TBUS 400 CH 6 Questions & CH 8

__________ could potentially be achieved through cost reductions stemming from strategic fit along the value chains of ITT's businesses. Economies of scope Diffusion of risk None of the answers are correct. Economies of scale Cost sharing

Economies of scope

Strategic alliances have proven to be a very effective strategic option for gaining a sustainable competitive advantage over rivals. True OR False

FALSE

______ requires creating a new business subsidiary from its inception. Internal development International expansion Related diversification External development

Internal development Why Not: External development Reason: Creating a new business subsidiary is internal development, not external development.

Corporate Strategy This video depicts corporate strategy and describes the three dimensions along which it is assessed. Click the ► button to watch the video. Then, answer the questions that follow. Corporate Strategy helps managers understand which strategy question? How should the firm compete? Where should the firm expand? Where should the firm compete? How should the firm expand? How can the firm buy out a competitor? Walt Disney is one of largest publicly owned companies in America with operations 0:13around the world including theme parks, media networks and branded consumer products. 0:19Today's Disney is a long way from 1923 when Walt and his brother Roy rented 0:23the back of a real estate office in Los Angeles for $10 a month. 0:28In that small office, Walt and Roy began honing their storytelling skills 0:33that are still at the heart of today's Walt Disney Company. 0:36Business strategy concepts and frameworks help managers understand competitive advantage, 0:42developing answers to the question: "How should the firm compete within a single industry?' 0:49Walt and Roy originally competed in the animated shorts industry. 0:53Based on Walt's vision and their technological prowess they produced the first 0:58fully synchronized sound cartoon,'Steamboat Willie' that introduced Mickey Mouse. 1:03The wild success of 'Steamboat Willie' launched Mickey 1:06and helped Disney create a sustainable competitive advantage with a mouse at the center. 1:13Corporate strategy helps managers understand how the business might expand beyond the firm's original industry. 1:19When asking the Corporate Strategy question "Where should the firm compete?" We are also asking: 1:25"Should the firm expand into new markets by offering new product and services? 1:29"Should the firm expand into new geographies?" 1:33"Should the firm expand vertically by bringing into its own operations things that are being done by suppliers or customers?" 1:41Disney has expanded in all of these ways. 1:45Disney expanded into new markets by leveraging the strength of its competitive advantage. 1:50Originating in short animated films. Disney expanded into feature length animated films and live action films 1:58Partnering with ABC, Disney expanded into television offering a regular series "Disneyland" 2:04which paved the way for the company to expand into yet another industry by opening the theme park "Disneyland" 2:12Disney has also expanded into new geographies, copying its successful U.S. theme park 2:19and opening theme parks in Tokyo, Paris, Hong Kong and Shanghai. 2:24To be successful in these different geographies, Disney's managers had to carefully consider 2:29how to adapt the theme park experience for these different consumers. 2:34Disney has also expanded vertically along the value chain. For example, as Disney became 2:40more reliant on television revenue it moved to acquire its former television partner ABC in 1995. 2:49More recently Disney's managers acquired Marvel in 2009 and LucasFilm in 2012. 2:56Bringing inside the firm critical suppliers with characters and stories that Disney can leverage. 3:03The Marvel and LucasFilm acquisitions are good examples of the Corporate Parenting advantage Disney offers. 3:10For example, Disney can now take advantage of Star Wars characters across its corporate platform. 3:17It can create new TV shows and movies within its media networks. 3:21It can create new consumer merchandize based on these characters. 3:25And it can showcase the most important of these characters in its theme Parks. 3:30Most importantly, these joint efforts reinforce the success of each of them individually. 3:36An effective Corporate strategy can leverage the firm's advantage across new geographies, 3:42new markets and in other sections of the value chain.

McGrawHill Education: Corporate Strategy How should the firm expand?

When one company purchases another company and absorbs its operations, it is participating in a(n) acquisition. merger. strategic alliance. joint venture.

acquisition.

Select all that apply A strategic alliance is more likely to be long-lasting when continued collaboration benefits both parties. the alliance is formed by companies who are not in direct competition. the alliance is formed by companies in the same industry segment. there is a high degree of trust between partners.

continued collaboration benefits both parties. the alliance is formed by companies who are not in direct competition. there is a high degree of trust between partners.

Most large corporations maintain ______ strategic alliances. 1 or 2 less than 10 30 to 50 over 100

30 to 50

Core Concept A cash cow generates operating cash flows over and above its internal requirements, thereby providing financial resources that may be used to invest in cash hogs, finance new acquisitions, fund share buyback programs, or pay dividends.

A diversified company has good financial resources fit when the excess cash generated by its cash cow businesses is sufficient to fund the investment requirements of promising cash hog businesses. Ideally, investing in promising cash hog businesses over time results in growing the hogs into self-supporting star businesses that have strong or market-lead competitive positions in attractive, high-growth markets and high levels of profitability. Star businesses are often the cash cows of the future-when the markets of star businesses begin to mature and their growth slows, their competitive strength should produce self-generated cash flows more than sufficient to cover their investment needs. The "success sequence" is thus cash hog to young star (but perhaps still cash hog) to self-supporting star to cash cow. If however, a cash hog has questionable promise (because of either low industry attractiveness or a weak competitive position), then it becomes a logical candidate for divestiture. Aggressively investing in a cash hog with an uncertain future seldom makes sense because it requires the corporate parent to keep pumping more capital into the business with only dim hope of turning the cash hog into a future star. Such businesses are a financial drain and fail the resource-fit test because they strain the corporate parent's ability to adequately fund its other businesses. Divesting a less-attractive cash hog business is usually the best alternative unless: 1. It has highly valuable strategic fit with other business units or 2. The capital infusions needed from the corporate parent are modest relative to the funds available. & 3. There is a decent chance of growing the business into a solid bottom-line contributor. Aside from cash flow considerations, two other factors to consider in assessing the financial resource fit for businesses in a diversified firm's portfolio are: * Do individual businesses adequately contribute to achieving companywide performance targets? A business exhibits poor financial fit if it soaks up a disproportionate share of the company's financial resources, while making subpar or insignificant contributions to the bottom line. Too many underperforming businesses reduce the company's overall performance and ultimately limit growth in shareholder value. * Does the corporation have adequate financial strength to fund its different businesses and maintain a healthy credit rating? A diversified company's strategy fails the resources fit test when the resource needs of its portfolio unduly stretch the company's financial health and threaten to impair its credit rating. Many of the world's largest banks, including Royal Bank of Scotland, Citigroup, and HSBC, recently found themselves so undercapitalized and financially overextended that they were forced to sell some of their business assets to meet regulatory requirements and store public confidence in their solvency.

Step 2 of Evaluating the Strategy of a Diversified Company The second step in evaluating a diversified company is to determine how strongly positioned its business units are in their respective industries. Doing an appraisal of each business unit's strength and competitive position in its industry not only reveals its chances for industry success but also provides a basis for ranking the units from competitively strong to weakest. Quantitative measures of each business unit's competitive strength can be calculated using a procedure similar to that for measuring industry attractiveness. The following factors may be used in quantifying the competitive strength of a diversified company's business subsidiaries: * Relative Market Share 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. For instance, if business A has a market-leading share of 40 percent and its largest rivals has 30 percent, A's relative market share is 1.33. If business B has a 15 percent market share and B's largest rival has 30 percent, B's relative market share is 0.5. * Costs Relative to Competitors' Costs: There's reason to expect that business units with higher relative market shares have lower unit costs than competitors with lower relative market shares because of the possibility of scale economies and experience or learning-curve effects. Another indicator of low cost can be a business unit's supply chain management capabilities. * Products or Services that Satisfy Buyer Expectations: A Company's competitiveness depends in part on being able to offer buyers appealing features, performance, reliability, and service attributes. * Ability To Benefit From Strategic Fit With Sibling Businesses. Strategic fit with other businesses within the company enhances a business unit's competitive strength and may provide a competitive edge. * Number and Caliber of Strategic Alliances and Collaborative Partnerships. Well-functioning alliances and partnerships may be a source of potential competitive advantage and thus add to a business's competitive strength. * Brand Image and Reputation: A strong brand name is a valuable competitive asset in most industries. * Competitively Valuable Capabilities: All industries contain a variety of important competitive capabilities related to product innovation, production, capabilities, distribution capabilities, or marketing prowess. * Profitability Relative to Competitors Above-average returns on investment and large profit margins relative to rivals are usually accurate indicators of competitive advantage.

After settling on a set of competitive strength measures that are well matched to the circumstances of the various business units, weights indicating each measure's importance need to be assigned. As in the assignment of weights to industry attractiveness measures, the importance weights must add up to 1.0. Each business unit is then rated on each of the chosen strength measures, using a rating scale of 1 to 10 (where 10 signifies competitive strength and a rating of 1 signifies competitive weakness). If the available information is too skimpy to confidently assign a rating value to a business unit on a particular strength measure, then it is usually best to use a score of 5. Weighted strength rating are calculated by multiplying the business unit's rating on each strength measure by the assigned weight. For example: a strength score of 6 times a weight of 0.15 gives a weighted strength rating of 0.90. The sum of weighted ratings across all the strength measures provides a quantitative measure of a business unit's overall market strength and competitive standing. Table 8.2 provides sample calculations of competitive strength ratings for four businesses.

Core Concept: Strategic Fit: exists when value chains of different businesses present opportunities for cross-business skills transfer, cost sharing, or brand sharing.

Cross-business strategic fit can exist anywhere along the value chain: in R&D and technology activities, in supply chain activities, in manufacturing, in sales and marketing, or in distribution activities. Likewise, different businesses can often use the same administrative and customer service infrastructure. For instance, a cable operator that diversifies as a broadband provider can use the same customer data network, the same customer call centers and local offices, the same billing and customer accounting systems, and the same customer service infrastructure to support all its products and services.

Which of the following is not an example of unrelated diversification? a homebuilder acquiring a forest products company a manufacturer of golf shoes acquiring a retailer of fishing rods and lures a producer of snow skis and ski boots acquiring a maker of ski apparel and accessories (outerwear, goggles, gloves and mittens, helmets and toboggans) a steel producer acquiring a hardware store an online merchandiser acquiring a retail supermarket that specializes in natural and organic foods

a producer of snow skis and ski boots acquiring a maker of ski apparel and accessories (outerwear, goggles, gloves and mittens, helmets and toboggans)

Which of the following has the disadvantage of providing little opportunity to reduce costs and leverage brand name to gain competitive advantages? a. unrelated diversification b. a focused low-cost strategy c. related diversification d. a low-cost provider strategy

a. unrelated diversification

A(n) ______ discounts the importance of cross-business strategic fit, focusing instead on entering businesses that allow the company as a whole to increase earnings. a. related diversification strategy b. unrelated diversification strategy c. acquisition d. strategic alliance

b. unrelated diversification strategy WHY NOT: a. related diversification strategy Reason: A related diversification strategy should take into consideration cross-business strategic fit.

An independent entity that is jointly owned by two or more businesses is known as a(n) acquisition. outsourcing agreement. merger. joint venture.

joint venture.

Diversification into new industries merits strong consideration when a single-business company encounters diminishing market opportunities and stagnating sales in its principal business. True or False

True NOTE WHY NOT: False Reason: Recall that diversification should be an option when a company sees its core business declining.

True or false: Diversification into new industries merits strong consideration when a single-business company encounters diminishing market opportunities and stagnating sales in its principal business.

True Why Not: False Reason: Recall that diversification should be an option when a company sees its core business declining.

A first-mover strategy requires the first-mover to also be a fast learner. almost always results in the first-mover retaining market leadership despite the efforts of rivals to overtake them. is more easily sustained in an industry with quickly advancing technology. virtually guarantees that rivals cannot match the first-mover's skills, know-how, or actions.

requires the first-mover to also be a fast learner. WHY NOT: almost always results in the first-mover retaining market leadership despite the efforts of rivals to overtake them. Reason: Recall that a first-mover strategy does not always result in the fast-mover retaining market leadership despite the efforts of rivals to overtake them.

When PepsiCo's management was considering the divestiture of a group of fast-food restaurant businesses (KFC, Pizza Hut, and Taco Bell), the following question was most likely asked: "Do we need to do the math to achieve 1 + 1 = 3 outcomes from these diversified businesses?" "Did we miss the opportunity to milk these cash cows?" "Why couldn't we derive a parenting advantage with these businesses?" "If we were not in this business today, would we want to get into it now?" "Will these three businesses pass the 'cost-of-exit' test?"

"If we were not in this business today, would we want to get into it now?"

Which of these is not a reason why strategic alliances terminate rather than remain in place long term? Diverging objectives and priorities Inability to work well together A market separation of the partners such that there is no overlap in target buyer groups. Changing conditions that make the purpose of the alliance obsolete

A market separation of the partners such that there is no overlap in target buyer groups.

Select all that apply A late-mover strategy may be advantageous when a. a late-mover can enter the market with lower costs than the first mover. b. potential buyers are skeptical about the new product offered by the first-mover. c. the overall economy is poor and demand for consumer goods begins to fall. d. consumer needs evolve away from an existing product.

a late-mover can enter the market with lower costs than the first mover. potential buyers are skeptical about the new product offered by the first-mover. consumer needs evolve away from an existing product.

Diversified companies might find it desirable to add to their existing business lineup for which of the following reasons? a. to address vulnerabilities due to seasonal or recessionary influences b. to make use of the potential for transferring resources and capabilities to other related businesses c. to counter unfavorable driving forces facing core businesses d. to weaken the market position of one of its existing businesses.

a. to address vulnerabilities due to seasonal or recessionary influences b. to make use of the potential for transferring resources and capabilities to other related businesses c. to counter unfavorable driving forces facing core businesses

Under which of the following conditions is a joint venture, as a diversification strategy, a strategically good idea? a. when the expansion-minded company wants to minimize risk in entering an industry with significant political and regulatory factors b. when the expansion-minded company wants to ensure a long-term business arrangement with a partner that fits with their diversification goals c. when the opportunity involves too much risk or complexity for one company to assume alone d. when the opportunities in a new industry require a broader range of capabilities and knowledge than an expansion-minded company has

a. when the expansion-minded company wants to minimize risk in entering an industry with significant political and regulatory factors c. when the opportunity involves too much risk or complexity for one company to assume alone & d. when the opportunities in a new industry require a broader range of capabilities and knowledge than an expansion-minded company has

Which of the following is generally not true of unrelated diversification? a. Few companies have top management capabilities that are capable of successfully managing a diverse set of businesses. b. Odds are, the results will be 1+1=3. c. Competently overseeing widely diverse businesses is harder than it sounds. d. The failure rate of financial results is higher than the success rate.

b. Odds are, the results will be 1+1=3. WHY NOT: a. Few companies have top management capabilities that are capable of successfully managing a diverse set of businesses. Reason This indeed is generally true of unrelated diversification.

Which of the following strategic business units generate 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? cash hogs cash cows star businesses stars cash dogs

cash cows

Being "held hostage" to an outside supplier is a potential risk of a(n) ______ strategy. outsourcing blue ocean forward integration backward integration

outsourcing

A first-mover strategy Multiple choice question. requires the first-mover to also be a fast learner. almost always results in the first-mover retaining market leadership despite the efforts of rivals to overtake them. is more easily sustained in an industry with quickly advancing technology. virtually guarantees that rivals cannot match the first-mover's skills, know-how, or actions.

requires the first-mover to also be a fast learner. NOTE WHY NOT almost always results in the first-mover retaining market leadership despite the efforts of rivals to overtake them. Reason: Recall that a first-mover strategy does not always result in the fast-mover retaining market leadership despite the efforts of rivals to overtake them.

