MGT 4302 Chapter 8

The task of crafting corporate strategy for a diversified company encompasses
A. picking the new industries to enter and deciding on the means of entry.
B. initiating actions to boost the combined performance of the businesses the firm has entered.
C. pursuing opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantage.
D. steering corporate resources into the most attractive business units.
E. All of these choices are correct.

E. All of these choices are correct.

Which one of the following is not one of the elements of crafting corporate strategy for a diversified company?
A. picking new industries to enter and deciding on the means of entry
B. choosing the appropriate value chain for each business the company has entered
C. pursuing opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantage
D. steering corporate resources into the most attractive business units
E. initiating actions to boost the combined performance of the businesses the firm has entered

B. choosing the appropriate value chain for each business the company has entered

Diversification merits strong consideration whenever a single-business company
A. has integrated backward and forward as far as it can.
B. faces diminishing market opportunities and stagnating sales in its principal business.
C. has achieved industry leadership in its main line of business.
D. encounters declining profits in its mainstay business.
E. faces strong competition and is struggling to earn a good profit.

B. faces diminishing market opportunities and stagnating sales in its principal business.

Diversification ought to be considered when a
A. company's profits are being squeezed, and it needs to increase its net profit margins and return on investment.
B. company lacks sustainable competitive advantage in its present business.
C. company begins to encounter diminishing growth prospects in its mainstay business.
D. company has run out of ways to achieve a distinctive competence in its present business.
E. company is under the gun to create a more attractive and cost-efficient value chain.

C. company begins to encounter diminishing growth prospects in its mainstay business.

Diversifying into new businesses can be considered a success only if it
A. results in increased profit margins and bigger total profits.
B. builds shareholder value.
C. helps a company escape the rigors of competition in its present business.
D. leads to the development of a greater variety of distinctive competencies and competitive capabilities.
E. helps the company overcome the barriers to entering additional foreign markets.

B. builds shareholder value.

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. diversify into businesses that can perform better under a single corporate umbrella than they could perform operating as independent, stand-alone businesses.

The three tests for judging whether a particular diversification move can create value for shareholders are the
A. industry 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. attractiveness test, the cost-of-entry test, and the better-off test.

To test whether a particular diversification move has good prospects for creating added shareholder value, corporate strategists should use the
A. profit test, the competitive strength test, and the industry attractiveness test.
B. better-off test, the competitive advantage test, and the profit expectations test.
C. barrier to entry test, the competitive advantage test, and the stock price effect test.
D. strategic fit test, the industry attractiveness test, and the dividend effect test.
E. the industry attractiveness test, the cost-of-entry test, and the better-off test.

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

The attractiveness test for evaluating whether diversification into a particular industry is likely to build shareholder value involves determining whether
A. conditions in the target industry allow for profits and return on investment that is equal to or better than that of the company's present business(es).
B. the potential diversification move will boost the company's competitive advantage in its existing business.
C. shareholders will view the contemplated diversification move as attractive.
D. key success factors in the target industry are attractive.
E. there are attractive strategic fits between the value chains of the company's present businesses and the value chain of the new business it is considering entering.

A. conditions in the target industry allow for profits and return on investment that is equal to or better than that of the company's present business(es).

The cost-of-entry test for evaluating whether diversification into a particular industry is likely to build shareholder value involves determining whether
A. a newly entered business presents opportunities to cost-efficiently transfer competitively valuable skills or technology from one business to another.
B. the cost to enter the target industry will strain the company's credit rating.
C. a company's costs to enter the target industry are so high that the potentials for good profitability and return on investment are eroded.
D. the cost to enter the target industry will raise or lower the company's total profits.
E. the cost a company incurs to enter the target industry will raise or lower production costs.

C. a company's costs to enter the target industry are so high that the potentials for good profitability and return on investment are eroded.

The better-off test for evaluating whether a particular diversification move is likely to generate added value for shareholders involves assessing whether the diversification move
A. will make the company better off because it will produce a greater number of core competencies.
B. will make the company better off by improving its balance sheet strength and credit rating.
C. will make the company better off by spreading shareholder risks across a greater number of businesses and industries.
D. offers potential for the company's existing businesses and new businesses to perform better together under a single corporate umbrella.
E. will benefit shareholders due to gains in earnings per share and faster stock price appreciation.

D. offers potential for the company's existing businesses and new businesses to perform better together under a single corporate umbrella.

Which of the following statements about corporate diversification is incorrect?
A. Creating added value for shareholders via diversification requires building a multibusiness company where the whole is greater than the sum of its parts.
B. Diversification moves that satisfy all three diversification tests have the greatest potential to grow shareholder value over the long term.
C. The more attractive an industry's prospects are for growth and good long-term profitability, the less expensive it can be to enter.
D. Diversification cannot be considered a success unless it results in added shareholder value—value that shareholders cannot capture for themselves by spreading their investments across the stocks of companies in different industries.
E. Shareholder value is not created by diversification unless it passes the "better off" or "1 + 1 = 3 test."

C. The more attractive an industry's prospects are for growth and good long-term profitability, the less expensive it can be to enter.

Acquisition of an existing business is an attractive strategy option for entering a promising new industry because it
A. is an effective way to hurdle entry barriers, is usually quicker than trying to launch a new start-up operation, and allows the acquirer to move directly to the task of building a strong position in the target industry.
B. is less expensive than launching a new start-up operation, thus passing the cost-of-entry test.
C. is a less risky way of passing the attractiveness test.
D. is more likely to result in passing the shareholder value test, the profitability test, and the better-off test.
E. offers the prospect of gaining an immediate competitive advantage in the new industry and thus helps ensure that the diversification move will pass the competitive advantage test for building shareholder value.

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

Which one of the following is not a factor that makes it appealing to diversify into a new industry by forming an internal start-up subsidiary to enter and compete in the target industry?
A. when internal entry is cheaper than entry via acquisition
B. when a company possesses the skills and resources needed to compete effectively and there is ample time to launch the business
C. when adding new production capacity will not adversely impact the supply/demand balance in the industry
D. when the industry is growing rapidly and the target industry is comprised of several relatively large and well-established firms
E. when incumbent firms are likely to be slow or ineffective in combating a new entrant's efforts to crack the market

D. when the industry is growing rapidly and the target industry is comprised of several relatively large and well-established firms

Diversifying into a new industry by forming a new internal subsidiary to enter and compete in the target industry is attractive when
A. all of the potential acquisition candidates are losing money.
B. it is impractical to outsource most of the value chain activities that have to be performed in the target business/industry.
C. there is ample time to launch the new business from the ground up.
D. the company has built up a hoard of cash with which to finance a diversification effort.
E. none of the companies already in the industry is an attractive strategic alliance partner.

C. there is ample time to launch the new business from the ground up.

A joint venture is an attractive way for a company to enter a new industry when
A. the firm is missing some essential skills or capabilities or resources and needs a partner to supply the missing expertise and competencies or fill the resource gaps.
B. the firm needs access to economies of scope and good financial fits in order to be cost-competitive.
C. it is uneconomical for the firm to achieve economies of scope on its own initiative.
D. the firm has no prior experience with diversification.
E. the firm has not built up a hoard of cash with which to finance a diversification effort.

A. the firm is missing some essential skills or capabilities or resources and needs a partner to supply the missing expertise and competencies or fill the resource gaps.

A joint venture is an attractive way for a company to enter a new industry when
A. the pool of attractive acquisition candidates in the target industry is relatively small.
B. the firm needs better access to economies of scope in order to be cost-competitive.
C. the industry is growing slowly and adding too much capacity too soon could create oversupply conditions.
D. the firm has no prior experience with diversification and the industry is on the verge of explosive growth.
E. the opportunity is too risky or complex for the company to pursue alone or when the company lacks some important resources or competencies and needs a partner to supply them.

E. the opportunity is too risky or complex for the company to pursue alone or when the company lacks some important resources or competencies and needs a partner to supply them.

The essential requirement for different businesses to be "related" is that
A. their value chains possess competitively valuable cross-business relationships.
B. the products of the different businesses are bought by much 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 that they employ both entail economies of scale.

A. their value chains possess competitively valuable cross-business relationships.

Businesses are said to be "related" when
A. they have several key suppliers and several key customers in common.
B. their value chains have the same number of primary activities.
C. their products are both sold through retailers.
D. their value chains possess competitively valuable cross-business relationships that present opportunities to transfer skills and capabilities from one business to another, share resources or facilities to reduce costs, share use of a well-known brand name, and/or create mutually useful resource strengths and capabilities.
E. many consumers buy the products/services of both businesses.

D. their value chains possess competitively valuable cross-business relationships that present opportunities to transfer skills and capabilities from one business to another, share resources or facilities to reduce costs, share use of a well-known brand name, and/or create mutually useful resource strengths and capabilities.

Which of the following is an important appeal of a related diversification strategy?
A. It represents an effective way of capturing valuable financial fit benefits.
B. It offers opportunities to transfer skills, expertise, technical know-how, or other capabilities from one business to another.
C. It offers significant opportunities to strongly differentiate a company's product offerings from those of rivals.
D. It is more likely to pass the cost-of-entry test and the capital gains test than unrelated diversification.
E. It is typically more profitable than unrelated diversification, which is a major factor in helping related diversification pass the attractiveness test.

