Question 1

Identify and briefly discuss each of the three tests for determining whether diversification into a new business is likely to build shareholder value.

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Question 2

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? For what reasons?

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Question 3

What is meant by the term strategic fit? What are the advantages of pursuing strategic fit in choosing which industries to diversify into?

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Question 4

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?

Accepted Answer

Retrenching to a narrower diversification base may not be advisable when a company has too many cash cows that can still generate significant cash flows and contribute to overall shareholder value. The company should continue to leverage these businesses for continued growth and profitability.

Question 5

Retrenching to a narrower diversification base

Accepted Answer

Retrenching to a narrower diversification base is directed at improving long-term performance by building stronger positions in a smaller number of core businesses. This allows the company to focus its resources and efforts on areas where it has the potential to excel and gain a competitive advantage. It is a strategic move typically undertaken by companies that want to streamline operations and achieve better financial results.

Question 6

Briefly discuss when it makes good strategic sense for a company to consider diversification.

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Question 7

Briefly explain 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.

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Question 8

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.retrenching
e.unrelated diversification

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Question 9

What is meant by the term resource fit as it applies to evaluating a diversified company's business lineup?

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Question 10

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?

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Question 11

What does the industry attractiveness test involve in evaluating a diversified company's business lineup? Why is it relevant?

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Question 12

Divestiture can be accomplished by

Accepted Answer

Divestiture is the process of selling off a business or a portion of a business. Option B describes the act of spinning off an unwanted business as a separate company by selling shares to the investing public, thereby achieving divestiture. The other options either involve purchasing a business or investing in an unwanted business to improve it, which is not divestiture. Option E also seems to be about selecting businesses to sell rather than accomplishing the divestiture itself. Therefore, option B is the best choice.

Question 13

Corporate restructuring strategies

Accepted Answer

Corporate restructuring strategies involve making significant changes in a company's business lineup, including divesting some businesses and acquiring new ones, to reshape the company's overall business structure.

Question 14

Carefully explain the difference between a strategy of related diversification and a strategy of unrelated diversification.

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Question 15

Explain the difference between a cash cow business and a cash hog business.

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Question 16

Identify and briefly describe the six steps involved in evaluating a diversified company's business lineup and diversification strategy.

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Question 17

A company that is already diversified may choose to broaden its business scope by building positions in new related or unrelated businesses because of all of the following considerations except

Accepted Answer

Top management wanting to increase their compensation is not a valid consideration for a company to broaden its business scope. The other options listed are commonly considered when a company is looking to expand or diversify its business.

Question 18

Conditions that may make corporate restructuring strategies appealing include all of the following except

Accepted Answer

A business lineup consisting of too many cash cow businesses is actually desirable and not a condition that may make corporate restructuring strategies appealing. Cash cow businesses generate high cash flows and provide resources for investing in other businesses.

Question 19

The option of sticking with the current business lineup makes sense when

Accepted Answer

Sticking with the current business lineup makes sense when the company's present businesses offer attractive growth opportunities and can be counted on to generate good earnings and cash flows for shareholders. This allows the company to focus on improving and expanding existing businesses rather than taking on the risk of entering new markets.

Question 20

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.

Accepted Answer

In evaluating the "better-off" test,diversifying into a new business must offer potential for the company's existing businesses and the new business to perform better together (1 + 1 = 3)under a single corporate umbrella than they would perform operating as independent,stand-alone businesses.That is,creating added value for shareholders via diversification requires building a multibusiness company where the whole is greater than the sum of its parts.

Quiz 8: Corporate Strategy: Diversification and the Multibusiness Company