Economies of scope are derived from the cost-saving efficiencies of scattering a company's manufacturing/assembly plants over a wider geographic area. have to do with the cost-saving efficiencies of operating across a bigger portion of an industry's total value chain. stem from cost-saving strategic fits along the value chains of related businesses. refer to the cost savings that flow from being able to combine the value chains of different businesses into a single value chain. are like economies of scale and arise from being able to lower costs via a larger volume operation.

stem from cost-saving strategic fits along the value chains of related businesses.

A(n) ______ is a collaborative relationship between two separately owned companies in which resources, risk, and operational control are shared. strategic alliance merger acquisition outsourcing agreement

strategic alliance

A company's horizontal scope refers to the extent of its ownership in multiple joint ventures. the various defensive strategies the company can employ. the extent to which the company participates in the various activities of the industry's value chain. the various product and services that it offers.

the various product and services that it offers.

Which of these are common reasons why companies enter into strategic alliances? to create a more cost-efficient operation by collapsing ownership of two or more companies into one company. to improve market access and marketing capabilities to collaborate on the development of a new technology to make supply chains more efficient

to improve market access and marketing capabilities to collaborate on the development of a new technology to make supply chains more efficient

in the calculation of industry attractiveness scores, the relative importance given to various measures of attractiveness is determined by using factors called ___________________, which together add up to 1.0. (Remember to type only one word per blank.)

weights or weightings

True or false: Because the partners will have shared ownership in the new business, a joint venture is neither a feasible nor effective diversification strategy.

FALSE Why it is not true: Remember that sometimes pooling the resources and competencies of multiple companies can reduce risk and be effective.

Businesses in the three cells in the lower right corner of the matrix (business D in figure 8.3) typically are weak performers and have the lowest claim on corporate resources. Such businesses are typically good candidates for being divested or else managed in a manner calculated to squeeze out the maximum cash flows from operations. The cash flows from low-performing/low-potential businesses can then be diverted to financing expansion of business units with greater market opportunities. In exceptional cases where a business located in the three lower right cells is nonetheless fairly profitable or has the potential for good earnings and return on investment, the business merits retention and the allocation of sufficient resources to achieve better performance. The nine cell attractiveness competitive 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.

Step 3: Determining the Competitive Value of Strategic Fit in Multibusiness Companies: The potential for competitively important strategic fit is central to making conclusions about the effectiveness of a company's related diversification strategy. This step can be bypassed for diversified companies whose businesses are all unrelated (because, by design, no cross-business strategic fit is present). Checking the competitive advantage potential of cross-business strategic fit involves evaluating how much benefit a diversified company can gain from value chain matchups that present: 1. Opportunities to combine the performance of certain activities, thereby reducing costs and capturing economies of scope. 2. Opportunities to transfer skills, technology, or intellectual capital from one business to another. 3. Opportunities to share use of a well-respected brand name across multiple product and/or service categories. The greater the value of cross-business strategic fit in enhancing a company's performance in the marketplace or the bottom line, the more powerful is its strategy of related diversification. But more than just strategic-fit identification is needed. The real test is what competitive value can be generated from this fit. To what extent can cost savings be realized? How much competitive value will come from cross-business transfer of skills, technology, or intellectual capital? Will transferring a potent brand name to the products of sibling businesses grow sales significantly? Absent significant strategic fit and dedicated company efforts to capture the benefits, one has to be skeptical about the potential for a diversified company's businesses to perform better together than apart.

Step 6: Crafting New Strategic Moves to Improve the Overall Corporate Performance Identify a diversified company's four main corporate strategy options for solidifying its diversification strategy and improving company performance. The conclusions flowing from the five preceding analytical steps set the agenda for crafting strategic moves to improve a diversified company's overall performance. The strategic options boil down to four broad categories of actions: 1. Sticking closely with the existing business lineup and pursuing the opportunities these businesses present. 2. Broadening the company's business scope by making new acquisitions in new industries. 3. Divesting some businesses and retrenching to a narrower base of business operations. 4. Restructuring the company's business lineup and putting a whole new face on the company's business makeup

Sticking Closely With The Existing Business Lineup The option of sticking with the current business lineup makes sense when the company's present businesses offer attractive growth opportunities and can be counted on to generate good earnings and cash flows. As long as the company's set of existing businesses puts it in a good position for the future and these businesses have good strategic and/or resource fit, then rocking the boat with major changes in the company's business mix is usually unnecessary. Corporate executives can concentrate their attention on getting the best performance from each of the businesses, steering corporate resources into those areas of greatest potential and profitability. However, in the event that corporate executives are not entirely satisfied with the opportunities they see in the company's present set of businesses, they can opt for any of the three strategic alternatives listed in the remainder of this section: Alternatives to sticking with the plan: Option 1: Broadening the Diversification Base: Diversified companies sometimes find it desirable to add to the diversification base for any one of the same reasons a single-business company might pursue initial diversification. Sluggish growth in revenues or profits, vulnerability to seasonality or recessionary influences, potential for transferring resources and capabilities to other related businesses, or unfavorable driving forces facing core businesses are all reasons management of a diversified company might choose to broaden diversification. An additional, and often very important, motivating factor for adding new businesses is to complement and strengthen the market position and competitive capabilities of one or more of its present businesses. Procter & Gamble's acquisition of Gillette strengthened and extended P&G's reach into personal care and household products-Gillette's businesses included Oral-B toothbrushes, Gillette razors and razor blades, Duracell batteries, Braun shavers and small appliances (coffeemakers, mixers, hair dryers, and electric toothbrushes), and toiletries (Right Guard, Foamy, Soft & Dry, White Rain, and Dry Idea). Option 2: Divesting Some Businesses and Retrenching to a Narrower Diversification Base: A number of diversified firms have had difficulty managing a diverse groups of businesses and have elected to get out of some of them. Selling a business outright to another company is far and away the most frequently used option for divesting a business. In 2012, Sara Lee Corporation sold its International Coffee and Tea business to J.M. Smucker and Nike sold its Umbro and Cole Haan brands to focus on the Jordan brand and Converse that are more complementary to the Nike brand. But sometimes a business selected for divestiture has ample resources and capabilities to compete successfully on its own. In such cases, a corporate parent may elect to spin off the unwanted business as a financially and managerially independent company, either by selling shares to the public via an initial public offering or by distributing shares in the new company to shareholders of the corporate parent. eBay spun off PayPal in 2015 at a valuation of $45 billion-a value 30 times more than what eBay paid for the company in a 2002 acquisition.

Select all that apply Which of the following are considered the best reasons to invest in vertical integration? To discover untapped market opportunities To improve competitive strength To boost a company's profitability To limit competition

To improve competitive strength & To boost a company's profitability

Which of the following is not a typical objective of a merger or acquisition? To gain quick access to new technologies and competitive capabilities. To scale back on the company's product line or eliminate some product categories. To expand a company's geographic reach. To improve the cost efficiency of the combined businesses.

To scale back on the company's product line or eliminate some product categories.

Which of the following are the potential benefits of backward integration? better customer service stronger value-chain relationships improved product quality less dependence on outside vendors

better customer service improved product quality less dependence on outside vendors

Select all that apply Which of the following are advantages of forward integration? better market visibility selling costs are shifted to wholesalers and distributors improved relationships with end users convenient purchases as a differentiating feature

better market visibility improved relationships with end users convenient purchases as a differentiating feature

A ______ strategy involves identifying and targeting a new and distinctive market segment rather than competing in established market spaces. Multiple choice question. defensive guerrilla warfare blue ocean new product

blue ocean

______ involves radically altering the business lineup by divesting businesses that lack strategic fit or are poor performers and acquiring new businesses that offer better potential for shareholder value. a. Divestiture through initial public offering b. Corporate de-layering c. Outsourcing d. Corporate restructuring

d. Corporate restructuring

______ are cost reductions stemming from strategic fit along the value chains of related businesses. a. Strategic diversification b. Economies of scale c. Competitive fit d. Economies of scope

d. Economies of scope Why Not: b. Economies of scale Reason: This provides cost reductions stemming from size, not strategic fit.

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

examining a company's costs relative to the costs of its chief rivals in the industry.

Core Concept: A cash hog generates operating cash flows that are too small to fully fund its operations and growth; a cash hog must receive cash infusions from outside sources to cover its working capital and investment requirements.

In contrast, business units with leading market positions in mature industries may be cash cows- businesses that generate substantial cash surpluses over what is needed to adequately fund their operations. Market leaders in slow-growth industries often generate sizable positive cash flows over and above what is needed for growth and reinvestment because the slow-growth nature of their industry often entails relatively modest annual investment requirements. Cash cows, through not always attractive from a growth standpoint, are valuable businesses from a financial resources to deploy elsewhere.

Under which of the following market conditions should a company avoid investing heavily in a first-mover strategy? The new product requires consumer to purchase complementary products or services that are currently available. There is virtually no competition in the market. The infrastructure needed to support a strong increase in demand has already been established. It is expensive, difficult, or otherwise inconvenient for buyers to adopt a new product or technology,

It is expensive, difficult, or otherwise inconvenient for buyers to adopt a new product or technology,

Which of the following statements regarding single-business versus diversified firms is correct? Strategy-making tends to be more complicated in a diversified firm versus a single-business firm. Unlike single-business firms, in most diversified firms strategy-making authority is not delegated to business-unit managers. Diversified firms tend to be less attractive to investors than single-business firms. Single-business firms tend to be less profitable than diversified firms.

Strategy-making tends to be more complicated in a diversified firm versus a single-business firm. NOTE WHY NOT: Unlike single-business firms, in most diversified firms strategy-making authority is not delegated to business-unit managers. Reason: In most diversified companies, corporate-level executives delegate considerable strategy-making authority to the heads of each business.

Select all that apply: Strategic fit among businesses can enhance shareholder value by a. leveraging use of a common brand name. b. transferring skills and capabilities from one business to another. c. spreading risk across completely different businesses. d. sharing facilities or resources to reduce costs.

a. leveraging use of a common brand name. b. transferring skills and capabilities from one business to another. d. sharing facilities or resources to reduce costs.

A diversification strategy should avoid adding businesses that make excessive demands on nonfinancial resources, including which of the following? a. managerial talent b. marketing support c. technology and information systems d. surplus cash reserves

a. managerial talent b. marketing support c. technology and information systems

The basic purpose of calculating competitive strength scores for each of a diversified company's business units is to determine which business unit has the greatest number of resources, competencies, and competitive capabilities and which one has the least. assess how strongly positioned each business unit is in its industry and the extent to which it already is or can become a strong market contender. rank each business unit's strategic fit from highest to lowest. rank each business unit's resource fit from highest to lowest. rank each business unit's strategy from best to worst.

assess how strongly positioned each business unit is in its industry and the extent to which it already is or can become a strong market contender.

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: expansion into new geographies. integration advantage. synergy advantage. vertical advantage. parenting advantage.

parenting advantage.

Determining the competitive value of strategic fit in diversified companies is A. highly important in companies with a completely unrelated mix of businesses. B. important for evaluating the viability of a related diversification strategy. C. a more practical method than using a nine-cell attractiveness/strength matrix. D. not necessary in companies with related diversification since strategic fit is already present.

B. important for evaluating the viability of a related diversification strategy. WHY NOT A. highly important in companies with a completely unrelated mix of businesses. REASON This is a case of a no cross-business strategic fit. D. not necessary in companies with related diversification since strategic fit is already present. REASON This situation provides ways to combine resources that need to be evaluated.

In what ways can vertical integration make a business less responsive to market changes? A firm may be unable to respond to changes in consumer preferences using its existing facilities. Vertical integration makes a firm less reliant on high sales volumes, reducing its need to innovate and respond to customer requests. Significant capital investments in vertical integration reduce the impact of an industry downturn, making profitability less urgent. Significant investments in older technology make the firm less likely to adopt new technologies.

A firm may be unable to respond to changes in consumer preferences using its existing facilities. Significant investments in older technology make the firm less likely to adopt new technologies.

When Business Diversification Becomes a Consideration Understand when and how business diversification can enhance shareholder value. 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. Consider, for example, what mobile phone companies and marketers of Voice over Internet Protocol (VoIP) have done to the revenues of long-distance providers such as AT&T, British Telecommunications, and NTT in Japan. 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.

Building Shareholder Value: The Ultimate Justification for Business Diversification: Diversification must do more for a company than simply spread its business risk across various industries. In principle, 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. Business diversification stands little chance of building shareholder value without passing the following three tests: Test 1: The Industry Attractiveness Test: The industry to be entered through diversification must offer an opportunity for profits and return on investment that is equal to or better than that of the company's present business(es). Test 2: The Cost of Entry Test: The cost to enter the target industry must not be so high as to erode the potential for good profitability. A catch-22 can prevail here, however. The more attractive an industry's prospects are for growth and good long-term profitability, the more expensive it can be to enter. It's easy for acquisitions of companies in highly attractive industries to fail the cost-of-entry test. Test 3: The Better-Off Test: Diversifying into a new business must offer potential for the company's existing businesses and the new business to perform better together under a single corporate umbrella than they would perform operating as independent, standalone businesses. For example, let's say company A diversifies by purchasing company B in another industry. If A and B's consolidated profits in the years to come prove no greater than what each could have earned on its own, then A's diversification will not provide its shareholders with added value. Company A's shareholders could have achieved the same 1+1=2 result by merely purchasing stock in company B. Shareholder value is not created by diversification unless it produces a 1+1=3 effect. Creating added value for shareholders via diversification requires building a multibusiness company in which the whole is greater than the sum of its parts. Diversification moves that satisfy all three tests have the greatest potential to grow shareholder value over the long term. Diversification moves that can pass only one or two test are suspect.

Entering a New Line of Business Through Internal Development Achieving diversification through internal Development involves starting a new business subsidiary from scratch. Generally, forming a startup subsidiary to enter a new business has appealed only when: 1. The parent company already has in-house most or all of the skills and resources needed to compete effectively; 2. There is ample time to launch the business 3. Internal entry lower costs than entry via acquisition 4. The targeted industry is populated with many relatively small firms such that the new startup does not have to compete against large, powerful rivals 5. Adding new production capacity will not adversely impact the supply-demand balance in the industry & 6. Incumbent firms are likely to be slow or ineffective in responding to a new entrant's efforts to crack the market.

Using Joint Ventures to Achieve Diversification A joint venture to enter a new business can be useful in at least two types of situations: 1. A joint venture is a good vehicle for pursuing an opportunity that is too complex, uneconomical, or risky for one company to pursue alone. 2. Joint ventures make sense when the opportunities in a new industry require a broader range of competencies and know-how than an expansion-minded company can marshal. Many of the opportunities in biotechnology call for the coordinated development of complementary innovations and tackling an intricate web of technical, political, and regulatory factors simultaneously. In such cases, pooling the resources and competencies of two or more companies is a wiser and less risky way to proceed. However, as discussed in Chapter 6 and 7, partnering with another company-in the form of either a joint venture or a collaborative alliance- has significant drawbacks due to the potential for conflicting objectives, disagreements over how to best operate the venture, culture clashes, and so on. Joint ventures are generally the least durable of the entry options, usually lasting only until the partners decide to go their own ways.

Economies of scope a. are cost savings that accrue directly from a larger operation, such as lower unit costs in a large plant versus a small plant. b. are cost reductions stemming from strategic fit along the value chains of related businesses. c. can be the result of a related strategy that allows businesses to share technology, facilities, or a common sales force. d. are important in achieving a cost-based competitive advantage in a related diversification strategy.

b. are cost reductions stemming from strategic fit along the value chains of related businesses. c. can be the result of a related strategy that allows businesses to share technology, facilities, or a common sales force. & d. are important in achieving a cost-based competitive advantage in a related diversification strategy.

Economies of scope in a diversified company a. are rarely sufficient to significantly impact profitability. b. can help the company achieve the 1+1=3 'better off' test. c. are important for efficiency but do not help the company in earning higher profits and returns. d. are usually not a factor in delivering shareholder value.

b. can help the company achieve the 1+1=3 'better off' test. Why Not: c. are important for efficiency but do not help the company in earning higher profits and returns. Reason: They not only improve efficiency but also lead to higher profits and returns.

