Question 1

The two biggest drawbacks or disadvantages of unrelated diversification are

Accepted Answer

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 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 it has diversified into. 
E)  the difficulties of achieving economies of scope and conflicts/incompatibility among the competitive strategies of the company's different businesses.

Question 2

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

Accepted Answer

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.

Question 3

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

Accepted Answer

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.

Question 4

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

Accepted Answer

A)  Market size and projected growth rate, industry profitability, and the intensity of competition 
B)  Industry uncertainty and business risk 
C)  The 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)  The presence of cross-industry strategic fits

Question 5

The essential requirement for different businesses to be "related" is that

Accepted Answer

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.

Question 6

The essential requirement for different businesses to be "related" is that

Accepted Answer

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 productions methods that they employ both entail economies of scale.

Question 7

What rationales for unrelated diversification are not likely to increase shareholder value?

Accepted Answer

A)  To reduce risk by spreading the company's investments over a set of truly diverse industries 
B)  To enable a company to achieve rapid or continuous growth 
C)  To chance that market downtrends in some of the company's businesses will be partially offset by cyclical upswings in its other businesses 
D)  To provide benefits to managers such as high compensation and reduction in employment risk 
E)  All of the above

Question 8

When evaluating strategic fit benefits that related diversification can deliver one must keep in consideration a number of factors. Which one is not relevant?

Accepted Answer

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 is 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.

Question 9

Corporate restructuring strategies

Accepted Answer

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.

Question 10

Economies of scope

Accepted Answer

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.

Question 11

Acquisition of an existing business is an attractive strategy option for entering a promising new industry because it

Accepted Answer

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.

Question 12

The basic purpose of calculating competitive strength scores for each of a diversified company's business units is to

Accepted Answer

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.

Question 13

The businesses in a diversified company's lineup exhibit good resource fit when

Accepted Answer

A)  the resource requirements of each business exactly match the resources the company has available. 
B)  individual businesses add to a company's resource strengths and when a company has the resources to adequately support the requirements of its businesses as a group without spreading itself too thin. 
C)  each business 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.

Question 14

A company that is already diversified may choose to broaden its business base by building positions in new related or unrelated businesses because

Accepted Answer

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.

Question 15

Diversification merits strong consideration whenever a single-business company

Accepted Answer

A)  has integrated backward and forward as far as it can. 
B)  is faced with 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.

Question 16

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?

Accepted Answer

A)  Stick closely with the existing business lineup 
B)  Restructure the company's business lineup 
C)  Craft new initiatives to build/enhance the company's reputation 
D)  Divest some businesses and retrench to a narrower diversification base 
E)  Broaden the diversification base

Question 17

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?

Accepted Answer

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

Question 18

A joint venture is an attractive way for a company to enter a new industry when

Accepted Answer

A)  a 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)  it 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)  it has not built up a hoard of cash with which to finance a diversification effort.

Question 19

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.

Question 20

A joint venture is an attractive way for a company to enter a new industry when

Accepted Answer

A)  the pool of attractive acquisition candidates in the target industry is relatively small. 
B)  it 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 a company to pursue alone or when a company lacks some important resources or competencies and needs a partner to supply them.

Exam 8: Corporate Strategy: Diversification and the Multibusiness Company

The two biggest drawbacks or disadvantages of unrelated diversification are

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

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

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

The essential requirement for different businesses to be "related" is that

The essential requirement for different businesses to be "related" is that

What rationales for unrelated diversification are not likely to increase 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?

Corporate restructuring strategies

Economies of scope

Acquisition of an existing business is an attractive strategy option for entering a promising new industry because it

The basic purpose of calculating competitive strength scores for each of a diversified company's business units is to

The businesses in a diversified company's lineup exhibit good resource fit when

A company that is already diversified may choose to broaden its business base by building positions in new related or unrelated businesses because

Diversification merits strong consideration whenever a single-business company

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?

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 joint venture is an attractive way for a company to enter a new industry when

The basic premise of unrelated diversification is that

A joint venture is an attractive way for a company to enter a new industry when