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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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25 Questions

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

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

2. Which one of the following is not part of the task of checking a diversified company's business line-up for adequate resource fit?

Determining whether the company has adequate financial strength to fund its different businesses and maintain a healthy credit ratingDetermining whether the excess cash flows generated by cash cow businesses are sufficient to cover the negative cash flows of its cash hog businessesDetermining whether recently acquired businesses are acting to strengthen a company’s resource base and competitive capabilities or whether they are causing its competitive and managerial resources to be stretched too thinly across its businessesDetermining 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 intoDetermining whether some business units have value chain match-ups that offer opportunities to transfer skills or technology or intellectual capital from one business to another

3. Calculating quantitative attractiveness ratings for the industries a company has diversified into involves

identifying each industry's average profitability, rating the difficulty of achieving average profitability in each industry, and deciding whether the company’s prospects for above-average profitability are attractive or unattractive, industry-by-industryselecting a set of industry attractiveness measures, weighting the importance of each measure, rating each industry on each attractiveness measure, multiplying the industry ratings by the assigned weight to obtain a weighted rating, adding the weighted ratings for each industry to obtain an overall industry attractiveness score, and using the overall industry attractiveness scores to evaluate the attractiveness of all the industries, both individually and as a group.determining each industry's key success factors, calculating the ability of the company to be successful on each industry KSF, and obtaining overall measures of the firm's ability to compete successfully in each of its industries based on the combined KSFdetermining each industry's competitive advantage factors, calculating the ability of the company to be successful on each competitive advantage factor, and obtaining overall measures of the firm's ability to achieve sustainable competitive advantage in erating the attractiveness of each industry’s strategic and resource fits, summing the attractiveness scores, and determining whether the overall scores for the industries as a group are appealing or not.

4. The success of unrelated diversification is dependent upon management’s ability to

spotting bargain-priced companies with big upside potential and then turning around their operations quickly with the aid of the parent company’s financial resources and managerial know-how.acquire new businesses that utilize much the same technology as existing businesses.identify potential new acquisition candidates that are cash cows (as opposed to cash hogs).acquire new businesses having attractive distribution-related and customer-related strategic fits with existing businesses.divest businesses whose competitive strategies do not match the overall competitive strategy of the corporation.

5. The chief purpose of calculating quantitative industry attractiveness scores for each industry a company has diversified into is to

determine which industry is the biggest and fastest growing.rank the attractiveness of the various industry value chains from best to worst. provide a basis for drawing analysis-based conclusions about the attractiveness of the industries a company has diversified into, both individually and as a group, and further to provide an indication of which industries offer the best and worst long-term prospects.get in position to rank the industries from most competitive to least competitive.ascertain which industries have the easiest-to-achieve key success factors.

6. In companies pursuing a strategy of unrelated diversification,

there is a strong chance that the combined competitive advantages of the various businesses will produce a 1 + 1 = 3 performance outcome as opposed to just a 1 + 1 = 2 performance outcome.the main basis for improved shareholder value is strong cross-business financial fits.each business is on its own in trying to build a competitive edge and the consolidated performance of the businesses is likely to be no better than the sum of what the individual businesses could achieve if they were independent.the main basis for competitive advantage and improved shareholder value is increased ability to achieve economies of scope.the main basis for improved shareholder value is increased ability to achieve economies of scale in the businesses it has entered.

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

it is a cash cow.it operates in an industry where competition is less intense and driving forces are relatively weak.it is in a fast-growing industry.it is the company's biggest profit producer or is capable of becoming the biggest.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.

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

whether the company has adequate financial strength to fund its different businesses and maintain a healthy credit rating.whether a business adequately contributes to achieving the corporate parent’s performance targets. 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 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 or can develop sufficient resource strengths and competitive capabilities to be successful in each of the businesses it has diversified into.

9. The strategic options to improve a diversified company’s overall performance do not include which of the following categories of actions?

Divesting weak-performing businesses and retrenching to a narrower base of business operationsRestructuring the company’s business lineup with a combination of divestitures and acquisitions to put a whole new face on the company’s business makeupPursuing multinational diversification and striving to globalize the operations of several of the company’s business unitsIncreasing dividend payments to shareholders and/or repurchasing shares of the company's stockBroadening the company’s business scope by making new acquisitions in new industries

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

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.companies that are employing the same basic type of competitive strategy as the parent corporation’s existing businesses.companies offering the biggest potential to reduce labor costs.cash cow businesses with excellent financial fit.companies that are market leaders in their respective industries.

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

each business is sufficiently profitable to generate an attractive return on invested capital.the resource requirements of each business exactly match the company’s available resources.each business is a cash cow.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.

