Strategic Management TB Chap009

1Test Bank, Chapter 9
Chapter 9: Diversification—Strategies for Managing a Group of Businesses
Multiple Choice Questions
The Four Facets of Crafting Corporate Strategy
1. The task of crafting corporate strategy for a diversified company encompasses

A) picking the new industries to enter and deciding on the means of entry.
B) initiating actions to boost the combined performance of the businesses the firm has entered.
C) pursuing opportunities to leverage cross-business value chain relationships and strategic fits
into competitive advantage.
D) establishing investment priorities and steering corporate resources into the most attractive
business units.
E) All of these.
Answer: E Difficulty: Easy
2. Which one of the following is not one of the elements of crafting corporate strategy for a
diversified company?
A) Picking new industries to enter and deciding on the means of entry
B) Choosing the appropriate value chain for each business the company has entered
C) Pursuing opportunities to leverage cross-business value chain relationships and strategic fits
into competitive advantage
D) Establishing investment priorities and steering corporate resources into the most attractive
business units
E) Initiating actions to boost the combined performance of the businesses the firm has entered
Answer: B Difficulty: Medium
When to Diversify
3. Diversification merits strong consideration whenever a single-business company

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.

2 Test Bank, Chapter 9
4. Diversification becomes a relevant strategic option when a company

A) spots opportunities to expand into industries whose technologies and products complement
its present business.
B) can leverage existing competencies and capabilities by expanding into industries where these
same resource strengths are key success factors and valuable competitive assets.
C) 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 businesses.
D) can open up new avenues for reducing costs by diversifying into closely related businesses.
E) All of these.
5. Diversification ought to be considered when

A) a company's profits are being squeezed and it needs to increase its net profit margins and
return on investment.
B) a company lacks sustainable competitive advantage in its present business.
C) a company begins to encounter diminishing growth prospects in its mainstay business.
D) a company has run out of ways to achieve a distinctive competence in its present business.
E) a company is under the gun to create a more attractive and cost-efficient value chain.
Answer: C Difficulty: Medium
6. Diversification becomes a relevant strategic option in all but which one of the following
situations?
A) When a company spots opportunities to expand into industries whose technologies and
products complement its present business.
B) When a company is only earning a low profit margin in its principal business
C) When a company 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 businesses.
D) When a company can open up new avenues for reducing costs by diversifying into closely
related businesses.
E) When a company can leverage existing competencies and capabilities by expanding into
industries where these same resource strengths are key success factors and valuable
competitive assets.
Answer: B Difficulty: Easy

Building Shareholder Value: The Ultimate Justification For Diversifying
7. Diversifying into new businesses is justifiable only if it

A) results in increased profit margins and bigger total profits.
B) builds shareholder value.
C) helps acompany 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.
8. To create value for shareholders via diversification, a company must

A) get into new businesses that are profitable.
B) diversify into industries that are growing rapidly.
C) spread its business risk across various industries by only acquiring firms that are strong
competitors in their respective industries.
D) diversify into businesses that can perform better under a single corporate umbrella than they
could perform operating as independent, stand-alone businesses.
E) diversify into businesses that have either key success factors or value chains that are similar
to its present businesses.
Answer: D Difficulty: Medium
9. The three tests for judging whether a particular diversification move can create value for
shareholders are
A) the attractiveness test, the profitability test, and the shareholder value test.
B) the strategic fit test, the competitive advantage test, and the return on investment test.
C) the resource fit test, the profitability test, and the shareholder value test.
D) the attractiveness test, the cost-of-entry test, and the better-off test.
E) the shareholder value test, the cost-of-entry test, and the profitability test.
Answer: D Difficulty: Hard
10. To test whether a particular diversification move has good prospects for creating added
shareholder value, corporate strategists should use
A) the profit test, the competitive strength test, the industry attractiveness test, and the capital
gains test.
B) the better-off test, the competitive advantage test, the profit expectations test, and the
shareholder value test.
C) the barrier to entry test, the competitive advantage test, the growth test, and the stock price
effect test.
D) the strategic fit test, the industry attractiveness test, the growth test, the dividend effect test,
and the capital gains test.
E) the attractiveness test, the cost of entry test, and the better-off test.
Answer: E Difficulty: Hard

11. The attractiveness test for evaluating whether diversification into a particular industry is likely to
build shareholder value involves determining whether
A) conditions in the target industry are sufficiently attractive to permit earning consistently good
profits and returns on investment.
B) the potential diversification move will boost the company’s competitive advantage in its
existing business.
C) shareholders will viewed the contemplated diversification move as attractive.
D) key success factors in the target industry are attractive.
E) there are attractive strategic fits between the value chains of the company's present businesses
and the value chain of the new business it is considering entering.
Answer: A Difficulty: Medium
12. The cost-of-entry test for evaluating whether diversification into a particular industry is likely to
build shareholder value involves
A) determining whether a newly entered business presents opportunities to cost-efficiently
transfer competitively valuable skills or technology from one business to another.
B) determining whether the cost to enter the target industry will strain the company’s credit
rating.
C) considering whether a company’s costs to enter the target industry are low enough to preserve
attractive profitability or so high that the potentials for good profitability and return on
investment are eroded.
D) determining whether the cost to enter the target industry will raise or lower the company’s
total profits.
E) determining whether the cost a company incurs to enter the target industry will raise or lower
production costs.
13. The better-off test for evaluating whether a particular diversification move is likely to generate
added value for shareholders involves
A) assessing whether the diversification move will make the company better off because it will
produce a greater number of core competencies.
B) assessing whether the diversification move will make the company better off by improving its
balance sheet strength and credit rating.
C) assessing whether the diversification move will make the company better off by spreading
shareholder risks across a greater number of businesses and industries.
D) 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.
E) assessing whether the diversification move will benefit shareholders due to gains in earnings
per share and faster stock price appreciation.

Strategies for Entering New Businesses
14. Acquisition of an existing business is an attractive strategy option for entering a promising new
industry because it
A) is an effective way to hurdle entry barriers, is usually quicker than trying to launch a brand-
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.
15. Internal start-up of a new business subsidiary can be a more attractive means of entering a
desirable new business than is acquiring an existing firm already in the targeted industry when
A) the costs associated with internal startup are less than the costs of buying an existing
company and the company has ample time and adequate resources to launch the new internal
start-up business from the ground up.
B) there is a small pool of desirable acquisition candidates.
C) the target industry is growing rapidly and no good joint venture partners are available.
D) all of the potential acquisition candidates are losing money.
E) the target industry is comprised of several relatively large and well-established firms.
16. The most popular strategy for entering new businesses and accomplishing diversification is
A) forming a joint venture with another company to enter the target industry.
B) internal startup.
C) acquisition of an existing business already in the chosen industry.
D) forming a strategic alliance with another company to enter the target industry.
E) None of the above—strategic alliances and joint ventures are equally popular and rank well
ahead of acquisition and internal start-up in terms of frequency of use.
Answer: C Difficulty: Easy

17. A company can best accomplish diversification into new industries by

A) outsourcing most of the value chain activities that have to be performed in the target
business/industry.
B) acquiring a company already operating in the target industry, creating a new subsidiary
internally to compete in the target industry, or forming a joint venture with another company
to enter the target industry.
C) integrating forward or backward into the target industry.
D) shifting from a strategic group comprised mostly of single-business companies to a strategic
group comprised of diversified companies.
E) employing an offensive strategy with new product innovation as its centerpiece.
18. 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) 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
19. Diversifying into a new industry by forming a new internal subsidiary to enter and compete in the
target industry is attractive when
A) all of the potential acquisition candidates are losing money.
B) it is impractical to outsource most of the value chain activities that have to be performed in
the target business/industry.
C) there is ample time to launch the new business from the ground up and entry barriers can be
hurdled at acceptable cost.
D) the company has built up a hoard of cash with which to finance a diversification effort.
E) none of the companies already in the industry are attractive strategic alliance partners.
20. A joint venture is an attractive way for a company to enter a new industry when
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.