B. It offers opportunities to transfer skills, expertise, technical know-how, or other capabilities from one business to another.

One strategic fit-based approach to related diversification would be to
A. diversify into new industries that present opportunities to combine value chain activities of two or more businesses to lower costs.
B. diversify into those industries where the same kinds of driving forces and competitive forces prevail, thus allowing use of much the same competitive strategy in all of the businesses a company is in.
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. diversify into new industries that present opportunities to combine value chain activities of two or more businesses to lower costs.

Opportunities for cross-business strategic fit exist
A. in R&D and technology activities only.
B. in supply chain activities only.
C. in sales and marketing activities only.
D. in production and distribution activities only.
E. anywhere along the respective value chains of related businesses; no one place is best.

E. anywhere along the respective value chains of related businesses; no one place is best.

Cross-business strategic fits can be derived from
A. transferring competitively valuable resources, expertise, technological know-how, or other capabilities from one business to another.
B. cost sharing between separate businesses whose activities can be combined.
C. brand sharing between business units that have common customers or that draw upon common core competencies.
D. sharing common administrative and customer service infrastructure.
E. All of these choices are correct.

E. All of these choices are correct.

Economies of scope
A. are cost reductions that flow from cost-saving strategic fits along the value chains of related businesses in the business lineup of a multibusiness corporation.
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. are cost reductions that flow from cost-saving strategic fits along the value chains of related businesses in the business lineup of a multibusiness corporation.

What makes related diversification an attractive strategy is the
A. ability to broaden the company's product line.
B. opportunity to convert the competitive advantage potential into 1 + 1 = 3 gains in shareholder value.
C. potential for improving the stability of the company's financial performance.
D. ability to serve a broader spectrum of buyer needs.
E. added capability it provides in overcoming the barriers to entering foreign markets.

B. opportunity to convert the competitive advantage potential into 1 + 1 = 3 gains in shareholder value.

A diversified company that leverages the strategic fits of its related businesses into competitive advantage
A. has a distinctive competence in its related businesses.
B. has a clear path to achieving 1 + 1 = 3 synergy gains in shareholder value.
C. has a clear path to global market leadership in the industries where it has related businesses.
D. passes the value chain test and the profit expectations test for building shareholder value.
E. achieves economies of scale and passes the reduced-costs test for crafting a diversification strategy capable of creating added shareholder value.

B. has a clear path to achieving 1 + 1 = 3 synergy gains in shareholder value.

When evaluating strategic fit benefits that related diversification can deliver, one must keep in consideration a number of factors. Which one is not relevant?
A. Shareholder value stemming from a diversified business cannot be replicated by simply owning a diversified portfolio of stocks.
B. The capture of cross-business strategic fits benefits is possible only through related diversification.
C. Cross-business strategic fit benefits are not automatically realized; the benefits materialize only after management has successfully pursued internal actions to capture them.
D. Shareholder value is created when the diversified company's profitability exceeds expectations.
E. Related diversification is the process of holding the stock of many businesses in a portfolio.

E. Related diversification is the process of holding the stock of many businesses in a portfolio.

The essential requirement for different businesses to be "related" is that
A. their value chains possess competitively valuable cross-business fit relationships.
B. the products of the different businesses are bought by much 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 that they employ both entail economies of scale.

A. their value chains possess competitively valuable cross-business fit relationships.

A strategy of diversifying into unrelated businesses
A. is aimed at achieving good financial fit (whereas related diversification aims at good strategic fit).
B. is the best way for a company to pass the attractiveness test in choosing which types of businesses/industries to enter.
C. discounts the importance of strategic fit and instead focuses on building and managing a group of businesses in attractive industries that can acquired on financial terms that allow for acceptable returns on investment.
D. concentrates on diversifying into businesses where a company can leverage use of a well-known brand name in ways that create added value for shareholders.
E. generally offers more competitive advantage potential than related diversification.

C. discounts the importance of strategic fit and instead focuses on building and managing a group of businesses in attractive industries that can acquired on financial terms that allow for acceptable returns on investment.

Different businesses are said to be "unrelated" when
A. they are in different industries.
B. the products of the different businesses are not bought by the same types of buyers or sold in the same types of retail stores.
C. the products of the different businesses satisfy different buyer needs.
D. the businesses have different supply chains and different types of suppliers.
E. there is an absence of competitively valuable strategic fits between their respective value chains.

E. there is an absence of competitively valuable strategic fits between their respective value chains.

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 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. any company that can be acquired on good financial terms and has satisfactory growth and earnings potential represents a good acquisition and a good business opportunity.

With an unrelated diversification strategy, the types of companies that make particularly attractive acquisition targets are
A. financially distressed 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 are employing the same basic type of competitive strategy as the parent corporation's existing businesses.

A. financially distressed 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.

One of the suggested advantages of an unrelated diversification strategy is that it
A. expands a firm's competitive advantage opportunities to include a wider array of businesses.
B. spreads the stockholders' risks across a group of truly diverse businesses.
C. increases strategic fit opportunities and the potential for a 1 + 1 = 3 outcome on the bottom line.
D. results in having more cash cow businesses than cash hog businesses.
E. facilitates capturing the financial fits among sister businesses (as compared to a strategy of related diversification).

B. spreads the stockholders' risks across a group of truly diverse businesses.

Which of the following is not one of the suggested appeals of an unrelated diversification strategy?
A. ability to spread business risk over truly diverse businesses (as compared to related diversification, which is limited to spreading risk only among businesses with strategic fit)
B. ability to employ the company's financial resources to maximum advantage by investing in whatever industries/businesses offer the best profit prospects
C. ability to capture cross-business strategic fit with which to capture added competitive advantage and few managerial demands
D. potential for achieving somewhat more stable corporate sales and profits over the course of economic upswings and downswings (to the extent the company diversifies into businesses whose ups and downs tend to occur at different times)
E. potential to grow shareholder value by investing in bargain-priced companies with big upside profit potential

C. ability to capture cross-business strategic fit with which to capture added competitive advantage and few managerial demands

The success of unrelated diversification is contingent upon management's ability to
A. acquire new businesses that utilize much the same technology as existing businesses.
B. divest businesses whose competitive strategies do not match the overall competitive strategy of the corporation.
C. acquire new businesses having attractive distribution-related and customer-related strategic fits with existing businesses.
D. identify bargain-priced companies with big upside potential and then turn around their operations quickly with the aid of the parent company's financial resources and managerial know-how.
E. identify potential new acquisition candidates that are cash cows (as opposed to cash hogs).

D. identify bargain-priced companies with big upside potential and then turn around their operations quickly with the aid of the parent company's financial resources and managerial know-how.

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. demanding managerial requirements and the limited competitive advantage potential that cross-business strategic fit provides.
D. ending up with too many cash hog businesses and too much diversity among the competitive strategies of the businesses the company 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. demanding managerial requirements and the limited competitive advantage potential that cross-business strategic fit provides.

The two biggest drawbacks or disadvantages 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 the company 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. 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.

The one factor that company executives need not worry about when their company is managing many diverse, unrelated firms is
A. staying abreast of what's happening in each industry and subsidiary.
B. picking business-unit heads who have the requisite combination of managerial skills and know-how to motivate people.
C. understanding the true value of strategic investment proposals by business-unit managers.
D. knowing what to do if a business unit stumbles.
E. "managing by the numbers"—that is, keeping a close track on the financial and operating results of each subsidiary.

B. picking business-unit heads who have the requisite combination of managerial skills and know-how to motivate people.

What rationales for unrelated diversification are not likely to increase shareholder value?
A. reduce risk by spreading the company's investments over a set of truly diverse industries
B. enable a company to achieve rapid or continuous growth
C. stabilize earnings; that is, market downtrends in some of the company's businesses will be partially offset by cyclical upswings in its other businesses
D. provide benefits to managers such as high compensation and reduction in employment risk
E. all of these choices are correct.

E. all of these choices are correct.

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. dominant business enterprise

The procedure for evaluating the pluses and minuses of a diversified company's strategy includes
A. assessing the attractiveness of the industries the company has diversified into.
B. assessing the competitive strength of each business the company has diversified into.
C. ranking the performance prospects of the various businesses from best to worst and determining the priorities for resource allocation.
D. evaluating the extent of cross-business strategic fits and checking whether the firm's resources fit the needs of the various businesses the company has diversified into.
E. All of these choices are correct.

E. All of these choices are correct.

Which of the following is not a major consideration in evaluating the pluses and minuses of a diversified company's strategy?
A. checking whether the company's resources fit the requirements of its present business lineup
B. scrutinizing each industry/business to determine where driving forces are strongest/weakest and how many profitable strategic groups the company has diversified into
C. 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
D. evaluating the extent of cross-business strategic fits
E. assessing the competitive strength of each business the company has diversified into

B. scrutinizing each industry/business to determine where driving forces are strongest/weakest and how many profitable strategic groups the company has diversified into

A comprehensive evaluation of the group of businesses a company has diversified into involves
A. evaluating the attractiveness of industries the company has diversified into and the competitive strength of each of its business units.
B. evaluating the strategic fits and resource fits among the various sister businesses.
C. ranking the performance prospects of the businesses from best to worst and determining what the corporate parent's priorities should be in allocating resources to its various businesses.
D. using the results of the prior analytical steps as a basis for crafting new strategic moves to improve the company's overall performance.
E. All of these choices are correct.