Acme Insurance Company's policies are sold by a network of independent insurance agents, each of whom offers plans from a number of competing companies. Acme decides to discontinue this approach and instead sell policies only through their own insurance offices. This is an example of ______ integration. a. tapered b. horizontal c. backward d. forward

d. forward NOTE: Backward Reason: Recall backward integration involves suppliers

Hiring outside vendors to perform important value chain activities is known as a. backward integration. b. vertical integration. c. a merger. d. outsourcing.

d. outsourcing.

Select all that apply For backward integration to be a profitable strategy, a company must be able to develop in-house proprietary technology. maintain a similar cost structure as outside suppliers. match or exceed the supplier's production efficiency. improve product quality even if production efficiency is reduced.

maintain a similar cost structure as outside suppliers. & match or exceed the supplier's production efficiency.

Which of the following is not a type of vertical integration strategy? tapered integration partial integration full integration value integration

value integration WHY NOT: tapered integration Reason: This is a mix of vertical integration and market exchange.

As a strategy for diversification, ______ allows a company to move straight to building a strong market position in the target industry without getting tangled up in launching a start-up. a. internal development b. acquisition c. a joint venture d. starting a subsidiary

b. acquisition

Select all that apply: Which of the following are measures used in calculating industry attractiveness scores in a diversified company? a. use of third-party contract manufacturing in the business units b. emerging opportunities and threats c. social, political, regulatory, and environmental factors d. market size and projected growth rate

b. emerging opportunities and threats c. social, political, regulatory, and environmental factors d. market size and projected growth rate

A ______ company is spread around a wide collection of related businesses, unrelated businesses, or a combination of both. a. narrowly diversified b. dominant-business c. broadly diversified d. core diversified

c. broadly diversified

The three tests that must be "passed" in order for a diversification strategy to build shareholder value are a. better-off, strategic fit, and SWOT. b. industry attractiveness, benchmarking, and profitability. c. industry attractiveness, cost-of-entry, and better-off. d. cost-of-entry, profit growth, and labor cost.

c. industry attractiveness, cost-of-entry, and better-off.

What are the two important pitfalls of an unrelated diversification strategy? a. Detrimental effects of governmental policies and high regulatory requirements b. Very little value chain strategic fit and limited potential for industry expertise in a single area c. Difficulty in maintaining consistent marketing approaches and lack of investment capital to keep the businesses running d. Highly taxing managerial requirements and limited opportunity for competitive advantage

d. Highly taxing managerial requirements and limited opportunity for competitive advantage Why Not: a. Detrimental effects of governmental policies and high regulatory requirements Reason: Recall that the two important negatives of an unrelated diversification strategy are very demanding managerial requirements and limited competitive advantage potential. b. Very little value chain strategic fit and limited potential for industry expertise in a single area Reason: Recall that the two important negatives of an unrelated diversification strategy are very demanding managerial requirements and limited competitive advantage potential. c. Difficulty in maintaining consistent marketing approaches and lack of investment capital to keep the businesses running Reason: Recall that the two important negatives of an unrelated diversification strategy are very demanding managerial requirements and limited competitive advantage potential.

A spinoff occurs when a company a. wants to get rid of a business but divestiture is legally prohibited. b. sells an unwanted business unit to another company. c. makes an offer to acquire another company but the offer is refused. d. creates a financially and managerially independent company intended to function on its own.

d. creates a financially and managerially independent company intended to function on its own. WHY NOT: c. makes an offer to acquire another company but the offer is refused. REASON This is not a spinoff. A spinoff involves a business that a company already owns.

When a diversification strategy has resulted in resources and management attention being stretched too thin, which of the following is the most appropriate strategic move? a. making acquisitions to purchase positions in new industries with high growth prospects c. divesting some businesses and retrenching to a narrower diversification base c. divesting some businesses and retrenching to a narrower diversification base d. sticking closely with the existing business lineup until the economy improves enough to consider selling

c. divesting some businesses and retrenching to a narrower diversification base WHY NOT c. divesting some businesses and retrenching to a narrower diversification base REASON This would stretch resources and management attention even further.

A portfolio approach to ensuring financial fit among businesses in a diversified company A. is based on the fact that different businesses have different cash flow and investment characteristics. B. positions most or all of the company's businesses as stars rather than cash cows or cash hogs. C. can be used instead of other strategic approaches that help in maintain a steady cash flow in the business. D. ensures that most of the company's businesses will be cash cows rather than cash hogs.

A. is based on the fact that different businesses have different cash flow and investment characteristics.

What is it called when a company owns a variety of businesses that increase its effectiveness, while having plenty of resources to add customer value to these businesses without financially stressing itself? A. competitive mix B. resource fit C. industry leadership D. diverse marketing

B. resource fit WHY NOT A. competitive mix REASON The situation described is the definition of resource fit. C. industry leadership REASON The situation described is the definition of resource fit. D. diverse marketing REASON The situation described is the definition of resource fit.

The Pitfalls of Unrelated Diversification Unrelated diversification strategies have two important negatives that undercut the pluses: very demanding managerial requirements and limited competitive advantage potential.

Demanding Managerial Requirements Successfully managing a set of fundamentally different businesses operating in fundamentally different industry and competitive environments is an exceptionally difficult proposition for corporate-level managers. The greater the number of businesses a company is in and the more diverse they 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. As a rule, the more unrelated businesses that a company has diversified into, the more corporate executives are forced to "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 to look good. Managing by the numbers work if the heads of the various business units are quite capable and consistently meet their numbers. But problems arise when things start to go awry and corporate management has to get deeply involved in turning around a business it does not know much about. Unrelated diversification requires that corporate executives rely on the skills and expertise of business-level managers to build competitive advantage and boost the performance of individual businesses.

Calculating Industry Attractiveness Scores Two conditions are necessary for producing valid industry attractiveness scores using this method. 1st requirement: deciding on appropriate weights for the industry attractiveness measures. This is not always easy because different analysts have different views about which weights are most appropriate. Also, different weightings may be appropriate for different companies - based on their strategies, performance targets, and financial circumstances. For instance, placing a low weight on financial resource requirements may be justifiable for a cash-rich company, whereas a high weight may be more appropriate for a financially strapped company. 2nd requirement: for creating accurate attractiveness measure. It's usually rather easy to locate statistical data needed to compare industries on market size, growth rate, seasonal and cyclical influences, and industry profitability. Cross-industry fit and resources requirements are also fairly easy to judge. But the attractiveness measure that is toughest to rate is that of intensity of competition. It is not always easy to conclude whether competition in one industry is stronger or weaker than in another industry. In the event that the available information is too skimp to confidently assign a rating value to an industry on a particular attractiveness measure, then it is usually best to use a score of 5, which avoids biasing the overall attractiveness score either up or down.

Despite the hurdles, calculating industry attractiveness scores is a systematic and reasonably reliable method for ranking a diversified company's industries from most to least attractive.

In a nine-cell matrix for evaluating the strength of a diversified company's business lineup, ______ is plotted on the vertical axis and ______ is plotted on the horizontal axis. a. competitive strength; industry attractiveness b. industry attractiveness; competitive strength c. importance weight; industry rating d. percentage of revenue generated; resource allocation priority

b. industry attractiveness; competitive strength WHY NOT a. competitive strength; industry attractiveness REASON: The values are plotted on the opposite axes.

The management of a diversified company might choose to broaden the company's diversification base when the company a. has favorable driving forces facing core businesses. b. is no longer vulnerable to seasonal downturns. c. experiences sluggish growth in sales and profits. d. sees no potential in transferring resources to other related businesses.

c. experiences sluggish growth in sales and profits. WHY NOT: d. sees no potential in transferring resources to other related businesses. REASON Diversified companies sometimes add to the diversification base to potentially transfer resources and capabilities to other related businesses.

Which of these is not one of the steps in evaluating the strategy of a diversified company? a. ranking the performance prospects of the business from best to worst and determining how to allocate resources b. assessing the competitive strength of the business units c. independently evaluating the value chain of each business unit as a stand-alone entity d. assessing the attractiveness of the industries represented by the company's business units

c. independently evaluating the value chain of each business unit as a stand-alone entity WHY NOT: a. ranking the performance prospects of the business from best to worst and determining how to allocate resources REASON: Recall that ranking the performance prospects of the business from best to worst and determining how to allocate resources is one of the steps in evaluating the strategy of a diversified company. d. assessing the attractiveness of the industries represented by the company's business units REASON: Recall that assessing the attractiveness of the industries represented by the company's business units is one of the steps in evaluating the strategy of a diversified company.

A single-business firm should strongly consider diversifying into new industries when a. they have achieved significant and profitable growth in their main business. b. they need to quickly generate cash across multiple business units. c. marketing opportunities and sales decrease in their primary business. d. they are unable to compete with foreign companies.

c. marketing opportunities and sales decrease in their primary business.

An unrelated diversification strategy a. is not as likely to achieve competitive advantage in a particular industry as is a related diversification strategy. b. is usually executed through internal development. c. represents a willingness by senior management to diversify into any industry where there are opportunities to improve financial results. d. is also called a conglomerate.

c. represents a willingness by senior management to diversify into any industry where there are opportunities to improve financial results. d. is also called a conglomerate.

Investing in ways to grow existing business or to fund long-range R&D ventures for opening new market opportunities are examples of ______ for allocating company financial resources. a. financial options b. no-risk options c. strategic options d. ill-advised practices

c. strategic options

The key outcome of a nine-cell matrix attractiveness/strength matrix is in providing valuable guidance in making strategic decisions about a. which industries the company should acquire next. b. where to place greater emphasis on a revised marketing strategy. c. where to allocate resources and investment capital in a diversified business.

c. where to allocate resources and investment capital in a diversified business. WHY NOT a. which industries the company should acquire next. REASON: The key outcome is guidance where to allocate resources and investment capital. b. where to place greater emphasis on a revised marketing strategy. REASON: The key outcome is guidance where to allocate resources and investment capital.

Achieving diversification through internal development involves a. buying an existing business within the same industry versus outside the industry. b. expanding the current business via global partners. c. hiring key employees from more successful competitors. d. creating an entirely new business subsidiary within the company.

d. creating an entirely new business subsidiary within the company. Why Not: a. buying an existing business within the same industry versus outside the industry. Reason: Buying a business is not internal development, which is development within a company. b. expanding the current business via global partners. Reason: Reason: This is not internal development, which is development within a company.

Which of the following is not one of the actions needed by corporate executives to succeed in an unrelated diversification strategy? a. overseeing the businesses so that they perform at a higher level than they would as stand-alone businesses b. negotiating favorable acquisition prices c. identifying and acquiring new businesses that can produce good earnings and returns on investment d. taking a completely "hands off" approach to let each of the unrelated businesses run itself

d. taking a completely "hands off" approach to let each of the unrelated businesses run itself Why Not: a. overseeing the businesses so that they perform at a higher level than they would as stand-alone businesses Reason: This is one of the actions needed by corporate executives to succeed in an unrelated diversification strategy. The question asks what is not one of the actions. b. negotiating favorable acquisition prices Reason: This is one of the actions needed by corporate executives to succeed in an unrelated diversification strategy. The question asks what is not one of the actions. c. identifying and acquiring new businesses that can produce good earnings and returns on investment Reason: This is one of the actions needed by corporate executives to succeed in an unrelated diversification strategy. The question asks what is not one of the actions.

In a diversified company, adhering tightly to the existing business lineup as opposed to shaking things up is advisable when a. individual business units lack strong resource fit. b. the diversification strategy needs to be retrenched. c. the company's current businesses do not generate reliable earnings and cash flow. d. the company already has promising growth potential.

d. the company already has promising growth potential. WHY NOT c. the company's current businesses do not generate reliable earnings and cash flow. REASON If the company does not generate reliable earnings and cash flow, its existing business lineup may need to be changed.

A(n) ______ discounts the importance of cross-business strategic fit, focusing instead on entering businesses that allow the company as a whole to increase earnings. a. acquisition b. related diversification strategy c. strategic alliance d. unrelated diversification strategy

d. unrelated diversification strategy Why Not: b. related diversification strategy Reason: A related diversification strategy should take into consideration cross-business strategic fit.

Being a first mover is strategically important because it leads firms to identify the correct marketing mix to gain a significant share in a new market. it creates significant barriers to entry for other firms and allows first-movers to maintain a monopoly. it allows firms to charge higher prices than competitors without losing market share. it almost always results in a sustainable competitive advantage.

it leads firms to identify the correct marketing mix to gain a significant share in a new market. NOTE WHY NOT: b. it creates significant barriers to entry for other firms and allows first-movers to maintain a monopoly. Reason: A fast follower with significant design and production resources can quickly overtake first-movers. d. it almost always results in a sustainable competitive advantage. Reason: Recall that competitors with significant design and production resources can quickly overtake first-movers that are less prepared for competition.

Which of the following are strategic options for allocating company financial resources in a diversified company? a. increase dividend payments to shareholders b. make acquisitions to establish positions in new industries c. invest in ways that grow existing businesses d. fund long-range R&D ventures aimed at opening market opportunities in existing businesses

b. make acquisitions to establish positions in new industries c. invest in ways that grow existing businesses d. fund long-range R&D ventures aimed at opening market opportunities in existing businesses WHY NOT a. increase dividend payments to shareholders REASON This is a financial option for allocating company financial resources.

Analyzing a Company's Diversification Strategy Businesses Read the overview below and complete the activities that follow. In this exercise you will apply the concepts of diversification and strategic fit to ITT, a company with multiple business units and products. The purpose of diversification is to build shareholder value. Diversification builds shareholder value when a diversified group of businesses can perform better under the auspices of a single corporate parent than they would as independent, stand-alone businesses. The goal is to achieve not just a 1 + 1 = 2 result but rather to realize important 1 + 1 = 3 performance benefits. There are two fundamental approaches to diversification—into related businesses and into unrelated businesses. The rationale for related diversification is based on cross-business strategic fit: diversify into businesses with strategic fit along their respective value chains, capitalize on strategic fit relationships to gain competitive advantage, and then use competitive advantage to achieve the desired 1 + 1 = 3 impact on shareholder value. Unrelated diversification strategies surrender the competitive advantage potential of strategic fit. Given the absence of cross-business strategic fit, the task of building shareholder value through a strategy of unrelated diversification hinges on the ability of the parent company to: (1) do a superior job of identifying and acquiring new businesses that can produce consistently good earnings and returns on investment; (2) do an excellent job of negotiating favorable acquisition prices; and (3) do such a good job of overseeing and parenting the collection of businesses that they perform at a higher level than they would on their own efforts. The greater the number of businesses a company has diversified into and the more diverse these businesses are, the harder it is for corporate executives to select capable managers to run each business, know when the major strategic proposals of business units are sound, or decide on a wise course of recovery when a business unit stumbles. Review the concepts in Chapter 8 on diversification and strategic fit to help you with this exercise. Read about ITT in Assurance of Learning Exercise 3, located in the end of chapter material and shown below. Also, visit the company's website at www.itt.com. ITT is a technology-oriented engineering and manufacturing company with the following business divisions and products: Industrial Process Division—industrial pumps, valves, and monitoring and control systems; aftermarket services for the chemical, oil and gas, mining, pulp and paper, power, and biopharmaceutical markets. Motion Technologies Division—durable brake pads, shock absorbers, and damping technologies for the automotive and rail markets. Interconnect Solutions—connectors and fittings for the production of automobiles, aircraft, railcars and locomotives, oil field equipment, medical equipment, and industrial equipment. Control Technologies—energy absorption and vibration dampening equipment, transducers and regulators, and motion controls used in the production of robotics, medical equipment, automobiles, subsea equipment, industrial equipment, aircraft, and military vehicles. ITT's portfolio of business units reflects a strategy of: unrelated diversification. related diversification. a combination of related and unrelated diversification. corporate restructuring. unrelated value chains.

a combination of related and unrelated diversification.