21. A joint venture is an attractive way for a company to enter a new industry when
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, a company lacks some
important resources or competencies and needs a partner to supply them, and/or a company
needs a local partner in order to enter a desirable business in a foreign country.
The Case for Diversifying into Related Businesses
22. The essential requirement for different businesses to be "related" is that

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.
23. Businesses are said to be "related" when

A) they have several key suppliers and several key customers in common.
B) their value chains have the same number of primary activities.
C) their products are both sold through retailers.
D) their value chains possess competitively valuable cross-business relationships that present
opportunities to transfer resources from one business to another, combine similar activities
and reduce costs, share use of a well-known brand name, and/or create mutually useful
resource strengths and capabilities.
E) many consumers buy the products/services of both businesses.
24. Which of the following is the best example of related diversification?

A) An airline firm acquiring a rent-a-car company
B) A greeting card manufacturer deciding to open a chain of stores to retail its lines of greeting
cards
C) A manufacturer of ready-to-eat cereals acquiring a producer of cake mixes and baking
products
D) A manufacturer of snack foods diversifying into fast-food restaurants
E) A manufacturer of ski equipment acquiring a chain of retail shops specializing in Christmas
ornaments and decorations

Test Bank, Chapter 9
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25. Which of the following is the best example of related diversification?

A) A beer brewer acquiring a maker of aluminum cans
B) A manufacturer of canoes diversifying into the production of tennis rackets
C) A PC producer deciding to diversify into producing and marketing its own brands of MP3
players and LCD TVs.
D) A producer of golf clubs and golf bags acquiring a maker of digital cameras
E) A supermarket chain acquiring a chain of frozen yogurt shops
26. A big advantage of related diversification is that

A) it offers ways for a firm to realize 1 + 1 = 3 benefits because the value chains of the different
businesses present competitively valuable cross-business relationships.
B) it is less capital intensive and usually more profitable than unrelated diversification.
C) it involves diversifying into industries having the same kinds of key success factors.
D) it is less risky than either vertical integration or unrelated diversification due to lower capital
requirements.
E) it passes the industry attractiveness test and thus offers the best route to 2 + 2 = 4 benefits.
Answer: A Difficulty: Easy
27. Which of the following is not one of the appeals of related diversification?
A) It can offer opportunities for transferring expertise, technology, and other capabilities from
one business to another.
B) It can offer opportunities for reducing costs and for leveraging use of a competitively
powerful brand name.
C) Related diversification is particularly well-suited for the use of offensive strategies and
capturing valuable financial fits.
D) It may present opportunities for cross-business collaboration to create valuable new
competencies and capabilities.
E) The relatedness among the different businesses provides sharper focus for managing
diversification and a useful degree of strategic unity across the company’s various business
activities.
28. Which of the following is an important appeal of a related diversification strategy?

A) Related diversification is an effective way of capturing valuable financial fit benefits.
B) Related diversification offers more competitive advantage potential than does unrelated
diversification.
C) Related diversification offers significant opportunities to strongly differentiate a company’s
product offerings from those of rivals.
D) Related diversification is more likely to pass the cost-of-entry test and the capital gains test
than unrelated diversification.
E) Related diversification is typically more profitable than unrelated diversification, which is a
major factor in helping related diversification pass the attractiveness test.

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29. A company pursuing a related diversification strategy would likely address the issue of what
additional industries/businesses to diversify into by
A) locating businesses with well-known brand names and large market shares.
B) identifying industries with the least competitive intensity.
C) identifying an attractive industry whose value chain has good strategic fit with one or more of
the firm's present businesses.
D) identifying businesses with the potential to diversify the number and types of different
activities in the firm's value chain make-up.
E) locating new businesses with high degrees of financial fit with its present businesses.
Cross-Business Strategic Fits
30. Strategic fit between two or more businesses exists when one or more activities comprising their
respective value chains present opportunities
A) to transfer expertise or technology or capabilities from one business to another.
B) for cross-business use of a common brand name.
C) to lower costs by combining the performance of the related value chain activities of different
businesses.
D) for cross-business collaboration to build valuable new resource strengths and competitive
capabilities.
E) All of these.
31. One strategic fit-based approach to related diversification would be to

A) diversify into new industries that present opportunities to transfer competitively valuable
expertise, technological know-how, or other skills/capabilities from one sister business to
another.
B) diversify into those industries where the same kinds of driving forces and competitive forces
prevail, thus allowing use of much the same competitive strategy in all of the business a
company is in.
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).
E) expand into foreign markets where the firm currently does no business.
32. The best place to look for cross-business strategic fits is

A) in R&D and technology activities.
B) in supply chain activities.
C) in sales and marketing activities.
D) in production and distribution activities.
E) anywhere along the respective value chains of related businesses—no one place is best.

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33. Cross-business strategic fits can be found

A) in unrelated as well as related businesses and in the markets of foreign countries as well as in
domestic markets.
B) only in businesses whose products/services satisfy the same general types of buyer needs and
preferences.
C) mainly in either technology related activities or sales and marketing activities.
D) chiefly in the R&D portions of the value chains of unrelated businesses
E) anywhere along the respective value chains of related businesses.
Answer: E Difficulty: Medium
34. Which of the following statements about cross-business strategic fit in a diversified enterprise is
not accurate?
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 1 + 1 = 3 performance outcome.
D) Strategic fit is primarily a byproduct 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.
Strategic Fit, Economies of Scope, and Competitive Advanatage
35. Economies of scope

A) are cost reductions that flow from operating in multiple businesses.
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.

36. Economies of scope

A) stem from the cost-saving efficiencies of operating over a wider geographic area.
B) have to do with the cost-saving efficiencies of distributing a firm's product through many
different distribution channels simultaneously.
C) stem from cost-saving 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.
E) arise from the cost-saving efficiencies of having a wide product line and offering customers a
big selection of models and styles to choose from.
37. Which of the following best illustrates an economy of scope?

A) Being able to eliminate or reduce costs by combining related value-chain activities of
different businesses into a single operation
B) Being able to eliminate or reduce costs by performing all of the value chain activities of
related sister businesses at the same location
C) Being able to eliminate or reduce costs by extending the firm's scope of operations over a
wider geographic area
D) Being able to eliminate or reduce costs by expanding the size of a company's manufacturing
plants
E) Being able to eliminate or reduce costs by having more value chain activities performed in-
house rather than outsourcing them
38. What makes related diversification an attractive strategy is

A) the ability to broaden the company’s product line.
B) the opportunity to convert cross-business strategic fits into competitive advantages 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.
39. A diversified company that leverages the strategic fits of its related businesses into competitive
advantage
A) has a distinctive competence in its related businesses.
B) has a clear path to achieving 1 + 1 = 3 gains in shareholder value.
C) has a clear path to global market leadership in the industries where it has related businesses.
D) passes the value chain test and the profit expectations test for building shareholder value.
E) achieves economies of scope and passes the reduced-costs test for crafting a diversification
strategy capable of creating added shareholder value.

