And the stock price effect test

Chapter 08 Test Bank Key

1. In terms of strategy making, what is the difference between a one­business company and a diversified company?

E. The first uses a single­line strategy, while the second uses a multi­line strategy.

In a one­business company, managers have to come up with a plan for competing successfully in only a single industry environment—labeled as business strategy (or business­level strategy). But in a diversified company, the strategy­making challenge involves developing a set of business strategies, one for each industry arena in which the diversified company operates and a companywide (or corporate) strategy for improving the performance of the company's overall business lineup.

D. establishing investment priorities and steering corporate resources into the most attractive business units.

E. divesting well­performing
businesses.

A. selecting the appropriate value chain operating practices to improve the financial outlook.

B. starting a business from the
ground up.

5. To take advantage of cross­business value chain relationships and strategic fit and turn them into a competitive advantage requires that companies determine whether there are opportunities to strengthen the business, which includes such tasks as all of the following, EXCEPT:

A. the transferring of valuable resources and capabilities from one business to another.

Forcing cultural independence, operating diversity, and sophisticated analytical responsibility on the businesses are not tasks for leveraging cross­business value chain relationships into competitive advantage.

6. Establishing investment priorities and steering corporate resources into the most attractive business units typically requires the company to decide on all of the following options, EXCEPT:

E. the divestiture of businesses that do not fit into the company's longer term plans.

The pursuit of debt reduction opportunities that can lower the debt/equity ratio while maintaining asset levels is not one of the rapid growth strategies for a company.

D. restructuring the entire company by adding and removing businesses to improve overall performance.

E. refocusing the existing businesses on new substitute product­line opportunities outside the existing industry framework.

C. has a powerful and well­known 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 businesses.

D. can open up new avenues for reducing costs by diversifying into closely related businesses.

B. the strategic fit test, the competitive advantage test, and the return­on­ investment test.

C. the resource fit test, the profitability test, and the shareholder value test.

A. the profit test, the competitive strength test, the industry attractiveness test, and the capital gains test.

B. the better­off test, the competitive advantage test, the profit expectations test, and the shareholder value test.

11. The better­off test for evaluating whether a particular diversification move is likely to generate added value for shareholders involves assessing whether the move will:

A. make the company better off because it will produce a greater number of core competencies.

Diversification does not result in added long­term value for shareholders unless it produces a 1 plus 1 equal to 3 effect, whereby the businesses perform better together as part of the same firm than they could have performed as independent companies.

12. A company can best accomplish diversification into new industries by:

E. employing an offensive strategy with new product innovation as its centerpiece.

A company can achieve diversification by acquiring an existing company, starting up a new business from scratch, or forming a joint venture with one or more companies to enter new businesses. In every case, however, the decision to diversify must start with a strong economic justification for doing so.

D. is more likely to result in passing the shareholder value test, the profitability test, and the better­off 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.

C. the comparable value of similar companies within the same market.

D. the amount paid as a down payment to be held in escrow until closing.

16. Which of the following is NOT a factor that makes it appealing to diversify into a new industry by forming an internal startup 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 to overcome entry barriers and there is ample time to launch the business and compete effectively
C. When adding new production capacity will not adversely impact the supply demand balance in the industry by creating oversupply conditions
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
If the target industry is already comprised of several relatively large and well­established firms, it will not be appealing for a company to form an internal startup and enter and compete in the same industry.

D. establishing supplier
relationships.

E. acquiring technical know­
how.

C. bargaining
costs.

D. the costs of completing the
transaction.

B. the products of the different businesses are bought by many of the same types of buyers.

C. the products of the different businesses are sold in the same types of retail stores.

A. sell products from the different businesses to much the same types of buyers and retail outlets.

B. have dissimilar value chains and resource requirements with no competitively important cross­business commonalities at the value chain level.