Which of the following are examples of outsourcing? A company expands its own manufacturing capacity to ramp up production of a new product design. A company uses an outside information technology firm to manage its IT infrastructure. A company contracts with an overseas plant to assemble and package its product. A company contracts with an outside payroll vendor to handle their payroll function.

A company uses an outside information technology firm to manage its IT infrastructure. A company contracts with an overseas plant to assemble and package its product. A company contracts with an outside payroll vendor to handle their payroll function.

In which of the following situations should a company consider backward integration for producing an item in-house? When suppliers have excess capacity for making the item When the profit margins of suppliers of the item are high When the technology to make the item is difficult to acquire When the supplied item contributes significantly to the cost of a product

When the profit margins of suppliers of the item are high When the supplied item contributes significantly to the cost of a product

Select all that apply Offering direct online sales to consumers while also promoting wholesale and retail sales can result in a. a net loss of sales due to disgruntled dealers. b. a signal of the company's strong commitment to retailers. c. channel conflict. d. cannibalization of retailers' sales.

a net loss of sales due to disgruntled dealers. channel conflict. cannibalization of retailers' sales.

Tiger Electronics' research and development team has produced a working prototype of a virtual reality headset that could be ready for market many months ahead of their closest competitor. Tiger's marketing research team, however, reports that consumers are skeptical about virtual reality, even though they are excited about its possible applications. In this case, Tiger would be wise to Multiple choice question. pursue a first-mover advantage and release the product as-is. abandon the product entirely. allow its competitor to be the first mover, and quickly redesign the headset according to consumer reactions before releasing it to the market. wait until several firms have released virtual reality headsets, and tailor the marketing mix according to the status quo.

allow its competitor to be the first mover, and quickly redesign the headset according to consumer reactions before releasing it to the market. NOTE WHY NOT: pursue a first-mover advantage and release the product as-is. Reason: The first-mover advantage would be lost if the skeptical market rejects the first models.

Which of the following makes acquisition an attractive approach to diversifying into another industry? if it is not time-consuming and allows the firm to realize great profits and a sustainable competitive advantage only if it is less expensive, less risky, and more effective than launching a new startup operation if it satisfies all three diversity tests (industry attractiveness test, cost-of-entry-test, better-off test) to grow shareholder value over the long term if 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 if due diligence and integration can be done easily and at low cost

if 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

Mergers and acquisitions can enhance job security due to the combining of the operations of two or more companies. sometimes fail to produce the anticipated results. are a low-risk strategic option. almost always produce the hoped-for results.

sometimes fail to produce the anticipated results. NOTE WHY NOT: a. can enhance job security due to the combining of the operations of two or more companies. Reason: Combining operations tends to eliminate jobs rather than enhance job security.

As long as a single-business company can achieve profitable growth opportunities in its present industry, it needs to avoid putting all of its "eggs" in one industry basket. it will face diminishing market opportunities and stagnating sales in its principal business. its opportunities are limited to leverage existing competencies and capabilities by expanding into businesses where these same resources are key success factors and valuable competitive assets. it has diminished prospects to lower costs by entering closely related businesses and/or an opportunity 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. there is no urgency to pursue a diversification strategy.

there is no urgency to pursue a diversification strategy.

Which of the following involves expanding a company's involvement in industry value chain activities? a fast-mover strategy outsourcing vertical integration horizontal integration

vertical integration A vertically integrated firm is one that performs value chain activities along more than one stage of an industry's overall value chain

In which of the following situations should a company consider backward integration for producing an item in-house? When the profit margins of suppliers of the item are high When suppliers have excess capacity for making the item When the supplied item contributes significantly to the cost of a product When the technology to make the item is difficult to acquire

When the profit margins of suppliers of the item are high When the supplied item contributes significantly to the cost of a product

In what ways can vertical integration make a business less responsive to market changes? Significant capital investments in vertical integration reduce the impact of an industry downturn, making profitability less urgent. A firm may be unable to respond to changes in consumer preferences using its existing facilities. Vertical integration makes a firm less reliant on high sales volumes, reducing its need to innovate and respond to customer requests. Significant investments in older technology make the firm less likely to adopt new technologies.

A firm may be unable to respond to changes in consumer preferences using its existing facilities. & Significant investments in older technology make the firm less likely to adopt new technologies.

An unrelated diversification strategy A. is more likely than related diversification to exhibit a high degree of strategic fit and therefore a greater chance of competitive advantage. B. offers significantly better potential for competitive advantage compared to what each business could generate on its own. C. offers limited potential for competitive advantage beyond what each business can generate on its own. D. is likely to offer enhanced consolidated performance compared to the sum of what the individual businesses could achieve independently.

C. offers limited potential for competitive advantage beyond what each business can generate on its own. WHY NOT: A. is more likely than related diversification to exhibit a high degree of strategic fit and therefore a greater chance of competitive advantage. REASON Recall that an unrelated diversification strategy offers limited potential for competitive advantage beyond what each business can generate on its own. B. offers significantly better potential for competitive advantage compared to what each business could generate on its own. REASON Recall that an unrelated diversification strategy offers limited potential for competitive advantage beyond what each business can generate on its own. D. is likely to offer enhanced consolidated performance compared to the sum of what the individual businesses could achieve independently. REASON Recall that an unrelated diversification strategy offers limited potential for competitive advantage beyond what each business can generate on its own.

Broadly Restructuring the Business Lineup Through a Mix of Divestitures and New Acquisitions Corporate Restructuring strategies involve divesting some businesses and acquiring other so as to put a new face on the company's business lineup. Performing radical surgery on a company's group of businesses is an appealing corporate strategy when its financial performance is squeezed or eroded by: * A Serious mismatch between the company's resources and capabilities and the type of diversification that it has pursued. * Too many businesses in slow-growth, declining, low-margin, or otherwise unattractive industries. * Too many competitively weak businesses. * The emergence of new technologies that threaten the survival of one or more important businesses. * Ongoing declines in the market shares of one or more major business units that are falling prey to more market-savvy competitors. * An excessive debt burden with interest costs that eat deeply into profitability. * Ill-chosen acquisitions that have not lived up to expectations.

Core Concept Corporate Restructuring involves radically altering the business lineup by divesting businesses that lack strategic fit or are poor performers and acquiring new businesses that offer better promise for enhancing shareholder value.

Limited Competitive Advantage Potential The second big negative associated with unrelated diversification is that such strategy offers limited potential for competitive advantage beyond what each individual business can generate on its own. Unlike a related diversification strategy, there is no cross-business strategic fit to draw on for reducing costs; transferring capabilities, skills, and technology; or leveraging use of a powerful brand name and thereby adding to the competitive advantage possessed by individual businesses. Without the competitive advantage potential of strategic fit, consolidated performance of an unrelated group of businesses is unlikely to be better than the sum of what the individual business units could achieve independently in most instances.

Misguided Reasons for Pursuing Unrelated Diversification: Competently overseeing a set of widely diverse businesses can turn out to be much harder than it sounds. In practice, comparatively few companies have proved that they have top management capabilities that are up to the task. Far more corporate executives have failed than have been successful at delivering consistently good financial results with an unrelated diversification strategy. Odds are that the result of unrelated diversification will be 1 + 1 =2 or less. In addition, management sometimes undertakes a strategy of unrelated diversification for the wrong reasons. * Risk Reduction: Managers sometimes pursue unrelated diversification to reduce risk by spreading the company's investments over a set of diverse industries. But this cannot create long-term shareholder value alone since the company's shareholders can more efficiently reduce their exposure to risk by investing in a diversified portfolio of stocks and bonds. * Growth: While unrelated diversification may enable a company to achieve rapid or continuous growth in revenues, only profitable growth can bring about increases in shareholder value and justify a strategy of unrelated diversification. * Earnings Stabilization: In a broadly diversified company, there's a chance that market downtrends in some of the company's businesses will be partially offset by cyclical upswings in its other businesses, thus producing somewhat less earnings volatility. In actual practice, however, there's no convincing evidence that the consolidated profits of firms with unrelated diversification strategies are more stable than the profits of firms with related diversification strategies. * Managerial Motives: Unrelated diversification can provide benefits to managers such as higher compensation, which tends to increase with firm size and degree of diversification. Diversification for this reason alone is far more likely to reduce shareholder value than to increase it.

Candidates for divestiture in a corporate restructuring effort typically include not only weak or up-and-down performers or those in unattractive industries but also business units that lack strategic fit with the businesses to be retained, businesses that are cash hogs or that lack other types of resources fit, and businesses incompatible with the company's revised diversification strategy (even though they may be profitable or in an attractive industry). As businesses are divested, corporate restructuring generally involves aligning the remaining business units into groups with the best strategic fit and then redeploying the cash flows from the divested business to either pay down debt or make new acquisitions.

Over the past decade, corporate restructuring has become a popular strategy at many diversified companies, especially those that had diversified broadly into many different industries and lines of business. VF Corporation, maker of North Face and other popular "lifestyle" apparel brands, has used a restructuring strategy to provide its shareholders with returns that are more than five times greater than shareholder returns for competing apparel makers. Since its acquisition and turnaround of North Face in 2000, VF has spent nearly $5 billion to acquire 20 additional businesses, including about $2 billion in 2011 for Timberland. New apparel brands acquired by VF Corporation include Eastpak, Vans, Napapijri backpacks, 7 for All Mankind, Eagle Creek travel bags, Ella Moss, Dickies, Icebreaker Merino wood clothing and accessories, and Altra footwear. By 2018, VF Corporation had become a $12 billion powerhouse-one of the largest and most profitable apparel and footwear companies in the world

5. Evaluating a company's diversification strategy is a six step process: Step 1: Evaluate the long-term attractiveness of the industries into which the firm has diversified. Determining industry attractiveness involves developing a list of industry attractiveness measures, each of which might have a different importance weight. Step 2: Evaluate the relative competitive strength of each of the company's business units. The purpose of rating each business's competitive strength is to gain clear understanding of which businesses are strong contenders in their industries, which are weak contenders, and the underlying reasons for their strength or weakness. The conclusions about industry attractiveness can be joined with the conclusions about competitive strength by drawing an industry attractiveness-competitive strength matrix that helps identify the prospects of each business and what priority each business should be given in allocating corporate resources and investment capital. Step 3: Check for cross-business strategic fit. A business is more attractive strategically when it has value chain relationships with sibling business units that offer the potential to (3a) Realize economies of scope or cost-saving efficiencies (3b) Transfer technology, skills, know-how, or other resources and capabilities from one business to another; and/or (3c) leverage use of a well known and trusted brand name. Cross-business strategic fit represents a significant avenue for producing competitive advantage beyond what any one business can achieve on its own. Step 4: Check whether the firm's resources fit the requirements of its present business lineup. Resources fit exists when (4a) Businesses, individually, strengthen a company's overall mix of resources and capabilities & (4b) A company has sufficient resources to support its entire group of businesses without spreading itself too thin. One important test of financial resource fit involves determining whether a company has ample cash cows and not too many cash hogs.

Step 5: Rank the performance prospects of the businesses from best to worst, and determine what the corporate parent's priority should be in allocating resources to its various businesses. The most important considerations in judging business-unit performance are sale growth, profit growth, contribution to company earnings, cash flow characteristics, and the return on capital invested in the business. Normally, strong business units in attractive industries should head the list for corporate resources support. Step 6: Crafting new strategic moves to improve overall corporate performance. This step entails using the results of the preceding analysis as the basis for selecting one of four different strategic paths for improving a diversified company's performance: (6a) Stick closely with the existing business lineup and pursue opportunities presented by these businesses (6b) Broaden the scope of diversification by entering additional industries. (6c) Retrench to a narrower scope of diversification by divesting poorly performing businesses. & (6d) Broadly restructure the business lineup with multiple divestitures and/or acquisitions.

True or false: Resource fit in a diversified company extends beyond financial resources.

TRUE Reason It's not False: In nonfinancial resource fit there should be a good fit between the company's resources and core competencies and the key success factors of each industry it has diversified into.

Select all that apply Which of the following is an important consideration in evaluating the potential for strategic fit to deliver competitive advantage and shareholder value in a related diversification strategy? a. Capturing strategic fit through related diversification builds shareholder value in ways that a diversified stock portfolio cannot. b. If the businesses cannot deliver shareholder value as stand-alone firms, then competitive advantage through strategic fit is unlikely to occur. c. Realizing cross-business strategic fit benefits is possible only through related diversification. d. The benefits of cross-business strategic fit are not obtained unless management successfully takes internal actions to reach them.

a. Capturing strategic fit through related diversification builds shareholder value in ways that a diversified stock portfolio cannot. c. Realizing cross-business strategic fit benefits is possible only through related diversification. & d. The benefits of cross-business strategic fit are not obtained unless management successfully takes internal actions to reach them.

______ exists when the value chains of different businesses present opportunities for cross-business skills transfer, cost sharing, or brand-sharing. a. Strategic fit b. Internal development c. Resource fit d. Value chain matching

a. Strategic fit Why Not: d. Value chain matching Reason The scenario does not suggest value chains will be matched, or duplicated, but that they can boost their value strategically.

A reliable approach in finding an industry into which to diversify a company involves a. calculating quantitative industry attractiveness scores. b. focusing on industries with greater uncertainties and higher overall business risk. c. selecting slow-growing industries in which competitive pressures are strong. d. choosing industries in which buyer demand undergoes cyclical swings.

a. calculating quantitative industry attractiveness scores. WHY NOT: b. focusing on industries with greater uncertainties and higher overall business risk. REASON: A reliable approach involves focusing on industries with less uncertainty on the horizon and lower overall business risk. c. selecting slow-growing industries in which competitive pressures are strong. REASON: A reliable approach involves selecting fast-growing industries in which competitive pressures are relatively weak. d. choosing industries in which buyer demand undergoes cyclical swings.. REASON: A reliable approach involves choosing industries where buyer demand is relatively steady year-round.

The greater the number of unrelated businesses a company is in, the more corporate executives will need to: a. remain informed about each industry. b. pick business-unit leaders with the ability to achieve performance gains c. expect that risky strategic business-unit proposals will have to be accepted even if not particularly prudent. d. know what to do if a business encounters difficulty.

a. remain informed about each industry. b. pick business-unit leaders with the ability to achieve performance gains d. know what to do if a business encounters difficulty.

In justifying diversification as a strategy to build shareholder value, the ______ test says that the industry to be entered through diversification must offer an opportunity for profits and return on investment that is equal or better than that of the company's present business. 1 + 1 = 3 industry attractiveness cost-of-entry better-off

industry attractiveness NOTE WHY NOTS: 1 + 1 = 3 Reason: This is the better-off test. Cost of Entry Reason: This tests whether the cost of entering the target industry takes away the potential for profitability. Better-off Reason: This tests whether the combined businesses will perform better together than apart

A publishing strategist that predicts a significant future overlap with the activities of digital technology firms should consider an outsourcing arrangement with a digital technology firm. merging with or acquiring a digital technology firm. a blue ocean strategy. abandoning the publishing industry in favor of the digital technology industry.

merging with or acquiring a digital technology firm.

A manager should pursue vertical integration if it will strengthen profitability and competitive standing. eliminate a major competitor. increase the size of the company's workforce. signal to investors that the company is pursuing an aggressive growth strategy.

strengthen profitability and competitive standing. WHY NOT: d. signal to investors that the company is pursuing an aggressive growth strategy. Reason: The reason for pursuing any strategy is for profitability and competitive advantage.

