Question 1

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

Accepted Answer

A)  Scale refers to the magnitude or size of the operation, while scope refers to the reach of defined savings within the value chain. 
B)  Scale refers to the extent of change, while scope refers to the possibilities of change. 
C)  Scale is about dimensions, while scope is about the capacity available for production capabilities. 
D)  Scale refers to cost savings that accrue directly from larger-sized operations, while scope stems directly from strategic fit along the value chains of related businesses. 
E)  Scale and scope mean the same thing and the only difference is the extent of cost savings accrued from unrelated businesses in each. 
A)  Scale refers to the magnitude or size of the operation, while scope refers to the reach of defined savings within the value chain. 
B)  Scale refers to the extent of change, while scope refers to the possibilities of change. 
C)  Scale is about dimensions, while scope is about the capacity available for production capabilities. 
D)  Scale refers to cost savings that accrue directly from larger-sized operations, while scope stems directly from strategic fit along the value chains of related businesses. 
E)  Scale and scope mean the same thing and the only difference is the extent of cost savings accrued from unrelated businesses in each. D

Question 2

The attractiveness test is the most important test for determining whether diversification into a new business is likely to result in 1 + 1 = 3 increases in shareholder value (as opposed to simply a 1 + 1 = 2 type of increase). True or false? Justify and explain your answer.

Accepted Answer

A) True 
 B)False  True

Question 3

Identify and briefly discuss each of the three options for entering new businesses. What are the driving choice parameters for entry into new businesses and which one is the most popular in the sense of being used most frequently?

Accepted Answer

- Acquisition is the most popular means of diversifying into another industry. Not only is it quicker than trying to launch a new operation, but it also offers an effective way to hurdle such entry barriers as acquiring technological know-how, establishing supplier relationships, achieving scale economies, building brand awareness, and securing adequate distribution.
- Achieving diversification through internal development involves starting a new business subsidiary from scratch. Generally, internal development of a new business has appeal only when (1) the parent company already has in-house most of the resources and capabilities it needs to piece together a new business and compete effectively; (2) there is ample time to launch the business; (3) the internal cost of entry is lower than the cost of entry via acquisition; (4) adding new production capacity will not adversely impact the supply-demand balance in the industry; and (5) incumbent firms are likely to be slow or ineffective in responding to a new entrant's efforts to crack the market.
- Entering a new business via a joint venture can be useful in at least three types of situations. First, a joint venture is a good vehicle for pursuing an opportunity that is too complex, uneconomical, or risky for one company to pursue alone. Second, joint ventures make sense when the opportunities in a new industry require a broader range of competencies and know-how than a company can marshal on its own. Third, companies sometimes use joint ventures to diversify into a new industry when the diversification move entails having operations in a foreign country.

Question 4

What is meant by the term strategic fit? What are the advantages of pursuing strategic fit and matchups in choosing which industries to diversify into?

Accepted Answer

A related diversification strategy invol

Question 5

An acquisition premium is the amount by which the price offered for an existing business exceeds the

Accepted Answer

A)  fair market value of similar companies in the same geographic locale. 
B)  preacquisition market value of the target company. 
C)  comparable value of similar companies within the same market. 
D)  amount paid as a down payment to be held in escrow until closing. 
E)  difference between the amount that was offered and the amount that is escrowed. 
A)  fair market value of similar companies in the same geographic locale. 
B)  preacquisition market value of the target company. 
C)  comparable value of similar companies within the same market. 
D)  amount paid as a down payment to be held in escrow until closing. 
E)  difference between the amount that was offered and the amount that is escrowed.

Question 6

There is ample room for companies to customize their diversification strategies and be defined as being either narrowly or broadly diversified, and when combination related-unrelated diversification strategy options are adopted, they have particular appeal to

Accepted Answer

A)  those companies with a mix of valuable competitive assets, covering the spectrum from generalized to specialized resources and capabilities. 
B)  those large multibusiness firms, sometimes called conglomerates, because they have a unique capability designed to stabilize earnings. 
C)  companies with a portfolio of product choices for buyer-related behavior. 
D)  corporate managers who take on risks without performing due diligence. 
E)  corporate managers who want to play the corporate parent role without fiduciary responsibility. 
A)  those companies with a mix of valuable competitive assets, covering the spectrum from generalized to specialized resources and capabilities. 
B)  those large multibusiness firms, sometimes called conglomerates, because they have a unique capability designed to stabilize earnings. 
C)  companies with a portfolio of product choices for buyer-related behavior. 
D)  corporate managers who take on risks without performing due diligence. 
E)  corporate managers who want to play the corporate parent role without fiduciary responsibility.

