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Strategic Management Practice Test: Diversification: Strategies for Managing a Group of Businesses

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Strategic Management Practice Test: Diversification: Strategies for Managing a Group of Businesses

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1. Relative market share is

calculated by adjusting a company’s dollar market share up or down in proportion to whether the company’s quality and customer service are above/below industry averages.calculated by dividing a company’s market share (based on dollar volume) by the industry-average market share.calculated by subtracting the industry-average market share (based on dollar volume) from a company’s market share to determine how much a company’s market share is above/below the industry average—this amount is a better indicator of a business's competicalculated by dividing a business's percentage share of total industry sales volume by the percentage share held by its largest rival—it is a better indicator of a business's competitive strength than is a simple percentage measure of market share.particularly useful in identifying cash cows and cash hogs?cash cow businesses have big relative market shares (above 1.0) and cash hog businesses have low relative market shares (below 0.5).

2. Which of the following is an important appeal of a related diversification strategy?

Related diversification is typically more profitable than unrelated diversification, which is a major factor in helping related diversification pass the attractiveness test.Related diversification offers significant opportunities to strongly differentiate a company’s product offerings from those of rivals.Related diversification is an effective way of capturing valuable financial fit benefits.Related diversification is more likely to pass the cost-of-entry test and the capital gains test than unrelated diversification.Related diversification offers more competitive advantage potential than does unrelated diversification.

3. To create value for shareholders via diversification, a company must

spread its business risk across various industries by only acquiring firms that are strong competitors in their respective industries.get into new businesses that are profitable.diversify into industries that are growing rapidly.diversify into businesses that can perform better under a single corporate umbrella than they could perform operating as independent, stand-alone businesses.diversify into businesses that have either key success factors or value chains that are similar to its present businesses.

4. A company pursuing a related diversification strategy would likely address the issue of what additional industries/businesses to diversify into by

locating businesses with well-known brand names and large market shares.locating new businesses with high degrees of financial fit with its present businesses. identifying businesses with the potential to diversify the number and types of different activities in the firm's value chain make-up.identifying industries with the least competitive intensity.identifying an attractive industry whose value chain has good strategic fit with one or more of the firm's present businesses.

5. One appealing aspect of unrelated diversification is that it

results in having more cash cow businesses than cash hog businesses.facilitates capturing the financial fits among sister businesses (as compared to a strategy of related diversification).increases strategic fit opportunities and the potential for a 1 + 1 =3 outcome on the bottom line.expands a firm's competitive advantage opportunities to include a wider array of businesses.spreads the business risk across a group of truly diverse industries.

6. In judging the attractiveness of the businesses a multi-business company has diversified into, it is important to

consider to what extent the industries a company has invested in hold promise for attractive growth and profitability.calculate industry attractiveness scores for each industry into which the company has diversified.All of the aboveconsider whether each industry the company has diversified into represents a good business for the company to be in.consider the appeal of the whole group of industries in which the company has invested.

7. In a diversified company, a business subsidiary has more competitive advantage potential when

it is a cash cow.it has value chain relationships with other business subsidiaries that present competitively valuable opportunities to transfer skills or technology or intellectual capital from one business to another, combine the performance of related activities and reduce costs, share use of a well-respected brand name, or collaborate to create new competitive capabilities.it is the company's biggest profit producer or is capable of becoming the biggest.it operates in an industry where competition is less intense and driving forces are relatively weak.it is in a fast-growing industry.

8. Businesses are said to be related" when"

their value chains have the same number of primary activities.their value chains possess competitively valuable cross-business relationships that present opportunities to transfer resources from one business to another, combine similar activities and reduce costs, share use of a well-known brand name, and/or create mutually useful resource strengths and capabilities.many consumers buy the products/services of both businesses.they have several key suppliers and several key customers in common. their products are both sold through retailers.

9. Diversification merits strong consideration whenever a single-business company

encounters declining profits in its mainstay business.is faced with diminishing market opportunities and stagnating sales in its principal business.faces strong competition and is struggling to earn a good profit.has achieved industry leadership in its main line of business.has integrated backward and forward as far as it can.