Select all that apply Under which of the following conditions is internal development as a diversification strategy an attractive option? when adding new production capacity will not adversely impact the supply-demand balance in the industry when the parent company already possesses the skills and resources needed to be competitive when the targeted industry has many small firms such that the start-up does not have to compete against large, powerful rivals when the business needs to be launched and operational within a very short time

when adding new production capacity will not adversely impact the supply-demand balance in the industry when the parent company already possesses the skills and resources needed to be competitive when the targeted industry has many small firms such that the start-up does not have to compete against large, powerful rivals

To avoid channel conflict resulting from Internet selling, a company should charge prices for online direct sales that are lower than what dealers normally charge. work with dealers to design an online sales portal that benefits both partners. ensure that customers are unaware of availability of products through dealers rather than the company's own website. offer a completely different product line on the company's own website versus the products offered through the company's dealers.

work with dealers to design an online sales portal that benefits both partners.

To avoid channel conflict resulting from Internet selling, a company should work with dealers to design an online sales portal that benefits both partners. offer a completely different product line on the company's own website versus the products offered through the company's dealers. charge prices for online direct sales that are lower than what dealers normally charge. ensure that customers are unaware of availability of products through dealers rather than the company's own website.

work with dealers to design an online sales portal that benefits both partners.

Which of the following is not an example of vertical integration? A beauty products company begins selling products on its own website rather than only through independent sales consultants. An auto parts manufacturer opens its own chain of auto parts retail stores. A grocery store chain acquires a distributor of packaged food products. A manufacturer ceases manufacturing their own components and instead contracts with another manufacturer to make and supply the components.

A manufacturer ceases manufacturing their own components and instead contracts with another manufacturer to make and supply the components. NOTE WHY NOT: a. A beauty products company begins selling products on its own website rather than only through independent sales consultants. Reason: This is an example of vertical integration because the company is integrating its sales channel.

Choosing the Diversification Path; Related Versus Unrelated Businesses Once a company decides to diversify, its first big corporate strategy decisions is whether to diversify into related businesses, unrelated businesses, or some mix of both (see figure 8.1). Businesses are said to be related when their value chains possess competitively valuable cross-business relationships. These value chains matchups present opportunities for the businesses to perform better under the same corporate umbrella than they could be operating as standalone entities. Businesses are said to be unrelated when the activities comprising their respective value chains and resource requirements are so dissimilar than no competitively valuable cross-business relationships are present.

Figure 8.1: Strategic Themes of Multibusiness Corporation Diversification Strategy Options are: 1. Diversify Into Related Businesses: * Enhancing shareholder value by capturing cross-business strategic fits: --- Transfer skills and capabilities from one business to another. --- Share facilities or resources to reduce costs. --- Leverage use of a common brand name. *** Combine resources to create new strengths and capabilities. 2. Diversify Into Unrelated Businesses * Spread risks across completely different businesses. * Build shareholder value by doing a superior job of choosing businesses to diversify into and of managing the whole collection of businesses in the company's portfolio. 3. Diversity Into Both Related and Unrelated Businesses

True or false: Strategists should consider how quickly they expect a product or technology to become popular when deciding whether to pursue a first-mover advantage.

TRUE WHY NOT FALSE: Reason: Recall that first movers can gain a considerable competitive advantage by being the first to produce a product that catches on quickly.

Select all that apply A late-mover strategy may be advantageous when a. a late-mover can enter the market with lower costs than the first mover. b. consumer needs evolve away from an existing product. c. the overall economy is poor and demand for consumer goods begins to fall. d. potential buyers are skeptical about the new product offered by the first-mover.

a. a late-mover can enter the market with lower costs than the first mover. b. consumer needs evolve away from an existing product.. d. potential buyers are skeptical about the new product offered by the first-mover.

Select all that apply Reasons why a merger or acquisition might fail include disenchantment and voluntary turnover of key employees. difficulty in meshing the two corporate cultures. smaller cost savings than expected. a lack of consumer demand or an evolution in consumer needs.

a. disenchantment and voluntary turnover of key employees. b. difficulty in meshing the two corporate cultures. c. smaller cost savings than expected.

Being a first mover is strategically important because a. it leads firms to identify the correct marketing mix to gain a significant share in a new market. b. it creates significant barriers to entry for other firms and allows first-movers to maintain a monopoly. c. it allows firms to charge higher prices than competitors without losing market share. d. it almost always results in a sustainable competitive advantage.

a. it leads firms to identify the correct marketing mix to gain a significant share in a new market. NOTE WHY NOT: it creates significant barriers to entry for other firms and allows first-movers to maintain a monopoly. Reason: A fast follower with significant design and production resources can quickly overtake first-movers. it almost always results in a sustainable competitive advantage. Reason: Recall that competitors with significant design and production resources can quickly overtake first-movers that are less prepared for competition.

In terms of business strategy, a blue ocean is Multiple choice question. an untapped market space or industry opportunity. a strategy to improve market share within the existing market space of the industry. a situation where industry boundaries are well-defined and accepted by industry members. a defensive strategy used to thwart price competition.

an untapped market space or industry opportunity. NOTE WHY NOT: a strategy to improve market share within the existing market space of the industry. Reason: Recall that a blue ocean strategy seeks to gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and inventing a new industry or distinctive market segment that renders existing competitors largely irrelevant. a situation where industry boundaries are well-defined and accepted by industry members. Reason: The metaphor of a blue ocean refers to an area without limits or boundaries.

In a diversified company, resource fit is present when individual businesses strengthen the company's total mix of resources and capabilities, and: a. the available resources match exactly or very closely with the company's value chain activities. b. the parent company is aligned with the resource requirements of each industry it competes in. c. there is overlap among industry resource requirements in a highly unrelated mix of businesses. d. the company has enough value adding resources to support the whole group of businesses without overextending itself.

d. the company has enough value adding resources to support the whole group of businesses without overextending itself. WHY NOT a. the available resources match exactly or very closely with the company's value chain activities. REASON: This is not required for resource fit, but company does need sufficient resources to support its entire group of businesses. b. the parent company is aligned with the resource requirements of each industry it competes in. REASON: This is not required for resource fit, but company does need sufficient resources to support its entire group of businesses. c. there is overlap among industry resource requirements in a highly unrelated mix of businesses. REASON: This is not required for resource fit, but company does need sufficient resources to support its entire group of businesses.

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. expansion into vertical markets by leveraging a core asset. expansion into vertical markets to address critical supplier power. expansion into new geographies by leveraging a core capability. expansion into new geographies by leveraging assets.

expansion into new markets by leveraging a core capability.

The Nine-Cell Industry Attractiveness-Competitive Strength Matrix is a valuable tool for ranking a company's different businesses from best to worst based on strategic fit. shows which of a diversified company's businesses have a good or poor resource fit. indicates which businesses have the highest or lowest economies of scale and which have the highest or lowest economies of scope. involves assigning quantitative measures of industry attractiveness and competitive strength to plot each business's location on the matrix; the thesis underlying the matrix is that there are good reasons to concentrate the company's resources on those businesses having relatively strong competitive positions in industries with relatively high attractiveness and to invest minimally or even divest those businesses with relatively weak competitive positions in industries with relatively low attractiveness. pinpoints which of a diversified company's businesses are resource-rich cash cows and which are resource-poor cash hogs.

involves assigning quantitative measures of industry attractiveness and competitive strength to plot each business's location on the matrix; the thesis underlying the matrix is that there are good reasons to concentrate the company's resources on those businesses having relatively strong competitive positions in industries with relatively high attractiveness and to invest minimally or even divest those businesses with relatively weak competitive positions in industries with relatively low attractiveness.

A packaged food manufacturer that decides to open its own distributorship and acquire a chain of local supermarkets, but opts to maintain its existing contracts with independent farmers and suppliers rather than growing its own ingredients, is pursuing a(n) ______ integration strategy. partial tapered full extreme

partial REASON WHY NOT: tapered Reason: In the given scenario the company has brought part of its value chain activities in-house rather than outsourcing existing activities.

A packaged food manufacturer that decides to open its own distributorship and acquire a chain of local supermarkets, but opts to maintain its existing contracts with independent farmers and suppliers rather than growing its own ingredients, is pursuing a(n) ______ integration strategy. partial extreme tapered full

partial WHY NOT: tapered Reason: In the given scenario the company has brought part of its value chain activities in-house rather than outsourcing existing activities.

Which of the following would not generate a strategic fit among ITT's business units? transfer of competitively valuable resources among business units provide low-level oversight and make available minimal corporate resources brand sharing among business units that have common customers or that draw upon common core competencies cost-sharing among business units where value chain activities can be combined transfer of expertise and technological know-how among business units

provide low-level oversight and make available minimal corporate resources

Which of the following is not an example of a strategic offensive? Multiple choice question. moving quickly to take advantage of a rare opportunity innovating in order to capture market share from competitors publicly committing to matching competitors' prices offering lower prices on superior products

publicly committing to matching competitors' prices NOTE WHY NOT: moving quickly to take advantage of a rare opportunity Reason: This indeed is an example of a strategic offensive. innovating in order to capture market share from competitors Reason: This indeed is an example of a strategic offensive. offering lower prices on superior products Reason: This indeed is an example of a strategic offensive.

Which of the following is not an example of a strategic offensive? Multiple choice question. publicly committing to matching competitors' prices moving quickly to take advantage of a rare opportunity innovating in order to capture market share from competitors offering lower prices on superior products

publicly committing to matching competitors' prices NOTE WHY NOT: moving quickly to take advantage of a rare opportunity, innovating in order to capture market share from competitors, offering lower prices on superior products Reason: This indeed is an example of a strategic offensive.

Calculating quantitative attractiveness ratings for the industries a company has diversified into involves determining the strength of the five competitive forces in each industry, calculating the ability of the company to overcome or contend successfully with each force, and obtaining overall measures of the firm's ability to compete successfully in each of its industries. determining each industry's average profit margins, calculating how far the firm's profit margins are above or below the industry averages, and then using these values to draw conclusions about industry attractiveness. rating the attractiveness of each industry's strategic and resource fit, summing the attractiveness scores, and determining whether the overall scores for the industries as a group are appealing or not. selecting a set of industry attractiveness measures, weighting the importance of each measure (with the sum of the weights adding to 1.0), 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 evaluate the attractiveness of all the industries, both individually and as a group. identifying each industry's average price, rating the difficulty of charging an above-average price in each industry, and deciding whether the company's prospects for being able to charge above-average prices make the industry attractive or unattractive.

selecting a set of industry attractiveness measures, weighting the importance of each measure (with the sum of the weights adding to 1.0), 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 evaluate the attractiveness of all the industries, both individually and as a group.

Ranking a diversified company's businesses in terms of priority for resource allocation and new capital investment should be done chiefly on the basis of appealing industry attractiveness and resource fit and secondarily on the basis of competitive strength and strategic fit with other businesses. entails arraying the various businesses from the biggest cash hog down to the biggest cash cow; big cash hogs get the highest priority for resource allocation and big cash cows get the lowest priority. should be done principally on the basis of which businesses offer the best prospects (given their industry attractiveness and competitive strength) and have solid and appealing strategic fits and resource fits. should be based chiefly on relative market share, recent profitability, and potential for achieving cash cow status. should be based primarily on cross-business resource fit considerations, each business unit's relative market share, and each business's projected ability to cover its debt payments and generate positive cash flows

should be done principally on the basis of which businesses offer the best prospects (given their industry attractiveness and competitive strength) and have solid and appealing strategic fits and resource fits.

Publicly announcing commitment to maintain the company's current market share, publicly committing the company to a policy of matching competitors' prices, and maintaining a war chest of cash and marketable securities are examples of Multiple choice question. signaling challengers that strong retaliation is likely in the event of an attack. launching a blue ocean strategy using a number of different tactics. sticking with a late-mover strategy. implementing strategic offensives to improve market share.

signaling challengers that strong retaliation is likely in the event of an attack. NOTE WHY NO: implementing strategic offensives to improve market share. Reason: The items described do not actively improve market share but do serve as a potential threat to rivals.

Publicly announcing commitment to maintain the company's current market share, publicly committing the company to a policy of matching competitors' prices, and maintaining a war chest of cash and marketable securities are examples of Multiple choice question. launching a blue ocean strategy using a number of different tactics. sticking with a late-mover strategy. signaling challengers that strong retaliation is likely in the event of an attack. implementing strategic offensives to improve market share.

signaling challengers that strong retaliation is likely in the event of an attack. NOTE WHY NOT: implementing strategic offensives to improve market share. Reason: The items described do not actively improve market share but do serve as a potential threat to rivals.

The defining characteristic of unrelated diversification (as opposed to related diversification) is the presence of cross-business resource fit (whereas the defining characteristic of related diversification is the presence of cross-business strategic fit). that the value chains of different businesses are so dissimilar that no competitively valuable cross-business relationships are present (in other words, the value chains of a company's businesses offer no opportunities to benefit from skills or technology transfer across businesses, economies of scope, cross-business use of a powerful brand name, and/or cross-business collaboration in creating stronger competitive capabilities). the presence of cross-business strategic fit (whereas the defining characteristic of related diversification is the presence of cross-business resource fit). that the company's businesses are in different industries. the presence of cross-business financial fit.

that the value chains of different businesses are so dissimilar that no competitively valuable cross-business relationships are present (in other words, the value chains of a company's businesses offer no opportunities to benefit from skills or technology transfer across businesses, economies of scope, cross-business use of a powerful brand name, and/or cross-business collaboration in creating stronger competitive capabilities).

To judge whether a particular diversification move has good potential for building added shareholder value, the move should pass the following tests: the attractiveness test, the barrier-to-entry test, and the growth test. the strategic fit test, the resource fit test, and the profitability test. the barrier-to-entry test, the growth test, and the shareholder value test. the attractiveness test, the cost-of-entry test, and the better-off test. the resource fit test, the strategic fit test, the profitability test, and the shareholder value test.

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

A company's vertical scope refers to Multiple choice question. the various products and services that the company offers. the various offensive strategies that the company can employ. the extent to which the company participates in strategic alliances with other firms. the extent to which the company participates in the industry value chain, from raw material extraction to end-user sales.

the extent to which the company participates in the industry value chain, from raw material extraction to end-user sales.

Imagine that you are advising the CEO of a of a diversified corporate event-planning business that is considering broadening the company's business scope, for example, by building positions in new related or unrelated businesses such as providing corporate campus food services and corporate conference facilities. You would advise the CEO to pursue a diversification strategy for all of the following reasons except the company has or can develop the specific resources and competitive capabilities needed to be successful in each of its businesses. the parent company has enough cash hog businesses to supply capital to its cash cow businesses. lines of business targeted for diversification would adequately contribute to achieving companywide performance targets. other recently acquired businesses are already acting to strengthen the company's resource base and competitive capabilities. the company possesses adequate financial strength to fund the needs of its various businesses and maintain a healthy credit rating.

the parent company has enough cash hog businesses to supply capital to its cash cow businesses.

The defining characteristic of related diversification (as opposed to unrelated diversification) is that the diversified businesses are utilizing similar competitive strategies. the presence of cross-business value chain relationships and strategic fits. that each business the company has diversified into has very similar core competencies and competitive capabilities. that the company has about the same number of cash cow businesses as it has cash hog businesses. the existence of cross-industry resource fits and similar key success factors from industry to industry.

the presence of cross-business value chain relationships and strategic fits.

When two companies combine via a merger, their resource and competitive capabilities are _____ if they had combined via an acquisition. less effective than much better than the same as slightly better than

the same as WHY NOT: less effective than Reason: The resulting competitive capabilities are similar in either case. much better than Reason: The resulting competitive capabilities are similar in either case. slightly better than Reason: The resulting competitive capabilities are similar in either case.

