Chapter 8
What does a competitive strength score above 5 tell us about a diversified company's position in the market? A. that its business units are all fairly strong market contenders in their respective industries B. that its business units are all fairly weak market contenders in their respective industries C. that the company will not likely perform well D. that a company's competitive strength score does not relate to the market position of that business E. that the company will likely fail
A
A big advantage of related diversification is that it: A. offers ways for a firm to realize 1 + 1 = 3 benefits because the value chains of the different businesses present competitively valuable cross-business relationships. B. is less capital intensive and usually more profitable than unrelated diversification. C. involves diversifying into industries having the same kinds of key success factors. D. is less risky than either vertical integration or unrelated diversification due to lower capital requirements. E. passes the industry attractiveness test and thus offers the best route to 2 + 2 = 4 benefits.
A
A diversified company has a parenting advantage when it: A. is more able than other companies to boost the combined performance of its individual businesses through its high-level guidance, general oversight, and other corporate-level contributions. B. is more able than other companies to create positive collaboration within its portfolio for different specialty groups and geographic locations. C. results in supporting short-term economic shareholder value. D. manages a set of fundamentally similar business operations inside fundamentally similar industries and environments. E. avoids acquiring undervalued companies and thus reduces risks.
A
A related diversification strategy involves building the company around businesses: A. with strategic fit with respect to key value chain activities and competitive assets. B. that are highly independent, proficient, and efficient operating firms. C. with strategic fit across separate value chain activities that drive each business. D. that can also include unrelated businesses with dissimilar resource requirements. E. that have dissimilar value chain activities with no cross-business commonalities.
A
An umbrella brand: A. is a generalized resource that can be leveraged in unrelated diversification. B. is a brand name that can steer a narrow assortment of business types. C. represents a public disclosure spotlighting the corporate image. D. represents an overall corporate marker covering its overriding image of sustainability and responsibility. E. is a specialized resource designed to influence profit growth.
A
Economies of scope: A. are cost reductions that flow from operating in multiple related businesses. B. arise only from strategic fit relationships in the production portions of the value chains of sister businesses. C. are more associated with unrelated diversification than related diversification. D. are present whenever diversification satisfies the attractiveness test and the cost of entry test. E. arise mainly from strategic fit relationships in the distribution portions of the value chains of unrelated businesses.
A
In terms of strategy making, what is the difference between a one-business company and a diversified company? A. The first uses a business-level strategy, while the second uses a set of business strategies and a corporate strategy. B. The first uses a business-level strategy, while the second uses a corporate-wide strategy. C. The first uses an operating strategy, while the second uses a business-line strategy. D. The first uses a functional strategy, while the second uses a business-line strategy. E. The first uses a single-line strategy, while the second uses a multi-line strategy.
A
One strategic fit based approach to related diversification would be to: A. diversify into new industries that present opportunities to transfer specialized expertise, technological know-how, or other valuable resources and capabilities from one business's value chain to another's. B. diversify into foreign markets where the firm has unrelated businesses. C. acquire rival firms that have broader product lines so as to give the company access to a wider range of buyer groups. D. acquire companies in forward distribution channels (wholesalers and/or retailers). E. expand into foreign markets where the firm currently does no business.
A
Relative market share is: A. calculated by dividing a company's percentage share of total industry sales volume by the percentage share held by its largest rival. B. calculated by adjusting a company's revenue share up or down by a factor proportional to whether their quality/customer service factors are above/below industry averages. C. calculated by dividing a company's market share (based on dollar volume) by the industry-average market share. D. particularly useful in identifying cash cows, which have big relative market shares (above 1.0), and cash hogs, which have low relative market shares (below 0.5). E. calculated by subtracting the industry-average market share (based on revenue) from the company's market share to highlight relative share above/below the industry average. This amount is a better indicator of a business's competitive strength than is just looking at the firm's market share percentage.