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The Case for Diversifying into an Unrelated Business
40. A strategy of diversifying into unrelated businesses

A) is aimed at achieving good financial fit (whereas related diversification aims at good strategic
fit).
B) is the best way for a company to pass the attractiveness test in choosing which types of
businesses/industries to enter.
C) discounts the value and importance of strategic fit benefits and instead focuses on building
and managing a group of businesses capable of delivering good financial performance
irrespective of the industries these businesses are in.
D) concentrates on diversifying into businesses where a company can leverage use of a well-
known brand name in ways that create added value for shareholders.
E) generally offers more competitive advantage potential than related diversification.
41. Different businesses are said to be "unrelated" when

A) they are in different industries.
B) the products of the different businesses are not bought by the same types of buyers or sold in
the same types of retail stores.
C) the products of the different businesses satisfy different buyer needs.
D) the businesses have different supply chains and different types of suppliers.
E) there is an absence of competitively valuable strategic fits between their respective value
chains.
42. 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.
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.

43. Which of the following is the best example of unrelated diversification?

A) A chain of radio stations acquiring TV stations.
B) An electrical equipment manufacturer acquiring an athletic footwear company.
C) A producer of canned soups acquiring a maker of breakfast cereals.
D) A pizza chain acquiring a chain of hamburger outlets.
E) A cable TV company buying a Hollywood movie studio.
44. In companies pursuing a strategy of unrelated diversification,

A) the main basis for competitive advantage and improved shareholder value is increased ability
to achieve economies of scope.
B) each business is on its own in trying to build a competitive edge and the consolidated
performance of the businesses is likely to be no better than the sum of what the individual
businesses could achieve if they were independent.
C) there is a strong chance that the combined competitive advantages of the various businesses
will produce a 1 + 1 = 3 performance outcome as opposed to just a 1 + 1 = 2 performance
outcome.
D) the main basis for improved shareholder value is strong cross-business financial fits.
E) the main basis for improved shareholder value is increased ability to achieve economies of
scale in the businesses it has entered.
Answer: B Difficulty: Hard
45. In diversified companies with unrelated businesses, the strategic attention of top executives tends
to be focused on
A) screening acquisition candidates and evaluating the pros and cons or keeping or divesting
existing businesses.
B) identifying acquisition candidates that can pass the better-off test.
C) identifying opportunities to achieve greater economies of scope.
D) identifying opportunities to acquire businesses that can benefit from using the parent
company’s potent brand name.
E) identifying acquisition candidates that can pass the capital gains test

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46. Which of the following is not likely to command much strategic attention from the top executives
of companies pursuing an unrelated diversification strategy?
A) Acquiring new businesses with attractive profit prospects
B) Whether existing businesses should be retained or divested based on their ability to meet
corporate targets for profit and returns on investment
C) Looking for new businesses that present good opportunities for achieving economies of scope
D) Identifying acquisition candidates that are financially distressed, can be acquired at a bargain
price, and whose operations can, in management’s opinion, be turned around with the aid of
the parent company’s financial resources and managerial know-how
E) Identifying opportunities to acquire new businesses in industries with bright growth prospects
47. Which of the following merits top priority attention by top executives of companies pursuing an
unrelated diversification strategy?
A) Acquiring new businesses that utilize much the same technology as existing businesses
B) Whether to keep or divest businesses whose competitive strategies do not match the overall
competitive strategy of the corporation
C) Looking for new businesses having attractive distribution-related and customer-related
strategic fits with existing businesses
D) Identifying acquisition candidates that are financially distressed, can be acquired at a bargain
price, and whose operations can, in management’s opinion, be turned around with the aid of
the parent company’s financial resources and managerial know-how
E) Identifying potential new acquisition candidates that are cash cows (as opposed to cash hogs)
48. With an unrelated diversification strategy, the types of companies that make particularly attractive
acquisition targets are
A) financially distressed 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 are employing the same basic type of competitive strategy as the parent
corporation’s existing businesses.

49. A key issue in companies pursuing an unrelated diversification strategy is

A) how wide a net to cast in building a portfolio of unrelated businesses.
B) whether to keep or divest businesses whose technological approaches do not match the
overall technology and R&D strategy of the corporation.
C) how quickly to divest businesses whose competitive strategies do not closely match the
competitive strategies of sister businesses.
D) whether to build shareholder value via paying higher dividends or via actions aimed at
increasing the company’s stock price.
E) whether to acquire new businesses that offer potential for achieving greater economies of
scope or businesses that offer potential for achieving greater economies of scale.
50. One of the chief advantages of an unrelated diversification strategy is that it

A) expands a firm's competitive advantage opportunities to include a wider array of businesses.
B) spreads the stockholders' risks across a group of truly diverse businesses.
C) increases strategic fit opportunities and the potential for a 1 + 1 =3 outcome on the bottom
line.
D) results in having more cash cow businesses than cash hog businesses.
E) facilitates capturing the financial fits among sister businesses (as compared to a strategy of
related diversification).
51. Which of the following is not one of the appeals of an unrelated diversification strategy?
A) The ability to spread business risk over truly diverse businesses (as compared to related
diversification which is limited to spreading risk only among businesses with strategic fit)
B) An ability to employ the company’s financial resources to maximum advantage by investing
in whatever industries/businesses offer the best profit prospects
C) Superior top management ability to cope with the wide variety of problems encountered in
managing a broadly diversified group of businesses
D) A potential for achieving somewhat more stable corporate sales and profits over the course of
economic upswings and downswings (to the extent the company diversifies into businesses
whose ups and downs tend to occur at different times)
E) The potential to grow shareholder value by investing in bargain-priced or struggling
companies with big upside profit potential, turning their operations around fairly quickly with
infusions of cash and managerial know-how, and then riding the crest of higher profitability

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52. Which of the following is not among the disadvantages and managerial problems encountered by
companies pursuing unrelated diversification strategies?
A) Being without the added source of competitive advantage that cross-business strategic fit
provides
B) Spreading corporate resources too thinly over too many different lines of business
C) The strain it places on corporate-level management in trying to stay on top of fresh industry
developments and the strategic progress and plans of each business subsidiary
D) Ending up with too many cash hog businesses (as compared to related diversification
strategies where cash hog businesses are rare)
E) The potential that corporate management will not know how to bail a business subsidiary that
runs into deep trouble—because the company has diversified into businesses that corporate
management has little experience or expertise in running
53. The two biggest drawbacks or disadvantages of unrelated diversification are

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 being without the added source of competitive
advantage 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.
54. The two biggest drawbacks or disadvantages of unrelated diversification are

A) underemphasizing the importance of resource fit and the strong likelihood of diversifying
into businesses that top management does not know all that much about.
B) insufficient cash flows to finance so many different lines of business and a lack of uniformity
among the strategies of the businesses it has diversified into.
C) volatile sales and profits and making the mistake of diversifying into too many cash cow
businesses.
D) the difficulties of competently managing many different businesses and being without the
added source of competitive advantage that cross-business strategic fit provides.
E) over-investing in the achievement of economies of scope and the difficulties of achieving a
good mix of cash cow and cash hog businesses.

