Question

The success of unrelated diversification is contingent upon management's ability to A. E) identify potential new acquisition candidates that are cash cows (as opposed to cash hogs). B. B) divest businesses whose competitive strategies do not match the overall competitive strategy of the corporation. C. A) acquire new businesses that utilize much the same technology as existing businesses. D. C) acquire new businesses having attractive distribution-related and customer-related strategic fits with existing businesses. E. D) identify bargain-priced companies with big upside potential and then turn around their operations quickly with the aid of the parent company's financial resources and managerial know-how.

Answer 1

Answer:

A. E) identify potential new acquisition candidates that are cash cows (as opposed to cash hogs).

Explanation:

Unrelated diversification strategies refer to a business diversifying its product portfolio by adding unrelated product lines in order to enter new or different markets. For example, a clothing manufacturer that decides to acquire a watch company, or Amazon acquiring Whole Foods.

The success of the unrelated diversification strategy relies upon purchasing companies that can be profitable. E.g. when Amazon purchased Whole Foods, they paid a very high price, but Amazon would benefit not only form the retail business, but also lower distribution costs. Amazon got so large, that its distribution costs are too high now, and that is why it has continued to open brick and mortar stores but under a different format.

Answer 2

Answer:

A. identify potential new acquisition candidates that are cash cows (as opposed to cash hogs).

Explanation:

The success of unrelated diversification is contingent upon management's ability to identify potential new acquisition candidates that are cash cows (as opposed to cash hogs).

A cash cow business produces large internal cash flows over and above what is needed to build and maintain the business whereas the internal cash flows of a cash hog business are too small to fully fund its operating needs and capital requirements.