E. All of these choices are correct.

As a rule, all the industries represented in a diversified company's business portfolio should be judged on such attractiveness factors as
A. market size and projected growth rate.
B. emerging opportunities and threats, the intensity of competition, and the degree of industry uncertainty and business risk.
C. resource requirements and the presence of cross-industry strategic fits.
D. seasonal and cyclical factors, industry profitability, and whether an industry has significant social, political, regulatory, and environmental problems.
E. All of these choices are correct.

E. All of these choices are correct.

Which of the following is not generally something that ought to be considered in evaluating the attractiveness of a diversified company's business makeup?

A. market size and projected growth rate, industry profitability, and the intensity of competition
B. industry uncertainty and business risk
C. frequency with which strategic alliances and collaborative partnerships are used in each industry, the extent to which firms in the industry utilize outsourcing, and whether the industries a company has diversified into have common key success factors
D. seasonal and cyclical factors, resource requirements, and whether an industry has significant social, political, regulatory, and environmental problems
E. presence of cross-industry strategic fits

C. frequency with which strategic alliances and collaborative partnerships are used in each industry, the extent to which firms in the industry utilize outsourcing, and whether the industries a company has diversified into have common key success factors

When industry attractiveness ratings are calculated for each of the industries a multibusiness company has diversified into, the results help indicate
A. which industries appear to be the most and least attractive from the standpoint of the company's long-term performance.
B. which industries have attractive key success factors and which have unattractive key success factors.
C. which industries have the biggest economies of scale and which have the greatest economies of scope and the overall potential for cost reduction in the industries as a group.
D. which industries are most attractive from the standpoint of long-term growth and the growth prospects of all the industries as a group.
E. which industries are most attractive from the standpoint of industry driving forces and competitive forces.

A. which industries appear to be the most and least attractive from the standpoint of the company's long-term performance.

When calculating industry attractiveness scores, to produce a valid response it is necessary to
A. ensure the appropriate weights are assigned to each measure and that the preparer has sufficient knowledge to rate the industry on each attractiveness measure.
B. ensure the weights are assigned evenly so as not to bias the attractiveness scores.
C. ensure at least three companies within the industry are clearly well-understood to ensure validated scores.
D. be prepared to make an educated guess if the available information is skimpy.
E. All of these choices are correct.

A. ensure the appropriate weights are assigned to each measure and that the preparer has sufficient knowledge to rate the industry on each attractiveness measure.

Assessments of how a diversified company's subsidiaries compare in competitive strength should be based on such factors as
A. vulnerability to seasonal and cyclical downturns, vulnerability to driving forces, and vulnerability to fluctuating interest rates and exchange rates.
B. relative market share, ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors, and ability to benefit from strategic fits with sister businesses.
C. the appeal of its strategy, relative number of competitive capabilities, the number of products in each businesses product line, which businesses have the highest/lowest market shares, and which businesses earn the highest/lowest profits before taxes.
D. the ability to hurdle barriers to entry, value chain attractiveness, and business risk.
E. cost reduction potential, customer satisfaction potential, and comparisons of annual cash flows from operations.

B. relative market share, ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors, and ability to benefit from strategic fits with sister businesses.

The value of determining the relative competitive strength of each business a company has diversified into is to
A. have a quantitative basis for identifying which businesses have large/small competitive advantages or competitive disadvantages vis-à-vis the rivals in their respective industries.
B. have a quantitative basis for rating them from strongest to weakest in terms of contributing to the corporate parent's revenue growth.
C. compare resource strengths and weaknesses, business by business.
D. have a quantitative basis for rating them from strongest to weakest in contending for market leadership in their respective industries.
E. have a quantitative basis for rating them from strongest to weakest in terms of contributing to the corporate parent's profitability.

D. have a quantitative basis for rating them from strongest to weakest in contending for market leadership in their respective industries.

The basic purpose of calculating competitive strength scores for each of a diversified company's business units is to
A. rank the business unit from best to worst in terms of potential for cost reduction and profit margin improvement.
B. provide a quantitative measure of the overall market strength and competitive standing for each business unit.
C. determine which business unit has the greatest number of resource strengths, competencies, and competitive capabilities, and which one has the least.
D. determine which one has the biggest market share and is growing the fastest.
E. rank each business unit's strategy from best to worst.

B. provide a quantitative measure of the overall market strength and competitive standing for each business unit.

The Nine-Cell Industry Attractiveness-Competitive Strength Matrix
A. is useful for helping decide which businesses should have high, average, and low priorities in allocating corporate resources.
B. indicates which businesses are cash hogs and which are cash cows.
C. pinpoints what strategies are most appropriate for businesses positioned in the three top cells of the matrix but is less clear about the best strategies for businesses positioned in the bottom six cells.
D. identifies which sister businesses have the greatest strategic fit.
E. indicates the relative size of the businesses.

A. is useful for helping decide which businesses should have high, average, and low priorities in allocating corporate resources.

The most important strategy-making guidance that comes from drawing a Nine-Cell Industry Attractiveness-Competitive Strength Matrix is
A. which businesses in the portfolio have the most potential for strategic fit and resource fit.
B. why cash cow businesses are more valuable than cash hog businesses.
C. that corporate resources should be concentrated on those businesses enjoying both a higher degree of industry attractiveness and competitive strength and that businesses having low competitive strength in relatively unattractive industries should be looked at for possible divestiture.
D. which businesses have the biggest competitive advantages and which ones confront serious competitive disadvantages.
E. which businesses are in industries with profitable value chains and which are in industries with money-losing value chains.

C. that corporate resources should be concentrated on those businesses enjoying both a higher degree of industry attractiveness and competitive strength and that businesses having low competitive strength in relatively unattractive industries should be looked at for possible divestiture.

In analyzing the Nine-Cell Industry Attractiveness-Competitive Strength Matrix, those businesses occupying the three cells in the lower right corner of the matrix
A. are typically weak performers and have the lowest claim on corporate resources.
B. typically are prime candidates for divesture.
C. are destined for squeezing out the maximum cash flows.
D. typically have dimmer profit outlooks than those in the middle with medium resource priority.
E. All of these choices are correct.

E. All of these choices are correct.

In a diversified company, the competitive advantage potential of cross-business strategic fit is greater when
A. the business lineup includes a number of cash cows.
B. valuable opportunities exist to transfer skills, technology, or intellectual capital from one business to another, combine the performance of related activities, or share the use of a well-respected brand name across multiple products or service categories.
C. the strategy maps of the various business units converge.
D. businesses included in the corporate portfolio compete in fast-growing industries.
E. competition is less intense and driving forces are relatively weak.

B. valuable opportunities exist to transfer skills, technology, or intellectual capital from one business to another, combine the performance of related activities, or share the use of a well-respected brand name across multiple products or service categories.

Checking a diversified firm's business portfolio for the competitive advantage potential of cross-business strategic fits entails consideration of
A. whether the parent company's competitive advantages are being deployed to maximum advantage in each of its business units.
B. Whether the competitive strategies employed in each business act to reinforce the competitive power of the strategies employed in the company's other businesses.
C. whether the competitive strategies in each business possess good strategic fit with the parent company's corporate strategy.
D. the extent to which there are competitively valuable relationships between the value chains of sister business units and what opportunities they present to reduce costs, share use of a potent brand name, or transfer skills or technology or intellectual capital from one business to another.
E. how compatible the competitive strategies of the various sister businesses are and whether these strategies are properly aimed at achieving the same kind of competitive advantage.

D. the extent to which there are competitively valuable relationships between the value chains of sister business units and what opportunities they present to reduce costs, share use of a potent brand name, or transfer skills or technology or intellectual capital from one business to another.

A diversified company's business units exhibit good resource fit when
A. each business is a cash cow.
B. a company 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 resource strengths.
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 resources the company has available.

B. a company 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 resource strengths.

The businesses in a diversified company's lineup exhibit good resource fit when
A. the resource requirements of each of its businesses exactly match the resources the company has available.
B. its individual businesses add to a company's resource strengths and when it has the resources to adequately support the requirements of its businesses as a group without spreading itself too thin.
C. each business unit generates just enough cash flow annually to fund its own capital requirements and thus does not require cash infusions from the corporate parent.
D. each business unit produces sufficient cash flows over and above what is needed to build and maintain the business, thereby providing the parent company with enough cash to pay shareholders a generous and steadily increasing dividend.
E. there are enough cash cow businesses to support the capital requirements of the cash hog businesses.

B. its individual businesses add to a company's resource strengths and when it has the resources to adequately support the requirements of its businesses as a group without spreading itself too thin

One important dimension of resource fit concerns the potential to generate internal cash flows sufficient to fund capital requirements of its business lineup, termed the firm's
A. internal capital market.
B. debt policy management.
C. Liquidity management.
D. economic value added.
E. All of these choices are correct.

A. internal capital market.

A cash cow type of business
A. generates unusually high profits and returns on equity investment.
B. is so profitable that it has no long-term debt.
C. generates positive cash flows over and above its internal requirements, thus providing a corporate parent with cash flows that can be used for financing new acquisitions, investing in cash hog businesses, funding share buyback programs, and/or paying dividends.
D. is a business with such a strong competitive advantage that it generates big profits, big returns on investment, and big cash surpluses after dividends are paid.
E. has good strategic fit with a cash hog business.

