ranking of business units and establishing a priority for resource allocation should

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

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

rank the performance potential of the businesses.

Assessments of how a diversified company's subsidiaries compare in competitive strength should be based on such factors as

relative market share, the ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors, and the ability to benefit from strategic fits with sister businesses.

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

resource fit.

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

restructure its business lineup.

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

restructuring

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

retrench to a narrower diversification base.

Calculating quantitative competitive strength ratings for each of a diversified company's business units involves

selecting a set of competitive strength measures, weighting the importance of each measure, rating each business on each strength measure, multiplying the strength ratings by the assigned weight to obtain a weighted rating, adding the weighted ratings for each business unit to obtain an overall competitive strength score, and using the overall competitive strength scores to evaluate the competitive strength of all the businesses, both individually and as a group.

Diversifying into new industries

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

Checking the competitive advantage potential of cross-business strategic fits in a diversified company involves evaluating the extent to which sister businesses present opportunities

to create a positive image in the industry irrespective of the financial performance of its businesses.

Related corporate diversification does not necessarily provide opportunities

to exploit a first-mover strategy and capture valuable financial fits.

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

umbrella brands

The drawbacks of an unrelated diversification strategy include

very demanding managerial requirements and limited competitive advantage potential.

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

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.

Imagine that you are the CEO of a multinational corporate consumer food company. What would make it attractive to you to consider related diversification via acquisition, rather than unrelated diversification into a new industry, such by forming an internal startup subsidiary to enter and compete in the target industry?

when the incumbent industry enables your company to create strategic fits with the acquired firm to exploit cross-business value chain activities and resource similarities that could lead to more efficient production, distribution, and sale of profitable processed food products

Unrelated diversification requires that company managers spend much time and effort screening acquisition candidates using all of the following criteria except

whether the business has a cross-business strategic fit.

Diversification is not really viewed as a success unless it

yields added long-term economic value for shareholders.