Select all that apply What is/are the goals of signaling competitors that strong retaliation is likely in the event of an attack? Multiple select question. to let competitors know that a challenge will not be profitable to prevent challenges from competitors to convince challengers to pursue other strategic options to pressure competitors into raising prices and dissuade a price war

to let competitors know that a challenge will not be profitable to prevent challenges from competitors to convince challengers to pursue other strategic options

Select all that apply What is/are the goals of signaling competitors that strong retaliation is likely in the event of an attack? Multiple select question. to let competitors know that a challenge will not be profitable to pressure competitors into raising prices and dissuade a price war to prevent challenges from competitors to convince challengers to pursue other strategic options

to let competitors know that a challenge will not be profitable to prevent challenges from competitors to convince challengers to pursue other strategic options

Key Points 1. The purpose of diversification is to build shareholder value. Diversification builds shareholder value when a diversified group of businesses can perform better under the auspices of a single corporate parent than they would as independent, standalone businesses-the goal is to achieve not just a 1 + 1 = 2 results but rather to realize important 1 + 1 = 3 performance benefits. Whether getting into a new business has potential to enhance shareholder value hinges on whether a company's entry into that business can pass the attractiveness test, the cost-of-entry test, and the better-off test.

2. Entry into new businesses can take any of three forms: Acquisition, Internal Development, or Joint Venture/Strategic Partnership. Each has its pros and cons, but acquisition usually provides the quickest entry into a new business; internal development takes the longest to produce home-run results; and joint venture/strategic partnership tends to be the least durable.

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 adding new production capacity will not adversely impact the supply demand balance in the industry by creating oversupply conditions when internal entry for your company is cheaper than entry via acquisition when the incumbent industry enables your company to create strategic fits with the acquired firm in order 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 when your company possesses the skills and resources to overcome entry barriers and there is ample time to launch the business and compete effectively when rival incumbent consumer food companies are likely to be slow or ineffective in combating a new entrant's efforts to crack the market

when the incumbent industry enables your company to create strategic fits with the acquired firm in order 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

Which of the following best describes a tough decision for a company considering diversification through acquisition? how to generate the capital to buy a company that does not meet the cost-of-entry test but is still thought to be a strategically viable acquisition whether to pay a high price for a successful company or a low price for a struggling company how many companies to acquire whether to acquire a small or large company

whether to pay a high price for a successful company or a low price for a struggling company NOTE WHY NOT: how to generate the capital to buy a company that does not meet the cost-of-entry test but is still thought to be a strategically viable acquisition Reason: A company needs to meet the cost-of-entry test to be considered for a strategic acquisition.

3. There are two fundamental approaches to diversification: into related businesses and into unrelated businesses. The rationale for related diversification is based on cross-business strategic fit: Diversify into businesses with strategic fit along their respective value chains, capitalize on strategic-fit relationships to gain competitive advantage, and then use competitive advantage to achieve the desired 1 + 1 = 3 impact on shareholder value.

4. Unrelated diversification strategies surrender the competitive advantage potential of strategic fit. Given the absence of cross-business strategic fit, the task of building shareholder value through a strategy of unrelated diversification hinges on the ability of the parent company to (1) do a superior job of identifying and acquiring new businesses that can produce consistently good earnings and returns on investment (2) do an excellent job of negotiating favorable acquisition prices (3) do such a good job of overseeing and parenting the collection of businesses that they perform at a higher level than they would on their own efforts. The greater number of businesses a company has diversified into and the more diverse these businesses are, the harder it is for corporate executives to select capable managers to run each business, know when the major strategic proposals of business units are sound, or decide on a wise course of recovery when a business unit stumbles.

Diversifying Into Unrelated Businesses Recognize the merits and risks of corporate strategies keyed to unrelated diversification. An unrelated diversification strategy discounts the importance of pursuing cross-business strategic fit and, instead, focuses squarely on entering and operating businesses in industries that allow the company as a whole to increase its earnings. Companies that pursue a strategy of unrelated diversification generally exhibit a willingness to diversify into any industry where senior managers see opportunity to realize improved financial results. Such companies are frequently labeled conglomerates because their business interests range broadly across diverse industries. Companies that pursue unrelated diversification nearly always enter new businesses by acquiring an established company rather than by internal development. 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. & 3. Struggling companies whose operations can be turned around with the aid of the parent company's financial resources and managerial know-how.

Building Shareholder Value Through Unrelated Diversification Given the absence of cross-business strategic fit with which to capture added competitive advantage, the task of building shareholder value via unrelated diversification ultimately hinges on the ability of the parent company to improve its businesses via other means. To succeed with a corporate strategy keyed to unrelated diversification, corporate executives must: * Do a superior job of identifying and acquiring new businesses that can produce consistently good earnings and returns on investment. * Do an excellent job of negotiating favorable prices. * Do such a good job overseeing and parenting the firm's businesses that they perform at a higher level than they would otherwise be able to do through their own efforts alone. The parenting activities of corporate executives can take the form of providing expert problem-solving skills, creative strategy suggestions, and first-rate advice and guidance on how to improve competitiveness and financial performance to the heads of the various business subsidiaries. Royal Little, the founder of Textron, was a major reason that the company became an exemplar of the unrelated diversification strategy while he was CEO. Little's bold moves transformed the company from its origins as a small textile manufacturer into global powerhouse known for its Bell helicopters, Cessna aircraft, and a host of other strong brands in an array of industries

The Ability of Related Diversification to Deliver Competitive Advantage and Gains in Shareholder Value: Economies of scope and the other strategic-fit benefits provide a dependable basis for earning higher profits and returns than what a diversified company's businesses could earn as standalone enterprises. Converting the competitive advantage potential into greater profitability is what fuels 1 + 1 = 3 gains in shareholder value - the necessary outcome for satisfying the better-off test. There are three things to bear in mind here.... Better Off Test: 1. Capturing cross-business strategic fit via related diversification builds shareholder value in ways that shareholders cannot replicate by simply owning a diversified portfolio of stocks. 2. The capture of cross-business strategic-fit benefits is possible only through related diversification & 3. The benefits of cross-business strategic fit are not automatically realized - the benefits materialize only after management has successfully pursued internal actions to capture them?

Concepts and Connections 8.1: describes the merger of Kraft Foods Group, Inc., with the H. J. Heinz Holding Corporation, in pursuit of the strategic fit benefits of a related diversification strategy. The $62.6 billion merger between Kraft and Heinz that was finalized in 2015 created the third-largest food and beverage company in North America and the fifth-largest in the world. It was a merger predicated on the idea that the strategic fit between these two companies was such that they could create more value as a combined enterprise than they could as two separate companies. As a combined enterprise, Kraft Heinz would be able to exploit its cross-business value chain activities and resource similarities to more efficiently produce, distribute, and sell profitable processed food products. Kraft and Heinz products share many of the same raw materials (milk, sugar, salt, wheat, etc.), which allows the new company to leverage its increased bargaining power as a larger business to get better deals with suppliers, using strategic fit in supply chain activities to achieve lower input costs and greater inbound efficiencies. Moreover, because both of these brands specialize in prepackaged foods, there is ample manufacturing-related strategic fit in production processes and packaging technologies that allow the new company to trim and streamline manufacturing operations. Their distribution-related strategic fit will allow for the complete integration of distribution channels and transportation networks, resulting in greater outbound efficiencies and reduction in travel time for products moving from factories to stores. The Kraft Heinz Company is currently looking to leverage Heinz's global platform to expand Kraft's products internationally. By utilizing Heinz's already highly developed global distribution network and brand familiarity (key specialized resources), Kraft can more easily expand into the global market of prepackaged and processed food. Because these two brands are sold at similar types of retail stores (supermarket chains, wholesale retailers, and local grocery stores), they are now able to claim even more shelf space with the increased bargaining power of the combined company. Strategic fit in sales and marketing activities will allow the company to develop coordinated and more effective advertising campaigns. Toward this aim, the Kraft Heinz Company is moving to consolidate its marketing capabilities under one marketing firm. Also, by combining R&D teams, the Kraft Heinz Company could come out with innovative products that may appeal more to the growing number of on-the-go and health-conscious buyers in the market. Many of these potential and predicted synergies for the Kraft Heinz Company have yet to be realized, since merger integration activities always take time.

Financial Resource Fit One important dimension of resource fit concerns whether a diversified company can generate the internal cash flows sufficient to fund the capital requirements of its businesses, pay its dividends, meet its debt obligations, and otherwise remain financially healthy. While additional capital can usually be raised in financial markets, it is also important for a diversified firm to have a healthy internal capital market that can support the financial requirements of its business lineup. The greater the extent to which a diversified company is able to fund investment in its businesses through internally generated free cash flows rather than from equity issues or borrowing, the more powerful its financial resource fit and the less dependent the firm is on external financial resources.

Core Concept A strong internal capital market allows a diversified company to 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 portfolio approach to ensuring financial fit among the firm's businesses is based on the fact that different businesses have different cash flow and investment characteristics. For example, business units in rapidly growing industries are often cash hogs- so labeled because the cash flow they generate from internal operations are not big enough to fund their expansion. To keep pace with rising buyer demand, rapid-growth businesses frequently need sizable annual capital infusions-for new facilities and equipment, technology improvements, and additional working capital to support inventory expansion. Because a cash hog's financial resources must be provided by the corporate parent, corporate managers have to decide whether it makes good financial and strategic sense to keep pouring new money into a cash hog business.

Step 4: Evaluating Resource Fit The businesses in a diversified company's lineup need to exhibit good resource fit. Resource fit exists when: 1. businesses, individually, strengthen a company's overall mix of resources and capabilities & 2. The parent company has sufficient resources that add customer value to support its entire group of businesses without spreading itself too thin.

Core Concept: A diversified company exhibits resource fit when its businesses add to a company's overall mix of resources and capabilities and when the parent company has sufficient resources to support its entire group of businesses without spreading itself too thin.

Strategic Fit and Economies of Scope: Strategic fit in the value chain activities of a diversified corporation's different businesses opens up opportunities for economies of scope - a concept distinct from economies of scale. Economies of Scale are cost savings that accrue directly from a larger operation; for example, unit costs may be lower in large plant than in a small plant. Economies of Scope: Stem directly from cost-saving strategic fit along the value chains of related businesses. Such economies are open only to a multibusiness enterprise and are the result of a related diversification strategy that allows sibling businesses to share technology, perform R&D together, use common manufacturing or distribution facilities, share a common sales force or distributor/dealer network, and/or share the same administrative infrastructure. The greater the cross-business economies associated with cost-savings strategic fit, the greater the potential for a related diversification strategy to yield a competitive advantage based on lower costs than rivals.

Core Concept: Economies of Scope: are cost reductions stemming from strategic fit along the value chains of related businesses (thereby, a larger scope of operations), whereas economies of scale accrue from a larger operation.

Step 1: Evaluating Industry Attractiveness A principal consideration in evaluating the caliber of a diversified company's strategy is the attractiveness of the industries in which it has business operations. The more attractive the industries (both individually and as a group) a diversified company is in, the better its prospects for good long-term performance. A simple and reliable analytical tool for gauging industry attractiveness involves calculating quantitative industry attractiveness scores bases upon the following measures: * Market Size and Projected Growth Rate Big Industries are more attractive than small industries, and fast-growing industries tend to be more attractive than slow-growing industries, other things being equal. * The Intensity of Competition. Industries in which competitive pressures are relatively weak are more attractive than industries with strong competitive pressures. * Emerging Opportunities and Threats Industries with promising opportunities and minimal threats on the near horizon are more attractive than industries with modest opportunities and imposing threats. * The presence of cross-industry strategic fit The more the industry's value chain and resource requirements match up well with the value chain activities of other industries in which the company has operations, the more attractive the industry is to a firm pursuing related diversification. However, cross-industry is to a firm pursuing related diversification. However, cross-industry strategic fit may be of no consequence to a company committed to a strategy of unrelated diversification. * Resource requirements Industries having resources requirements within the company's reach are more attractive than industries where capital and other resource requirements could strain corporate financial resources and organizational capabilities. * Seasonal and cyclical Factors Industries where buyer demand is relatively steady year-round and not unduly vulnerable to economic ups and downs tend to be more attractive than industries with wide seasonal or cyclical swings in buyer demand. * Social, political, regulatory, and environmental factors. Industries with significant problems in such areas as consumer health, safety, or environmental pollution or that are subject to intense regulation are less attractive than industries where such problems are not burning issues. * Industry profitability. Industries with healthy profit margins are generally more attractive than industries where profits have historically been low or unstable. * Industry Uncertainty and Business Risk: Industries with less uncertainty on the horizon and lower overall business risk are more attractive than industries whose prospects for one reason or another are quite uncertain.

Each attractiveness measure should be assigned a weight reflecting its relative importance in determining an industry's attractiveness; it is weak methodology to assume that the various attractiveness measures are equally important. The intensity of competition in an industry should nearly always carry a high weight (say, 0.20 to 0.30). Strategic-fit considerations should be assigned a high weight in the case of companies with related diversification strategies; but for companies with an unrelated diversification strategy, strategic fit with other industries may be given a low weight or even dropped from the list of attractiveness measures. Seasonal and cyclical factors generally are assigned a low weight (or maybe even eliminated from the analysis) unless a company has diversified into industries strongly characterized by seasonal demand and/or heavy vulnerability to cyclical upswings and downswings. The importance weights must add up to 1.0. Next, each industry is rated on each of the chosen industry attractiveness measures, using a rating scale of 1 to 10 (where 10 signifies high attractiveness and 1 signifies low attractiveness). Weighted attractiveness scores are then calculated by multiplying the industry's rating on each measure by the corresponding weight. For example, a rating of 8 times a weight of 0.25 gives a weighted attractiveness score of 2.00. The sum of the weighted scores for all the attractiveness measures provides an overall industry attractiveness score. This producer is illustrated in table 8.1.

Diversifying Into Both Related and Unrelated Businesses There's nothing to preclude a company from diversifying into both related and unrelated businesses. Indeed, the business makeup of diversified companies varies considerably. Some diversified companies are really dominant-business enterprises-one major "core" business accounts for 50 to 80 percent of the total revenues, and a collection of small related or unrelated businesses accounts for the remainder. Some diversified companies are narrowly diversified around a few (two or five) related or unrelated businesses. Other are broadly diversified around a wide-ranging collection of related businesses, unrelated businesses, or a mixture of both. And a number of multibusiness enterprises have diversified into several unrelated groups of related businesses. There's ample room for companies to customize their diversification strategies to incorporate elements of both related and unrelated diversification.

Evaluating the Strategy of a Diversified Company Evaluate a company's diversification strategy. Strategic analysis of diversified companies builds on the methodology used for single-business companies discussed in Chapter 3 and 4 but utilizes tools that streamline the overall process. The procedure for evaluating the pluses and minuses of a diversified company's strategy and declining what actions to take to improve the company's performance involves six steps: Step 1: Assessing the attractiveness of the industries the company has diversified into. Step 2: Assessing the competitive strength of the company's business units. Step 3: Evaluating the extend of cross-business strategic fit along the value chains of the company's various business units. Step 4. Checking whether the firm's resources fit the requirements of its present business lineup. Step 5: Ranking the performance prospects of the businesses from best to worst and determining a priority for allocating resources. Step 6: Crafting new strategic moves to improve overall corporate performance. The core concepts and analytical techniques underlying each of these steps are discussed further in this section of the chapter.