55. A fundamental weakness of unrelated diversification is

A) the tendency of corporate managers to place too much emphasis on investing in cash cows
rather than promising cash hogs.
B) reducing a company's access to economies of scope.
C) greater potential for there to be too much diversity among the competitive strategies of the
various business subsidiaries.
D) the greater risk of getting trapped in tough struggles with strong competitors.
E) that the greater the number of businesses a company is in and the more diverse they are, the
harder it is for corporate managers to stay abreast of what’s happening in each industry and
each subsidiary, know much about the problems and issues each business confronts, and
know what to do if a business unit stumbles and its results suddenly head downhill.
Identifying a Diversified Company’s Strategy
56. To identify a diversified company’s strategy, one should consider such factors as
A) the extent to which the firm is broadly or narrowly diversified, whether it is pursuing related
or unrelated diversification (or a mixture of both), and the recent moves it has made to divest
businesses, acquire new businesses, and strengthen the positions of existing businesses.
B) whether the company is focusing on “milking its cash cows” or “feeding its cash hogs.”
C) the technological proficiencies, labor skill requirements, and functional area strategies
characterizing each of the firm's businesses.
D) each business's competitive approach—whether it is pursuing a low-cost leadership,
differentiation, best-cost, focused differentiation, or focused low-cost strategy.
E) whether it is emphasizing the pursuit of economies of scale or economies of scope.
57. When identifying a diversified company's present corporate strategy, which of the following
would not be something to look for?
A) Recent moves to build positions in new industries
B) The company’s approach to allocating investment capital and resources across its present
businesses
C) Recent management actions to strengthen the company’s positions in existing businesses
D) Recent moves to divest weak or unattractive business units
E) Actions over the past few years to substitute global strategies for multi-country strategies in
one or more business units

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Evaluating the Strategy of a Diversified Company
58. The procedure for evaluating the pluses and minuses of a diversified company's strategy includes
A) assessing the attractiveness of the industries the company has diversified into.
B) assessing the competitive strength of each business the company has diversified into to see
which ones are the strongest/weakest contenders in their respective industries.
C) ranking the performance prospects of the various businesses from best to worst and
determining the priorities for resource allocation.
D) checking the competitive advantage potential of cross-business strategic fits and also
checking whether the firm’s resources fit the needs of the various businesses the company has
diversified into.
E) All of the above.
59. Which of the following is not a major consideration in evaluating the pluses and minuses of a
diversified company's strategy?
A) Checking whether the company’s resources fit the requirements of its present business lineup
B) Scrutinizing each industry/business to determine where driving forces are strongest/weakest
and how many profitable strategic groups the company has diversified into
C) Ranking the performance prospects of the various businesses from best to worst and
determining what the corporate parent’s priorities should be in allocating resources to its
different businesses
D) Checking the competitive advantage potential of cross-business strategic fits
E) Assessing the competitive strength of each business the company has diversified into and
determining which ones are strong/weak contenders in their respective industries
60. A comprehensive evaluation of the group of businesses a company has diversified into involves
A) evaluating the attractiveness of industries the company has diversified into and the
competitive strength of each of its business units.
B) evaluating the strategic fits and resource fits among the various sister businesses.
C) ranking the performance prospects of the businesses from best to worst and determining what
the corporate parent’s priorities should be in allocating resources to its various businesses.
D) using the results of the prior analytical steps as a basis for crafting new strategic moves to
improve the company’s overall performance.
E) All of the above.

61. Evaluating a diversified company's corporate strategy and critiquing the pluses and minuses of its
business lineup involves
A) a SWOT analysis of each industry in which the firm has a business interest.
B) applying the cost-of-entry test, the better-off test, the profitability test, and the shareholder
value test to each business and industry represented in the company's business portfolio.
C) evaluating the strategic fits and resource fits among the various sister businesses and deciding
what priority to give each of the company's business units in allocating resources.
D) looking at each industry/business to determine how many profitable strategic groups that the
company has diversified into.
E) determining how many of the business units are following focus strategies, differentiation
strategies, best-cost provider strategies, and low-cost leadership strategies.
62. Which one of the following is not an important aspect of evaluating the merits of a diversified
company’s strategy?
A) Assessing the competitive strength of each business the company has diversified into
B) Determining which business units are cash cows and which ones are cash hogs and then
evaluating how soon the company's cash hogs can be transformed into cash cows
C) Evaluating the strategic fits and resource fits among the various sister businesses
D) Assessing the attractiveness of the industries the company has diversified into, both
individually and as a group
E) Ranking the performance prospects of the businesses from best to worst and deciding what
priority to give each of the company's business units in allocating resources
Evaluating Industry Attractiveness
63. In judging the attractiveness of the businesses a multi-business company has diversified into, it is
important to
A) consider whether each industry the company has diversified into represents a good business
for the company to be in.
B) calculate industry attractiveness scores for each industry into which the company has
diversified.
C) use the industry attractiveness scores to rank the industries from most to least attractive.
D) use the industry attractiveness scores to evaluate the attractiveness of all the industries as a
group.
E) All of the above

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64. As a rule, all the industries represented in a diversified company's business portfolio should be
judged on such attractiveness factors as
A) market size and projected growth rate.
B) emerging opportunities and threats, the intensity of competition, and the degree of industry
uncertainty and business risk.
C) resource requirements and the presence of cross-industry strategic fits.
D) seasonal and cyclical factors, industry profitability, and whether an industry has significant
social, political, regulatory, and environmental problems.
E) All of these.
65. Which of the following is not generally something that ought to be considered in evaluating the
attractiveness of a diversified company's business makeup?
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
66. Assessments of the long-term attractiveness of each industry represented in a diversified

company's lineup of businesses should be based on
A) a complete value-chain analysis of each industry.
B) whether the industries have the same kinds of driving forces.
C) how many companies in each industry are making money and how many are losing money.
D) quantitative industry attractiveness scores derived from rating each industry on several
relevant attractiveness measures (weighted according to their relative importance in
determining overall attractiveness).
E) the competitive advantage potential offered by each industry's key success factors.

67. Calculating quantitative attractiveness ratings for the industries a company has diversified into
involves
A) determining each industry's key success factors, calculating the ability of the company to be
successful on each industry KSF, and obtaining overall measures of the firm's ability to
compete successfully in each of its industries based on the combined KSF ratings.
B) determining each industry's competitive advantage factors, calculating the ability of the
company to be successful on each competitive advantage factor, and obtaining overall
measures of the firm's ability to achieve sustainable competitive advantage in each of its
industries based on the combined competitive advantage factor ratings.
C) selecting a set of industry attractiveness measures, weighting the importance of each
measure, 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.
D) 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.
E) identifying each industry's average profitability, rating the difficulty of achieving average
profitability in each industry, and deciding whether the company’s prospects for above-
average profitability are attractive or unattractive, industry-by-industry.
Answer: C Difficulty: Hard
68. The chief purpose of calculating quantitative industry attractiveness scores for each industry a
company has diversified into is to
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.
69. A weighted industry attractiveness assessment is generally analytically superior to an unweighted

assessment because
A) a weighted ranking identifies which industries offer the best/worst long-term profit prospects.
B) an unweighted ranking doesn't discriminate between strong and weak industry driving forces
and industry competitive forces.
C) it does a more accurate job of singling out which industry key success factors are the most
important.
D) an unweighted ranking doesn't help identify which industries have the easiest and hardest
value chains to execute.
E) the various measures of attractiveness are not likely to be equally important in determining
overall attractiveness.