A
The essential requirement for different businesses to be "related" is that: A. their value chains exhibit competitively valuable cross-business commonalities. B. the products of the different businesses are bought by many of the same types of buyers. C. the products of the different businesses are sold in the same types of retail stores. D. the businesses have several key suppliers in common. E. the production methods they employ both entail economies of scale.
A
There is ample room for companies to customize their diversification strategies and be defined as being either narrowly or broadly diversified, and when combination related-unrelated diversification strategy options are adopted, they have particular appeal to: A. those companies with a mix of valuable competitive assets, covering the spectrum from generalized to specialized resources and capabilities. B. those large multibusiness firms, sometimes called conglomerates, because they have a unique capability designed to stabilize earnings. C. companies with a portfolio of product choices for buyer-related behavior. D. corporate managers who take on risks without performing due diligence. E. corporate managers who want to play the corporate parent role without fiduciary responsibility.
A
What is the name of the process for developing new businesses as an outgrowth of a company's established business operations? A. corporate venturing B. value chain integration C. resource capability process D. diversification activity capabilities E. business launch
A
When a corporate parent creates an independent company and divests it by distributing to its stockholders new shares in the business, it is called: A. a spinoff. B. a wholly-owned subsidiary. C. a functional divesture. D. fully-diluted stock. E. a restructure.
A
When calculating the weighted industry attractiveness scores, we find the more intensely competitive an industry is: A. the lower the attractiveness weighting for that industry. B. the higher the attractiveness weighting for that industry. C. suggests the resources are beyond the parent company's reach. D. suggests the industry attractiveness measures have been incorrectly weighted. E. the more likely the company's profit and revenues will be intensive.
A
With an unrelated diversification strategy, the types of companies that make particularly attractive acquisition targets are: A. struggling companies with good turnaround potential, undervalued companies that can be acquired at a bargain price, and companies that have bright growth prospects but are short on investment capital. B. companies offering the biggest potential to reduce labor costs. C. cash cow businesses with excellent financial fit. D. companies that are market leaders in their respective industries. E. companies that employ the same basic type of competitive strategy as the parent corporation's existing businesses.
A
A company can best accomplish diversification into new industries by: A. outsourcing most of the value chain activities that have to be performed in the target business/industry. B. acquiring a company already operating in the target industry, creating a new business from scratch, or forming a joint venture with one or more companies to enter the target industry. C. integrating forward or backward into the target industry. D. shifting from a strategic group comprised mostly of single-business companies to a strategic group comprised of diversified companies. E. employing an offensive strategy with new product innovation as its centerpiece.
B
A diversified company's business units exhibit good resource fit when: A. each business is a cash cow. B. its businesses add to a company's overall resource strengths and have matching resource requirements and/or when the parent has adequate corporate resources to support its business needs and add value. C. each business is sufficiently profitable to generate an attractive return on invested capital. D. each business unit produces large internal cash flows over and above what is needed to build and maintain the business. E. the resource requirements of each business exactly match the company's available resources.
B
An acquisition premium is the amount by which the price offered for an existing business exceeds the: A. fair market value of similar companies in the same geographic locale. B. preacquisition market value of the target company. C. comparable value of similar companies within the same market. D. amount paid as a down payment to be held in escrow until closing. E. difference between the amount that was offered and the amount that is escrowed.
B
For a diversified company to be a strong performer: A. a substantial portion of its revenues and expenses must come from business units with relatively low attractiveness scores. B. its principal business must be in industries with a good outlook for growth and above-average profitability. C. its business units in high attractiveness score industries should be candidates for divesture. D. its business units must operate within the favorable aspects of their industry environment. E. its business units must have a popular image, even if the performance of their products does not greatly satisfy buyer expectations.