C. generates positive cash flows over and above its internal requirements, thus providing a corporate parent with cash flows that can be used for financing new acquisitions, investing in cash hog businesses, funding share buyback programs, and/or paying dividends.

A cash hog type of business
A. is one that is losing money and requires cash infusions from its corporate parent to continue operations.
B. generates cash flows that are too small to fully fund its operations and growth, and so must receive cash infusions from outside sources to cover working capital and investment requirements.
C. generates negative cash flows from internal operations and thus requires cash infusions from its corporate parent to report a profit.
D. is a business growing so rapidly that it does not have the funds to cover its short- and long-term debt obligations.
E. is one that has more current liabilities than current assets and faces a liquidity crisis due to declining sales revenues and declining profitability.

B. generates cash flows that are too small to fully fund its operations and growth, and so must receive cash infusions from outside sources to cover working capital and investment requirements.

The difference between a cash cow business and a cash hog business is that a cash cow business
A. is making money, whereas a cash hog business is losing money.
B. generates enough profits to pay off long-term debt, whereas a cash hog business does not.
C. generates positive retained earnings, whereas a cash hog business produces negative retained earnings.
D. produces large internal cash flows over and above what is needed to build and maintain the business, whereas the internal cash flows of a cash hog business are too small to fully fund its operating needs and capital requirements.
E. generates very large increases in sales revenues, whereas a cash hog business has declining sales revenues and chronic deficiencies of working capital.

D. produces large internal cash flows over and above what is needed to build and maintain the business, whereas the internal cash flows of a cash hog business are too small to fully fund its operating needs and capital requirements.

A diversified company has a good financial fit when the excess cash generated by its
A. cash cow businesses is sufficient to fund the needs of its cash hog businesses.
B. cash cow businesses is sufficient to fund its needs to turn into potential young stars.
C. self-supporting stars use their cash flow to fund cash cows.
D. cash hog businesses is sufficient to fund the needs of its cash cow businesses.
E. potential young stars is sufficient to help stars.

A. cash cow businesses is sufficient to fund the needs of its cash hog businesses.

Which one of the following is not a rationale for retaining a cash hog business in a diversified company's portfolio?
A. Capital infusions needed from the corporate parent are modest relative to the funds available.
B. There is a decent chance of growing the business into a solid bottom-line contributor.
C. The business is in an industry with low attractiveness and has a weak competitive position in that industry.
D. There is a better than even chance that investing in the cash hog will result in it becoming a star business with a strong or market-leading competitive position in a high growth market and high levels of profitability.
E. The cash hog has a valuable strategic fit with other business units.

C. The business is in an industry with low attractiveness and has a weak competitive position in that industry.

A diversified company's business units exhibit good financial resource fit when
A. each business is a cash cow.
B. a company 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.
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. a company 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

Conclusions about what the priorities should be for allocating resources to the various businesses of a diversified company need to be based on such considerations as
A. each business's profit and growth prospects.
B. industry attractiveness and competitive strength of the various businesses.
C. the degree of strategic fit and resource fit with other business units.
D. each business's cash flow characteristics and return on capital invested.
E. All of these choices are correct.

E. All of these choices are correct.

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

D. put business units with the brightest profit and growth prospects and solid strategic and resource fits at the top of the investment priority list.

The options for allocating a diversified company's financial resources include
A. making acquisitions to establish positions in new businesses or to complement existing businesses.
B. investing in ways to strengthen or grow existing businesses.
C. funding long-range R&D ventures aimed at opening market opportunities in new or existing businesses.
D. paying off existing debt, increasing dividends, building cash reserves, or repurchasing shares of the company's stock.
E. All of these choices are correct.

E. All of these choices are correct.

Which one of the following is not a reasonable option for deploying a diversified company's financial resources?
A. making acquisitions to establish positions in new businesses or to complement existing businesses
B. concentrating most of a company's financial resources in cash cow businesses and allocating little or no additional resources to cash hog businesses until they show enough strength to generate positive cash flows
C. funding long-range R&D ventures aimed at opening market opportunities in new or existing businesses
D. paying down existing debt, increasing dividends, or repurchasing shares of the company's stock
E. investing in ways to strengthen or grow existing businesses

B. concentrating most of a company's financial resources in cash cow businesses and allocating little or no additional resources to cash hog businesses until they show enough strength to generate positive cash flows

Moves to improve a diversified company's overall performance include
A. broadening the company's business scope by making new acquisitions in new industries.
B. divesting weak-performing businesses and retrenching to a narrower base of business operations.
C. restructuring the company's business lineup and putting a whole new face on the company's business makeup.
D. sticking closely to the existing business lineup and pursuing the growth opportunities presented by these businesses.
E. All of these choices are correct.

E. All of these choices are correct.

The strategic options to improve a diversified company's overall performance do not include which of the following categories of actions?
A. broadening the company's business scope by making new acquisitions in new industries
B. increasing dividend payments to shareholders and/or repurchasing shares of the company's stock
C. restructuring the company's business lineup and putting a whole new face on the company's business makeup
D. sticking closely with the existing business lineup and pursuing opportunities these businesses present
E. divesting weak-performing businesses and retrenching to a narrower base of business operations

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

Once a company has diversified into a collection of related or unrelated businesses and concludes that some strategy adjustments are needed, which one of the following is not one of the main strategy options that a company can pursue?
A. Stick closely with the existing business lineup.
B. Restructure the company's business lineup.
C. Craft new initiatives to build or enhance the company's reputation.
D. Divest some businesses and retrench to a narrower diversification base.
E. Broaden the diversification base.

C. Craft new initiatives to build or enhance the company's reputation.

The option of sticking with the current business lineup makes sense when
A. the company's present businesses offer attractive growth opportunities and can be counted on to generate good earnings and cash flows for shareholders.
B. companies are seeking multinational diversification.
C. corporate executives are excited about market opportunities.
D. corporate executives are satisfied with current performance of each of their businesses and can use redirect capabilities and resources for expansion opportunities.
E. corporate executives want to divest some businesses and retrench to a narrower diversification base.

A. the company's present businesses offer attractive growth opportunities and can be counted on to generate good earnings and cash flows for shareholders.

A company that is already diversified may choose to broaden its business base by building positions in new related or unrelated businesses because
A. it has resources or capabilities that are eminently transferable to other related or complementary businesses.
B. the company's growth is sluggish, and it needs the sales and profit boost that a new business can provide.
C. management wants to lessen the company's vulnerability to seasonal or recessionary influences.
D. unfavorable driving forces face the company's core business.
E. All of these choices are correct.

E. All of these choices are correct.

Retrenching to a narrower diversification base
A. is 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. is directed at improving long-term performance by building stronger positions in a smaller number of core businesses.
C. is an attractive strategy option for revamping a diverse business lineup that lacks strong cross-business financial fit.
D. is sometimes an attractive option for deepening a diversified company's technological expertise and supporting a faster rate of product innovation.
E. is a strategy best reserved for companies in poor financial shape.

B. is directed at improving long-term performance by building stronger positions in a smaller number of core businesses.

In which of the following instances is retrenching to a narrower diversification base not likely to be an attractive or advisable strategy for a diversified company?
A. when a diversified company has businesses that are weakly positioned in their respective industries and are struggling to earn a decent return on investment
B. when a diversified company has too many cash cows
C. when one or more businesses are cash hogs with questionable long-term potential
D. when businesses in once-attractive industries have badly deteriorated
E. when a diversified company has businesses that have little or no strategic or resource fits with the "core" businesses that management wishes to concentrate on

B. when a diversified company has too many cash cows

Divestiture can be accomplished by
A. selling a business outright.
B. spinning the unwanted business off as a managerially and financially independent company by selling shares to the investing public via an initial public offering of stock.
C. spinning the unwanted business off as a managerially and financially independent company by distributing shares in the new company to existing shareholders of the parent company.
D. spinning the unwanted business off as a financially and managerially independent company.
E. All of these choices are correct.

E. All of these choices are correct.

Corporate restructuring strategies
A. involve making radical changes in a diversified company's business lineup, divesting some businesses, and acquiring new ones so as to put a new face on the company's business lineup.
B. entail reducing the scope of diversification to a smaller number of businesses.
C. entail selling off marginal businesses to free resources for redeployment to the remaining businesses.
D. focus on crafting initiatives to restore a diversified company's money-losing businesses to profitability.
E. focus on broadening the scope of diversification to include a larger number of businesses and boost the company's growth and profitability.

A. involve making radical changes in a diversified company's business lineup, divesting some businesses, and acquiring new ones so as to put a new face on the company's business lineup.

Conditions that may make corporate restructuring strategies appealing include
A. an excessive debt burden with interest costs that eat deeply into profitability.
B. a business lineup that consists of too many businesses competing in slow-growth, declining, or low-margin industries.
C. a lineup containing too many competitively weak businesses.
D. ill-chosen acquisitions that haven't lived up to expectations.
E. All of these choices are correct.