Using a Nine-Cell Matrix to Evaluate the Strength of a Diversified Company's Business Lineup The industry attractiveness and business strength scores can be used to portray the strategic positions of each business in a diversified company. Industry attractiveness is plotted on the vertical axis and competitive strength on the horizontal axis. A nine-cell grid emerges from dividing the vertical axis into three regions (High, Medium, and Low Attractiveness) and the horizontal axis into three regions (Strong, Average, and Weak Competitive Strength). As shown in Figure 8.3, high attractiveness is associated with scores of 3.3 to 6.7, and low attractiveness with scores below 3.3. Likewise, high competitive strength is defined as a score of greater than 6.7, average strength as a scores of 3.3 to 6.7, and low strength as scores below 3.3. Each business unit is plotted on the nine-cell matrix according to its overall attractiveness and strength scores, and then shown as a "bubble". The size of each bubble is scaled to what percentage of revenues the business generates relative to total corporate revenues. The bubbles in figure 8.3 were located on the grid using the four industry attractiveness scores from table 8.1 and the strength scores for the four business unites in table 8.2.

Figure 8.3: A nine-cell attractiveness-competitive Strength Matrix

Allocating Financial Resources Figure 8.4 shows the chief strategic and financial options for allocating a diversified company's financial resources. Divesting businesses with the weakest future prospects and businesses that lack adequate strategic fit and/or resource fit is one of the best ways of generating additional funds for redeployment to businesses with better opportunities and better strategic and resource fit. Free cash flows from cash cow businesses also add to the pool of funds that can be useful deployed. Ideally, a diversified company will have sufficient financial resources to strengthen or grow its existing businesses make any new acquisitions that are desirable, fund other promising business opportunities, pay off existing debt, and periodically increase dividend payments to shareholders and/or repurchase shares of stock. But, as a practical matter, a company's financial resources are limited. Thus, for top executives to make the best use of the available funds, they must steer resources to those businesses with the best opportunities and performance prospects and allocate little, if any, resources to businesses with marginal or dim prospects-this is why ranking the performance prospects and allocate little, if any, resources to businesses with marginal or dim prospects-this is why ranking the performance prospects of the various businesses from best to worst is so crucial. Strategic uses of corporate financial resources (see figure 8.4) should usually take precedence unless there is a compelling reason to strengthen the firm's balance sheet or better reward shareholders.

Figure 8.4: The Chief Strategic and Financial Options for Allocating a Diversified Company's Financial Resources

In general, corporate executives of a company that has extensively diversified into unrelated businesses are forced to "manage by the ______________________ ," meaning that they need to rely on the financial and operating results of each business.

NUMBERS

The locations of the business unites on the attractiveness - competitive strength matrix provide valuable guidance in deploying corporate resources. In general, a diversified company's best prospects for good overall performance involve concentrating corporate resources on business units having the greatest competitive strength and industry attractiveness. Businesses plotted in the three cells in the upper left portion of the attractiveness-competitive strength matrix have both favorable industry attractiveness and competitive strength and should receive a high investment priority. Business units plotted in these three cells (such as business A in Figure 8.3) are referred to as "grow and build" businesses because of their capability to drive future increases in shareholder value.

Next in priority come businesses positioned in the three diagonal cells stretching from the lower left to the upper right (businesses B and C in figure 8.3). Such businesses usually merit medium or intermediate priority in the parent's resources allocation ranking. However, some businesses in the medium-priority diagonal cells may have brighter or dimmer prospects than others. For example, a small business in the upper right cell of the matrix (like business B), despite being in a highly attractive industry, may occupy too weak a competitive position in its industry to justify the investment and resources needed to turn it into a strong market contender. If, however, a business in the upper right cell has attractive opportunities for rapid growth and a good potential for winning a much stronger market position over time, management may designate it as a grow and build business-the strategic objective here would be to move the business leftward in the attractiveness-competitive strength matrix over time.

Core Concept A spin-off is an independent company created when a corporate parent divests a business either by selling shares to the public via an initial public offering or by distributing shares in the new company to shareholders of the corporate parent.

Retrenching to a narrower diversification base in usually undertaken when top management concludes that its diversification strategy has ranged too far afield and that the company can improve long-term performance by concentrating on building stronger positions in a smaller number of core businesses and industries. But there are other important reasons for divesting one or more of a company's present businesses. Sometimes divesting a business has to be considered because market conditions in a once-attractive industry have badly deteriorated. A business can become a prime candidate for divestiture because it lacks adequate strategic or resource fit, because it is a cash hog with questionable long-term potential, or because it is weakly positioned in its industry with little prospect of earning a decent return on investment. Sometimes a company acquires businesses that, down the road, just do not work out as expected, even though management has tried all it can think of to make them profitable. On occasion, a diversification move that seems sensible from a strategic fit standpoint turns out to be a poor cultural fit. Evidence indicates that pruning businesses and narrowing a firm's diversification base improves corporate performance. Corporate parents often end up selling businesses too late and at too low a price, sacrificing shareholder value. A useful guide to determine whether or when to divest a business subsidiary is to ask, "if we were not in this business today, would we want to get into it now?" When the answer is no or probably not, divestiture should be considered. Another signal that a business should become a divestiture candidate is whether it is worth more to another company than to the present parent; in such cases, shareholders would be well served if the company were to sell the business and collect a premium price from the buyer for whom the business is a valuable fit.

Examining a Diversified Company's Non financial Resource Fit. A diversified company must also ensure that the nonfinancial resource needs of its portfolio of businesses are met by its corporate capabilities. Just as diversified company must avoid allowing an excessive number of cash-hungry businesses to jeopardize its financial stability, it should also avoid adding to the business lineup in ways that overly stretch such nonfinancial resources as managerial talent, technology and information systems, and marketing support.: * Does the company have or can it develop the specific resources and competitive capabilities needed to be successful in each of its businesses? Sometimes the resources a company has accumulated in its core business prove to be a poor match with the competitive capabilities needed to succeed in businesses into which it has diversified. For instance, BTR, a multibusiness company in Great Britain, discovered that the company's resources and managerial skills were quite well suited for parenting industrial manufacturing businesses but not for parenting its distribution businesses (National Tyre Services and Texas-based Summer Group). As a result, BTR decided to divest its distribution businesses and focus exclusively on diversifying around small industrial manufacturing. Resource fit extends beyond financial resources to include a good fit between the company's resources and core competencies and the key success factors of each industry it has diversified into. * Are the company's resources being stretched too thinly by the resource requirements of one or more of its businesses? A diversified company has to guard against overtaxing its resources, a condition that can arise when: 1. It goes on an acquisition spree and management is called upon to assimilate and oversee many new businesses very quickly or 2. When it lacks sufficient resource depth to do a creditable job of transferring skills and competencies from one of its businesses to another.

Step 5: Ranking Business Units and Setting a Priority for Resource Allocation Once a diversified company's businesses have been evaluated from the standpoints of industry attractiveness, competitive strength, strategic fit, and resource fit, the next step is to use this information to rank the performance prospects of the businesses from best to worst. Such ranking help top-level executives assign each business a priority for corporate resource support and new capital investment. The locations of the different businesses in the nine-cell industry attractiveness-competitive strength matrix provide a solid basis for identifying high-opportunity businesses and low-opportunity businesses. Normally, competitively strong businesses in attractive industries have significantly better performance prospects that competitively weak businesses in unattractive industries. Also, normally, the revenue and earnings outlook for businesses in fast-growing industries is better than for businesses in slow-growing industries. As a rule, business subsidiaries with the brightest profit and growth prospects, attractive positions in the nine-cell matrix, and solid strategic and resources fit should receive top priority for allocation of corporate resources. However, in ranking the prospects of the different businesses from best to worst, it is usually wise to also consider each business's past performance as concerns sales growth, profit growth, contribution to company earnings, return on capital invested in the business, and cash flow from operations. While past performance is not always a reliable predictor of future performance, it does signal whether a business already has good to excellent performance or has problems to overcome.

Which of these is a solid justification for pursuing an unrelated diversification strategy? a. Management personnel have a high ability to spot low-priced, underperforming companies that could become profitable with some basic guidance. b. The consolidated profit of unrelated businesses is more stable than profits of firms with related businesses. c. Higher levels of managerial compensation associated with a greater degree of diversification tend to increase shareholder value. d. Risk is reduced by spreading investments over a set of diverse industries.

a. Management personnel have a high ability to spot low-priced, underperforming companies that could become profitable with some basic guidance. WHY NOT: b. The consolidated profit of unrelated businesses is more stable than profits of firms with related businesses. Reason: In actual practice, there's no convincing evidence that such profits are more stable. c. Higher levels of managerial compensation associated with a greater degree of diversification tend to increase shareholder value. Reason: Higher compensation tends to reduce shareholder value, not increase it. d. Risk is reduced by spreading investments over a set of diverse industries. Reason: This is not a solid justification because it cannot create long-term shareholder value. Shareholders can reduce risk more efficiently in other ways.

In a company pursuing unrelated diversification, the objective is to a. deliver returns that on average rise enough annually to reward shareholders. b. earn an immediate and short-term return on investment to please shareholders. c. acquire as many businesses as possible within a short time frame to signal to shareholders that the diversification strategy is very aggressive. d. divest any businesses that do not have cross-strategic business fit with their value chains.

a. deliver returns that on average rise enough annually to reward shareholders. Why Not: c. acquire as many businesses as possible within a short time frame to signal to shareholders that the diversification strategy is very aggressive. Reason: Recall that acquiring as many businesses as possible within a short time frame to signal to shareholders that the diversification strategy is very aggressive is not the premise of unrelated diversification. d. divest any businesses that do not have cross-strategic business fit with their value chains. Reason: Recall that divesting any businesses that do not have cross-strategic business fit with their value chains is not the premise of unrelated diversification.

In a ______, one central business accounts for 50 to 80% of total revenues and several smaller businesses contribute the rest. a. dominant-business enterprise b. narrowly diversified firm c. mixed-diversification enterprise d. broadly diversified firm

a. dominant-business enterprise WHY NOT: b. narrowly diversified firm REASON: This type of company is narrowly diversified around a few (two to five) related or unrelated businesses. d. broadly diversified firm REASON This type of firm does not have a central business that accounts for one-half or more of total revenues.

Select all that apply Which of these are key strategic decisions that top-level managers must make in crafting a company's diversification strategy? a. finding ways to leverage cross-business value chain relationships into competitive advantage b. investing the company's resources into the most attractive business units c. taking action to improve the collective performance of all of the company's businesses d. choosing new industries to enter and deciding how to enter those industries e. seeking buyers for the company's extra business units so they can pare operations down to one core business

a. finding ways to leverage cross-business value chain relationships into competitive advantage b. investing the company's resources into the most attractive business units c. taking action to improve the collective performance of all of the company's businesses d. choosing new industries to enter and deciding how to enter those industries

In terms of diversification, unrelated businesses are business that a. have dissimilar value chains and resource requirements with no competitively valuable cross-business relationships. b. are located in geographically dispersed locations on a global scale. c. tend to have a lower earnings potential compared to related businesses. d. that are based on strategic alliances with no shared ownership or single corporate parent.

a. have dissimilar value chains and resource requirements with no competitively valuable cross-business relationships.

Diversification through acquisition of an existing business a. is usually less successful than other approaches to diversification. b. helps the acquiring company clear entry barriers to an industry. c. usually costs less than internal development. d. is preferable to a joint venture because of the level of investment required

b. helps the acquiring company clear entry barriers to an industry. Why Not: d. is preferable to a joint venture because of the level of investment required Reason: Acquisition of an existing business is likely more costly.

Ranking the performance prospects of business units in a diversified company from best to worst a. helps corporate management decide where to allocate resources and capital investments among the business units. b. should largely be determined by where resources are currently being allocated among the business units. c. indicates which businesses are cash hogs that will need additional investment. d. should not take into consideration past financial performance of the businesses since it does not guarantee future performance.

a. helps corporate management decide where to allocate resources and capital investments among the business units. WHY NOT b. should largely be determined by where resources are currently being allocated among the business units. REASON This information would not be useful, since the allocation would change with the diversification. d. should not take into consideration past financial performance of the businesses since it does not guarantee future performance. REASON It is no guarantee, but it is important information to consider in evaluating companies.

Select all that apply: A diversified company can gain from value chain match-ups that present which of the following? (Select all that apply.) a. opportunities to share a well-respected brand name across product or service categories b. opportunities to transfer skills, technology, or intellectual capital between businesses c. opportunities for interaction between the businesses of a diversified company where all the business are unrelated d.opportunities to combine the performance of activities that will reduce costs and capture economies of scope

a. opportunities to share a well-respected brand name across product or service categories b. opportunities to transfer skills, technology, or intellectual capital between businesses d.opportunities to combine the performance of activities that will reduce costs and capture economies of scope

A diversified company can gain from value chain match-ups that present which of the following? (Select all that apply.) a. opportunities to share a well-respected brand name across product or service categories b. opportunities for interaction between the businesses of a diversified company where all the business are unrelated c. opportunities to combine the performance of activities that will reduce costs and capture economies of scope d. opportunities to transfer skills, technology, or intellectual capital between businesses

a. opportunities to share a well-respected brand name across product or service categories c. opportunities to combine the performance of activities that will reduce costs and capture economies of scope d. opportunities to transfer skills, technology, or intellectual capital between businesses

Which of the following are financial options for allocating financial resources in a diversified company? (Select all that apply.) a. paying off existing long-term and short-term debt b. making acquisitions to establish positions in new industries c. increasing dividend payments to shareholders d. repurchasing shares of the company's common stock

a. paying off existing long-term and short-term debt c. increasing dividend payments to shareholders d. repurchasing shares of the company's common stock WHY NOT: b. making acquisitions to establish positions in new industries REASON This is a strategic option for allocating company financial resources.

Select all that apply: Evaluating each business unit's strength and competitive position in its industry a. serves as a guide for ordering the units from competitively strongest to weakest. b. cannot meaningfully be done in a highly unrelated diversification strategy. c. indicates each business unit's likelihood of success. d. is performed using calculations similar to an assessment of overall industry attractiveness.

a. serves as a guide for ordering the units from competitively strongest to weakest. c. indicates each business unit's likelihood of success. d. is performed using calculations similar to an assessment of overall industry attractiveness. WHY NOT b. cannot meaningfully be done in a highly unrelated diversification strategy.

Select all that apply Which of these are key strategic decisions that top-level managers must make in crafting a company's diversification strategy? a. taking action to improve the collective performance of all of the company's businesses b. finding ways to leverage cross-business value chain relationships into competitive advantage c. investing the company's resources into the most attractive business units d. choosing new industries to enter and deciding how to enter those industries e. seeking buyers for the company's extra business units so they can pare operations down to one core business

a. taking action to improve the collective performance of all of the company's businesses b. finding ways to leverage cross-business value chain relationships into competitive advantage c. investing the company's resources into the most attractive business units d. choosing new industries to enter and deciding how to enter those industries

In which of the following situations is corporate restructuring an appealing business strategy? a. when many of the company's business are in slow-growth or low-margin industries b. when new technologies threaten one or more important business of the company c. when a major business in the company experiences ongoing growth in market share d. when the company has an excessive debt burden and interest payments

a. when many of the company's business are in slow-growth or low-margin industries b. when new technologies threaten one or more important business of the company d. when the company has an excessive debt burden and interest payments

Which of the following statements regarding single-business versus diversified firms is correct? a. Unlike single-business firms, in most diversified firms strategy-making authority is not delegated to business-unit managers. b. Strategy-making tends to be more complicated in a diversified firm versus a single-business firm. c. Single-business firms tend to be less profitable than diversified firms. d. Diversified firms tend to be less attractive to investors than single-business firms.

b. Strategy-making tends to be more complicated in a diversified firm versus a single-business firm. Why Not: a. Unlike single-business firms, in most diversified firms strategy-making authority is not delegated to business-unit managers. Reason: In most diversified companies, corporate-level executives delegate considerable strategy-making authority to the heads of each business.

Which of the following most accurately defines related businesses? a. The businesses depend on the same set of suppliers for key materials and inputs. b. The value chains of the businesses possess competitively valuable cross-business relationships. c. The businesses use an overlapping marketing strategy targeting essentially the same customer groups. d. The businesses all sell the same products within the same industry.

b. The value chains of the businesses possess competitively valuable cross-business relationships.