Question 7

A diversified company's business units exhibit good resource fit when

Accepted Answer

A)  each business is a cash cow. 
B)  its businesses add to a company's overall resource strengths and have matching resource requirements and/or when the parent has adequate corporate resources to support its business needs and add value. 
C)  each business is sufficiently profitable to generate an attractive return on invested capital. 
D)  each business unit produces large internal cash flows over and above what is needed to build and maintain the business. 
E)  the resource requirements of each business exactly match the company's available resources. 
A)  each business is a cash cow. 
B)  its businesses add to a company's overall resource strengths and have matching resource requirements and/or when the parent has adequate corporate resources to support its business needs and add value. 
C)  each business is sufficiently profitable to generate an attractive return on invested capital. 
D)  each business unit produces large internal cash flows over and above what is needed to build and maintain the business. 
E)  the resource requirements of each business exactly match the company's available resources.

Question 8

The three tests for judging whether a particular diversification move can create value for shareholders are the

Accepted Answer

A)  attractiveness test, the profitability test, and the shareholder value test. 
B)  strategic fit test, the competitive advantage test, and the return-on-investment test. 
C)  resource fit test, the profitability test, and the shareholder value test. 
D)  attractiveness test, the cost of entry test, and the better-off test. 
E)  shareholder value test, the cost of entry test, and the profitability test. 
A)  attractiveness test, the profitability test, and the shareholder value test. 
B)  strategic fit test, the competitive advantage test, and the return-on-investment test. 
C)  resource fit test, the profitability test, and the shareholder value test. 
D)  attractiveness test, the cost of entry test, and the better-off test. 
E)  shareholder value test, the cost of entry test, and the profitability test.

Question 9

An additional, and often very important motivating factor for adding new businesses is to complement and strengthen the market position and competitive capabilities of one or more of its present businesses. Explain and give three examples.

Accepted Answer

Sometimes, companies need to complement

Question 10

What are the four main strategic paths that a diversified company can employ to improve the performance of its overall business lineup?

Accepted Answer

Strategic moves to improve a diversified

Question 11

Which of the following is the BEST guideline for deciding what the priorities should be for allocating resources to the various businesses of a diversified company?

Accepted Answer

A)  Businesses with high industry attractiveness ratings should be given top priority and those with low industry attractiveness ratings should be given low priority. 
B)  Business subsidiaries with the brightest profit and growth prospects, attractive positions on the nine-cell matrix, and solid strategic and resource fits generally should head the list for corporate resource support. 
C)  The positions of each business in the nine-cell attractiveness-strength matrix should govern resource allocation. 
D)  Businesses with the most strategic and resource fits should be given top priority and those with the fewest strategic and resource fits should be given low priority. 
E)  Businesses with high competitive strength ratings should be given top priority and those with low competitive strength ratings should be given low priority. 
A)  Businesses with high industry attractiveness ratings should be given top priority and those with low industry attractiveness ratings should be given low priority. 
B)  Business subsidiaries with the brightest profit and growth prospects, attractive positions on the nine-cell matrix, and solid strategic and resource fits generally should head the list for corporate resource support. 
C)  The positions of each business in the nine-cell attractiveness-strength matrix should govern resource allocation. 
D)  Businesses with the most strategic and resource fits should be given top priority and those with the fewest strategic and resource fits should be given low priority. 
E)  Businesses with high competitive strength ratings should be given top priority and those with low competitive strength ratings should be given low priority.

Question 12

With an unrelated diversification strategy, the types of companies that make particularly attractive acquisition targets are

Accepted Answer

A)  struggling companies with good turnaround potential, undervalued companies that can be acquired at a bargain price, and companies that have bright growth prospects but are short on investment capital. 
B)  companies offering the biggest potential to reduce labor costs. 
C)  cash cow businesses with excellent financial fit. 
D)  companies that are market leaders in their respective industries. 
E)  companies that employ the same basic type of competitive strategy as the parent corporation's existing businesses. 
A)  struggling companies with good turnaround potential, undervalued companies that can be acquired at a bargain price, and companies that have bright growth prospects but are short on investment capital. 
B)  companies offering the biggest potential to reduce labor costs. 
C)  cash cow businesses with excellent financial fit. 
D)  companies that are market leaders in their respective industries. 
E)  companies that employ the same basic type of competitive strategy as the parent corporation's existing businesses.

