Crafting and Executing Strategy: Chapter 8

18. 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.

E. 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.

15. 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

A. 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.

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.

A. 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.

13. Acquisition of an existing business is an attractive strategy option for entering a promising new industry because it: Ais 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. is less expensive than launching a new startup operation, thus passing the cost-of-entry test. Coffers 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. is more likely to result in passing the shareholder value test, the profitability test, and the better-off test. Eoffers 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.

A. is 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.

4. 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.

A. 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.

19. 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.

A. 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.

21. 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.

A. 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.

20. 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 . commonalitiesatthevaluechainlevel. 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.

B 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

3. 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

B. 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.

12. 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. Bacquiring 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.

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. 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.

17. Acquisition is an effective way to hurdle all of the following entry barriers EXCEPT: A. building brand awareness. B. avoiding the costs of doing due diligence. C. achieving scale economies. D. establishing supplier relationships. E. acquiring technical know-how.

B. avoiding the costs of doing due diligence. 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.

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

B. the 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.

22. 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.

C. 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.

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. Cforcing 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.

C. 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.

23. 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.

D. 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. 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. Dproduce 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.

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. 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.

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

D. the 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.

6. 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.

D. 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.

16. 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 . tolaunchthebusinessandcompeteeffectively C When adding new production capacity will not adversely impact the supply demand balance in the . industrybycreatingoversupplyconditions 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

D.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.

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.

E. 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.

8. 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. Bleverages existing resources and capabilities by expanding into industries where these same resource . strengths are key success factors and valuable competitive assets. Chas 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.

E. 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.

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.

E. 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.

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

E. the 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.