B
It becomes particularly urgent for a company to consider diversification when there are: A. opportunities to leverage existing competencies and capabilities by expanding into businesses where these same resources are key success factors and valuable competitive assets. B. diminishing market opportunities and stagnating sales in its principal business. C. opportunities to lower costs by entering closely related businesses. D. opportunities to transfer a powerful and well-respected brand name to the products of other businesses and thereby increase the sales and profits of these newly entered businesses. E. needs to avoid putting all of its "eggs" in one industry basket.
B
Management's ranking of business units and establishing a priority for resource allocation should: A. always make the company's business units with strong resource strengths and competitive capabilities the central focus of funding initiatives. B. put business units with the brightest profit and growth prospects and solid strategic and resource fits at the top of the investment priority list. C. utilize activity-based costing and benchmarking to determine the funding needs of each business unit. D. first consider the strength of funding proposals presented by managers of each division or business unit. E. give priority for funding to cash hog businesses.
B
Retrenching to a narrower diversification base is: A. usually the most attractive long-run strategy for a broadly diversified company confronted with recession, high interest rates, mounting competitive pressures in several of its businesses, and sluggish growth. B. a strategy that allows a diversified firm's energies to be concentrated on building strong positions in a smaller number of businesses rather the stretching its resources and managerial attention too thinly across many businesses. C. an attractive strategy option for revamping a diverse business lineup that lacks strong cross-business financial fit. D. sometimes an attractive option for deepening a diversified company's technological expertise and supporting a faster rate of product innovation. E. a strategy best reserved for companies in poor financial shape.
B
The big dilemma an acquisition-minded firm faces is whether to: A. focus on building brand awareness or establishing supplier relationships. B. pay a premium price for a successful company or buy a struggling company at a bargain price. C. strive for scale economies or to acquire technical know-how to customize production. D. focus on building brand awareness or striving for scale economies. E. focus on acquiring technical know-how or outsourcing production.
B
The one factor that company executives need not worry about when their company is managing many diverse, unrelated firms is to: A. stay abreast of what's happening in each industry and subsidiary. B. pick business-unit heads having the requisite combination of managerial skills and know-how to motivate people. C. understand the true value of strategic investment proposals by business-unit managers. D. know what to do if a business unit stumbles. E. "manage by the numbers"—that is, keep a close track on the financial and operating results of each subsidiary.
B
Unrelated businesses: A. sell products from the different businesses to much the same types of buyers and retail outlets. B. have dissimilar value chains and resource requirements with no competitively important cross-business commonalities at the value chain level. C. perform better than just the sum of the individual businesses. D. will always have several key suppliers in common. E. employ production methods that create economies of scale.
B
What makes related diversification an attractive strategy? A. the ability to broaden the company's product line B. the opportunity to convert cross-business strategic fit into competitive advantage over business rivals whose operations don't offer comparable strategic fit benefits C. the potential for improving the stability of the company's financial performance D. the ability to serve a broader spectrum of buyer needs E. the added capability it provides in overcoming the barriers to entering foreign markets
B
Which of the following is the BEST guideline for deciding what the priorities should be for allocating resources to the various businesses of a diversified company? A. Businesses with high industry attractiveness ratings should be given top priority and those with low industry attractiveness ratings should be given low priority. B. Business subsidiaries with the brightest profit and growth prospects, attractive positions on the nine-cell matrix, and solid strategic and resource fits generally should head the list for corporate resource support. C. The positions of each business in the nine-cell attractiveness-strength matrix should govern resource allocation. D. Businesses with the most strategic and resource fits should be given top priority and those with the fewest strategic and resource fits should be given low priority. E. Businesses with high competitive strength ratings should be given top priority and those with low competitive strength ratings should be given low priority.
B
A diversified company's business units exhibit good financial resource fit when: A. each business is sufficiently profitable to generate an attractive return on invested capital. B. the resource requirements of each business exactly match the company's available resources. C. it has the resources to adequately support the requirements of its businesses as a group without spreading itself too thin and when individual businesses add to a company's overall strengths. D. each business unit produces large internal cash flows over and above what is needed to build and maintain the business. E. each business is sufficiently profitable to generate an attractive return on invested capital.
