FINAL Examination: SPRING 2021

MGT 480: Strategic Management

Section 5 Marks: 20 Time: 75 min.

Answer to the all questions

Part: 2 Subjective Part (Marks: 16)

1.“This increases the value of a company’s product line because customers often
obtain a price discount when purchasing a set of products at one time, and customers
become used to dealing with only one company and its representatives.” Discussing it
by using the most relevant two points (benefits) of relevant integration (Marks 4)

2. “when the board of Sotheby’s discovered that the company had been engaged in
price fixing with Christie’s, board members moved quickly to oust both the CEO and
the chairman of the company. But not all boards perform as well as they should. The
board of now-bankrupt energy company Enron approved the company’s audited
financial statements, which were later discovered to be grossly misleading” Find out
the most relevant one agency problem & one relevant solution (governance
mechanism) then explain them with pros & cons. (Marks 4)

3. “In 2010, a study by Graef Crystal evaluated the relationship between CEO pay
and performance and concluded that there virtually is none. For example, if CEOs
were paid according to shareholder return, the CEO of CBS Corporation, Leslie
Moonves, who earned an impressive $43.2 million in 2009, should have gotten a $28
million paycut, according to Crystal.” Is it a agency problem or solution
(governance mechanism) or both? Justify your answer with proper explanation.
(Marks 4)

4. The lack of trust arises from the risk of holdup—that is, being taken advantage of
by a trading partner after the investment in specialized assets has been made. How
can an organization overcome the situation of hold up? Explain the most
relevant two ways for overcoming this hold up situation?(Marks 4)

Part: 3 Case Study Analysis (Marks 4)

GE competes in many different industries ranging from appliances, aviation, and

consumer electronics to energy, financial services, health care, oil, and wind turbines.
Historically, GE has done an exceptionally good job of allocating capital across its
many businesses, although it has suffered a discount to other diversified competitors
of late. Even though GE is a related linked firm, it differentially allocates capital
across its major strategic business units. Even though GE Capital (GE’s financial
services business unit) produced high returns for GE over the last few decades, it
received a healthy amount of capital from internal allocations. However, GE has been
balancing its financial services portfolio over the last few years. In particular, GE
committed to shrinking its financial operation because Jeff Immelt, GE’s CEO, has
been under pressure by investors to make GE a more focused industrial company,
primarily because its stock price has stayed below $30 since the financial crisis.
Ultimately, the goal is to scale back GE Capital from 42 percent of the profit in 2014
to 25 percent of GE’s profit in 2016. Before the financial crisis, almost 50 percent of
profits were derived from GE Capital. Regulation has forced GE to keep more capital
in its financial arm, and thus it can no longer pull as much cash out “to help pay
dividends, buy back shares, and help finance GE’s industrial operations.” It also
prevents other restructuring efforts. For example, GE wanted to sell its appliance
business, but had to hold on to it for several years during the crisis because the price it
could get would be too low. Immelt added, “make no mistake, the ultimate size of GE
Capital will be based on competitiveness, returns, and the impact of regulation on the
entire company.” However, since the financial crisis, GE realized the risks of have so
much capital invested in GE Capital which almost toppled GE. GE is also under
pressure because it had built up its oil and gas service operations through acquisitions.
However, since the drop in oil prices, this unit has come under pressure. When these
assets were purchased, crude oil was selling for $100 per barrel, but crude oil has
been recently selling for near $50 per barrel. Also, United Technologies, an unrelated
firm, has allocated resources internally according to their best and most efficient use.
Similar to GE, it often bought, restructured, and operated the businesses until it made
sense to sell them. United Technologies owns Otis Elevator, building fires and
security system brands Chubb and Kidde, Pratt & Whitney jet engines, Carrier air
conditioners, and Sikorsky Aircraft. Sikorsky is best known for its Black Hawk
helicopters, and it is one of the largest helicopter makers in the world. United
Technologies’ new CEO, Gregory J. Hayes, told analysts that it was evaluating its
portfolio. The Sikorsky division has come under pressure amidst softer military
spending and weakness in demand for oil services companies which utilize
helicopters to fly employees to platforms offshore as well as onshore. Although Hayes
had considered a tax free spinoff, he ultimately contracted to sell the Sikorsky
business unit to Lockheed Martin, a big defense contractor. Interestingly, he is also
hunting for a large acquisition to purchase, restructure, and include in United
Technologies portfolio. Both GE and United Technology have used internal capital
allocate resources among their diversified business units efficiently. Also, both
businesses have used the restructuring strategy to make their operations more efficient
and, when appropriate, sold them on the open market, either through selloff to another
acquirer or through spinoffs where two stock prices are created, one for the legacy
business and one for the spinoff firm

Question Identify the most relevant reason for value creation (value creation/value
neutral/ value reducing ) then explain the reasons in the context of above mention
case.