In justifying diversification as a strategy to build shareholder value, the ______ test says that diversifying into a new business must offer potential for the company's existing business and the new business to perform better after consolidation than as stand-alone businesses. a. cost-of-entry b. better-off c. 1+1=3 d. industry attractiveness

b. better-off Why Nots: a. cost-of-entry Reason: This tests whether the cost of entering the target industry takes away the potential for profitability. c. 1+1=3 Reason: his is not a test but an illustration of the better-off test. d. industry attractiveness Reason: This tests whether the industry offers opportunity for profit.

In justifying diversification as a strategy to build shareholder value, the ______ test says that entering the target industry shouldn't be so costly that it takes away the potential for profitability. a. industry attractiveness b. cost-of-entry c. better-off d. 1+1=3

b. cost-of-entry Why Not: a. industry attractiveness Reason: This tests whether the industry offers opportunity for profit. c. better-off Reason: This tests whether the combined businesses will perform better together than apart. d. 1+1=3 Reason: This is not a test but an illustration of the better-off test.

Which of these is the last step in evaluating the strategy of a diversified company? a. checking whether the firm's resources fit the requirements of its present business lineup b. crafting new strategic moves to improve overall corporate performance c. assessing the competitive strength of the business units d. assessing the attractiveness of the industries represented by the company's business units

b. crafting new strategic moves to improve overall corporate performance. WHY NOT: a. checking whether the firm's resources fit the requirements of its present business lineup REASON: This is the third to last step. c. assessing the competitive strength of the business units REASON: This is an early step in evaluating the strategy of a diversified company d. assessing the attractiveness of the industries represented by the company's business units REASON: This is an early step in evaluating the strategy of a diversified company

Select all that apply When conditions allow corporate executives to stick closely with the existing business lineup, they are likely to do which of the following? a. begin to restructure through new business acquisitions b. focus on getting the best performance from each of the firm's businesses c. direct corporate resources to the areas with greatest profitability d. seek to retrench to a narrower diversification base

b. focus on getting the best performance from each of the firm's businesses c. direct corporate resources to the areas with greatest profitability

Ranking the performance prospects of business units in a diversified company from best to worst a. should largely be determined by where resources are currently being allocated among the business units. b. helps corporate management decide where to allocate resources and capital investments among the business units. c. should not take into consideration past financial performance of the businesses since it does not guarantee future performance. d. indicates which businesses are cash hogs that will need additional investment.

b. helps corporate management decide where to allocate resources and capital investments among the business units. WHY NOT a. should largely be determined by where resources are currently being allocated among the business units. REASON This information would not be useful, since the allocation would change with the diversification. c. should not take into consideration past financial performance of the businesses since it does not guarantee future performance. REASON It is no guarantee, but it is important information to consider in evaluating companies.

An unrelated diversification strategy: a. is more likely than related diversification to exhibit a high degree of strategic fit and therefore a greater chance of competitive advantage. b. offers limited potential for competitive advantage beyond what each business can generate on its own. c. is likely to offer enhanced consolidated performance compared to the sum of what the individual businesses could achieve independently. d. offers significantly better potential for competitive advantage compared to what each business could generate on its own.

b. offers limited potential for competitive advantage beyond what each business can generate on its own. WHY NOT: a. is more likely than related diversification to exhibit a high degree of strategic fit and therefore a greater chance of competitive advantage. REASON Recall that an unrelated diversification strategy offers limited potential for competitive advantage beyond what each business can generate on its own. c. is likely to offer enhanced consolidated performance compared to the sum of what the individual businesses could achieve independently. REASON: Recall that an unrelated diversification strategy offers limited potential for competitive advantage beyond what each business can generate on its own. d. offers significantly better potential for competitive advantage compared to what each business could generate on its own. REASON: Recall that an unrelated diversification strategy offers limited potential for competitive advantage beyond what each business can generate on its own.

Which of the following should not receive high priority for the allocation of company resources in a multibusiness company? a. the businesses with good profit and growth prospects b. the businesses that show weak performance in unattractive industries c. the businesses that have good strategic and resource fit d. the businesses with attractive positions in the nine-cell matrix

b. the businesses that show weak performance in unattractive industries

Relative market share, brand image and reputation, and costs and profitability relative to competitors are measures that can be used in evaluating a. overall industry attractiveness in an unrelated diversification strategy. b. the competitive strength of each business-unit in a diversified company. c. potential for outsourcing in a broadly diversified company. d. financial fit of business units in a diversified company.

b. the competitive strength of each business-unit in a diversified company. WHY NOT a. overall industry attractiveness in an unrelated diversification strategy. REASON: Recall that relative market share, costs and profitability relative to competitors, brand image and reputation, and competitively valuable capabilities are measures that can be used in evaluating business-unit competitive strength in a diversified company. d. financial fit of business units in a diversified company. REASON: Recall that relative market share, costs and profitability relative to competitors, brand image and reputation, and competitively valuable capabilities are measures that can be used in evaluating business-unit competitive strength in a diversified company.

Which of the following statements is true about unrelated diversification of a firm? a. Unrelated diversification is a good strategy for transferring capabilities and skills among business units. b. Unrelated diversification leads to good cross-business strategic fit. c. Unrelated diversification offers limited potential for competitive advantage beyond what each business generates on its own. d. The performance of the unrelated businesses as a group is much better than what the sum of the performances of each business would be independently.

c. Unrelated diversification offers limited potential for competitive advantage beyond what each business generates on its own. Why Not: a. Unrelated diversification is a good strategy for transferring capabilities and skills among business units. Reason: With unrelated diversification strategy there is no transferring capabilities, skills and technologies. b. Unrelated diversification leads to good cross-business strategic fit. Reason: There is no cross-business strategic fit. d. The performance of the unrelated businesses as a group is much better than what the sum of the performances of each business would be independently. Reason: Without the competitive advantage potential of strategic fit, consolidated performance of an unrelated group of businesses is unlikely to be better than the sum of what the individual business units could achieve independently, in most instances.

The two necessary conditions for producing valid industry attractiveness scores are a. determining whether the company is using related or unrelated diversification and deciding on appropriate weights for the attractiveness measures. b. evaluating the company's overall performance versus evaluating each measure separately. c. determining proper weights for the attractiveness measures and having adequate knowledge to rate the industry on each measure. d. using a weighted score method versus a ranking method.

c. determining proper weights for the attractiveness measures and having adequate knowledge to rate the industry on each measure. WHY NOT: a. determining whether the company is using related or unrelated diversification and deciding on appropriate weights for the attractiveness measures. REASON: Determining whether the company is using related or unrelated diversification is not one of the two necessary conditions.

Which of the following is not an example of vertical integration? A manufacturer ceases manufacturing their own components and instead contracts with another manufacturer to make and supply the components. A grocery store chain acquires a distributor of packaged food products. An auto parts manufacturer opens its own chain of auto parts retail stores. A beauty products company begins selling products on its own website rather than only through independent sales consultants.

A manufacturer ceases manufacturing their own components and instead contracts with another manufacturer to make and supply the components. WHY NOT: A beauty products company begins selling products on its own website rather than only through independent sales consultants. Reason: This is an example of vertical integration because the company is integrating its sales channel.

CH 8 Corporate Strategy: Diversification and the Company Multibusiness Company This chapter moves up one level in the strategy making in a diversified enterprise. Because a diversified company is a collection of individual business, the strategy making task is more complicated. In a one-business company, managers have to come up with a plan for competing successfully in only a single industry environment - the result is what chapter 2 labeled as business strategy (or business level strategy). But in a diversified company, the strategy-making challenge involves assessing multiple industry environments and developing a set of business strategies, one for each industry arena in which the the diversified company operates. And top executives at a diversified company must still go one step further and devise a companywide or corporate strategy for improving the attractiveness and performance of the company's overall business lineup and for making a rational whole out of its diversified collection of individual businesses. In most diversified companies, corporate-level executives delegate considerable strategy-making authority to the heads of each business, usually giving them the latitude to craft a business strategy suited to their particular industry and competitive circumstances and holding them accountable for producing good results. But the task of crafting a diversified company's overall corporate strategy falls squarely in the lap of top-level executives and involves four distinct facets:

Crafting a diversified company's overall corporate strategy: 1. Picking New Industries to Enter and Deciding on the Means of Entry: The decision to pursue business diversification requires that management decide what new industries offer the best growth prospects 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. 2. Pursuing Opportunities to Leverage Cross-Business Value Chain Relationship Into Competitive Advantage: Companies that diversify into businesses with strategic fit across the value chains of their business units have a much better chance of gaining a 1+1=3 effect than do multibusiness companies lacking strategic fit. 3. Establishing Investment Priorities and Steering Corporate Resources into the Most Attractive Business Units: A diversified company's business units are usually not equally attractive, and it is incumbent on corporate management to channel resources into areas where earnings potentials are higher. 4. Initiating Actions to Boost the Combined Performance of the Corporation's Collection of Businesses: Corporate strategists must craft moves to improve the overall performance of the corporation's business lineup and sustain increases in shareholder value. Strategic options for diversified corporations include: A. Sticking closely with the existing business lineup and pursuing opportunities presented by these businesses. B. Broadening the scope of diversification by entering additional industries. C. Retrenching to a narrower scope of diversification by divesting poorly performing businesses & D. Broadly restructuring the business lineup with multiple divestitures and/or acquisitions. The first portion of this chapter describes the various means a company can use to diversify and explores the pros and cons of related versus unrelated diversification strategies. The second part of the chapter looks at how to evaluate the attractiveness of a diversified company's business lineup, decide whether it has a good diversification strategy, and identify ways to improve its future performance.

Approaches to Diversifying the Business Lineup The means of entering new industries and lines of business can take any of three forms: Acquisition, Internal Development, or Joint Ventures with other Companies

Diversification by Acquisition of an Existing Business Acquisition is a popular means of diversifying into another industry. Not only is it quicker than trying to launch a new operation, but it also 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. Buying an ongoing operation allows the acquirer to move directly to the task of building a strong market position in the target industry, rather than getting bogged down in the fine points of launching a startup. 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. If the buying firm has little knowledge of the industry but has ample capital, it is often better off purchasing a capable, strongly positioned firm-unless the price of such an acquisition is prohibitive and flunks the cost-of-entry tests. However, when the acquirer sees promising ways to transform a weak firm into a strong one, a struggling company can be the better long-term investment.

Core Concept: Related Businesses possess competitively valuable cross-business value chain and resource matchups; unrelated businesses have dissimilar value chains and resources requirements, with no competitively important cross-business value chain relationships. The next two sections explore the ins and outs of related and unrelated diversification

Diversifying Into Related Businesses Explain how related diversification strategies can produce cross-business strategic fit capable of delivering competitive advantage. A related diversification strategy involves building the company around businesses whose value chains possess competitively valuable strategic fit, as shown in figure 8.2 Strategic Fit exists whenever one or more activities comprising the value chains of different businesses are sufficiently similar to present opportunities for: 1. Transferring Competitively Valuable Resources, Expertise, Technological Know-How, or Other Capabilities From One Business To Another: Google's technological know-how and innovation capabilities refined in its Internet search business have aided considerably in the development of its Android mobile operating system and Chrome operating system for computers. After acquiring Marvel Comics in 2009 and Lucasfilm in 2012, Walt Disney Company integrated Marvel's iconic characters such as Spider-Man and Iron Man and Lucasfilm's Star Wars and Indiana Jones franchises into other Disney businesses, including its theme parks, retail stores, motion picture division, and video game business. 2. Cost Sharing Between Separate Businesses Where Value Chain Activities Can Be Combined: For instance, it is often feasible to manufacture the products of different businesses in a single plant or have a single sales force for the products of different businesses if they are marketed to the same types of customers. 3. Brand Sharing Between Business Units That Have Common Customers or That Draw Upon Common Core Competencies: For example, Apple's reputation for producing easy-to-operate computers and stylish designs were competitive assets that facilitated the company's diversification into smartphones, tablet computers, and wearable technology.

Which of the following is/are potential disadvantages of vertical integration? It diminishes a company's control over the crucial steps of its value chain, possibly impairing the company's competitive strategy. It can result in capacity matching problems when components must be manufactured in different quantities. It increases a firm's risk of loss if the industry experiences a downturn. Vertically integrated companies may be slow to embrace technological changes due to investments in older technology or facilities.

It can result in capacity matching problems when components must be manufactured in different quantities. It increases a firm's risk of loss if the industry experiences a downturn. Vertically integrated companies may be slow to embrace technological changes due to investments in older technology or facilities.

Required information Skip to question Chapter 8: Exercises for Simulation Participants If you are participating in a strategy simulation exercise during the academic term, you may be instructed to complete the following exercise. What strategic fit benefits might be captured by transferring resources and competitive capabilities to newly acquired related businesses? Strategic fit exists when company value chains are different and where leadership desires to learn the business of the acquired company. Strategic fit benefits include economies of scale. Transferring resources and competitive capabilities leads to greater growth potential in an unrelated business strategy. Strategic fit opens up opportunities for economies of scope by realizing cost reductions in the value chain.

Strategic fit opens up opportunities for economies of scope by realizing cost reductions in the value chain.

Select all that apply A firm that uses backward integration may find it difficult to match the cost advantages of suppliers for which of the following reasons? The firm will need to achieve the same production efficiency without losing product quality. Suppliers will have greater production volume to achieve economies of scale. The firm's employees will be less efficient when they are required to take on new production responsibilities. Wholesalers will demand price decreases that will offset the firm's cost savings.

The firm will need to achieve the same production efficiency without losing product quality. & Suppliers will have greater production volume to achieve economies of scale.

Which of the following describes a company's biggest long-term risk with an outsourcing strategy? The risk of losing control over activities crucial to the company's competitive success. The risk of missing out on industry growth and profitability. The risk of being saddled with outdated technologies. The risk of less efficient production of nonessential products.

The risk of losing control over activities crucial to the company's competitive success.

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. assessing the competitive strength of each business the company has diversified into and determining which ones are strong or weak contenders in their respective industries. 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. a determination of the degree of risk involved with each business unit.

a determination of the degree of risk involved with each business unit.

Which of the following is not a good target for an offensive attack? Multiple choice question. market leaders with strong profitability and solid market share small local and regional firms lacking experience or resources market leaders having a weak competitive strategy with regard to cost versus differentiation runner-up firms with weaknesses in areas that can be exploited by a firm with greater strengths in those areas

market leaders with strong profitability and solid market share NOTE WHY NOT: a. market leaders with strong profitability and solid market share Reason: Recall that market leaders should only be attacked when they show signs of vulnerability, such as poor customer service ratings. c. market leaders having a weak competitive strategy with regard to cost versus differentiation Reason: Such a firm has vulnerabilities that could be exploited. d. runner-up firms with weaknesses in areas that can be exploited by a firm with greater strengths in those areas Reason: Such a firm has vulnerabilities that could be exploited.

When two company's mutually agree to become a single corporate entity, they are participating in a(n) strategic alliance acquisition joint venture merger.

merger.

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 multinational diversification. mostly unrelated diversification. horizontal merger and acquisitions. mostly related diversification. corporate restructuring.

mostly unrelated diversification.

Attacking the competitive weaknesses of rivals, adopting and improving on the good ideas of other companies, and deliberately attacking market segments where rivals make a huge profit, are examples of early-mover strategies. offensive strategies. defensive strategies. blue ocean strategies.

offensive strategies.

Challenging a firm that is on the verge of failure is an example of a(n) Multiple choice question. defensive strategy. offensive strategy. blue ocean strategy. late-mover strategy.

offensive strategy. NOTE WHY NOT: blue ocean strategy. Reason: A blue ocean strategy seeks to gain a durable competitive advantage by abandoning efforts to beat out competitors in existing markets and, instead, inventing a new industry.