E. All of these choices are correct.

MGT 4302 Chapter 8 - Subjecto.com

MGT 4302 Chapter 8

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The task of crafting corporate strategy for a diversified company encompasses
A. picking the new industries to enter and deciding on the means of entry.
B. initiating actions to boost the combined performance of the businesses the firm has entered.
C. pursuing opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantage.
D. steering corporate resources into the most attractive business units.
E. All of these choices are correct.

E. All of these choices are correct.

Which one of the following is not one of the elements of crafting corporate strategy for a diversified company?
A. picking new industries to enter and deciding on the means of entry
B. choosing the appropriate value chain for each business the company has entered
C. pursuing opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantage
D. steering corporate resources into the most attractive business units
E. initiating actions to boost the combined performance of the businesses the firm has entered

B. choosing the appropriate value chain for each business the company has entered

Diversification merits strong consideration whenever a single-business company
A. has integrated backward and forward as far as it can.
B. faces diminishing market opportunities and stagnating sales in its principal business.
C. has achieved industry leadership in its main line of business.
D. encounters declining profits in its mainstay business.
E. faces strong competition and is struggling to earn a good profit.

B. faces diminishing market opportunities and stagnating sales in its principal business.

Diversification ought to be considered when a
A. company’s profits are being squeezed, and it needs to increase its net profit margins and return on investment.
B. company lacks sustainable competitive advantage in its present business.
C. company begins to encounter diminishing growth prospects in its mainstay business.
D. company has run out of ways to achieve a distinctive competence in its present business.
E. company is under the gun to create a more attractive and cost-efficient value chain.

C. company begins to encounter diminishing growth prospects in its mainstay business.

Diversifying into new businesses can be considered a success only if it
A. results in increased profit margins and bigger total profits.
B. builds shareholder value.
C. helps a company escape the rigors of competition in its present business.
D. leads to the development of a greater variety of distinctive competencies and competitive capabilities.
E. helps the company overcome the barriers to entering additional foreign markets.

B. builds shareholder value.

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. diversify into businesses that can perform better under a single corporate umbrella than they could perform operating as independent, stand-alone businesses.

The three tests for judging whether a particular diversification move can create value for shareholders are the
A. industry 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. attractiveness test, the cost-of-entry test, and the better-off test.

To test whether a particular diversification move has good prospects for creating added shareholder value, corporate strategists should use the
A. profit test, the competitive strength test, and the industry attractiveness test.
B. better-off test, the competitive advantage test, and the profit expectations test.
C. barrier to entry test, the competitive advantage test, and the stock price effect test.
D. strategic fit test, the industry attractiveness test, and the dividend effect test.
E. the industry attractiveness test, the cost-of-entry test, and the better-off test.

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

The attractiveness test for evaluating whether diversification into a particular industry is likely to build shareholder value involves determining whether
A. conditions in the target industry allow for profits and return on investment that is equal to or better than that of the company’s present business(es).
B. the potential diversification move will boost the company’s competitive advantage in its existing business.
C. shareholders will view the contemplated diversification move as attractive.
D. key success factors in the target industry are attractive.
E. there are attractive strategic fits between the value chains of the company’s present businesses and the value chain of the new business it is considering entering.

A. conditions in the target industry allow for profits and return on investment that is equal to or better than that of the company’s present business(es).

The cost-of-entry test for evaluating whether diversification into a particular industry is likely to build shareholder value involves determining whether
A. a newly entered business presents opportunities to cost-efficiently transfer competitively valuable skills or technology from one business to another.
B. the cost to enter the target industry will strain the company’s credit rating.
C. a company’s costs to enter the target industry are so high that the potentials for good profitability and return on investment are eroded.
D. the cost to enter the target industry will raise or lower the company’s total profits.
E. the cost a company incurs to enter the target industry will raise or lower production costs.

C. a company’s costs to enter the target industry are so high that the potentials for good profitability and return on investment are eroded.

The better-off test for evaluating whether a particular diversification move is likely to generate added value for shareholders involves assessing whether the diversification move
A. will make the company better off because it will produce a greater number of core competencies.
B. will make the company better off by improving its balance sheet strength and credit rating.
C. will make the company better off by spreading shareholder risks across a greater number of businesses and industries.
D. offers potential for the company’s existing businesses and new businesses to perform better together under a single corporate umbrella.
E. will benefit shareholders due to gains in earnings per share and faster stock price appreciation.

D. offers potential for the company’s existing businesses and new businesses to perform better together under a single corporate umbrella.

Which of the following statements about corporate diversification is incorrect?
A. Creating added value for shareholders via diversification requires building a multibusiness company where the whole is greater than the sum of its parts.
B. Diversification moves that satisfy all three diversification tests have the greatest potential to grow shareholder value over the long term.
C. The more attractive an industry’s prospects are for growth and good long-term profitability, the less expensive it can be to enter.
D. Diversification cannot be considered a success unless it results in added shareholder value—value that shareholders cannot capture for themselves by spreading their investments across the stocks of companies in different industries.
E. Shareholder value is not created by diversification unless it passes the "better off" or "1 + 1 = 3 test."

C. The more attractive an industry’s prospects are for growth and good long-term profitability, the less expensive it can be to enter.

Acquisition of an existing business is an attractive strategy option for entering a promising new industry because it
A. is an effective way to hurdle entry barriers, is usually quicker than trying to launch a new start-up operation, and allows the acquirer to move directly to the task of building a strong position in the target industry.
B. is less expensive than launching a new start-up operation, thus passing the cost-of-entry test.
C. is a less risky way of passing the attractiveness test.
D. is more likely to result in passing the shareholder value test, the profitability test, and the better-off test.
E. offers the prospect of gaining an immediate competitive advantage in the new industry and thus helps ensure that the diversification move will pass the competitive advantage test for building shareholder value.

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

Which one of the following is not a factor that makes it appealing to diversify into a new industry by forming an internal start-up subsidiary to enter and compete in the target industry?
A. when internal entry is cheaper than entry via acquisition
B. when a company possesses the skills and resources needed to compete effectively and there is ample time to launch the business
C. when adding new production capacity will not adversely impact the supply/demand balance in the industry
D. when the industry is growing rapidly and the target industry is comprised of several relatively large and well-established firms
E. when incumbent firms are likely to be slow or ineffective in combating a new entrant’s efforts to crack the market

D. when the industry is growing rapidly and the target industry is comprised of several relatively large and well-established firms

Diversifying into a new industry by forming a new internal subsidiary to enter and compete in the target industry is attractive when
A. all of the potential acquisition candidates are losing money.
B. it is impractical to outsource most of the value chain activities that have to be performed in the target business/industry.
C. there is ample time to launch the new business from the ground up.
D. the company has built up a hoard of cash with which to finance a diversification effort.
E. none of the companies already in the industry is an attractive strategic alliance partner.

C. there is ample time to launch the new business from the ground up.

A joint venture is an attractive way for a company to enter a new industry when
A. the firm is missing some essential skills or capabilities or resources and needs a partner to supply the missing expertise and competencies or fill the resource gaps.
B. the firm needs access to economies of scope and good financial fits in order to be cost-competitive.
C. it is uneconomical for the firm to achieve economies of scope on its own initiative.
D. the firm has no prior experience with diversification.
E. the firm has not built up a hoard of cash with which to finance a diversification effort.

A. the firm is missing some essential skills or capabilities or resources and needs a partner to supply the missing expertise and competencies or fill the resource gaps.

A joint venture is an attractive way for a company to enter a new industry when
A. the pool of attractive acquisition candidates in the target industry is relatively small.
B. the firm needs better access to economies of scope in order to be cost-competitive.
C. the industry is growing slowly and adding too much capacity too soon could create oversupply conditions.
D. the firm has no prior experience with diversification and the industry is on the verge of explosive growth.
E. the opportunity is too risky or complex for the company to pursue alone or when the company lacks some important resources or competencies and needs a partner to supply them.

E. the opportunity is too risky or complex for the company to pursue alone or when the company lacks some important resources or competencies and needs a partner to supply them.

The essential requirement for different businesses to be "related" is that
A. their value chains possess competitively valuable cross-business relationships.
B. the products of the different businesses are bought by much 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 that they employ both entail economies of scale.

A. their value chains possess competitively valuable cross-business relationships.

Businesses are said to be "related" when
A. they have several key suppliers and several key customers in common.
B. their value chains have the same number of primary activities.
C. their products are both sold through retailers.
D. their value chains possess competitively valuable cross-business relationships that present opportunities to transfer skills and capabilities from one business to another, share resources or facilities to reduce costs, share use of a well-known brand name, and/or create mutually useful resource strengths and capabilities.
E. many consumers buy the products/services of both businesses.

D. their value chains possess competitively valuable cross-business relationships that present opportunities to transfer skills and capabilities from one business to another, share resources or facilities to reduce costs, share use of a well-known brand name, and/or create mutually useful resource strengths and capabilities.

Which of the following is an important appeal of a related diversification strategy?
A. It represents an effective way of capturing valuable financial fit benefits.
B. It offers opportunities to transfer skills, expertise, technical know-how, or other capabilities from one business to another.
C. It offers significant opportunities to strongly differentiate a company’s product offerings from those of rivals.
D. It is more likely to pass the cost-of-entry test and the capital gains test than unrelated diversification.
E. It is typically more profitable than unrelated diversification, which is a major factor in helping related diversification pass the attractiveness test.

B. It offers opportunities to transfer skills, expertise, technical know-how, or other capabilities from one business to another.

