Question 1

It is not necessary for a core competence to be difficult to imitate or to be nonsubstitutable.

Accepted Answer

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it.

Question 2

Economies of scope in a related diversification strategy result from the leveraging of core competencies and the sharing of activities such as production.

Accepted Answer

Related diversification enables a firm to benefit from economies of scope, which are cost savings that are derived from leveraging core competencies or sharing related activities among businesses in a corporation. A firm can also enjoy greater revenues if two businesses attain higher levels of sales growth combined than either company could attain independently.

Question 3

Research shows that the vast majority of acquisitions results in value creation rather than value destruction.

Accepted Answer

Research shows that the vast majority of acquisitions result in value destruction rather than value creation.

Question 4

At times,the only other people who may have benefited from a merger-acquisition were the shareholders of the acquired firms.

Accepted Answer

At times, the only other people who may have benefited were the shareholders of the acquired firms or the investment bankers who advise the acquiring firm, because they collect huge fees upfront regardless of what happens afterward.

Question 5

Diversification initiatives must be justified by the creation of value for shareholders.

Accepted Answer

Diversification initiatives, whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development, must be justified by the creation of value for shareholders. They typically are successful when they introduce synergy.

Question 6

All diversification moves,including those involving mergers and acquisitions,erode performance.

Accepted Answer

Not all diversification moves, including those involving mergers and acquisitions, erode performance. For example, acquisitions in the oil industry, such as the British Petroleum purchases of Amoco and Arco, are performing well as is the Exxon-Mobil merger. MetLife was able to dramatically expand its global footprint by acquiring Alico, a global player in the insurance business from AIG in 2010 when AIG was in financial distress.

Question 7

Economies of scope are cost savings from leveraging core competencies or sharing unrelated activities among businesses in a corporation.

Accepted Answer

Economies of scope are cost savings from leveraging core competencies or sharing related activities among businesses in a corporation.

Question 8

Many acquisitions ultimately result in divestiture.

Accepted Answer

Many acquisitions ultimately result in divestiture, that is, an admission that things did not work out as planned. In fact, some years ago, a writer for Fortune magazine lamented that studies show that 33 percent to 50 percent of acquisitions are later divested, giving corporate marriages a divorce rate roughly comparable to that of men and women.

Question 9

Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities.

Accepted Answer

Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities (e.g., production and distribution facilities). This enables a corporation to benefit from economies of scope.

Question 10

Benefits derived from horizontal and hierarchical relationships are mutually exclusive.

Accepted Answer

Benefits derived from horizontal (related diversification) and hierarchical (unrelated diversification) relationships are not mutually exclusive. Many firms that diversify into related areas benefit from information technology expertise in the corporate office. Similarly, unrelated diversifiers often benefit from the best practices of sister businesses even though their products, markets, and technologies may differ dramatically.

Question 11

Cooper Industries has followed a successful strategy of related diversification.There are few similarities in the products it makes or the industries in which it competes.

Accepted Answer

Cooper Industries has followed a successful strategy of unrelated diversification. There are few similarities in the products it makes or the industries in which it competes; however, the corporate office adds value through such activities as superb human resource practices and budgeting systems.

Question 12

Core competencies do not create value in a business.

Accepted Answer

Core competencies may also be viewed as the glue that binds existing businesses together or as the engine that fuels new business growth. They reflect the collective learning in organizations such as how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services.

Question 13

One of the criteria for a core competence is that the different businesses in the corporation must be similar in at least one important way related to the core competence.

Accepted Answer

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it.

Question 14

Reasons for acquisition failure include: ineffective integration of the acquisition,too high of a premium paid for the common stock of the target company,or inability to understand how the assets of the acquired firm would fit with the lines of business of the existing company.

Accepted Answer

Research shows that the vast majority of acquisitions result in value destruction rather than value creation. Many large multinational firms have also failed to effectively integrate their acquisitions, paid too high a premium for the common stock of the acquired firm, or were unable to understand how the assets of the acquired firm would fit with their own lines of business.

Question 15

When firms diversify into unrelated businesses,the primary potential benefits are horizontal relationships,i.e.,businesses sharing tangible and intangible resources.