12. The value of determining the relative competitive strength of each business a company has diversified into is

to have a quantitative basis for rating them from strongest to weakest in terms of contributing to the corporate parent’s profitability.to compare resource strengths and weaknesses, business by business.to have a quantitative basis for rating them from strongest to weakest in terms of contributing to the corporate parent’s revenue growth.to have a quantitative basis for rating them from strongest to weakest in contending for market leadership in their respective industries.to have a quantitative basis for identifying which businesses have large/small competitive advantages or competitive disadvantages vis-à-vis the rivals in their respective industries.

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

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. 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 can open up new avenues for reducing costs by diversifying into closely related businesses. When a company is only earning a low profit margin in its principal business

14. 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 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).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 company’s market share (based on dollar volume) by the industry-average market share.

15. Cross-business strategic fits can be found

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

16. Diversification ought to be considered when

a company is under the gun to create a more attractive and cost-efficient value chain. a company's profits are being squeezed and it needs to increase its net profit margins and return on investment.a company has run out of ways to achieve a distinctive competence in its present business.a company begins to encounter diminishing growth prospects in its mainstay business.a company lacks sustainable competitive advantage in its present business.

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

is a less risky way of passing the attractiveness test.is less expensive than launching a new start-up operation, thus passing the cost-of-entry test.offers the prospect of gaining an immediate competitive advantage in the new industry and thus helps ensure that the diversification move will pass the competitive advantage test for building shareholder value.is more likely to result in passing the shareholder value test, the profitability test, and the better-off test.is an effective way to hurdle entry barriers, is usually quicker than trying to launch a brand-new start-up operation, and allows the acquirer to move directly to the task of building a strong position in the target industry.

18. Which one of the following is not a reasonable option for deploying a diversified company's financial resources?

Funding long-range R&D ventures aimed at opening market opportunities in new or existing businessesMaking acquisitions to establish positions in new businesses or to complement existing businessesPaying down existing debt, increasing dividends, or repurchasing shares of the company's stockConcentrating most of a company's financial resources in cash cow businesses and allocating little or no additional resources to cash hog businesses until they show enough strength to generate positive cash flowsInvesting in ways to strengthen or grow existing businesses

19. The basic premise of unrelated diversification is that

any company that can be acquired on good financial terms and that has satisfactory growth and earnings potential represents a good acquisition and a good business opportunity.the best companies to acquire are those that offer the greatest economies of scope rather than the greatest economies of scale.the least risky way to diversify is to seek out businesses that are leaders in their respective industry.the task of building shareholder value is better served by seeking to stabilize earnings across the entire business cycle than by seeking to capture cross-business strategic fits.the best way to build shareholder value is to acquire businesses with strong cross-business financial fit.

20. Businesses are said to be related" when"

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.their products are both sold through retailers.many consumers buy the products/services of both businesses.they have several key suppliers and several key customers in common. their value chains have the same number of primary activities.

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

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

underemphasizing the importance of resource fit and the strong likelihood of diversifying into businesses that top management does not know all that much about.insufficient cash flows to finance so many different lines of business and a lack of uniformity among the strategies of the businesses it has diversified into.the difficulties of competently managing many different businesses and being without the added source of competitive advantage that cross-business strategic fit provides.volatile sales and profits and making the mistake of diversifying into too many cash cow businesses.over-investing in the achievement of economies of scope and the difficulties of achieving a good mix of cash cow and cash hog businesses.

23. Calculating quantitative attractiveness ratings for the industries a diversified company has invested in

identifies which industry has the best/worst value chain from the standpoint of cost reduction potential.allows a company to rank the competitive advantage opportunities in each industry from best to worst.provides a basis for deciding whether a diversified company has good prospects for growth and profitability, given the attractiveness ratings of the industries in which it has business interests.helps identify which industries have the best/worst prospects for revenue growth.helps identify which industry is likely to be the largest/smallest contributor to the company’s growth and profitability.

24. The options for allocating a diversified company's financial resources include

paying off existing debt, increasing dividends, building cash reserves, or repurchasing shares of the company's stock.making acquisitions to establish positions in new businesses or to complement existing businesses.All of these.investing in ways to strengthen or grow existing businesses.funding long-range R&D ventures aimed at opening market opportunities in new or existing businesses.

25. Divestiture can be accomplished by

None of the above—the best and quickest ways to divest a business are either to close it down or else just walk away and give the keys to creditors.selling a business outright.spinning the unwanted business off as a managerially and financially independent company by distributing shares in the new company to existing shareholders of the parent company.All of the above.spinning the unwanted business off as a managerially and financially independent company by selling shares to the investing public via an initial public offering of stock.

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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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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