he correct answer for each question is indicated by a

1
INCORRECT

Which one of the following is not one of the elements of crafting corporate
strategy for a diversified company?

A)

Picking the new industries to enter and deciding on the means of entry.

Initiating actions to boost the combined performance of the businesses

B)the firm has entered.

Standardizing the resource fit across the group of businesses the

C)company has diversified into.

Establishing investment priorities and steering corporate resources into

D)the most attractive business units.

Pursuing opportunities to leverage cross-business value chain

E)relationships and strategic fits into competitive advantage.

2 CORRECT
Important reasons for a company to consider diversification include
_______________

A)

a desire to avoid putting all of its "eggs" in one industry basket.

diminishing market opportunities and stagnating sales in its principal

B)business.
opportunities to leverage existing competencies and capabilities by
expanding into businesses where these same resources are key success
C)factors and valuable competitive assets.
an opportunity to lower costs by entering closely related businesses
and/or an opportunity to transfer a powerful and well-respected brand
D)name to the products of other businesses and thereby increase the sales
and profits of these newly entered businesses.

E)

3
INCORRECT

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:
the attractiveness test, the barrier-to-entry test, and the growth test.

A)

B)

C)

D)

the strategic fit test, the resource fit test, and the profitability test.

the barrier-to-entry test, the growth test, and the shareholder value test.

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

the resource fit test, the strategic fit test, the profitability test, and the
E)shareholder value test.

4
INCORRECT

The better-off test for evaluating whether a particular diversification move is

likely to generate added value for shareholders involves _______________
evaluating whether the diversification move will produce a 1 + 1 = 3
outcome such that the companys different businesses perform better
A)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
B)off by increasing its resources 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
C)and/or suppliers.
assessing whether the diversification move will make the company better
D)off by increasing its profit margins and returns on investment.

E)

All of these.

5 CORRECT
Which of the following does not accurately describe entering a new business
via acquisition, internal development, or a joint venture?
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
A)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
B)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
C)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
D)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 market.
The big drawbacks to entering a new industry via internal development
include the costs of overcoming entry barriers, building an organization
E)from the ground up, and the extra time it takes to build a strong and
profitable competitive position.

6 CORRECT
The defining characteristic of related diversification (as opposed to unrelated
diversification) is _______________
that the businesses the company has diversified into are utilizing similar
A)competitive strategies.

the presence of cross-business value chain relationships and strategic

B)fits.

that each business the company has diversified into has very similar core
C)competencies and competitive capabilities.

that the company has about the same number of cash cow businesses as
D)it does cash hog businesses.

the existence of cross-industry resource fits and similar key success

E)factors from industry to industry.

7 CORRECT
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)a powerful brand name, and/or cross-business collaboration in creating
stronger competitive capabilities.
it is less capital intensive than unrelated diversification because related
diversification emphasizes getting into cash cow businesses (as opposed
B)to cash hog businesses).
it involves diversifying into industries having the same kinds of key
C)success factors.

it is less risky than unrelated diversification because it avoids the

D)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
E)buyer groups and/or buyer needs.

8
INCORRECT

Which of the following is the best example of related diversification?

A manufacturer of golf shoes diversifying into the production of fishing
A)rods and fishing lures.

B)

C)

A homebuilder acquiring a building materials retailer.

A steel producer acquiring a manufacturer of farm equipment.

A producer of snow skis and ski boots acquiring a maker of ski apparel
and accessories (outerwear, goggles, gloves and mittens, helmets and
D)toboggans).

E)

9
INCORRECT

A publisher of college textbooks acquiring a publisher of magazines.

Economies of scope _______________

stem from the cost-saving efficiencies of scattering a companys
A)manufacturing/assembly plants over a wider geographic area.

have to do with the cost-saving efficiencies of operating across a bigger

B)portion of an industrys total value chain.

stem from cost-saving strategic fits along the value chains of related
C)businesses.

refer to the cost savings that flow from being able to combine the value
D)chains of different businesses into a single value chain.

are like economies of scale and arise from being able to lower costs via a
E)larger volume operation.

10
CORRECT

Cross-business strategic fits can exist _______________

in the R&D and technology portion of the value chains of related

A)businesses.

B)

in the supply chain portion of the value chains of related businesses.

in the manufacturing or production portions of the value chains of related

C)businesses.

in the sales and marketing portion of the value chains of related

D)businesses.

All of the above; cross-business strategic fits can exist anywhere along
E)the values chains of related businesses.

11
CORRECT

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
A)strategic fit).
that the value chains of different businesses are so dissimilar that no
competitively valuable cross-business relationships are present (in other
B)words, the value chains of a companys 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
C)resource fit).

D)

E)

12
INCORRECT

that the companys businesses are in different industries.

the presence of cross-business financial fit.

