MGMT 490 - CH 8

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?

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

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.

Which of the following statements are true of specialized resources?

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

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

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

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.

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

-risk reduction -boosting managerial compensation -reducing earnings volatility

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. -divesting certain businesses and retrenching to a narrower base of business operations. -widening the company's business scope by making new acquisitions in new industries.

A company has good financial resource fit if

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

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 current lineup reliably creates economic value for shareholders. -the existing business lineup provides ample opportunity for growth.

__________ could potentially be achieved through cost reductions stemming from strategic fit along the value chains of ITT's businesses.

Economies of scope

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

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

Barbara Rentler, CEO of Ross Stores, Inc. (parent company of Ross Dress for Less and dd's Discount retail chains) is considering broadening her company's business scope, by building positions in new related or unrelated businesses. Ms. Rentler would be advised to pursue a diversification strategy for all of the following reasons except

Ross's top management wants to increase its compensation.

What is the difference between economies of scale and economies of scope?

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.

How would you explain the difference between a one-business company and a diversified company?

The first uses a business-level strategy, while the second uses a set of business strategies and a corporate strategy.

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.

Which of the following is true of economies of scope?

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

Corporate Strategy helps managers understand which strategy question?

Where should the firm compete?

Which of the following is a diversified business with one major "core" business and a collection of small related or unrelated businesses?

a dominant business enterprise

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

a parenting advantage.

Business units with competitive-strength ratings

above 6.7 are strong market contenders in their industries.

A diversified company's base can be broadened by

acquiring more businesses and building positions in new industries.

Economies of scope

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

Michelle Buck, CEO of the Hershey Company has hired you as a consultant to assess her diversified company's business units for cross-business competitive advantage potential. Your assessment would not normally involve ascertaining the extent to which Hershey's business units

are making maximum use of the parent company's competitive advantages.

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

Diversifying into new businesses can be considered a success only if it

builds shareholder value.

Huawei has hired you to calculate its relative share of the global mobile phone market. How would you conduct this analysis?

by dividing Huawei's percentage share of total industry sales volume by the percentage share held by its largest rival.

A portfolio business that generates 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 is commonly called a

cash cow

The portfolio approach to financial fit revolves around the fact that

cash flow and investment characteristics vary among businesses.

ITT's portfolio of business units reflects a strategy of

combination of related and unrelated diversification.

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

The options for allocating a diversified company's financial resources include all of the following except

decreasing dividend payments and/or selling shares of stock.

The procedure for evaluating a diversified company's strategy does not entail

determining the degree of risk involved with each business unit.

On June 26, 2018, CEO John Flannery of General Electric Company (GE) announced that the company planned to spin off its healthcare business and divest its stake in oil-services firm Baker Hughes. The slimmed-down company would re-focus on jet engines, power plants and renewable energy. What was not an important consideration for CEO Flannery when evaluating the merits of this diversified company's new strategy?

determining which business units were cash cows and which ones were cash hogs, and then evaluating how soon GE's cash hogs could be transformed into cash cows

The task of crafting a company's overall corporate strategy for a diversified company encompasses all of the following except

divesting well-performing businesses.

A sound justification for unrelated diversification is that

doing so can deliver enhanced shareholder value if an undervalued company can be purchased at a bargain price

Cost reductions stemming from strategic fit along the value chains of related businesses can result in

economies of scope.

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.

Assessing the competitive advantage potential of cross-business strategic fit involves

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

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.

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

false

When Disney acquired Marvel Comics on August 31, 2009, for $4.24 billion, management needed to determine whether or not there were opportunities to strengthen the business, which includes all of the following considerations, except

forcing cultural independence, operating diversity, and sophisticated analytical responsibility on the businesses to ensure compatibility with the corporate overhead identity.

A "cash hog" type of business

generates cash flows that are too small to fully fund its operations and growth.

Combination related-unrelated diversification strategies have particular appeal for companies

having a mix of valuable competitive assets, covering the spectrum from generalized to special resources and capabilities.

The strategic options to improve a diversified company's overall performance do not include which of the following categories of actions?

increasing dividend payments to shareholders and/or repurchasing shares of the company's stock

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

is especially important when credit is tight.

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

mostly unrelated diversification.

Companies practicing unrelated diversification overwhelmingly enter new businesses by

obtaining an established company.

A big advantage of related diversification is that it

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.

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

parenting advantage.

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

pass the industry attractiveness test.

