Question 1

Diversifying into a new industry by forming a new internal subsidiary to enter and compete in the target industry is attractive when

Accepted Answer

Forming a new internal subsidiary to enter and compete in the target industry would be attractive when there is ample time to launch the new business from the ground up and entry barriers can be hurdled at acceptable cost. This option allows the company to have complete control over the new venture and build it from scratch as they see fit. It may be impractical to outsource certain value chain activities, but this is not necessarily the determining factor in choosing to diversify through a subsidiary. The other options presented do not provide a sufficient reason to choose this method of diversification.

Question 2

An acquisition premium is the amount by which the price offered for an existing business exceeds

Accepted Answer

An acquisition premium is the amount by which the price offered for an existing business exceeds the pre-acquisition market value of the target company. This premium is paid by the acquirer to the target company's shareholders as an incentive to sell their shares. It represents the acquirer's willingness to pay more than the market value in order to obtain the benefits of the target company's assets, technology or market position.

Question 3

The cost-of-entry test for evaluating whether diversification into a particular industry is likely to build shareholder value involves

Accepted Answer

The cost-of-entry test evaluates if the costs to enter a target industry are low enough to generate good profits or high enough to erode potential profits. This test assesses whether a company can enter a new industry without compromising its existing business or financial stability. Therefore, option C is the best choice as it describes the key element of the cost-of-entry test. Options A, B, D, and E do not fully capture the essence of this evaluation.

Question 4

The task of crafting corporate strategy for a diversified company encompasses

Accepted Answer

Crafting corporate strategy for a diversified company involves all of the tasks mentioned in the options - identifying new industries to enter and means of entry, improving the performance of existing businesses, leveraging cross-business relationships for competitive advantage, and prioritizing investments and resources among business units. Therefore, the best choice is E - All of these.

Question 5

The attractiveness test for evaluating whether diversification into a particular industry is likely to build shareholder value involves determining whether

Accepted Answer

Conditions in the target industry are the most important factor in determining whether diversification into a particular industry is likely to build shareholder value. If the target industry is not attractive, then it is unlikely that the diversification move will be successful.

Question 6

To test whether a particular diversification move has good prospects for creating added shareholder value,corporate strategists should use

Accepted Answer

The answer of To test whether a particular diversification move...

Question 7

The three tests for judging whether a particular diversification move can create value for shareholders are

Accepted Answer

The three tests for judging whether a particular diversification move can create value for shareholders are the attractiveness test, the cost-of-entry test, and the better-off test. The attractiveness test assesses the attractiveness of the industry in which the firm is considering diversifying; the cost-of-entry test determines how costly it will be for the firm to enter the new industry; and the better-off test evaluates whether the firm will be better off diversifying than not. These tests are described in detail in the textbook "Strategic Management: Concepts and Cases: Competitiveness and Globalization."

Question 8

The most popular strategy for entering new businesses and accomplishing diversification is

Accepted Answer

According to the text, the most popular strategy for entering new businesses and accomplishing diversification is "acquisition of an existing business already in the chosen industry." Therefore, choice C is the best answer.

Question 9

A company can best accomplish diversification into new industries by

Accepted Answer

The most effective way for a company to diversify into new industries is by acquiring a company already operating in the target industry, creating a new business subsidiary internally to compete in the target industry, or forming a joint venture with another company to enter the target industry. This allows the company to leverage the expertise and resources of an already-established business in the target industry, rather than starting from scratch. Outsourcing may not lead to a true diversification, and integrating forward or backward may not be feasible for all companies. Shifting strategic groups may provide some benefits, but may not guarantee diversification. Employing an offensive strategy can be effective, but is not a reliable method for diversification.

Question 10

Diversification merits strong consideration whenever a single-business company

Accepted Answer

Diversification is a strategy that involves expanding into new markets or businesses to reduce risk and increase revenue. Option B is the most appropriate choice as it describes a situation where a company is experiencing stagnating sales in its primary business and is faced with diminishing market opportunities. Diversification would help such a company to explore new revenue streams and reduce its dependence on a single product or market. Options A, C, D, and E do not necessarily require diversification as a strategy to address the stated problems.

Question 11

Internal development 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

Accepted Answer

When a company has ample time and adequate resources, it may be more attractive to develop a new subsidiary internally rather than acquiring an existing firm. This allows the company to build the subsidiary tailored to its own needs and goals, rather than inheriting the strengths and weaknesses of an existing firm.

Question 12

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?

Accepted Answer

The other factors listed (A, B, C, and E) all make it more appealing to diversify into a new industry via an internal start-up subsidiary. However, if the target industry is comprised of several large and well-established firms, it may be more difficult to successfully enter and compete in the market.

Question 13

Diversification becomes a relevant strategic option when a company

Accepted Answer

All of these options are valid reasons for a company to consider diversification as a strategic option. Diversification can help a company expand into industries that complement their existing business, leverage existing competencies and capabilities, utilize a powerful brand name, and open up new cost reduction opportunities. Therefore, all of these factors can make diversification a relevant strategic option.

Question 14

Diversifying into new businesses is justifiable only if it

Accepted Answer

Diversifying into new businesses is justifiable if it builds shareholder value, as this aligns with the primary goal of most companies to enhance the wealth of their shareholders.

Question 15

The better-off test for evaluating whether a particular diversification move is likely to generate added value for shareholders involves

Accepted Answer

The better-off test involves 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. This is the most comprehensive and accurate way to determine whether diversifying will add value for shareholders. Option A is questionable because simply producing a greater number of core competencies does not necessarily result in added value. Option B is limited because improved balance sheet strength and credit rating may not directly translate into added value for shareholders. Option C may help mitigate risk, but does not necessarily maximize shareholder value. Option E is a possible outcome, but does not account for the potential costs and risks associated with diversification.

Question 16

To create value for shareholders via diversification,a company must

Accepted Answer

The best way for a company to create value for shareholders via diversification is to diversify into businesses that can perform better under a single corporate umbrella than they could perform operating as independent, stand-alone businesses. This type of diversification allows for synergies to be realized, resulting in cost savings, improved efficiencies, and increased revenues. This is the most effective way to diversify and create value for shareholders.

Question 17

Diversification becomes a relevant strategic option in all but which one of the following situations?

Accepted Answer

When a company is only earning a low profit margin in its principal business, it should focus on improving its core business rather than diversifying into other industries. Diversification may be a way to escape from the problems of the core business, but it may not be the best long-term solution. Instead, the company should invest in improving the efficiency, quality, and innovation of its existing operations.

Question 18

Acquisition of an existing business is an attractive strategy option for entering a promising new industry because it

Accepted Answer

Acquisition of an existing business offers a quick entry into a new industry by overcoming entry barriers and allows for the acquirer to focus on building a strong position in the industry. It is usually a quicker approach than starting a new venture from scratch.

Question 19

Diversification ought to be considered when

Accepted Answer

Diversification is often considered when a company faces diminishing growth prospects in its main business, as it seeks new opportunities to sustain growth and profitability.

Question 20

Which one of the following is not one of the elements of crafting corporate strategy for a diversified company?

Accepted Answer

Choosing the appropriate value chain for each business is not one of the elements of crafting corporate strategy for a diversified company. The other options are all key elements in crafting corporate strategy for a diversified company.

Quiz 8: Corporate Strategy: Diversification and the Multibusiness Company