Question 13

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

Accepted Answer

A)  the costs of searching for an attractive target. 
B)  the costs of evaluating its worth. 
C)  bargaining costs. 
D)  the costs of completing the transaction. 
E)  the premium cost. 
A)  the costs of searching for an attractive target. 
B)  the costs of evaluating its worth. 
C)  bargaining costs. 
D)  the costs of completing the transaction. 
E)  the premium cost.

Question 14

The basic premise of unrelated diversification is that

Accepted Answer

A)  the least risky way to diversify is to seek out businesses that are leaders in their respective industry. 
B)  the best companies to acquire are those that offer the greatest economies of scope rather than the greatest economies of scale. 
C)  the best way to build shareholder value is to acquire businesses with strong cross-business financial fit. 
D)  any company that can be acquired on good financial terms and that has satisfactory growth and earnings potential represents a good acquisition and a good business opportunity. 
E)  the task of building shareholder value is better served by seeking to stabilize earnings across the entire business cycle than by seeking to capture cross-business strategic fits. 
A)  the least risky way to diversify is to seek out businesses that are leaders in their respective industry. 
B)  the best companies to acquire are those that offer the greatest economies of scope rather than the greatest economies of scale. 
C)  the best way to build shareholder value is to acquire businesses with strong cross-business financial fit. 
D)  any company that can be acquired on good financial terms and that has satisfactory growth and earnings potential represents a good acquisition and a good business opportunity. 
E)  the task of building shareholder value is better served by seeking to stabilize earnings across the entire business cycle than by seeking to capture cross-business strategic fits.

Question 15

The decision to pursue diversification requires management to resolve which industries to enter and whether to enter, and includes such decisions as the following, EXCEPT

Accepted Answer

A)  selecting the appropriate value chain operating practices to improve the financial outlook. 
B)  starting a business from the ground up. 
C)  acquiring a company already established in the target industry. 
D)  forming a joint venture or partnership with another company. 
E)  structuring a strategic alliance with another company to take advantage of the opportunity. 
A)  selecting the appropriate value chain operating practices to improve the financial outlook. 
B)  starting a business from the ground up. 
C)  acquiring a company already established in the target industry. 
D)  forming a joint venture or partnership with another company. 
E)  structuring a strategic alliance with another company to take advantage of the opportunity.

Question 16

Which of the following statements about cross-business strategic fit in a diversified enterprise is NOT accurate?

Accepted Answer

A)  Strategic fit between two businesses exists when the management know-how accumulated in one business is transferable to the other. 
B)  Strategic fit exists when two businesses present opportunities to economize on marketing, selling, and distribution costs. 
C)  Competitively valuable cross-business strategic fits are what enable related diversification to produce a synergistic performance outcome. 
D)  Strategic fit is primarily a by-product of unrelated diversification and exists when the value chain activities of unrelated businesses possess economies of scope and good financial fit. 
E)  Strategic fit exists when a company can transfer its brand-name reputation to the products of a newly acquired business and add to the competitive power of the new business. 
A)  Strategic fit between two businesses exists when the management know-how accumulated in one business is transferable to the other. 
B)  Strategic fit exists when two businesses present opportunities to economize on marketing, selling, and distribution costs. 
C)  Competitively valuable cross-business strategic fits are what enable related diversification to produce a synergistic performance outcome. 
D)  Strategic fit is primarily a by-product of unrelated diversification and exists when the value chain activities of unrelated businesses possess economies of scope and good financial fit. 
E)  Strategic fit exists when a company can transfer its brand-name reputation to the products of a newly acquired business and add to the competitive power of the new business.