The one factor that company executives need not worry about when their company is managing many diverse, unrelated firms is to

pick business-unit heads having the requisite combination of managerial skills and know-how to motivate people.

Which of the following would not generate a strategic fit among ITT's business units?

provide low-level oversight and make available minimal corporate resources

Corporate restructuring strategies

radically alter the business lineup by divesting poor performers and acquiring new promising 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.

Moves to improve a diversified company's overall performance do not include

retaining weak-performing businesses in order to sustain a wide base of business operations.

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

speed

The major benefit of a related diversification strategy is

that it offers potential 1 + 1 = 3 or "synergy" benefits because of valuable cross-business relationships among the value chains of the corporation's different businesses

The two biggest drawbacks or disadvantages of unrelated diversification are

the difficulties of competently managing many different businesses and being without the added source of competitive advantage that cross-business strategic fit provides.

Coca-Cola's August 2018 move to acquire Costa Coffee, an international coffee chain, meant that the acquired company had to first pass which three Tests of Corporate Advantage?

the industry attractiveness test, the cost-of-entry test, and the better-off (synergy) test

The transaction costs of completing a business agreement or deal of some sort, over and above the price of the deal, can include all of the following except

the premium cost.

As a rule, the key indicators of industry attractiveness, for all the industries represented in a diversified company's business portfolio, should not be measured on such attractiveness factors as

the utility of the products for consumers from all age groups.

Related corporate diversification does not necessarily provide opportunities

to exploit a first-mover strategy and capture valuable financial fits.

The drawbacks of an unrelated diversification strategy include

very demanding managerial requirements and limited competitive advantage potential.

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

Unrelated diversification requires that company managers spend much time and effort screening acquisition candidates using all of the following criteria except

whether the business has a cross-business strategic fit

Diversification is not really viewed as a success unless it

yields added long-term economic value for shareholders.

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.

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.

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.

strategic fit

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

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

can be placed into four broad categories of action.

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

general resources

Unrelated diversification strategies

tend to have more overall failures than successes.

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

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

true

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

-acquisition -joint ventures -internal startup

Which of the following statements are true of unrelated diversification?

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

Restructuring a business

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

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.

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.

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? -How much competitive value will come from the cross-business transfer of skills, technology, or intellectual capital? -Will leveraging a potent umbrella brand or corporate image strengthen the businesses and increase sales?

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. -The portfolio approach relies on the premise that cash flow and investment traits vary among different businesses. -Cash cows have limited growth but are a valuable financial resource.

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

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

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

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

Which of the following are drawbacks of acquisition?

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

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 a useful way to get over entry barriers, such as building brand awareness. -It is quicker than trying to launch a new operation.

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

-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. -The more a company's businesses are related, the greater the company's opportunity to turn strategic fit into competitive advantage.

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

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

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

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

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

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

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

-The rankings help high-level executives prioritize businesses for resource support and capital investment. -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.

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

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

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

-They are available only to firms engaging in related diversification. -They 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 have compatible value chain activities. -They can be combined to perform better than the sum of the individual businesses. -They have similar resources and capabilities.

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 strategic options for increasing a corporation's overall success?

-broadening the scope of diversification by entering additional industries -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

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

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

The three strategy options for pursuing diversification are

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

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

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

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

-evaluating potential targets -negotiating a price -identifying potential targets

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

Cross-business strategic fit can exist

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

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.

What are the three Tests of Corporate Advantage?

-industry attractiveness test -better-off test -cost of entry test

Quantitative industry-attractiveness scores can be calculated based on

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

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

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

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

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

-relative market share. -costs relative to competitors' costs. -ability to match or beat rivals on key product attributes.

Examples of strategic fit in manufacturing include

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

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

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

Examples of opportunities for strategic fit include

-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. -exploiting the common use of a well-known brand name.

Examples of strategic fit in sales and marketing include

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

Corporate parents effectively contribute to the success of their businesses by

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

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

-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 -when diversification entails operations in a foreign country

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 company has too many businesses in slowly growing or declining industries -when the interest owed on large debts is greatly reducing profitability

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

acquisition

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.

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 decision to diversify should begin with

an economic justification.

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

an unrelated diversification strategy

Strategic analysis of diversified companies

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

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.

Choosing how best to enter a new business

depends partially on determining the least costly mode of entry.

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.

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.

Determining the competitive value of strategic fit in diversified companies

is important in evaluating their related diversification strategies.

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.

Diversifying into new industries

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

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.

Businesses are said to be related when

their value chains exhibit competitively important cross-business commonalities.

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

umbrella brands