Question 1

Restructuring requires the corporate office to find either exceptionally performing firms with realized potential or firms in industries on the threshold of significant,negative change.

Accepted Answer

Restructuring is a means by which the corporate office can add value to a business. Here, the corporate office tries to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change. The parent intervenes, often selling off parts of the business; changing the management; reducing payroll and unnecessary sources of expenses; changing strategies; and infusing the company with new technologies, processes, reward systems, and so forth.

Question 2

Gillette developed the Fusion and Mach 3 shaving systems.These products created superior customer value as a result of the company 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.

Question 3

In recent years,many high-tech firms such as Priceline.com have suffered from the negative impact of uncontrolled growth.

Accepted Answer

In recent years, many high-tech firms have suffered from the negative impact of their uncontrolled growth. Consider, for example, Priceline.com made an ill-fated venture into an online service to offer groceries and gasoline. A myriad of problems, perhaps most importantly a lack of participation by manufacturers, caused the firm to lose more than 5 million USD a week prior to abandoning these ventures.

Question 4

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 5

Portfolio management should be considered as the primary basis for formulating corporate-level strategies.

Accepted Answer

Portfolio management helps achieve a better understanding of the competitive position of an overall portfolio of businesses, to suggest strategic alternatives for each of the businesses, and to identify priorities for the allocation of resources.

Question 6

A disadvantage of mergers and acquisitions is that they can enable a firm to rapidly enter new product markets.

Accepted Answer

Growth through mergers and acquisitions has been critical to many corporations in a wide variety of high-technology and knowledge-intensive industries. Speed (speed to market, speed to positioning, and speed to becoming a viable company) is critical in such industries. For example, in 2010, Apple acquired Siri Inc. so that they could quickly fully integrate the Siri natural language voice recognition software into iOS, the Apple proprietary operating system.

Question 7

Diversified public corporations,such as Berkshire Hathaway and Virgin Group,create value through management expertise by improving plans and budgets.This is an example of a related diversification strategy.

Accepted Answer

One of the purposes of diversification is to reduce the risk that is inherent in the variability in revenues and profits of a firm over time. If a firm enters new products or markets that are affected differently by seasonal or economic cycles, its performance over time will be more stable. For example, a firm that manufactures lawn mowers may diversify into snow blowers in order to even out its annual sales.

Question 8

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 9

Greenmail is an offer by a company,threatened by takeover,to offer its stock at a reduced price to a third party.

Accepted Answer

Greenmail is an effort by the target firm to prevent an impending takeover. When a hostile firm buys a large block of outstanding target company stock and the target company management feels that a tender offer is impending, they offer to buy the stock back from the hostile company at a higher price than the unfriendly company paid for it.

Question 10

Research shows that most acquisitions of public corporations result in value creation rather than value destruction.

Accepted Answer

Research shows that a majority of acquisitions of public corporations result in value destruction rather than value creation.

Question 11

A golden parachute is a prearranged contract with managers specifying that,in the event of a hostile takeover,the target company managers will be paid a significant severance package.

Accepted Answer

A golden parachute is a prearranged contract with managers specifying that, in the event of a hostile takeover, the target company managers will be paid a significant severance package. Although top managers lose their jobs, the golden parachute provisions protect their income.

Question 12

Portfolio models such as the BCG Portfolio matrix are limited in value because they only compare the SBU on four dimensions.

Accepted Answer

Despite the potential benefits of portfolio models, there are also some notable downsides. First, they compare SBUs on only two dimensions, making the implicit but erroneous assumption that (1) those are the only factors that really matter and (2) every unit can be accurately compared on that basis.

Question 13

The potential advantages of strategic alliances and joint ventures include entering new markets as well as developing and diffusing new technologies.

Accepted Answer

Strategic alliances and joint ventures have many potential advantages. Among these are entering new markets, reducing manufacturing (or other) costs in the value chain, and developing and diffusing new technologies.

Question 14

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 15

With unrelated diversification,potential benefits can be gained from vertical or hierarchical relationships; that is,the creation of synergies from the interaction of the corporate office with outside stakeholders.

Accepted Answer

With unrelated diversification, potential benefits can be gained from vertical or hierarchical relationships; that is, the creation of synergies from the interaction of the corporate office with the individual business units.

Question 16

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 USD of the 11 billion USD it paid for Autonomy, a software company that it purchased one year earlier. After the purchase was completed, HP realized that the Autonomy accounting statements were not accurate. This resulted in a nearly 80 percent drop in the value of Autonomy once the accounting irregularities were corrected.

Question 17

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 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 18

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 19

It is necessary for a core competence to be difficult to imitate and to be non-substitutable.

Accepted Answer