Outline Porter's three critical tests for evaluating strategy.
What will be an ideal response?
The attractiveness test - Successful efforts at diversification must be directed toward attractive industries or, at the very least, industries that managers have identified as having a strong potential to become attractive in the near future. Some indicators of attractiveness include industries with high entry barriers, low customer and supplier bargaining power, and few substitute products.
The cost-of-entry test - Diversifying successfully means that the cost the firm must bear to enter the new venture does not outweigh all future profits. If the cost of entry is so high that it negatively affects the potential return on investment, profitability is eroded before the firm even begins to integrate the activity into its broader strategy and should therefore be avoided.
The better-off test - A successful diversification initiative means that the acquisition will provide a competitive advantage to either the acquirer or the acquired. There must be evidence of some form of potential synergy as advantage emerges for the new unit via its link to the company, or vice versa.
You might also like to view...
Which of the following ratios would generally be used to evaluate a firm's overall liquidity position?
a. Working capital b. Current ratio c. Acid-test ratio d. Cash ratio e. Inventory turnover in days
All cities, counties, and other governmental subdivisions have basic powers to adopt ordinances, such as traffic and zoning laws, within their sphere of operation
Indicate whether the statement is true or false
Describe in brief the intellectual properties that copyright laws protect and the exceptions to it
Which of the following is not a current reporting requirement for a statement that reports changes in cash over a period of time?
A. This statement must classify cash flows into three categories: operating, investing, and financing activities. B. Cash equivalents must be combined with cash in preparing this statement. C. Working capital may be used as a substitute for cash in preparing this statement. D. The title for this statement is "Statement of Cash Flows."