GEB 4890 - Business Strategy Chapter 8

In calculating industry attractiveness scores,

competition intensity should be heavily weighted.

The three strategy options for pursuing diversification are

diversifying into related businesses. diversifying into unrelated businesses. diversifying into both related and unrelated businesses.

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

rank the performance potential of the businesses.

Strategic fit

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

Steps involved in assessing the positive and negative aspects of a diversified company's strategy and determining how to improve performance include which of the following?

Determining the competitive strength of the company's business units. Determining if the firm's resources fit the requirements of its current business lineup. Evaluating the individual and group attractiveness of the industries the company has diversified into.

Which of the following statements are true about a successful diversification effort?

It must add long-term economic value for shareholders. It must give shareholders value that they cannot get by purchasing different stocks on their own.

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

an unrelated diversification strategy

In answering the question of comparative costs, acquisition transaction costs include which of the following?

negotiating a price evaluating potential targets identifying potential targets

Which of the following are drawbacks of acquisition?

There can be high integration costs. Integration of the company into the existing firm can be time consuming. There are often excessive premiums.

A diversified company's base can be broadened by

acquiring more businesses and building positions in new industries.

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

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

In an unrelated diversification strategy, managers must make sure acquisition candidates have which of the following characteristics?

They meet corporate targets for profitability and return on investment. They are big enough to significantly contribute to the parent company's bottom line. They are in an industry with attractive growth potential.

Which of the following are among the four questions that need to be asked when determining how best to enter a new business?

Which is the least costly mode of entry, given the company's objectives? Is speed an important factor in the firm's chances for successful entry? Are there entry barriers to overcome?

Which of the following are questions to ask when evaluating industry attractiveness?

Which of the company's industries are most attractive? How appealing is the whole group of industries in which the company has invested? Does each industry the company has diversified into represent a good market for the company to be in?

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

a parenting advantage.

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

acquisition.

The decision to diversify should begin with

an economic justification.

Cross-business strategic fit can exist

at various points along the value chain. in supply chain activities. in customer service activities.

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

better-off test.

Strategic analysis of diversified companies

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

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

can be placed into four broad categories of action.

Unrelated diversification strategy

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

A company

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

The portfolio approach to financial fit revolves around the fact that

cash flow and investment characteristics vary among businesses.

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

speed

A company has good financial resource fit if

the company can adequately fund all its businesses while keeping a good credit rating. each individual business sufficiently contributes to meeting companywide performance targets. the company can create enough internal cash flow to provide the capital required by its businesses.

It makes sense to stick closely with a diversified company's present business lineup when

the company's existing businesses match the company's diversification strategy. the existing business lineup provides ample opportunity for growth. the current lineup reliably creates economic value for shareholders.

Businesses are said to be related when

their value chains exhibit competitively important cross-business commonalities.

The nine-cell attractiveness-strength matrix makes a case for a company to take which of the following actions?

to be cautious about investing in companies located intermediately on the grid to remove resources from ventures that are low in attractiveness and strength unless they offer superior profit or cash flow opportunity to concentrate resources in businesses that possess higher degrees of attractiveness and competitive strength

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

umbrella brands.

Retrenching to a narrower diversification base can include which of the following?

focusing corporate resources on businesses in a few, carefully selected industries getting out of businesses that are competitively weak eliminating businesses that have poor strategic fit

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

general resources.

Quantitative industry-attractiveness scores can be calculated based on

market size and projected growth rate. emerging threats and opportunities. the presence of cross-industry strategic fit.

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

internal capital market.

Which of the following are true concerning the interpretation of industry-attractiveness scores?

If a company's scores are all above 5, it probably operates in an attractive group of industries Industries that score much less than five are unlikely to be attractive. A strongly performing diversified company's primary businesses should be in industries with high growth potential.

Internal development of a new business is a good idea when which of the following conditions are met?

It is cheaper to enter internally than through an acquisition. The parent company has the in-house resources needed to launch the company. There is plenty of time to start the business.

Which of the following statements are true of a nine-cell matrix?

Overall attractiveness and strength scores are used to plot business units, which are displayed as bubbles. The vertical axis is divided into regions for high, medium, and low attractiveness. The horizontal axis is divided into regions for strong, average, and weak competitive strength.

Which of the following statements are true concerning the ranking of a diversified company's business units from best to worst?