21. A related diversification strategy involves building the company around businesses:

A. with strategic fit with respect to key value chain activities and competitive assets.

A related diversification strategy involves building the company around businesses where there is good strategic fit across corresponding value chain activities. Strategic fit exists whenever one or more activities constituting the value chains of different businesses are sufficiently similar to present opportunities for cross­business sharing or transferring of the resources and capabilities that enable these activities.

22. Which of the following is NOT one of the appeals of related diversification?

E. It can facilitate sharing of other resources (besides brands) that support corresponding value chain activities across businesses.

Related diversification is based on value chain matchups with respect to key value chain activities—those that play a central role in each business's strategy and that link to its industry's key success factors. Such matchups facilitate the sharing or transfer of the resources and capabilities that enable the performance of these activities and underlie each business's quest for competitive advantage. By facilitating the sharing or transferring of such important competitive assets, related diversification can elevate each business's prospects for competitive success.

D. for cross­business collaboration to build valuable new resource strengths and competitive capabilities.

E. to maintain business value chain activities separate and apart from one business to another to protect company independence.

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).

26. Businesses with strategic fit with respect to their supply chain activities perform better together because of all of the following EXCEPT:

A. the potential for skills transfer in procuring
materials.

Businesses with strategic fit with respect to their supply chain activities can perform better together because of the potential for transferring skills in procuring materials, sharing resources and capabilities in logistics, collaborating with common supply chain partners, and/or increasing leverage with shippers in securing volume discounts on incoming parts and components.

27. Which of the following is NOT a contributing reason for businesses with strategic fit in R&D or technology activities to perform better together?

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.

A. Strategic fit between two businesses exists when the management know­how 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.

30. What makes related diversification an attractive strategy?

A. The ability to broaden the company's
product line
B. The opportunity to convert cross­business strategic fit into competitive advantage over business rivals whose operations don't offer comparable strategic fit benefits
C. The potential for improving the stability of the company's financial
performance
D. The ability to serve a broader spectrum of buyer
needs
E. The added capability it provides in overcoming the barriers to entering foreign
markets
What makes related diversification an attractive strategy is the opportunity to convert cross­business strategic fit into a competitive advantage over business rivals whose operations do not offer comparable strategic­fit benefits.

D. are present whenever diversification satisfies the attractiveness test and the cost­of­ entry test.

E. arise mainly from strategic fit relationships in the distribution portions of the value chains of unrelated businesses.

C. stem from cost­saving strategic fits along the value chains of related businesses.

D. refer to the cost savings that flow from operating across all or most of an industry's value chain activities.

B. performing all of the value chain activities of related sister businesses at the same location.

C. extending the firm's scope of operations over a wider
geographic area.

A. offers ways for a firm to realize 1 + 1 = 3 benefits because the value chains of the different businesses present competitively valuable cross­business relationships.

B. is less capital intensive and usually more profitable than unrelated diversification.

35. 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.

With a strategy of unrelated diversification, an acquisition is deemed to have potential if it passes the industry­attractiveness and cost of entry tests and if it has good prospects for attractive financial performance.

36. With a strategy of unrelated diversification, an acquisition is deemed to have potential if it:

D. can pass at least the industry attractiveness test if not the cost of entry test.

E. can add economic value for
managers.

C. the corporation's ability to provide generalized support resources so as to create value by lowering companywide overhead costs by eliminating duplication of efforts.

D. efforts to capitalize on the umbrella brands and enhance value proposition across businesses.

B. is a brand name that can steer a narrow assortment of
business types.

C. represents a public disclosure spotlighting the corporate
image.

A. is more able than other companies to boost the combined performance of its individual businesses through its high­level guidance, general oversight, and other corporate­level contributions.

B. is more able than other companies to create positive collaboration within its portfolio for different specialty groups and geographic locations.

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

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.

Struggling companies with good turnaround potential, undervalued companies that can be acquired at a bargain price, and companies with bright growth prospects but short on investment capital are all attractive acquisition targets for a company with an unrelated diversification strategy.