10. The nine-cell industry attractiveness-competitive strength matrix

identifies which sister businesses have the greatest resource fit.is useful for helping decide which businesses should have high, average, and low priorities in allocating corporate resources.pinpoints what strategies are most appropriate for businesses positioned in the three top cells of the matrix but is less clear about the best strategies for businesses positioned in the bottom six cells.indicates which businesses are cash hogs and which are cash cows.identifies which sister businesses have the greatest strategic fit.

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

determining whether the cost a company incurs to enter the target industry will raise or lower production costs. determining whether a newly entered business presents opportunities to cost-efficiently transfer competitively valuable skills or technology from one business to another.determining whether the cost to enter the target industry will strain the company’s credit rating.considering whether a company’s costs to enter the target industry are low enough to allow for good profits or so high that potential profits would be eroded.determining whether the cost to enter the target industry will raise or lower the company’s total profits.

12. The two biggest drawbacks or disadvantages of unrelated diversification are

the difficulties of passing the cost-of-entry test and the ease with which top managers can make the mistake of diversifying into businesses where competition is too intense.the difficulties of achieving economies of scope and conflicts/incompatibility among the competitive strategies of the company’s different businesses. demanding managerial requirements and limited competitive advantage potential that cross-business strategic fit provides.the difficulties of capturing financial fit and having insufficient financial resources to spread business risk across many different lines of business.Ending up with too many cash hog businesses and too much diversity among the competitive strategies of the businesses it has diversified into.

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

shareholders will viewed the contemplated diversification move as attractive.key success factors in the target industry are attractive.the potential diversification move will boost the company’s competitive advantage in its existing business.there are attractive strategic fits between the value chains of the company's present businesses and the value chain of the new business it is considering entering.conditions in the target industry are sufficiently attractive to permit earning consistently good profits and returns on investment.

14. Checking a diversified firm's business portfolio for the competitive advantage potential of cross-business strategic fits entails consideration of

how compatible the competitive strategies of the various sister businesses are and whether these strategies are properly aimed at achieving the same kind of competitive advantage.whether the competitive strategies in each business possess good strategic fit with the parent company’s corporate strategy.whether the parent’s company’s competitive advantages are being deployed to maximum advantage in each of its business units.whether the competitive strategies employed in each business act to reinforce the competitive power of the strategies employed in the company’s other businesses.the extent to which there are competitively valuable relationships between the value chains of sister business units and what opportunities they present to reduce costs, share use of a potent brand name, create competitively valuable new capabilities via cross-business collaboration, or transfer skills or technology or intellectual capital from one business to another.

15. A diversified company's business units exhibit good resource fit when

the resource requirements of each business exactly match the company’s available resources.each business unit produces large internal cash flows over and above what is needed to build and maintain the business.a company has the resources to adequately support the requirements of its businesses as a group without spreading itself too thin and when individual businesses add to a company’s overall strengths.each business is a cash cow.each business is sufficiently profitable to generate an attractive return on invested capital.

16. With an unrelated diversification strategy, the types of companies that make particularly attractive acquisition targets are

companies offering the biggest potential to reduce labor costs.companies that are market leaders in their respective industries.cash cow businesses with excellent financial fit.companies that are employing the same basic type of competitive strategy as the parent corporation’s existing businesses.struggling companies with good turnaround potential, undervalued companies that can be acquired at a bargain price, and companies that have bright growth prospects but are short on investment capital.

17. One of the most significant contributions to strategy-making in diversified companies that the 9-cell industry attractiveness/competitive strength matrix provides is

identifying which businesses have strategies that should be continued, which business have strategies that need fine-tuning, and which businesses have strategies that need major overhaul.pinpointing which businesses to keep and which ones to divest.its ability to pinpoint what kind of competitive advantage or disadvantage each business has.that businesses having the greatest competitive strength and positioned in the most attractive industries should have the highest priority for corporate resource allocation and that competitively weak businesses in relatively unattractive industries should have the lowest priority and perhaps even be considered for divestiture.pinpointing what strategies are most appropriate for businesses positioned in the four corners of the matrix (although the matrix reveals little about the best strategies for businesses positioned in the remainder of the matrix).