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70. When industry attractiveness ratings are calculated for each of the industries a multi-business
company has diversified into, the results help indicate
A) which industries appear to be the best and worst ones to be in and the attractiveness of all the
industries as a group from the standpoint of the company’s long-term performance.
B) which industries have attractive key success factors and which industries have unattractive
key success factors.
C) which industries have the biggest economies of scale and which industries have the greatest
economies of scope and the overall potential for cost reduction in the industries as a group.
D) which industries are most attractive from the standpoint of long-term growth and the growth
prospects of all the industries as a group.
E) which industries are most attractive from the standpoint of industry driving forces and
competitive forces.
Answer: A Difficulty: Hard
71. Calculating quantitative attractiveness ratings for the industries a diversified company has
invested in
A) allows a company to rank the competitive advantage opportunities in each industry from best
to worst.
B) helps identify which industries have the best/worst prospects for revenue growth.
C) identifies which industry has the best/worst value chain from the standpoint of cost reduction
potential.
D) provides a basis for deciding whether a diversified company has good prospects for growth
and profitability, given the attractiveness ratings of the industries in which it has business
interests.
E) helps identify which industry is likely to be the largest/smallest contributor to the company’s
growth and profitability.
Evaluating Business-Unit Competitive Strength
72. Assessments of how a diversified company's subsidiaries compare in competitive strength should
be based on such factors as
A) vulnerability to seasonal and cyclical downturns, vulnerability to driving forces, and
vulnerability to fluctuating interest rates and exchange rates.
B) relative market share, ability to match or beat rivals on key product attributes, brand image
and reputation, costs relative to competitors, and ability to benefit from strategic fits with
sister businesses.
C) the appeal of its strategy, relative number of competitive capabilities, the number of products
in each businesses product line, which businesses have the highest/lowest market shares, and
which businesses earn the highest/lowest profits before taxes.
D) the ability to hurdle barriers to entry, value chain attractiveness, and business risk.
E) cost reduction potential, customer satisfaction potential, and comparisons of annual cash
flows from operations.

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73. The basic purpose of calculating competitive strength scores for each of a diversified company's
business units is to
A) rank the business unit from best to worst in terms of potential for cost reduction and profit
margin improvement.
B) determine how strongly positioned each business unit is in its industry and the extent to
which it already is or can become a strong market contender.
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.
74. Calculating quantitative competitive strength ratings for each of a diversified company’s business
units involves
A) determining each industry's key success factors, rating the ability of each business to be
successful on each industry KSF, and adding the individual ratings to obtain overall measures
of each business's ability to compete successfully.
B) identifying the competitive forces facing each business, rating the strength of these
competitive forces industry-by-industry, and then ranking each business’s ability to be
profitable, given the strength of the competition it faces.
C) selecting a set of competitive strength measures, weighting the importance of each measure,
rating each business on each strength measure, multiplying the strength ratings by the
assigned weight to obtain a weighted rating, adding the weighted ratings for each business
unit to obtain an overall competitive strength score, and using the overall competitive
strength scores to evaluate the competitive strength of all the businesses, both individually
and as a group.
D) determining which businesses possess good strategic fit with other businesses, identifying the
portion of the value chain where this fit occurs, and evaluating the strength of the competitive
advantage attached to each of the strategic fits to get an overall measure of competitive
advantage potential—businesses with the highest/lowest competitive advantage potential
have the most/least competitive strength.
E) rating the caliber of each businesses strategic and resource fits, weighting the importance of
each type of strategic/resource fit, calculating weighted strategic/resource fit scores, and
adding the weighted ratings for each business to obtain an overall strength score for each
business unit that indicates whether the company has adequate strategic/resource fits to be a
strong market contender in each of the industries where it competes.

75. Relative market share is

A) calculated by dividing a business's percentage share of total industry sales volume by the
percentage share held by its largest rival—it is a better indicator of a business's competitive
strength than is a simple percentage measure of market share.
B) calculated by adjusting a company’s dollar market share up or down in proportion to whether
the company’s quality and customer service are above/below the industry-average quality
and the industry-average caliber of customer service—this measure is a far superior indicator
of whether a business has the ability to compete on the basis of quality and service.
C) calculated by dividing a company’s market share (based on dollar volume) by the industry-
average market share to determine the percentage by which a company’s market share is
above/below the industry average—this percentage is a better indicator of a business's
competitive strength than is just looking at the firm’s market share percentage.
D) particularly useful in identifying cash cows and cash hogs¾cash cow businesses have big
relative market shares (above 1.0) and cash hog businesses have low relative market shares
(below 0.5).
E) calculated by subtracting the industry-average market share (based on dollar volume) from a
company’s market share to determine how much a company’s market share is above/below
the industry average—this amount is a better indicator of a business's competitive strength
than is just looking at the firm’s market share percentage.
Answer: A Difficulty: Hard
76. Using relative market share to assess a business's competitive strength is analytically superior to
straight percentage measures of market share because relative market share
A) is a better measure of a business's potential for increased sales and profitability.
B) is a better indicator of competitive strength than is a simple percentage measure of market
share—for instance, a company with a 20% share is in a much stronger competitive position
if its largest rival has a share of 10% (which means its relative market share is 2.0) than it is if
its largest rival has a 30% market share (in which case the company’s relative market share is
only 0.67).
C) is a better overall measure of a business's ability to compete on the basis of quality, service,
and product performance as well as on price.
D) is a more revealing measure of whether a business has a profitable business strategy.
E) provides a more accurate indication of the business's brand image and reputation with buyers.
77. A weighted competitive strength analysis of a diversified company's business units is

conceptually stronger than an unweighted analysis because
A) it provides a more accurate assessment of the strength of cross-business strategic fits.
B) it provides better indication of which business units have the best strategy (vis-à-vis the rival
in their respective industry).
C) the different measures of competitive strength are unlikely to be equally important.
D) the different business units are unlikely to be equally important.
E) an unweighted ranking provides no insight into which business has the strongest arsenal of
competitive assets and which has the weakest.

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78. The value of determining the relative competitive strength of each business a company has
diversified into is
A) to have a quantitative basis for identifying which businesses have large/small competitive
advantages or competitive disadvantages vis-à-vis the rivals in their respective industries.
B) to have a quantitative basis for rating them from strongest to weakest in terms of contributing
to the corporate parent’s revenue growth.
C) to compare resource strengths and weaknesses, business by business.
D) to have a quantitative basis for rating them from strongest to weakest in contending for
market leadership in their respective industries.
E) to have a quantitative basis for rating them from strongest to weakest in terms of contributing
to the corporate parent’s profitability.
Using a Nine Cell Matrix to Simultaneously Display Industry Attractiveness and Competitive
Strength
79. The nine-cell industry attractiveness-competitive strength matrix

A) is useful for helping decide which businesses should have high, average, and low priorities in
allocating corporate resources.
B) indicates which businesses are cash hogs and which are cash cows.
C) pinpoints what strategies are most appropriate for businesses positioned in the three top cells
of the matrix but is less clear about the best strategies for businesses positioned in the bottom
six cells.
D) identifies which sister businesses have the greatest strategic fit.
E) identifies which sister businesses have the greatest resource fit.
80. The most importance strategy-making guidance that comes from drawing a 9-cell industry
attractiveness-competitive strength matrix is
A) which businesses in the portfolio have the most potential for strategic fit and resource fit.
B) why cash cow businesses are more valuable than cash hog businesses.
C) that corporate resources should be concentrated on those businesses enjoying both a higher
degree of industry attractiveness and competitive strength and that businesses having low
competitive strength in relatively unattractive industries should be looked at for possible
divestiture.
D) which businesses have the biggest competitive advantages and which ones confront serious
competitive disadvantages.
E) which businesses are in industries with profitable value chains and which are in industries
with money-losing value chains.