C
Calculating quantitative attractiveness ratings for the industries a company has diversified into involves: A. determining each industry's key success factors, calculating the ability of the company to be successful on each industry KSF, and obtaining overall measures of the firm's ability to compete successfully in each of its industries based on the combined KSF ratings. B. determining each industry's competitive advantage factors, calculating the ability of the company to be successful on each competitive advantage factor, and obtaining overall measures of the firm's ability to achieve sustainable competitive advantage in each of its industries based on the combined competitive advantage factor ratings. C. selecting a set of industry attractiveness measures, weighting the importance of each measure, rating each industry on each attractiveness measure, multiplying the industry ratings by the assigned weight to obtain a weighted rating, adding the weighted ratings for each industry to obtain an overall industry attractiveness score, and using the overall industry attractiveness scores to interpret the attractiveness of all the industries, both individually and as a group. D. rating the attractiveness of each industry's strategic and resource fits, summing the attractiveness scores, and determining whether the overall scores for the industries as a group are appealing or not. E. identifying each industry's average profitability, rating the difficulty of achieving average profitability in each industry, and deciding whether the company's prospects for above-average profitability are attractive or unattractive, industry by industry.
C
Calculating quantitative competitive strength ratings for each of a diversified company's business units involves: A. determining each industry's key success factors, rating the ability of each business to be successful on each industry KSF, and adding the individual ratings to obtain overall measures of each business's ability to compete successfully. B. identifying the competitive forces facing each business, rating the strength of these competitive forces industry by industry, and then ranking each business's ability to be profitable, given the strength of the competition it faces. C. selecting a set of competitive strength measures, weighting the importance of each measure, rating each business on each strength measure, multiplying the strength ratings by the assigned weight to obtain a weighted rating, adding the weighted ratings for each business unit to obtain an overall competitive strength score, and using the overall competitive strength scores to evaluate the competitive strength of all the businesses, both individually and as a group. D. determining which businesses possess good strategic fit with other businesses, identifying the portion of the value chain where this fit occurs, and evaluating the strength of the competitive advantage attached to each of the strategic fits to get an overall measure of competitive advantage potential. Businesses with the highest/lowest competitive advantage potential have the most/least competitive strength. E. rating the caliber of each businesses strategic and resource fit, weighting the importance of each type of strategic/resource fit, calculating weighted strategic/resource fit scores, and adding the weighted ratings for each business to obtain an overall strength score for each business unit that indicates whether the company has adequate strategic/resource fits to be a strong market contender in each of the industries where it competes.
C
The chief purpose of calculating quantitative industry attractiveness scores for each industry a company has diversified into is to: A. determine which industry is the biggest and fastest growing. B. get in position to rank the industries from most competitive to least competitive. C. provide a basis for drawing analysis-based conclusions about the attractiveness of the industries a company has diversified into, both individually and as a group, and further to provide an indication of which industries offer the best and worst long-term prospects. D. ascertain which industries have the easiest-to-achieve key success factors. E. rank the attractiveness of the various industry value chains from best to worst.
C
The nine-cell attractiveness-strength matrix provides clear, strong logic for considering using: A. only industry attractiveness in allocating resources and investment capital to its different businesses. B. only business strength in allocating resources and investment capital to the different businesses. C. both industry attractiveness and business strength in allocating resources and investment capital to its different businesses. D. both industry attractiveness and product strength in allocating resources and investment capital to its different businesses. E. both resource fit and product strength in allocating resources and investment capital to its different businesses.
