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7/6/2014 Chapter Test 1/2
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A company becomes a prime candidate for diversifying under the following circumstances _______________________
When it spots opportunities for expanding into industries whose technologies and products complement its present
When it has a powerful and well-known brand name that can be transferred to the products of other businesses and
thereby used as a lever for driving up the sales and profits of such business.
When diversifying into additional businesses opens new avenues for reducing costs via cross-business sharing or
transfer of competitively valuable resources and capabilities.
When can leverage its collection of resources and capabilities by expanding into businesses where these resources
and capabilities are valuable assets.
E) All of these.
To judge whether a particular diversification move has good potential for building added shareholder value, the move should
pass the following tests:
A) the attractiveness test, the barrier-to-entry test, and the growth test.
B) the strategic fit test, the resource fit test, and the profitability test.
C) the barrier-to-entry test, the growth test, and the shareholder value test.
D) the attractiveness test, the cost-of-entry test, and the better-off test.
E) the resource fit test, the strategic fit test, the profitability test, and the shareholder value test.
The better-off test for evaluating whether a particular diversification move is likely to generate added value for shareholders
evaluating whether the diversification move will produce a 1 + 1 = 3 outcome such that the company's different
businesses perform better together than apart and the whole ends up being greater than the sum of the parts.
assessing whether the diversification move will make the company better off by increasing its resource strengths and
competitive capabilities.
evaluating whether the diversification move will make the company better off by making it less subject to the
bargaining power of customers and/or suppliers.
assessing whether the diversification move will make the company better off by increasing its profit margins and
returns on investment.
E) All of these.
Which of the following is not accurate as concerns entering a new business via acquisition, internal start-up, or a joint
The big dilemma of entering an industry via acquisition of an existing company is whether to pay a premium price for a
successful company or to buy a struggling company at a bargain price.
Acquisition is generally the most profitable way to enter a new industry, tends to be more suitable for an unrelated
diversification strategy than a related diversification strategy, and usually requires less capital than entering an
industry via internal start-up.
Acquisition is the most popular means of diversifying into another industry, has the advantage of being quicker than
trying to launch a brand-new operation, and offers an effective way to hurdle entry barriers.
Joint ventures are an attractive way to enter new businesses when the opportunity is too complex, uneconomical, or
risky for one company to pursue alone, when the opportunities in a new industry require a broader range of
competencies and know-how than a company can marshal on its own, and/or when it aids entry into a foreign
The big drawbacks to entering a new industry via internal start-up include the costs of overcoming entry barriers,
building an organization from the ground up, and the extra time it takes to build a strong and profitable competitive
The strategic appeal of related diversification is that
it allows a firm to reap the competitive advantage benefits of skills transfer, lower costs (due to economies of scope),
cross-business use of a powerful brand name, and/or cross-business collaboration in creating stronger competitive
it is less capital intensive than unrelated diversification because related diversification emphasizes getting into cash
cow businesses (as opposed to cash hog businesses).
C) it involves diversifying into industries having the same kinds of key success factors.
D) it is less risky than unrelated diversification because it avoids the acquisition of cash hog businesses.
it facilitates the achievement of greater economies of scale since the company only enters those businesses that
serve the same types of buyer groups and/or buyer needs.
Economies of scope
stem from the cost-saving efficiencies of scattering a company's manufacturing/assembly plants over a wider
geographic area.
B) have to do with the cost-saving efficiencies of operating across a bigger portion of an industry's total value chain.
C) stem from cost-saving strategic fits along the value chains of related multiple businesses.
refer to the cost-savings that flow from being able to combine the value chains of different businesses into a single
value chain.
E) are like economies of scale and arise from being able to lower costs via a larger volume operation.
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7/6/2014 Chapter Test 2/2
The defining characteristic of unrelated diversification (as opposed to related diversification) is
the presence of cross-business resource fit (whereas the defining characteristic of related diversification is the
presence of cross-business strategic fit).
that the value chains of different businesses are so dissimilar that no competitively valuable cross-business
relationships are present (in other words, the value chains of a company's businesses offer no opportunities to
benefit from skills or technology transfer across businesses, economies of scope, cross-business use of a powerful
brand name, and/or cross-business collaboration in creating stronger competitive capabilities).
the presence of cross-business strategic fit (whereas the defining characteristic of related diversification is the
presence of cross-business resource fit).
D) that the company's businesses are in different industries.
E) the presence of cross-business financial fit.
Calculating quantitative attractiveness ratings for the industries a company has diversified into involves
determining the strength of the five competitive forces in each industry, calculating the ability of the company to
overcome or contend successfully with each force, and obtaining overall measures of the firm's ability to compete
successfully in each of its industries.
determining each industry's average profit margins, calculating how far the firm's profit margins are above/below the
industry averages, and then using these values to draw conclusions about industry attractiveness.
rating the attractiveness of each industry's strategic and resource fits, summing the attractiveness scores, and
determining whether the overall scores for the industries as a group are appealing or not.
selecting a set of industry attractiveness measures, weighting the importance of each measure (with the sum of the
weights adding to 1.0), rating each industry on each attractiveness measure, multiplying the industry ratings by the
assigned weight to obtain a weighted rating, adding the weighted ratings for each industry to obtain an overall
industry attractiveness score, and using the overall industry attractiveness scores to evaluate the attractiveness of
all the industries, both individually and as a group.
identifying each industry's average price, rating the difficulty of charging an above-average price in each industry, and
deciding whether the company's prospects for being able to charge above-average prices make the industry
attractive or unattractive.
The 9-cell industry attractiveness-competitive strength matrix
A) is a valuable tool for ranking a company's different businesses from best to worst based on strategic fit.
B) shows which of a diversified company's businesses have good/poor resource fit.
indicates which businesses have the highest/lowest economies of scale and which have the highest/lowest
economies of scope.
uses quantitative measures of industry attractiveness and competitive strength to plot each business's location on
the matrixthe thesis underlying the matrix is that there are good reasons to concentrate the company's resources
on those businesses having relatively strong competitive positions in industries with relatively high attractiveness
and to invest minimally or even divest those businesses with relatively weak competitive positions in industries with
relatively low attractiveness.
pinpoints which of a diversified company's businesses are resource-rich cash cows and which are resource-poor cash
Once a firm has diversified and established itself in several different businesses, then its main strategic alternatives include
all but which one of the following?
A) Broadening the firm's business scope by diversifying into additional businesses.
B) Shifting from a multi-country to a global strategy.
Restructuring the company's business line-up with a combination of divestitures and new acquisitions to put a whole
new face on the company's business makeup.
Pursuing multinational diversification and striving to globalize the operations of several of the company's business
E) Divesting some businesses and retrenching to a narrower base of business operations.
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