81. One of the most significant contributions to strategy-making in diversified companies that the 9-
cell industry attractiveness/competitive strength matrix provides is
A) identifying which businesses have strategies that should be continued, which business have
strategies that need fine-tuning, and which businesses have strategies that need major
overhaul.
B) that businesses having the greatest competitive strength and positioned in the most attractive
industries should have the highest priority for corporate resource allocation and that
competitively weak businesses in relatively unattractive industries should have the lowest
priority and perhaps even be considered for divestiture.
C) pinpointing what strategies are most appropriate for businesses positioned in the four corners
of the matrix (although the matrix reveals little about the best strategies for businesses
positioned in the remainder of the matrix).
D) its ability to pinpoint what kind of competitive advantage or disadvantage each business has.
E) pinpointing which businesses to keep and which ones to divest.
Checking the Competitive Advantage Potential of Cross-Business Strategic Fits
82. In a diversified company, a business subsidiary has more competitive advantage potential when
A) it is a cash cow.
B) it has value chain relationships with other business subsidiaries that present competitively
valuable opportunities to transfer skills or technology or intellectual capital from one
business to another, combine the performance of related activities and reduce costs, share use
of a well-respected brand name, or collaborate to create new competitive capabilities.
C) it is the company's biggest profit producer or is capable of becoming the biggest.
D) it is in a fast-growing industry.
E) it operates in an industry where competition is less intense and driving forces are relatively
weak.
83. Checking the competitive advantage potential of cross-business strategic fits in a diversified
company involves evaluating the extent to which sister businesses present
A) opportunities to combine the performance of certain cross-business activities and thereby
reduce costs.
B) opportunities to transfer skills, technology, or intellectual capital from one business to
another.
C) opportunities for the company’s different businesses to share use of a well-respected brand
name.
D) opportunities for sister businesses to collaborate in creating valuable new competitive
capabilities.
E) All of these.

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84. Checking a diversified company's business portfolio for the competitive advantage potential of
cross-business strategic fits does not involve ascertaining
A) the extent to which sister business units have value chain match-ups that offer opportunities
to combine the performance of related value chain activities and reduce costs.
B) the extent to which sister business units have value chain match-ups that offer opportunities
to transfer skills or technology or intellectual capital from one business to another.
C) the extent to which sister business units have opportunities to share use of a well-respected
brand name.
D) the extent to which sister business units have value chain match-ups that offer opportunities
to create new competitive capabilities or to leverage existing resources.
E) which business units are cash cows and which ones are cash hogs.
85. Checking a diversified firm's business portfolio for the competitive advantage potential of cross-
business strategic fits entails consideration of
A) whether the parent’s company’s competitive advantages are being deployed to maximum
advantage in each of its business units.
B) whether the competitive strategies employed in each business act to reinforce the competitive
power of the strategies employed in the company’s other businesses.
C) whether the competitive strategies in each business possess good strategic fit with the parent
company’s corporate strategy.
D) the extent to which there are competitively valuable relationships between the value chains of
sister business units and what opportunities they present to reduce costs, share use of a potent
brand name, create competitively valuable new capabilities via cross-business collaboration,
or transfer skills or technology or intellectual capital from one business to another.
E) how compatible the competitive strategies of the various sister businesses are and whether
these strategies are properly aimed at achieving the same kind of competitive advantage.
86. Which of the following is not a part of checking a diversified company's business units for cross-
business competitive advantage potential?
A) Ascertaining the extent to which sister business units have value chain match-ups that offer
opportunities to combine the performance of related value chain activities and reduce costs
B) Ascertaining the extent to which sister business units have value chain match-ups that offer
opportunities to transfer skills or technology or intellectual capital from one business to
another
C) Ascertaining the extent to which sister business units are making maximum use of the parent
company’s competitive advantages
D) Ascertaining the extent to which sister business units have value chain match-ups that offer
opportunities to create new competitive capabilities or to leverage existing resources
E) Ascertaining the extent to which sister business units present opportunities to share use of a
well-respected brand name

Checking for Resource Fit
87. A diversified company's business units exhibit good resource fit when
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 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.
88. The businesses in a diversified company's lineup exhibit good resource fit when
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 is 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.
89. A “cash cow” type of business

A) generates unusually high profits and returns on equity investment.
B) is so profitable that it has no long-term debt.
C) generates positive cash flows over and above its internal requirements, thus providing a
corporate parent with cash flows that can be used for financing new acquisitions, investing in
cash hog businesses, and/or paying dividends.
D) is a business with such a strong competitive advantage that it generates big profits, big
returns on investment, and big cash surpluses after dividends are paid.
E) has good strategic fit with a cash hog business.

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90. A “cash hog” type of business

A) is one that is losing money and requires cash infusions from its corporate parent to continue
operations.
B) is one that generates cash flows that are too small to fully fund its operations and growth.
C) generates negative cash flows from internal operations and thus requires cash infusions from
its corporate parent to report a profit.
D) is a business growing so rapidly that it does not have the funds to cover its short- and long-
term debt obligations.
E) is one that has more current liabilities than current assets and faces a liquidity crisis due to
declining sales revenues and declining profitability.
91. The difference between a “cash-cow” business and a “cash hog” business is that
A) a cash cow business is making money whereas a cash hog business is losing money.
B) a cash cow business generates enough profits to pay off long-term debt whereas a cash hog
business does not.
C) a cash cow business generates positive retained earnings whereas a cash hog business
produces negative retained earnings.
D) a cash cow business produces large internal cash flows over and above what is needed to
build and maintain the business whereas the internal cash flows of a cash hog business are
too small to fully fund its operating needs and capital requirements.
E) a cash cow business generates very large increases in sales revenues whereas a cash hog
business has declining sales revenues and chronic deficiencies of working capital.
92. The tests of whether a diversified company’s businesses exhibit resource fit do not include
A) whether the excess cash flows generated by cash cow businesses are sufficient to cover the
negative cash flows of its cash hog businesses.
B) whether a business adequately contributes to achieving the corporate parent’s performance
targets.
C) whether the company has adequate financial strength to fund its different businesses and
maintain a healthy credit rating.
D) whether 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) whether 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.

