Question

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

A) the attractiveness test, the cost-of-entry test, and the better-off test.
B) the barrier to entry test, the competitive advantage test, and the stock price effect test.
C) the profit test, the competitive strength test, and the industry attractiveness test.
D) the better-off test, the competitive advantage test, and the profit expectations test.

Answer 1

The answer is: A) the attractiveness test, the cost-of-entry test, and the better-off test.

Step-by-step explanation:

To ensure that companies are diversifying to create long-term shareholder value, Michael Porter has devised three tests, which need to be fully satisfied.

Attractiveness test

• Aims to ensure that diversification is directed towards an attractive industry.

• Assesses the factors in Porter’s five forces to determine if something is attractive since firms can sometimes pay too much to enter.

Cost of entry test

• Ensures the cost of entry does not capitalise all future profits (i.e. only do it if it can be done cheaply).
• This test tends to act as the main culling factor for diversification

Better off test

• The new business unit must gain a competitive advantage from its link with the corporation or vice versa.
• If it does not fit into the firm’s portfolio, then a firm should proceed with diversification even if it is cheap. It also needs to have synergies to share resources and capabilities for the long run