MGMT 449 FINAL EXAM VERIFIED STUDY GUIDE
Corporate-Level Strategy - Answers - A strategy that focuses on gaining long-term
revenue, profits, and market value through managing operations in multiple businesses
Why do firms diversify? - Answers - Synergy - working together
Related Businesses - Answers - - horizontal relationships
- sharing tangible resources
- sharing intangible resources
Unrelated Businesses - Answers - - hierarchical relationships
- value creation derives from corporate office
- leveraging support activities
Testing whether a diversification will add long-term value for shareholders - Answers - -
The industry attractiveness test
- The cost of entry test
- The better off test
Better-Off Test - Answers - How much synergy (stronger overall performance) will be
gained by diversifying into the industry
Theories Related to Diversification - Answers - - Rationale 1 (Cost/competence)
- Rationale 2 (Market power/transaction cost)
Rationale 1a: Diversification driven by cost reduction (economies of scope) - Answers -
Economies of Scope:
- Cost savings from leveraging core competencies or sharing related activities among
businesses in a corporation
Economies of Scale:
- Accrue when unit costs are reduced due to the increased output of larger sized
operations of a firm
Rationale 1b: Diversification driven by competence (Core competence) - Answers - A
firm's strategic resources that reflect the collective learning in the organization
Provide synergy when:
- enhance competitive advantage by creating superior value
- different businesses must be similar in at least one way
- Must be difficult for competitors to imitate or find substitutes
, Rationale 2a: Related diversification driven by market power - Answers - Firms' abilities
to profit through restricting or controlling supply to a market or coordinating with other
firms to reduce investment
Pooled Negotiating Power - Answers - The improvement in bargaining position relative
to suppliers and customers
Vertical Integration - Answers - An expansion or extension of the firm by integrating
preceding or successive production processes
Five issues must be considered:
1. Is the company satisfied with the quality of the value that its present suppliers &
distributors are providing?
2. Are there activities in the industry value chain presently being outsourced or
performed independently by others that are a viable source of future profits?
3. Is there a high level of stability in the demand for the organization's products?
4. Does the company have the necessary competencies to execute the vertical
integration strategies?
5. Will the vertical integration initiatives have potential negative impacts on the firm's
stakeholders?
Unrelated Diversification - Answers - A firm entering a different business that has little
horizontal interaction with other businesses of a firm
- potential benefits from vertical relationships
Parenting Advantage - Answers - The positive contributions of the corporate office to a
new business as a result of expertise and support provided and not as a result of
substantial changes in assets, capital structure, or management
Restructuring - Answers - The intervention of the corporate office in a new business that
substantially changes the assets, capital structure, and/or management, including
selling off parts of the business, changing the management, reducing payroll and
unnecessary sources of expenses, changing strategies, and infusing the new business
with new technologies, processes, and reward systems
Portfolio Management - Answers - A method of (a) assessing the competitive position of
a portfolio of businesses within a corporation, (b) suggesting strategic alternatives for
each business, and (c) identifying priorities for the allocation of resources across the
businesses.
Means to Achieve Diversification - Answers - - Mergers and acquisitions
- Strategic alliances
- Joint ventures
- Internal development
Corporate-Level Strategy - Answers - A strategy that focuses on gaining long-term
revenue, profits, and market value through managing operations in multiple businesses
Why do firms diversify? - Answers - Synergy - working together
Related Businesses - Answers - - horizontal relationships
- sharing tangible resources
- sharing intangible resources
Unrelated Businesses - Answers - - hierarchical relationships
- value creation derives from corporate office
- leveraging support activities
Testing whether a diversification will add long-term value for shareholders - Answers - -
The industry attractiveness test
- The cost of entry test
- The better off test
Better-Off Test - Answers - How much synergy (stronger overall performance) will be
gained by diversifying into the industry
Theories Related to Diversification - Answers - - Rationale 1 (Cost/competence)
- Rationale 2 (Market power/transaction cost)
Rationale 1a: Diversification driven by cost reduction (economies of scope) - Answers -
Economies of Scope:
- Cost savings from leveraging core competencies or sharing related activities among
businesses in a corporation
Economies of Scale:
- Accrue when unit costs are reduced due to the increased output of larger sized
operations of a firm
Rationale 1b: Diversification driven by competence (Core competence) - Answers - A
firm's strategic resources that reflect the collective learning in the organization
Provide synergy when:
- enhance competitive advantage by creating superior value
- different businesses must be similar in at least one way
- Must be difficult for competitors to imitate or find substitutes
, Rationale 2a: Related diversification driven by market power - Answers - Firms' abilities
to profit through restricting or controlling supply to a market or coordinating with other
firms to reduce investment
Pooled Negotiating Power - Answers - The improvement in bargaining position relative
to suppliers and customers
Vertical Integration - Answers - An expansion or extension of the firm by integrating
preceding or successive production processes
Five issues must be considered:
1. Is the company satisfied with the quality of the value that its present suppliers &
distributors are providing?
2. Are there activities in the industry value chain presently being outsourced or
performed independently by others that are a viable source of future profits?
3. Is there a high level of stability in the demand for the organization's products?
4. Does the company have the necessary competencies to execute the vertical
integration strategies?
5. Will the vertical integration initiatives have potential negative impacts on the firm's
stakeholders?
Unrelated Diversification - Answers - A firm entering a different business that has little
horizontal interaction with other businesses of a firm
- potential benefits from vertical relationships
Parenting Advantage - Answers - The positive contributions of the corporate office to a
new business as a result of expertise and support provided and not as a result of
substantial changes in assets, capital structure, or management
Restructuring - Answers - The intervention of the corporate office in a new business that
substantially changes the assets, capital structure, and/or management, including
selling off parts of the business, changing the management, reducing payroll and
unnecessary sources of expenses, changing strategies, and infusing the new business
with new technologies, processes, and reward systems
Portfolio Management - Answers - A method of (a) assessing the competitive position of
a portfolio of businesses within a corporation, (b) suggesting strategic alternatives for
each business, and (c) identifying priorities for the allocation of resources across the
businesses.
Means to Achieve Diversification - Answers - - Mergers and acquisitions
- Strategic alliances
- Joint ventures
- Internal development