The position of different businesses in the nine-cell matrix is a good criteria for identifying high-opportunity and low-opportunity businesses. Future revenue and earnings for fast-growing industries usually look superior to those for slow-growing industries. The rankings help high-level executives prioritize businesses for resource support and capital investment.

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

adhere to the existing business lineup.

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

critical resources and capabilities.

Entering a new business via a joint venture can be useful in which of the following situations?

when diversification entails operations in a foreign country when an opportunity is too complicated or risky for one company to attempt alone when an opportunity in a new industry requires more know-how than one company has alone

Which of the following statements are true concerning the portfolio approach to ensuring financial fit?

Business units in quickly expanding industries are often cash hogs. Cash cows have limited growth but are a valuable financial resource. The portfolio approach relies on the premise that cash flow and investment traits vary among different businesses.

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

a dominant-business enterprise.

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

acquisition.

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

acquisition.

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

comparative cost.

What are the three Tests of Corporate Advantage?

cost of entry test better-off test industry attractiveness test

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

internal development.

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

is especially important when credit is tight.

Determining the competitive value of strategic fit in diversified companies

is important in evaluating their related diversification strategies.

Which of the following are the ways a company can enter a new business?

joint ventures internal startup acquisition

Examples of strategic fit in manufacturing include

the transfer of expertise in quality control. the consolidation of production into a smaller number of plants. the sharing of cost-efficient production methods.

Restructuring a business

usually occurs when a diversified company acquires a new business that is underperforming. often entails transferring experienced managers to the newly acquired business. generally involves liquidating underutilized assets.

Which of the following statements are true concerning whether a company has sufficient nonfinancial resources?

A company's resources can be overtaxed by making many acquisitions and calling on management to oversee many businesses quickly. The broader the diversification, the greater the concern that corporate executives are overburdened trying to parent too many companies. If a company's strategy is closely tied to moving technologies from existing businesses to new ones, it must develop more resources to supply them.

Which of the following statements are true of unrelated diversification?

A very small number of unanticipated problems or mistakes can have a major negative effect on corporate earnings. Problems can occur when corporate management makes decisions for businesses they do not know well. Most management teams are not capable of effectively managing a diversified group of unrelated businesses.

Which of the following ratings concerning interpretation of competitive-strength scores are correct?

Businesses with ratings below 3.3 are in competitively weak market positions. Business units with ratings above 6.7 are strong market contenders in their industries. Businesses with ratings in the 3.3 to 6.7 range have moderate competitive strength.

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

False

Which of the following are benefits of acquisition?

It allows access to hard-to-find resources and capabilities that work well with those of the acquiring company. It is quicker than trying to launch a new operation. It is a useful way to get over entry barriers, such as building brand awareness.

Which of the following statements are true of specialized resources?

Their value is evident only when they are used in very specific businesses and industries. Their usefulness is limited in applications beyond those which they were created to serve. They are leveraged in related diversification.

Business units with competitive-strength ratings

above 6.7 are strong market contenders in their industries.

Which of the following are terms that refer to diversification by starting a new business subsidiary from scratch?

new venture development internal development corporate venturing

Companies practicing unrelated diversification overwhelmingly enter new businesses by

obtaining an established company.

Businesses with strategic fit in supply chain activities are able to perform better together by

obtaining volume discounts on incoming components. sharing logistical resources. cooperating with common supply chain partners.

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

pass the industry attractiveness test.

The steps involved in creating a diversified company's corporate strategy include

picking new industries to enter and the means for entering them. leveraging cross-business value chain relationships into competitive advantage. establishing investment priorities.

Examples of strategic fit in sales and marketing include

promoting products on the same website. reducing billing costs by using common promotional tie-ins. using a single sales force.

Unrelated diversification

provides very general, low-value resources for the subsidiaries. rarely performs better than the sum of what the individual business units could achieve independently. provides a limited potential for competitive advantage.

Corporate parents effectively contribute to the success of their businesses by

providing general resources that lower their operating costs. utilizing popular umbrella brands.

Which of the following would be misguided reasons for pursuing unrelated diversification?

reducing earnings volatility boosting managerial compensation risk reduction

Factors that can be used to quantify the competitive strengths of a diversified company's business subsidiaries include

relative market share. absolute industry market share. costs relative to competitors' costs.