93. Which one of the following is not part of the task of checking a diversified company's business
line-up for adequate resource fit?
A) Determining whether the excess cash flows generated by cash cow businesses are sufficient
to cover the negative cash flows of its cash hog businesses
B) Determining whether recently acquired businesses are acting to strengthen a company’s
resource base and competitive capabilities or whether they are causing its competitive and
managerial resources to be stretched too thinly across its businesses (sometimes newly-
acquired businesses soak up a disproportionate share of management’s time and put a strain
on other company resources)
C) Determining whether some business units have value chain match-ups that offer opportunities
to transfer skills or technology or intellectual capital from one business to another
D) Determining whether the company has adequate financial strength to fund its different
businesses and maintain a healthy credit rating
E) Determining whether 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
Ranking the Performance Prospects of Business Units and Assigning a Priority for Resource
Allocation
94. Conclusions about what the priorities should be for allocating resources to the various businesses
of a diversified company need to be based on such considerations as
A) each business’s profit and growth prospects.
B) industry attractiveness and competitive strength of the various businesses—normally strong
businesses in attractive industries should carry a higher priority than weak businesses in
unattractive industries.
C) the degree of strategic fit and resource fit with other business units.
D) whether and how corporate resources can be used to enhance the competitiveness of
particular business units.
E) All of these.
95. Which one of the following is not a particularly relevant consideration in deciding what the
priorities should be for allocating resources to the various businesses of a diversified company?
A) Whether and how corporate resources and capabilities can be used to enhance the
competitiveness of particular business units
B) What competitive strategy the business is presently using
C) Whether a business exhibits good strategic fit and resource fit with sister businesses
D) Whether to divest marginal businesses and free up resources for redeployment to higher-
opportunity areas
E) Industry attractiveness and the competitive strength of the various businesses¾normally
strong businesses in attractive industries should be given higher priority than weak businesses
in unattractive industries

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96. Which one 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?
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 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
97. The options for allocating a diversified company's financial resources include
A) making acquisitions to establish positions in new businesses or to complement existing
businesses.
B) investing in ways to strengthen or grow existing businesses.
C) funding long-range R&D ventures aimed at opening market opportunities in new or existing
businesses.
D) paying off existing debt, increasing dividends, building cash reserves, or repurchasing shares
of the company's stock.
E) All of these.
98. Which one of the following is not a reasonable option for deploying a diversified company's
financial resources?
A) Making acquisitions to establish positions in new businesses or to complement existing
businesses
B) Concentrating most of a company's financial resources in cash cow businesses and allocating
little or no additional resources to cash hog businesses until they show enough strength to
generate positive cash flows
C) Funding long-range R&D ventures aimed at opening market opportunities in new or existing
businesses
D) Paying down existing debt, increasing dividends, or repurchasing shares of the company's
stock
E) Investing in ways to strengthen or grow existing businesses

Crafting New Strategic Moves to Improve Overall Corporate Performance
99. Moves to improve a diversified company’s overall performance include

A) broadening the company’s business scope by making new acquisitions in new industries.
B) divesting weak-performing businesses and retrenching to a narrower base of business
operations.
C) restructuring the company’s business lineup and putting a whole new face on the company’s
business makeup.
D) pursuing growth opportunities in the existing business lineup.
E) All of these.
100. The strategic options to improve a diversified company’s overall performance do not include
which of the following categories of actions?
A) Broadening the company’s business scope by making new acquisitions in new industries
B) Increasing dividend payments to shareholders and/or repurchasing shares of the company's
stock
C) Restructuring the company’s business lineup and putting a whole new face on the company’s
business makeup
D) Pursuing multinational diversification and striving to globalize the operations of several of
the company’s business units
E) Divesting weak-performing businesses and retrenching to a narrower base of business
operations
After a Company Diversifies: The Four Main Strategy Alternatives
101. 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?
A) Pursue multinational diversification
B) Restructure the company’s business lineup
C) Craft new initiatives to build/enhance the reputation of the company’s brand name
D) Divest some businesses and retrench to a narrower diversification base
E) Broaden the diversification base

39
Strategies to Broaden a Diversified Company's Business Base
102. A company that is already diversified may choose to broaden its business base by building
positions in new related or unrelated businesses because
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 or to threats from emerging new technologies.
D) it wants to make new acquisitions to strengthen or complement some of its present
businesses.
E) All of these.
Divestiture Strategies Aimed at Retrenching to a Narrower Diversification Base
103. Retrenching to a narrower diversification base

A) is usually the most attractive long-run strategy for a broadly diversified company confronted
with recession, high interest rates, mounting competitive pressures in several of its
businesses, and sluggish growth.
B) has the advantage of focusing a diversified firm's energies on building strong positions in a
few core businesses rather the stretching its resources and managerial attention too thinly
across many businesses.
C) is an attractive strategy option for revamping a diverse business lineup that lacks strong
cross-business financial fit.
D) is sometimes an attractive option for deepening a diversified company's technological
expertise and supporting a faster rate of product innovation.
E) is a strategy best reserved for companies in poor financial shape.
Answer: B Difficulty: Hard
104. Retrenching to a narrower diversification base can be attractive or advisable when

A) a diversified company has struggled to make certain businesses attractively profitable.
B) a diversified company has businesses that have little or no strategic or resource fits with the
"core" businesses that management wishes to concentrate on.
C) divesting businesses frees resources that can be used to pay down burdensome debt.
D) market conditions in a once-attractive business have badly deteriorated.
E) All of these.

105. In which of the following instances is retrenching to a narrower diversification base not likely to
be an attractive or advisable strategy for a diversified company?
A) When a diversified company has struggled to make certain businesses attractively profitable
B) When a diversified company has too many cash cows
C) When one or more businesses are cash hogs with questionable long-term potential
D) When businesses in once-attractive industries have badly deteriorated
E) When a diversified company has businesses that have little or no strategic or resource fits
with the "core" businesses that management wishes to concentrate on
106. Divestiture can be accomplished by

A) selling a business outright.
B) spinning the unwanted business off as a managerially and financially independent company
by selling shares to the investing public via an initial public offering of stock.
C) spinning the unwanted business off as a managerially and financially independent company
by distributing shares in the new company to existing shareholders of the parent company.
D) All of the above.
E) None of the above—the best and quickest ways to divest a business are either to close it
down or else just walk away and give the keys to creditors.
Strategies to Restructure a Company’s Business Lineup
107. Strategies to restructure a diversified company’s business lineup involves

A) revamping the value chains of each of a diversified company's businesses.
B) focusing on restoring the profitability of its money-losing businesses and thereby improving
the company's overall profitability.
C) revamping the strategies of its different businesses, especially those that are performing
poorly.
D) divesting some businesses and acquiring new ones so as to put a new face on a diversified
company's business makeup.
E) broadening the scope of diversification to include a larger number of smaller and more
diverse businesses.

41
108. Corporate restructuring strategies

A) involve making radical changes in 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) entails reducing the scope of diversification to a smaller number of businesses.
C) entail selling off marginal businesses to free up 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.
109. Conditions that may make corporate restructuring strategies appealing include
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) the appointment of a new CEO with a new or different strategic vision for the company that
doesn't include many of the company's present businesses.
D) ill-chosen acquisitions that haven’t lived up to expectations.
E) All of these.
Multinational Diversification Strategies
110. What sets a multinational diversification strategy apart from other diversification strategies is
A) the presence of extra degrees of strategic fit and more economies of scope.
B) the potential to have a higher degree of technological expertise.
C) a diversity of businesses and a diversity of national markets.
D) the potential for faster growth, higher rates of profitability, and more profit sanctuaries.
E) greater diversity in the types of value chain activities in its different businesses.