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

When a company is only earning a low profit margin in its principal businessWhen a company can open up new avenues for reducing costs by diversifying into closely related businesses. When a company has a powerful and well-known brand name that can be transferred to the products of other businesses and thereby used as a lever for driving up the sales and profits of such businesses.When a company spots opportunities to expand into industries whose technologies and products complement its present business.When a company can leverage existing competencies and capabilities by expanding into industries where these same resource strengths are key success factors and valuable competitive assets.

19. Internal start-up 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

the target industry is comprised of several relatively large and well-established firms.the target industry is growing rapidly and no good joint venture partners are available.the company has ample time and adequate resources to launch the new internal start-up business from the ground up.all of the potential acquisition candidates are losing money.there is a small pool of desirable acquisition candidates.

20. The tests of whether a diversified company’s businesses exhibit resource fit do not include

whether the corporate parent has or can develop sufficient resource strengths and competitive capabilities to be successful in each of the businesses it has diversified into.whether the company has adequate financial strength to fund its different businesses and maintain a healthy credit rating.whether the excess cash flows generated by cash cow businesses are sufficient to cover the negative cash flows of its cash hog businesses.whether the corporate parent has sufficient cash to fund the needs of its individual businesses and pay dividends to shareholders without having to borrow money.whether a business adequately contributes to achieving the corporate parent’s performance targets.

21. What makes related diversification an attractive strategy is

the ability to broaden the company’s product line.the opportunity to convert cross-business strategic fits into competitive advantages over business rivals whose operations don’t offer comparable strategic fit benefits.the potential for improving the stability of the company's financial performance.the ability to serve a broader spectrum of buyer needs.the added capability it provides in overcoming the barriers to entering foreign markets.

22. When industry attractiveness ratings are calculated for each of the industries a multi-business company has diversified into, the results help indicate

which industries are most attractive from the standpoint of long-term growth and the growth prospects of all the industries as a group.which industries are most attractive from the standpoint of industry driving forces and competitive forces.which industries appear to be the best and worst ones to be in and the attractiveness of all the industries as a group from the standpoint of the company’s long-term performance.which industries have the biggest economies of scale and which industries have the greatest economies of scope and the overall potential for cost reduction in the industries as a group.which industries have attractive key success factors and which industries have unattractive key success factors.

23. Cross-business strategic fits can be found

anywhere along the respective value chains of related businesses. chiefly in the R&D portions of the value chains of unrelated businessesin unrelated as well as related businesses and in the markets of foreign countries as well as in domestic markets.mainly in either technology related activities or sales and marketing activities.only in businesses whose products/services satisfy the same general types of buyer needs and preferences.

24. Which one of the following is not an important aspect of evaluating the merits of a diversified company’s strategy?

Determining which business units are cash cows and which ones are cash hogs and then evaluating how soon the company's cash hogs can be transformed into cash cowsRanking the performance prospects of the businesses from best to worst and deciding what priority to give each of the company's business units in allocating resourcesAssessing the attractiveness of the industries the company has diversified into, both individually and as a groupEvaluating the strategic fits and resource fits among the various sister businessesAssessing the competitive strength of each business the company has diversified into

25. Which of the following is not likely to command much strategic attention from the top executives of companies pursuing an unrelated diversification strategy?

Identifying opportunities to acquire new businesses in industries with bright growth prospectsLooking for new businesses that present good opportunities for achieving economies of scopeWhether existing businesses should be retained or divested based on their ability to meet corporate targets for profit and returns on investmentIdentifying acquisition candidates that are financially distressed, can be acquired at a bargain price, and whose operations can, in management’s opinion, be turned around with the aid of the parent company’s financial resources and managerial know-howAcquiring new businesses with attractive profit prospects

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25 Questions

❤ If you liked Fatskills, consider supporting us by checking out The Life Manuals You Never Got.

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Without work one finishes nothing. - Ralph Waldo Emerson© 2026 Fatskills.com

All trademarks, logos and brand names are the property of their respective owners. All company, product and service names used in this website are for identification purposes only. Use of these names, trademarks and brands does not imply endorsement.

About | Explore | User Guide | Topics | Subjects | Doubt Solver | Career Aptitude Test | Answers | Free Tools | OSHA Basics Quiz | What Should We Know?
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Without work one finishes nothing. - Ralph Waldo Emerson
© 2026 Fatskills.com