Question 17

The chief purpose of calculating quantitative industry attractiveness scores for each industry a company has diversified into is to

Accepted Answer

A)  determine which industry is the biggest and fastest growing. 
B)  get in position to rank the industries from most competitive to least competitive. 
C)  provide a basis for drawing analysis-based conclusions about the attractiveness of the industries a company has diversified into, both individually and as a group, and further to provide an indication of which industries offer the best and worst long-term prospects. 
D)  ascertain which industries have the easiest-to-achieve key success factors. 
E)  rank the attractiveness of the various industry value chains from best to worst. 
A)  determine which industry is the biggest and fastest growing. 
B)  get in position to rank the industries from most competitive to least competitive. 
C)  provide a basis for drawing analysis-based conclusions about the attractiveness of the industries a company has diversified into, both individually and as a group, and further to provide an indication of which industries offer the best and worst long-term prospects. 
D)  ascertain which industries have the easiest-to-achieve key success factors. 
E)  rank the attractiveness of the various industry value chains from best to worst.

Question 18

Conditions that may make corporate restructuring strategies appealing include all of the following EXCEPT

Accepted Answer

A)  ongoing declines in the market shares of one or more major business units that are falling prey to more market-savvy competitors. 
B)  a business lineup that consists of too many slow-growth, declining, low-margin, or competitively weak businesses. 
C)  an excessive debt burden with interest costs that eat deeply into profitability. 
D)  ill-chosen acquisitions that haven't lived up to expectations. 
E)  a business lineup that consists of too many cash cow businesses. 
A)  ongoing declines in the market shares of one or more major business units that are falling prey to more market-savvy competitors. 
B)  a business lineup that consists of too many slow-growth, declining, low-margin, or competitively weak businesses. 
C)  an excessive debt burden with interest costs that eat deeply into profitability. 
D)  ill-chosen acquisitions that haven't lived up to expectations. 
E)  a business lineup that consists of too many cash cow businesses.

Question 19

When should a business NOT be divested?

Accepted Answer

A)  when the business is worth more to another company than to the parent company 
B)  when the business is a cash cow 
C)  when the business provides valuable strategic or resource fits for another company 
D)  when shareholders would be better served if the company sells the business for a generous premium 
E)  when the business lacks the cross-boundary presence of shared values and cultural compatibility 
A)  when the business is worth more to another company than to the parent company 
B)  when the business is a cash cow 
C)  when the business provides valuable strategic or resource fits for another company 
D)  when shareholders would be better served if the company sells the business for a generous premium 
E)  when the business lacks the cross-boundary presence of shared values and cultural compatibility

Question 20

The tests of whether a diversified company's businesses exhibit resource fit do NOT include whether

Accepted Answer

A)  the excess cash flows generated by cash cow businesses are sufficient to cover the negative cash flows of its cash hog businesses. 
B)  a business adequately contributes to achieving the corporate parent's performance targets. 
C)  the company has adequate financial strength to fund its different businesses and maintain a healthy credit rating. 
D)  the corporate parent has sufficient cash to fund the needs of its individual businesses and pay dividends to shareholders without having to borrow money. 
E)  the corporate parent has or can develop sufficient resource strengths and competitive capabilities to be successful in each of the businesses it has diversified into. 
A)  the excess cash flows generated by cash cow businesses are sufficient to cover the negative cash flows of its cash hog businesses. 
B)  a business adequately contributes to achieving the corporate parent's performance targets. 
C)  the company has adequate financial strength to fund its different businesses and maintain a healthy credit rating. 
D)  the corporate parent has sufficient cash to fund the needs of its individual businesses and pay dividends to shareholders without having to borrow money. 
E)  the corporate parent has or can develop sufficient resource strengths and competitive capabilities to be successful in each of the businesses it has diversified into.

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

The attractiveness test is the most important test for determining whether diversification into a new business is likely to result in 1 + 1 = 3 increases in shareholder value (as opposed to simply a 1 + 1 = 2 type of increase). True or false? Justify and explain your answer.

Identify and briefly discuss each of the three options for entering new businesses. What are the driving choice parameters for entry into new businesses and which one is the most popular in the sense of being used most frequently?

What is meant by the term strategic fit? What are the advantages of pursuing strategic fit and matchups in choosing which industries to diversify into?