111. A multinational diversification strategy allows a firm to pursue maximum competitive advantage
potential by
A) fully capturing economies of scale and learning/experience curve effects and also pursuing
cross-business economy of scope opportunities.
B) exploiting opportunities for both cross-business and cross-country collaboration and strategic
coordination.
C) leveraging use of a well-known and competitively powerful brand name.
D) transferring competitively valuable resources both from one business to another and one
country to another.
E) All of these.
112. The sources of a competitive advantage for a diversified multinational corporation do not include
A) transferring competitively valuable resources from one business to another and one country
to another.
B) the ability to exploit opportunities for both cross-business and cross-country collaboration
and strategic coordination.
C) leveraging use of a well-known and competitively powerful brand name.
D) pursuing cross-business economy of scope opportunities and striving to fully capture scale
economies.
E) trying to maximize the number of cash cow businesses and minimize the number of cash hog
businesses.
113. Which one of the following is not a way for a company to build competitive advantage by
pursuing a multinational diversification strategy?
A) Fully capturing economies of scale and experience curve effects as well as cross-business
economies of scope
B) Using cross-business or cross-country market subsidization to outcompete rivals
C) Fully capturing both cross-business financial fits and cross-country financial fits
D) Transferring competitively valuable resources from one business to another and one country
to another
E) Leveraging use of a well-known and competitively powerful brand name across two or more
of its businesses
114. A diversified company may pursue expansion of several of its businesses into the markets of
additional foreign countries in order to
A) fully capture economies of scale and learning/experience curve effects in these businesses.
B) exploit opportunities for both cross-business and cross-country coordination of value chain
activities and strategic initiatives.
C) gain the benefits of using cross-country market subsidization techniques.
D) transfer competitively valuable resources in these businesses from one country to another.
E) All of these.

43
Short Answer Questions
115. Briefly discuss when it makes good strategic sense for a company to consider diversification.
Difficulty: Medium
116. Identify and briefly discuss each of the three options for entering new businesses. Which one is
the most popular in the sense of being used most frequently?
Difficulty: Medium
117. Identify and briefly discuss each of the three tests for determining whether diversification into a
new business is likely to build shareholder value.
Difficulty: Medium
118. 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.
Difficulty: Medium
119. Explain the relevance of the following as they relate to building shareholder value via
diversification:
a.) the attractiveness test.
b.) the cost-of-entry test.
c.) the better-off test.
Difficulty: Medium
120. What is meant by the term strategic fit? What are the advantages of pursuing strategic fit in
choosing which industries to diversify into?
Difficulty: Medium
121. What is meant by the term resource fit as it applies to evaluating a diversified company’s business
lineup?
Difficulty: Medium
45
122. Carefully explain the difference between a strategy of related diversification and a strategy of
unrelated diversification.
Difficulty: Easy
123. Identify and explain the meaning and strategic significance of each of the following terms:
a.) related diversification
b.) strategic fit
c.) economies of scope
d.) unrelated diversification
e.) the attractiveness test (as it relates to a potential diversification move)
f.) divestiture
g.) corporate restructuring
h.) the better-off test (as it relates to a potential diversification move)
Difficulty: Medium
124. Which is the better approach to diversification—a strategy of related diversification or a strategy
of unrelated diversification? Explain and support your answer.
Difficulty: Hard
125. Discuss the pros and cons of a strategy of unrelated diversification.
Difficulty: Medium
126. Shareholder interests are generally best served by concentrating corporate resources on
businesses that can contend for market leadership. True or false? Explain your answer.
Difficulty: Medium
127. What are the advantages and benefits of using an industry attractive-business strength matrix to
evaluate a diversified company's lineup of businesses?
Difficulty: Hard
128. Explain the difference between a cash cow business and a cash hog business.
Difficulty: Easy
129. What does the industry attractiveness test involve in evaluating a diversified company's business
lineup? Why is it relevant?
Difficulty: Medium
47
130. Identify and briefly describe the six steps involved in evaluating a diversified company's business
lineup and diversification strategy.
Difficulty: Hard
131. What is the relevance of quantitatively measuring the competitive strength of each business in a
diversified company's business portfolio and determining which business units are strongest and
weakest?
Difficulty: Medium
132. Why is it pertinent in evaluating a diversified company's business lineup to rank a diversified
company’s businesses on the basis of their future performance prospects?
Difficulty: Medium
133. Briefly explain what is meant by each of the following terms:

a.) a cash cow business
b.) a cash hog business
c.) resource fit
d.) relative market share
Difficulty: Medium
134. Under what circumstances might a diversified firm choose to divest one of its businesses?
Difficulty: Medium
135. Under what circumstances might an already diversified company chose to enter additional
businesses and broaden its diversification base?
Difficulty: Hard
136. Under what circumstances might an already diversified company chose to pursue corporate
restructuring?
Difficulty: Hard
137. Why might a diversified multinational enterprise deliberately refrain from employing cross-
business or cross-country subsidization tactics to try to out-compete its rivals in particular
businesses or in particular country markets?
Difficulty: Hard
49
138. Identify and briefly describe at least four types of competitive advantages that can accrue to a
multinational corporation pursuing related diversification.
Difficulty: Medium
139. A strategy of multinational diversification contains more built-in competitive advantage potential
(above and beyond what is achievable through a particular business’s own competitive strategy)
than any other diversification strategy. True or false? Explain and support your answer.
Difficulty: Medium
140. Once a company has diversified into a collection of related or unrelated businesses and concludes
that some strategy adjustments are needed, what are the four main strategic alternatives that it can
employ to improve the performance of its overall business lineup?
Difficulty: Medium

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What are the four facets of crafting corporate strategy for a diversified company?

What are the four facets of crafting corporate strategy for a diversified company?

When does diversification merit strong consideration?

When does diversification merit strong consideration?

1Test Bank, Chapter 9

Chapter 9: Diversification—Strategies for Managing a Group of Businesses

Multiple Choice Questions

The Four Facets of Crafting Corporate Strategy

1. The task of crafting corporate strategy for a diversified company encompasses

Answer: E Difficulty: Easy

Answer: B Difficulty: Medium

3. Diversification merits strong consideration whenever a single-business company

Answer: B Difficulty: Medium

4. Diversification becomes a relevant strategic option when a company

Answer: E Difficulty: Easy

5. Diversification ought to be considered when

Answer: C Difficulty: Medium

Answer: B Difficulty: Easy

Building Shareholder Value: The Ultimate Justification For Diversifying

7. Diversifying into new businesses is justifiable only if it

Answer: B Difficulty: Easy

8. To create value for shareholders via diversification, a company must

Answer: D Difficulty: Medium

Answer: D Difficulty: Hard

Answer: E Difficulty: Hard

Answer: A Difficulty: Medium

Answer: C Difficulty: Medium

Answer: D Difficulty: Hard

Strategies for Entering New Businesses

Answer: A Difficulty: Medium

Answer: A Difficulty: Medium

Answer: C Difficulty: Easy

17. A company can best accomplish diversification into new industries by

Answer: B Difficulty: Easy

Answer: D Difficulty: Medium

Answer: C Difficulty: Easy

Answer: A Difficulty: Medium

Answer: E Difficulty: Easy

The Case for Diversifying into Related Businesses

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

Answer: A Difficulty: Medium

23. Businesses are said to be "related" when

Answer: D Difficulty: Medium

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

Answer: C Difficulty: Medium

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

Answer: C Difficulty: Medium

26. A big advantage of related diversification is that

Answer: A Difficulty: Easy

Answer: C Difficulty: Medium

28. Which of the following is an important appeal of a related diversification strategy?

Answer: B Difficulty: Medium

Answer: C Difficulty: Medium

Cross-Business Strategic Fits

Answer: E Difficulty: Easy

31. One strategic fit-based approach to related diversification would be to

Answer: A Difficulty: Easy

32. The best place to look for cross-business strategic fits is