One strategic fit-based approach to related diversification would be to
A. diversify into new industries that present opportunities to combine value chain activities of two or more businesses to lower costs.
B. diversify into those industries where the same kinds of driving forces and competitive forces prevail, thus allowing use of much the same competitive strategy in all of the businesses a company is in.
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. diversify into new industries that present opportunities to combine value chain activities of two or more businesses to lower costs.

Opportunities for cross-business strategic fit exist
A. in R&D and technology activities only.
B. in supply chain activities only.
C. in sales and marketing activities only.
D. in production and distribution activities only.
E. anywhere along the respective value chains of related businesses; no one place is best.

E. anywhere along the respective value chains of related businesses; no one place is best.

Cross-business strategic fits can be derived from
A. transferring competitively valuable resources, expertise, technological know-how, or other capabilities from one business to another.
B. cost sharing between separate businesses whose activities can be combined.
C. brand sharing between business units that have common customers or that draw upon common core competencies.
D. sharing common administrative and customer service infrastructure.
E. All of these choices are correct.

E. All of these choices are correct.

Economies of scope
A. are cost reductions that flow from cost-saving strategic fits along the value chains of related businesses in the business lineup of a multibusiness corporation.
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. are cost reductions that flow from cost-saving strategic fits along the value chains of related businesses in the business lineup of a multibusiness corporation.

What makes related diversification an attractive strategy is the
A. ability to broaden the company’s product line.
B. opportunity to convert the competitive advantage potential into 1 + 1 = 3 gains in shareholder value.
C. potential for improving the stability of the company’s financial performance.
D. ability to serve a broader spectrum of buyer needs.
E. added capability it provides in overcoming the barriers to entering foreign markets.

B. opportunity to convert the competitive advantage potential into 1 + 1 = 3 gains in shareholder value.

A diversified company that leverages the strategic fits of its related businesses into competitive advantage
A. has a distinctive competence in its related businesses.
B. has a clear path to achieving 1 + 1 = 3 synergy gains in shareholder value.
C. has a clear path to global market leadership in the industries where it has related businesses.
D. passes the value chain test and the profit expectations test for building shareholder value.
E. achieves economies of scale and passes the reduced-costs test for crafting a diversification strategy capable of creating added shareholder value.

B. has a clear path to achieving 1 + 1 = 3 synergy gains in shareholder value.

When evaluating strategic fit benefits that related diversification can deliver, one must keep in consideration a number of factors. Which one is not relevant?
A. Shareholder value stemming from a diversified business cannot be replicated by simply owning a diversified portfolio of stocks.
B. The capture of cross-business strategic fits benefits is possible only through related diversification.
C. Cross-business strategic fit benefits are not automatically realized; the benefits materialize only after management has successfully pursued internal actions to capture them.
D. Shareholder value is created when the diversified company’s profitability exceeds expectations.
E. Related diversification is the process of holding the stock of many businesses in a portfolio.

E. Related diversification is the process of holding the stock of many businesses in a portfolio.

The essential requirement for different businesses to be "related" is that
A. their value chains possess competitively valuable cross-business fit relationships.
B. the products of the different businesses are bought by much 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 that they employ both entail economies of scale.

A. their value chains possess competitively valuable cross-business fit relationships.

A strategy of diversifying into unrelated businesses
A. is aimed at achieving good financial fit (whereas related diversification aims at good strategic fit).
B. is the best way for a company to pass the attractiveness test in choosing which types of businesses/industries to enter.
C. discounts the importance of strategic fit and instead focuses on building and managing a group of businesses in attractive industries that can acquired on financial terms that allow for acceptable returns on investment.
D. concentrates on diversifying into businesses where a company can leverage use of a well-known brand name in ways that create added value for shareholders.
E. generally offers more competitive advantage potential than related diversification.

C. discounts the importance of strategic fit and instead focuses on building and managing a group of businesses in attractive industries that can acquired on financial terms that allow for acceptable returns on investment.

Different businesses are said to be "unrelated" when
A. they are in different industries.
B. the products of the different businesses are not bought by the same types of buyers or sold in the same types of retail stores.
C. the products of the different businesses satisfy different buyer needs.
D. the businesses have different supply chains and different types of suppliers.
E. there is an absence of competitively valuable strategic fits between their respective value chains.

E. there is an absence of competitively valuable strategic fits between their respective value chains.

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 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. any company that can be acquired on good financial terms and has satisfactory growth and earnings potential represents a good acquisition and a good business opportunity.

With an unrelated diversification strategy, the types of companies that make particularly attractive acquisition targets are
A. financially distressed 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 are employing the same basic type of competitive strategy as the parent corporation’s existing businesses.

A. financially distressed 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.

One of the suggested advantages of an unrelated diversification strategy is that it
A. expands a firm’s competitive advantage opportunities to include a wider array of businesses.
B. spreads the stockholders’ risks across a group of truly diverse businesses.
C. increases strategic fit opportunities and the potential for a 1 + 1 = 3 outcome on the bottom line.
D. results in having more cash cow businesses than cash hog businesses.
E. facilitates capturing the financial fits among sister businesses (as compared to a strategy of related diversification).

B. spreads the stockholders’ risks across a group of truly diverse businesses.

Which of the following is not one of the suggested appeals of an unrelated diversification strategy?
A. ability to spread business risk over truly diverse businesses (as compared to related diversification, which is limited to spreading risk only among businesses with strategic fit)
B. ability to employ the company’s financial resources to maximum advantage by investing in whatever industries/businesses offer the best profit prospects
C. ability to capture cross-business strategic fit with which to capture added competitive advantage and few managerial demands
D. potential for achieving somewhat more stable corporate sales and profits over the course of economic upswings and downswings (to the extent the company diversifies into businesses whose ups and downs tend to occur at different times)
E. potential to grow shareholder value by investing in bargain-priced companies with big upside profit potential

C. ability to capture cross-business strategic fit with which to capture added competitive advantage and few managerial demands

The success of unrelated diversification is contingent upon management’s ability to
A. acquire new businesses that utilize much the same technology as existing businesses.
B. divest businesses whose competitive strategies do not match the overall competitive strategy of the corporation.
C. acquire new businesses having attractive distribution-related and customer-related strategic fits with existing businesses.
D. identify bargain-priced companies with big upside potential and then turn around their operations quickly with the aid of the parent company’s financial resources and managerial know-how.
E. identify potential new acquisition candidates that are cash cows (as opposed to cash hogs).

D. identify bargain-priced companies with big upside potential and then turn around their operations quickly with the aid of the parent company’s financial resources and managerial know-how.

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. demanding managerial requirements and the limited competitive advantage potential that cross-business strategic fit provides.
D. ending up with too many cash hog businesses and too much diversity among the competitive strategies of the businesses the company 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. demanding managerial requirements and the limited competitive advantage potential that cross-business strategic fit provides.

The two biggest drawbacks or disadvantages 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 the company 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. 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.

The one factor that company executives need not worry about when their company is managing many diverse, unrelated firms is
A. staying abreast of what’s happening in each industry and subsidiary.
B. picking business-unit heads who have the requisite combination of managerial skills and know-how to motivate people.
C. understanding the true value of strategic investment proposals by business-unit managers.
D. knowing what to do if a business unit stumbles.
E. "managing by the numbers"—that is, keeping a close track on the financial and operating results of each subsidiary.

B. picking business-unit heads who have the requisite combination of managerial skills and know-how to motivate people.

What rationales for unrelated diversification are not likely to increase shareholder value?
A. reduce risk by spreading the company’s investments over a set of truly diverse industries
B. enable a company to achieve rapid or continuous growth
C. stabilize earnings; that is, market downtrends in some of the company’s businesses will be partially offset by cyclical upswings in its other businesses
D. provide benefits to managers such as high compensation and reduction in employment risk
E. all of these choices are correct.

E. all of these choices are correct.

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. dominant business enterprise

The procedure for evaluating the pluses and minuses of a diversified company’s strategy includes
A. assessing the attractiveness of the industries the company has diversified into.
B. assessing the competitive strength of each business the company has diversified into.
C. ranking the performance prospects of the various businesses from best to worst and determining the priorities for resource allocation.
D. evaluating the extent of cross-business strategic fits and checking whether the firm’s resources fit the needs of the various businesses the company has diversified into.
E. All of these choices are correct.

E. All of these choices are correct.

Which of the following is not a major consideration in evaluating the pluses and minuses of a diversified company’s strategy?
A. checking whether the company’s resources fit the requirements of its present business lineup
B. scrutinizing each industry/business to determine where driving forces are strongest/weakest and how many profitable strategic groups the company has diversified into
C. 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
D. evaluating the extent of cross-business strategic fits
E. assessing the competitive strength of each business the company has diversified into

B. scrutinizing each industry/business to determine where driving forces are strongest/weakest and how many profitable strategic groups the company has diversified into

A comprehensive evaluation of the group of businesses a company has diversified into involves
A. evaluating the attractiveness of industries the company has diversified into and the competitive strength of each of its business units.
B. evaluating the strategic fits and resource fits among the various sister businesses.
C. ranking the performance prospects of the businesses from best to worst and determining what the corporate parent’s priorities should be in allocating resources to its various businesses.
D. using the results of the prior analytical steps as a basis for crafting new strategic moves to improve the company’s overall performance.
E. All of these choices are correct.

