MGMT 490- Chapter 8

What is the benefit of calculating quantitative attractiveness ratings for the industries a diversified company has invested in? -Attractiveness ratings help to identify competitively valuable resources and capabilities. -Calculating attractiveness ratings is a systematic and reasonably reliable method for ranking a diversified company's industries from most to least attractive. -Attractiveness ratings identify which industry has the best/worst value chain matchups from the standpoint of cost reduction potential. -Attractiveness ratings help to identify the ability to match or beat rivals on key product attributes. -Attractiveness ratings help to identify the opportunities to exercise bargaining leverage with key suppliers or customers and help identify which industry is likely to be the largest/smallest contributor to the company's growth and profitability.

-Calculating attractiveness ratings is a systematic and reasonably reliable method for ranking a diversified company's industries from most to least attractive.

Which of the following best describes economies of scope? -Economies of scope stem from cost-saving efficiencies of operating overseas. -Economies of scope are cost reductions that flow from strategic fit along the value chains of related businesses. -Economies of scope accrue from a larger-sized operation. -Economies of scope create more value for shareholders just as economies of scale do. -Economies of scope arise mainly from strategic fit relationships in the distribution portions of the value chains of unrelated businesses.

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

Which of the following makes acquisition an attractive approach to diversifying into another industry? -It is quicker than trying to launch a brand-new operation, offers an effective way to hurdle entry barriers, and allows the acquirer to move directly to the task of building a strong position in the target industry. -It is not time-consuming and allows the firm to realize great profits in the end. -It is less expensive, less risky, and more effective than launching a new startup operation. -Due diligence and integration can be done easily and at low cost. -It satisfies all three diversity tests (industry attractiveness test, cost-of-entry-test, better-off test) to grow shareholder value over the long term.

-It is quicker than trying to launch a brand-new operation, offers an effective way to hurdle entry barriers, and allows the acquirer to move directly to the task of building a strong position in the target industry.

Which of the following is a prime benefit of a strategy keyed to related diversification? -Corporate parents created in related diversification can propel the company's business forward and help them gain ground over their market rivals. -Related diversification is less capital intensive and usually less risky than unrelated diversification. -Related diversification offers potential 1 + 1 = 3 benefits because of valuable cross-business relationships among the value chains of the corporation's different businesses. -Related diversification leads to competitive advantage and increased profitability. -Related diversification passes the industry attractiveness test and thus offers the best route to 2 + 2 = 4 benefits.

-Related diversification offers potential 1 + 1 = 3 benefits because of valuable cross-business relationships among the value chains of the corporation's different businesses.

A company can best accomplish diversification into new industries by -outsourcing most of the value chain activities that have to be performed in the target business/industry. -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. -integrating forward or backward into the target industry. -shifting from a strategic group comprised mostly of single-business companies to a strategic group comprised of diversified companies. -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.

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

To produce added long-term shareholder value, a move to diversify into a new business must pass three tests the -capability test, the industry attractiveness test, and the shareholder value test. -better-off test, the competitive advantage test, and the cost-of-entry test. -resource fit test, the profitability test, and the shareholder value test. -shareholder value test, the cost-of-entry test, and the competitive advantage test. -better-off test, the cost-of-entry test, and the industry attractiveness test.

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

Related diversification strategies are strong when built upon sharing -competitively valuable resources. -generalized resources and capabilities. -general management capabilities. -human resource management capabilities. -resources that have a broad utility and application outside a diversified company's core industry.

-competitively valuable resources.

The procedure for evaluating a diversified company's strategy involves all of the following steps EXCEPT -checking whether the firm's resources fit the requirements of its present business lineup. -ranking the performance prospects of the various businesses from best to worst and determining what the corporate parent's priorities should be in allocating resources to its different businesses. -checking the competitive advantage potential of cross-business strategic fit among the company's various business units. -determining the degree of risk involved with each business unit. -assessing the competitive strength of each business the company has diversified into and determining which ones are strong/weak contenders in their respective industries.

-determining the degree of risk involved with each business unit.

Which one of the following is NOT an important aspect of evaluating the merits of a diversified company's strategy? -assessing the competitive strength of each business the company has diversified into -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 the strategic fits and resource fits among the various sister businesses -assessing the attractiveness of the industries the company has diversified into, both individually and as a group -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

Which of the following refers to cost reductions stemming from strategic fit along the value chains of related businesses? -economies of scope -economies of scale -related diversification -unrelated diversification -cross-business strategic fits

-economies of scope

Which of the following are key indicators of industry attractiveness? -social and political factors, barriers to entry, and the intensity of competition -barriers to entry, overall profitability of the industry, and whether there are only a few major players in the market -emerging opportunities and threats, industry profitability, and market size and projected growth rate -the existence of economies of scope and whether an industry has significant social, political, regulatory, and environmental problems -strategic-fit, existence of economies of scope, and social and political factors

-emerging opportunities and threats, industry profitability, and market size and projected growth rate

Checking the competitive advantage potential of cross-business strategic fit involves -evaluating a diversified company's profitability relative to competitors. -examining a company's costs relative to the costs of its chief rivals in the industry. -determining if there are opportunities to exploit outsourcing opportunities by a diversified company's lineup of businesses. -considering what competitive value can be generated from strategic fit. -evaluating how much benefit a diversified company can gain from cross-business value chain matchups and resource sharing.

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

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 -it has resources or capabilities that are eminently transferable to other related or complementary businesses. -the company's growth is sluggish and it wants the sales and profit boost that a new business can provide. -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. -it wants to make new acquisitions to strengthen or complement some of its present businesses, market positioning, and competitive capabilities. -its top management wants to increase its compensation.

-its top management wants to increase its compensation.

The financial options for allocating a diversified company's financial resources do NOT include -investing in ways to strengthen or grow existing businesses. -making acquisitions to establish positions in new industries or to complement existing businesses. -funding long-range R&D ventures aimed at opening market opportunities in new or existing businesses. -purchasing competitively weak businesses or businesses in unattractive industries. -repurchasing shares of the company's common stock.

-purchasing competitively weak businesses or businesses in unattractive industries.

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

Moves to improve a diversified company's overall performance do NOT include -retrenching to a narrower base of business operations. -broadening the company's business scope by making new acquisitions in new industries. -restructuring the company's business lineup and putting a whole new face on the company's business makeup. -sticking closely to the existing business lineup and pursuing the growth opportunities presented by these businesses. -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.

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 combine the performance of certain cross-business activities and thereby reduce costs. -to transfer skills, technology, or intellectual capital from one business to another. -for the company's different businesses to share use of a well-respected brand name. -for sister businesses to collaborate in creating valuable new competitive capabilities. -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.

The drawbacks of an unrelated diversification strategy include -minimal potential for shareholder value creation and financial stability. -limited competitive advantage potential. financial instability and very demanding managerial requirements. -very demanding managerial requirements and limited competitive advantage potential. -cultural conflicts and very demanding financial requirements.

-very demanding managerial requirements and limited competitive advantage potential

Unrelated diversification requires that company managers spend much time and effort screening acquisition candidates using all of the following criteria EXCEPT -whether the business can meet corporate targets for profitability. -whether the business is in an industry with attractive growth potential. -whether the business is big enough to contribute significantly to the parent firm's bottom line. -whether the business can meet corporate targets for return on investment. -whether the business has a cross-business strategic fit.

-whether the business has a cross-business strategic fit.