Which one of the following is not part of the task of critiquing a diversified
companys strategy, assessing its business makeup, and deciding how to
improve overall company performance?
Checking whether each business a company has diversified into can pass
the profitability test, the capital gains test, the growth rate test, and the
A)resources test.

B)

Checking for strategic fit and resource fit.

Ranking the performance prospects of the businesses from best to worst

and determining what the corporate parents priority should be in
C)allocating resources to its various businesses.
Assessing the attractiveness of the industries the company has
D)diversified into, both individually and as a group.
Assessing the competitive strength of the companys business units and
determining how many are strong contenders in their respective
E)industries.

13
INCORRECT

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
A)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 firms profit margins are above/below the industry averages, and
B)then using these values to draw conclusions about industry
attractiveness.
rating the attractiveness of each industrys strategic and resource fit,
summing the attractiveness scores, and determining whether the overall
C)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
D)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
E)companys prospects for being able to charge above-average prices make
the industry attractive or unattractive.

14
INCORRECT

The basic purpose of calculating competitive strength scores for each of a

diversified company's business units is to _______________
determine which business unit has the greatest number of resources,
A)competencies, and competitive capabilities and which one has the least.
assess how strongly positioned each business unit is in its industry and
the extent to which it already is or can become a strong market
B)contender.

C)

D)

E)

15
CORRECT

rank each business units strategic fit from highest to lowest.

rank each business units resource fit from highest to lowest.

rank each business units strategy from best to worst.

The nine-cell industry attractiveness-competitive strength matrix

_______________
is a valuable tool for ranking a companys different businesses from best
A)to worst based on strategic fit.

shows which of a diversified companys businesses have good/poor

B)resource fit.

indicates which businesses have the highest/lowest economies of scale

C)and which have the highest/lowest economies of scope.
uses quantitative measures of industry attractiveness and competitive
strength to plot each businesss location on the matrixthe thesis
D)underlying the matrix is that there are good reasons to concentrate the
companys 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 companys businesses are resource-rich
E)cash cows and which are resource-poor cash hogs.

16
CORRECT

Checking a diversified companys business lineup for the competitive

advantage potential of cross-business strategic fits involves searching for
and evaluating how much benefit a diversified company can gain from value
chain matchups that present _______________
opportunities to combine the performance of certain activities, thereby
A)reducing costs and capturing economies of scope.

opportunities to transfer skills, technology, or intellectual capital from

B)one business to another, thereby leveraging use of existing resources.
opportunities to share use of a well-respected brand name.
C)

opportunities for sister businesses to collaborate in creating valuable new

competitive capabilities (such as enhanced supply chain management
D)capabilities, quicker first-to-market capabilities, or greater product
innovation capabilities).

E)

17
CORRECT

All of the above.

Checking a diversified companys business lineup for resource fit

does not involve which one of the following tests?
Determining whether a company has or can develop the specific
resources and competitive capabilities needed to be successful in each of
A)its businesses.
Determining whether recently acquired businesses are acting to
strengthen the companys resource base and competitive capabilities or
B)whether they are causing its competitive and managerial resources to be
stretched too thin.
Determining whether each business adequately contributes to achieving
C)companywide performance targets.

Determining whether the company has enough cash hog businesses to

D)supply capital to its cash cow businesses.
Determining whether the company has adequate financial strength to
fund the needs of its various businesses and maintain a healthy credit
E)rating.

18
CORRECT

Ranking a diversified companys businesses in terms of priority for resource

allocation and new capital investment _______________
should be done chiefly on the basis of appealing industry attractiveness
and resource fit and secondarily on the basis of competitive strength and
A)strategic fit with other businesses.
entails arraying the various businesses from the biggest cash hog down
to the biggest cash cow; big cash hogs get the highest priority for
B)resource allocation and big cash cows get the lowest priority.
should be done principally on the basis of which businesses offer the best
prospects (given their industry attractiveness and competitive strength)
C)and, also, have solid and appealing strategic fits and resource fits.
should be based chiefly on relative market share, recent profitability, and
D)potential for achieving cash cow status.
should be based primarily on cross-business resource fit considerations,
each business units relative market share, and each businesss projected
ability to cover its debt payments and generate positive cash flows.

E)

19
INCORRECT

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?
Broadening the firm's business scope by diversifying into additional
A)businesses.

B)

Shifting from a multiple-country to a global strategy.

Restructuring the companys business lineup with a combination of

divestitures and new acquisitions to put a whole new face on the
C)companys business makeup.
Sticking closely with the existing business lineup and pursuing the
D)opportunities these businesses present.

Divesting some businesses and retrenching to a narrower base of

E)business operations.

20
INCORRECT

Corporate restructuring strategies _______________

focus on broadening the scope of diversification to include a larger
A)number of businesses and boost the company's growth and profitability.

involve rightsizing the company's labor force to reduce the costs of

B)salaries and benefits.

are directed at achieving a 1 + 1 = 3 effect from the company's

C)diversification strategy.

focus on crafting initiatives to restore a diversified company's moneyD)losing businesses to profitability.

