Ch 8: Diversification and Multibusiness company

Question 1

What are the four distinctive facets of crafting a corporate strategy?

Answer 1

1. Picking new industries to enter and deciding on the means of entry
2. Pursuing opportunities to leverage cross-business value chain relationships into competitive advantage
3. Establishing investment priorities and steering resources into the most attractive business unit.
4. Initiating actions to boost the combined performance of the corporation’s collections of business

Question 2

When business diversification becomes a consideration?

Answer 2

1. Diminishing growth prospects in the present business
2. Opportunities in complementary businesses
3. To leverage existing competencies and capabilities
4. Reduce costs by diversifying into closely related businesses
5. Utilize powerful brand name

Question 3

Tests for building shareholder value through diversification:

Answer 3

1. industry attractiveness test
2. Cost-of-entry test
3. Better-off test

Question 4

Options for entering new industries and lines of business:

Answer 4

1. Diversification by acquisition of an existing business
2. Entering a new line of business through internal development
3. Using joint ventures to achieve diversification

Question 5

Diversification paths:

Answer 5

1. Related businesses
2. Unrelated business (riskier)

Question 6

When does strategic fit exists (for the case of related diversification)?

Answer 6

It exists when value chains of different businesses present opportunities for cross-business skills transfer, cost sharing, or brand sharing.

Question 7

Strategic fit present opportunities for:

Answer 7

1. Transferring competitively valuable resources and knowledge
2. Cost sharing
3. Brand sharing

Question 8

What does economies of scope mean?

Answer 8

They are cost reductions stemming from strategic fit along the value chains of related businesses (thereby, a larger scope of operations), whereas economies of scale accrue from a larger operation.

Question 9

List the three types of acquisition candidates:

Answer 9

1. Business with bright growth prospect but short on investment capital
2. Undervalued firms (having a bargain price)
3. Struggling firms that can be turned around

Question 10

The two main pitfalls of unrelated diversification:

Answer 10

1. Demanding managerial requirements
2. limited competitive advantage potential (no business strategic fit)

Question 11

Misguided reasons to undertake unrelated diversification:

Answer 11

1. Risk reduction
2. Growth
3. Managerial motives
4. Earnings stabilization

Question 12

What are the six steps of evaluating the strategy of a diversified company?

Answer 12

1. Assess the attractiveness of the industries the firm has diversified into
2. Assess the competitive strength of the firm’s business units
3. Evaluate the strategic fit
4. Check if the firm’s resources fit the requirements of its present business lineup
5. Rank the business based on performance (prioritizing resources accordingly)
6. Craft new strategic moves…

Question 13

How to evaluate an indusry’s attractiveness?

Answer 13

Question 14

In what ways could we evaluate business-unit competitive strength?

Answer 14

Question 15

A diversified company exhibits resource fit when

Answer 15

its business add to a company’s overall mix of resources and capabilities and when the parent company has sufficient resources to support its entire group of businesses without spreading itself too thin.

Think about Boston consulting group matrix!

Cash hogs (questionmark: high market growth and small relative market share) need cash

while cash cows (low market growth and large relative market share) have cash surplus

a fit means managing cash well!

Question 16

Reasons to keep a cash hog (question mark region in Boston Consulting matrix):

Answer 16

1. Has highly valuable strategic fit with other business
2. Capital infusions needed are modest relative to the funds available
3. There is a decent chance of growing the cash hog into Stars or Cash Cows

Question 17

List some factors to consider in judging business-unit performance:

Answer 17

1. Sales gowth
2. Profit growth
3. Earnings contribution
4. Cash flow generation
5. Return on investment

Question 18

A diversified company could allocate its financial resources to strategic or financial options. What are these options?

Answer 18

Strategic options

1. Strengthen or grow existing business
2. Make acquisitions
3. fund long-run R&D venture

Financial options

1. Pay off debt
2. Increase dividends
3. Repurchase stocks
4. Build cash reserve

Question 19

Step 6: Possible new strategy moves:

Answer 19

1. Stick closely with existing business lineup
2. Broaden the firm’s business scope
3. Divest sick business and retrench
4. Restructure the firm’s business lineup

Question 20

What is corporate restructuring?

Answer 20

It involves radically altering the business lineup by divesting businesses that lack strategic fit or are poor performers and acquiring new businesses that offer better promise for enhancing shareholder value

Question 21

What are the factors that diversified companies should consider when comparing subsidiaries in competitive strength?

Answer 21

1. Relative market share
2. Ability to match or beat rivals on key product attributes
3. brand image and reputation
4. Costs relative to competitors
5. Ability to benefit from strategic fits with sister businesses

Question 22

When does a diversifying move generate added value for shareholders?

Answer 22

When it offers potential for existing business and new ones to perform better together under a single corporate unbrella.