Chapter 8 Diversification: Strategies for Managing a Group of Businesses

Question 1

A diversified company needs a

Answer 1

multiple industry, multi-business strategy

Question 2

What is the ultimate purpose of diversification

Answer 2

Increase shareholder value OR 1+1=3

Question 3

What is the best standard for evaluating whether a diversification move has been successful?

Answer 3

?

Question 4

What three tests signal whether a diversification move will increase shareholder value?

Answer 4

industry attractiveness test
cost of entry test
better off test

Question 5

Industry Attractiveness Test ?

Answer 5

The industry being entered presents good long-term profit opportunities

Question 6

Cost of Entry Test ?

Answer 6

Cost of entering is not so high as to spoil the ability to earn attractive profits

Question 7

Better-Off Test ?

Answer 7

— A company’s different businesses should perform better together than as stand-alone enterprises, such that company A’s diversification into business B produces a 1 + 1 = 3 effect for shareholders

Question 8

What are the two fundamental approaches to diversification?

Answer 8

Related

Unrelated

Question 9

Related

Answer 9

Involves diversifying into businesses whose value chains possess competitively valuable “strategic fits” with value chain(s) of firm’s present business(es). (Skill Transfer, Lower Costs, Common brand name usage, stronger competitive capabilities.)

Question 10

Unrelated

Answer 10

Involves diversifying into businesses with no competitively valuable value chain match- ups or strategic fits with firm’s present business(es) (FINANCIAL GAINS)

- No Strategic fit 
- No meaningful value chain relationships
- No unifying strategic theme

Question 11

Where do we look to find strategic fit advantages in related companies?

Answer 11

• Cost Saving (Economies of Scope)
• Efficient Transfer of key skills. Technologies & Management Know-How
• Common Brand Name
• Strengthen Resources & Competitive Capabilities

Question 12

Name three potential financial advantages in unrelated diversifications?

Answer 12

• Spread risk over industries
• Quick Financial gain
• Stable earnings

Question 13

Name 2 potential disadvantages in unrelated diversifications

Answer 13

• Stretched resources & attention

- Dearth of Talented & shrewd managers & leaders.

Question 14

What are the rationales for related and unrelated diversification strategies?

Answer 14

Related – a strategy driven approach to creating shareholders value
Unrelated – a finance-driven approach to creating shareholder value.