Diversifying into new industries

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

The broad categories of action for crafting strategic moves to improve a diversified company's overall performance include

sticking closely with the existing business lineup and pursuing opportunities that those businesses present. widening the company's business scope by making new acquisitions in new industries. divesting certain businesses and retrenching to a narrower base of business operations.

For which of the following conditions is restructuring a diversified company's business lineup an attractive course of action?

when the market shares of one or more major business units are decreasing because of superior competition when the interest owed on large debts is greatly reducing profitability when the company has too many businesses in slowly growing or declining industries

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

True

Which of the following are circumstances that indicate a poor fit of nonfinancial resources in a diversified company?

A company's resources are stretched thin in order to assimilate and oversee many new businesses in a short time. A mismatch exists between a diversifying company's competitive assets and the key success factors of an industry into which it is expanding. A core business lacks accumulated resources to deal with the competitive environment of the businesses into which it has diversified.

What questions can be answered by determining the competitive value of strategic fit in diversified companies?

Are the cost savings associated with economies of scope likely to give one or more businesses a cost-based advantage? Will leveraging a potent umbrella brand or corporate image strengthen the businesses and increase sales? How much competitive value will come from the cross-business transfer of skills, technology, or intellectual capital?

Which of the following is true concerning relative market share?

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

Which of the following is true about joint ventures?

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

Diversification is not really viewed as a success unless it

yields added long-term economic value for shareholders.

Which of the following statements are true concerning the cross-business allocation of financial resources by parent companies?

Cross-business allocation can be especially advantageous during times of financial market crises. There is increased opportunity to add shareholder value because managers are privy to internal information unavailable to external financiers. Parent companies can deliver funds that would otherwise be unavailable owing to poor market conditions.

Which of the following statements are true of multibusiness diversification strategies?

Some companies are narrowly diversified around two to five related or unrelated businesses. Some multibusiness enterprises are diversified into unrelated areas but have a group of related businesses within each area. Combination related-unrelated diversification strategies are attractive to companies with a mix of valuable competitive assets.

Choosing how best to enter a new business

depends partially on determining the least costly mode of entry.

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

entry barriers.

Examples of opportunities for strategic fit include

exploiting the common use of a well-known brand name. transferring specialized expertise from the value chain of one business to another. sharing costs between businesses by combining their related value chain activities into a single operation.

Strategic options for allocating company financial resources include which of the following?

funding long-range R&D ventures aimed at opening market opportunities in new or existing businesses making acquisitions to establish positions in new industries or to complement existing businesses investing in ways to strengthen or grow existing businesses

The nine-cell attractiveness-strength matrix

identifies the business strength of businesses. identifies the industry attractiveness of businesses. helps diversified companies allocate resources among their businesses.

In a nine-cell matrix,

industry attractiveness is plotted on the vertical axis. each axis is divided into three regions. competitive strength is plotted on the horizontal axis.

In order to pass the three tests of corporate advantage, executives must

negotiate favorable acquisition prices. diversify into industries where the businesses can produce consistently good earnings and return on investment. do a superior job of corporate parenting via high-level managerial oversight.

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

resource fit.

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

restructure its business lineup.

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

restructuring.

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

retrench to a narrower diversification base.retrench to a narrower diversification base.

Which of the following are strategic options for increasing a corporation's overall success?

retrenching to a narrower scope of diversification by divesting poorly performing businesses sticking closely with the existing business lineup and pursuing opportunities presented by these businesses broadening the scope of diversification by entering additional industries

Unrelated diversification strategies

tend to have more overall failures than successes.

Which of the following are true in using cross-business strategic fit to create gains in profitability and shareholder value?

The more a company's businesses are related, the greater the company's opportunity to turn strategic fit into competitive advantage. It builds shareholder value in ways that are not possible through stock ownership in a variety of industries. Cross-business strategic fit benefits are possible only through a strategy of related diversification.

Which of the following statements are true of economies of scope?

They are available only to firms engaging in related diversification. result from strategic fit among related businesses, allowing the sharing of resources among diversified businesses. They are a distinct concept from economies of scale.

Which of the following are true of related businesses?

They can be combined to perform better than the sum of the individual businesses. They have similar resources and capabilities. They have compatible value chain activities.

Which of the following is true of economies of scope?

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

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

True

In order for a diversified company to perform well,

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