E. All of these choices are correct.

As a rule, all the industries represented in a diversified company’s business portfolio should be judged on such attractiveness factors as
A. market size and projected growth rate.
B. emerging opportunities and threats, the intensity of competition, and the degree of industry uncertainty and business risk.
C. resource requirements and the presence of cross-industry strategic fits.
D. seasonal and cyclical factors, industry profitability, and whether an industry has significant social, political, regulatory, and environmental problems.
E. All of these choices are correct.

E. All of these choices are correct.

Which of the following is not generally something that ought to be considered in evaluating the attractiveness of a diversified company’s business makeup?

A. market size and projected growth rate, industry profitability, and the intensity of competition
B. industry uncertainty and business risk
C. frequency with which strategic alliances and collaborative partnerships are used in each industry, the extent to which firms in the industry utilize outsourcing, and whether the industries a company has diversified into have common key success factors
D. seasonal and cyclical factors, resource requirements, and whether an industry has significant social, political, regulatory, and environmental problems
E. presence of cross-industry strategic fits

C. frequency with which strategic alliances and collaborative partnerships are used in each industry, the extent to which firms in the industry utilize outsourcing, and whether the industries a company has diversified into have common key success factors

When industry attractiveness ratings are calculated for each of the industries a multibusiness company has diversified into, the results help indicate
A. which industries appear to be the most and least attractive from the standpoint of the company’s long-term performance.
B. which industries have attractive key success factors and which have unattractive key success factors.
C. which industries have the biggest economies of scale and which have the greatest economies of scope and the overall potential for cost reduction in the industries as a group.
D. which industries are most attractive from the standpoint of long-term growth and the growth prospects of all the industries as a group.
E. which industries are most attractive from the standpoint of industry driving forces and competitive forces.

A. which industries appear to be the most and least attractive from the standpoint of the company’s long-term performance.

When calculating industry attractiveness scores, to produce a valid response it is necessary to
A. ensure the appropriate weights are assigned to each measure and that the preparer has sufficient knowledge to rate the industry on each attractiveness measure.
B. ensure the weights are assigned evenly so as not to bias the attractiveness scores.
C. ensure at least three companies within the industry are clearly well-understood to ensure validated scores.
D. be prepared to make an educated guess if the available information is skimpy.
E. All of these choices are correct.

A. ensure the appropriate weights are assigned to each measure and that the preparer has sufficient knowledge to rate the industry on each attractiveness measure.

Assessments of how a diversified company’s subsidiaries compare in competitive strength should be based on such factors as
A. vulnerability to seasonal and cyclical downturns, vulnerability to driving forces, and vulnerability to fluctuating interest rates and exchange rates.
B. relative market share, ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors, and ability to benefit from strategic fits with sister businesses.
C. the appeal of its strategy, relative number of competitive capabilities, the number of products in each businesses product line, which businesses have the highest/lowest market shares, and which businesses earn the highest/lowest profits before taxes.
D. the ability to hurdle barriers to entry, value chain attractiveness, and business risk.
E. cost reduction potential, customer satisfaction potential, and comparisons of annual cash flows from operations.

B. relative market share, ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors, and ability to benefit from strategic fits with sister businesses.

The value of determining the relative competitive strength of each business a company has diversified into is to
A. have a quantitative basis for identifying which businesses have large/small competitive advantages or competitive disadvantages vis-à-vis the rivals in their respective industries.
B. have a quantitative basis for rating them from strongest to weakest in terms of contributing to the corporate parent’s revenue growth.
C. compare resource strengths and weaknesses, business by business.
D. have a quantitative basis for rating them from strongest to weakest in contending for market leadership in their respective industries.
E. have a quantitative basis for rating them from strongest to weakest in terms of contributing to the corporate parent’s profitability.

D. have a quantitative basis for rating them from strongest to weakest in contending for market leadership in their respective industries.

The basic purpose of calculating competitive strength scores for each of a diversified company’s business units is to
A. rank the business unit from best to worst in terms of potential for cost reduction and profit margin improvement.
B. provide a quantitative measure of the overall market strength and competitive standing for each business unit.
C. determine which business unit has the greatest number of resource strengths, competencies, and competitive capabilities, and which one has the least.
D. determine which one has the biggest market share and is growing the fastest.
E. rank each business unit’s strategy from best to worst.

B. provide a quantitative measure of the overall market strength and competitive standing for each business unit.

The Nine-Cell Industry Attractiveness-Competitive Strength Matrix
A. is useful for helping decide which businesses should have high, average, and low priorities in allocating corporate resources.
B. indicates which businesses are cash hogs and which are cash cows.
C. pinpoints what strategies are most appropriate for businesses positioned in the three top cells of the matrix but is less clear about the best strategies for businesses positioned in the bottom six cells.
D. identifies which sister businesses have the greatest strategic fit.
E. indicates the relative size of the businesses.

A. is useful for helping decide which businesses should have high, average, and low priorities in allocating corporate resources.

The most important strategy-making guidance that comes from drawing a Nine-Cell Industry Attractiveness-Competitive Strength Matrix is
A. which businesses in the portfolio have the most potential for strategic fit and resource fit.
B. why cash cow businesses are more valuable than cash hog businesses.
C. that corporate resources should be concentrated on those businesses enjoying both a higher degree of industry attractiveness and competitive strength and that businesses having low competitive strength in relatively unattractive industries should be looked at for possible divestiture.
D. which businesses have the biggest competitive advantages and which ones confront serious competitive disadvantages.
E. which businesses are in industries with profitable value chains and which are in industries with money-losing value chains.

C. that corporate resources should be concentrated on those businesses enjoying both a higher degree of industry attractiveness and competitive strength and that businesses having low competitive strength in relatively unattractive industries should be looked at for possible divestiture.

In analyzing the Nine-Cell Industry Attractiveness-Competitive Strength Matrix, those businesses occupying the three cells in the lower right corner of the matrix
A. are typically weak performers and have the lowest claim on corporate resources.
B. typically are prime candidates for divesture.
C. are destined for squeezing out the maximum cash flows.
D. typically have dimmer profit outlooks than those in the middle with medium resource priority.
E. All of these choices are correct.

E. All of these choices are correct.

In a diversified company, the competitive advantage potential of cross-business strategic fit is greater when
A. the business lineup includes a number of cash cows.
B. valuable opportunities exist to transfer skills, technology, or intellectual capital from one business to another, combine the performance of related activities, or share the use of a well-respected brand name across multiple products or service categories.
C. the strategy maps of the various business units converge.
D. businesses included in the corporate portfolio compete in fast-growing industries.
E. competition is less intense and driving forces are relatively weak.

B. valuable opportunities exist to transfer skills, technology, or intellectual capital from one business to another, combine the performance of related activities, or share the use of a well-respected brand name across multiple products or service categories.

Checking a diversified firm’s business portfolio for the competitive advantage potential of cross-business strategic fits entails consideration of
A. whether the parent company’s competitive advantages are being deployed to maximum advantage in each of its business units.
B. Whether the competitive strategies employed in each business act to reinforce the competitive power of the strategies employed in the company’s other businesses.
C. whether the competitive strategies in each business possess good strategic fit with the parent company’s corporate strategy.
D. the extent to which there are competitively valuable relationships between the value chains of sister business units and what opportunities they present to reduce costs, share use of a potent brand name, or transfer skills or technology or intellectual capital from one business to another.
E. how compatible the competitive strategies of the various sister businesses are and whether these strategies are properly aimed at achieving the same kind of competitive advantage.

D. the extent to which there are competitively valuable relationships between the value chains of sister business units and what opportunities they present to reduce costs, share use of a potent brand name, or transfer skills or technology or intellectual capital from one business to another.

A diversified company’s business units exhibit good resource fit when
A. each business is a cash cow.
B. a company 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 resource strengths.
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 resources the company has available.

B. a company 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 resource strengths.

The businesses in a diversified company’s lineup exhibit good resource fit when
A. the resource requirements of each of its businesses exactly match the resources the company has available.
B. its individual businesses add to a company’s resource strengths and when it has the resources to adequately support the requirements of its businesses as a group without spreading itself too thin.
C. each business unit generates just enough cash flow annually to fund its own capital requirements and thus does not require cash infusions from the corporate parent.
D. each business unit produces sufficient cash flows over and above what is needed to build and maintain the business, thereby providing the parent company with enough cash to pay shareholders a generous and steadily increasing dividend.
E. there are enough cash cow businesses to support the capital requirements of the cash hog businesses.

B. its individual businesses add to a company’s resource strengths and when it has the resources to adequately support the requirements of its businesses as a group without spreading itself too thin

One important dimension of resource fit concerns the potential to generate internal cash flows sufficient to fund capital requirements of its business lineup, termed the firm’s
A. internal capital market.
B. debt policy management.
C. Liquidity management.
D. economic value added.
E. All of these choices are correct.

A. internal capital market.

A cash cow type of business
A. generates unusually high profits and returns on equity investment.
B. is so profitable that it has no long-term debt.
C. generates positive cash flows over and above its internal requirements, thus providing a corporate parent with cash flows that can be used for financing new acquisitions, investing in cash hog businesses, funding share buyback programs, and/or paying dividends.
D. is a business with such a strong competitive advantage that it generates big profits, big returns on investment, and big cash surpluses after dividends are paid.
E. has good strategic fit with a cash hog business.