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

Strategic analysis in diversified companies is an eight-step process:

Step 1:Get a clear fix on the present strategy. Determine whether the company's strategic
emphasis is on related or unrelated diversification; whether the scope of company operations is
mostly domestic or increasingly multinational, what moves have been made recently to add new
businesses and build positions in new industries, the rationale underlying recent divestitures, the
nature of any efforts to capture strategic fits and create competitive advantage based on
economies of scope and/or resource transfer, and the pattern of resource allocation to the various
business units. This step sets the stage for thorough evaluation of the need for strategy changes.
Step 2:Evaluate the long-term attractiveness of the industries into which the firm has
diversified. Industry attractiveness needs to be evaluated from three angles: the attractiveness of
each industry on its own, the attractiveness of each industry relative to the others, and the
attractiveness of all the industries as a group. Quantitative measures of industry attractiveness tell
a valuable story about just how and why some of the industries a company has diversified into are
more attractive than others. The two hardest parts of calculating industry attractiveness scores are
deciding on appropriate weights for the industry attractiveness measures and knowing enough
about each industry to assign accurate and objective ratings.
Step 3:Evaluate the relative competitive strength of each of the company's business units. Again,
quantitative ratings of competitive strength are preferable to subjective judgments. The purpose of
rating the competitive strength of each business is to gain clear understanding of which businesses
are strong contenders in their industries, which are weak contenders, and the underlying reasons
for their strength or weakness. Join the conclusions about industry attractiveness with the
conclusions about competitive strength by drawing an industry attractiveness/ competitive
strength matrix displaying the positions of each business on a nine-cell grid; use the
attractiveness/strength matrix to help determine the prospects of each business and what priority
they should have in allocating corporate resources and investment capital.
Step 4: Check for cross-business value chain relationships and strategic fit. A business is more
attractive strategically when it has value chain relationships with sister business units that present
opportunities to transfer skills or technology, reduce overall costs, share facilities, or share a
common brand name-any of which can represent a significant avenue for producing competitive
advantage beyond what any one business can achieve on its own. The more businesses with
competitively valuable strategic fits, the greater a diversified company's potential for achieving
economies of scope, enhancing the competitive capabilities of particular business units, and/or
strengthening the competitiveness of its product and business lineup, thereby realizing a combined
performance greater than the units could achieve operating independently.
Step 5:Determine whether the firm's resource strengths fit the resource requirements of its
present business lineup. The businesses in a diversified company's lineup need to exhibit
good resource fit as well as good strategic fit. Resource fit exists when (1) businesses add to a
company's resource strengths, either financially or strategically, (2) a company has the resources
to adequately support the resource requirements of its businesses as a group without spreading
itself too thin, and (3) there are close matches between a company's resources and industry key
success factors. One important dimension of resource fit concerns whether the company's business
lineup is well matched to its financial resources. Assessing the cash requirements of different
businesses in a diversified company's portfolio and determining which are cash hogs and which are
cash cows highlights opportunities for shifting corporate financial resources between business
subsidiaries to optimize the performance of the whole corporate portfolio, explains why priorities
for corporate resource allocation can differ from business to business, and provides good
rationalizations for both invest-and-expand strategies and divestiture.
Step 6:Rank the different business units on past performance and future prospects. The most
important considerations in judging business-unit performance are sales growth, profit growth,
contribution to company earnings, and the return on capital invested in the business. Sometimes,
cash flow generation is a big consideration. Normally, strong business units in attractive industries
have significantly better performance prospects than weak businesses or businesses in
unattractive industries.

Step 7:Decide on priorities for resource allocation and whether the general strategic direction for
each business unit should be aggressive expansion, fortify and defend, overhaul and reposition, or
harvest/divest. In doing the ranking, special attention needs to be given to whether and how
corporate resources and capabilities can be used to enhance the competitiveness of particular
business units. Options for allocating a diversified company's financial resources include (1)
investing in ways to strengthen or expand existing businesses, (2) making acquisitions to establish
positions in new industries, (3) funding long-range R&D ventures, (4) paying off existing long-term
debt, (5) increasing dividends, and (6) repurchasing the company's stock. Ideally, a company will
have the financial strength to accomplish what is needed strategically and financially; if not,
strategic uses of corporate resources should usually take precedence.
Step 8:Use the preceding analysis to craft a series of moves to improve overall corporate
performance. Typical actions include (1) making acquisitions, starting new businesses from within,
entering into new strategic alliances, and divesting marginal businesses or businesses that no
longer match the company's long-term direction and strategy; (2) devising moves to strengthen
the long-term competitive positions of the company's businesses; (3) capitalizing on strategic-fit
and resource-fit opportunities and turning them into long-term competitive advantage; and (4)
steering corporate resources out of low-opportunity areas and into high-opportunity areas.

Key Concepts and Principles