Corporate Diversification

Question 1

What are some constraints on market penetration?

Answer 1

Retaliation from competitors (price wars)
Legal constraints (restrictions from regulators)

Question 2

Define Synergy

Answer 2

The benefits gained when activities or assets complement each other so that their combined effect is greater than the sum of the parts.
‘2+2=5’ effect

Question 3

What are Porter’s Three Essential Tests?

Answer 3

If diversification is to create shareholder value, it must meet three tests:
1. Attractiveness Test (attractive industry)
2. Cost of Entry Test (less than future profits)
3. Better-off Test (some kind of synergy & competitive advantage)

Question 4

Value-destroying activities for corporate parent

Answer 4

Adding Management cost
Adding Bureaucratic complexity
Obscuring Financial performance

Question 5

What are the four quarters of BCG growth/share matrix?

Answer 5

High market growth, High market share = Stars
Low market growth, High market share = Cash Cows
High market growth, Low market share = Question Marks / Problem Child
Low Market growth, Low market share = Dogs

Question 6

What are the two axes of the Directional Policy (GE-McKinsey) Matrix?

Answer 6

Industry attractiveness and Business strength

Question 7

In the Directional Policy (GE-MKinsey) Matrix, what is it called when both axes are high?

Answer 7

Investment and growth

Question 8

In the Directional Policy (GE-McKinsey) Matrix, what is it called when one axis is medium and the other is high?

Answer 8

Selective growth

Question 9

In the Directional Policy (GE-McKinsey) Matrix, what two options could the grid say if either axes are low?

Answer 9

Selectivity or Harvest/divest