C. generates positive cash flows over and above its internal requirements, thus providing a corporate parent with cash flows that can be used for financing new acquisitions, investing in cash hog businesses, funding share buyback programs, and/or paying dividends.

A cash hog type of business
A. is one that is losing money and requires cash infusions from its corporate parent to continue operations.
B. generates cash flows that are too small to fully fund its operations and growth, and so must receive cash infusions from outside sources to cover working capital and investment requirements.
C. generates negative cash flows from internal operations and thus requires cash infusions from its corporate parent to report a profit.
D. is a business growing so rapidly that it does not have the funds to cover its short- and long-term debt obligations.
E. is one that has more current liabilities than current assets and faces a liquidity crisis due to declining sales revenues and declining profitability.

B. generates cash flows that are too small to fully fund its operations and growth, and so must receive cash infusions from outside sources to cover working capital and investment requirements.

The difference between a cash cow business and a cash hog business is that a cash cow business
A. is making money, whereas a cash hog business is losing money.
B. generates enough profits to pay off long-term debt, whereas a cash hog business does not.
C. generates positive retained earnings, whereas a cash hog business produces negative retained earnings.
D. produces large internal cash flows over and above what is needed to build and maintain the business, whereas the internal cash flows of a cash hog business are too small to fully fund its operating needs and capital requirements.
E. generates very large increases in sales revenues, whereas a cash hog business has declining sales revenues and chronic deficiencies of working capital.

D. produces large internal cash flows over and above what is needed to build and maintain the business, whereas the internal cash flows of a cash hog business are too small to fully fund its operating needs and capital requirements.

A diversified company has a good financial fit when the excess cash generated by its
A. cash cow businesses is sufficient to fund the needs of its cash hog businesses.
B. cash cow businesses is sufficient to fund its needs to turn into potential young stars.
C. self-supporting stars use their cash flow to fund cash cows.
D. cash hog businesses is sufficient to fund the needs of its cash cow businesses.
E. potential young stars is sufficient to help stars.

A. cash cow businesses is sufficient to fund the needs of its cash hog businesses.

Which one of the following is not a rationale for retaining a cash hog business in a diversified company’s portfolio?
A. Capital infusions needed from the corporate parent are modest relative to the funds available.
B. There is a decent chance of growing the business into a solid bottom-line contributor.
C. The business is in an industry with low attractiveness and has a weak competitive position in that industry.
D. There is a better than even chance that investing in the cash hog will result in it becoming a star business with a strong or market-leading competitive position in a high growth market and high levels of profitability.
E. The cash hog has a valuable strategic fit with other business units.

C. The business is in an industry with low attractiveness and has a weak competitive position in that industry.

A diversified company’s business units exhibit good financial resource fit when
A. each business is a cash cow.
B. a company 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.
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. a company 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

Conclusions about what the priorities should be for allocating resources to the various businesses of a diversified company need to be based on such considerations as
A. each business’s profit and growth prospects.
B. industry attractiveness and competitive strength of the various businesses.
C. the degree of strategic fit and resource fit with other business units.
D. each business’s cash flow characteristics and return on capital invested.
E. All of these choices are correct.

E. All of these choices are correct.

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

D. put business units with the brightest profit and growth prospects and solid strategic and resource fits at the top of the investment priority list.

The options for allocating a diversified company’s financial resources include
A. making acquisitions to establish positions in new businesses or to complement existing businesses.
B. investing in ways to strengthen or grow existing businesses.
C. funding long-range R&D ventures aimed at opening market opportunities in new or existing businesses.
D. paying off existing debt, increasing dividends, building cash reserves, or repurchasing shares of the company’s stock.
E. All of these choices are correct.

E. All of these choices are correct.

Which one of the following is not a reasonable option for deploying a diversified company’s financial resources?
A. making acquisitions to establish positions in new businesses or to complement existing businesses
B. concentrating most of a company’s financial resources in cash cow businesses and allocating little or no additional resources to cash hog businesses until they show enough strength to generate positive cash flows
C. funding long-range R&D ventures aimed at opening market opportunities in new or existing businesses
D. paying down existing debt, increasing dividends, or repurchasing shares of the company’s stock
E. investing in ways to strengthen or grow existing businesses

B. concentrating most of a company’s financial resources in cash cow businesses and allocating little or no additional resources to cash hog businesses until they show enough strength to generate positive cash flows

Moves to improve a diversified company’s overall performance include
A. broadening the company’s business scope by making new acquisitions in new industries.
B. divesting weak-performing businesses and retrenching to a narrower base of business operations.
C. restructuring the company’s business lineup and putting a whole new face on the company’s business makeup.
D. sticking closely to the existing business lineup and pursuing the growth opportunities presented by these businesses.
E. All of these choices are correct.

E. All of these choices are correct.

The strategic options to improve a diversified company’s overall performance do not include which of the following categories of actions?
A. broadening the company’s business scope by making new acquisitions in new industries
B. increasing dividend payments to shareholders and/or repurchasing shares of the company’s stock
C. restructuring the company’s business lineup and putting a whole new face on the company’s business makeup
D. sticking closely with the existing business lineup and pursuing opportunities these businesses present
E. divesting weak-performing businesses and retrenching to a narrower base of business operations

B. increasing dividend payments to shareholders and/or repurchasing shares of the company’s stock

Once a company has diversified into a collection of related or unrelated businesses and concludes that some strategy adjustments are needed, which one of the following is not one of the main strategy options that a company can pursue?
A. Stick closely with the existing business lineup.
B. Restructure the company’s business lineup.
C. Craft new initiatives to build or enhance the company’s reputation.
D. Divest some businesses and retrench to a narrower diversification base.
E. Broaden the diversification base.

C. Craft new initiatives to build or enhance the company’s reputation.

The option of sticking with the current business lineup makes sense when
A. the company’s present businesses offer attractive growth opportunities and can be counted on to generate good earnings and cash flows for shareholders.
B. companies are seeking multinational diversification.
C. corporate executives are excited about market opportunities.
D. corporate executives are satisfied with current performance of each of their businesses and can use redirect capabilities and resources for expansion opportunities.
E. corporate executives want to divest some businesses and retrench to a narrower diversification base.

A. the company’s present businesses offer attractive growth opportunities and can be counted on to generate good earnings and cash flows for shareholders.

A company that is already diversified may choose to broaden its business base by building positions in new related or unrelated businesses because
A. it has resources or capabilities that are eminently transferable to other related or complementary businesses.
B. the company’s growth is sluggish, and it needs the sales and profit boost that a new business can provide.
C. management wants to lessen the company’s vulnerability to seasonal or recessionary influences.
D. unfavorable driving forces face the company’s core business.
E. All of these choices are correct.

E. All of these choices are correct.

Retrenching to a narrower diversification base
A. is 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. is directed at improving long-term performance by building stronger positions in a smaller number of core businesses.
C. is an attractive strategy option for revamping a diverse business lineup that lacks strong cross-business financial fit.
D. is sometimes an attractive option for deepening a diversified company’s technological expertise and supporting a faster rate of product innovation.
E. is a strategy best reserved for companies in poor financial shape.

B. is directed at improving long-term performance by building stronger positions in a smaller number of core businesses.

In which of the following instances is retrenching to a narrower diversification base not likely to be an attractive or advisable strategy for a diversified company?
A. when a diversified company has businesses that are weakly positioned in their respective industries and are struggling to earn a decent return on investment
B. when a diversified company has too many cash cows
C. when one or more businesses are cash hogs with questionable long-term potential
D. when businesses in once-attractive industries have badly deteriorated
E. when a diversified company has businesses that have little or no strategic or resource fits with the "core" businesses that management wishes to concentrate on

B. when a diversified company has too many cash cows

Divestiture can be accomplished by
A. selling a business outright.
B. spinning the unwanted business off as a managerially and financially independent company by selling shares to the investing public via an initial public offering of stock.
C. spinning the unwanted business off as a managerially and financially independent company by distributing shares in the new company to existing shareholders of the parent company.
D. spinning the unwanted business off as a financially and managerially independent company.
E. All of these choices are correct.

E. All of these choices are correct.

Corporate restructuring strategies
A. involve making radical changes in a diversified company’s business lineup, divesting some businesses, and acquiring new ones so as to put a new face on the company’s business lineup.
B. entail reducing the scope of diversification to a smaller number of businesses.
C. entail selling off marginal businesses to free resources for redeployment to the remaining businesses.
D. focus on crafting initiatives to restore a diversified company’s money-losing businesses to profitability.
E. focus on broadening the scope of diversification to include a larger number of businesses and boost the company’s growth and profitability.

A. involve making radical changes in a diversified company’s business lineup, divesting some businesses, and acquiring new ones so as to put a new face on the company’s business lineup.

Conditions that may make corporate restructuring strategies appealing include
A. an excessive debt burden with interest costs that eat deeply into profitability.
B. a business lineup that consists of too many businesses competing in slow-growth, declining, or low-margin industries.
C. a lineup containing too many competitively weak businesses.
D. ill-chosen acquisitions that haven’t lived up to expectations.
E. All of these choices are correct.

E. All of these choices are correct.

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