C
The two biggest drawbacks or disadvantages of unrelated diversification are: A. the difficulties of passing the cost of entry test and the ease with which top managers can make the mistake of diversifying into businesses where competition is too intense. B. the difficulties of capturing financial fit and having insufficient financial resources to spread business risk across many different lines of business. C. the demanding managerial requirements and the limited competitive advantage potential due to lack of cross-business strategic fit benefits. D. ending up with too many cash hog businesses and too much diversity among the competitive strategies of the businesses it has diversified into. E. the difficulties of achieving economies of scope and conflicts/incompatibility among the competitive strategies of the company's different businesses.
C
With a strategy of unrelated diversification, an acquisition is deemed to have potential if it: A. can achieve at least existing profit margins into the near future. B. has the opportunity to generate positive buzz in the industry, even if it may not be able to contribute to the parent firm's bottom line. C. can pass the industry attractiveness test and the cost of entry test, and if it has good prospects for profit growth. D. can pass at least the industry attractiveness test if not the cost of entry test. E. can add economic value for managers.
C
Diversification into new industries deserves strong consideration when a: A. single-business company can achieve profitable growth opportunities in its present industry. B. single-business company needs to develop a corporate-wide strategy. C. single-business company needs to develop a multi-line strategy. D. single-business company encounters diminishing market opportunities and stagnating sales in its principal business. E. multiple-business company encounters enhanced market opportunities and increasing sales in its principal business.
D
Strategic fit between two or more businesses exists when one or more activities comprising their respective value chains present opportunities: A. to prevent the transfer of expertise or technology or capabilities from one business to another. B. to independently preserve common brand names from cross-business usage. C. to increase costs by combining the performance of the related value chain activities of different businesses. D. for cross-business collaboration to build valuable new resource strengths and competitive capabilities. E. to maintain business value chain activities separate and apart from one business to another to protect company independence.
D
Strategies to restructure a diversified company's business lineup involve: A. revamping the value chains of each of a diversified company's businesses. B. focusing on restoring the profitability of its money-losing businesses and thereby improving the company's overall profitability. C. revamping the strategies of its different businesses, especially those that are performing poorly. D. divesting low-performing businesses that do not fit and acquiring new ones where opportunities are more promising to put a new face on the company's business makeup. E. broadening the scope of diversification to include a larger number of smaller and more diverse businesses.
D
The basic premise of unrelated diversification is that: A. the least risky way to diversify is to seek out businesses that are leaders in their respective industry. B. the best companies to acquire are those that offer the greatest economies of scope rather than the greatest economies of scale. C. the best way to build shareholder value is to acquire businesses with strong cross-business financial fit. D. any company that can be acquired on good financial terms and that has satisfactory growth and earnings potential represents a good acquisition and a good business opportunity. E. the task of building shareholder value is better served by seeking to stabilize earnings across the entire business cycle than by seeking to capture cross-business strategic fits.
D
The better-off test for evaluating whether a particular diversification move is likely to generate added value for shareholders involves assessing whether the move will: A. make the company better off because it will produce a greater number of core competencies. B. make the company better off by improving its balance sheet strength and credit rating. C. make the company better off by spreading shareholder risks across a greater number of businesses and industries. D. produce a synergistic outcome such that the company's different businesses perform better together than apart and the whole ends up being greater than the sum of the parts. E. help each business earn exactly what they were earning before coming under the same corporate umbrella.
D
The three tests for judging whether a particular diversification move can create value for shareholders are the: A. attractiveness test, the profitability test, and the shareholder value test. B. strategic fit test, the competitive advantage test, and the return-on-investment test. C. resource fit test, the profitability test, and the shareholder value test. D. attractiveness test, the cost of entry test, and the better-off test. E. shareholder value test, the cost of entry test, and the profitability test.
D
The value of determining the relative competitive strength of each business a company has diversified into is to have a quantitative basis for: A. identifying which businesses have large/small competitive advantages or competitive disadvantages vis-à-vis the rivals in their respective industries. B. rating them from strongest to weakest in terms of contributing to the corporate parent's revenue growth. C. comparing resource strengths and weaknesses, business by business. D. rating them from strongest to weakest in contending for market leadership in their respective industries. E. rating them from strongest to weakest in terms of contributing to the corporate parent's profitability.