An acquisition premium is the amount by which the price offered for an existing business exceeds the

There is ample room for companies to customize their diversification strategies and be defined as being either narrowly or broadly diversified, and when combination related-unrelated diversification strategy options are adopted, they have particular appeal to

A diversified company's business units exhibit good resource fit when

The three tests for judging whether a particular diversification move can create value for shareholders are the

An additional, and often very important motivating factor for adding new businesses is to complement and strengthen the market position and competitive capabilities of one or more of its present businesses. Explain and give three examples.

What are the four main strategic paths that a diversified company can employ to improve the performance of its overall business lineup?

Which of the following is the BEST guideline for deciding what the priorities should be for allocating resources to the various businesses of a diversified company?

With an unrelated diversification strategy, the types of companies that make particularly attractive acquisition targets are

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

The basic premise of unrelated diversification is that

The decision to pursue diversification requires management to resolve which industries to enter and whether to enter, and includes such decisions as the following, EXCEPT

Which of the following statements about cross-business strategic fit in a diversified enterprise is NOT accurate?

The chief purpose of calculating quantitative industry attractiveness scores for each industry a company has diversified into is to

Conditions that may make corporate restructuring strategies appealing include all of the following EXCEPT

When should a business NOT be divested?

The tests of whether a diversified company's businesses exhibit resource fit do NOT include whether

What Is Strategy and Why Is It Important

Leading the Process of Crafting and Executing Strategy

Evaluating a Companys External Environment

Evaluating a Companys Resources and Competitive Position

The Five Generic Competitive Strategies: Which One to Employ

Supplementing the Chosen Competitive Strategy: Other Important Business Strategy Choices

Strategies for Competing in Foreign Markets

Ethical Business Strategies, Social Responsibility, and Environmental Sustainabil ITY

Building an Organization Capable of Good Strategy Execution

Managing Internal Operations: Actions That Promote Good Strategy Execution

Corporate Culture and Leadership: Keys to Good Strategy Execution

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Exam 8: Diversification: Strategies for Managing a Group of Businesses

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

The attractiveness test is the most important test for determining whether diversification into a new business is likely to result in 1 + 1 = 3 increases in shareholder value (as opposed to simply a 1 + 1 = 2 type of increase). True or false? Justify and explain your answer.

Identify and briefly discuss each of the three options for entering new businesses. What are the driving choice parameters for entry into new businesses and which one is the most popular in the sense of being used most frequently?

What is meant by the term strategic fit? What are the advantages of pursuing strategic fit and matchups in choosing which industries to diversify into?

An acquisition premium is the amount by which the price offered for an existing business exceeds the

There is ample room for companies to customize their diversification strategies and be defined as being either narrowly or broadly diversified, and when combination related-unrelated diversification strategy options are adopted, they have particular appeal to

A diversified company's business units exhibit good resource fit when

The three tests for judging whether a particular diversification move can create value for shareholders are the

An additional, and often very important motivating factor for adding new businesses is to complement and strengthen the market position and competitive capabilities of one or more of its present businesses. Explain and give three examples.

What are the four main strategic paths that a diversified company can employ to improve the performance of its overall business lineup?

Which of the following is the BEST guideline for deciding what the priorities should be for allocating resources to the various businesses of a diversified company?

With an unrelated diversification strategy, the types of companies that make particularly attractive acquisition targets are

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

The basic premise of unrelated diversification is that

The decision to pursue diversification requires management to resolve which industries to enter and whether to enter, and includes such decisions as the following, EXCEPT

Which of the following statements about cross-business strategic fit in a diversified enterprise is NOT accurate?

The chief purpose of calculating quantitative industry attractiveness scores for each industry a company has diversified into is to

Conditions that may make corporate restructuring strategies appealing include all of the following EXCEPT

When should a business NOT be divested?

The tests of whether a diversified company's businesses exhibit resource fit do NOT include whether

What Is Strategy and Why Is It Important

Leading the Process of Crafting and Executing Strategy

Evaluating a Companys External Environment

Evaluating a Companys Resources and Competitive Position

The Five Generic Competitive Strategies: Which One to Employ

Supplementing the Chosen Competitive Strategy: Other Important Business Strategy Choices

Strategies for Competing in Foreign Markets

Ethical Business Strategies, Social Responsibility, and Environmental Sustainabil ITY

Building an Organization Capable of Good Strategy Execution

Managing Internal Operations: Actions That Promote Good Strategy Execution

Corporate Culture and Leadership: Keys to Good Strategy Execution

Filters