Accepted Answer

When a corporation diversifies into unrelated businesses, the primary potential benefits are derived largely from hierarchical relationships, which is value creation derived from the corporate office. Horizontal relationships are the primary benefit of diversification into related businesses.

Question 16

When firms diversify into related businesses,the primary potential benefits come from horizontal relationships,which are businesses sharing intangible and tangible resources.

Accepted Answer

A firm may diversify into related businesses. Here, the primary potential benefits to be derived come from horizontal relationships; that is, businesses sharing intangible resources (e.g., core competencies such as marketing) and tangible resources (e.g., production facilities, distribution channels).

Question 17

Corporate-level strategy focuses on gaining short-term revenue through managing operations in multiple businesses.

Accepted Answer

Corporate-level strategy focuses on gaining long-term revenue, profits, and market value through managing operations in multiple businesses.

Question 18

The Hewlett-Packard and Autonomy merger in 2011 is an example of a successful merger.

Accepted Answer

In 2012, Hewlett-Packard wrote off $9 billion of the $11 billion it paid for Autonomy, a software company that it purchased one year earlier. After they purchased it, HP realized that the Autonomy accounting statements were not accurate resulting in a nearly 80 percent drop in the value of Autonomy once those accounting irregularities were corrected.

Question 19

For a core competency to create value and provide a viable basis for synergy among the businesses in a corporation it must at least create superior customer value and it must be difficult to imitate.

Accepted Answer

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it.

Question 20

Gillette developed the Fusion and Mach 3 shaving systems that created superior customer value as a result of their core competency in research and development.

Accepted Answer

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it. Every value-chain activity has the potential to provide a viable basis for building on a core competence. At Gillette, scientists developed the Fusion and Mach 3 after the introduction of the tremendously successful Sensor System because of a thorough understanding of several phenomena that underlie shaving. These include the physiology of facial hair and skin, the metallurgy of blade strength and sharpness, the dynamics of a cartridge moving across skin, and the physics of a razor blade severing hair. Such innovations are possible only with an understanding of such phenomena and the ability to combine such technologies into innovative products. Customers are willing to pay more for such technologically differentiated products.

Quiz 6: Corporate-Level Strategy: Creatingvalue Through Diversification

It is not necessary for a core competence to be difficult to imitate or to be nonsubstitutable.

Economies of scope in a related diversification strategy result from the leveraging of core competencies and the sharing of activities such as production.

Research shows that the vast majority of acquisitions results in value creation rather than value destruction.

At times,the only other people who may have benefited from a merger-acquisition were the shareholders of the acquired firms.

Diversification initiatives must be justified by the creation of value for shareholders.

All diversification moves,including those involving mergers and acquisitions,erode performance.

Economies of scope are cost savings from leveraging core competencies or sharing unrelated activities among businesses in a corporation.

Many acquisitions ultimately result in divestiture.

Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities.

Benefits derived from horizontal and hierarchical relationships are mutually exclusive.

Cooper Industries has followed a successful strategy of related diversification.There are few similarities in the products it makes or the industries in which it competes.

Core competencies do not create value in a business.

One of the criteria for a core competence is that the different businesses in the corporation must be similar in at least one important way related to the core competence.

Reasons for acquisition failure include: ineffective integration of the acquisition,too high of a premium paid for the common stock of the target company,or inability to understand how the assets of the acquired firm would fit with the lines of business of the existing company.

When firms diversify into unrelated businesses,the primary potential benefits are horizontal relationships,i.e.,businesses sharing tangible and intangible resources.

When firms diversify into related businesses,the primary potential benefits come from horizontal relationships,which are businesses sharing intangible and tangible resources.

Corporate-level strategy focuses on gaining short-term revenue through managing operations in multiple businesses.

The Hewlett-Packard and Autonomy merger in 2011 is an example of a successful merger.

For a core competency to create value and provide a viable basis for synergy among the businesses in a corporation it must at least create superior customer value and it must be difficult to imitate.

Gillette developed the Fusion and Mach 3 shaving systems that created superior customer value as a result of their core competency in research and development.