D
To create value for shareholders via diversification, a company must: A. get into new businesses that are profitable. B. diversify into industries that are growing rapidly. C. spread its business risk across various industries by only acquiring firms that are strong competitors in their respective industries. D. diversify into businesses that can perform better under a single corporate umbrella than they could perform operating as independent, stand-alone businesses. E. diversify into businesses that have either key success factors or value chains that are similar to its present businesses.
D
Two important negatives of unrelated diversification are: A. underemphasizing the importance of resource fit and the strong likelihood of diversifying into businesses that top management does NOT know all that much about. B. insufficient cash flows to finance so many different lines of business and a lack of uniformity among the strategies of the businesses it has diversified into. C. volatile sales and profits and making the mistake of diversifying into too many cash cow businesses. D. the difficulties of competently managing a set of fundamentally different businesses and having a very limited competitive advantage potential that cross-business strategic fit provides. E. overinvesting in the achievement of economies of scope and the difficulties of achieving a good mix of cash cow and cash hog businesses.
D
What is the difference between economies of scale and economies of scope? A. Scale refers to the magnitude or size of the operation, while scope refers to the reach of defined savings within the value chain. B. Scale refers to the extent of change, while scope refers to the possibilities of change. C. Scale is about dimensions, while scope is about the capacity available for production capabilities. D. Scale refers to cost savings that accrue directly from larger-sized operations, while scope stems directly from strategic fit along the value chains of related businesses. E. Scale and scope mean the same thing and the only difference is the extent of cost savings accrued from unrelated businesses in each.
D
A weighted industry attractiveness assessment is generally analytically superior to an unweighted assessment because: A. a weighted ranking identifies which industries offer the best/worst long-term profit prospects. B. an unweighted ranking doesn't discriminate between strong and weak industry driving forces and industry competitive forces. C. it does a more accurate job of singling out which industry key success factors are the most important. D. an unweighted ranking doesn't help identify which industries have the easiest and hardest value chains to execute. E. the various measures of attractiveness are not likely to be equally important in determining overall attractiveness.
E
Checking the competitive advantage potential of cross-business strategic fits in a diversified company involves evaluating the extent to which sister businesses present opportunities: A. to combine the performance of certain cross-business activities and thereby reduce costs. B. to transfer skills, technology, or intellectual capital from one business to another. C. for the company's different businesses to share use of a well-respected brand name. D. for sister businesses to collaborate in creating valuable new competitive capabilities. E. to create a positive image in the industry irrespective of the financial performance of its businesses.
E
Diversification into a new industry cannot be considered a success unless it results in: A. easing the means of entry. B. boosting performance of the existing business. C. lowered cost of entry. D. enhanced industry attractiveness. E. enhanced shareholder value.
E
What hurdles are present in calculating industry attractiveness scores? A. deciding on the appropriate weights for the attractiveness measures B. different analysts use different weights for the different attractiveness measures C. gaining sufficient command of the industry to assign more accurate and objective ratings D. deciding the impact of strategic fits to unrelated and related diversification E. deciding whether a business is related or unrelated
E
Which of the following is a diversified business with one major "core" business and a collection of small related or unrelated businesses? A. broadly diversified enterprise B. narrowly diversified enterprise C. multibusiness enterprise D. high-compensation/low-risk enterprise E. dominant business enterprise
E
Which of the following rationales for pursuing unrelated diversification is likely to increase shareholder value? A. to reduce risk by way of spreading the company's investments over a set of truly diverse industries B. to enable a company to achieve rapid or continuous growth C. to chance that market downtrends in some of the company's businesses will be partially offset by cyclical upswings in its other businesses D. to provide benefits to managers such as high compensation and reduced unemployment risk E. to restructure an underperforming business
E
